Professional Documents
Culture Documents
This borrows from, and revises, material from Jones, Candreva & Devore, Financing National Defense,
IAP Press, 2012.
1
Managerial accounting is what one does not see in a corporation's annual report.
It is the internal analysis conducted by the corporation to weigh one decision against the
next: Should we expand this plant? Should we drop that product line? Should we buy or
lease a specific capability? What does it cost to provide this service versus an alternative?
Terms associated with managerial accounting include weighted average cost of capital,
allocation, cost driver, internal rate of return, profit center, analysis of variances, and
cost-volume-profit analysis. Managerial accounting is performed on a cost basis, rather
than an accrual basis. There are common tools and practices for managerial accounting,
but no generally accepted management accounting principles; there is no government
oversight. The focus is on internal management decisions about the organization's
mission and scope of operations; the goal is to increase the value of the firm through an
understanding of costs and profits. The audience is internal; in fact, the data is so
proprietary that corporations typically wouldn't dream of sharing it within their
industries, with the government, or the public. Within the DOD, this type of accounting
enables working capital fund activities to set their rates based on unit cost; it is also
important information for determining cost estimates for investment decisions.
Budgetary accounting is what government employees are most familiar with. It is
the process of budgeting, justifying, and accounting for appropriations. Terms associated
with budgetary accounting include commitment, expenditure, apportionment, obligation,
authority, and disbursement. Budgetary accounting is performed on a cash basis in which
events are recorded as cash (or budget authority) is received, budget authority is
obligated, and payments are made (obligations are liquidated). There are strict rules
embedded in federal appropriation law and principles articulated by the Comptroller
General; there is significant oversight. The focus is on compliance with the law that
funds have been spent in accordance with the purpose, time, and amount that restrictions
attached to the appropriation. The audience is both internal and external. There is no
corporate analogy, though try discussing the concept of "obligation" with a
commercially focused certified public accountant Certified Public Accountant (CPA) or a
college accounting professor and gauge his or her reaction. Table 1 summarizes the three
bases of accounting.
Financial
Accounting
Managerial
Accounting
Budgetary
Accounting
Associated
Terms
Income Statement,
Balance Sheet, Cash
Flows, Revenue
Recognition, EBITDA,
EPS, P/E ratio, Quick ratio
Commitment, obligation,
outlay, appropriation,
apportionment, budget,
phasing plan, color of money
Time
Horizon
History a record of
whats already happened
Audience
Capital Markets
shareholders and potential
lenders
Internal Management*
Stakeholders: managers,
taxpayer, congress, everyone
Rules
GAAP
Tools, no rules*
Law
Oversight
None*
Objective
Transparency,
accountability, and
comparability (over time &
across entities)
Maximizing profitability,
adding economic value,
decision-making by
managers
Compliance
* Companies under contract with the federal government are required to follow certain cost accounting standards.
Consider the process of buying and using a piece of capital equipment. The same
sequence of events can be described in three different ways depending on the basis of
accounting. In financial, or accrual-based, accounting transactions are recorded when
economic events occur. When the item is shipped (or received) the organization has an
asset and a corresponding accounts payable. When the item is paid for, liquid assets are
reduced and the accounts payable is satisfied. When the item is used in the process of
generating products or services for sale, the asset is depreciated and the depreciation
expense matched to the revenue generated. Managerial accounting analysis may have
supported a make-buy-lease decision or a financing decision when the item was procured.
Managerial accounting is also concerned with recording the cost of the item in relation to
the lines of businesses or cost centers it supports. Budgetary accounting would have
recorded a commitment at the time a contracting approach was identified, an obligation
when the contract was signed, and an expenditure when the equipment was paid for. All
three systems describe the same series of events, but consider only certain portions of that
series worth capturing and reporting.
3
graphically represent the different purposes for which accounting systems exist in Figure
1.
Figure 1 Functions of Accounting Systems
Budgeting is distinct from accounting, and one should note that [b]udgets are
undeniably more important than financial statements in local as well as national
governments (Smith & Chen, 2006, p. 16). The process of budgeting is where policy
disputes are waged, priorities are established, resources are allocated, and winners and
losers determined. Budgets are also used as control devices during execution to keep
public managers focused on the policy priorities. Accounting is often regarded by line
managers as a housekeeping task that does not influence decision-making. Most
comptrollers offices within DOD are separated into two groups and [a]t times, the
communications between budget offices and accounting offices resemble a visit to a
foreign country where the language spoken is different from the visitors (Hoge &
Martin, 2006, p. 137). Line managers rarely communicate with the accountants yet
frequently interact with the budget side.
References
Hoge, J., and E. Martin. 2006. Linking Accounting and Budgeting Data: A Discourse.
Public Budgeting and Finance , 26/2: 121-142.
Jonas, Tina. 2002. Statement before the House Government Reform Committee,
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations, 20 March. Washington, DC: GPO.
Smith, K. A., and Chen, R. H. 2006. Assessing Reforms of Government Accounting and
Budgeting. Public Performance and Management Review, 30/1:14-34.