While financial accounting (statements for shareholders, taxes etc) is governed by GAAP and meant to be as standardized across orgs as possible, managerial accounting (internal statements for the purpose of decision making) require a lot more decision making about how you measure things in the interest of providing the most accurate financial picture of the decision at hand.
I am very rusty so anyone who has some real experience in accounting, please correct me. That said, consider a simple example: a manufacturer which sells two types of windows and creates the glass which is used in them.
Line A of windows is selling at lower than expected prices and in financial accounting terms it is loosing money. On the other hand, line B is selling well and appears profitable. With this in mind, the company kills line A expecting to increase their profitability by the amount the line was previously loosing. Unfortunately, the subsequent decrease in the amount of glass the organization is producing reduces the scale of their glass making operation and drives up their per-pane cost. At these higher input costs, line B is no longer profitable at it's current selling price and the company looses even more money than they would have had they continued to run the "unprofitable" line A.
Of course, any competent management team would be able to forecast this scenario and devise a host of other solutions (sell glass to a competitor, for example). But the question here is: how should they present this reality in financial accounting? Decrease the recorded cost of glass used in line A? Add some sort of subsidy from the profits of line A?
While financial accounting (statements for shareholders, taxes etc) is governed by GAAP and meant to be as standardized across orgs as possible, managerial accounting (internal statements for the purpose of decision making) require a lot more decision making about how you measure things in the interest of providing the most accurate financial picture of the decision at hand.
I am very rusty so anyone who has some real experience in accounting, please correct me. That said, consider a simple example: a manufacturer which sells two types of windows and creates the glass which is used in them.
Line A of windows is selling at lower than expected prices and in financial accounting terms it is loosing money. On the other hand, line B is selling well and appears profitable. With this in mind, the company kills line A expecting to increase their profitability by the amount the line was previously loosing. Unfortunately, the subsequent decrease in the amount of glass the organization is producing reduces the scale of their glass making operation and drives up their per-pane cost. At these higher input costs, line B is no longer profitable at it's current selling price and the company looses even more money than they would have had they continued to run the "unprofitable" line A.
Of course, any competent management team would be able to forecast this scenario and devise a host of other solutions (sell glass to a competitor, for example). But the question here is: how should they present this reality in financial accounting? Decrease the recorded cost of glass used in line A? Add some sort of subsidy from the profits of line A?
All of a sudden it becomes extremely "creative".