- The third basic flavor of accounting
is managerial accounting.
Recall that financial accounting
involves communicating summary results to outsiders.
Organizations also need to use information
to make internal decisions.
That internal information is the focus
of managerial accounting.
Think of managerial accounting data
as being the detailed, private information
that is used internally to make daily decisions.
Let's consider some examples
of managerial accounting information.
Let's say that I have a wood furniture business.
Somebody comes in and orders
a custom made oak table.
Well in order to make an intelligent decision
about whether I should sell that table
and at what price I should sell it,
I need to know how much it cost me to make that table.
So product costing is part of managerial accounting.
Another example of managerial accounting
is break even analysis.
Let's say I'm considering opening up
a scuba shop at the local mall.
Wow, that's a risky thing to do,
but okay, go ahead, think about it.
And one of the first things you should do
is to figure out how much you're going to have to pay
your manager.
Figure out how much you're going to have to pay for rent,
and then figure out how many customers
are going to have to come into the scuba shop
each month for you to break even
to avoid losing any money.
Budgeting is also part of managerial accounting.
Many startup businesses have been killed
because they just hadn't made a budget,
a numerical plan on paper.
A cash budget, for example,
allows you to see in advance, sometimes months in advance
when a cash shortage will occur.
If the company prepares a cash budget,
that cash shortage problem
can be addressed in advance.
Without a budget,
each day is a suspenseful, exciting, stress filled adventure
with no advanced warning of approaching problems.
Performance evaluation is also part
of managerial accounting.
Some employees are doing their jobs very well.
Some employees, not so well.
We want to reward the one and not reward the other.
So we need a system in place to gather the data
to evaluate different employees, different products,
and different processes in our companies.
Internal decision making also involves
assembling data to make long-term decisions.
This is called capital budgeting,
and is an important part of managerial accounting.
managerial accounting also involves making
special decisions such as whether to accept
a special order, to drop a product line,
or to outsource production.
What about outsourcing production?
Let's say I've got a production facility
right now in the central valley of California,
but should I stop making my product here in California
and outsource it?
Maybe it can be made in Brazil.
Maybe it can be made in Ethiopia.
There are all kinds of possibilities.
Product cost, break even analysis,
budgets, performance evaluation measures,
long-term capital budgeting, outsourcing decisions,
these are the kind of internal decisions
that are made using managerial accounting data.