Chapter 1

Managerial Accounting in the

Information Age

CMA

Presentation Outline
I. Goal of Managerial Accounting
II. Comparison of Managerial and Financial
Accounting
III. Variable vs. Fixed Costs
IV. Other Cost Terminology
V. Key Issues in Managerial Accounting
VI. Other Topics

I. Goal of Managerial Accounting

The goal of managerial accounting is to
provide information that managers need
for:
A. Planning
B. Control
C. Decision Making

A. Planning

Plan
Action taken to
Implement plan

Plans communicate goals to employees to coordinate functions such

as sales and production. Financial plans are often expressed in the
form of budgets (i.e., profit, cash, production budgets)

B. Control

Plan
Action taken to
Implement plan
Results
Comparison of
planned and actual
results
Evaluation

Performance reports compare actual with planned (budgeted)

performance. Management by exception is used meaning that only
significant deviations are investigated (see Illustration 1-3 on p. 5)

C. Decision Making

Plan

Decisions to
change operations
or revise plans

Action taken to
Implement plan

Decisions to
reward or punish
managers

Comparison of
planned and actual
results

Results

Evaluation
The distinction between evaluating managers and evaluating the
operations they control is important. For example, an evaluation of
an operation can be negative even when the manager evaluation is
positive.

II. Comparison of Managerial

and Financial Accounting
A. The User of the Information
B. The GAAP Requirement
C. The Level of Detail
D. The Emphasis on Nonmonetary
Information
E. The Time Frame of Focus

A. The User of the Information

Managerial Accounting
Primarily used by
internal users such as
company managers.

Financial Accounting
Primarily aimed at
external users such as
investors, creditors,
and government
agencies.

B. The GAAP Requirement

Managerial Accounting
Generally accepted
accounting principles
is optional. Use any
reporting convention
that is useful to
management.

Financial Accounting
Publicly traded
companies and many
private companies use
generally accepted
accounting principles
for financial
accounting.

GAAP only

C. The Level of Detail

Managerial Accounting
Managers need detailed
information to plan,
control, and make
decisions about different
organizational areas.

Financial Accounting
External users of
information are often
satisfied with more
summarized
information.

D. The Emphasis on
Nonmonetary Information
Managerial Accounting
Monetary information is
supplemented with
additional detail such as
quantity of materials used,
number of labor hours, etc.

Financial Accounting
Primarily includes
information regarding
assets, liabilities,
equity, revenues,
expenses, and cash
flows.

E. The Time Frame of Focus

Managerial Accounting
Uses past performance to
the extent it is useful
in making predictions
about the future.

Financial Accounting
Primarily presents the
results of past
transactions.

III. Variable vs. Fixed Costs

A. Variable Cost Per Unit

B. Variable Cost in Total
C. Fixed Cost Per Unit
D. Fixed Cost in Total

A. Variable Cost Per Unit

Variable cost per unit remains constant.
$

Variable cost
per unit

Level of Activity

B. Variable Cost in Total

Total variable cost increases and decreases in
proportion to changes in the activity level.
(See illustration on the bottom of page 7)
$
Variable cost
in total

Level of Activity

C. Fixed Cost Per Unit

Fixed cost decrease per unit as the activity level rises,
and increase per unit as the activity level falls..
$

Fixed cost
per unit
Level of Activity

D. Fixed Cost in Total

Total fixed cost is not affected by changes in the activity
level within the relevant range (i.e., total fixed cost
remains constant even if the activity level changes.
(See illustration in the middle of page 8)
$

Total fixed
cost

Level of Activity

IV. Other Cost Terminology

A. Sunk Costs
B. Opportunity Costs
C. Direct and Indirect Costs
D. Controllable and Noncontrollable Costs

A. Sunk Cost
Costs that have been incurred in the past are
irrelevant. They are known as sunk costs
and make no difference in future decisions
because they do not differ between
alternative courses of action.
I have got to make
this work out or I
will look bad!

B. Opportunity Cost
Opportunity costs are the benefits forgone when one
decision alternative is selected over another. For
example, extra floor space could be rented out or
used to add production capacity. The decision
must consider the lost rental income if the floor
space is used for production.

C. Direct and Indirect Costs

Direct costs are conveniently traceable to a cost
object (i.e., product, activity, department).
Indirect costs cannot be conveniently traced to a
cost object.
Note: The distinction between a direct and indirect
cost depends on the object of the cost tracing.
(See Illustration 1-4 on page 9)

D. Controllable and Noncontrollable

Costs

A manager can influence a controllable cost but

cannot influence an uncontrollable cost. A cost is
that is controllable at a higher management level
may be uncontrollable when allocated to a lower
management level. A manager should not be
evaluated unfavorably strictly because a
noncontrollable cost increases.

V. Key Ideas in Managerial

Accounting
A. Incremental Analysis
B. You Get What You Measure

A. Incremental Analysis
Incremental analysis is the appropriate way to
approach the solution to all business problems. It
involves the difference between the difference in
revenue versus the difference in cost between
decision alternatives. Only differences are relevant
to a decision (See illustrations on pages 10 and 11)
Does the above statement means that fixed costs are
always irrelevant and variable costs are always
relevant?

B. You Get What You Measure

Companies can select from a vast number of
performance measures (profit, new customer sales,
number of defects, etc.)
Since rewards will often depend on how well an
employee performs on a particular measure,
employees direct their attention to what is measured
and may neglect what isnt measured.
For example, suppose employees were evaluated on
quantity of production with little concern for product
quality.

VI. Other Topics

A. Ethical Behavior
B. The Roles of Company Officers
C. The Certified Management Accountant

A. Ethical Behavior
Ethical dilemmas are often complex and the situations
managers face are often gray rather than black and
white.
Codes of conduct are not always good guides to ethical
behavior since they often simply specify what cannot
be done rather than what should be done. Many also
focus strictly on staying just within the law.
Two important questions:
1. Am I comfortable with my decision?
2. Would I be comfortable in telling others about the
decision?

B. The Roles of Company

Officers
Controller top management accounting position providing
information for management decision making. (See
Illustration 1-6 on page 17)
Treasurer has custody of cash and funds invested in
various marketable securities.
Chief information officer (CIO) responsible for
companys information technology and computer systems.
Chief financial officer (CFO) senior executive responsible
for both accounting and financial operations.

C. The Certified Management

Accountant
Since 1973, the Institute of Management
Accountants (IMA) has conducted a
comprehensive exam to test if persons have the
knowledge needed by a management accountant in
todays business world.
Those who pass the examination become a
Certified Management Accountant (CMA) and can
use the CMA designation on resumes and business
cards.

Summary
Planning, Control, and Decision Making
Financial vs. Managerial Accounting (User,
GAAP, Detail, Nonmonetary, Time Frame)
Variable vs. Fixed Costs
Sunk, Opportunity, Direct, Noncontrollable
Costs
Incremental Analysis and Getting What You
Measure
Ethical Conduct, Company Officers, CMA