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Managerial

Accounting
The Basis for Business Decisions
ACCOUNTING:
Information for Decision Making
The
accountin
g process

Accounting
links decision
makers with Accounting
Economic
economic
activities information
activities and
with the results of
their decisions.

Actions
(decisions) Decision
makers
Types of Accounting Information

Financial Tax

Managerial
Information System

Cost & Revenue


Determination
Information Job costing Decision Support
Users Process costing CVP analysis
Investors ABC Performance
Creditors Sales evaluation
Managers Assets & Incremental
Owners Liabilities analysis
Customers Plant and Budgeting
Employees equipment Capital
Regulatory Loans & equity allocation
agencies Receivables, Earnings per
-SEC payables & cash share
-IRS Ratio analysis
Cash Flows
-EPA
From operations
From financing
From investing
Planning and Control Cycle
Formulating Long-and Begin
Short-Term Plans
(Planning)

Comparing Actual Implementing


to Decision the Plans
Planned Performance Making (Directing and
(Controlling) Motivating)

Measuring
Performance
(Controlling)
Objectives of External Financial
Reporting
The primary external users of financial
information are investors and creditors.

Cash Flow Prospects


Investors Creditors
Return on Periodic Periodic
Investment dividends interest
Sale of Repayment of
Return of ownership at a loan at a
Investment future date future date
(Specific
Information
) about economic Objectives
resources, claims to resources, and
changes in resources and claims. of
Financial
Reporting
Information useful in assessing
amount, timing and uncertainty of
future cash flows.

Information useful in making


investment and credit decisions.
(General)
Objectives of External Financial
Reporting
Balance Sheet

Income Statement
The primary
Statement of Cash Flows
financial
statements.
Financial
Statements:
A Lens to View
Business

Financial
Statements
Characteristics of Externally
Reported Information
A Means to
an End
Usefulness Broader
Enhanced than
via Financial
Explanation Statements
Based on
Historical
General
in Nature
Purpose
Assumption Results from Inexact
and Approximate
Internal Users of Accounting
Information

Board of Directors
Chief Executive Officer
Chief Financial Officer
Vice Presidents
Business Unit Managers
Plant Managers
Store Managers
Line Supervisors
Information about decision-making
authority, for decision-making support, and Objectives
for evaluating and rewarding decision-making of
performance.
Managerial
Reporting
Information useful in assessing
both the past performance and future
directions of the enterprise and information
from external and internal sources.

Information useful to help the enterprise


achieve its goal, objectives and mission.
Characteristics of Management
Accounting Information

Timeliness

A Means to an Identify
End Decision-Making
Authority

Measures of
Efficiency and Oriented
Effectiveness Toward Future
Folk/Garrison/Noreen

Introduction to
Managerial Accounting
First Edition
What is management accounting?

the processes and techniques that


focus on the effective use of
organisational resources, to support
manager in their tasks of enhancing both
customer value and shareholder value
What is management accounting?

Customer value
The value that a customer places on
particular features of a product or service
Shareholder value
The value that shareholders or owners place
on a business
Resources
Financial and non-financial, including
information, work processes, employees,
committed customers and suppliers
Management accounting systems

An information system that produces the


information required by managers to
manage resources and create value
Includes regular estimates of the cost of
goods and services, information for
planning and controlling operations, and
information for measuring performance
Ad-hoc information to satisfy managers
short-term and long-term decision-
making needs
Management accounting
information
Focus is on the needs of managers
within the organisation
Great flexibility in the nature of
information supplied
Influenced by
Production and service technologies,
organisational structure, organisational size,
level of sophistication of computer systems
Relevant to senior managers through to
operational managers
Management accounting vs.
financial accounting
Financial accounting
The practice of preparing and reporting
accounting information for parties outside
the organisation
Costing systems are common to both
financial and management accounting
A system that estimates the cost of goods
and services as well as the cost of
organisational units, such as departments
Management accounting vs.
financial accounting
Management accounting within
organisations
Most large organisations have a finance
function at the corporate level
Senior accountants
Financial controllers, chief accountants,
finance managers, GM of accounting, group
accountant
Accounting staff may be found in each
operating division
Management accounting increasingly
involves managers in other areas of the
business
Processes and techniques of
management accounting
Systems that support the organisations
formulation and implementation of
strategy
Information to help managers manage
their resources, through systems of
planning and control
Processes and techniques of
management accounting
Estimates of the costs of an
organisation's outputs, to support the
strategic and operational decision making
needs of managers
Contributes to activities that seek to
improve the organisations competitive
advantage
Management accounting and
strategy
Management accounting can support the
organisation's formulation and implementation of
strategy
Mission statement
Defines the purpose and boundaries of the organisation
Vision
The desired future state or aspiration of an organisation
Use by senior managers to focus the attention and energies of
staff
Management accounting and
strategy
Objectives
Specific statement of what the organisation
aims to achieve, often quantified and relating
to a specific period of time
Strategies
The direction that the organisation intends to
take over the long term, to meet its mission
and achieve its objectives
Ways to manage the organisation's
resources to create value for customers and
shareholders
Management accounting and
strategy
Major decisions
What business will we operate in?
How should we compete in that business?
What systems and structures should we
have in place to support our strategies?
Corporate strategy
Decisions about the types of businesses to
operate in, which businesses to acquire and
divest, and how best to structure and finance
the organisation
Management accounting and
strategy
Business (or competitive) strategy
The way a business competes within its
chosen market
Strategy implementation
Putting plans into place to implement and
support business strategies
Management accounting and
strategy
Competitive advantage
Cost leadership
Product differentiation
Management accounting systems should
provide information to support the
formulation and implementation of an
organisation's strategies
Planning
A broad concept that is concerned with
formulating the direction for future
operations
Allows an organisation to consider and
specify all resources needed in the
future
Occurs at all levels of the organisation
A budget is an example of a short-term
plan
Controlling
Involves putting mechanisms in place
to ensure that operations proceed
according to plan, and objectives are
achieved
Management accounting information
provides information for control by
comparing actual performance against
plans, targets or budgets
Control systems are the systems and
procedures that provide regular
information to assist in control
Planning and control
Costing goods and services

Estimates of the cost of producing goods


and services are needed to support a
range of operational and strategic
decisions
Routine costing systems form part of the
financial accounting system
Product costs are produced outside of
the financial accounting systems, to
better meet managers decision making
needs
Contributing to competitive
advantage
Management accounting may contribute
to activities that seek to improve the
organisation's performance in terms of
quality, delivery, time flexibility,
innovation and cost
Through modern process improvement and
cost management techniques
Performance measures that focus on
specific business strategies
Important considerations
Behavioural issues
An awareness of the expected and
unexpected outcomes of management
accounting systems
A key purpose of management
accounting systems is to motivate
managers and employees to direct their
efforts towards achieving the
organisations goals
An important motivational tool is the use
continued
of performance measures that reflect
organisational objectives, and reward
Important considerations
The tradeoff between the cost and
benefits of management accounting
information
Costs
Salary of accounting personnel
Cost of purchasing and operating
computers
Cost of gathering, storing and processing
data, and
continued
Cost of managers time to read,
understand and use the information
Important consideration
Benefits
Improved decisions
More effective planning
Greater operational efficiency
Better control, and
Improved customer and shareholder
value
Management accounting responses
to the environment
Conventional management accounting
systems
Includes budgeting, costing systems and
financial performance measurement
systems
In wide use for many decades, and still be
used in many organisations

continued
Management accounting responses
to the environment
Contemporary management accounting
systems
Includes activity-based costing, performance
measurement systems such as balanced
scorecards, cost management systems,
such as business process reengineering,
new approaches to customer profitability
analysis and supplier cost analysis

continued
Management accounting responses
to the environment
Contemporary management accounting
techniques have been developed over
recent years, and support the adoption of
new structures, systems and practices
Some organisations continue to use
conventional management accounting
systems, while others are in the midst of
implementing contemporary systems
Key influences on management
accounting systems
Work of Management

Planning
Directing and
Motivating

Controlling
Organizational Structure
An organization is a group of people
united for a common purpose.

Corporate Organization Chart


Board of Directors

President

Purchasing Personnel Vice President Chief Financial


Operations Officer

Treasurer Controller
Decentralization
Decentralization is the delegation of decision-
making authority throughout an organization.

Corporate Organization Chart


Board of Directors

President

Purchasing Personnel Vice President Chief Financial


Operations Officer

Treasurer Controller
Line and Staff Relationships

Line position are Staff positions support


directly related to and assist line
achievement of the positions.
basic objectives of an Example: Cost
organization. accountants in the
Example: Production manufacturing plant.
supervisors in a
manufacturing plant.
The Controller

The chief accountant in an organization


with responsibility for:
Financial planning and analysis.
Cost control.
Financial reporting.
Accounting information systems.
Importance of Ethics
in Business
Ethical practices in business build trust and
promote productive relationships. They are
necessary for the functioning of a market
economy.
Many companies and professional
organizations, such as the Institute
of Management Accountants (IMA),
have written codes of ethics which
serve as guides for employees.
IMA Code of Ethics for
Management Accountants

Competence

Confidentiality

Integrity

Objectivity

Resolution of Ethical Conflict


IMA Code of Ethics for
Management Accountants
Follow applicable laws,
regulations and
standards.

Maintain
professional Competence
competence.

Prepare complete and clear


reports after appropriate
analysis.
IMA Code of Ethics for
Management Accountants
Do not disclose confidential
information unless legally
obligated to do so.
Do not use
confidential
information for Confidentiality
personal
advantage.
Ensure that subordinates do
not disclose confidential
information.
IMA Code of Ethics for
Management Accountants
Avoid conflicts of interest
and advise others of
potential conflicts.

Do not subvert
organizations
legitimate
Integrity
objectives.

Recognize and
communicate personal and
professional limitations.
IMA Code of Ethics for
Management Accountants
Avoid activities that could
affect your ability to
perform duties.

Refrain from Refuse gifts


activities or favors
that could Integrity that might
discredit the influence
profession. behavior.
Communicate
unfavorable as well as
favorable information.
IMA Code of Ethics for
Management Accountants
Communicate information
fairly and objectively.

Objectivity

Disclose all information


that might be useful to
management.
IMA Code of Ethics for
Management Accountants
Resolution of Ethical Conflict
Follow established policies.
For unresolved ethical conflicts:
Discuss the conflict with immediate superior.
If immediate superior is the CEO, consider the
board of directors or the audit committee.
Except where legally prescribed, maintain
confidentiality.
IMA Code of Ethics for
Management Accountants
Resolution of Ethical Conflict
Clarify issues in a confidential discussion with
an objective advisor.
Consult an attorney as to legal obligations.
The last resort is to resign.
The Changing Business
Environment

A more competitive
environment emphasizing:
Higher quality products
Lower prices and costs
Global competition Business environment
changes in the past
Meeting and anticipating
customer needs twenty years
The Changing Business
Environment

New tools for


managers!

Just-In-Time
Total Quality
Management
Process Reengineering
Theory of Constraints
Just-in-Time (JIT) Systems
Receive
customer Complete products
orders. just in time to
ship customers.

Schedule
production.

Receive materials Complete parts


just in time for just in time for
production. assembly into products.
Benefits of a JIT System

Reduced
inventory Greater
costs customer
satisfaction

Higher quality
products
More rapid
response to
Less warehouse customer orders
space needed
Total Quality Management
Where are we?
Benchmarking
Where do we want to go?
Plan

Do we need How do
to change Act Do we start?
the plan? is

Check Continuous
Improvement
How are we doing?
Process Reengineering
A business process
is diagrammed
in detail.

Every step in The process is


the business redesigned to include
process must only those steps that make
be justified. our product more valuable.
Process Reengineering
A business process Anticipated results:
is diagrammed Process is simplified.
in detail. Process is completed
in less time.
Costs are reduced.
Opportunities for
errors are reduced.

Every step in The process is


the business redesigned to include
process must only those steps that make
be justified. our product more valuable.
Theory of Constraints

A sequential process of identifying and


removing constraints in a system.

Restrictions or barriers that impede


progress toward an objective
International Competition

Meeting world-class competition demands


a world-class management accounting
system.
End of Prologue