McGraw-Hill/Irwin 1- 1-1 The Changing Role of The Changing Role of Managerial Accounting Managerial Accounting in a Dynamic Business in a Dynamic Business Environment Environment 1 Chapter One Chapter One
Managerial Accounting OverviewMcGraw-Hill/Irwin
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The Changing Role of Managerial Accounting in a Dynamic Business
Environment
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An organization . . .
Acquires Resources
Hires People
Organized set
of activities
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Managers carry out three main activities – planning, directing and
motivating, and controlling.
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Planning
Identify
alternatives.
organization’s objectives.
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An important part of planning is to identify alternatives and then
to select from among the alternatives the one that does the best
job of furthering the organization’s objectives. Once alternatives
have been identified, the plans of management are often expressed
formally in budgets. Budgets are usually prepared under the
direction of the controller, who is the manager in charge of the
accounting department. Typically, budgets are prepared
annually.
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Directing and motivating involves managing day-to-day activities to
keep the organization running smoothly.
Employee work assignments.
Routine problem solving.
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In addition to planning for the future, managers must oversee
day-to-day activities to keep the organization functioning
smoothly. Managerial accounting data, such as daily sales reports,
are often used in this type of day-to-day decision making.
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Controlling
Feedback in the form of performance reports
that compare actual results with the budget
are an essential part of the control function.
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In carrying out the control function, managers seek to ensure that
the plan is being followed. Feedback, which signals whether
operations are on track, is the key to effective control. A
performance report compares budgeted to actual results. It suggests
where operations are not proceeding as planned and where some parts
of the organization may require additional attention.
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Measuring
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The work of management, which is known as the planning and control
cycle, can be depicted as shown. The process is a continuous loop
in many organizations. Once plans are made, they are implemented.
The controlling process starts with measuring actual performance
and then comparing those results with planned performance.
Corrective action may be necessary if actual results differ
significantly from the plan. In some cases, new information may
result in altering the plan before the cycle is repeated. Note that
decision making is involved in all management activities.
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Providing information for decision making and planning.
Assisting managers in directing and controlling activities.
Motivating managers and other employees towards organization’s
goals.
Measuring performance of activities, managers, and other
employees.
Assessing the organization’s competitive position.
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How do customers see us?
How can we continue to improve?
In which activities must we excel?
Financial Perspective
Goals Measures
Customer Perspective
Goals Measures
Operations Perspective
Goals Measures
Innovation Perspective
Goals Measures
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There are seven key differences between managerial accounting and
financial accounting:
Users: Financial accounting reports are prepared for external
parties, whereas managerial accounting reports are prepared for
internal users.
Emphasis on the future: Financial accounting summarizes past
transactions. Managerial accounting has a strong future
orientation.
Relevance of data: Financial accounting data should be objective
and verifiable. Managerial accountants focus on providing relevant
data even if these data are not completely objective and
verifiable.
Less emphasis on precision: Financial accounting focuses on
precision when reporting to external parties. Managerial accounting
aids decision makers by providing good estimates as soon as
possible rather than waiting for precise data later.
Segments of an organization: Financial accounting is concerned with
reporting for the company as a whole. Managerial accounting focuses
more on the segments of the company. Examples of segments include:
product lines, sales territories, divisions, departments,
etc..
Generally Accepted Accounting Principles (GAAP): Financial
accounting conforms to GAAP. Managerial accounting is not bound by
GAAP.
Managerial accounting – not mandatory: Financial accounting is
mandatory because various outside parties require periodic
financial statements. Managerial accounting is not mandatory.
Sheet1
Not required because for internal use only
Required. Must comform to GAAP which is regulated by FASB and
SEC.
Source of Data
Nature of Reports and Procedures
Reports often focus on subunits. Based on a combination of
historical data, estimates, and projections of future events.
Reports focus on the enterprise in its entirety. Based on
historical transactions.
Sheet2
Sheet3
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Line and Staff Positions
A line position is directly involved in achieving the basic
objectives of an organization.
Example: A production supervisor in a manufacturing plant.
A staff position supports and assists line positions.
Example: A cost accountant in the manufacturing plant.
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Controller
Financial planning and analysis.
Responsible for raising capital and safeguarding the organization’s
assets.
Supervises relationships with financial institutions.
Work with investors and potential
investors.
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
Managerial
Accounting
Information
Service Vs. Manufacturing
Identify and eliminate non-value-added costs.
Cost
Management
System
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Identify and evaluate new activities that can improve
performance.
Objectives
Identify and eliminate non-value-added costs.
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Product
Design
Research
and
Development
Securing raw
materials and
other resources
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Manufacturing costs are usually grouped into three main categories:
direct materials, direct labor, and manufacturing overhead. These
costs are incurred to make a product.
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Direct Materials
Raw materials that become an integral part of the product and that
can be conveniently traced directly to it.
Example: A radio installed in an automobile
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Direct materials are raw materials that become an integral part of
the finished product and whose costs can be conveniently traced to
it. Examples include the aircraft engines on a Boeing 777, the
Intel processing chip in a personal computer, the blank video
cassette in a pre-recorded video, and a radio in an
automobile.
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Direct Labor
Those labor costs that can be easily traced to individual units of
product.
Example: Wages paid to automobile assembly workers
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Direct labor consists of that portion of labor cost that can be
easily traced to a product. Direct labor is sometimes referred to
as “touch labor,” since it consists of the costs of workers who
“touch” the product as it is being made.
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Manufacturing costs that cannot be traced directly to specific
units produced.
Manufacturing Overhead
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Manufacturing overhead includes all manufacturing costs except
direct materials and direct labor. These costs cannot be easily
traced to specific units produced (also called indirect
manufacturing cost, factory overhead, and factory burden).
Manufacturing overhead includes indirect materials that are part of
the finished product, but that cannot be easily traced to it. It
includes indirect labor costs that cannot be conveniently traced to
the creation of products.
Other examples of manufacturing overhead include: maintenance and
repairs on production equipment, heat and light, property taxes,
depreciation and insurance on manufacturing facilities, etc.
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A manufacturing company incurs many other costs in addition to
manufacturing costs. For financial reporting purposes, most of
these other costs are typically classified as selling costs and
administrative costs. These costs are also called selling, general
and administrative costs, or SG&A. Selling and administrative
costs are incurred in both manufacturing and merchandising
firms.
Selling costs include all costs necessary to secure customer orders
and get the finished product into the hands of the customer. These
costs are also referred to as order-getting and order-filling
costs. Examples of selling costs include advertising, shipping,
sales travel, sales commissions, sales salaries, and costs of
finished goods warehouses.
Administrative costs include all executive, organizational, and
clerical costs associated with the general management of an
organization. Examples of administrative costs include executive
compensation, general accounting, secretarial, public relations,
and similar costs involved in the overall general administration of
the organization as a whole.
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Product costs include direct materials, direct labor, and
manufacturing overhead.
Period costs include all selling costs and administrative
costs.
Inventory
Costs can also be classified as product or period costs.
Product costs include all the costs that are involved in acquiring
or making a product. More specifically, it includes direct
materials, direct labor, and manufacturing overhead. Consistent
with the matching principle, product costs are recognized as
expenses when the products are sold. This can result in a delay of
one or more periods between the time in which the cost is incurred
and when it appears as an expense on the income statement. Product
costs are also known as inventoriable costs. The discussion in the
chapter follows the usual interpretation of GAAP in which all
manufacturing costs are treated as product costs.
Period costs include all selling costs and administrative costs.
These costs are expensed on the income statement in the period
incurred. All selling and administrative costs are typically
considered to be period costs. The usual rules of accrual
accounting apply to period costs. For example, administrative
salary costs are “incurred” when they are earned by the employees
and not necessarily when they are paid to employees.
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Quick Check
Which of the following costs would be considered a period rather
than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
C. Direct materials costs.
facility.
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Which of the following costs would be considered a period rather
than a product cost in a manufacturing company?
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Quick Check
Which of the following costs would be considered a period rather
than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
C. Direct materials costs.
facility.
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Property taxes on corporate headquarters and sales commissions are
period costs. All of the other costs listed are product
costs.
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Two more cost categories are often used in discussions of
manufacturing costs—prime cost and conversion cost. Prime cost is
the sum of direct materials cost and direct labor cost. Conversion
cost is the sum of direct labor cost and manufacturing overhead
cost. The term conversion cost is used to describe direct labor and
manufacturing overhead because these costs are incurred to convert
materials into the finished product.
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Merchandisers . . .
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MegaLoMart
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Merchandising companies purchase finished goods from suppliers for
resale to customers. Manufacturing companies purchase raw materials
from suppliers and produce and sell finished goods to
customers.
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Now, let’s consider similarities and differences on the balance
sheet for merchandising and manufacturing companies. Both
merchandising and manufacturing companies will likely have Cash and
Receivables. However, merchandising companies do not have to
distinguish between raw materials, work in process, and finished
goods. They report one inventory number on their balance sheets,
labeled merchandise inventory. Manufacturing companies report three
types of inventory on their balance sheets: raw materials, work in
process, and finished goods.
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Merchandiser
Raw materials are the materials used to make the product.
Part II
Work in process consists of units of product that are partially
complete, but will require further work to be saleable to
customers.
Part III
Finished goods consists of units of product that have been
completed, but not yet sold to customers.
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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
Professional Organizations
Publishes
Management
Accounting
Ethical business practices build trust and promote loyal,
productive relationships with customers, employees and
suppliers.
Many companies have written codes of ethics which serve as guides
for employees to follow.
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Prepare complete and clear reports after appropriate
analysis.
Maintain professional competence.
Confidentiality
Do not disclose confidential information unless legally obligated
to do so.
Ensure that subordinates do not disclose confidential
information.
Do not use confidential information for personal advantage.
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Avoid conflicts of interest and advise others of potential
conflicts.
Recognize and communicate personal and professional
limitations.
Do not subvert organization’s legitimate objectives.
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Avoid activities that could affect your ability to perform
duties.
Refrain from activities that could discredit the profession.
Communicate unfavorable as well as favorable information.
Refuse gifts or favors that might influence
behavior.
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Disclose all information that might be useful to management.
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If unresolved or if policy does not exist:
Clarify relevant concepts in a confidential discussion with an
objective advisor to explore possible courses of action.
Discuss problem with immediate supervisor.
Professional Ethics
Resolution of Ethical Conflict
If immediate supervisor is involved in the unethical behavior,
discuss at the next level.
If problem is not resolved, the last resort is to resign.
Generally, do not communicate ethical conflicts to outsiders.
Professional Ethics
make financial decisionsand control an organization
2. Time focusHistorical perspectiveFuture emphasis
3. VerifiabilityEmphasis onEmphasis on relevance
versus relevanceverifiabilityfor planning and control
4. Precision versusEmphasis on Emphasis on
timelinessprecisiontimeliness
the whole organizationof an organization
6. GAAP Must follow GAAPNeed not follow GAAP
and prescribed formatsor any prescribed format
7. RequirementMandatory forNot
Regulation
use only
FASB and SEC.
Source of Data
historical data, estimates, and
projections of future events.
historical transactions.
Organization Chart