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Chapter 1: Introduction to Managerial

Accounting

Prepared by :
Sinda Basly –Chartered Accountant & Master Degree in Accounting
Role of Managerial Accounting in
Organizations
• The primary goal of accounting is to provide
useful information for decision making.
• The key difference between Financial
Accounting (FA) and Managerial Accounting
(MA) is the intended user of the
information=>
FA MA

Intended users External users, ex: Internal users:


investors, creditors, business owners,
regulators… managers and
employees.
Comparison of financial and
managerial accounting
FA MA

User perspective External users, ex: investors, Internal users: business


creditors, regulators… owners, managers and
employees.

Types of reports Classified financial Various non-GAAP reports,


statements prepared such as budgets,
according to GAAP. performance evaluations,
and cost reports.

Nature of information Objective, reliable, Subjective, relevant, future


historical, aggregated. oriented, more detailed.
Comparison of financial and
managerial accounting
FA MA

Frequency of Prepared periodically Prepared as needed,


reporting (monthly, quarterly, perhaps day to day or
annually). even in real time.

Level of detail Information reported for Information reported at


the company as a the decision-making
whole. level (by product,
region, customer, or
other business
segment)
Functions of management
• All managers perform the same basic 4
functions: planning, organizing,
directing (or leading), and controlling =>
At the center of these managerial
functions is decision making and the role
of managerial accounting is to provide
managers with the information they
need, to take the good decision for their
functions.
Functions of management
Planning and
Organizing Controlling
Directing (or Leading)
=>
=> =>
Set short & long term Monitor results to
objectives and determine if the plan is
Take action to
determine the being achieved & Take
implement the plan.
resources and tactics corrective action and
Motivate others to
needed to achieve the adjust future plans, if
achieve results
plan necessary
=>
=>
=>
ACTION’S PLAN
CORRECTIVE ACTION
BUDGET

Decision Making
Types of organizations
Traditionally, businesses are classified into one of three
categories:
Manufacturing firms: purchase raw
materials from suppliers & convert them
into finished products.

Merchandising companies : sell the goods that


manufacturers produce=> wholesalers sell
exclusively to other businesses & retailers sell to
the general public.

Service companies provide a service to


customers or clients
Ethics and internal reporting
• All managers are responsible for creating and
maintaining an ethical work environment,
including the reporting of accounting
information.

• Ethics refer to the standards of conduct for


judging right from wrong, honest from
dishonest, and fair from unfair.
Ethics and internal reporting
• In the late 1990s and early 2000s the
reputation of business managers and
accountants was tarnished due to scandals at
certain companies (Enron..) => in response to
these scandals, Congress enacted the
Sarbanes-Oxley (SOX) Act of 2002 that aims
to renew investor confidence in the external
financial reporting system & that has many
implications for managers as well.
Ethics and internal reporting
• The SOX act focuses on 3 factors that affect
the accounting reporting environment:
opportunity, incentives & character.
SOX attempts to reduce the opportunity for error and fraud.
It requires that management must conduct a review of the
company’s internal control system & issue a report that
indicates whether the controls are effective at preventing
errors & fraud
=> It places additional responsibilities on the boards of
directors and external auditors to reduce the opportunity for
errors & fraud.
Ethics and internal reporting

SOX attempts to counteract the incentive to commit fraud by


providing much stiffer penalties in terms of monetary fines and
jail time.

SOX emphasizes the importance of the character of managers


and employees.
It introduces new rules to help employees of good character
make the right decision when confronted with ethical
dilemmas => For example:
audit committees are required to create tip lines that allow
employees to secretly submit concerns they may have about
suspicious accounting or auditing practices.
Ethics and internal reporting

 SOX gives federal employees whistleblower


protection to prevent retaliation by those charged
with fraud.

Finally, to reinforce good character, public


companies must adopt a code of ethics & ethics
must be embedded in the organizational
culture & top managers who lead must drive
ethical behavior in the organization.
Role of cost in managerial
accounting

Direct versus indirect costs


The cost object is the specific item that managers are
trying to determine the cost of, example:
Personal computer, a pair of blue jeans etc.
 Direct costs are costs that can be traced to the cost
object.
Indirect costs are costs that cannot be traced to the cost
object or that are not worth the effort of tracing.
Direct versus indirect costs

Costs/Cost Object Personal computer Pair of blue jeans

Direct costs Cost of components, Cost of the


wages of workers merchandise,
who assembled the commissions paid to
computer, delivery salesperson …
costs …

Indirect costs Production Store supervision,


supervision, factory rent, inventory
space, and quality control…
control …
Variable versus fixed costs
 Variable costs are those that change in direct proportion to
changes in activity levels.
 Although total variable costs vary (increase) with the number
of customer served, the per-unit or average cost will remain the
same, regardless of the number of customers served.
 For example: for a company that prepares and serves meals to
customers, if the number of customers served doubles, the
company will need to purchase more ingredients, so the total
cost of food, beverages and supplies will increase in direct
proportion. But the amount of ingredients used to make each
meal doesn’t change => the average or per-unit cost of
ingredients remains the same, regardless of the number of
meals sold.
Variable versus fixed costs

Variable cost : ingerdients : suppose 5$


per meal
Cost unit Units Total Cost
5 1 000 5 000
5 2 000 10 000

Total variable cost


Per-unit variable
increases in direct
cost remains the
proportion to
same
activity levels
Variable versus fixed costs
• Fixed costs are those that stay the same, regardless of activity
level. For example: rent, manager salaries, depreciation, property
taxes…For a company that prepares and serves meals these costs
remain the same, regardless of the number of meals prepared or
the number of customers served.
• Although total fixed costs are constant, average or per-unit fixed
costs vary inversely (decrease) with the number of units
produced or the number of customers served : that is because
spreading a constant amount over more units or customers
drives down the average cost, for example: if the number of
customers served doubles, total rent cost remains the same, but
the average cost of rent per customer will decrease because we
divide the total rent cost by a larger number of customers.
Variable versus fixed costs

Fixed cost : depreciation: suppose 10,000


$ per year
Cost unit Units Total Cost
10 1 000 10 000
5 2 000 10 000

Per-unit fixed cost


decreases in direct Total fixed cost
proportion to remains the same
activity levels
Manufacturing versus
nonmanufacturing costs
• Manufacturing costs represent all of
the costs associated with producing
or manufacturing a physical product
=> the distinction between
manufacturing & nonmanufacturing
costs does not apply to merchandise
or service companies that do not
make a physical product.
Manufacturing versus
nonmanufacturing costs
Manufacturing costs
Direct materials Direct labor =
Manufacturing
=> « hands on » =>
overhead =>
Major material Labor that can be
indirect costs that are
inputs that can be directly traced to
incurred inside the
directly traced to the product or
factory that cannot
the product or cost object (meal)
be traced to the
cost object (case : wages of
product, ex: indirect
of meal in our employees on the
materials, indirect
example) : meal production
labor, factory rent,
ingredients, line & in the
factory insurance,
packaging packaging
factory utilities…
materials. department.
Manufacturing versus
nonmanufacturing costs

Total Manufacturing Cost = Direct Materials +


Direct Labor + Manufacturing Overhead

Prime Cost = Direct Materials + Direct Labor

Conversion Cost = Direct Labor +


Manufacturing Overhead
Manufacturing versus
nonmanufacturing costs
Nonmanufacturing costs

General & administrative


Marketing & selling
expenses, are associated
expenses, incurred
with running the overall
to get the final
business => ex:
product to the
General management
customer => ex:
salaries, rent and utilities for
advertising, sales
corporate headquarters,
commissions,
accounting, payroll & legal
distribution costs…
departments.
Product versus period costs

Product Costs
(manufacturing Period Costs =
costs) = Inventoriable nonmanufacturing costs =>
Costs (raw materials incurred during the period
inventory, work in (advertising, selling,
process inventory, distribution expenses, general
finished goods & administrative expenses…)
inventory) => => reported as period
reported as cost of expenses in the income
goods sold in the statement.
income statement.
Relevant versus irrelevant costs

Irrelevant cost => will not


Relevant cost => has the influence a decision, ex:
potential to influence a sunk costs are past costs
decision=> must occur in already incurred : they
the future and differ are irrelevant for
between the various decision making =>
alternatives the “the manager can not
manager is considering ignore what happened in
=> differential costs. the past but focus on the
future”.
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