Managerial Accounting

Many definitions of accounting exist, although a popular one is that formulated by the American Accounting Association: “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.”

It is important to note, however, that all the information so provided does not have to be financial in nature, and qualitative as well as quantitative data might well help in the process of assisting management to make more informed decisions.

Managerial (the more normal United Kingdom expression is management) accounting is one of only several different facets of the accounting discipline. The normal distinction made is between financial accounting on the one hand and managerial accounting on the other. In this strict dichotomy, financial accounting is concerned with the preparation largely of documents that relate to past performance (hence the income statement [“profit and loss account”], statement of financial position [“balance sheet”], and cash or funds flow statement). Clearly, however, the projection of such documents to a future time period/date is also possible. In all developed nations it is mandatory to produce the specified documents on a regular basis (annually would be the norm), although for internal control purposes it is likely that any organization of a reasonable size would generate them far more frequently than this. But one of the most interesting aspects of the financial accounts is that the annual documents, at least in summary form, invariably must by law be made available to external constituencies (“external” meaning other than the incumbent management). Thus owners and government (because of the corporate tax implications) have an inalienable right in this regard; and employees and their representatives, investment analysts, the local community, etc., all might well be perceived also to have a vested interest in corporate performance as evidenced by the statements produced.

The structure and composition of the organizations financial accounts is constrained by legislation, the requirements of both the object country's accounting profession (perhaps collectively representing several bodies) and its stock exchange. In the United States, the Financial Accounting Standards Board has established Generally Accepted Accounting Principles (GAAPs) that are deemed to underpin the preparation of a business s financial statements. The world is increasingly moving toward the adoption of International Financial Reporting Standards because of the need to compare the performance of businesses on a global scale, particularly given the move toward multiple stock exchange quotations for multinational corporations (MNCs).

The situation described above should be compared with that of managerial accounting, which is largely concerned with the provision of information to people solely within the organization in order to assist [Page 1061]their better decision making. Such information is not intended to be released to external constituencies—indeed, much of it is highly sensitive and the very last sort of thing one would want one's competitors to get hold of. Such information relates to the costs and relative profitability of different products or product lines; the basis on which capital expenditure decisions are made; budgets for both the impending (in detail) and subsequent (in rather less detail) financial periods; and the identification of alternative uses for the company's resources, including such things as whether a product or service should be produced internally or “bought in” from outside (when the economist's concept of “opportunity cost” becomes an important consideration). Unlike the organization's financial accounting reports, its managerial accounting activities are unrestrained by GAAPs (since policing and enforcing them would be impossible), although one would nevertheless hope for some level of internal consistency in the provision of managerial accounting information.

...