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Accounting 202

Managerial Accounting Fundamentals

San Diego State University

School of Accountancy

Professor Phillip W. Gillet, Jr.


Chapter 1 Outline


I. The Management Process in Organizations

    1. Generally: "Managerial accounting is concerned with providing information to managersóthat is, to those who are inside an organization and who direct and control its operations. Managerial accounting can be contrasted with financial accounting, which is concerned with providing information to stockholders, creditors, and others who are outside an organization. Managerial accounting provides the essential data with which organizations are actually run. Financial accounting provides the scorecard by which a companyís past performance is judged." Ray W. Garrison & Eric W. Noreen, Managerial Accounting 4 (8th ed. 1997) (emphasis and bold in original).

    2. Not mandatory: "Financial accounting is mandatory; that is, it must be done. Various outside parties such as the Securities and Exchange Commission (SEC) and the tax authorities require periodic financial statements. Managerial accounting, on the other hand, is not mandatory. A company is completely free to do as much or as little as it wishes. There are no regulatory bodies or other outside agencies that specify what is to be done, or, for that matter, whether anything is to be done at all. [Because] managerial accounting is completely optional, the important question is always, ĎIs the information useful [i.e., does the benefit of having the information outweigh the cost of compiling the information]?í rather than, ĎIs the information required?í" Id. at 9.

    3. What types of organizations use managerial accounting?

    1. All types: All types of organizations including manufacturers, retailers, service industries, agribusiness, and non-profit firms use managerial accounting information.

    1. Uses: 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.

    2. Needs: 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?

    1. Managerial accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organizationís goals.

    1. Integral part of process: Managerial accounting is an integral part of the management process and managerial accountants are important strategic partners in an organizationís management team.

    2. Creating value: The management team seeks to create value for the organization by managing resources, activities, and people to achieve the organizationís goals effectively.

    3. Focus on internal personnel needs: The focus in managerial accounting is primarily on the needs of personnel within the organization.

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.

    1. Decision making: Management teams often decide which of the available alternatives help the organization most efficiently attain their goals.

    2. Planning: Planning of business operations involve developing detailed financial and operational descriptions of anticipated operations.

    3. Directing operational activities: This simply means running the organization on a day-to-day basis.

    1. Day-to-day work: 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

    1. Providing information for decision making and planning: Virtually all major decisions by internal users (i.e., managers) rely largely on managerial accounting information.

    2. 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).

    3. Assisting in directing and controlling: Directing and controlling day-to-day operations requires a variety of data about the process of providing a good or service.

    1. Directing operational activities: The management team needs data about the cost of providing goods or services in order to set fees and prices.

    2. Controlling operations: Management compares actual costs incurred with those specified in the budget (e.g., analyzing and comparing actual performance to budget plans).

    3. Attention-directing functions: 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.

    1. Motivating managers and employees: A key purpose of managerial accounting is to motivate managers and other employees to direct their efforts toward achieving the organizationís goals. This motivates managers to achieve the organizationís goals by communicating the plans, providing a measurement of how well the plan was achieved, and prompting an explanation of deviations from the plan.

    1. Budgeting: One means of achieving goals is through budgeting. The budget indicates the top managementís desire to allocate resources and emphasize certain activities.

    1. Explain deviations: 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. Empowerment: Another way to motivate employees to assist in achieving the organizationís goals is through empowerment. Employee empowerment is the concept of encouraging and authorizing workers to take the initiative to improve operations, product quality, customer service and reduce costs.

    1. Measuring performance: Another means of motivating employeesí toward the organizationís goals is to measure their performance in achieving their goals. Managerial accounting measures performance for both the entire organization, as in financial accounting, but also for many subunits as well (e.g., divisions, departments, managers).

    2. 1. Rewarding performance: Many large corporations compensate their executives, in part, on the basis of the profit achieved by the subunits they manage.

    3. Assessing the organization's competitive position: A crucial role of managerial accounting is to continually assess how an organization compares with the competition, with an eye toward continuously improving.

    1. Evaluation: This allows the firm to evaluate its financial and internal performance, customer satisfaction, and innovation compared to other similar firms.


III. Managerial Versus Financial Accounting:

    1. Internal focus of reports: The focus of managerial accounting is on the needs of managers within the organization, rather than interested parties outside the organization.

    2. External vs. internal users of information:

    1. External users: Financial accounting is primarily intended for external users (i.e., investors, creditors, etc.) and concerned with external financial reporting. It is: (1) highly regulated by FASB (Financial Accounting Standards Board), SEC (Securities and Exchange Commission); (2) mandatory for publicly traded companies; (3) historic in nature.

    2. Internal users: Managerial accounting is intended for internal users (i.e., managers); It is: (1) not highly regulated; (2) not mandatory but used when benefits exceed costs; (3) is future oriented.

IV. Role of the Managerial Accountant

    1. Line and staff positions

    1. Directly involved: Managers in line positions are directly involved in the provision of medical care or in the operation of the facilities.

    1. Examples: Managers of personnel, doctors and director of admissions (at a hospital), assembly workers (in a factory), teachers, director of purchasing.

    1. Indirectly involved: Managers in staff positions supervise activities that support the hospitalís mission, but they are indirectly involved in the hospitalís operation.

    1. Examples: Controller, treasurer, in-house counsel (lawyer), human resources director, accountants.

    1. Management accountants

    1. Controller: This is the chief accountant responsible for the supervision of the accounting department, preparation of reports, and the interpretation of information to the line managers.

    2. Treasurer: The treasurer is responsible for raising capital, managing cash, investments, insurance coverage, and the credit policy of an organization.

    3. Internal auditor: This person reviews accounting procedures, reports, and performance on behalf of top management.

V. Major Themes of Managerial Accounting

    1. Information and incentives: The need for information is the driving force behind managerial accounting.

    1. Two functions: Managerial accounting information serves two functions: a decision-facilitating function and a decision-influencing function.

    1. 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.

    1. Behavioral issues: The reactions of both individuals and groups to managerial accounting information will significantly affect the course of events in an organization. Everyone has behavioral tendencies and cognitive limitations that affect their use of information. The better a managerial accountantís understanding of human behavior is, the more effective he or she will be as a provider of information.

    2. Costs and benefits: The desirability of any particular managerial accounting technique or information must be determined in light of its costs and benefits.

    1. Costs: The cost of providing managerial accounting information includes the cost of compensation for the controller and Accounting Department personnel, the cost of purchasing and operating computers, and the costs of the time spent by the information users to read, understand, and utilize information.

    2. Benefits: The benefits include improved decisions, more effective planning, greater efficiency of operations at lower costs, and better directions and control of operations.

    1. Evolution of managerial accounting: Compared to financial accounting, managerial accounting is a young discipline. As a result, managerial accounting concepts and tools are still evolving as news ways are found to provide information that assists management. For managerial accounting to be as useful a tool in the future as it has been in the recent past, managerial accounting information must be adapted to reflect those changes.

    1. Growth of the service sector: 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.

    2. Emergence of new industries: Scientific discoveries are opening up whole new industries that challenge managerial accountant to provide relevant information in these new industries.

    3. Global competition: 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.

    1. Multinational company: It is an organization that has operational subunits, such as manufacturing plants or sales facilities, in two or more countries.

    1. Problems: Multinational firms face several challenges that domestic companies do not.

    1. Political systems: Accounting rules for external reporting, legal systems, and cultural norms vary widely among countries.

    2. Income tax systems: Managers of multinationals must take different tax laws and rates into their business decisions.

    3. Monetary systems: Monitoring the fluctuating foreign currency values is important because of the significant impact on contracts, goods, and business operations.

    1. Focus on the customer: 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.

    2. Cross-functional teams: 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.).

    1. Working together: 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.

    2. Managerial accountants hold team together: 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.

    1. Computer-integrated manufacturing: 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.

    2. Product life cycles and diversity: 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.

    3. Time-based competition: 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.

    4. Information and communication technology: 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.

    1. Personal computers: 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.

    2. Software packages: 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.

    3. Global technologies: 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.

    1. Just-in-time inventory management (JIT): Raw materials and parts (Inventory) are purchased or produced just in time to be used at each stage of the production process.

    1. Reduction in inventory costs: This approach to inventory and production management brings considerable cost savings from reduced inventory levels that reduce consumption of valuable resources and hidden costs.

    2. Pull approach: 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.

    1. Total quality management (TQM): 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.

    2. Continuous improvement: 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.

    1. Cost management systems: This is a management planning and control system with the following objectives:

    1. Measuring resources consumed: To measure the cost of the resources consumed in performing the organizationís significant activities.

    2. Eliminating non-value-added costs: To identify and eliminate non-value-added costs. These are the costs of activities that can be eliminated with no deterioration of product quality, performance, or perceived value.

    3. Determining efficiency and effectiveness: To determine the efficiency and effectiveness of all major activities performed in the enterprise.

    4. Evaluate new activities: To identify and evaluate new activities that can improve the future performance of the organization.

    1. Activity accounting: A cost management system with an emphasis on the organizationís activities is called activity accounting and is crucial to the goal of producing quality goods and services at the lowest possible cost.

    1. Activity-based costing: It is a system for determining the costs of producing goods or services called activity-based costing (ABC). In an ABC system, the costs of the organizationís significant activities are accumulated and then assigned to goods or services in accordance with how the activities are used in the production of those goods and services. An ABC system helps management to understand the casual linkages between activities and costs.

    2. Activity-based management: Using an activity-based costing system to improve the operations of an organization is called activity-based management or ABM.

    1. Strategic cost management and the value chain:

    1. Value chain: It is an organizationís set of linked, value-creating activities, ranging from securing basic raw materials and energy to the ultimate delivery of products and services.

    2. Strategic cost management: The overall recognition of the importance of cost relationships among the activities in the value chain, and the process of managing those cost relationships to the firmís advantage are called strategic cost management. In order for any organization to most effectively achieve its goals, it is important for its managers to understand the entire value chain in which their organization participates. This understanding can help managers ask, and answer, important questions about their organizationís strategy. The questions involve fundamental, strategic issues about how an organization can best meet its goals.

    1. Competitive advantage: 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.

    2. Cost drivers: 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.

    1. Theory of constraints: It is a management approach that focuses on identifying and releasing the constraints that limit an organizationís ability to reach a higher level of goal attainment.

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.

    1. Professional organizations:

    1. IMA: The Institute of Management Accountant (IMA) is the largest of the management accountant organizations.

    1. Professional certification:

    1. CMA: The IMA administers the Certified Management Accountant (CMA) program, which is essentially the equivalent of the CPA program for public accounts.

    1. Experience: It requires 2-years of continuous professional experience in management accounting any time prior to, or within 7 years of, passing the examination.

    2. Educational requirements: 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.

    3. Examination: Each of the four parts of the computerized on demand examination consists of 120 multiple-choice questions administered by Sylvan Testing Centers.

    1. Part I: Economics, Finance, and Management

    2. Part II: Financial Accounting and Reporting

    3. Part III: Management Reporting, Analysis, and Behavioral Issues.

    4. Part IV: Decision Analysis and Information Systems

    1. Professional ethics: As professionals, managerial accountants have an obligation to themselves, their colleagues, and their organizations to adhere to high standards of ethical conduct. Practitioners of management accounting have a responsibility act with:

    1. Competence:

    1. Continuing education: Maintain profession competence by continuing education.

    2. Act legally: Professional duties must be performed legally.

    3. Diligent in their work: Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.

    1. Confidentiality:

    1. Keep confidential matters confidential: Do not disclose confidential information, unless legally obligated to disclose it.

    2. Monitor and inform subordinates regarding confidentiality: 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.

    3. Refrain from using confidential information: Do not use or appear to use confidential information acquired in the course of work for unethical or illegal advantage.

    1. Integrity:

    1. Avoid conflicts of interest: Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.

    2. Refrain from activities conflicting with ethical duties.

    3. Do not take gifts that create or suggest an impropriety.

    4. Do not undermine an organizationís goals.

    5. Communicate professional limitations that would impair performance.

    6. Do not discredit the profession.

    1. Objectivity:

    1. Communicate information fairly and objectively.

    2. Disclose all relevant information.


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