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Managerial Accounting – Sorry state of

I was bemoaning recently the sorry state of managerial accounting. It is heavily oriented to manufacturing where few of our students will ever work and uses techniques that go back unchanged for a century.

Students typically get 6 hours of managerial accounting in their 5 years of accounting. To that they add 36 hours of financial accounting. Most of the better students go on to work for a public accounting firm and write their CPA exams. They become experts in public accounting. Most all of them leave the firms and go to work for clients that they audited. They take with them the 36 hours of financial accounting that they had as undergrads, the financial accounting material that they mastered for the CPA exam, and the public accounting practice in financial accounting that they have had. They get little or no managerial in all this time and so very little managerial gets transferred with them to their new careers.

Just two examples of what I mean: Most every company that I know expenses advertising and R&D in their internal reports because that’s what they do for financial reporting. Both are serious investments. We expense them for financial reporting purposes for reasons of conservatism. But it is insane to think that a company will spend millions on a Superbowl ad, say, and expect no return on that expenditure. Clearly, they do it because they expect some future benefit from the ad. If they did not expect a future benefit, then they could face criminal charges for spending shareholder money imprudently. The same is true of R&D. If a company spends money on research without any expectation of future returns, then it is guilty of dereliction of duty. Oil exploration costs tend to be expensed internally because they are required to be expensed externally. This too is crazy. The list goes on with internal reports created identically to exeternal reports in many organizations. In a survey that I did some years ago of top Fortune 500 companies, I could not find a single one that had a separate managerial accounting system and did contribution analysis say.

The problem created by the career path of most accounting graduates is compounded by the stated purpose of both the FASB and the IASB. When they were founded in 1973, they saw their duty as to external users only. There was a great deal of very, very unhappy commentary on the part of management at the time but the two boards have been steadfast. The result is that there has been no development of managerial accounting in the last 50 years. Well almost no development. Bob Kaplan, bless his heart, has pushed activity-based costing, which is a real development. But there is no equivalent to the Financial ASB. There is no Managerial ASB so, as a country, we have no formal development of managerial accounting techniques across industries and organizations.

Every managerial textbook does managerial in the context of manufacturing. The vast bulk of the case material was developed by Harvard at the big automobile companies in the fifties and sixties. All the stuff about allocation, overhead, direct costs and indirect costs was all developed almost a century ago. Almost all of what we teachin managerial was developed by Alfred Sloan at GM in the glory days of that company. (He died in 1966 so that tells one how old the material is.)  And it is all applied to large manufacturing companies. There is hardly a word about service companies in any textbook despite the fact that we are predominantly a service industry country these days. There is not a single line on managerial accounting in a not-for-profit organization! Of course, we have absolutely nothing on managerial in the government sector —another huge hole. We still define inventory in material terms. The notion that a court case, a consulting project, an audit might constitute a basis for collecting costs to match with revenue appears nowhere. And there is not a case, not an example, not a line in any textbook of which I am aware that has one word about managerial accounting in the energy industry. Of course, there are several on full cost versus successful effort accouinting to fulfil financial reporting purposes — but nothing on the managerial side at all.

I wish I knew how to change it but I suspect that nothing will until we change the incentives of professors. Currently the big rewards go to those doing empirical research in financial accounting so all the emphasis is on financial. But, the pendulum will swing one day as it always has.

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