In an earlier article, we discussed the essential role that financial accounting reports play in supporting capital markets and facilitating a healthy economy. In this article, we address the second major function of accounting systems. Managerial accounting is focused on providing internal managers of businesses the essential information they need to effectively manage each segment of their business.
Although income statements and balance sheets play an important role in providing information to external stakeholders and to high-level executives within an organization, such statements do little to help managers within an organization plan and control the business operations they manage. If a company’s income statement shows it is profitable, that may make management and investors happy with the results. But if a company is to remain profitable or improve its profit picture, managers of the various segments of a business must be able to make informed decisions that reflect the economic consequences of the decisions made and the actions taken by management and employees.
Successful organizations, both profit seeking and not-for-profit, operate in a competitive environment using the entity’s limited resources as wisely as possible to achieve its goals. Internal managers frequently want answers to questions such as (1) what parts of the business are most and least profitable; (2) what parts of our business are competitive and what parts are not; (3), what does it cost to make our products and provide our services, and how does that compare with our strongest competitors; (4) should our firm add new product lines or terminate current product lines? These and many other managerial questions are crucial to the successful management of operations and development of effective strategic and operational plans for the company.
An obvious question is, “What kinds of management accounting information are necessary to support management in answering these types of questions?” The answer is that it can be any information management believes is valuable in providing useful information to the management function. Unlike financial accounting, which is driven by Generally Accepted Accounting Principles (GAAP), management accounting information is driven primarily by the information needs of management. The key issue for management is to identify and provide management accounting information relevant to management’s information needs. Of course, the benefit of providing the information must be greater than the cost of capturing and reporting the information.
There are many different types of economic entities, each with their own challenges for effectively managing operations to achieve their goals. Therefore, each entity’s management accounting system is somewhat different than that of other firms. But all management accounting systems have the common goal of helping managers make the best and most informed decisions possible.
Professor Les Heitger, Ph.D., CPA, is the BKD Distinguished Professor of Forensic Accounting in the School of Accountancy at Missouri State University, He is the National President of the Forensic Accounting Section of the American Accounting Association (AAA), he is co-author of Forensic and Investigative Accounting, and he teaches primarily graduate Forensic Accounting courses. He can be reached firstname.lastname@example.org
This article appeared in the October 1 edition of the Springfield News-Leader and can be accessed online here.