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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
An easy-to-understand guide to making informed and effective business decisions
With clear explanations and real-life examples, Managerial Accounting For Dummies gives you the basic concepts, terminology, and methods you need to fully grasp this important area of business, anywhere. You'll know how to identify, measure, analyze, interpret, and communicate the data that drives decision making in every industry. Understand and manage costs, plan, budget, and use these accounting skills for business evaluation and control.
This approachable guide covers all the content in a typical managerial accounting course, making it perfect for students preparing for accounting careers. Professionals looking for a refresher will also benefit from this straightforward resource.
Inside:
- Get clear descriptions of managerial accounting techniques and processes
- Learn how to collect, report, and analyze financial data to drive effective business decisions
- Discover how managerial accounting can improve sustainability and reduce risk
Managerial Accounting For Dummies, 2nd Edition provides comprehensive information on global strategic management, basic data analysis techniques, and beyond—you'll understand all parts of the managerial accounting process and why it matters with this accessible resource.
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Veröffentlichungsjahr: 2025
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Managerial Accounting For Dummies®
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Introduction
About This Book
What You’re Not to Read
Foolish Assumptions
How This Book Is Organized
Icons Used in This Book
Where to Go from Here
Part 1: Introducing Managerial Accounting
Chapter 1: The Role of Managerial Accounting
Checking Out What Managerial Accountants Do
Understanding Costs
Planning and Budgeting for the Future
Evaluating and Controlling Operations
Distinguishing Managerial from Financial Accounting
Becoming a Certified Professional
Chapter 2: Using Managerial Accounting in Your Business
What Business Are You In? Classifying Companies by Their Output
Measuring Profits
Part 2: Managing Costs and Profitability
Chapter 3: Classifying Costs
Distinguishing Direct from Indirect Manufacturing Costs
Assessing Conversion Costs
Telling the Difference between Product and Period Costs
Searching for Incremental Costs
Accounting for Opportunity Costs
Ignoring Sunk Costs
Chapter 4: Figuring Cost of Goods Manufactured and Sold
Tracking Inventory Flow
Calculating Inventory Flow
Preparing a Schedule of Cost of Goods Manufactured
Chapter 5: Teaching Costs to Behave: Variable and Fixed Costs
Predicting How Costs Behave
Separating Mixed Costs into Variable and Fixed Components
Sticking to the Relevant Range
Chapter 6: Allocating Overhead
Distributing Overhead through Direct Labor Costing
Taking Advantage of Activity-Based Costing for Overhead Allocation
Chapter 7: Job Order Costing: Having It Your Way
Keeping Records in a Job Order Cost System
Understanding the Accounting for Job Order Costing
Chapter 8: Process Costing: Get In Line
Comparing Process Costing and Job Order Costing
Keeping Process Costing Books
Demonstrating Process Costing
Preparing a Cost of Production Report
Chapter 9: Straight to the Bottom Line: Examining Contribution Margin
Computing Contribution Margin
Preparing a Cost-Volume-Profit Analysis
Breaking Even
Shooting for Target Profit
Observing Margin of Safety
Taking Advantage of Operating Leverage
Part 3: Using Managerial Accounting Techniques to Make Decisions
Chapter 10: Capital Budgeting: Should You Buy That?
Identifying Incremental and Opportunity Costs
Keeping It Simple: The Cash Payback Method
It’s All In the Timing: The Net Present Value (NPV) Method
Measuring Internal Rate of Return (IRR)
Considering Nonquantitative Factors
Chapter 11: Reality Check: Making and Selling More than One Product
Preparing a Break-Even Analysis with More than One Product
Coping with Limited Capacity
Deciding When to Outsource Products
Eliminating Unprofitable Products
Chapter 12: The Price Is Right: Knowing How Much to Charge
Differentiating Products
Taking All Costs into Account with Absorption Costing
Pricing at Cost-Plus
Extreme Accounting: Trying Variable-Cost Pricing
Bull’s-Eye: Hitting Your Target Cost
Chapter 13: Spreading the Wealth with Transfer Prices
Pinpointing the Importance of Transfer Pricing
Negotiating a Transfer Price
Transferring Goods between Divisions at Cost
Positioning Transfer Price at Market Value
Part 4: Planning and Controlling Operations
Chapter 14: Responsibility Accounting
Linking Strategy with an Organization’s Structure
Identifying Different Kinds of Centers
Chapter 15: Master Budgets: Planning for the Future
Preparing a Manufacturer’s Master Budget
Applying Master Budgeting to Nonmanufacturers
Chapter 16: Flexing Your Budget: When Plans Change
Controlling Your Business
Dealing with Budget Variances
Implementing a Flexible Budget
Chapter 17: Variance Analysis: To Tell the Truth
Setting Up Standard Costs
Understanding Variances
Teasing Out Variances
Part 5: Managerial Accounting and Strategy
Chapter 18: Managing Risks: What Could Go Wrong?
Defining Uncertainties and Risks
Taking Four Steps Toward Managing Risks
Illustrating the Four Steps
Diving Deep into Step 2
Understanding How Your Mind Copes with Risks
Careers in Risk Management
Chapter 19: The Balanced Scorecard: Reviewing Your Business’s Report Card
Strategizing for Success: Introducing the Balanced Scorecard
Demonstrating the Balanced Scorecard
Chapter 20: Measuring Corporate Social Responsibility
Accounting for ESG
Setting Standards for Sustainability
Impacting Society and the Environment: Global Reporting Initiative
Expanding Financial Reporting to Integrated Reporting
Part 6: The Part of Tens
Chapter 21: Ten Key Managerial Accounting Formulas
The Accounting Equation
Net Income
Cost of Goods Sold
Contribution Margin
Cost-Volume-Profit Analysis
Break-Even Analysis
Price Variance
Quantity Variance
Future Value
Present Value
Chapter 22: Ten Careers in Managerial Accounting
Corporate Treasurer
Chief Financial Officer
Corporate Controller
Accounting Manager
Financial Analyst
Cost Accountant
Budget Analyst
Internal Auditor
Property Accountant
Risk Analyst
Chapter 23: Ten Legends of Managerial Accounting
Dan Bricklin
Cynthia Cooper
Sergio Cicero Zapata
Eliyahu Goldratt
Ernest Hauser
Robert Kaplan
Harry Markopoulos
Paul Sarbanes and Michael Oxley
David Stockman
Sherron Watkins
Index
About the Author
Connect with Dummies
End User License Agreement
List of Tables
Chapter 1
TABLE 1-1 Contrasting Managerial and Financial Accounting
Chapter 18
TABLE 18-1 Matrix of Knowns and Unknowns
Chapter 20
TABLE 20-1 Sustainability Accounting Standards Board (SASB) Sectors and Industri...
TABLE 20-2 Comparing SASB, GRI, and IR Frameworks
List of Illustrations
Chapter 1
FIGURE 1-1: A budget that doesn’t work.
FIGURE 1-2: A reworked budget.
FIGURE 1-3: Deming’s PDCA cycle.
Chapter 2
FIGURE 2-1: Chain of activity for manufacturers, retailers, and service compani...
FIGURE 2-2: How revenues and cost of goods sold fit into an income statement.
Chapter 3
FIGURE 3-1: Costing direct materials for a cake.
FIGURE 3-2: Costing direct labor for brain surgery.
FIGURE 3-3: Visualizing product and period costs.
Chapter 4
FIGURE 4-1: The retailer’s product flow.
FIGURE 4-2: The manufacturer’s product flow.
FIGURE 4-3: The production process for a single doodad.
FIGURE 4-4: Cost of goods manufactured schedule.
Chapter 5
FIGURE 5-1: Graphing total variable costs.
FIGURE 5-2: Effect on total variable costs of increasing the cost driver by 50 ...
FIGURE 5-3: Even when volume increases, variable cost per unit remains the same...
FIGURE 5-4: Total fixed costs remain the same regardless of activity level.
FIGURE 5-5: Fixed cost per unit decreases with volume.
FIGURE 5-6: Xeon Company’s product costs.
FIGURE 5-7: Classifying fixed and variable costs.
FIGURE 5-8: Xeon Company’s fixed and variable costs.
FIGURE 5-9: How total fixed costs and variable cost per unit interact.
FIGURE 5-10: Production level and total cost by time period.
FIGURE 5-11: Basic graph of total cost on the number of units produced.
FIGURE 5-12: Scattergraph of total cost on the number of units produced.
FIGURE 5-13: Input onto Excel’s Regression menu.
FIGURE 5-14: What happens outside the bounds of the relevant range.
Chapter 6
FIGURE 6-1: The role of overhead costs in overall product cost.
FIGURE 6-2: Allocating direct labor and overhead equally to two products.
FIGURE 6-3: Allocate direct labor according to hours needed to make each produc...
FIGURE 6-4: Allocate overhead to each product the same way you allocate direct ...
FIGURE 6-5: Total cost of product includes direct materials, direct labor, and ...
FIGURE 6-6: Compute the cost of widget model GO.
FIGURE 6-7: How debits and credits move product costs between accounts.
FIGURE 6-8: Adding up total overhead.
FIGURE 6-9: Identifying the cost drivers.
FIGURE 6-10: Computing overhead allocation rates under activity-based costing.
FIGURE 6-11: Using activity-based costing to allocate overhead.
FIGURE 6-12: Adding up the total cost of making A340.
FIGURE 6-13: This chart illustrates how costs flow to the finished product A340...
Chapter 7
FIGURE 7-1: A blank job order cost sheet.
FIGURE 7-2: The materials requisition slip authorizes personnel to issue raw ma...
FIGURE 7-3: Employees use a time ticket to keep track of the jobs they work on.
FIGURE 7-4: Enter information from materials requisition slips and time tickets...
FIGURE 7-5: Debits (to the left) increase, and credits (to the right) decrease.
FIGURE 7-6: Journal entries record transactions between different accounts.
FIGURE 7-7: How the journal entry in Figure 7-6 affects the accounts.
FIGURE 7-8: Journal entries to record purchase of materials.
FIGURE 7-9: Journal entries to record direct labor cost.
FIGURE 7-10: Journal entries to record payment for overhead.
FIGURE 7-11: Journal entries to record requisition of materials for BRM-10.
FIGURE 7-12: Journal entries to apply direct labor to job BRM-10.
FIGURE 7-13: Computing overhead allocation rates for National Snow Globe.
FIGURE 7-14: Allocating overhead for National Snow Globe.
FIGURE 7-15: Journal entry to allocate overhead.
FIGURE 7-16: Adding up all costs of making BRM-10.
FIGURE 7-17: Journal entry to transfer goods from Work-in-process inventory to ...
FIGURE 7-18: Job order cost sheet for job BRM-10.
FIGURE 7-19: Journal entry to record the sale of inventory.
Chapter 8
FIGURE 8-1: How process costing applies costs to goods.
FIGURE 8-2: Debits (to the left) increase, and credits (to the right) decrease.
FIGURE 8-3: Navigating through the books.
FIGURE 8-4: How to transfer materials from raw materials into the Cutting depar...
FIGURE 8-5: Journal entry to purchase materials.
FIGURE 8-6: Journal entries to record direct labor cost.
FIGURE 8-7: Journal entry to record payment for overhead.
FIGURE 8-8: Journal entry to move materials into the departments.
FIGURE 8-9: Journal entry to move the cost of direct labor into the departments...
FIGURE 8-10: Applying overhead to individual departments.
FIGURE 8-11: Journal entry to allocate overhead to the departments.
FIGURE 8-12: Journal entry to transfer goods from the Assembly department to th...
FIGURE 8-13: Journal entry to transfer goods from the Testing department to the...
FIGURE 8-14: Journal entry for the Finishing department to complete goods.
FIGURE 8-15: Journal entries to sell goods.
FIGURE 8-16: Using debits and credits to sail through process costing.
FIGURE 8-17: Theresa Toy Factory’s duck output.
FIGURE 8-18: Separate equivalent units for direct materials and conversion cost...
FIGURE 8-19: Total costs to account for in the Balloon department.
FIGURE 8-20: Separate equivalent units for direct materials and conversion cost...
FIGURE 8-21: Total costs accounted for.
FIGURE 8-22: Completed cost of production report.
Chapter 9
FIGURE 9-1: Multistep income statement.
FIGURE 9-2: Contribution margin income statement.
FIGURE 9-3: Cost-volume-profit graph.
FIGURE 9-4: Identifying net income and loss in a cost-volume-profit graph.
FIGURE 9-5: Applying a cost-volume-profit graph to a specific case.
FIGURE 9-6: Graphing the break-even point.
FIGURE 9-7: Graphing margin of safety.
FIGURE 9-8: How operating leverage increases risk.
Chapter 10
FIGURE 10-1: Computing cash payback period when net cash flows change each year...
FIGURE 10-2: Computing the present value of a series of cash flows.
FIGURE 10-3: Computing the net present value of Corporation X’s project.
FIGURE 10-4: Estimating the IRR of Corporation X’s project with a 10 percent in...
FIGURE 10-5: Estimating the IRR of Corporation X’s project with a 7 percent int...
Chapter 11
FIGURE 11-1: Contribution margin pie chart.
FIGURE 11-2: Estimating Acme’s sales mix.
FIGURE 11-3: Multiplying contribution margin ratio by sales mix to find WACMR.
FIGURE 11-4: Measuring contribution margin per unit of constrained resource.
FIGURE 11-5: The cost of making Duds.
FIGURE 11-6: Comparing the cost of making and buying Duds.
FIGURE 11-7: Projected income from making and selling Fizzy!
FIGURE 11-8: Comparing scenarios for Fizzy!
Chapter 12
FIGURE 12-1: Cost-plus pricing includes absorption cost of the product plus a m...
FIGURE 12-2: Cost-plus pricing gone wild.
FIGURE 12-3: Comparing cost-plus (a) and variable-cost pricing (b).
FIGURE 12-4: In target costing, the market price determines the product’s cost.
Chapter 13
FIGURE 13-1: Selling shirts at a transfer price of $8.
FIGURE 13-2: How a transfer price of $5.50 affects Javier’s and Sasha’s profits...
FIGURE 13-3: Selling division transfers product to the purchasing division.
FIGURE 13-4: Sylvia’s contribution margin when selling to the outside.
FIGURE 13-5: Ernie’s Western Dairy sets the transfer price at variable cost.
FIGURE 13-6: Ernie’s Western Dairy sets the transfer price at variable cost plu...
FIGURE 13-7: Best-case scenario: Sensui sells spring water to Jusu for $0.70 pe...
FIGURE 13-8: Jusu buys water from an outside vendor for $0.65 per gallon.
Chapter 14
FIGURE 14-1: A revenue center’s responsibility report.
FIGURE 14-2: Responsibility report for a cost center.
FIGURE 14-3: Transfer pricing can turn revenue and cost centers into profit cen...
FIGURE 14-4: Responsibility report for a profit center.
Chapter 15
FIGURE 15-1: A budgeting road map.
FIGURE 15-2: Projected sales of Forever Tuna.
FIGURE 15-3: How much will Forever Tuna sell next year?
FIGURE 15-4: How much inventory will Forever Tuna make next year?
FIGURE 15-5: What quantity of materials must Forever Tuna buy next year?
FIGURE 15-6: How much will Forever Tuna need to pay workers next year?
FIGURE 15-7: How much overhead will Forever Tuna pay next year?
FIGURE 15-8: Forever Tuna’s product cost per unit.
FIGURE 15-9: Forever Tuna’s S&A budget.
FIGURE 15-10: Forever Tuna’s predicted cash receipts.
FIGURE 15-11: Forever Tuna’s predicted cash payments.
FIGURE 15-12: Forever Tuna’s cash budget.
FIGURE 15-13: Forever Tuna’s budgeted income statement.
FIGURE 15-14: Pickers’ planned merchandise purchases.
Chapter 16
FIGURE 16-1: Skate’s static overhead budget.
FIGURE 16-2: Skate’s overhead budget report.
FIGURE 16-3: Flexing variable overhead costs.
FIGURE 16-4: Skate’s flexible overhead budget.
Chapter 17
FIGURE 17-1: Adding up direct materials standard price (SP).
FIGURE 17-2: Computing direct materials standard quantity (SQ) per unit.
FIGURE 17-3: Computing the direct labor standard rate (SR).
FIGURE 17-4: Computing direct labor standard hours (SH).
FIGURE 17-5: Summing up standard cost per unit.
FIGURE 17-6: How price and quantity variances contribute to direct materials va...
FIGURE 17-7: Computing direct materials variances by using a diagram.
FIGURE 17-8: How price and quantity variances add up to direct labor variance.
FIGURE 17-9: Computing the direct labor variances the easy way with a diagram.
FIGURE 17-10: Band Book’s variances.
Chapter 19
FIGURE 19-1: My convenience store’s strategy.
FIGURE 19-2: My convenience store’s balanced scorecard.
Guide
Cover
Table of Contents
Title Page
Copyright
Begin Reading
Index
About the Author
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Managerial Accounting For Dummies®, 2ndEdition
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Introduction
If accounting is the language of business, then managerial accounting is the language inside a business. Accountants establish specific definitions for terms such as revenue, expense, net income, assets, and liabilities. Everyone uses these same definitions when they announce and discuss these attributes, so that when a company reports sales revenue, for example, investors and other businesspeople understand how that figure was calculated. This way, companies, investors, managers, and everyone else in the business community speak the same language, a language for which accountants wrote the dictionary.
Managerial accounting allows a company’s managers to understand how their business operates and gives them information needed to make decisions. It helps them plan their business’s activities and control its operations. Suppose that a marketing executive needs to set a price for a new product. To set that price, the executive needs to understand how much the product costs; that’s where managerial accounting comes in. Furthermore, the price needs to be set at such a level that at the end of the year, when the company sells all the products it’s supposed to sell at whatever prices it sets, it earns the profit and cash flow that it has projected for itself. That, too, is where managerial accounting comes in.
When I teach managerial accounting, I always take care to point out who the users of managerial accounting information usually are. They’re the managers, marketing professionals, financial analysts, and information systems professionals working within a company. All have a role in not only developing managerial accounting information but also, more importantly, using it to make better decisions.
About This Book
Running a business without understanding managerial accounting would be difficult. Therefore, I wrote this book for businesspeople — both present and future — who want to better understand how to use managerial accounting to make decisions and how managerial accountants develop information.
That said, I have a confession to make: Much to the dismay of my wife and the embarrassment of my children, I love to do accounting, especially managerial accounting. And better yet, I love to teach it. I believe that contribution margin is the greatest thing since sliced bread (see Chapter 9) and that planning and controlling operations (Part 4) provides a useful template for planning one’s life. And I often think about and admire the legends of managerial accounting that I introduce in Chapter 23.
For all the bad rap that accounting gets for being boring (and for all that financial accountants, of all people, trash their poor managerial brethren for being the most boring of all accountants), I felt a special calling to commit to writing — and share with you — what I believe makes managerial accounting engaging and (yes) exciting, right here in this book.
Therefore, when you start reading this book and soon find that you can’t put it down, don’t blame me and my lame little puns. Instead, appreciate that after you start discovering accounting, it can be quite difficult to stop.
What You’re Not to Read
I tried to write this book so that it spellbinds you, the reader, such that you feel you can’t put it down until you read the whole thing. I won’t be upset, though, if you can’t resist the temptation to peek at the last few pages to see how it ends.
That said, if you’re the busy type, feel free to focus on the most important stuff that you need to know and skip some of these less important elements:
Technical Stuff icons:
Anything marked with the Technical Stuff icon is especially interesting to managerial accounting geeks like me. However, if you’re in a rush, you can skip these paragraphs.
Sidebars:
These fascinating, gray-shaded boxes include factoids and information that I thought you may enjoy, though you can pick up managerial accounting just fine without reading them.
Foolish Assumptions
To write this book, I had to make certain assumptions about you. I assume that you’re one of the following people:
A college student taking a managerial accounting course who needs some help understanding the topics you’re covering in class
A businessperson or entrepreneur who wants to know more about how to collect accounting information to make decisions
A recent college graduate interested in pursuing a career in managerial accounting, perhaps as a certified management accountant
A professional accountant or bookkeeper looking for a straightforward refresher in the basics of managerial accounting
How This Book Is Organized
Each of the six parts of this book tackles a different aspect of managerial accounting. The following sections explain how I organized the information so that you can find what you need quickly and easily.
Part 1: Introducing Managerial Accounting
Part 1 gives you just a taste of what managerial accounting is and why it’s important. This part also reviews some important aspects of accounting that every businessperson needs to know. I hit profitability, efficiency, productivity, and continuous improvement especially hard.
Part 2: Managing Costs and Profitability
At its crux, managerial accounting is all about costs — whether they’re direct, indirect, overhead, or whatever — and how those costs behave. What drives costs up, down, or sideways? Part 2 explores the world of costs.
Part 3: Using Managerial Accounting Techniques to Make Decisions
When you understand how costs work, you’re ready to make decisions, and that’s what Part 3 deals with. After a brief spiel about my favorite topic — contribution margin — I explain how to use cost information to make decisions. I cover such areas as whether to buy equipment, which products to make, and how to price.
Part 4: Planning and Controlling Operations
An important part of managing an organization is planning for the future, and managerial accountants play a critical role in this process by preparing budgets, the topic of Part 4. These budgets integrate information from every part of an organization to develop a plan to meet managers’ goals. To make things even more interesting, managerial accountants are responsible for controlling operations — carefully monitoring a company’s performance, and comparing that performance to their budgets. That way, managers can quickly identify and address problems before the problems become crises.
Part 5: Managerial Accounting and Strategy
Managerial accountants also play important roles in risk management, strategic planning, and corporate social responsibility. Sometimes running a company or organization can be something like navigating through a minefield. Managerial accountants help to identify what could go wrong in an organization, and develop systems to control these risks. They also provide information to help companies to stay on track in meeting strategic goals. And they even help managers to implement initiatives to meet environmental, social and governance objectives. Part 5 will dive deeply into these topics.
Part 6: The Part of Tens
The chapters in this part provide you with a quick reference to the most important formulas in the book. I also share some career options for managerial accountants and profile inspirational role models.
Icons Used in This Book
Throughout the margins of this book, certain symbols emphasize important points, examples, and warnings. Watch for these icons:
This icon highlights facts that are especially important to keep in mind. Tucking these facts away helps you keep key concepts at your fingertips.
This icon pops up alongside examples that show you how to apply an idea to real-life accounting problems.
Like building Titanic II, not every idea is a good idea. This icon alerts you to situations that require caution. Look out!
This icon marks simple hints that can help you solve problems on tests and in real-life managerial accounting situations.
I couldn’t resist sharing these interesting tidbits with you. However, if you’re in a hurry, don’t panic; just skip them.
Where to Go from Here
All the chapters in this book are modular, so you can study and understand them without reading other chapters. Just examine the table of contents and pick out a topic you want to know more about. I provide cross-references to topics in other chapters where appropriate, so if you’ve skipped a foundational concept crucial to what you’re reading about, you know where to find what you need.
If you’re looking to discover managerial accounting from scratch, or to unlearn some part of managerial accounting that you fear you learned wrong, start with Part 1 to take in the basics. When writing this book, I took special care to explain all the fundamentals that some managerial accounting texts skip. Students with little or no background in accounting should make a point to read Chapter 2.
Managerial accounting itself is built on a few basic principles. In my experience, most students who have trouble learning managerial accounting usually improve their performance after becoming more familiar with these basic principles. Therefore, to better understand these foundations, take a look at Chapter 3 (basic cost principles), Chapter 5 (cost behavior), and Chapter 9 (contribution margin).
In addition to what you’re reading right now, this product comes with a free access-anywhere Cheat Sheet that provides important formulas used in Managerial Accounting. To access this Cheat Sheet, simply go to www.dummies.com and type Managerial Accounting for Dummies Cheat Sheet in the Search box.
If you’re studying for a college exam, make sure you know the relevant key formulas in Chapter 21.
Part 1
Introducing Managerial Accounting
IN THIS PART …
In Part 1, I give a brief overview of all topics in managerial accounting. I first explain what managerial accountants do, why they do it, and what you can do to become a managerial accountant. Then I give you some background info about business and management to help you understand managerial accounting, including how different kinds of companies operate; how accountants measure profits, efficiency, and productivity; and how managers apply continuous improvement.
Chapter 1
The Role of Managerial Accounting
IN THIS CHAPTER
Understanding why managerial accounting is important
Costing business activities
Planning for profits and cash flow
Monitoring and evaluating performance
Considering the tasks and accreditation of managerial accountants
After months of work, you find yourself on your long-anticipated road trip, cruising down the highway for a relaxing week at the shore. Your goal is to enjoy a quiet week of sand, surfing, and fun. To reach your goal, you need a strategy, which in this case is loading up your car with luggage, tying the surfboards to the roof, filling the tank with fuel, and hitting the gas.
But you can’t forget to attend to important details along the way: Book a house rental. Drive carefully, don’t speed, follow GPS, and fill up the tank before you run out of gas. Make sure the surfboards stay securely attached to the roof. And out of excitement, try to predict what time you’ll reach your destination. Fulfilling your strategy (that is, reaching the shore) requires keeping an eye on a wide range of factors, many of which are critical to reaching your goal.
If you set aside the sand, sun, surf, and relaxation, managerial accounting is actually quite similar to embarking on a long road trip to the shore. Managerial accounting is the collecting and monitoring of information about a venture to make sure that it’s on its way to successfully meeting its goals.
This chapter explains what managerial accountants do and why they do it. It also explains what costs are and considers different ways of measuring them. First, I explore the important managerial accounting tasks of planning, budgeting, monitoring, and evaluating operations, and then I explain the difference between managerial accounting and financial accounting.
Checking Out What Managerial Accountants Do
Managerial accounting plays a critical role in running a business because it provides valuable information about the business to help managers make educated decisions. The process of gathering information involves these tasks:
Analyzing costs to understand how they behave and how they will respond to different activities
Planning and budgeting for the future
Evaluating and controlling operations by comparing plans and budgets to actual results
After gathering information, managerial accountants then report the facts and figures to the company’s managers, who need this information to run the business. In the following sections, I delve into each aspect of a managerial accountant’s job.
Analyzing costs
Managerial accountants carefully collect information about a company’s costs in order to understand how costs behave. What causes costs to increase? How can the company decrease them? Managerial accounting offers many useful tools to help you understand what drives costs and how various events affect net income.
For example, consider Grux Company, which manufactures grout. Every year, Grux must pay for raw materials, executive salaries, and sales commissions. The cost of raw materials varies with the volume of grout produced — the more grout you want to make, the more raw materials you need to buy. Executive salaries are probably fixed — they don’t change at all. Sales commissions vary with the amount of sales — the more sales, the more commissions. Managerial accounting helps Grux understand how different events affect costs and how they affect the company’s profits.
Planning and budgeting
After managers set goals and strategies for a company, managerial accountants get to work developing a realistic plan — with numbers, of course — to implement these strategies and ultimately meet their goals. This budgetary process requires coordinating all of a company’s functional areas, predicting sales, scheduling production, setting up purchases, planning staff levels, forecasting expenditures, and projecting cash flows.
The end result is a budget that predicts what will happen during the next period, explicitly laid down in dollars and cents.
Evaluating and controlling operations
Planning is one thing, but execution is another. Managerial accountants are responsible for continuously monitoring performance, evaluating it, and comparing it to the budget. This part of the job is much like taking an occasional look at the GPS when you’re on a road trip to make sure you’re on the right highway and heading in the right direction.
Suppose that the Busy Hardware store projects it will sell 75,000 snow shovels next winter. It orders delivery of 25,000 shovels each on December 1, January 1, and February 1. It receives its first shipment on December 1, as planned. That December, the weather is unseasonably warm, and it doesn’t snow; no one wants to buy snow shovels. On January 1, Busy Hardware receives its second shipment. But the heat wave continues, and there’s no snow.
Carefully watching sales trends and inventory levels, Busy Hardware’s managerial accountants notice the drop in snow-shovel sales and the accumulation of 50,000 unsold snow shovels in the back of the store. After checking the weather report, they call the purchasing department to cancel the February 1 delivery.
Carefully monitoring operations can help a company avert disaster. It can also help a company identify areas for improvement. Managerial accountants typically compare budget to actual results, investigating large differences, or variances. Understanding the nature of these variances helps managerial accountants identify problems that need additional attention and can help make future budgets more accurate.
Reporting information needed for decisions
Like other accountants, managerial accountants accumulate, classify, and report information. However, they report this information internally, to the company’s own decision-makers, rather than externally, to shareholders.
The information-gathering function focuses on collecting information that is both useful for internal decision-making and necessary for preparing external financial statements distributed to investors. Accordingly, managerial accountants classify revenues and costs into many different categories, for many different purposes. They then use this information to prepare reports and other information that helps managers understand how costs behave and how management decisions will impact total costs and profitability. The same accounting information system also provides information for external financial reporting. (I explain more about financial reporting in the later section “Distinguishing Managerial from Financial Accounting.”)
Understanding Costs
Managerial accountants are often called cost accountants because they focus primarily on costs: They collect information about costs, analyze that information, predict future costs, and use many different techniques to estimate how much various products or processes will cost. A given product may even have several different costs, depending on how managers plan to use the information.
Tom’s Taxi service estimates that driving from Tanta Mount to the airport costs $20 in gas plus $10 in wages — a total of $30 — so that a round trip costs the company $60. A taxi picks up passenger Pearl, who pays $100 for a ride from Tanta Mount to the airport. Expected profit comes to $40 ().
After dropping off Pearl at the airport, another passenger, Tex, hails the taxi to drive him back to Tanta Mount. However, Tex only has $20 to pay for the taxi ride. Should the driver give Tex an $80 discount and drive him for only $20?
This scenario begs another question: How much will Tex’s ride cost? You might say that it costs nothing. After all, Pearl already paid for a round trip, and the taxi needs to be driven back to town anyway. However, you might also say that it costs $30, the cost of gas and wages for driving from the airport back to Tanta Mount. Or to be fair, you might say that Tex’s ride back to town costs $60, just like Pearl’s ride to the airport (for which she paid $100).
Wait — what if driving Tex will prevent the taxi from picking up another passenger on the way back to Tanta Mount? This passenger would pay a $50 fare. Giving Tex a ride is becoming expensive: To drive him back from the airport, Tom may lose $50 in forgone revenue. Was that part of the cost of driving Tex?
As this example indicates, figuring out how much something costs requires considerable judgment, yet plays a vital role in the decisions you make. In the following sections, I define exactly what a cost is and describe some of the techniques accountants use to understand how costs behave. I briefly explain what to do with overhead costs, which are extremely difficult to assign to products (and which won’t go away), and then I summarize how to cost products made in two different kinds of production environments. Finally, I introduce the idea of relevant and irrelevant costs because for decision-makers, some cost information makes a difference and — quite frankly — some doesn’t.
Defining costs
A cost is the financial sacrifice a company makes to purchase or produce something. Managers accept this necessary evil with the expectation that costs provide some kind of benefit, such as sales or net income.
Costs can have many components. For example, a can of root beer includes raw material costs — the costs of purchasing water, sweetener, and other flavors. It also includes labor costs because the bottling plant must pay workers to run the machinery. And it includes overhead, which is the general expense of running the bottling plant. I describe many different kinds of costs in Chapter 3.
Costs can also be divided into product and period categories:
Product costs:
The costs of making products, usually inside the factory. These costs include raw materials, labor, and overhead. After a product is made, its cost becomes an asset: inventory.
Period costs:
The costs of running your business, usually outside the factory — that is, all the business’s costs except its product costs. Some examples include office rent, income taxes, and advertising.
Product costs — and any costs that retailers must pay to purchase products — ultimately become part of cost of sales, an expense on the income statement. In Chapter 4, I explain how to compute this figure.
Predicting cost behavior
To make decisions, managers need to understand how certain choices affect costs and profitability. Suppose that managers are trying to decide whether to pay employees overtime (time-and-a-half) in order to increase factory production. On one hand, more production will increase sales. On the other hand, overtime wages will increase cost rates. Which choice will result in higher profits?
To answer these questions, managerial accountants focus on cost behavior, which can be variable or fixed. Variable costs change with volume made or sold: The more you sell, the higher the cost. Fixed costs don’t change with volume: Regardless of how many items you make or sell, the cost stays the same. Managerial accountants who know which costs are variable and which are fixed can use that information to predict how changes in volume affect total costs.
That said, managerial accountants don’t know everything about cost behavior. They develop their understanding from what the company has experienced in the past. Radical changes push managerial accountants out of their comfort zones and make predicting future costs quite difficult. For example, if a factory shuts down and then retools to make a new product, managerial accountants have little experience from which to make predictions. Similarly, if a factory doubles its production, hiring many more workers, cost behaviors are also likely to change in unpredictable ways.
I explain the nature of cost behavior in greater detail in Chapter 5.
Driving overhead
Some costs behave quite nicely, such that accountants can easily figure out how they relate to finished products. For example, if your factory makes leather wallets, you should have no problem figuring out exactly how much leather is necessary for each wallet. You can also observe and measure how long a single worker takes to finish sewing a wallet.
However, some costs — namely, overhead — are more difficult to handle. These overhead costs include all costs that can’t be easily traced to products, such as heat and electricity. How much heat and electricity cost goes into each wallet?
Don’t dismiss the importance of this question. A chain is only as strong as its weakest link, and an inaccurate overhead allocation will over- or under-cost your product, causing you to misprice it, too. As factories automate, and as products become more complex to manufacture, companies use less and less labor but more and more overhead, making accurate costs all the more dependent on accurate overhead allocations. (Although I’m sure you’ve heard managers and other business people disparage overhead, I bet you never imagined it was this big of a pain in the neck.)
As I explain in Chapter 6, managerial accountants dedicate much effort to identifying various factors that drive, or bring about, overhead costs. In the old days, when factories relied more on labor, overhead seemed to follow the amount of labor worked. Think about the classic sweatshop with underpaid workers operating sewing machines in a hot and crowded room. Overhead included supervisor wages and rent, which are costs of supporting workers. After all, the more workers you have, the more supervisors and space you need, so direct labor hours or wages drive overhead in this scenario. If Product X requires 30 minutes to make and Product Y requires an hour, a single unit of Product X brings on half the overhead that Product Y does.
These days, with robots running factories, figuring out what drives overhead isn’t so simple. Some factories have no direct labor. Therefore, managerial accountants have become more creative when allocating the cost of overhead to units. Many now use a system called activity-based costing to identify a set of overhead cost drivers.
Costing jobs and processes
Factories usually use one of two approaches to manufacturing products. Some products are manufactured to meet customer specifications. These products are usually ordered directly by the customer, made especially for that customer, and follow a system called job order costing. Other products are mass produced, with the factory making many identical or nearly identical units. These mass-production factories follow a system called process costing.
Job order costing
When manufacturers make goods to order, they accumulate the cost of each order separately. For example, a tailor who makes custom shirts computes the cost of materials, labor, and overhead needed to make each shirt. Some shirts require more materials or labor than others and therefore cost more. Chapter 7 explains the fundamentals of job order costing.
Process costing
Manufacturers who make many homogeneous products at a time usually use process costing. Each unit must be processed by several different manufacturing departments. Therefore, accountants first assign costs to the departments and then assign the costs of the departments to the products made. Chapter 8 explains how to make these allocations.
Distinguishing relevant costs from irrelevant costs
Whether a cost is product or period, fixed or variable, job-ordered or process (see the preceding sections in this chapter for a rundown on all these options), you have to consider one basic rule: Some costs make a difference, and some don’t.
When you’re faced with a decision, pay attention to the costs that make a difference. Ignore the others. Suppose that you’re trying to decide whether to eat at home or in a restaurant. You want to choose whichever option is cheaper. Here are some relevant costs:
The cost of food in the restaurant
The cost of gasoline to drive to the restaurant
The extra money you pay if you split the check among friends who order more expensive food or drinks than you
Any extra groceries you would have to buy in order to eat at home
The cost of paying a tip to the server
All these costs depend on your decision. However, certain costs are not relevant:
Your car’s lease payments:
You may think that because you have an expensive lease payment, you should justify it by driving your car. However, dining in a restaurant doesn’t bring down your lease payments (sorry).
The cost of food spoiling in your fridge:
Perhaps you think you should eat at home so that the food in your fridge doesn’t spoil. However, you already paid for the food in the fridge, so eating at home won’t get you a refund. Choosing to eat in the restaurant doesn’t mean you have to pay for the spoiled food twice.
Your rent payment:
Perhaps your rent is so high that you feel like it commits you to spending more time in your apartment (and less time in restaurants). However, staying home doesn’t lower your rent.
When you’re faced with a decision, focus on the costs that actually depend on the outcome of your decision. Ignore all other costs.
Planning and Budgeting for the Future
When you understand how costs behave, you can then apply that understanding to develop realistic goals and strategies for the future. Knowing that fixed costs will stay fixed and that variable costs will change with volume, you can accurately predict likely costs, income, and cash flow for coming periods.
Analyzing contribution margin
Analysis of contribution margin provides a simple and powerful approach to planning. A product’s contribution margin measures how selling that product will impact your overall profits. For example, if a farm stand sells jars of honey for $3 apiece and each jar costs $1 to make, the stand earns a contribution margin of $2 per jar. That is, every jar sold increases the farm stand’s profits by $2. Contribution margin also helps you figure out how many units of a product you need to sell in order for your business to break even. I explain this approach in Chapter 9.
