Financial vs Managerial Accounting
Financial accounting is the branch of accounting that organizes accounting information for presentation to interested parties outside of the organization. The primary financial accounting reports are the balance sheet (often called a statement of financial position), the income statement, and the statement of cash flows. The balance sheet is a summary of assets, liabilities, and shareholders’ equity at a specified point in time. The income statement reports revenues and expenses resulting from the company’s operations for a particular time period.
The statement of cash flows shows the sources and uses of cash over a time period for operating, investing, and financing activities. Managerial accounting is the branch of accounting that meets managers’ information needs. Because managerial accounting is designed to assist the firm’s managers in making business decisions, relatively few restrictions are imposed by regulatory bodies and generally accepted accounting principles. Therefore, a manager must define which data are relevant for a particular purpose and which are not. In managerial accounting, however, the segment is of major importance.
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Segments may be products, projects, divisions, plants, branches, regions, or any other subset of the business. Tracing of allocating costs, revenues, and assets to segments create difficult issues for managerial accountants. Two important similarities do exist. The transaction and accounting information systems discussed earlier are used to generate the data inputs for both financial statements and management reports. Therefore, when the system accumulates and classifies information, it should do so in formats that accommodate both types of accounting.
Discuss a possible negative managerial scenario that the regional manager may be sensing. The Regional Manager is piecing together trends and abnormalities in order to predict the near future of store #9. At a glance, we determine that store 9 run by an effective manager with a successful track record. However, the lack of investment in training signals an attempt to cut overhead costs in order to show a larger store profit. Cutting employee training may be an effective tool for the short term but may create issues in the future. Additionally, we see that the Store has decided to withdraw from several costly, but high visibility events.
Again, this may be a reduction in variable cost in order to reduce store overhead in the short term and increase profitability. The Regional Manager’s concern is that the entire company profits from these community events, not just the single store, and therefore, the impact may be detrimental to sales in multiple areas. Lastly, we see that store #6 has increased its operating costs since the store manager in question departed. This signals an issue consistent with the concerns above that this manager simply aims to reduce overhead as low as possible in order to increase the overall store profit.
Might the manager of Store 9 be an exceptional manager? Although on the surface, the three trends above may appear to be negative; this store manager may in fact be a very effective manager. For example: Perhaps instead of accounting for the trainee’s hours as overhead in training costs, he has put that individual in a position to learn-on-the-job, therefore, making the employee’s working hours into a direct labor cost and minimizing overhead. When it comes to advertising, we saw the manager spent most of his advertising dollars early in the year.
It may be possible that the manager elected to spend his variable expense advertising dollars during a time period where they would produce the most sales, and then tapered off his advertising dollars during a time period of steady business flow. Lastly, the cancellation of high visibility events may have been due to the determination that cost was not yielding substantial sales or visibility. Despite this fact, it stands to reason that a store manager would inform a regional manager of any choices having a broader impact on the overall company.
If there was a lack of communication here, I believe it is to the detriment of the store manager’s credibility. What are the ethical implications of the scenario? Variable Cost defines the cost of a single assembled product based on the materials consumed and labor invested directly in unit production. To illustrate our point, we can say that making a single baked potato with all of the fixings will cost $3. 00 to produce (potato, sour cream, chives, plate, fork, napkin and labor). If we decide to go into the baked potato business, we must then sell these potatoes for at least $3. 00 per unit.
Any less would cause us to lose money on the endeavor. This cost cannot be made up of an increasing volume of sales. Judy Koch discussed the fact that bulk purchases can benefit you reduce these variable costs. If we decided to purchase potato-making materials in larger quantities and hired more workers to produce these products, we could then possibly produce our product for a lower Variable Cost based on the new price. Fixed costs will remain the same no matter how our potato shop does. As an example, our potato restaurant rental costs will be the same whether we sell one hundred potatoes or zero potatoes per month.
The electricity, the heating costs, the manager’s salary. All of these factors will stay consistent no matter how many units we sell. Judy Koch’s statement is in reference to the fact that these costs are indeed changeable, however, they do not vary per unit sold. We can decide to upgrade our successful restaurant and pay higher rental fees, the government can increase our tax liability and we can hire more management. None of these costs will increase if we sell more potatoes. They are independent of unit sales.
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