Chapter 1

The Changing Role

of Managerial
Accounting in a
Dynamic Business
Environment

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All

Learning
Objective
1

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All

ORGANIZATIONS
Types of organizations include
manufacturers, retailers, service industries,
agribusinesses, and nonprofit firms. These
organizations have goalsfor example:
growth, profit, quality, leadership, etc.
All organizations have information needs in
the financial, production, personnel,
environmental, and legal areas. Managerial
accounting provides some of this
information.

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)

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 IMAs
website at www.imanet.org

Focus of Accounting
Identifying
Economic
Events

Recording
Economic
Events
Reporting
and
Analyzing
Economic
Events

Influence of Accounting
Accounting
Accounting

is a
system that

Identifies
Identifies
Records
Records

Relevant
Relevant

information
that is

Communicates
Communicates

Reliable
Reliable
Comparable
Comparable

to
tohelp
helpusers
usersmake
make
better
betterdecisions.
decisions.

Define Managerial Accounting

Managerial accounting is the process of

Identifying
Measuring
Analyzing
Interpreting
Communicating information
In pursuit of an organizations goals

Learning
Objective
2

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Managing Resources, Activities,

and People
An organization has set . . .GOALS

Directing

Acquires Resources

Hires People

Organized
Organized set
set
of
of activities
activities

Controlling

Decision
Making

Planning

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 todays 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.
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 & Control Systems

Planning selects goals, predicts results,
decides how to attain goals, and
communicates this to the organization
Budget the most important planning tool

Control takes actions that implement the

planning decision, decides how to evaluate
performance, and provides feedback to the
organization
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Planning and Control

(cont.)

Control is the process of monitoring the

companys operations and determining whether
the objectives identified in the planning process
are being accomplished. Effective control is
achieved through the following:
1.
2.
3.

Assigning responsibility.
Periodically measuring and comparing results.
Taking necessary corrective action.

A Five-Step Decision
Making Process in Planning
& Control
1.
2.
3.
4.

Identify the problem and uncertainties

Obtain information
Make predictions about the future
Make decisions by choosing between
alternatives
5. Implement the decision, evaluate
performance, and learn
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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
centers manager can control.
A variance is the favorable or unfavorable
difference between actual costs and budgeted
costs.

DAILY NEWS
PERFORMANCE REPORT
March 31, 2009
ACTUAL
RESULT

ADVERTISING
PAGES SOLD
AVERAGE RATE
PER PAGE
ADVERTISING
REVENUES

DIFFERENCE
BUDGETE
(ACTUAL RESULT
D
- BUDGETED
AMOUNT
AMOUNT)
2

3=1-2

40 PAGES
760 PAGES 800 PAGES UNFAVOURABLE
$5,080

$5,200

$4,160,00
$3,860,800
0

$120
UNFAVOURABLE
$299,200
UNFAVOURABLE

DIFFERENCE
AS A
PERCENTAGE
OF
BUDGETED
AMOUNT
4=3/2
5.0%
UNFAVOURABL
E
2.3%
UNFAVOURABL
E
7.2%
UNFAVOURABL
E

Performance Report Example

Renaldis Restaurant
Performance Report
September 30, 2006
Budgeted
Actual
Expense

Kitchen Wages
Food
Supplies
Utilities
Total

F = Favorable
U=
Unfavorable

September

$5,500
17,700
3,300
1,850
$28,350

Year-to-Date

$47,000
155,300
27,900
15,350
$245,550

September

$5,200
18,300
3,700
1,730
$28,930

Year-to-Date

$46,100
157,600
29,100
16,200
$249,000

Variance
September

$300 F
600 U
400 U
120 F
$580 U

Year-to-Date

$900 F
2,300 U
1,200 U
850 U
$3,450 U

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.

Learning
Objective
3

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All

Learning
Objective
4

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All

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.
2009 Pearson Prentice Hall. All rights reserved.

Major Differences Between

Financial & Managerial
Managerial
AccountingAccounting
Financial Accounting
Purpose

Decision making

Communicate financial
position to outsiders

Primary
Users

Internal managers

External users

Future-oriented

Past-oriented

Do not have to follow

GAAP; cost vs. benefit

GAAP compliant;
CPA audited

Ultra current to very

long
time horizons

Historical monthly,
quarterly reports

Focus/Empha
sis
Rules
Time Span
Behavioral
Issues

Designed to influence
Indirect effects on
2009
Pearson Prentice
Hall. All rights reserved.
employee
behavior
employee behavior

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

calculating cost of goods
sold and finished goods,
work in process, and raw
materials inventory using
historical costs and GAAP.

Budgeting
Special decisions such as
make or buy a component,
keep or replace a facility,
and sell a product at a
special price.
Nonfinancial information
such as defect rates, % of
returned products, and ontime 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.
2.
3.
4.

Determining the selling price of a product.

Meeting competition.
Bidding on contracts.
Analyzing profitability.

Managerial versus Financial

Accounting
Accounting
Accounting System
System
(accumulates
(accumulates financial
financial and
and
managerial
managerial accounting
accounting data
data in
in the
the
cost
cost accounting
accounting system)
system)
Managerial
Managerial Accounting
Accounting
Information
Information for
for decision
decision
making,
making, planning,
planning, and
and
controlling
controlling an
an
organizations
organizations
operations.
operations.
Internal
Users

Financial
Financial Accounting
Accounting
Published
Published financial
financial
statements
statements and
and other
other
financial
financial reports.
reports.

External
Users

Managerial versus Financial

Accounting

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 firms overall strategy

2009 Pearson Prentice Hall. All rights reserved.

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).
2009 Pearson Prentice Hall. All rights reserved.

33

Strategy & Management

Accounting
Management accounting helps 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? HewlettPackard designs new printers after comparing the
funtionality, quality and price of its printers to other
printers available in the marketplace.
2009 Pearson Prentice Hall. All rights reserved.

Strategy & Management

Accounting
Management accounting helps answer important
questions such as:
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 companys product or service

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How Managerial Accounting Adds

Value to the Organization
Providing
Providing information
information for
for decision
decision making
making and
and
planning
planning and
and proactively
proactively participating
participating in
in decisiondecisionmaking
making and
and planning
planning process.
process.
Assisting
Assisting managers
managers in
in directing
directing and
and controlling
controlling
activities.
activities.
Motivating
Motivating managers
managers and
and other
other employees
employees
towards
towards organizations
organizations goals.
goals.
Measuring
Measuring performance
performance of
of activities,
activities, subunits,
subunits,
managers,
managers, and
and other
other employees.
employees.
Assessing
Assessing the
the organizations
organizations competitive
competitive position.
position.

The Balanced Scorecard

A Model of Performance
Evaluation
How do we look
to our owners?

Financial Perspective
Goals

Customer Perspective
Goals
Measures

Measures

In which activities
must we excel?

Operations Perspective
Goals
Measures

How do customers
see us?

Innovation Perspective
Goals

Measures

How can we
continue to
improve?

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 & Developmentgenerating

and experimenting with ideas related to

new products, services or processes.
2. Designdetailed planning and
engineering of products, services or
processes.
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Management Accounting and

Value
The Value-Chain consists of:

ProductionAcquiring, coordinating, and

assembling resources to produce a product or
deliver a service.
4. MarketingPromoting and selling products
or services to customers or prospective
customers.
5. DistributionDelivering products or
services to customers.
6. Customer ServiceProviding after-sale
support to customers.
3.

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Strategic Cost Management and

the Value Chain
Product
Product
Design
Design
Research
Research
and
and
Development
Development
Securing
Securing raw
raw
materials
materials and
and
other
other resources
resources

Start

Production
Production
Marketing
Marketing
Distribution
Distribution
Customer
Customer
Service
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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Learning
Objective
5

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All

Line and Staff Positions

AA line
line position
position is
is directly
directly
involved
involved in
in achieving
achieving the
the
basic
basic objectives
objectives of
of an
an
organization.
organization.
Example:
Example: AA production
production
supervisor
supervisor in
in aa
manufacturing
manufacturing plant.
plant.

AA staff
staff position
position supports
supports
and
and assists
assists line
line positions.
positions.
Example:
Example: AA cost
cost
accountant
accountant in
in the
the
manufacturing
manufacturing plant.
plant.

Learning
Objective
6

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Copyright 2008 by The McGraw-Hill Companies, Inc. All

Controller
The
The chief
chief managerial
managerial and
and financial
financial accountant
accountant
responsibility
responsibility for:
for:
Supervising
Supervising accounting
accounting personnel
personnel
Preparation
Preparation of
of information
information and
and reports,
reports, managerial
managerial
and
and financial
financial
Analysis
Analysis of
of accounting
accounting information
information
Planning
Planning and
and decision
decision making
making

Treasurer
Responsible
Responsible for
for raising
raising capital
capital and
and safeguarding
safeguarding the
the
organizations
organizations assets.
assets.
Supervises
Supervises relationships
relationships with
with financial
financial institutions.
institutions.
Work
Work with
with investors
investors and
and potential
potential
investors.
investors.
Manages
Manages investments.
investments.
Establishes
Establishes credit
credit policies.
policies.
Manages
Manages insurance
insurance coverage
coverage

Internal Auditor
Responsible
Responsible for
for reviewing
reviewing accounting
accounting procedures,
procedures,
records,
records, and
and reports
reports in
in both
both the
the controllers
controllers and
and the
the
treasurers
treasurers area
area of
of responsibility.
responsibility.
Expresses
Expresses an
an opinion
opinion to
to top
top
management
management regarding
regarding the
the
effectiveness
effectiveness of
of the
the
organizations
organizations accounting
accounting
system.
system.

Learning
Objective
7

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Major Themes in Managerial

Accounting
Behavioral
Behavioral
Issues
Issues

Costs
Costs and
and
Benefits
Benefits

Information
Information
and
and Incentives
Incentives

Evolution
Evolution and
and
Adaptation
Adaptation

Managerial
Accounting

Evolution and Adaptation in

Managerial Accounting
E-Business
Service vs.
Manufacturing Firms
Emergence of New
Industries
Global Competition
Focus on the Customer
Cross-Functional Teams
Computer-Integrated
Manufacturing

Product Life Cycles

Time-Based
Competition

Change

Information and
Communication
Technology

Just-in-Time Inventory
Total Quality Management
Continuous Improvement

Cost Management Systems

Objectives
Objectives

Measure
Measure the
the cost
cost of
of
resources
resources consumed.
consumed.

Identify
Identify and
and eliminate
eliminate
non-value-added
non-value-added
costs.
costs.

Cost
Management
System

Cost Management Systems

Objectives
Objectives

Determine
Determine efficiency
efficiency
and
and effectiveness
effectiveness of
of
major
major activities.
activities.

Identify
Identify and
and evaluate
evaluate
new
new activities
activities that
that
can
can improve
improve
performance.
performance.

Cost
Management
System

Learning
Objective
8

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Theory of Constraints
A sequential process of identifying and removing
constraints in a system.
Restrictions
Restrictions or
or barriers
barriers that
that impede
impede
progress
progress toward
toward an
an objective
objective

Learning
Objective
9

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Copyright 2008 by The McGraw-Hill Companies, Inc. All

Ethical Climate of Business

The
The corporate
corporate scandals
scandals experienced
experienced over
over the
the last
last
few
few years
years have
have shown
shown us
us that
that unethical
nethical behavior
behavior
in
in business
business is
is wrong
wrong in
in aa moral
moral sense
sense and
and can
can be
be
disastrous
disastrous in
in the
the economy.
economy. In
In addition
addition to
to
Sarbanes-Oxley,
Sarbanes-Oxley, there
there will
will likely
likely be
be more
more reforms
reforms
in
in corporate
corporate governance
governance and
and accounting.
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
users 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.

Learning
Objective
10

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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

2009 Pearson Prentice Hall. All rights reserved.

Managerial Accounting as a
Career
Professional Organizations

Institute of Management Accountants (IMA)

Publishes
Publishes
Management
Management
Accounting
Accounting
and
and research
research
studies.
studies.

Administers
Administers
Certified
Certified
Management
Management
Accountant
Accountant
program
program

Develops
Develops
Standards
Standards of
of
Ethical
Ethical
Conduct
Conduct for
for
Management
Management
Accountants
Accountants

End of Chapter 1