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Topics: absorption, contribution, CMA, break-even analysis

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What is the difference between managerial and financial accounting?
- How is managerial accounting different from financial accounting?
- Comment on the different needs and use of financial information for internal purposes.
- The managerial accounting profession and its role in today's business environment. How has it changed over time?
- Comment on the Certified Management Accountant (CMA) designation. How is it different from the CPA certification?

Part II:
- Explain the main differences between the absorption and contribution (behavioral, variable) income statements. Will net income always be the same under the two approaches? If not, explain the difference.
- Comment specifically on why companies feel the need to create yet another income statement in a different format. What information can the company gleam from this approach which is helpful as a tool in the decision making process.
- Explain situations in which break-even analysis can be a useful tool. Explain the break-even formula and provide a specific example using numbers for a product with which you are familiar. Reasonable estimates are adequate. Don't forget to include the source of the information.

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Solution Preview

Financial and managerial accounting, while both part of the profession of accounting, have different missions and different tasks. And those differences lead to reports that differ considerably in content and use. The certifications for each type of accounting are also quite different. This discussion will identify these differences, gives examples, and explain why they occur.

How managerial accounting differs from financial accounting
- Financial accounting focuses on gathering and summarizing the financial activity of the period and the resources left at the end of the period and then creating external financial statements from that data. The main concern is for the completeness, fairness and understandability of the financial reports to the external user. The financial accountant can work for a single firm but can also be part of a financial services firm or auditor that serves many businesses. By contrast, the managerial accountant primarily serves the decision-making team of a single firm, learning that firm and its threats and opportunities deeply. The management accountant creates customized reports that include a range of purposes. The range of activity goes from the simple actual vs. budget variance analysis to highly sensitive details that assist with a decision to change competitive initiatives in the market to information to support the creation of a long-term strategic planning.

Needs and use of financial information for internal purposes.
- Internal users need financial information to monitor performance, ensure proper controls over processes and purchases, and give them information about upcoming decision options. For instance, internal financial reports might show when purchases are made at a higher price than authorized. The annual budget would indicate the amount ...

Solution Summary

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