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Managerial Accounting

There's No Substitute For Good Information

Video Playlist: Intro. To Managerial Accounting

After taking a Financial Accounting course, some people get the impression that
accounting is simply about coming up with reports to comply with the information needs
of shareholders and lenders. But the reality is managers need reliable accounting
information too. And since their primary consideration is whether the numbers are
useful and relevant, there's no need for the accounting numbers to comply with
Generally Accepted Accounting Principles-- instead, organizations can come up with
their own metrics to guide managerial decision-making, evaluate the performance of
managers and their divisions, or decide whether a product line is unprofitable. These
decisions revolve largely around the organization's ability to measure and control costs,
concepts which are covered extensively in the topics below.
TOPICS IN MANAGERIAL
ACCOUNTING

This topic provides an introduction to Managerial Accounting and explains how it differs
from Financial Accounting. After laying this foundational groundwork, we move on
to the three types of manufacturing costs (direct materials, direct labor, and
manufacturing overhead), the difference between product and period costs, and the
three types of inventory (raw materials, work-in-process, and finished goods) accounted
for in manufacturing firms.

It is often difficult to predict how a cost will

We can assign costs to an infinite number of cost objects:
products, jobs, even customers. In this topic, we
distinguish between the different types of costs (variable
vs. fixed, direct vs. indirect) so we might begin to
understand how costs behave.
behave; rarely do costs follow a simple
pattern. In this topic, we discuss unusual
ways in which costs might behave (step-
variable costs, mixed costs) and identify
tools that help us parse out the fixed and
variable components of costs.

Firms that manufacture a variety of products can allocate their costs based on a When a firm manu
particular job. In this topic, we discuss how job-order costing can be used to measure there's little point i
the cost of a customer order. discuss how proce
Traditional cost drivers (labor hours or machine hours) sometimes do a poor job helping
us assign overhead to products. In this topic, we discuss how activity-based costing
provides a superior method for accurately determining the cost of a product.

Whichever costing method we choose, we need to determine how we will treat fixed
manufacturing overhead costs when we're measuring our profitability internally. In this
topic, we introduce the concepts of Absorption Costing and Variable Costing and
discuss how the use of Absorption Costing for internal decision-making can provide
managers with perverse incentives.

Budgets are exceptionally useful for both planning and control. In this topic, we discuss
the role of budgeting within the organization, the creation of the master budget, and
the intricacies of several key budgets (the sales budget, the production budget, the cash
budget).

Budgeting is crucial to the organizational planning process, but Even after we've used the Flexible

relying on the initial budgeted figures for evaluating a manager's or unfavorable spending variance, we

division's performance can be problematic while the actual level of occurred; did we use too much mat

activity (e.g., the number of units sold) differs from the activity level too much for the materials (a price

we had budgeted. In this topic, we introduce the concept of Flexible the concept of Standard Costing an

Budgeting and illustrate how we can adjust our budget for differences parse out variances so that we migh
 in the activity level, ultimately deriving revenue and spending department or production departme
variances which can then be interpreted to measure performance. favorable or unfavorable spending
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