How to reply to the below Discussion response. Managerial accounting provides in

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How to reply to the below Discussion response.

Managerial accounting provides internal managers the use of accounting to plan and control business operations (Pearsoncustom.com, n.d). The internal nature of managerial accounting is opposite to financial accounting which is used in regards to external entities (investors, creditors and government). Management accounting focuses on the cost-benefit analysis to operating procedures within an organization.

Associated with the two forms of accounting are two cost structures used in an income statement: absorption and variable. The two cost structures identify the cost of a product but absorption costing includes the fixed manufacturing overhead. Variable costing identifies fixed manufacturing overhead as a period cost thus not including it in the price of a unit produced (EducationUnlocked, 2014). Absorption costing is typically utilized in financial accounting for external entities. Variable costing is typically used in managerial accounting because they focus on only variable costs which eliminate skewed results from fixed overhead in unused inventory. In the short-run managers don’t need to include fixed costs because they are regarded as sunk costs no matter how many units are produced or sold.

A variable costing income statement generates a contribution margin. The contribution margin reflects the sale price of a product less all variable costs (EducationUnlocked, 2014).   The contribution margin gains insight into costs that can be calculated in units. The contribution margin can help managers understand profit per unit based on the variable expenses incurred. As the contribution margin doesn’t include fixed expenses it can quickly identify if a company is going to be profited able by subtracting the fixed expenses from the contribution margin.

Explanation / Answer

Managerial accounting and the connecting branches highlighted in Exhibit 1-2 provide the focus of this textbook. As indicated in the exhibit, managerial accounting is linked to cost accounting, cost management, activity management and investment management. Managerial accounting involves generating information for internal users including all levels of management and others within the organization. Some of the same information is reported that appears in the external financial statements, but frequently the information provided to internal users is in more detail, provided more often, and in many different forms depending on how the information is to be used. A key difference between financial accounting and managerial accounting is that managerial accounting reports are not directly constrained by GAAP.

Tax accounting and financial accounting both involve generating financial reports for external users, although the two reports may be very different. Tax returns are required for reporting to the Internal Revenue Service (IRS) and must conform to a specific set of rules. Financial accounting, on the other hand, involves preparing general purpose financial statements for stockholders and creditors. In addition, a family of K-statements (e.g., 8K, 10K) are prepared for the Securities and Exchange Commission (SEC). Financial accounting statements must conform to generally accepted accounting principles (GAAP). This requirement causes external financial statements to be of limited usefulness for internal purposes. The previous statement is not meant to be a criticism of external financial statements, but merely to recognize that different audiences (e.g., stockholders, creditors, plant managers) need different types of information. Internal statement users tend to need more timely, less aggregated information than external statement users. The specific requirements of GAAP and the SEC are outside the scope of this textbook.

Absorption costing is defined as a method for accumulating the costs associated with a production process and apportioning them to individual products. This type of costing is required by the accounting standards to create an inventory valuation that is stated in an organization's balance sheet.

A product may absorb a broad range of fixed and variable costs. These costs are not recognized as expenses in the month when an entity pays for them. Instead, they remain in inventory as an asset until such time as the inventory is sold; at that point, they are charged to the cost of goods sold.

Variable and absorption are two different costing methods. Almost all successful companies in the world use both the methods. Variable costing and absorption costing cannot be substituted for one another because both the systems have their own benefits and limitations.

These costing approaches are known by various names. For example, variable costing is also known as direct costing or marginal costing and absorption costing is also known as full costing or traditional costing.

The information provided by variable costing method is mostly used by internal management for decision making purposes. Absorption costing provides information that is used by internal management as well as by external parties like creditors, government agencies and auditors etc.

Fixed cost has to be reduced from total contribution to arrive at the profit generated by the company.

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