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An in-depth analysis into Managerial and the issues surrounding adopting this

method for business reporting

In all businesses, accounting is a very important function in regards to determining its financial health as well as providing assistance in remaining compliant with laws governing financial reporting. Depending on the needs of the business, a company can choose to use either financial or managerial accounting methods for their daily operations and reporting. Financial accounting is more prevalent within most of corporate America, while managerial accounting tends to take a backseat as only a select few types of companies find it to be beneficial for their needs.

The differences between the two methods are very distinct. In financial accounting, financial data is accumulated from the start of the business and tracked periodically (i.e. monthly, quarterly, and yearly). This data is, then, combined into many financial statements which provide snapshots of how the business is doing and can help analysts determine the financial strength at any point in time. On the other hand, managerial accounting is not as focused on the numbers as financial accounting is, but more concentrated on the internal processes used to account for business transactions such First In First Out (FIFO) and Last In First Out (LIFO) ("The difference between", 2017).

Not many individuals understand the intertwining's of managerial accounting as a whole, and some may not know it even exists. As a business owner, it's best to know what there is to look forward to when planning to adopt this method as part of the business model. In this case, what issues will arise once this method is in fully implemented? Freedman identifies the following problems associated with managerial accounting, which will be discussed in more detail in this paper: GAAP Compliance, Adaptability, Reliability, and Cost. A full understanding of these faults will help in the decision process to recognize how much risk the business is willing to take during implementation.

1.GAAP Compliance

Users of the managerial accounting method claim that in some businesses it cannot be used due to its noncompliance with GAAP. This is why many businesses do not lean towards managerial accounting in an effort to follow GAAP as their business model. Tasks such as activity based costing are viewed as noncompliant within GAAP, which is a major feature of managerial accounting. Activity based costing uses a cost structure that connects overhead expenses to the products and services that use them. In financial accounting, these expenses are just grouped into a general ledger code with other similar expenses.

2.Reliability

Managerial accounting is said to be unreliable in a sense of having access to information at any point in time. With financial accounting, trends can be predicted based on previous month's or year's data. Management can determine whether expenses are increasing at a fast rate or whether there needs to be cut backs in order to gain in other areas. In managerial accounting, information is used based on real time occurrences. Due to this issue, management cannot properly evaluate or predict the outcome of future periods. For more accurate reporting, it is best to wait for the current period to assess the data.

3.Cost

In the accounting industry, it's always easiest to find professionals that deal heavily with financial accounting as well as have the basic knowledge of it from school. It is very rare to find accountants that have specializations in managerial accounting, hence why it could be proven to be a costly move to find talent with this expert knowledge. Freedman further explains that if a company plans to implement using the managerial method, it could mean moving current employees to other roles to compensate for adding on managerial expertise. In addition, professionals who consult are typically more expensive than training current employees; however, time may prevent the company from going the training route.

References:

Freedman, J. (n.d.) Problems of Management Accounting. Retrieved from http://smallbusiness.chron.com/problems-management-accounting-71019.html

(2017, Aug. 30) The difference between financial and managerial accounting. Retrieved from https://www.accountingtools.com/articles/what-is-the-difference-between-financial-and-managerial-acco.html

(2017, September 16). Activity based costing. Retrieved fromhttps://www.accountingtools.com/articles/2017/5/14/activity-based-costing

Kapi, J. (2014). ACTIVITY BASED COSTING - ABC.Business Consultant / Poslovni Konsultant,6(32), 9-16.