PACE Academic IG

Introduction

At one of the colleges where I taught, economics courses were required before taking accounting courses.  I thought that was a great decision because economics built a foundation for understanding terminology in both financial accounting and managerial accounting.  Economics, when combined with accounting, provided a foundation for understanding topics in financial management.  I had the opportunity to teach economics, accounting, and financial management at this college, an opportunity that helped me connect my employment as a management accountant to the classroom.  The opportunity to make this connection is what I would like to describe in this article, a description that can help accounting majors choose a fulfilling and rewarding career in management accounting.

Organization

I organize my presentation of economics in accounting by 3 primary topics:

1.     Supply and Demand  

2.     Differentiators

3.     Demand Inelasticity

Supply and Demand

In many courses I teach, I emphasize a foundation for further learning.  In financial accounting, I emphasize the accounting equation.  In economics, I emphasize the laws of supply and demand.

One example of how I use the laws of supply and demand is when I teach bond pricing.  Bonds are issued at face value when the income supplied by borrowers is the same as the income demanded by lenders.  Bonds are issued at a discount when the income supplied by borrowers is less than the income demanded by lenders.  Bonds are issued at a premium when the income supplied by borrowers is greater than the income demanded by lenders.  The income supplied by borrowers is the coupon rate, the income demanded by lenders is the market rate.

In managerial accounting, I use the foundation of supply and demand to expand on topics covered in the course.  Job-order costing, process costing, cost-volume-profit, master budgeting, flexible budgets, and responsibility accounting are examples of chapters in which I connect supply and demand to managerial accounting.  The connection, however, goes beyond the foundation of economics, as I build on the foundation by connecting differentiators and demand inelasticity to the course.

Differentiators

Differentiators may be seen as a marketing topic, but marketing uses an economics concept to show how a company’s products or services stand out from the competition.  Differentiators are characteristics of products or services that help them stand out from the products or services of competitors.  I use differentiators in both financial and managerial accounting, two courses helping accounting majors prepare for a fulfilling and rewarding career in management accounting. 

In financial accounting, I use differentiators when discussing accounts receivable, inventory, and long-term assets.  For accounts receivable, differentiators can encourage customers to pay more timely, increasing accounts receivable turnover, decreasing the average collection period, and decreasing the risk of uncollectible accounts receivable.  For inventory, differentiators can encourage customers to buy products faster, increasing inventory turnover, decreasing the average age of inventory, and decreasing the risk of obsolescence.  For long-term assets, differentiators can guide management to select equipment or intangible assets that increase total asset turnover, decrease the risk of impairment, and increase return on equity.  Accounting majors can connect differentiators to not only assess but also improve the financial health of companies through profitability, liquidity, and solvency.

In managerial accounting, I cover job-order costing early in the semester, which allows me to build a foundation for differentiators through this costing system.  The system is most appropriate when products or services require a high degree of customization, which provides companies with opportunities to differentiate based on the amount of customization.  The system also provides opportunities to differentiate by understanding the nature of documents like materials requisition slips and time tickets.  The data in both documents helps management think about how to differentiate by the materials the company purchases, the suppliers providing the materials, and the employees transforming materials into products.

Another topic in which I use differentiators is master budgeting.  The master budgeting system provides students with opportunities to connect the qualitative elements of differentiation with the quantitative elements in the system.  The connection requires thinking in many ways, but relationships are the central point.  Relationships with customers, employees, and suppliers can provide students with how to take master budgeting outside of the classroom.  Thinking about how to be more accessible, competent, courteous, flexible, or innovative can be done in master budgeting, and providing this thought process provides accounting majors with knowledge on how to have a fulfilling and rewarding career in management accounting.

Demand Inelasticity

Accounting majors can create a fulfilling and rewarding career in management accounting when their education goes beyond accounting.  For me, microeconomics provided an opportunity to create a fulfilling and rewarding career in not only private industry but also private practice.  In this course, I learned a real-life example of demand inelasticity, which has been part of my professional life for decades.  I share this educational experience with my students because I want them to have the fulfilling and rewarding careers that I have had.  For accounting majors, demand inelasticity will provide a better understanding of revenue, which one of my definitions of revenue is the validation of differentiators.

The validation of differentiators, revenue, arises when a company is able to deliver a product or provide a service that cannot be easily substituted, and that is what demand inelasticity is about.  Public transportation was the real-life example I learned in college about demand inelasticity.  When people rely on public transportation, like I and so many other students did, rate increases would not decrease demand at a rate equal to or greater than the rate increase.  That experience in college taught me something important for a management accountant.  A management accountant can help a company achieve demand inelasticity through transaction analysis, financial statements, and financial statement analysis, which is I want accounting majors to take from the classroom to the job.

Conclusion

Accounting majors have many courses to take in their undergraduate and graduate education.  Besides the courses in their chosen major, courses in data analytics has become more important, and courses in finance continue their presence in an accounting major’s schedule.  The foundation of education, however, cannot be ignored.  When accounting majors build on their educational foundation, career opportunities increase, especially in the fulfilling and rewarding career of management accounting.  To obtain this type of career, one cannot overstate the importance of an economics education for a management accountant.