Financial reporting system implementation memo for ICBI management

Financial reporting system is any system that compiles financial data and presents it to management in a meaningful format. There are different types of such systems, depending on the system's purpose. So a company can have a one system to assist with financial accounting, and another that delivers managerial accounting outputs. A system that delivers financial statements needs to use generally accepted accounting principles (GAAP), so there is little choice with respect to formatting, only the rules that the company choses to adhere to.

With managerial accounting, however, there are a number of different systems that can be used. This is where the design of the reporting system comes into play, because the design of the system is what ensures that management will receive from the system the information that it needs. Each systems contains different components, including methods of reporting, different measures that are used, and methods of presentation. These differences reflect the different types of data that are recorded, how they are recorded, and how they are presented to management. As a couple of examples, there is an activity-based budget and there is an operating budget.

The operating budget is a fairly basic form of budget document. Tatum (2013) notes that an operating budget is one that "focuses on managing current expenses" but that it also might contain provisions for future expenses, since as with all budgets it is a forward-looking document. The operating budget is aggregate for the entire organization, and seeks to determine the funding level that the organization needs for a future period. The operating budget can then also be used to determine ways to reduce expenses, and to identify areas where expenses are growing at an undue rate.

An activity-based budget is a "method of budgeting in which the activities that incur costs in every functional area are recorded and their relationships are defined and analyzed" (Investopedia, 2013). What this means is instead of budgeting for the entire organization, each activity will have its own budget, including the percentage of any fixed costs that the activity uses up. This type of budget provides specific information about each product or service offered, and allows management the opportunity for decision-making that is more fine-tuned than does the operating budget. It is because of this fine-tuning and the specificity of detailing the budget by each individual activity that management should use activity-based budgeting -- it is simply a more powerful tool because it provides better information.

There are some similarities between the two. First, they are both forward-looking, and as such their outputs are only as good as the inputs and assumptions that are used to build them. Also, the end result should be the same totals. The difference is in how the totals are broken-down. In the operating budget, they are broken down by generalized expense categories (salaries, cogs, etc.) while in the activity-based budget the breakdown is also by individual products and services offered.