Chapter 1

The Manager and Management Accounting

2009 Pearson Prentice Hall. All rights reserved.

Learning Objectives
1. Describe how cost accounting supports
management accounting and financial accounting
2. Understand how management accountants affect
strategic decisions
3. Describe the set of business functions in the value
chain and identify the dimensions of performance
that customers are expecting of companies
4. Explain the five-step decision-making process and
its role in management accounting
5. Describe three guidelines management
accountants follow in supporting managers
6. Understand how management accounting fits into
an organizations structure
7. Understand what professional ethics means to
management accountants

Learning Objective 1
Describe how cost
accounting supports
management accounting and
financial accounting

Accounting Discipline Overview

Financial Accounting focus on reporting to

external users including investors, creditors,

and governmental agencies. Financial
statements must be based on GAAP.
Managerial Accounting involve partnering in
management decision making, devising
planning and performance management
systems, and providing expertise in financial
reporting and control to assist management in
the formulation and implementation of an
organizations strategy. Managerial accounting
need not be GAAP compliant.
2009 Pearson Prentice Hall. All rights reserved.

Accounting Discipline
Overview

Cost accounting provides information for both

financial accounting and management
accounting. In this text the terms cost
accounting and management accounting
are used interchangeably.
Cost management describes the approaches
and activities of managers to use resources to
increase the value to customers and to
achieve organizational goals. It is not just
about reducing costs, but involves revenue
and profit planning as well.
2009 Pearson Prentice Hall. All rights reserved.

Major Differences Between

Financial & Managerial
Managerial
AccountingAccounting
Financial Accounting
Purpose

Decision making

Communicate financial
position to outsiders

Primary
Users

Internal managers

External users

Future-oriented

Past-oriented

Do not have to follow

GAAP; cost vs. benefit

GAAP compliant;
CPA audited

Ultra current to very

long
time horizons

Historical monthly,
quarterly reports

Focus/Empha
sis
Rules
Time Span
Behavioral
Issues

Designed to influence
Indirect effects on
2009
Pearson Prentice
Hall. All rights reserved.
employee
behavior
employee behavior

Learning Objective 2
Understand how
management accountants
affect strategic decisions

Strategy & Management

Accounting
Strategy specifies how an organization matches

its own capabilities with the opportunities in the

marketplace to accomplish its objectives
two broad strategies: cost leadership and
product differentiation
Strategic Cost Management focuses specifically
on the cost dimension within a firms overall
strategy
2009 Pearson Prentice Hall. All rights reserved.

Strategy & Management

Accounting
Strategic cost management helps answer

important questions such as:

Who are our most important customers, and how

do we deliver value to them?

What substitute products exist in the marketplace,
and how do they differ from our own?
What is our critical capability?
Will we have enough cash to support our strategy
or will we need to seek additional sources?

2009 Pearson Prentice Hall. All rights reserved.

Strategy & Management

Accounting
Management accounting provides information

about the sources of competitive advatange.

2009 Pearson Prentice Hall. All rights reserved.

10

Learning Objective 3
Describe the set of business
functions in the value chain
and identify the dimensions
of performance that
customers are expecting of
companies
11

Management Accounting and

Value

Creating value is an important part of

planning and implementing strategy
Value is the usefulness a customer gains from
a companys product or service (fair price,
high quality, timely delivery, fashion, after
sale service.)

2009 Pearson Prentice Hall. All rights reserved.

12

Management Accounting and

Value Chain is the sequence of business
Value
functions in which customer usefulness is
added to products or services

Management accountants provide decision support

for managers in the following six business

functions:
1. Research & Development
2. Design
3. Production
4. Marketing
5. Distribution
6. Customer Service

2009 Pearson Prentice Hall. All rights reserved.

13

1. Research and Development: The process that is conducted

to generate and experiment with ideas related to new
products, services, or processes.
2. Design: The detailed planning and engineering of products,
services, or processes.
3. Production: The acquisition, coordination, and assembly of
resources to produce a product or deliver a service.
4. Marketing: The manner by which companies
promote and sell their products or services to customers
or prospective customers.
5. Distribution: The delivery of products or services to the
customer.
6. Service: The after-sale support activities provided to
customers.
14

The Value Chain Illustrated

2009 Pearson Prentice Hall. All rights reserved.

15

Value Chain Analysis

Management accountants are involved in the

value chain as they keep track of costs

incurred in each category. This information
helps managers evaluate cost-benefit
tradeoffs.

16

Supply chain describes the flow of goods, services,

and information from cradle to grave, regardless of
whether those activities occur in the same
organization or other organizations.

17

A Supply Chain
Implementation

2009 Pearson Prentice Hall. All rights reserved.

18

Key Success Factors

The value chain and supply chain should be

used by the company to deliver improving

levels of performance for the customer
regarding several of the following:
Cost and efficiency
Quality
Time
Innovation

2009 Pearson Prentice Hall. All rights reserved.

19

Cost organizations are under continuous pressure

to reduce costs.
Quality customers are expecting higher levels of
quality.
Time organizations are under pressure to complete
activities faster and to meet promised delivery dates
more reliably.
New product development, customer response time
Innovation a continuing flow of innovative
products or services is the basis for ongoing
company success.
20

Learning Objective 4
Explain the five-step
decision-making process and
its role in management
accounting

21

Planning & Control Systems

Planning selects goals, predicts results, decides

how to attain goals, and communicates this to

the organization.
Budget the most important planning tool
A budget is the quantitative expression of a

proposed plan and is an aid to coordinate what

needs to be done to implement the plan.

Management accounting:
Help to develop strategies
Help to improve business process
Help to build teamwork and commitment
Prepare budget
2009 Pearson Prentice Hall. All rights reserved.

22

Planning & Control Systems

Control is the actions taken to implement the

planning decision, deciding how to evaluate

performance, and provides feedback to the
organization
Performance reports: reports that compare
actual results with budgeted amounts.
Feedback: This involves managers examining
past performance and systematically
exploring alternative ways to make better
informed decisions in the future.
2009 Pearson Prentice Hall. All rights reserved.

23

Boone Shop, July 2003

Budget
Revenues
$59,000
Cost of goods sold 42,000
Wages
6,700
General
1,300
Fixed costs
5,000
Operating income $ 4,000

Actual
$60,000
43,400
7,000
900
5,000
$ 3,700

Variance
$1,000 F
1,400 U
300 U
400 F
0
$ 300 U
24

Actual cost of goods sold were

72% of revenues instead of the budgeted 71%.
Budget
% Actual
%
Revenues
$59,000 100 $60,000 100
Cost of goods sold 42,000
71 43,400
72
Gross margin
$17,000
29 $16,600
28

25

A Five-Step Decision Making

Process in Planning & Control
1. Identify the problem and uncertainties
2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing between

alternatives
5. Implement the decision, evaluate
performance, and learn
2009 Pearson Prentice Hall. All rights reserved.

26

27

Learning Objective 5
Describe three guidelines
management accountants
follow in supporting
managers

28

Management Accounting
Guidelines
Cost Benefit approach is commonly used:

benefits generally must exceed costs as a

basic decision rule
Behavioral & Technical Considerations
people are involved in decisions, not just
dollars and cents
Different definitions of cost may be used for
different purposes
2009 Pearson Prentice Hall. All rights reserved.

29

A management accounting system should have two

simultaneous considerations for providing information:

1. Behavioral considerations: Consider the

motivational aspect of the decision.

2. Technical considerations: Provides managers with

appropriate information at appropriate intervals to
assist in decision making.
30

Learning Objective 6
Understand how
management accounting fits
into an organizations
structure

31

line and staff

relationships
Line management is directly responsible for
attaining the goals of the organization.
Production is a line function.
Staff management supports line
management with advice and assistance.
Accounting and human resources are two
examples of staff management functions.

32

A Typical Organizational
Structure and the Management
Accountant

2009 Pearson Prentice Hall. All rights reserved.

33

Learning Objective 7
Understand what
professional ethics means to
management accountants

34

Professional Ethics
The four standards of ethical conduct for

management accountants as advanced by the

Institute of Management Accountants (IMA):
Competence
Confidentiality
Integrity
Credibility

2009 Pearson Prentice Hall. All rights reserved.

35

36