chap one

ORGANIZATIONSTypes of organizations include manufacturers, retailers, service industries, agribusinesses, and nonprofit firms. These organizations have goalsfor example: growth, profit, quality, leadership, etc.All organizations have information needs in the financial, production, personnel, environmental, and legal areas. Managerial accounting provides some of this information.

Types of Businesses That Use Managerial AccountingManufacturers ( Packages, Lever Brothers, Ford, General Motors, )Merchandisers (AlFateh, H-Karim Bux, WalMart, Kmart)Wholesalers (Beverage Distributors)For-profit Service Businesses (CAs, Attorneys)Not-for-profit Service Agencies (Edhi, Red Crescent, United Way, Red Cross)

The Manufacturing ProcessThis process involves the conversion of direct (raw) materials, direct labor, and factory overhead into finished goods.Product quality is an important competitive weapon in manufacturing.Many companies require their suppliers to be ISO 9000 certified.

ISO 9000 CertificationThe International Organization for Standardization created a set of five international standards for quality management, ISO 9000-9004.These standards require that manufacturers have a well-defined quality control system and they consistently maintain a high level of quality.

Management AccountingThe Institute of Management Accountants (IMA) is the largest organization of accountants in industry. The Certified Management Accountant (CMA) is comparable to the Certified Public Accountant (CPA) for public accountants.For more information, please visit the IMAs website at www.imanet.org

Identifying Economic Events Recording Economic Events Reporting and Analyzing Economic EventsFocus of Accounting

IdentifiesRecordsCommunicatesRelevantReliableComparableInfluence of AccountingAccountingto help users make better decisions.

Managerial accounting is the process of IdentifyingMeasuringAnalyzingInterpretingCommunicating informationIn pursuit of an organizations goalsDefine Managerial Accounting

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective2

Managing Resources, Activities, and PeopleAn organization has set . . .GOALSAcquires ResourcesHires PeopleOrganized setof activitiesDecisionMakingPlanningDirectingControlling

The Need for Managerial AccountingCost accounting provides the detailed cost data that management needs to control current operations and plan for the future.Companies must control costs in order to keep prices competitive.In todays global environment, cost information is more crucial than ever in remaining competitive.

Planning and ControlPlanning is the process of establishing objectives or goals for the firm and determining the means by which the firm will attain them. Effective planning is facilitated by the following:Clearly defined objectives of the manufacturing operation.A production plan that will assist and guide the company in reaching its objectives.

Planning & Control SystemsPlanning selects goals, predicts results, decides how to attain goals, and communicates this to the organizationBudget the most important planning toolControl takes actions that implement the planning decision, decides how to evaluate performance, and provides feedback to the organization 2009 Pearson Prentice Hall. All rights reserved.

Planning and Control (cont.)Control is the process of monitoring the companys operations and determining whether the objectives identified in the planning process are being accomplished. Effective control is achieved through the following:Assigning responsibility.Periodically measuring and comparing results.Taking necessary corrective action.

A Five-Step Decision Making Process in Planning & ControlIdentify the problem and uncertaintiesObtain informationMake predictions about the futureMake decisions by choosing between alternativesImplement the decision, evaluate performance, and learn 2009 Pearson Prentice Hall. All rights reserved.

Responsibility AccountingResponsibility accounting is the assignment of accountability for costs or production results to those individuals who have the most authority to influence them.A cost center is a unit of activity within the factory to which costs may be practically and equitably assigned. The manager of a cost center is responsible for those costs that the manager controls.

ReportingCost and production reports for a cost center reflect all cost and production data identified with that center.The performance report will include only those costs and production data that the centers manager can control.A variance is the favorable or unfavorable difference between actual costs and budgeted costs.

DAILY NEWSPERFORMANCE REPORTMarch 31, 2009ACTUAL RESULT BUDGETED AMOUNT DIFFERENCE (ACTUAL RESULT - BUDGETED AMOUNT)DIFFERENCE AS A PERCENTAGE OF BUDGETED AMOUNT123=1-24=3/2ADVERTISING PAGES SOLD760 PAGES800 PAGES40 PAGES UNFAVOURABLE5.0% UNFAVOURABLEAVERAGE RATE PER PAGE$5,080 $5,200 $120 UNFAVOURABLE2.3% UNFAVOURABLEADVERTISING REVENUES$3,860,800 $4,160,000 $299,200 UNFAVOURABLE7.2% UNFAVOURABLE

Performance Report Example

Renaldis RestaurantPerformance ReportSeptember 30, 2006BudgetedActualVarianceExpenseSeptemberYear-to-DateSeptemberYear-to-DateSeptemberYear-to-DateKitchen Wages$5,500$47,000$5,200$46,100$300 F$900 FFood17,700155,30018,300157,600600 U2,300 USupplies3,30027,9003,70029,100400 U1,200 UUtilities1,85015,3501,73016,200120 F850 UTotal$28,350$245,550$28,930$249,000$580 U$3,450 UF = FavorableU = Unfavorable

Management Accounting GuidelinesCost Benefit approach is commonly used: benefits generally must exceed costs as a basic decision ruleBehavioral & Technical Considerations people are involved in decisions, not just dollars and centsDifferent definitions of cost may be used for different applications 2009 Pearson Prentice Hall. All rights reserved.


Learning Objective3


Learning Objective4

2009 Pearson Prentice Hall. All rights reserved.Accounting Discipline OverviewManagerial Accounting measures, analyzes and reports financial and nonfinancial information to help managers make decisions to fulfill organizational goals. Managerial accounting need not be GAAP compliant.

Financial Accounting focus on reporting to external users including investors, creditors, and governmental agencies. Financial statements must be based on GAAP.

2009 Pearson Prentice Hall. All rights reserved.


2009 Pearson Prentice Hall. All rights reserved.Major Differences Between Financial & Managerial Accounting 2009 Pearson Prentice Hall. All rights reserved.

Managerial AccountingFinancial AccountingPurposeDecision makingCommunicate financial position to outsidersPrimary UsersInternal managersExternal usersFocus/EmphasisFuture-orientedPast-orientedRulesDo not have to follow GAAP; cost vs. benefitGAAP compliant; CPA auditedTime SpanUltra current to very long time horizonsHistorical monthly, quarterly reportsBehavioral IssuesDesigned to influence employee behaviorIndirect effects on employee behavior


Cost Accounting vs. Financial and Managerial AccountingCost Accounting System

CharacteristicsFinancial AccountingManagerial AccountingUsers:External PartiesManagersManagersFocus:Entire businessSegments of the businessUses of Cost Information:Product costs for calculating cost of goods sold and finished goods, work in process, and raw materials inventory using historical costs and GAAP.BudgetingSpecial decisions such as make or buy a component, keep or replace a facility, and sell a product at a special price.Nonfinancial information such as defect rates, % of returned products, and on-time deliveries

Cost Accounting vs. Financial and Managerial Accounting (cont.)Cost accounting includes those parts of both financial and management accounting that collect and analyze cost information.

Determining Product Costs and PricingCost accounting is used to determine products costs and help with marketing decisions.Determining the selling price of a product.Meeting competition.Bidding on contracts.Analyzing profitability.

Managerial versus Financial AccountingAccounting System(accumulates financial andmanagerial accounting data in the cost accounting system)Managerial AccountingInformation for decisionmaking, planning, and controlling an organizationsoperations.Financial AccountingPublished financialstatements and otherfinancial reports.

InternalUsersExternalUsers

Managerial versus Financial Accounting

Sheet1

Managerial AccountingFinancial Accounting

Users of InformationManagers, within the organization.Interested parties, outside the organization.

RegulationNot required and unregulated, since it is intended only for management.Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.

Source of DataThe organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delaysAlmost exclusively drawn from the organization's basic accounting system, which accumulates financial information.

Nature of Reports and ProceduresReports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events.Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Sheet2

Sheet3

2009 Pearson Prentice Hall. All rights reserved.Strategy & Management AccountingStrategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. It describes how an organization will compete and the opportunities its managers should seek and pursue.Strategic Cost Management focuses specifically on the cost dimension within a firms overall strategy 2009 Pearson Prentice Hall. All rights reserved.


TYPES OF STRATEGIESLow cost LeadershipProviding quality products or services at low prices. Examples: Southwest Airlines and Vanguard (the mutual fund company). Differentiation Offering differentiated or unique products or services that are often priced higher than the products or services of their competitors.Examples: Pfizer and EMC (the manufacturer of data-storage equipment). 2009 Pearson Prentice Hall. All rights reserved.*


2009 Pearson Prentice Hall. All rights reserved.Strategy & Management AccountingManagement accounting helps answer important questions such as:Who are our most important customers, and how do we deliver value to them? Barnes and Noble developed the capabilities to sell online by building its information and technology infrastructureWhat substitute products exist in the marketplace, and how do they differ from our own? Hewlett-Packard designs new printers after comparing the funtionality, quality and price of its printers to other printers available in the marketplace. 2009 Pearson Prentice Hall. All rights reserved.


2009 Pearson Prentice Hall. All rights reserved.Strategy & Management AccountingManagement accounting helps answer important questions such as:What is our critical capability? Is it technology, production, or marketing? Kellog Company, for example, uses the reputation of its brand to introduce new types of cereal.Will we have enough cash to support our strategy or will we need to seek additional sources? Proctor and Gamble issued new debt and equity to fund its strategic acquisition of Gillette, a maker of shaving products. 2009 Pearson Prentice Hall. All rights reserved.


2009 Pearson Prentice Hall. All rights reserved.Management Accounting and ValueCreating value is an important part of planning and implementing strategyValue is the usefulness a customer gains from a companys product or service 2009 Pearson Prentice Hall. All rights reserved.


How Managerial Accounting Adds Value to the OrganizationProviding information for decision making and planning and proactively participating in decision-making and planning process.Assisting managers in directing and controlling activities.Motivating managers and other employees towards organizations goals.Measuring performance of activities, subunits, managers, and other employees.Assessing the organizations competitive position.

The Balanced Scorecard A Model of Performance EvaluationHow do we look to our owners?How do customers see us?How can we continue to improve?In which activities must we excel?

2009 Pearson Prentice Hall. All rights reserved.Management Accounting and ValueValue Chain is the sequence of business functions in which customer usefulness is added to products or servicesThe Value-Chain consists of:Research & Developmentgenerating and experimenting with ideas related to new products, services or processes.Designdetailed planning and engineering of products, services or processes. 2009 Pearson Prentice Hall. All rights reserved.


2009 Pearson Prentice Hall. All rights reserved.Management Accounting and ValueThe Value-Chain consists of:3. ProductionAcquiring, coordinating, and assembling resources to produce a product or deliver a service.4.MarketingPromoting and selling products or services to customers or prospective customers.5.DistributionDelivering products or services to customers.6.Customer ServiceProviding after-sale support to customers. 2009 Pearson Prentice Hall. All rights reserved.


ProductDesignResearchandDevelopmentStrategic Cost Management and the Value ChainSecuring rawmaterials andother resourcesProductionMarketingDistributionCustomerServiceStart

Key Success FactorsThe dimensions of performance that customers expect, and that are key to the success of a company include:Cost and efficiencyQualityTimeInnovation 2009 Pearson Prentice Hall. All rights reserved.


Learning Objective5

A staff position supports and assists line positions.Example: A cost accountant in the manufacturing plant.Line and Staff PositionsA line position is directly involved in achieving the basic objectives of an organization.Example: A production supervisor in a manufacturing plant.


Learning Objective6

Controller The chief managerial and financial accountant responsibility for:Supervising accounting personnel Preparation of information and reports, managerial and financialAnalysis of accounting informationPlanning and decision making

Treasurer Responsible for raising capital and safeguarding the organizations assets.Supervises relationships with financial institutions.Work with investors and potential investors. Manages investments.Establishes credit policies.Manages insurance coverage

Internal Auditor Responsible for reviewing accounting procedures, records, and reports in both the controllers and the treasurers area of responsibility.Expresses an opinion to top management regarding the effectiveness of the organizations accounting system.


Learning Objective7

Major Themes in Managerial AccountingManagerialAccountingInformationand IncentivesCosts andBenefitsEvolution andAdaptationBehavioralIssues

Evolution and Adaptation in Managerial AccountingService vs. Manufacturing FirmsEmergence of NewIndustriesGlobal CompetitionFocus on the CustomerCross-Functional TeamsComputer-IntegratedManufacturingProduct Life CyclesTime-Based CompetitionInformation andCommunicationTechnologyJust-in-Time InventoryTotal Quality ManagementContinuous ImprovementChangeE-Business

ObjectivesMeasure the cost of resources consumed.Identify and eliminate non-value-added costs.Cost Management SystemsCost Management System

ObjectivesDetermine efficiency and effectiveness of major activities.Identify and evaluate new activities that can improve performance.Cost Management SystemsCost Management System


Learning Objective8

Theory of Constraints A sequential process of identifying and removing constraints in a system.Restrictions or barriers that impede progress toward an objective


Learning Objective9

Ethical Climate of Business The corporate scandals experienced over the last few years have shown us that unethical behavior in business is wrong in a moral sense and can be disastrous in the economy. In addition to Sarbanes-Oxley, there will likely be more reforms in corporate governance and accounting.

Professional EthicsCompetenceConfidentialityIntegrityCredibility

Professional EthicsCompetence

Maintain an appropriate level of professional expertise by continually developing knowledge and skill.Perform professional duties in accordance with relevant laws, regulations, and technical standards.Provide decision support information and recommendations that are accurate, clear, concise, and timely.Recognize and communicate professional limitations or constraints that would preclude responsible judgment or successful performance of an activity.

Professional EthicsConfidentiality

Keep information confidential except when disclosure is authorized or legally required.Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates activities to ensure compliance.Refrain from using confidential information for unethical or illegal advantage.

Professional EthicsIntegrity

Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.Refrain from engaging in any conduct that would prejudice carrying out duties ethically.Abstain from engaging in or supporting any activity that might discredit the profession.

Professional EthicsCredibility

Communicate information fairly and objectively.Disclose all relevant information that could reasonably be expected to influence an intended users understanding of the reports, analyses, or recommendations.Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.


Learning Objective10

2009 Pearson Prentice Hall. All rights reserved.Management Accounting GuidelinesCost Benefit approach is commonly used: benefits generally must exceed costs as a basic decision ruleBehavioral & Technical Considerations people are involved in decisions, not just dollars and centsDifferent definitions of cost may be used for different applications 2009 Pearson Prentice Hall. All rights reserved.


Managerial Accounting as a CareerProfessional OrganizationsInstitute of Management Accountants (IMA)PublishesManagementAccountingand researchstudies.AdministersCertifiedManagementAccountantprogramDevelopsStandards ofEthicalConduct forManagementAccountants

End of Chapter 1

Managerial accounting is an integral part of the management process. It is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit an organizations goals. (LO1)In pursuing its goals, an organization acquires resources, hires people, and then engages in an organized set of activities. It is up to the management team to make the best use of the organizations resources, activities, and people in achieving the organizations goals. The day-to-day work of the management team comprises four activities: Decision making Directing operational activities Planning Controlling(LO2)

*****Both managerial and financial accounting information draw upon data from an organizations basic accounting system. One part of that system, the cost accounting system, accumulates cost data for both managerial and financial accounting. Managerial accounting information is used for decision making, planning, directing, and controlling an organization's operations, and assessing its competitive position. It is intended for managers of all levels within the organization. Financial accounting information is used to prepare the published financial statements and other financial reports. It is intended for external Users, such as stockholders, financial analysts, lenders, unions, consumer groups, and governmental agencies. (LO4)This exhibit summarizes the differences between managerial and financial accounting. Managerial accounting reports are intended for managers within the organization and are not subject to any regulation. The data is drawn from the basic accounting system as well as other sources. The reports often focus on departments or subunits and are based on historical data, estimates and future projections. Financial accounting reports are intended for external users and are subject to regulation. The data is drawn almost completely from the basic accounting system and are almost exclusively historical. (LO4)****Managerial accountants add value to an organization by providing information, assisting in directing and controlling activities, motivating managers and employees towards the organizations goals, measuring performance, and assessing the organizations competitive position. (LO3)The balanced scorecard is a model of business performance evaluation that balances measures of financial performance, internal operations, innovation and learning, and customer satisfaction. If an organization is to remain viable in a changing and ever more competitive business environment, its managers need to continually ask the questions emphasized in the balanced scorecard. (LO3)

**Usually many activities are involved in securing basic raw materials and turning them into valuable products or services. The set of linked, valuecreating activities, ranging from securing basic raw materials and energy to the ultimate delivery of products and services, is called the value chain. Although there may be only one organization involved in a particular value chain, usually there are many. (LO8)

***Line positions are directly involved in providing goods and services while staff positions support the line positions. Management accountants are staff positions that need to work closely with line management. (LO5)The chief financial office, also known as the controller, is the title given to the top managerial and financial accountant. This person is responsible for accounting personnel and preparing the information and reports used in both managerial and financial accounting. The CFO is an integral member of the management team, often involved in planning and decision making at all levels and across all functional areas. (LO6)The treasurer typically is responsible for raising capital and safeguarding the organizations assets. In addition, the treasurer manages the organizations investments, its credit policy and its insurance coverage. (LO6)

The internal auditor is responsible for reviewing the accounting procedures, records and reports in both the controllers and the treasurers areas. The internal auditor expresses an opinion to top management about the effectiveness of the accounting system. (LO6)Managerial accounting is driven by the need for information. It is intended to assist in decision-making, but often it is also intended to influence a managers decision. Reactions to managerial accounting information can have a large impact on an organization. A managerial accountants understanding of human behavior can help him or her to be more effective provider of information.There are costs and benefits to providing managerial accounting information. The costs include compensation of personnel, purchase and operations of computers, and the time spent by users reading and understanding the information. Benefits include improved decisions, more effective planning, improved efficiency, and better control of operations.Managerial accounting concepts and tools are still evolving. Also, as business environments change, managerial accounting information must also be adapted. (LO7)Managerial accounting information must be adapted to reflect the changes in the business environment. The changes shown here are especially pertinent to managerial accounting. (LO7)A cost management system is a planning and control system with four objectives:Measure the cost of resources consumed in the organizations significant activitiesIdentify and eliminate non-value-added costs. These are costs of activities that can be eliminated without deteriorating quality, performance or value. (LO7)Determine the efficiency and effectiveness of all major activitiesIdentify and evaluate new activities that can improve future performance

The emphasis on the organizations activities is crucial to the goal of producing quality goods and services at the lowest possible cost. (LO7)Managers should carefully examine the chain of linked activities in order to identify any constraints that prevent the organization from reaching a higher level of achievement. This approach is often called the theory of constraints. The most cost effective ways to ease the most limiting constraints are sought. When these constraints are relaxed, the organization can reach a higher level of goal attainment. (LO8)The stream of corporate scandals has taught us that not only is unethical behavior in business wrong in a moral sense, but it also can be disastrous to the business and the economy. There will most likely be reforms in corporate governance and accounting. The Sarbanes-Oxley Act is one example. These scandals have served as a wake-up call to focus more on ethical issues in practice and teaching. (LO9)

As professionals, managerial accountants have an obligation to themselves, their colleagues, and their organizations to adhere to high standards of ethical conduct. In recognition of this obligation, the IMA has developed the following ethical standards for its members, who are practitioners of managerial accounting and financial management. (LO10)





**Managerial accountants are providers of information and are often in touch with the heartbeat of the organization. They frequently interact with sales personnel, finance specialists, production people and managers at all levels. To keep up with new developments in their field, management accountants often belong to one or more professional organizations. The largest is the Institute of Management Accountants. The IMA publishes journals, administers the Certified Management Accountant program, and develops ethical standards for its members. (LO10)

chap one

Documents

quality management

management needs

product quality

cost information

information needs

planning decision

effective planning

important planning toolcontrol