Financial Vs. Managerial Accounting In The Costco Way

Managerial accounting focuses on the needs of internal users (managers) and on data relevant for decision making.

The strategic objective of Costco is based on the concept of offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories while producing high sales volumes and rapid inventory turnover. This rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self service warehouse facilities, enables Costco to operate profitably at significantly lower gross margins than traditional wholesalers, discount retailers and supermarkets. (1)

There are additional examples of managerial and financial accounting information that can apply to Costco. Examples of Costco’s financial accounting information are revenue, gross margin percentage, operating income, operating margin percentage, net income, earnings per share, dividends, shares, operating cash flow, cap spending, free cash flow, working capital, tax rate percentage, net margin percentage, average asset turnover, return on assets percentage, average financial leverage, return on equity percentage, return on invested capital percentage, and interest coverage (Morningstar, 2016). This information is very useful to external users such as creditors, government agencies, analysts, reporters, and investors (Edmonds, Olds, & Tsay,

Hilton, R. (2011). Managerial accounting: Creating value in a dynamic business environment (9th Ed.). McGraw-Hill. Hardcover ISBN: 9780073526928.

Managerial accounting is essential for decision making. Making the best choice depends on the manager's goals, the anticipated results from each alternative, and the information available when the decision is made (Schneider, 2012). The different techniques associated with managerial accounting are very helpful in the decisions that need to be made. In order to truly understand decision making with managerial accounting one must first discern exactly what managerial accounting means and some of the techniques associated with it. The definition of managerial accounting will be discussed along with the techniques of cost management techniques, budgeting, and quality control.

For the final project of managing finance Wal-Mart Stores Inc is chosen as the discussion target. Being one of the grocery retail shop leaders in the world, Wal-Mart (WM) operates business with 10,000 retail units in 27 countries with about USD444 million of sales in 2012 (Wal-Mart homepage 2012).

Q1. Contrast financial and managerial accounting on the basis of user orientation, purpose of information, level of aggregation, length of time period, orientation toward past or future, conformance to external standards, and emphasis on objective data.

Although Costco seem to have their organization going in the right direction, there are other examples they could have added to the table when it comes to managerial accounting data. They could measure their success by showing reports of their budgets vs their actual results in various categories; this will show if they have any variances. To attract new investors, they could show projected quarterly earnings, and revenue of their products. When a company as large as Costco, they probably get large orders that need to be shipped; it is important to show reports of their back logs so investors will know how efficient their company is. If the back log rises, the company could have increased their sales or have problems with production.

More examples of managerial accounting would be how an individual Costco store is performing verses how the company as a whole is fairing against a competitor such as Walmart which this would be considered financial accounting. Another example for managerial accounting would be how a Costco store has lower turnover than another but for financial accounting it would come down to how the chain as a whole had performed. How Costco takes care of its employees by providing them with competitive wages and adequate healthcare while Walmart has low wages and inadequate healthcare this would be managerial accounting. Also how Costco’s employees seem to be more satisfied with their job and benefits they stay with the company where Walmart has a higher

Managerial Accounting reports are primarily used by supervisors, line managers, process owners, as well as executives, to gain a better understanding of the current financial and operational health of the organization. (Internal)

Bhimani, A., Horngren, C., Datar, S., Rajan, M. et al. (2012) Management and Cost Accounting. 5th ed. Edinburgh: Prentice Hall, p.369 - 378.

For instance, the concept of cost estimation which assists in estimating future expenditure as the expenditure depends on the cost of the respective activities can be applied in the setting of a budget which is simply an estimate and schedule of all costs required to be assigned to an activity. One can make an estimation of the resources required for an activity by applying the cost estimation techniques. Since there are limiting factors to each activity such as scarcity of resources for activities, the concept of constraints can be applied together with the concept of cost volume profit analysis to ensure that maximum benefits are driven from the scarce resources and the number of activities that are available. This facilitates the allocation of resources that most equitable and profitable. The theory of constraints is also applicable in the process of setting up budgets. In setting up budget one considers the amount of resources that are available and cannot therefore set a budget plan that exceeds the amount of resources that are available. This implies that the budget is constrained by the amount of

The primary difference between financial and managerial accounting is that financial accounting is used for external members of the company; they do not control or run the businesses’ operations. An example of external members would be customers and shareholders of the business. On the other hand, managerial accounting is used for internal members in the company such as managers and officers. The internal members use managerial accounting to increase efficiency and effectiveness within their company. According to accounting4management.com, financial accounting and managerial accounting have several differences, but they both depend on the same data.

The Burns and Scapens framework for analyzing managerial accounting change was built on the study of old institutional economics, which sees "economics as a process of social provision, subject to multiple and cumulative causation." This view culminates in a model that argues that the managerial accounting practices at institutions are subject to a process of constant change, influenced by routines and rules. The institutions contribute to these routines and rules, but so do actions on the part of managers within the institutions. By combining multiple influences over time, we arrive at modern managerial accounting practice. In other words, Burns and Scapens tells us that managerial accounting practice changes over time, influenced by a number of factors including rules, routines and actions.

Inspection occurs at the 100% completion stage. Normal spoilage is 5 % of the good units passing inspection.