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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
The Changing Roleof Managerial
Accounting in a
Dynamic BusinessEnvironment
Chapter 1
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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Learning
Objective
1
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Organizations
Definition
Two things common in organizations
Set of goals or objectives
Need of information
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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)
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The Need for Managerial
Accounting
Cost accounting provides the detailed cost datathat management needs to control current
operations and plan for the future.
Companies must control costs in order to keep
prices competitive.
In todays global environment, cost information is
more crucial than ever in remaining competitive.
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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 competitiveweapon in manufacturing.
Many companies require their suppliers to be
ISO 9000 certified.
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ISO 9000 Certification
The International Organization forStandardization created a set of fiveinternational standards for qualitymanagement, ISO 9000-9004.
These standards require that manufacturershave a well-defined quality control systemand they consistently maintain a high level of
quality.
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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.
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Management Accounting
The Institute of Management Accountants(IMA) is the largest organization ofaccountants in industry. The CertifiedManagement Accountant (CMA) is
comparable to the Certified Public Accountant(CPA) for public accountants.
For more information, please visit the IMAs
website at www.imanet.org
http://www.imanet.org/http://www.imanet.org/7/28/2019 aChap One.ppt
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Managerial accounting is the process of
Identifying Measuring Analyzing
Interpreting
Communicating informationIn pursuit of an organizations goals
Define Managerial Accounting
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Learning
Objective
2
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Managing Resources, Activities,
and PeopleAn organization . . .
Acquires Resources
Hires People
Organized set
of activities
Decision
Making
Planning
Directing
Controlling
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Planning and Control
Planning is the process of establishingobjectives or goals for the firm and determiningthe means by which the firm will attain them.Effective planning is facilitated by the following:
1. Clearly defined objectives of the manufacturingoperation.
2. A production plan that will assist and guide thecompany in reaching its objectives.
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Planning & Control Systems Planning selects goals, predicts results,
decides how to attain goals, and
communicates this to the organizationBudget the most important planning tool
Control takes actions that implement the
planning decision, decides how toevaluate performance, and provides
feedback to the organization
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Planning and Control (cont.)
Control is the process of monitoring thecompanys 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.
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A Five-Step Decision MakingProcess in Planning & Control
1. Identify the problem and uncertainties2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing betweenalternatives
5. Implement the decision, evaluate
performance, and learn 2009 Pearson Prentice Hall. All rights reserved.
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Responsibility Accounting
Responsibility accounting is the assignment ofaccountability for costs or production results to
those individuals who have the most authority to
influence them.
A cost centeris 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 managercontrols.
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Reporting
Cost and production reports for a cost centerreflect all cost and production data identifiedwith that center.
The performance report will include only
those costs and production data that thecenters manager can control.
A variance is the favorable orunfavorable
difference between actual costs and budgetedcosts.
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DAILY NEWS
PERFORMANCE REPORT
March 31, 2009
ACTUAL
RESULT
BUDGETED
AMOUNT
DIFFERENCE (ACTUAL
RESULT - BUDGETED
AMOUNT)
DIFFERENCE AS A
PERCENTAGE OF
BUDGETED
AMOUNT
1 2 3=1-2 4=3/2
ADVERTISING PAGES
SOLD 760 PAGES 800 PAGES
40 PAGES
UNFAVOURABLE
5.0%
UNFAVOURABLE
AVERAGE RATE PERPAGE $5,080 $5,200 $120 UNFAVOURABLE
2.3%UNFAVOURABLE
ADVERTISING
REVENUES $3,860,800 $4,160,000
$299,200
UNFAVOURABLE
7.2%
UNFAVOURABLE
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Performance Report Example
Renaldis Restaurant
Performance ReportSeptember 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 = FavorableU = Unfavorable
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Management Accounting Guidelines
Cost Benefit approach is commonlyused: benefits generally must exceed costsas a basic decision rule
Behavioral & Technical Considerations
people are involved in decisions, not justdollars and cents
Different definitions of cost may be used
for different applications 2009 Pearson Prentice Hall. All rights reserved.
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Learning
Objective
3
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Learning
Objective
4
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2009 Pearson Prentice Hall. All rights reserved.
Accounting Discipline Overview Managerial Accounting measures, analyzes and
reports financial and nonfinancial information to helpmanagers make decisions to fulfill organizational
goals.
Managerial accounting need not be GAAP compliant.
Managers use management accounting information
1. to choose, communicate and implement strategy, 2. to coordinate product design, production, and
marketing decisions,
3. and to evaluate performance.
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Accounting Discipline Overview Financial Accounting focus on reporting to external
users including investors, creditors, andgovernmental agencies. Financial statements must be
based on GAAP.
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Major Differences Between
Financial & Managerial AccountingManagerial Accounting Financial Accounting
Purpose Decision makingCommunicate financial
position to outsidersPrimary Users Internal managers External users
Focus/Emphasis Future-oriented Past-oriented
Rules
Do not have to follow GAAP;
cost vs. benefit
GAAP compliant;
CPA audited
Time SpanUltra current to very long
time horizonsHistorical monthly,
quarterly reports
BehavioralIssues
Designed to influenceemployee behavior
Indirect effects onemployee behavior
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Cost Accounting vs. Financial and
Managerial Accounting
Characteristics Financial Accounting Managerial Accounting
Users: External PartiesManagers Managers
Focus: Entire business Segments of the business
Uses of Cost Information: Product costs for calculating
cost of goods sold and finished
goods, work in process, and
raw materials inventory usinghistorical costs and GAAP.
Budgeting
Special decisions such as
make or buy a component,
keep or replace a facility, andsell a product at a special price.
Nonfinancial information such
as defect rates, % of returned
products, and on-time
deliveries
Cost Accounting System
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Cost Accounting vs. Financial and
Managerial Accounting (cont.)
Cost accountingincludes those parts of
both financial and
management
accounting that collectand analyze cost
information.
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Managerial versus Financial
AccountingAccounting System
(accumulates financial and
managerial accounting data in the
cost accounting system)
Managerial Accounting
Information for decision
making, planning, and
controlling anorganizations
operations.
Financial Accounting
Published financial
statements and other
financial reports.
Internal
Users
External
Users
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Managerial versus Financial
AccountingManagerial Accounting Financial Accounting
Users of Information Managers, within the organization. Interested parties, outside the organization.
Regulation Not required and unregulated, since it is intended
only for management.
Required and must conform to generally accepted
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
various other sources, such as rates of effective
products manufactured, physical quantities of
material and labor used in production, occupancy
rates in hotels and hospitals, and average take-off
dela s in airlines.
Almost exclusively drawn from the organization's
basic accounting system, which accumulates
financial information.
Nature of Reports and
Procedures
Reports often focus on subunits within the
organization, such as departments, divisions,
geographical regions, or product lines. Based on a
combination of historical data, estimates, and
projections of future events.
Reports focus on the enterprise in its entirety.
Based almost exclusively on historical transaction
data.
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Strategy & ManagementAccounting
Strategy specifies how an organization matches itsown capabilities with the opportunities in themarketplace to accomplish its objectives. It describeshow an organization will compete and theopportunities its managers should seek and pursue.
Strategic Cost Management focuses specifically onthe cost dimension within a firms overall strategy
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Strategy & Management
Accounting Management accounting helps answer important
questions such as:
Who are our most important customers, and how dowe deliver value to them? Barnes and Noble developedthe capabilities to sell online by building itsinformation and technology infrastructure
What substitute products exist in the marketplace, andhow do they differ from our own? Hewlett-Packarddesigns new printers after comparing the funtionality,quality and price of its printers to other printersavailable in the marketplace.
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Strategy & Management
Accounting Management accounting helps answer important
questions such as:
What is our critical capability? Is it technology,production, or marketing? Kellog Company, forexample, uses the reputation of its brand to introducenew types of cereal.
Will we have enough cash to support our strategy orwill we need to seek additional sources? Proctor andGamble issued new debt and equity to fund its strategicacquisition 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 acompanys product or service
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H M i l A ti
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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 controllingactivities.
Motivating managers and other employees
towards organizations goals.
Measuring performance of activities, subunits,
managers, and other employees.
Assessing the organizations competitive position.
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A Model of Performance
EvaluationFinancial Perspective
Goals Measures
Customer Perspective
Goals Measures
Operations Perspective
Goals Measures
Innovation Perspective
Goals Measures
How do we lookto our owners?
How do customers
see us?
How can we
continue to
improve?
In which activities
must we excel?
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Management Accounting and ValueValue Chain is the sequence of business functions
in which customer usefulness is added toproducts or services
The Value-Chain consists of:1. Research & Development
2. Design
3. Production
4. Marketing5. Distribution
6. Customer Service
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St t i C t M t d
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Product
Design
Research
and
Development
Strategic Cost Management and
the Value Chain
Securing raw
materials andother resources
Production
Marketing
Distribution
Customer
ServiceStart
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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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Learning
Objective5
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Line and Staff Positions
A line position is directlyinvolved in achieving the
basic objectives of an
organization.
Example: A productionsupervisor in a
manufacturing plant.
A staff position supportsand assists line positions.
Example: A costaccountant in the
manufacturing plant.
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Learning
Objective6
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Controller
The chief managerial and financial accountantresponsibility for:
Supervising accounting personnel
Preparation of information and reports, managerial
and financial
Analysis of accounting information
Planning and decision making
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Treasurer
Responsible for raising capital and safeguarding theorganizations assets.
Supervises relationships with financial institutions.
Work with investors and potential
investors. Manages investments.
Establishes credit policies.
Manages insurance coverage
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Internal Auditor
Responsible for reviewing accounting procedures,
records, and reports in both the controllers and the
treasurers area of responsibility.
Expresses an opinion to top
management regarding theeffectiveness of the
organizations accounting
system.
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Learning
Objective7
Major Themes in Managerial
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Major Themes in Managerial
Accounting
Managerial
Accounting
Information
and Incentives
Costs and
Benefits
Evolution and
Adaptation
Behavioral
Issues
Evolution and Adaptation in
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Evolution and Adaptation in
Managerial Accounting
Service vs.
Manufacturing Firms
Emergence of NewIndustries
Global Competition
Focus on the Customer
Cross-Functional Teams
Computer-Integrated
Manufacturing
Product Life Cycles
Time-Based
Competition
Information and
Communication
Technology
Just-in-Time Inventory
Total Quality Management
Continuous Improvement
Change
E-Business
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Cost Management Systems
ObjectivesMeasure the cost of
resources consumed.
Identify and eliminatenon-value-added
costs.Cost
Management
System
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Cost Management Systems
ObjectivesDetermine efficiency
and effectiveness of
major activities.Identify and evaluatenew activities thatcan improve
performance.
Cost
Management
System
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Learning
Objective8
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Theory of Constraints
A sequential process ofidentifying and
removing constraintsin a system.
Restrictions or barriers that impede
progress toward an objective
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Learning
Objective9
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Ethical Climate of Business
The corporate scandals experienced over the lastfew years have shown us that unethical behaviorin business is wrong in a moral sense and can be
disastrous in the economy. In addition to
Sarbanes-Oxley, there will likely be more reformsin corporate governance and accounting.
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Professional Ethics
Competence
ConfidentialityIntegrity
Credibility
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Learning
Objective10
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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
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A Typical Organizational Structure and
the Management Accountant
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Managerial Accounting as a
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Managerial Accounting as a
Career
Professional Organizations
Institute of Management Accountants (IMA)
Publishes
Management
Accountingand research
studies.
Administers
Certified
ManagementAccountant
program
Develops
Standards of
Ethical
Conduct forManagement
Accountants
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End of Chapter 1