Chapter 1

The Changing Role

of Managerial
Accounting in a
Dynamic Business
Environment

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 Learning
Objective
1

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 Organizations
• Social Entities
• Goal Directed
• Designed as deliberately structured and
coordinated activity systems
• Linked to the external environment
 ORGANIZATIONS
• Types of organizations include
manufacturers, retailers, service industries,
agribusinesses, and nonprofit firms. These
organizations have goals—for example:
growth, profit, quality, leadership, etc.
Types of Businesses That
Use Managerial
Accounting
 Manufacturers ( Packages, Lever
Brothers, Ford, General Motors, )
 Merchandisers (AlFateh, H-Karim Bux,
WalMart, Kmart)
 Wholesalers (Beverage Distributors)
 For-profit Service Businesses (CAs,
Attorneys)
 Not-for-profit Service Agencies (Edhi,
Red Crescent, United Way, Red Cross)
 ORGANIZATIONS
• All organizations have information needs in
the financial, production, personnel,
environmental, and legal areas. Managerial
accounting provides some of this
information.
 The Manufacturing Process
• This process involves the conversion of direct
(raw) materials, direct labor, and factory
overhead into finished goods.
• Product quality is an important competitive
weapon in manufacturing.
• Many companies require their suppliers to be
ISO 9000 certified.
 ISO 9000 Certification
• The International Organization for
Standardization created a set of five
international standards for quality
management, ISO 9000-9004.
• These standards require that manufacturers
have a well-defined quality control system
and they consistently maintain a high level of
quality.
 Management Accounting
• The Institute of Management Accountants
(IMA) is the largest organization of
accountants in industry. The Certified
Management Accountant (CMA) is
comparable to the Certified Public Accountant
(CPA) for public accountants.
• For more information, please visit the IMA’s
website at www.imanet.org
 Focus of Accounting

 Identifying  Recording
Economic Economic
Events Events
 Reporting
and
Analyzing
Economic
Events
 Influence of Accounting
is a
Accounting Identifies
system that

Records

information
Relevant Communicates
that is

Reliable
to help users make
Comparable better decisions.
Define Managerial Accounting

Managerial accounting is the process of

 Identifying
 Measuring
 Analyzing
 Interpreting
 Communicating information
In pursuit of an organization’s goals
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 Managing Resources, Activities,
and People
An organization has set . . .GOALS
Directing

Acquires Resources Decision

Organized set Making
of activities

Controlling Planning
Hires People
 The Need for Managerial
Accounting
• Cost accounting provides the detailed cost data
that management needs to control current
operations and plan for the future.
• Companies must control costs in order to keep
prices competitive.
• In today’s global environment, cost information is
more crucial than ever in remaining competitive.
 Planning and Control
• Planning is the process of establishing objectives
or goals for the firm and determining the means by
which the firm will attain them.
• Planning selects goals, predicts results,
decides how to attain goals, and
communicates this to the organization
– Budget – the most important planning tool.
• Effective planning is facilitated by the following:
1. Clearly defined objectives of the manufacturing
operation.
2. A production plan that will assist and guide the
company in reaching its objectives.
Planning and Control
(cont.)
 Control is the process of monitoring the
company’s operations and determining
whether the objectives identified in the
planning process are being accomplished.
Effective control is achieved through the
following:
1. Assigning responsibility.
2. Periodically measuring and comparing
results.
3. Taking necessary corrective action.
Control Systems
 Control takes actions that implement the
planning decision, decides how to
evaluate performance, and provides
feedback to the organization

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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
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Daily News: Example

Highly respected journalists who write

well-researched articles
Colour to enhance attractiveness to
readers and advertisers
Web site that delivers up-to-the minute
news, interviews and analyses
Daily News: Example

The newspaper has following resources to

deliver on this strategy
 An automated, computer integrated,
state of the art printing facility
Web-based information technology
infrastructure
A distribution network that is the best in
the newspaper industry
 Identify the problem and uncertainties.
Naomi has two choices:
 A. Increase the selling price of the
newspaper;
 B. Increase the rate per page charged to
the advertisers
 Obtain information: Naomi asks her
 A. Marketing manager to talk to some
representative readers to gauge their
reactions to an increase in the
newspaper’s selling price
 B. Advertising manager to talk to current
and potential advertisers to assess
demand for advertising
 Make predictions about the future
Increasing price would upset readers and
decrease readership. She expects market
wide increase in advertising rates
Make decisions by choosing between
alternatives Strategy serves as vital guide
post
 Implement the decision, evaluate
performance, and learn
 Responsibility Accounting
• Responsibility accounting is the assignment of
accountability for costs or production results to
those individuals who have the most authority to
influence them.
• A cost center is a unit of activity within the factory
to which costs may be practically and equitably
assigned. The manager of a cost center is
responsible for those costs that the manager
controls.
 Reporting
• Cost and production reports for a cost center
reflect all cost and production data identified
with that center.
• The performance report will include only
those costs and production data that the
center’s manager can control.
• A variance is the favorable or unfavorable
difference between actual costs and budgeted
costs.
 DAILY NEWS

PERFORMANCE REPORT

March 31, 2009

DIFFERENCE AS A
DIFFERENCE (ACTUAL
ACTUAL BUDGETED PERCENTAGE OF
RESULT - BUDGETED
RESULT AMOUNT BUDGETED
AMOUNT)
AMOUNT

1 2 3=1-2 4=3/2
ADVERTISING PAGES 40 PAGES 5.0%
SOLD 760 PAGES 800 PAGES UNFAVOURABLE UNFAVOURABLE
AVERAGE RATE PER 2.3%
PAGE $5,080 $5,200 $120 UNFAVOURABLE UNFAVOURABLE
ADVERTISING $299,200 7.2%
REVENUES $3,860,800 $4,160,000 UNFAVOURABLE UNFAVOURABLE
 Performance Report Example

Renaldi’s Restaurant
Performance Report
September 30, 2006
Budgeted Actual Variance
Expense September Year-to-Date September Year-to-Date September Year-to-Date

Kitchen Wages $5,500 $47,000 $5,200 $46,100 $300 F $900 F

Food 17,700 155,300 18,300 157,600 600 U 2,300 U
Supplies 3,300 27,900 3,700 29,100 400 U 1,200 U
Utilities 1,850 15,350 1,730 16,200 120 F 850 U
Total $28,350 $245,550 $28,930 $249,000 $580 U $3,450 U

F = Favorable
U = Unfavorable
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 applications
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Objective
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Objective
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Accounting Discipline Overview
 Managerial Accounting – measures, analyzes and
reports financial and nonfinancial information to help
managers make decisions to fulfill organizational
goals. Managerial accounting need not be GAAP
compliant.

 Financial Accounting – focus on reporting to external

users including investors, creditors, and
governmental agencies. Financial statements must be
based on GAAP.

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Major Differences Between
Financial & Managerial Accounting
Managerial Accounting Financial Accounting

Communicate financial
Purpose Decision making
position to outsiders

Primary Users Internal managers External users

Focus/Emphasis Future-oriented Past-oriented

Do not have to follow GAAP; GAAP compliant;

Rules
cost vs. benefit CPA audited
Ultra current to very long Historical monthly,
Time Span
time horizons quarterly reports
Behavioral Designed to influence Indirect effects on
Issues employee behavior employee behavior
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Cost Accounting vs. Financial and
Managerial Accounting
Cost Accounting System

Characteristics Financial Accounting Managerial Accounting

Users: •External Parties

•Managers Managers
Focus: Entire business Segments of the business
Uses of Cost Information: Product costs for •Budgeting
calculating cost of goods •Special decisions such as
sold and finished goods, make or buy a component,
work in process, and raw keep or replace a facility,
materials inventory using and sell a product at a
historical costs and GAAP. special price.
•Nonfinancial information
such as defect rates, % of
returned products, and on-
time deliveries
 Cost Accounting vs. Financial and
Managerial Accounting (cont.)
• Cost accounting
includes those parts of
both financial and
management
accounting that collect
and analyze cost
information.
 Determining Product Costs and
Pricing
• Cost accounting is used to determine
products costs and help with marketing
decisions.
1. Determining the selling price of a product.
2. Meeting competition.
3. Bidding on contracts.
4. Analyzing profitability.
 Managerial versus Financial
Accounting
Accounting System
(accumulates financial and
managerial accounting data in the
cost accounting system)

Managerial Accounting Financial Accounting

Information for decision Published financial
making, planning, and statements and other
controlling an financial reports.
organization’s
operations.
Internal External
Users Users
 Managerial versus Financial
Accounting
Managerial Accounting Financial Accounting
Users of Information Managers, within the organization. Interested parties, outside the organization.
Regulation Not required and unregulated, since it is intended Required and must conform to generally accepted
only for management. accounting principles. Regulated by the Financial
Accounting Standards Board, and, to a lesser
degree, the Securities and Exchange
Commission.
Source of Data The organization's basic accounting system, plus Almost exclusively drawn from the organization's
various other sources, such as rates of effective basic accounting system, which accumulates
products manufactured, physical quantities of financial information.
material and labor used in production, occupancy
rates in hotels and hospitals, and average take-off
delays in airlines.
Nature of Reports and Reports often focus on subunits within the Reports focus on the enterprise in its entirety.
Procedures organization, such as departments, divisions, Based almost exclusively on historical transaction
geographical regions, or product lines. Based on a data.
combination of historical data, estimates, and
projections of future events.
Strategy & Management
Accounting
 Strategy – specifies how an organization matches its
own capabilities with the opportunities in the
marketplace to accomplish its objectives. It describes
how an organization will compete and the
opportunities its managers should seek and pursue.
 Strategic Cost Management – focuses specifically on
the cost dimension within a firm’s overall strategy

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 TYPES OF STRATEGIES
Low cost Leadership
Providing quality products or services at low prices.
Examples: Southwest Airlines and Vanguard (the mutual
fund company).
 Differentiation
Offering differentiated or unique products or services
that are often priced higher than the products or services
of their competitors.
Examples: Pfizer and EMC (the manufacturer of data-
storage equipment).

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Strategy & Management
Accounting
 Management accountants help formulate strategy by
helping managers answer important questions such
as:
 Who are our most important customers, and how do
we deliver value to them? Barnes and Noble developed
the capabilities to sell online by building its
information and technology infrastructure
 What substitute products exist in the marketplace, and
how do they differ from our own? Hewlett-Packard
designs new printers after comparing the funtionality,
quality and price of its printers to other printers
available in©the marketplace.
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Strategy & Management
Accounting
 What is our critical capability? Is it technology,
production, or marketing? Kellog Company, for
example, uses the reputation of its brand to
introduce new types of cereal.
 Will we have enough cash to support our
strategy or will we need to seek additional
sources? Proctor and Gamble issued new debt
and equity to fund its strategic acquisition of
Gillette, a maker of shaving products.
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Management Accounting and Value
 Creating value is an important part of planning and
implementing strategy
 Value is the usefulness a customer gains from a
company’s product or service

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 How Managerial Accounting
Adds Value to the Organization
• Providing information for decision making and
planning and proactively participating in decision-
making and planning process.
• Assisting managers in directing and controlling
activities.
• Motivating managers and other employees
towards organization’s goals.
• Measuring performance of activities, subunits,
managers, and other employees.
• Assessing the organization’s competitive position.
 The Balanced Scorecard
A Model of Performance
How do we look
Evaluation
to our owners? Financial Perspective

Goals Measures
In which activities
must we excel?

Customer Perspective Operations Perspective

Goals Measures Goals Measures
How do customers
see us?

How can we
Innovation Perspective continue to
improve?
Goals Measures
Management Accounting and Value
 Value Chain is the sequence of business functions
in which customer usefulness is added to
products or services
 The Value-Chain consists of:
1. Research & Development—generating and
experimenting with ideas related to new
products, services or processes.
2. Design—detailed planning and engineering of
products, services or processes.

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Management Accounting and Value
 The Value-Chain consists of:
3.Production—Acquiring, coordinating, and
assembling resources to produce a product or
deliver a service.
4. Marketing—Promoting and selling products
or services to customers or prospective
customers.
5. Distribution—Delivering products or services
to customers.
6. Customer Service—Providing after-sale
support to customers.
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 Strategic Cost Management and
the Value Chain
Product
Design
Production
Research
and
Development Marketing

Securing raw
materials and Distribution
other resources

Customer
Start Service
The Value Chain Illustrated

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A Value Chain Implementation

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Key Success Factors
 The dimensions of performance that
customers expect, and that are key to the
success of a company include:
 Cost and efficiency
 Quality
 Time
 Innovation

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 Line and Staff Positions
• A line position is directly • A staff position supports
involved in achieving the and assists line positions.
basic objectives of an – Example: A cost
organization. accountant in the
manufacturing plant.
– Example: A production
supervisor in a
manufacturing plant.
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 Controller
The chief managerial and financial accountant
responsibility for:
– Supervising accounting personnel
– Preparation of information and reports, managerial
and financial
– Analysis of accounting information
– Planning and decision making
 Treasurer
Responsible for raising capital and safeguarding the
organization’s assets.
– Supervises relationships with financial institutions.
– Work with investors and potential
investors.
– Manages investments.
– Establishes credit policies.
– Manages insurance coverage
 Internal Auditor
Responsible for reviewing accounting procedures,
records, and reports in both the controller’s and the
treasurer’s area of responsibility.
– Expresses an opinion to top
management regarding the
effectiveness of the
organizations accounting
system.
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 Major Themes in Managerial
Accounting
Behavioral Costs and
Issues Benefits

Information Evolution and

and Incentives Adaptation

Managerial
Accounting
 Evolution and Adaptation in
Managerial Accounting
E-Business
Service vs. Product Life Cycles
Manufacturing Firms
Time-Based
Competition
Emergence of New
Industries Change Information and
Communication
Global Competition Technology

Focus on the Customer Just-in-Time Inventory

Cross-Functional Teams Total Quality Management

Computer-Integrated Continuous Improvement

Manufacturing
 Cost Management Systems
Objectives
Measure the cost of
resources consumed.
Identify and eliminate
non-value-added Cost
costs. Management
System
 Cost Management Systems
Objectives
Determine efficiency
and effectiveness of
major activities.
Identify and evaluate
new activities that Cost
Management
can improve System
performance.
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 Theory of Constraints
A sequential process of identifying and
removing constraints in a system.

Restrictions or barriers that impede

progress toward an objective
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 Ethical Climate of Business
• The corporate scandals experienced over
the last few years have shown us that
unethical behavior in business is wrong in a
moral sense and can be disastrous in the
economy. In addition to Sarbanes-Oxley,
there will likely be more reforms in corporate
governance and accounting.
Professional Ethics

Competence
Confidentiality
Integrity
Credibility
Professional Ethics
Competence
 Maintain an appropriate level of professional expertise by
continually developing knowledge and skill.
 Perform professional duties in accordance with relevant
laws, regulations, and technical standards.
 Provide decision support information and
recommendations that are accurate, clear, concise, and
timely.
 Recognize and communicate professional limitations or
constraints that would preclude responsible judgment or
successful performance of an activity.
Professional Ethics

Confidentiality
Keep information confidential except when
disclosure is authorized or legally required.
Inform all relevant parties regarding
appropriate use of confidential information.
Monitor subordinates activities’ to ensure
compliance.
Refrain from using confidential information for
unethical or illegal advantage.
Professional Ethics

Integrity
1. Mitigate actual conflicts of interest. Regularly
communicate with business associates to
avoid apparent conflicts of interest. Advise all
parties of any potential conflicts.
2. Refrain from engaging in any conduct that
would prejudice carrying out duties ethically.
3. Abstain from engaging in or supporting any
activity that might discredit the profession.
Professional Ethics
Credibility
1. Communicate information fairly and objectively.
2. Disclose all relevant information that could reasonably
be expected to influence an intended user’s
understanding of the reports, analyses, or
recommendations.
3. Disclose delays or deficiencies in information,
timeliness, processing, or internal controls in
conformance with organization policy and/or
applicable law.
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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
applications

© 2009 Pearson Prentice Hall. All rights reserved.

A Typical Organizational Structure and
the Management Accountant

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 Managerial Accounting as a
Career
Professional Organizations
Institute of Management Accountants (IMA)

Develops
Publishes Administers
Standards of
Management Certified
Ethical
Accounting Management
Conduct for
and research Accountant
Management
studies. program
Accountants
End of Chapter 1