Question & Answer: Now that you have a better understanding of Managerial Accounting, compare the reports managers use to those used in G…..

Investors should have access to managerial reports, because :

1. Investors will gain more confidence in the activities of the company
2. Investors will be able to make more informed decisions.
3. Investors will be able to increase their investment, in case the reports look conducive to the investors.

Investors should NOT have access to such reports, because :

1. General investors do not understand all the technical jargons associated with such reports.
2. It may confuse the investors.
3. It may take their attention away from more understandable statements of income & position
4. Investors being a risk-averse class, may misinterpret the info & take everything to be negative.
5. It may ruin the reputation of the company even due to the smallest of temporary causes, which may look big to an investor due to his non-involvement in the affairs of the company.

Let’s take a real world practical example to demonstrate difference between traditional & Activity based costing:

Let’s say that a company makes two products :

Pizza – 1000 units

& Sandwich – 1000 units

Electricity bill is $2000 for the end of the month.

Under traditional costing, we shall simply divide the bill in the ratio of the quantity of different products:

i.e. 1000:1000

1:1

$1 per pizza

&

$1 per sandwich

BUT

In activity based costing, ABC in short, we find out HOW MUCH of electricity is used by each product;

e.g. we may find out that one pizza takes 4 units of electricity to produce, while a sandwich takes only one such unit;

Under ABC, we will assign costs as :

Pizza = 2000*0.8 = 1600

& for Sandwich it will be 2000*0.2 = 400

Advantages:

ABC helps in reducing time by eliminating low margin products.

It helps in reducing money-wastage, by giving a true picture of cost & revenue & helps sticking to the budget.