In managerial accounting, managers analyze financial information to make better decisions and identify areas that the company could improve. One of the most important concepts in managerial accounting is costing. Costing is the process of identifying the expenses or cost involved in the production process. Managers use costing to help assign pricing. All expenses that a company incurs are categorized as either fixed costs or variable costs. Which category a cost falls into depends on whether it varies with activity levels. Managers also consider differential costs—in other words, how much money it will cost to choose Option A instead of Option B. Managers use still other factors to make decisions, such as sunk costs and opportunity costs.
At A Glance
Managerial accounting and financial accounting differ in their purpose, focus, level of oversight, and amount of detail.
- Managerial accounting is flexible, allowing organizations to focus on specific segments of a company and to evaluate products, departments, and managers.
- Companies use variable costing, absorption costing, or throughput costing as they examine expenses that are part of production.
- Costing allows managers to control costs internally and to report correct data in external financial statements.
- Manufacturing companies often differentiate between direct labor and direct materials costs.
Manufacturing overhead and administrative overhead are separate costs.
- There are two types of cost: variable costs and fixed costs.
- Variable costs and fixed costs can be combined to provide a mixed cost amount.
- When choosing between alternatives, managers analyze the differential cost associated with each alternative before making a decision.
- Some costs are already spent, while others are potential costs depending on managerial decisions.