Introduction to Management Accounting

Copyright © 2007 Prentice-Hall. All rights reserved

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Introduction to Management Accounting

Introduction to Management Accounting

Chapter 1


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Objective 1Objective 1

Identify managers’ four primary responsibilities


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Setting goals and objectives

Overseeing day-to-day operations

Evaluating resultsof operations

Managers’ ResponsibilitiesManagers’ Responsibilities

Directing

Controlling

DecisionMaking

Planning


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Distinguish financial accounting from management accounting


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Primary Users?Primary Users?

Management • Internal • Managers

Financial• External• Investors, creditors,

government regulators


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Purpose of Information?Purpose of Information?

Management• Help managers plan,

direct, and control business operations

Financial• Help investors and

creditors make investment and credit decisions


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Primary Accounting Product?Primary Accounting Product?

Management• Any internal

accounting report deemed worthwhile by management

Financial• General-purpose

financial statements


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What must be included?What must be included?

Management• Whatever

management needs as long as benefits of using report exceeds cost of preparing it

Financial• Determined by GAAP


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Underlying basis of the information?

Underlying basis of the information?

Management• Focus on future• Information on

external and internal transactions

Financial• Based on historical

transactions• External transactions


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Information characteristic emphasized?

Information characteristic emphasized?

Management• Relevance

Financial• Reliable and objective


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Business unit?Business unit?

Management• Segments – products,

geographical regions, customers

Financial• Company as a whole


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How often prepared?How often prepared?

Management• Depends on

management needs

Financial• Annually and

quarterly


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Verification?Verification?

Management• No independent

audits• Internal audits may

occur

Financial• Independent audits of

publicly traded companies


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Required by outside group?Required by outside group?

Management• No

Financial• Yes – SEC for publicly

traded companies


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Concern over how reports affect employee behavior?

Concern over how reports affect employee behavior?

Management• Yes

Financial• Concern is about

adequacy of disclosure


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E1-10E1-10

a. Companies must follow GAAP in their ____________________ systems.

b. Financial accounting develops reports for external parties, such as __________ and _______________.

c. When managers evaluate the company’s performance compared to the plan, they are performing the __________ role of management.

Financial accounting

CreditorsShareholders

Controlling


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E1-10E1-10

d. __________ are decision makers inside a company.

e. ___________________ provides information on a company’s past performance to external parties.

f. ______________________ systems are not restricted by GAAP but are chosen by comparing the costs versus the benefits of the system.

Managers


Management accounting


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E1-10E1-10

g. Choosing goals and the means to achieve them is the __________ function of management.

h. _____________________ systems report on various segments or business units of the company.

i. ____________________ statements of public companies are audited annually by CPAs.

Planning

Managerial accounting



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Describe organizational structure and the roles and skills required of management

accountants within the organization


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Organizational StructureOrganizational Structure

Board of Directors

Chief Executive Officer

Chief Operating Officer

Chief Financial Officer

Vice Presidents of various operations

Treasurer Controller Internal Audit

Audit Committee

Board of Directors

Chief Executive Officer

Chief Operating Officer

Chief Financial Officer

Vice Presidents of various operations

Treasurer Controller Internal Audit

Audit Committee


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Management AccountantsManagement Accountants

• Often part of cross-functional teams

• Report to various vice-presidents of operations

• Role is to analyze financial impact of business decisions

• Internal consultants


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Roles of Management Accountants

Roles of Management Accountants

• Ensuring accurate financial records– Helping to design information systems– Recording non-routine transactions– Making adjustments to financial records

• Planning, analyzing, and interpreting accounting data

• Providing decision support


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Required SkillsRequired Skills

• Knowledge of financial and managerial accounting

• Analytical skills

• Knowledge of how a business functions

• Ability to work on a team

• Oral and written communications skills


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E1-11E1-11

a.The _____ and the _____ report to the CEO.

b.The internal audit function reports to the CFO or _______ and the _____________.

c. The __________ is directly responsible for financial accounting, managerial accounting, and tax reporting.

d.The CEO is hired by the _____________.

CFO COO

CEOcontroller

audit committee

Board of Directors


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E1-11E1-11

e. The __________ is directly responsible for raising capital and investing funds.

f. The __________ is directly responsible for the company’s operations.

g. Management accountants often work with __________________________.

h. The subgroup of the board of directors is called the _________________.

treasurer

COO

cross functional teams

audit committee


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Describe the role of the Institute of Management Accountants (IMA) and use its ethical standards to make reasonable

ethical judgments


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IMAIMA

• Professional association for managerial accountants

• Goal– Advance management accounting profession– Educate society about role of managerial

accountants

• Certifications– Certified Management Accountant (CMA)– Certified Financial Managers (CFM)


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EthicsEthics

• Statement of Ethical Professional Practice (IMA)– Maintain professional competence– Preserve confidentiality of information– Uphold their integrity– Perform duties with credibility– Consult an attorney


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Steps to Resolve Ethical DilemmasSteps to Resolve Ethical Dilemmas

• Follow company’s policies for reporting unethical behavior

• If not resolved– Discuss with immediate supervisor– Discuss with objective advisor


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E1-13E1-13

a. The ______ is the professional association for management accountants.

b. The institute offers two types of certification: The _____ and _____.

c. The __________ exam focuses on managerial accounting topics, economics, and business finance.

IMA

CMA CFM

CMA


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E1-13E1-13

d. The ______ exam focuses on financial statement analysis, business valuation, risk management, working capital policy, and capital structure.

e. The institute’s monthly publication, called ________________, addresses current topics of interest to managerial accountants.

CFM

Strategic Finance


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E1-13E1-13

f. The institute says that approximately _____ percent of accountants work inside of organizations, rather than at CPA firms.

85


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Discuss trends in the business environment


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Sarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002

• CEO and CFO - responsible for financial statements, internal control system, procedures for financial reporting

• Audit committee – independent and should include a financial expert

• CPA firms – limited non-audit services for audit clients and periodic quality review

• Stiffer penalties for white-collar crimes


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TrendsTrends

• Shift toward service economy

• Competing in global marketplace

• Time-based competition– ERP systems– E-Commerce– Just-in-Time Management

• Total Quality Management


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TrendsTrends

• Cost-Benefit Analysis – weighing costs against benefits to help make decisions


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Today’s Business TrendsToday’s Business Trends

• Shift toward a service economy

• Global competition

• Time-based competition– Advanced information systems– E-Commerce– Just-in-Time management

• Total Quality Management


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E1-16E1-16

a. To account for uncertainty in the amounts of future costs and benefits, we compute the ______________ by multiplying the probability of each outcome by the dollar value of that outcome.

b. To make a cost-benefit decision today, we must find the ______________ of the costs and benefits that are incurred in the future.

expected value

present value


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c. The goal of _______ is to meet customers’ expectations by providing them with superior products and services by eliminating defects and waste throughout the value chain.

TQM


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E1-16E1-16

d. Most of the costs of adopting ERP, JIT, expanding into a foreign market, or improving quality are incurred in the ________, but most of the benefits occur in the _______.present

future


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E1-16E1-16

e. _______________ is the time between buying raw materials and selling the finished products.

f. __________ serves the information needs of people in accounting, as well as people in marketing and in the warehouse.

g. Firms adopt __________ to conduct business on the Internet.

Throughput time

ERP

e-commerce


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h. Firms acquire the ______________ certification to demonstrate their commitment to quality.

ISO9001:2000


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Use cost-benefit analysis to make business decisions


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E1-18E1-18

1. What are the total costs of adopting JIT?

Employee training $13,500Streamline production process 37,000Supplier identification 8,000Total costs $58,500


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E1-18E1-18

2. What are the total benefits of adopting JIT?

Savings in warehouse expenses $97,000Lower spoilage costs 46,000Total benefits $143,000


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E1-18E1-18

3. Should Wild Rides adopt JIT? Why or why not?

Expected total benefits $143,000Expected total costs (58,500)Excess of benefits over costs $ 84,500

Wild Rides should adopt JIT because the expected benefits exceed the costs.


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S1-8S1-8

Expected value of additional benefits:

Outcome Benefits Probability Expected value

Moderately successful

$20 million 0.85 =

Extremely successful

$80 million 0.15 =

$17 million

$12 million

$29 million


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S1-8S1-8

Total benefits:

Benefits already realized $170 million

Expected value of additional benefits 29 million

Total expected benefits $199 million

Total costs $200 million


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S1-8S1-8

The costs of $200 million just exceed the total expected benefits of $199 million. Under these circumstances, the quality program does not appear to have been a worthwhile investment.


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End of Chapter 1End of Chapter 1

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Introduction to Management Accounting

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