Introduction to Management Accounting Managerial Accounting:

The Business Organization, and Professional Ethics

Learning Objectives
When you have finished studying this chapter, you should be able to:
1. Describe the major users and uses of accounting information. 2. Describe the cost-benefit and behavioral issues involved in designing an accounting system. 3. Explain the role of budgets and performance reports in planning and control.

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1-1

Learning Objectives

4. Discuss the role accountants play in the companys value-chain functions. 5. Explain why accounting is important in a variety of career paths. 6. Identify current trends in management accounting. 7. Explain why ethics and standards of ethical conduct are important to accountants.

Users of Accounting Information

Management Accounting Internal managers Financial Accounting External Users Investors: Stockholders Creditors: Suppliers Bankers Government Authorities

Decisions: Day-to-day operating Long-range strategic

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1-2

Decision Making Scorekeeping: Evaluate Organizational Performance Problem Solving: Assess Possible Courses of Action

Attention Directing: Compare Actual Results to Expected

Accounting Information System

Process of gathering, organizing, and communicating financial information

Financial Statements

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1-3

Influences on Accounting Systems

Generally accepted accounting principles (GAAP) Foreign Corrupt Practices Act Internal controls Internal auditors Management audits Sarbanes-Oxley Act

Sarbanes-Oxley Act

In 2002, the Sarbanes-Oxley Act required chief executive officers to sign a statement verifying the accuracy of the companys financial statements.

External auditors must examine and report on the companys internal control system.

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1-4

Cost-Benefit and Behavioral Considerations

Cost-benefit balance Behavioral implications
The system must provide accurate, timely budgets and performance reports in a form useful to managers. Weigh estimated costs against probable benefits.

Managers must use accounting reports, or the reports create no benefits.

Planning and Control

Accounting information helps managers plan and control the organizations operations.

Planning: Setting objectives and outlining how the objectives will be obtained.

Control: Implementing plans and using feedback to evaluate the attainment of objectives.

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1-5

The Nature of Planning and Controlling

Management Process Internal Accounting System Budgets, Special Reports
Other information systems
Customer surveys

Corrections and revisions of plans and actions

Planning Increase Profitability

Accounting System Control Actions Evaluations

Competitor analysis
Advertising impact New items report

Performance Reports

Budget and Performance Reports

Budget: quantitative expression of a plan of action

Performance reports: compare actual results with budgeted amounts provide feedback by comparing results with plans highlight variances

Variances: deviations from plans

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1-6

Performance Reports
Mayfair Starbucks Store, March 31, 20X1
Sales Less: Ingredients Store labor Other labor Utilities, etc. Total expenses Operating income Budget $50,000 22,000 12,000 6,000 4,500 $44,500 $ 5,500 Actual $50,000 24,500 11,600 6,050 4,500 $46,650 $ 3,350 Variance 0 $2,500 U 400 F 50 U 0 $2,150 U $2,150 U

U= Unfavorable actual exceeds budget F Favorable actual is less than budget

Product Life Cycle

Product life cycle refers to the various stages through which a product passes.

No Sales

Sales Growth

Stable Sales Level

Low sales No sales

Product Development

Introduction to Market

Mature Market

Phase-out Product

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1-7

The Value Chain

Research and Development Product And Service Process Design

Service

Customer Focus

Distribution

Production

Marketing

Management Accountants Role as Internal Consultant

Collects and compiles information Internal Consultant Interprets and Analyzes information Is Involved in decision making Prepares standardized reports

Management

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1-8

Organizational Authority and Responsibility

Line managers: directly involved with making and selling products or services.

Staff managers: Advisory Support line managers.

Cross-functional teams: Found in modern, flatter organizations; Functional areas work together in decision-making process.

Accounting Function
Chief Financial Officer (CFO)
Controller Functions
Planning for control Reporting and interpreting Evaluating and consulting Tax administration

Treasurer Functions
Provision of capital Investor relations Short-term financing Banking and custody Credits and collections Investments Risk management (insurance)

Government reporting
Protection of assets Economic appraisal

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1-9

Career Opportunities in Management Accounting

The Certified Management Accountant (CMA)

CMAs must pass a four-part examination: 1. Business Analysis 2. Management accounting and reporting 3. Strategic Management, and 4. Business Applications.

Management Accounting Change Drivers

Shift from a manufacturing-based to a service-based economy Increased global competition Advances in technology

Changes in business processes

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1 - 10

Major Influences on Management Accounting

Advances in technology: E-commerce Enterprise resource planning (ERP) B2C and B2B Business process reengineering: Just-in-time (JIT) philosophy Lean manufacturing Computer-integrated manufacturing Six sigma

Standards of Ethical Conduct

The Institute of Management Accountants (IMA) Statement of Ethical Professional Practice for Management Accounting Members Requires members to adhere to a code of conduct regarding: Competence, Confidentiality, Integrity, and Credibility.

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1 - 11

Ethics
Reliability
Trust Integrity

No regulation can be as effective in ensuring reliability as high ethical standards of accountants.

Ethical Dilemmas
Managers must choose an alternative and there are: Significant value conflicts among differing interests. Real alternatives that are all justifiable, and Significant consequences on stakeholders in the situation.

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1 - 12

Unethical Behavior Temptations

Emphasis on short-term results: Pressure to meet expected profit numbers.
1.

Ignoring the small stuff: Large misdeeds often result from many small ones.
2.

Unethical Behavior Temptations

Economic cycles: Downturn markets reveal what an upturn market conceals. Vigilance in all stages of economic markets maintains high ethical standards.
3.

Accounting rules: Avoid creative interpretations of the rules. Practice full and fair disclosure to convey companys performance.
4.

2004 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

1 - 13