Topic outline

  • If you have completed Saylor Academy's BUS103: Introduction to Financial Accounting, you know that firms need to track various forms of data in order to report to investors, regulators, and potential business associates such as customers and vendors. Firm managers, however, often need information that is much more detailed than the data provided in these financial reports. They use what is known as "managerial accounting" to make various decisions about their businesses. To avoid information overload, much of their data is tailored to the needs of a particular business unit instead of generally applicable to the firm as a whole. As you might expect, different managers have different needs. However, almost all management decisions deal with the same key issues: cost, price, and profit. This course will examine this sort of decision-making, identifying the tools and methods managers use to make the best-informed decisions possible. This course begins with an introduction to the terms that will be referenced in the later units. We will then discuss the various methods and theories that managers deploy when tracking costs and profits. The final section will explain how managers report the overall performance of a firm or department for internal use. Upon completion of this course, you will be better prepared to make informed decisions within a firm.

  • This unit will begin by examining the differences between financial and managerial accounting. The primary difference, as you will learn, is the audience for the financial and managerial accounting information. Financial accounting information is geared toward external users, and managerial accounting information is geared toward internal users. Managerial accounting is integral to making operational and strategic decisions. At the end of this unit, you will be able to explain why there is a need for both financial and managerial accounting.

    This unit will also introduce you to the manufacturing process and related financial accounting transactions. You will differentiate between costs assigned to products and costs assigned to the period. One key item to notice is that the flow of costs in accounting mirrors the physical flow of the inventory. For example, a pizza parlor purchases pepperoni, sausage, and olives (direct materials) to go on the pizzas. When a customer orders a pizza, the direct materials are assembled and baked (work in process), and a completed pizza (finished goods) is delivered to the customer.

    Completing this unit should take you approximately 8 hours.

  • Unit 1 Conclusion

    Unit 1 has introduced you to the basics of managerial accounting. You have looked at the functions managerial accounting is needed for and the people and organizational structure needed to enable a management information system to be effective. You have seen that a difference exists between financial and management accounting. In the next unit you will start to learn managerial accounting with a focus on learning by example with real world applications.

    • This unit focuses on three categories of cost management: job costing, activity-based costing, and process/production costing. For a company that produces items for jobs, it is easy to identify the direct materials and direct labor for a specific job. However, how do you determine direct materials if the company uses a continuous assembly line? It would be inefficient to track each unit of production separately. This unit also addresses how to allocate manufacturing overhead. Manufacturing overhead consists of costs not directly related to the product but necessary to run the production process. This includes, but is not limited to, factory equipment, factory rent, and utilities for the factory.

      Completing this unit should take you approximately 16 hours.

    • Unit 2 Conclusion

      In this unit, you learned how to organize costs so that they can be efficiently used to assist management decision-making. You have read about and seen examples of job costing, activity-based costing, and process/production costing. Most management decisions involve predictions of future activity. If a manger decides to increase product price, she will be asked what effect that will have on the volume sold and profits. Unit 3 explores how short-term management decision-making is assisted by management accounting information.

      • This unit will introduce a new way to evaluate costs and make management decisions. Rather than examining direct materials, direct labor, and manufacturing overhead, this information is rearranged into variable costs, fixed costs, and mixed costs (both fixed and variable costs combined). For example, a factory worker who earns a salary and an annual bonus based on company performance was classified as direct labor in the previous unit. In this unit, salary is allocated to fixed costs and the bonus to variable costs.

        This unit looks at how managers make short-term decisions. Short-term decisions cover what should be done in the next hour, day, week, or year. At the extreme a short term decision is defined by fixed cost restraints, such as plant size, equipment size and age.    

        Understanding how these three types of costs variables behave means you will be able to make predictions about revenue and operating income, given changes in sales volume.

        Completing this unit should take you approximately 15 hours.

      • Unit 3 Conclusion

        In this unit you have identified costs as fixed, variable, or mixed. You then examined the behavior of costs to predict future financial patterns. The production of the contribution margin income statement is an important management decision making tool. In the next unit you move on to one of the most useful tools in the managerial accounting tool box cost-volume-profit analysis, or break-even analysis. Every manager needs to know how much has to be produced to generate a profit. A well done break even analysis will also respond to questions about what happens if  one or more cost variables changed because you can estimate how sensitive profit is to any of these variables.

        • This unit explores how a company can plan for profitability. Snowboard Company is a manufacturer of one model of snowboard. Snowboard Company’s CEO wants to know how many boards she would have to make to end the month with a decent profit. The methods in this unit are used to answer questions regarding break-even level of production and focus on how to achieve desired profit points. This unit considers the relationship among costs, volume, and profit  (CVP). CVP analysis identifies how changes in key variables may impact financial projections and, ultimately, profitability. Breakeven analysis is synonymous with CVP analysis.

          Completing this unit should take you approximately 8 hours.

        • Unit 4 Conclusion

          In this unit you saw how cost-volume-profit analysis (also known as break-even analysis) is used for financial decision-making. The CVP method makes predictions and those predictions are subject to variance. Fortunately, CVP can provide a measure of sensitivity of profits to the CVP variables. You also saw that CVP was able to provide information on how production should be managed when production inputs are constrained. In the next unit you will learn about differential analysis, another tool for managers to use in dealing with uncertainty.


          • This unit examines Best Boards, Inc., a manufacturer of wakeboards that is facing a decision to outsource a part of its operation or not. This unit explores how Best Boards goes about this difficult task. A part of their decision process will be to undertake a differential analysis.

            Differential analysis determines  the difference in revenues and costs among alternative courses of action. The text begins with a relatively simple example to establish the format used to perform differential analysis. More complicated examples are presented later in the unit. As you work through this unit, notice that you use the contribution margin income statement format.

            Completing this unit should take you approximately 8 hours.

          • Unit 5 Conclusion

            This unit has demonstrated how differential analysis can be used to assist with a myriad of management decisions. Differential analysis builds on the contribution margin income statement. Further costing strategies have also been provided, cost plus and target costs both have their place in the managerial toolbox. In the next unit you will delve into the why and how of master budgets.

            • The CEO of Jerry's Ice Cream wants to increase sales next year. The company knows that to accomplish this, it will need to plan for expansion. A budget is the best planning document available to Jerry's Ice Cream. The budget process is essential to planning and controlling cycles. It provides a plan for operations and a benchmark by which to measure progress. The budget process involves coordination among all the departments in a company.

              In this unit, you will learn about the components of the master budget and prepare all of the underlying schedules. Once the master budget is complete, the company can measure actual performance against the budget.

              Completing this unit should take you approximately 8 hours.

            • Unit 6 Conclusion

              In this unit, you have learned to develop a master budget. It starts with recognizing the importance of the process and the involvement of all strata of the company. The master budget is composed of several schedules. All schedules interlock and are important. A critical schedule is the sales schedule as it drives all other schedules, and  it involves possibly the greatest amount of uncertainty, as predicting sales into the future requires assumptions about many variables. A good master budget is essential to a well-run business. In Unit 7, you will learn how to make the master budget into a flexible living document that accommodates change as it happens and  promotes good managerial decisions and control.

              • Jerry’s Ice Cream has been following their master budget, prepared in Unit 6, and the good news is that actual sales exceeded predicted sales. The bad news is that, compared to the master budget, their actual results show significant cost overruns.

                In this unit, you start to use actual results to modify and improve the information used in managerial decisions. When actual sales differ from budgeted sales, it is inappropriate to evaluate performance by comparing actual results to the master budget. If actual sales volume is higher than the master budget, variable costs should be higher than the master budget. The opposite is true as well.

                In this unit, you will learn various methods for rationalizing the master budget for actual results. In one thread of this unit, you follow Jerry’s Ice Cream as they take their planned master budget and modify it as a long, hot summer unfolds. In another thread, you will watch as Tony Bell considers various "problems" that explain variance and how accounting for variance will improve ongoing management decisions.

                Completing this unit should take you approximately 10 hours.

              • Unit 7 Conclusion

                This unit examined a critical part of the budgeting cycle – Variance Analysis. You have learned how to create a Flexible Budget that incorporates actual results into the Master Budget. Standard Costing and Direct Labor and Material Variance have also been considered. You concluded with a consideration of fixed overhead and its use. In the next unit you look at another ‘budget’ type – a Capital Budget. In this coming unit – ‘fixed’ cost can become variable. A good way to think about Capital Budgeting/Planning is that they are “long term” plans and a company can only ‘plan’ for the long term as it always lives in the short term and works with its ‘fixed’ costs.
                • The previous unit focused on budgeting for the day-to-day operations of a business. You will now focus on budgeting for long-term investments in capital projects, such as machinery. The capital budgeting processes is usually performed simultaneously when preparing the Master Budget. A company uses capital budgeting to evaluate long-term investments. For example, should the company replace a machine now or wait another three years?

                  You use several different methods to evaluate the results of capital budgeting. Project selection or rejection criteria are based on the time value of money and discounted cash flows. This unit will briefly introduce you to the time value of money.

                  Completing this unit should take you approximately 8 hours.

                • Unit 8 Conclusion

                  This unit has provided a comprehensive review of capital budgeting and how it can be used for project selection. A capital budget is a normal and regular activity usually conducted along with Master Budget preparation. In the next unit you explore performance evaluation in decentralized organizations.

                  • In this unit, you consider the issues that Game Products, Inc., encounters in evaluating the performance of its divisional mangers. Game Inc. has three divisions: Sporting Goods, Board Games, and Computer Games. Each division is relatively autonomous with a separate manager, who independently oversees each division.

                    You will explore ways in which managerial accounting helps companies evaluate performance of the company as a whole and its departments and individuals. Responsibility accounting assumes that every cost incurred by a company is the responsibility of someone. Companies that utilize responsibility accounting connect managers' compensation to financial performance. How productive is each division manager in using its assets to produce profits? The focus of this unit is on how to evaluate the performance of division managers within a decentralized organization like Game Inc.

                    Completing this unit should take you approximately 8 hours.

                  • Unit 9 Conclusion

                    In this unit, you learned how you can apply management accounting techniques to decentralized organizations. The main focus is how to evaluate "investment centers" using such techniques as the development of a segmented income statement and the application of performance metrics to these segmented accounts. In the next unit, you learn how to prepare a Cash Flow, one of the most vital tools in management accounting.

                    • Cash is like blood; it flows through a company. Adequate amounts are needed if all parts of the company are to remain healthy and have the potential for profitability. Only in exceptional circumstances do expenses and revenues occur such that today’s expenses are paid by today’s revenues. The lag between expenses and revenue means that cash must be managed so that expenses can be paid in a timely manner. Many companies can manage their cash and ensure that sufficient reserves are maintained to pay expenses when due. Other companies, such as ones experiencing rapid growth or with highly seasonal sales may not have the ability to retain a sufficient cash reserve and must use work capital loans. In all businesses, understanding and managing cash flow is essential. Although the income statement and balance sheet provide important information concerning financial performance and financial condition, neither statement provides information regarding cash activity for a period of time. The focus of this unit is on preparing a statement that provides cash flow information. This statement is appropriately called the statement of cash flows. From this statement comes many important performance measures, aside from just cash on hand and cash needed, these measure are  a part of the next unit.

                      Completing this unit should take you approximately 8 hours.

                    • Unit 10 Conclusion

                      In this unit, you learned what a cash flow statement is and why it is an important part of the management accounting tool box. Most companies, either because of legal requirements or because of prudence, create a cash flow statement as a part of their normal reporting documentation – Income Statement, Balance Sheet, Statement of Owner’s Equity and Cash Flow. With each accounting period, monthly or quarterly, the Cash Flow is updated to reflect actual sales and other relevant events. Managers need to be continually aware of their companies ‘cash’ position. In the next and last unit you will consider other metrics that managers should be aware of and use to monitor their companies economic health.

                      • The analysis of a company’s financial information typically follows a three-pronged approach. First, trends within a company’s own financial information are analyzed, such as sales and earnings from one year to the next, using two methods—trend analysis and common-size analysis. Second, financial measures are compared between competitors. Finally, financial ratios are compared to industry averages/standards.

                        Completing this unit should take you approximately 4 hours.

                      • Unit 11 Conclusion

                        You end this unit and the course on a very practical and important topic. You have learned to use managerial accounting to produce great deals of information germane to management decisions. Trends and ratio are critical, but so too is nonfinancial analysis critical for successful managerial decisions.

                        Margaret Heffernan in MoneyWatch reports that 50 to 80% of mergers fail! Before a merger is entered into there is copious and scrupulous managerial accounting information produced and reviewed, yet the merger failure rate has been far too high for decades. The lesson here is that, although the numbers you can now produce and analyze are important, they cannot, on their own answer complex management questions. Management accounting information serves a critical role, but decision-makers always need to look beyond the numbers and use a balanced approach.