Whereas financial accounting focuses on organizational-level data for presentation in a business’s financial statements, managerial accounting focuses mostly on sub-unit—say, a department—data used internally for managerial decision making.1 For example, managerial accounting information is used for routine budgeting processes, allocation of managerial bonuses, and pricing decisions, all of which deal with sub-units of an organization. Also, managerial accounting data can be compiled for special projects such as assessing alternative modes of delivery or projecting the profitability of a particular reimbursement contract.

In short, the focus of managerial accounting is to develop information to meet the needs of managers within the organization, rather than interested parties (mainly investors) outside the organization. Thus, while financial accounting information is driven primarily by the needs of outsiders, managerial accounting information is driven by the needs of managers.

Managers are more concerned with what will happen in the future than with what has happened in the past. Unlike financial accounting, managerial accounting is for the most part forward-looking. Because the past is certain, while most of the future is uncertain, managerial accounting information tends to be much less reliable than financial accounting data. As managers embark on budgeting and pricing decisions, they often must make many assumptions regarding factors such as utilization, reimbursement, and costs. This requirement for assumptions about the future, combined with the fact that there are no generally agreed-upon rules for managerial accounting, makes it much more open to improvisation than financial accounting.

In general, financial accounting can be thought of as reporting work, while managerial accounting is best described as decision work. We do not mean to imply that there is little value in financial accounting data. Financial statements are key to understanding a business’s overall financial status. Still, the managerial decisions that are made on a daily basis that create this status are influenced much more by managerial accounting data, which focus on individual activities, than by financial accounting data, which focus on aggregate amounts.

A critical part of managerial accounting is the measurement of costs. In fact, the concept of costs is so important that it has spawned its own field of accounting—cost accounting. Cost accounting generally is considered to be a subset of managerial accounting, although cost accounting systems also are used to develop the expense data reported on a business’s income statement. Therefore, cost accounting bridges both managerial and financial accounting. Unfortunately, there is no single definition of the term cost.

Rather, there are different costs for different purposes. As a general rule for healthcare providers, a cost involves a resource use associated with providing, or supporting, a specific service. However, the cost-per-service identified for pricing purposes can differ from the cost-per-service used for management control purposes. Also, the cost-per-service used for long-range planning purposes may differ from the cost-per-service defined for short-term purposes.