Cost-Effectiveness: Comparing Financial Accounting vs. Managerial Accounting

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An accountant uses a calculator to calculate costs for a client.

The traditional role of an accountant in providing information useful for decision-making is alive and well. Accurate, conscientious accounting is fundamental to any business and always will be.

But many factors — including technological advances in production; a fast-paced, global financial environment; internet retail increasingly replacing brick-and-mortar retail; and companies vacating office space for remote workspace — have influenced accounting needs. Many companies are seeking accountants whose skill sets go beyond presenting the financial picture. These companies want accountants to play a more important part in the decision-making process. They want accountants who can turn Big Data into information and analyze the financial implications of potential business decisions.

The Value of a Master of Accountancy Degree

Businesses need accountants with advanced degrees. If you aspire to a senior financial position, earning a Master of Accountancy (MAcc) degree will take you beyond the foundational principles of accounting to a deeper understanding of the practices that guide high-level business operations, such as data analytics, prescriptive and predictive analytics, tax strategy, and planning for complex transactions.

In today’s job market, some senior accounting positions emphasize hard numbers, expertise with regulations, application of accounting standards, analysis of expenses, and the ability to locate inefficiencies in a company’s balance sheet that may adversely affect the bottom line. Other senior positions, however, may involve analysis of the bigger picture and predictive skills that can guide a company in determining the viability of new ventures or acquisitions.

In earning an advanced degree, aspiring accountants learn to apply the fundamentals of two methods of evaluating the profitability of a business: financial accounting versus managerial accounting. One focuses on providing information relevant for external decision-makers (such as equity and debt holders) versus the other providing information relevant for internal decision-making (management). Financial accounting revolves around presenting financial information in accordance with Generally Accepted Accounting Principles. Managerial accounting attempts to quantify economic costs and benefits in a manner useful for management in leading the company. These represent different ways of looking at the same set of numbers, resulting in different measures of profitability and possibly different business plans and strategies.

Accounting Cost Versus Economic Cost

Financial accounting expenses are the explicit costs a company incurs, which are then subtracted from the total revenue to determine a net profit or loss. These costs are objective, quantifiable expenses: employee wages, utilities, rent, materials, storage, transportation, and so on. These costs appear on a company’s financial statements and are backward-looking, that is, referring to expenses already accrued or incurred. Most, but not all, of these expenses are used in reporting taxes, which means a significant number of accountants, including many certified public accountants and those in senior positions, will use financial accounting cost analysis almost exclusively.

Managerial accounting, economic cost analysis adds a wrinkle to the accounting process that could be described as a what-if. It allows management to define economic costs without the confines of financial reporting rules. With an economic cost model, accountants use explicit and implicit costs to determine a profit or loss. Implicit costs, or opportunity costs, refer to revenue forgone that could have been used to generate revenue. For instance, if a company owns a building and uses it for business operations instead of renting it out, the money forfeited in not collecting rent for the building is considered an implicit cost. In a managerial cost evaluation, that figure is subtracted from the revenue along with explicit costs.

Consider another illustration of financial accounting expenses versus managerial cost accounting. A woman quits her $150,000-a-year job as an information technology director and opens a restaurant. The restaurant’s revenues for the first year are $500,000, and the explicit expenses (staff, food, equipment, rent, advertising, etc.) total $400,000. In financial accounting terms, the woman has earned a profit of $100,000. But an economic cost analysis would factor in the opportunity cost and subtract that from the revenue. In this scenario, the lost income of $150,000 would leave the restaurant with a net operating loss of $50,000.

MAcc candidates can become well versed in both ways of interpreting financial pictures. Some may gravitate toward positions based on financial accounting, perhaps preferring to analyze and strategize using hard numbers. These positions may include accounting for government contracts, which are highly regulated and require expertise in compliance, transparency, and audit readiness.

Other MAcc candidates may prefer analyzing various potential business plans and ventures and projecting the most lucrative outcome; these accountants can choose to work for companies that factor the economic cost and opportunity cost into their decision-making. These companies, whose business plans and profit models tend to be fluid, may include tech startups and internet businesses.

Sometimes the two analyses converge. For instance, an financial accounting analysis of a small business might find that the office rent cuts too deeply into the bottom line. An economic cost analysis might look at the revenue lost by not renting out the space. In both analyses, the recommendation is the same: Transition to a remote workforce and rent out some or all of the office space.

Applying Master of Accountancy Skills

Two real examples illustrate financial accounting cost decisions versus economic cost decisions. The discussion that follows is speculative, as large companies don’t generally reveal the details of their decision-making processes.

In 2016, Nike cut off production for all golf equipment, excluding shoes and apparel, after nearly 20 years. It based its reasoning on the bottom line. After years of sustained growth, due largely to “the Tiger effect,” or having Tiger Woods elevating golf’s popularity in general and Nike sales specifically, Nike golf sales suffered for years when Woods was involved in a public controversy and then dealt with back injuries. Nike golf sales fell by 8% in the year leading up to its exit from the golf industry. Without Woods propelling growth, Nike most likely determined it wouldn’t be able to keep pace with established golf companies like TaylorMade and Callaway. This can be seen as a decision based on accounting cost — the revenues being generated weren’t enough to justify the explicit costs of competing in the marketplace.

An example of economic cost would be Verizon’s restructuring in 2018. Verizon made two acquisitions in the media industry: AOL in 2015 and Yahoo and related properties in 2017. The two purchases totaled roughly $9 billion. In November 2018, Verizon split into three distinct entities — Verizon Media, Verizon Consumer, and Verizon Business — separating the media operation from the core telecom business. Shortly thereafter, the company took a write down on the media division, valuing it at only $200 million. The revenue of the media venture was down marginally, and it wasn’t making inroads into the advertising shares of Facebook and Google. Still, at first glance, declaring a multibillion-dollar investment virtually worthless after a short time may seem drastic. Indeed, many business media outlets considered the move “stunning.”

But if you view this development in terms of economic cost analysis, it makes more sense. Verizon may well have considered the economic or opportunity costs of running the media business — money that could’ve been invested in generating revenue and gaining market share in the burgeoning next wave of fifth-generation (5G) technology. Interestingly, Verizon CEO Hans Vestberg’s stated goal in announcing the restructuring was to place his company at the leading edge of 5G technology. The senior members of Verizon’s financial team were almost surely involved in the seismic shift in company finances.

Pursuing a Career with a Master of Accountancy

The hard skills, soft skills, and technological process that come from acquiring a deeper understanding of the principles of accounting and finances in a MAcc program can prepare you for senior accounting careers across the business world.

These careers include senior accountant, financial analyst, company controller, information and technology accountant, and chief financial officer. MAcc candidates will gain advanced skills that will enable them to enter the field and assume a higher level of responsibility and potentially a higher salary. Such candidates are better equipped to choose a position in line with their interests, whether in banking, the tech sector, the government, or another area.

So if you’re looking to carve out a rewarding career in accounting, kick-start your ambitions by enrolling in a MAcc program, such as the online Master of Accountancy program at Ohio University.

Sources:

Bizfluent, “Accounting Costs vs. Economic Costs”

Business Insider, “This Chart Shows Why Nike Is Getting Out of the Golf Equipment Business”

Complete Controller, The Difference Between Accounting Costs and Economic Costs

Finance Management, “Accounting Basics for Personal Money Management”

Golf.com, “A Chronological Look at the History of Nike Golf”

Houston Chronicle, “The Differences Between Accounting Costs & Economic Costs”

Investopedia, Implicit Cost

Lumen Learning, Difference Between Economic and Accounting  Profit

Ohio University, Online Master of Accountancy

Ohio University College of Business, Full-Time Master of Accountancy

Robert Half, 6 Soft Accounting and Finance Skills Candidates Should Have

TechTarget, “Prescriptive Analytics”