Managerial Accounting- Change in mindset
March 23, 2013 1 Comment
Why is Managerial Accounting required? Where does it help? Why it is so important now than before.
This kind of Accounting helps stake holders internal to the company to understand cost structure, make price decisions as well as plan and budget. The accounting practice is free from GAAP(though it can use it, but there’s no obligation) and can be tailor made for different requirements.
Let’s understand the change in mindset, and why managerial accounting plays more important role now than before.
Cost + Profit = Selling Price (Monopoly): This is the formula used by monopolistic organizations, where profit is at your discretion. Since it’s a monopoly, it can demand decent profit, and Selling Price is determined via cost and profit factors.
Selling Price – Cost = Profit (Competition): This is the competition era, where Selling Price is determined by market forces and organizations don’t have much say in it. With pressure on ever decreasing selling prices, and ever increasing costs, profits keeps on diminishing.
Selling Price – Profit = Cost (Change in mindset): The funny part is that we have written the same equation in different ways and mathematically all are same, but when it comes to accounting, meanings are different. In this, we are saying that selling price is determined by market, profit is something you would like to have and can’t reduce, and only thing to play with is cost.
Since cost has attained the center stage, managerial accounting has become that much more important, with real focus on reducing costs, and making decisions governed by cost(of course there are many other factors).
Executive Management 
Slight changes to make it more interesting
When there was no competition (monopoly markets), management group (board of directors) used to decide the profits at the discretion of owners, appropriate cost price (based on current cost objects) and then decide on the ‘Selling Price’. Customers used to be price takers and organizations as price setters.
Cost Price + Profit = Selling Price
Slowly when markets have become competitive (competition era), ‘Selling Price’ has gone down as dictated by the markets and since ‘Cost Price’ stays where it is; owner’s profit was diminishing (owners acted as profit takers)
Selling Price – Cost Price = Profit
Going further it has become so complex that, ‘Selling Price’ was set by markets, ‘Profits’ were set by owners and the only left over option was ‘Cost Price’, so one has to play with CP in such a way that it works for markets, as well as owners.
Selling Price – Profit = Cost Price
The funny part is that we have written the same equation in different ways and mathematically all are same, but when it comes to accounting, meanings are different.
Since cost has attained the center stage, managerial accounting has become that much more important, with real focus on reducing costs, and making decisions governed by cost(of course there are many other factors).