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Managerial Accounting Fundamentals
San Diego State University
School of Accountancy
Professor Phillip W. Gillet, Jr.
Chapter 1 Outline
I. The Management Process in Organizations
What types of organizations use managerial accounting?
- : All types of organizations including manufacturers, retailers, service industries, agribusiness, and non-profit firms use managerial accounting information.
- : All organizations have goals for growth, profit, quality, leadership, etc. and they use managerial accounting information to set and access their completion of these goals.
- : All organizations have informational needs in the financial, production, personnel, environmental, and legal areas. Managerial accounting provides some of this information.
D. What is managerial accounting?
- is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organizationís goals.
- : Managerial accounting is an integral part of the management process and managerial accountants are important strategic partners in an organizationís management team.
Integral part of process
- : The management team seeks to create value for the organization by managing resources, activities, and people to achieve the organizationís goals effectively.
- : The focus in managerial accounting is primarily on the needs of personnel within the organization.
Focus on internal personnel needs
E. Management activities: The owners, directors, or trustees of an organization set its goals, often with the help of management. 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 organizationís resources, activities, and people in achieving the organizationís goals. The day-to-day work of the management team comprises four activities.
- : Management teams often decide which of the available alternatives help the organization most efficiently attain their goals.
- : Planning of business operations involve developing detailed financial and operational descriptions of anticipated operations.
- : This simply means running the organization on a day-to-day basis.
Directing operational activities
- : The day-to-day work of management teams will typically include: (1) decision making; (2) planning; (3) directing operational activities; (4) controlling.
4. Controlling: Management must control
business organization to: (1) assure consistent
operation with the managementís decisions;
and (2) achieve desired goals.
II. Objectives of Managerial Accounting
Providing information for decision making and planning: Virtually all major decisions by internal users (i.e., managers) rely largely on managerial accounting information.
1. Type of data: This information includes financial and nonfinancial data to help managers with strategic planning and decision-making (e.g., the cost of products, budgets, cash flows).
Assisting in directing and controlling
- : The management team needs data about the cost of providing goods or services in order to set fees and prices.
Directing operational activities
- : Management compares actual costs incurred with those specified in the budget (e.g., analyzing and comparing actual performance to budget plans).
- : The attention-directing function of managerial accounting information directs managersí attention to issues that need their attention (i.e., it highlights successful or problem areas).
a. No solutions, merely information: Managerial accounting reports rarely solve a decision problem, however, these reports often direct managersí attention to an issue that requires their skills.
Motivating managers and employees
- : When actual operations do not conform to the budget, managers will be asked to explain the reasons for the deviation. This creates both an incentive to conform with the budget and possible negative consequences.
1. Rewarding performance: Many large corporations compensate their executives, in part, on the basis of the profit achieved by the subunits they manage.
Assessing the organization's competitive position
III. Managerial Versus Financial Accounting:
Internal focus of reports
External vs. internal users of information
IV. Role of the Managerial Accountant
Line and staff positions
Directly involved: Managers in line positions are directly involved in the provision of medical care or in the operation of the facilities.
- : Managers of personnel, doctors and director of admissions (at a hospital), assembly workers (in a factory), teachers, director of purchasing.
- : Controller, treasurer, in-house counsel (lawyer), human resources director, accountants.
V. Major Themes of Managerial Accounting
Information and incentives
Information is usually supplied to a decision-maker to assist that manager in choosing an alternative. Often that information is also intended to influence the managerís decision. It should be noted, however, that the managerial accounting information merely facilitates and influences decisions, it does not make final decisions for managers.
Costs and benefits
Evolution of managerial accounting
- : A service sector occupies a growing role in the United States economy. Nevertheless, 75 out of 100 people are employed in the service industry. If the number of those employed in manufacturing industries that provide support services are added in, 86% of people are engaged in service.
Growth of the service sector
- : Scientific discoveries are opening up whole new industries that challenge managerial accountant to provide relevant information in these new industries.
Emergence of new industries
- : Todayís marketplace is truly global. A firm is much more likely to be in competition with a foreign competitor than at any other time in history.
- : It is an organization that has operational subunits, such as manufacturing plants or sales facilities, in two or more countries.
- : Multinational firms face several challenges that domestic companies do not.
- : Accounting rules for external reporting, legal systems, and cultural norms vary widely among countries.
- : Managers of multinationals must take different tax laws and rates into their business decisions.
Income tax systems
- : Monitoring the fluctuating foreign currency values is important because of the significant impact on contracts, goods, and business operations.
- : The right customer at the right time is always right. To succeed in this ear, businesses of all types must continually focus on their customers. In response to this heightened customer focus, managerial accounting systems now often measure various attributes of customer value including product price, quality, functionality, user-friendliness, customer service, warranty, and maintenance costs.
Focus on the customer
- : Today, a cross-functional managerial approach has replaced the narrow managerial prospective of the past which was characterized by isolation of company divisions (i.e., marketing, production, legal, etc.).
- : Cross-functional managerial teams bring together production and operation managers, marketing managers, purchasing and material-handling specialists, design engineers, quality management personnel, and managerial accountants to focus their varied expertise and experience on virtually all management issues.
- : The managerial accountant designs an information system and provides data ranging across all aspects of the organizationís internal operations and external environment. Then the managerial accountant works as an integral member of the cross-functional team, interpreting information and analyzing the implications of decision alternatives.
Managerial accountants hold team together
- : A computer-integrated manufacturing (CIM) process is fully automated, with computers controlling the entire production process. In CIM systems, the types of costs incurred by the manufacturer are quite different from those in traditional manufacturing environments.
- : The rate at which technology is changing means that the life cycles of most products are becoming shorter. To be competitive, manufacturers must keep up with the rapidly changing marketplace. Managers must have timely information about production costs and other product characteristics in order to respond quickly and effectively to the competition.
Product life cycles and diversity
- : In the global competitive environment, time has become a crucial element in many companiesí strategies for success. By reducing the time it takes to develop a new product and getting the product on the market more quickly, a company can gain an important advantage over its competitors. Thus, the time to market has become a critical objective for many companies. Delays between product development stages must be reduced or eliminated. The production process must be efficient and product quality must be high.
- : The virtual explosion in data availability has enabled management accounting systems to provide information that would have been impossible to supply only a few years ago.
Information and communication technology
- : In most offices, virtually every employee has a personal computer for such tasks as word processing, data and report generation, presentation preparation, and communication. These PCs are often linked together in a network that enables employees to electronically transfer files and reports, share data, and communicate via e-mail. Often called an intranet, these networked PCs are invaluable tools in the era of cross-functional management teams. Moreover, these intranets are not confined to the walls of a building, as the World Wide Web, or Internet allows computer-to-computer interface anywhere in the world.
- : Many businesses are adopting integrated business software packages that handle a broad range of computing needs, such as customer and supplier data bases, personnel and payroll functions, production scheduling and management, inventory records, and financial and managerial accounting functions. Managerial accountants often play significant roles in selecting software for their organizations or designing in-house software to meet the organizationís unique needs.
- : Global cellular technology now enables voice communications from the most remote locations. The global positioning satellite systems (GPS) now enable trucking, railroad, shipping, and rental car companies to more easily track vehicles.
- : Raw materials and parts (Inventory) are purchased or produced just in time to be used at each stage of the production process.
Just-in-time inventory management (JIT)
- : This approach to inventory and production management brings considerable cost savings from reduced inventory levels that reduce consumption of valuable resources and hidden costs.
Reduction in inventory costs
- : The key to the JIT systems is the "pull" approach to controlling manufacturing. Inventory is ordered only when needed for production. As opposed to the traditional "push" method where large quantities of component parts or inventory are warehoused until used for production.
- : One implication of just-in-time inventory philosophy is the need to emphasize product quality. Therefore, managerial accountants have become increasingly involved in monitoring product quality and measuring the costs of maintaining quality. This information helps companies maintain programs of TQM. TQM refers to the broad set of management and control processes designed to focus the entire organization and all of its employees on providing products or services that do the best possible job of satisfying the customer.
Total quality management (TQM)
- : It is the constant effort to eliminate waste, reduce response time, simplify the design of both products and processes, and improve quality and customer service. Global competition is forcing companiesí management accountants to implement cost management systems.
Cost management systems
Measuring resources consumed
Eliminating non-value-added costs
Determining efficiency and effectiveness
Evaluate new activities
Strategic cost management and the value chain
Strategic cost management
- : An organization achieves a sustainable competitive advantage when it either: (1) performs one or more activities in the value chain at the same quality level as its competitors, but at a lower cost, or (2) perform its value chain activities at a higher quality level than its competitors, but at no greater cost.
- : Understanding the value chain, and the factors that cause costs, often called cost drivers, to be incurred in each activity in the value chain, is a crucial step in the development of the firmís strategy.
Theory of constraints
VI. Managerial Accounting as a Career: Managerial accountant serve a crucial function in virtually any enterprise and to be most efficient must be knowledgeable in other business disciplines as well.
- : It requires 2-years of continuous professional experience in management accounting any time prior to, or within 7 years of, passing the examination.
- : Candidates seeks admission to the CMA program must either: (1) hold a baccalaureate degree in any area, from an accredit college or university; or (2) score in the 50th percentile or higher on the GMAT or GRE.
- : Each of the four parts of the computerized on demand examination consists of 120 multiple-choice questions administered by Sylvan Testing Centers.
Part I: Economics, Finance, and Management
Part II: Financial Accounting and Reporting
Part III: Management Reporting, Analysis, and Behavioral Issues.
Part IV: Decision Analysis and Information Systems
- : Maintain profession competence by continuing education.
- : Professional duties must be performed legally.
- : Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.
Diligent in their work
- : Do not disclose confidential information, unless legally obligated to disclose it.
Keep confidential matters confidential
- : Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality.
Monitor and inform subordinates regarding confidentiality
- : Do not use or appear to use confidential information acquired in the course of work for unethical or illegal advantage.
Refrain from using confidential information
- : Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.
Avoid conflicts of interest
Refrain from activities conflicting with ethical duties.
Do not take gifts that create or suggest an impropriety.
Do not undermine an organizationís goals.
Communicate professional limitations that would impair performance.
Do not discredit the profession.
Communicate information fairly and objectively.
Disclose all relevant information.
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