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ABSTRACT
Building on the companion article "A Tutorial on Managerial Cost Accounting: Living with Variances" by Fry and Fiedler (2011), this current paper picks up where the previous paper left off and illustrates how the management accounting system (MCA) is linked to financial accounting (FA) to generate the year-end financial reports required by shareholders, banks, and the IRS. The prior paper focused on the detailed use of information provided by the MCA throughout the year and walked through the development of the yearly budget, calculation of product costs, determination of budget variances, derivation of the periodic income and statement of cash flows reports, and provides possible examples of dysfunctional behavior at a fictitious company called Mandrake Manufacturing. This tutorial concentrates on the interaction of the MCA and FA systems and the production of year end FA statements. In addition to providing information such as cost of goods sold, inventory values, and operating standards to the FA, the year end information provided by the MCA is also used to develop next year's budgets. In this present paper, the conversion of the MCA reports into the FA reports will be presented. Also, the impact of the MCA reports on future budgets will be discussed. As pointed out in F&F, it is vital that operations managers understand how the accounting systems used by their company function. Without such understanding, many of the problems associated with the improper use of the accounting systems will never be corrected.
INTRODUCTION
In any company, there are two distinct groups of stakeholders served by the company's accounting systems. Those stakeholders inside the company (the managers) are focused on managing while those stakeholders outside the company (investors, banks, and various governmental agencies) are concerned with assessing company performance. The managers need actionable information concerning the present and future while external users rely on the availability of standardized, accurate historical information. The informational needs of the two groups require different systems that can at times be at odds with each other. The internal managers are served by managerial accounting systems, and the external world views the company through financial accounting systems.
For most companies the managerial cost accounting (MCA) system is an important component of internal reporting and can act as a bridge...