What We Cover
Sudhakar V. Balachandran
Assistant Professor of Accounting
Managerial Accounting (Accounting II) studies how managers use information from accounting systems, internal and external financial reports and other sources. Central to the course is the idea that bad information leads to bad decisions. However, there are tradeoffs in determining which information is bad and how to make it better. For example, most companies use absorption costing in their efforts to match both fixed and variable costs with the revenues of products sold. This approach may lead to more accurate measurement of long-term product profitability, but it distorts short-run decisions and provides incentives to make current profitability appear better by producing more than is necessary. An alternative to absorption costing is variable costing, which eliminates incentives to overproduce but could create a mismatch between revenues and the resources needed to create those revenues - and hence poor information about long-term product profitability.
Why It Matters
Accounting information affects individuals in a business as well as the relationship between businesses and society. Understanding how to systematically think about tradeoffs involved in making accounting information better has the potential to improve decision making, corporate control and, ultimately the contribution of business to both its shareholders and society.
What Students Learn
Students learn that all accounting numbers contain three elements: the true number, measurement error and discretion. While the discretion could be used to produce better information, it can also be used to manipulate. Students also learn that using discretion to manipulate accounting numbers is myopic because accrual accounting manipulations reverse out over time; if you manipulate to look better now, you will look worse later.