Managerial accounting focuses on the information needs of internal users, while financial accounting focuses on the information needs of external users. Managerial accounting uses economic, operating, and nonfinancial, as well as financial, data. Managerial accounting information is local (pertains to the company’s subunits), is limited by cost/benefit considerations, is more concerned with relevance and timeliness, and is future oriented. Financial accounting information, on the other hand, is more global than managerial accounting information. It supplies information that applies to the whole company. Financial accounting is regulated by numerous authorities, is characterized by objectivity, is focused on reliability and accuracy, and is historical in nature.

Both managerial and financial accounting are concerned with product costing. Financial accountants need product cost information to determine the amount of inventory reported on the balance sheet and the amount of cost of goods sold reported on the income statement. Managerial accountants need to know the cost of products for pricing decisions and for control and evaluation purposes. When determining unit product costs, managers use the average cost per unit. Determining the actual cost of each product requires an unreasonable amount of time and record keeping and it makes no difference in product pricing and product cost control decisions.

Product costs are the costs incurred to make products: the costs of direct materials, direct labor, and overhead. Overhead costs are product costs that cannot be cost effectively traced to a product; therefore, they are assigned to products using cost allocation. Overhead costs include indirect materials, indirect labor, depreciation, rent, and utilities for manufacturing facilities. Product costs are first accumulated in an asset account (Inventory). They are expensed as cost of goods sold in the period the inventory is sold. The difference between sales revenue and cost of goods sold is called gross margin.

General, selling, and administrative costs are classified separately from product costs. They are subtracted from gross margin to determine net income. General, selling, and administrative costs can be divided into two categories. Costs incurred before the manufacturing process begins (research and development costs) are upstream costs. Costs incurred after manufacturing is complete (transportation) are downstream costs. Service companies, like manufacturing companies, incur materials, labor, and overhead costs, but the products provided by service companies are consumed immediately. Therefore, service company product costs are not accumulated in an Inventory account. A code of ethical conduct is needed in the accounting profession because accountants hold positions of trust and face conflicts of interest. In recognition of the temptations that accountants face, the IMA has issued Standards of Ethical Conduct for Management Accountants, which provides accountants guidance in resisting temptations and in making difficult decisions.

Emerging trends such as just-in-time inventory and activity-based management are methods that many companies have used to reengineer their production and delivery systems to eliminate waste, reduce errors, and minimize costs. Activity-based management seeks to eliminate or reduce nonvalue-added activities and to create new value-added activities. Just-in-time inventory seeks to reduce inventory holding costs and to lower prices for customers by making inventory available just in time for customer consumption.