Managerial Accounting Contrastedto Financial AccountingManagerial accounting supports the internal planning (future-oriented) decisionsmade by management. Financial accounting has more of a scorekeeping, historicalorientation, although data produced by the financial accounting process form some ofthe foundation on which plans are based. Planning is a key part of the managementLO 1Explain the management planning andcontrol cycle.1. What does it mean to state that there are different costs for different purposes? QWhat DoesIt Mean?A n s w e r o np a g e 4 8 6mar2529X_ch12_458-503.indd 459 26/11/12 2:05 PM460 Part 2 Managerial Accountingprocess; and although there are many descriptions of that process, a generally acceptable definition would include reference to the process of planning, organizing,and controlling an entity’s activities so that the organization can achieve its desiredoutcomes. A general model of the process looks like this:Implement PlansDecision Making Decision MakingDecision MakingPlanning and Control CycleData Collection and Performance FeedbackRevisit PlansExecutingOperationalActivities(Managing)PerformanceAnalysis:Plans versusActual Results(Controlling)Strategic,Operational,and Financial(Planning)The model suggests that control is achieved through feedback. Actual results are compared to planned results; if a difference exists between the two, then either the plan orthe actions, or perhaps both, are changed. Management decision making occurs in eachphase of the planning and control cycle using information provided by the accountinginformation system in an effort to continuously improve organizational performance.Not all of a firm’s objectives are stated in financial terms by any means. For example, market share, employee morale, absence of layoffs, and responsible corporatecitizenship are all appropriate objectives that are expressed in nonfinancial terms.However, many of the firm’s goals will be financial (ROI, ROE, growth in sales, earnings, and dividends, to name just a few). The management accountant plays a majorrole in identifying these goals, helping to achieve them, and measuring the degree towhich they have been accomplished.Emphasis on the future is a principal characteristic that makes managerial accounting different from financial accounting. Anticipating what revenues will be andforecasting the expenses that will be incurred to achieve those revenues are criticalactivities of the budgeting process. Another difference between managerial accountingand financial accounting that is emphasized in planning is breadth of focus. Financialaccounting deals primarily with the financial statements for the organization as awhole; managerial accounting is more concerned with operating units within the organization. Thus, even though an overall company ROI objective is established, effectiveplanning requires that the planned impact of the activities and results of each unit (division, product line, plant, sales territory, and so on) of the organization be considered.Measuring results involves using the historical data of financial accounting; andbecause of the time required to perform financial accounting and auditing procedures,there is usually a time lag of weeks or months between the end of an accounting periodand the issuance of financial statements. However, for performance feedback to be mosteffective, it should be provided as quickly as possible after action has been completed.Management accounting is not constrained by generally accepted accounting principles,so approximate results can be quickly generated for use in the control process. In otherwords, relevant data, even though not absolutely accurate in a financial accounting sense,are useful for evaluating performance soon after an activity has been completed.
Managerial Accounting Contrasted
to Financial Accounting
Managerial accounting supports the internal planning (future-oriented) decisions
made by management. Financial accounting has more of a scorekeeping, historical
orientation, although data produced by the financial accounting process form some of
the foundation on which plans are based. Planning is a key part of the management
LO 1
Explain the management planning and
control cycle.
1. What does it mean to state that there are different costs for different purposes? Q
What Does
It Mean?
A n s w e r o n
p a g e 4 8 6
mar2529X_ch12_458-503.indd 459 26/11/12 2:05 PM
460 Part 2 Managerial Accounting
process; and although there are many descriptions of that process, a generally acceptable definition would include reference to the process of planning, organizing,
and controlling an entity’s activities so that the organization can achieve its desired
outcomes. A general model of the process looks like this:
Implement Plans
Decision Making Decision Making
Decision Making
Planning and Control Cycle
Data Collection and Performance Feedback
Revisit Plans
Executing
Operational
Activities
(Managing)
Performance
Analysis:
Plans versus
Actual Results
(Controlling)
Strategic,
Operational,
and Financial
(Planning)
The model suggests that control is achieved through feedback. Actual results are compared to planned results; if a difference exists between the two, then either the plan or
the actions, or perhaps both, are changed. Management decision making occurs in each
phase of the planning and control cycle using information provided by the accounting
information system in an effort to continuously improve organizational performance.
Not all of a firm’s objectives are stated in financial terms by any means. For example, market share, employee morale, absence of layoffs, and responsible corporate
citizenship are all appropriate objectives that are expressed in nonfinancial terms.
However, many of the firm’s goals will be financial (
role in identifying these goals, helping to achieve them, and measuring the degree to
which they have been accomplished.
Emphasis on the future is a principal characteristic that makes managerial accounting different from financial accounting. Anticipating what revenues will be and
forecasting the expenses that will be incurred to achieve those revenues are critical
activities of the budgeting process. Another difference between managerial accounting
and financial accounting that is emphasized in planning is breadth of focus. Financial
accounting deals primarily with the financial statements for the organization as a
whole; managerial accounting is more concerned with operating units within the organization. Thus, even though an overall company ROI objective is established, effective
planning requires that the planned impact of the activities and results of each unit (division, product line, plant, sales territory, and so on) of the organization be considered.
Measuring results involves using the historical data of financial accounting; and
because of the time required to perform financial accounting and
there is usually a time lag of weeks or months between the end of an accounting period
and the issuance of financial statements. However, for performance feedback to be most
effective, it should be provided as quickly as possible after action has been completed.
Management accounting is not constrained by generally accepted accounting principles,
so approximate results can be quickly generated for use in the control process. In other
words, relevant data, even though not absolutely accurate in a financial accounting sense,
are useful for evaluating performance soon after an activity has been completed.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
