chapter 1 zimmerman s

8/3/2019 Chapter 1 Zimmerman S

1/20

McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Introduction

Chapter One


2/20

11--22

Decision Making - Product Management

Examples Add newproduct

Terminatean existing productline

Accept or rejectspecial order

Related Topics

Operationsmanagement

Budgeting - capitaland operating

Just-in-time (JIT)


3/20

11--33

Decision Making - Pricing

Examples Setselling price to achieve desired profits

Setselling price to achievepositive cash flow

Related Topics

Marketing

Microeconomics - Price Theory

Corporate Finance


4/20

11--44

Decision Making - Cost Control

Examples Add newequipment

Changeproduction process

Make internally versus buy externally (outsource)

Related Topics Processengineering

Management information systems

Activity-based costing (ABC)


5/20

11--55

Control - Incentives

Assumptions Individualsmaximize their own self-interest

Owners of firmwant to maximize firmvalue

Maximizing firmprofitsmaximizes firmvalue

Incentives Design performance incentives based on internal

accounting measures to motivateemployees to takeactions thatwillmaximize firmvalue


6/20

11--66

Control - Performance Evaluation

Examples Performance bonuses depend on accounting results

Benchmarking: comparisons to industry leaders

Related Topics

Organizational behavior

Human resourcesmanagement


7/20

11--77

Design - Multiple Roles of Accounting

Study Figure 1-1.

Main point:Accounting reportsare used for multiplepurposes.


8/20

11--88

Design - External Reports

Users ofexternal reports Shareholders, bondholders, banks,and analysts

(SEC, FASB) Taxing authorities (IRS,states,etc.)

Regulatory authorities (GASB,etc.) Board of directors

Objectives in external reporting

Comparability between firms Historicalaccounting Auditors can verify reports


9/20

11--99

Design - Internal Reports

Users of internal reports Managersatalllevels

Objectives of internal reporting Useful for decision making about futureactivities

Measureperformance that is relevant to the firm

Focus on projects or processeswithin a firm


10/20

11--1010

Design - Conflicting Goals

Control Incentives to motivate behavior changes

Tendency to ignore information notspecificallyincluded in incentivesystem

Report good numbers to satisfy topmanagement

Decision making Want to avoid distorted information

Estimates useful to plan futureactivities


11/20

11--1111

Design - Evolution

Economic Darwinism:Over thelong termsystemssurvive incompetitivemarketswhen the benefits

exceed or equal the costs ofmaintainingthosesystems.

Survival does not imply optimality.

Better systemsmay exist, but have not yetbeen discovered.


12/20

11--1212

Design - Figure 1-2

Study Figure 1-2.

Main Point:In a typical corporation, the corporate controller isresponsible for all internaland externalaccountingreports. Therearealso controllers in the operating

divisions.


13/20

11--1313

Design - Organizational Structure

Controller Reports to chief financial officer (CFO) Administers internaland externalaccounting Budgetplanning

Controls financial data collection and reporting Growing roleas internal consultants or business

analysts to thepoint of being viewed as businesspartners

Balanceproviding information to other managersfor decision making againstproviding monitoringinformation used to control behavior oflower-levelmanagers.


14/20

11--1414

Evolution of Management Accounting:

A Framework for Change

Business Environment

Business Strategy

Organizational Architecture

Decision-Right Assignment

Performance Evaluation

Reward System

Incentives and Actions

Firm Value


15/20

11--1515

Example - Vortec Special Order

With no overtime and congestionCurrent With Order IncrementalUnitsproduced and sold TotalRevenueand Costs

100,000 102,000 2,000

Sales ($5.00 regular, $4.00special) $ 500,000 $508,000 8,000

Cost ofsales ($4.50, $4.47) 450,000 455.940 8,000

Administrativeexpenses - 27,500 27,500 0

Netprofit before taxes $ 22,500 $ 24,560 $ 2,060

Incremental revenue (2,000 unitsx $4.00) $8,000

Total cost @ 102,000 units (102,000x $4.47) $455,940

Total cost @ 100,000 units (100,000x $4.50) 450.000

Incremental cost of2,000 units -5,940

Incrementalprofit of2,000 units $2,060


16/20

11--1616

Example - Vortec Special Order

With overtime and congestionCurrent With Order Incremental

Unitsproduced and sold

Total Revenue and Costs

100,000 102,000 2,000

Sales ($5.00 regular, $4.00special) $ 500,000 $508,000 8,000

Cost ofsales ($4.50, $4.08 on

additional2,000)

450,000 458,160 -8,160

Administrativeexpenses - 27,500 27,500 0

Netprofit before taxes $ 22,500 $ 22,340 $ -160

Incremental revenue (2,000 unitsx $4.00) $8,000

Total cost @ 102,000 units (102,000x $4.50)

plus (2,000x $4.08)

$458,160

Total cost @ 100,000 units (100,000x $4.50) 450.000

Incremental cost of2,000 units -8,160

Incrementalprofit of2,000 units -160


17/20

11--1717

Example - Beware of Average Costs

Average costper unitat currentproductionvolume is usually notan accurateestimate ofthe costper unitat other levels ofproduction.

Average costs include: fixed costs that do not changewith volume variable costsper unit that can changewith volume

Costper unitmay increasewhen productionvolume is near or above normal operatingcapacity.


18/20

11--1818

Example - Consider Opportunity Costs

Opportunity costsmeasurewhat the firmforgoeswhen it choosesaspecific action

Consider whata firm forgoes by accepting aspecial order


19/20

11--1919

Example - Supplement Accounting Data

Supplement historical costaccounting datawith other knowledge

Could include: expected customer demands

competitorsplans

future technology

government regulation


20/20

11--2020

Example - Accounting Data for

Evaluation

When managers have incentives to maximizeperformance on oneparticular accountingmeasure, firmprofitsare not necessarily

maximized.

Reducing averagemanufacturing costsper unit doesnotalwaysmaximizeprofit

Maximizing total revenue does notalwaysmaximizeprofit

chapter 1 zimmerman s

Documents