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Module 1 Introduction To Managerial Accounting
Module 1 Introduction To Managerial Accounting
AGRIBUS 2
Managerial Accounting
BS IN AGRIBUSINESS
MODULE 1:
BASIC ACCOUNTING CONCEPTS AND
CONSIDERATIONS
Objectives:
1. To identify the features of managerial accounting and the comparison to financial accounting.
2. To discuss the management functions, organizational structure, and business ethics.
Content:
Unlike financial accounting, which is primarily concentrated on the coordination and reporting of the
company’s financial transactions to outsiders (e.g., investors, lenders), managerial accounting is focused
on internal reporting to aid decision-making.
Managerial accountants need to analyze various events and operational metrics in order to translatedata
into useful information that can be leveraged by the company’s management in their decision- making
process. They aim to provide detailed information regarding the company’s operations by analyzing each
individual line of products, operating activity, facility, etc.
• Managerial accounting is used strictly for internal purposes, while financial accounting
providesfinancial information based on accounting standards.
• Managerial accounting frequently looks ahead, while financial accounting offers analysis
ofhistorical data.
• Managerial accounting typically runs a variety of operational reports throughout the
month,while financial accounting runs financial statements at the end of the accounting
period.
• Managerial accounting uses estimated amounts, while financial accounting only uses
actualnumbers.
If you’re training your employees how to track business expenses more efficiently, you’re using
managerial accounting, but if you’re using accounting ratios to determine the profitability of your
company, you’re using financial accounting.
Because managerial accounting centers around business potential and performance, it mainly deals
with the future.
Managerial accounting focuses on problem-solving, devising strategies for making the company more
profitable and efficient long term.
Financial accounting does play a role in managerial accounting, mainly in the form of financial
statements, which are necessary when creating strategic plans, streamlining operations, solving
logjams, and creating business budgets and forecasts.
For any public company, financial accounting processes must abide by a very specific set of rules
provided by the Generally Accepted Accounting Principles (GAAP), the accounting standard adopted
by the U.S. Securities and Exchange Commission framework.
There are also additional rules for publicly held companies that are governed by the Securities and
Exchange Commission (SEC) that need to be followed as well.
Financial accounting uses a chart of accounts that has been created for the company, with set policies
and procedures in place that govern how transactions are to be posted using these accounts, with the
end goal to create factual financial statements for a very specific period of time.
However, it’s important to remember that routine tasks such as creating an invoice or
tracking accounts receivable balances are also part of the financial accounting process.
Think of it like this: managerial accounting is used by management to better run the company, while
financial accounting is used by third parties to determine compliance standards set by the Financial
Accounting Standards Board (FASB) and other regulators.
Both managerial accounting and financial accounting are centered around numbers, but how those
numbers are used varies greatly in these two types of accounting methods
These are the main differences between managerial and financial accounting.
Managerial accounting looks at a way to solve specific management issues while financial accounting
looks at the company as a whole.
1. Looking forward vs. looking back
Financial activity is handled very differently in managerial and financial accounting. Managerial
accounting is used to create strategic plans, tasking managers with creating budgets, and estimating
upcoming income and expenses.
Financial accounting analyzes company results that have already been achieved, with those results
contained in financial statements.
Financial accounting focuses on performance for a very specific time frame. Another major difference
is that managerial reports are used internally, while financial reports are distributed to those outside
the company, including regulators, investors, and financial institutions.
The information contained in financial statements must be accurate and is derived from the various
financial transactions entered throughout the specified accounting period.
Remember, the facts contained in financial statements often play a role in managerial accounting, but
estimates have no role in financial accounting.
4. Legal requirements
There are no legal standards or requirements involved with managerial accounting, which can be
usedby businesses as they wish.
However, any publicly traded company is required to prepare financial statements that follow set rules
and regulations.
While many businesses use a combination of managerial and financial accounting, only the financial
statements produced using financial accounting processes are required to be audited by an
independent CPA firm.
5. Tools
While you’re likely using accounting software in order to track your financial accounting activity
accurately, you’ll probably need to use other resources such as budgeting or planning tools in
managerial accounting.
How managerial and financial accounting are similar
Managerial accounting and financial accounting do have a few things in common. Both need to have
accurate numbers to work from: managerial accounting to use as a basis for creating budgets and
estimates, financial accounting to comply with FASB standards in order to be deemed accurate and in
compliance with regulations.
While managerial accounting works more as a problem solver, financial accounting shows you exactly
what your business has accomplished to date.
In most companies, they are used simultaneously to create a more efficient, profitable business.
Though some accounting software applications do offer budgeting capability, many businesses use a
spreadsheet application such as Microsoft Excel to create budgets and estimates.
MANAGEMENT FUNCTIONS:
The four basic functions of management are planning, organizing, leading and controlling. These
functions work together in the creation, execution and realization of organizational goals. The four
functions of management can be considered a process where each function builds on the previous
function. To be successful, management needs to follow the four functions of management in the
proper order.
Managers first need to develop a plan, then organize their resources and delegate responsibilities to
employees according to the plan, then lead others to efficiently carry out the plan, and finally evaluate
the plan’s effectiveness as it is being executed and make any necessary adjustments.
• Planning
• Organizing
• Leading
• Controlling
Planning
In the planning stage, managers establish organizational goals and create a course of action to
achieve them. During the planning phase, management makes strategic decisions to set a direction
forthe organization. Managers can brainstorm different alternatives to achieve the objective before
choosing the best course of action. While planning, managers typically conduct in-depth analysis of
the organization’s current state of affairs, taking into consideration its vision and mission and
evaluating what resources are available to meet organizational objectives.
While planning, managers usually evaluate internal and external factors that may affect the execution
of the plan, such as economic growth, customers and competitors. They also establish a realistic
timeline for achieving the goal or goals based on the organization’s available finances, personnel and
resources. Managers may have to take additional steps, such as seeking approval from other
departments, executives or their board of directors before proceeding with the plan.
• Tactical planning: Tactical planning is the shorter-term planning of an objective that will take
ayear or less to achieve. It is usually carried out by an organization’s middle management.
Tactical planning is usually aimed at a specific area or department of the organization such as
itsfacilities, production, finance, marketing or personnel.
Organizing
The purpose of organizing is to distribute the resources and delegate tasks to personnel to achieve
thegoals established in the planning stage. Managers may need to work with other departments of
the organization, such as finance and human resources, to organize the budget and staffing. During
the organizing stage, managers strive to create a work environment conducive to productivity.
Managers typically take employees’ motivation and aptitude into account to match employees with
roles and tasks that best fit their abilities.
When assigning team member roles, managers should explain and ensure that employees
understandtheir individual duties. To help employees feel engaged and productive, managers should
ensure that employees are assigned an appropriate amount of work and an appropriate amount of
time to complete their work.
• If the company’s brand manager works part-time and the organization’s goal is to launch a new
advertising campaign for a product, the brand manager may not take on the significant
responsibility of managing the campaign besides their regular duties. The company may hire
anadvertising agency to help with the promotion of the product.
• If a company’s sales in a geographic area have grown exponentially, management may plan
tosplit the territory in two and need to divide the current team working in the territory and hire
additional staff members as needed.
Leading
Leading consists of motivating employees and influencing their behavior to achieve organizational
objectives. Leading focuses on managing people, such as individual employees, teams and groups
rather than tasks. Though managers may direct team members by giving orders and directing to their
team, managers who are successful leaders usually connect with their employees by using
interpersonal skills to encourage, inspire and motivate team members to perform to the best of their
abilities.
Managers can foster a positive working environment by identifying moments when employees need
encouragement or direction and using positive reinforcement to give praise when employees have
done their jobs well.
Managers usually incorporate different leadership styles and change their management style to adapt
to different situations. Examples of situational leadership styles include:
• Directing: The manager leads by deciding with little input from the employee. This is an
effective leadership style for new employees who need a lot of initial direction and
training.
• Coaching: The manager is more receptive to input from employees. They may pitch their
ideasto employees to work cooperatively and build trust with team members. This style of
leadership
is effective for individuals who need managerial support to further develop their skills.
• Supporting: The manager decides with team members but focuses more on building
relationships within the team. This style of leadership is effective for employees who have
fullydeveloped skills but are sometimes inconsistent in their performance.
• Delegating: The leader provides a minimum of guidance to employees and is more concerned
with the vision of the project than day-to-day operations. This style of leadership is effective
withemployees able to work and perform tasks on their own with little guidance. The leader
can focus more on high-level goals than on tasks.
Controlling
Controlling is the process of evaluating the execution of the plan and making adjustments to ensure
that the organizational goal is achieved. During the controlling stage, managers perform tasks such
astraining employees as necessary and managing deadlines. Managers monitor employees and
evaluate the quality of their work. They can conduct performance appraisals and give employees
feedback, providing positive remarks on what they are doing well and suggestions for improvement.
They may also offer pay raise incentives to high-performing employees.
ORGANIZATIONAL STRUCTURE:
An organizational structure is defined as “a system used to define a hierarchy within an
organization. It identifies each job, its function and where it reports to within the organization.” A
structure is then developed to establish how the organization operates to execute its goals.
There are many types of organizational structures. There’s the more traditional functional structure,
thedivisional structure, the matrix structure and the flatarchy structure. Each organizational structure
comes with different advantages and disadvantages and may only work for companies or
organizations in certain situations or at certain points in their life cycles.
Ultimately, it’s important to get a group’s organizational structure correct in order for its aims to be
successful.
Example: 1. Functional
If you’ve had a job, you likely worked in a functional organizational structure.
The functional structure is based on an organization being divided up into smaller groups with specific
tasks or roles. For example, a company could have a group working in information technology,
anotherin marketing and another in finance.
Each department has a manager or director who answers to an executive a level up in the hierarchy
who may oversee multiple departments. One such example is a director of marketing who supervisesthe
marketing department and answers to a vice president who is in charge of the marketing, financeand IT
divisions.
An advantage of this structure is employees are grouped by skill set and function, allowing them to
focus their collective energies on executing their roles as a department.
One of the challenges this structure presents is a lack of inter-departmental communication, with
mostissues and discussions taking place at the managerial level among individual departments. For
example, one department working with another on a project may have different expectations or
detailsfor its specific job, which could lead to issues down the road.
In addition, with groups paired by job function, there’s the possibility employees can develop “tunnel
vision” — seeing the company solely through the lens of the employee’s job function.
Example 2: Divisional
Larger companies that operate across several horizontal objectives sometimes use a divisional
organizational structure.
This structure allows for much more autonomy among groups within the organization. One example
ofthis is a company like General Electric. GE has many different divisions including aviation,
transportation, currents, digital and renewable energy, among others.
Under this structure, each division essentially operates as its own company, controlling its own
resources and how much money it spends on certain projects or aspects of the division.
BUSINESS ETHICS:
By definition, business ethics are the moral principles that act as guidelines for the way a business
conducts itself and its transactions. In many ways, the same guidelines that individuals use to conduct
themselves in an acceptable way – in personal and professional settings – apply to businesses as well.
Acting ethically ultimately means determining what is “right” and what is “wrong.” Basic standards
existaround the world that dictate what is wrong or unethical in terms of business practices. For
example, unsafe working conditions are generally considered unethical because they put workers in
danger. An example of this is a crowded work floor with only one means of exit. In the event of an
emergency – such as a fire – workers could become trapped or might be trampled on as everyone
heads for the only means of escape.
While some unethical business practices are obvious or true for companies around the world, they do
still occur. Determining what practices are ethical or not is more difficult to determine if they exist in a
grey area where the lines between ethical and unethical can become blurred.
For example, assume Company A works with a contact at Company B, an individual through which
they negotiate all the prices for supplies they buy from Company B. Company A naturally wants to
getthe best prices on the supplies. When the individual from Company B comes to their home office
to negotiate a new contract, they put him up in a top-tier hotel, in the very best suite, and make sure
thatall his wants and needs are met while he’s there.
In technical terms, the practice is not illegal. However, it might be considered a grey area – close to,but
not quite, bribery – because the individual is then likely to be more inclined to give Company A aprice
break at the expense of getting the best deal for his own company.
Business ethics are important for every company. They keep workers safe, help trade and interactions
between companies remain honest and fair, and generally make for better goods and services.
Distinguishing what a company will and won’t stand for is not always the same for each organization,but
knowing basic ethical guidelines is a key component of company management.
ACTIVITY-1
True or False:
1. Reports prepared in financial accounting are general-purpose reports, whereas reportsprepared in
managerial accounting are usually special-purpose reports.
4. Controlling is the process of determining whether planned goals are being met.
6. The belief that each member of a group bears no responsibility for the well-being of other
members is a common principle underlying all ethical systems.
7. Modern cost accounting takes the perspective that collecting cost information is a function ofthe
management decisions being made.
9. Line management is directly responsible for attaining the goals of the organization.
10. If a managerial accountant suspected his or her immediate superior of wrongdoing, themanagerial
accountant should request an immediate meeting with the Board of Directors.
MULTIPLE CHOICE:
1. Management accounting:
A) focuses on estimating future revenues, costs, and other measures to forecast activities and
theirresults
B) provides information about the company as a whole
C) reports information that has occurred in the past that is verifiable and reliable
D) provides information that is generally available only on a quarterly or annual basis
2. Financial accounting:
A) focuses on the future and includes activities such as preparing next year's operating budget
B) must comply with GAAP (generally accepted accounting principles)
C) reports include detailed information on the various operating segments of the business such
asproduct lines or departments
D) is prepared for the use of department heads and other employees
9. The Standards of Ethical Conduct for management accountants include concepts related to:
A) competence, performance, integrity, and reporting
B) competence, confidentiality, integrity, and credibility
C) experience, integrity, reporting, and objectivity
D) None of these answers are correct.
12. Which of the following actions should a management accountant take first in confronting
apotential ethical conflict concerning your direct supervisor?
A) Inform the Board of Directors of the existence of a potential conflict.
B) Confront the supervisor directly.
C) Discuss the situation with your supervisor's direct supervisor.
D) Review your organization's procedures concerning resolution of such a conflict.
13. If there is an ethical conflict concerning your direct supervisor, you may contact all of the
followinggroups EXCEPT:
A) local media
B) audit committee
C) executive committee
D) board of directors