CHAPTER 1:

INTRODUCTION
TO MANAGERIAL ACCOUNTING
LEARNING OBJECTIVES
After learning this chapter, students should be
able to :
• Define managerial accounting
• Explain the roles of managerial accounting
• Compare managerial accounting and financial
accounting
• Describe managerial accounting tools and
techniques
• Explain contemporary issues in managerial
accounting
DEFINITION OF MANAGERIAL ACCOUNTING

Managerial accounting is process of

identifying, collecting, measuring, classifying
and reporting financial and non-financial
information by organization’s management
team to assist in planning, controlling and
decision making.
 The role of accounting in business
Accounting

Relevant
A Identifies
Information
system
that Reliable
that is
Records

Comparable
Commu
nicates

To help users make

better decision
Users of accounting information
External users Internal users

• Lenders (banks) • Managers

• Government • Directors
• Shareholders • Sales staff
• Consumer groups • Internal auditor
• External auditor • Budget officer
• Labor unions • Employee
Typology

Accounting

Management
Financial accounting
accounting

Information intended primarily

Information intended for both for internal user to aid
internal and external users management in planning,
implementing ad controlling
activities
 Financial accounting vs managerial accounting

Financial accounting
• Standard financial statement
• For external users (often assessing “company
health”
• Focus on past data
• Follow the GAAP (Generally Accepted Accounting
Principles)
• Audited
Financial statement:
• Balance sheet
• Income statement
• Cash flow statement
• Statement of change of equity
Managerial accounting

• Specialized data products

• For internal users making smart business decision
• Forward looking
• Does not need to follow GAAP
• Not audited
• May include more detailed info
• May include nonfinancial info
COMPARISION OF FINANCIAL AND MANAGERIAL ACCOUNTING
COMPARISION OF FINANCIAL AND MANAGERIAL ACCOUNTING
ROLES OF MANAGERIAL ACCOUNTING

Planning
Planning is a process of setting goals or
objectives in the organization. Thus, the
manager should identify methods or
actions to achieve them. Manager must
establish objectives, which are
statements of what needs to be
achieved and when it should be
achieved.
ROLES OF MANAGERIAL ACCOUNTING

Controlling

Controlling process involves comparing the actual performance

with the budgeted or planned performance. Manager must
make decisions about the best courses of action for achieving
the performance for organization. They must then formulate
necessary steps and ensure effective implementation of plans.
ROLES OF MANAGERIAL ACCOUNTING

Decision making

Every selected alternative must be

evaluated properly to make the decision.
After evaluating the various alternatives,
the best alternatives must be selected in
the decision making process.
MANAGERIAL ACCOUNTING TECHNIQUES AND TOOLS

SOME OF MANAGERIAL ACCOUNTING TECHNIQUES AND TOOLS ARE:

• Cost Elements
The costing process involves in computing product costs such as
labor costs, directs materials cost and overhead costs. Two
common costing systems that are used in organization are process
costing and job costing.

• Budgeting
Budgeting is a set of financial plans for the future. It is a key
component of planning process. Thus, an organization need to
identify objectives and actions to achieve them. Example of
budgeting is production budgets, sales budget etc.
MANAGERIAL ACCOUNTING TECHNIQUES AND TOOLS

• Cost Volume Profit Analysis.

Cost-volume-profit (CVP) Analysis estimates how changes in costs, sales and
price affect a company’s profit. Breakeven point is calculated in the analysis in
order to know the minimum unit the organization needs to be produced to
gain profit.

• Benchmarking
The process of comparing business’s process and performance to other
companies.

• Decision Making Techniques

The process of analyzing and choosing the best alternatives in an
organization. For example to buy or outsource raw material, to keep or drop
product line and to sell or to reject the offers.
Current focus of managerial accounting - 1

New methods of costing products

and services
Activity Based Costing
was developed to
Company needs accurate information record all costs relate to
on the cost of products and services products and services
they produce

United Parcel Service, Inc. used ABC to discover

and manage the cost of activities with shipping
package by truck, as opposed to by plane, to bet
FedEx as it overnight delivery business in quick-
mid distance (up to 500 miles)
Current focus of managerial accounting - 2

Firm can establish a

Customer orientation
competitive advantage

Creating better customer

Creating equivalent value for
value for the same or lower
lower cost than competitors
cost than competitors

Strategic positioning The value chain

Superior products
Cost leadership through
differentiation
 Best Buy Geek Squad of computer
technician creates a competitive advantage
by providing 24 hour in home technical
assistance for its customers
CONTEMPORARY ISSUES IN MANAGERIAL ACCOUNTING

• Managerial accounting has several contemporary issues

especially pertaining to managerial accounting tools and
techniques.

• Managerial accounting techniques and tools are used in

manufacturing industries only. But now it becomes a
common theme when exploring the benefits of some
techniques for use in service industries..

• Activity-based Costing (ABC), Total Quality Management

(TQM), Just in Time (JIT) process, Balance Scorecard (BSC)
and Environmental Management Accounting (EMA)
CONTEMPORARY ISSUES IN MANAGERIAL ACCOUNTING

• Activity-based costing (ABC) has become one of the most popular

methods of costing by using activities to assign overhead costs to
products.

• Total Quality Management is a set of systematic activities carried

out (by integrating all organizational functions such as marketing,
finance, production etc.) by the entire organization to effectively and
efficiently achieve company objectives and to provide customers
with the products and services that satisfy their needs.

• Just In Time (JIT) process is a production and inventory control

system in which materials are purchased and units are produced
only based on actual customer demand. This method is very useful
to those companies where holding cost for inventory is very high.
CONTEMPORARY ISSUES IN MANAGERIAL ACCOUNTING

• Balance Scorecard (BCS) is a strategic planning and management

system that is used extensively in organization and nonprofit organizations
worldwide to align business activities to the vision and strategy of the
organization, improve internal and external communications, and monitor
organization performance against strategic goals. Four key components of
Balance Scorecard are financial, customers, internal business process and
learning and growth.

• Environmental Management Accounting (EMA) is the generation and

analysis of both financial and non-financial information in order to support
internal environmental management processes. It is complementary to the
conventional financial management accounting approach, with the aim to
develop appropriate mechanisms that assist in the identification and
allocation of environment-related costs.