Managerial and Financial Accounting Concepts Explained
1. Managerial Versus Financial Accounting Differences
Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators. Managerial accounting is concerned with providing information to managers for use within the organization.
- Financial accounting emphasizes the financial consequences of past transactions, objectivity and verifiability, precision, and companywide performance.
- Managerial accounting emphasizes decisions affecting
Costing, Budgeting, and Variance Analysis in Accounting
Variable Costing
Definition
A method of calculating product costs where direct materials, direct labor, and variable manufacturing overhead are included in the cost of the product. Fixed overhead costs are considered a period expense, not a part of manufacturing overhead. This method is not GAAP for external financial reporting.
Benefits
- Shows incremental costs of production.
- Treats fixed overhead costs as period costs, independent of sales volume.
Absorption Costing
Definition
A method of calculating product
Read MoreEvaluating Business Strategy: Process and Criteria
Basic Activities of Strategy Evaluation
Strategy evaluation involves three basic activities:
- Examining the underlying bases of a firm’s strategy
- Comparing expected to actual results
- Taking corrective actions to ensure performance conforms to plans
Key Steps in Strategy Evaluation
Fixing Performance Benchmarks
While fixing benchmarks, strategists encounter questions such as: what benchmarks to set, how to set them, and how to express them. In order to determine the benchmark performance to be set, it
Read MoreKey Concepts in Cost Accounting: Overheads & Budgeting
Understanding Overhead Costs
Any cost which cannot be directly charged to a cost center or cost unit is known as overhead. Overhead is the total of indirect material costs, indirect labor costs, and indirect expenses. Overhead costs are operating costs of a business enterprise that cannot be directly traced to an enterprise unit.
Overhead Classification Methods
- Function-wise Classification: Includes manufacturing, selling, and administration overheads.
- Behavior-wise Classification: Categorizes overheads
Cost Accounting: Break-Even, Relevant Costs, and Allocation
Break-Even Point and Operating Leverage
The break-even point is the level of operating activity at which revenues cover all fixed and variable costs, resulting in zero profit. It’s the point where total revenues equal total costs. Until break-even sales are reached, the product, service, event, or business segment operates at a loss. To determine the break-even point, the equation for total revenues is set equal to the equation for total costs and then solved for the break-even unit sales volume.
Read MoreActivity-Based Costing: Principles and Implementation
UNIT 5: The Activity-Based Costing System
Evolution of the Manufacturing Environment
Activity-Based Costing (ABC) emerged in the 1980s as a method to improve the assignment of costs to products due to several significant changes in the manufacturing environment:
- The automation of productive processes reduced the relevance of direct labor costs within total production costs.
- There was an increase in the importance of support functions.
- Companies began manufacturing a greater variety of products for diverse