Chapter 1 Managerial Accounting in the Information Age

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Chapter 1Managerial Accounting in the
Information Age
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Presentation Outline

1. Goal of Managerial Accounting
2. Comparison of Managerial and Financial Accounting
3. Variable vs. Fixed Costs
4. Other Cost Terminology
5. Key Issues in Managerial Accounting
6. Other Topics

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I. Goal of Managerial Accounting

• The goal of managerial accounting is to provide
  information that managers need for
• Planning
• Control
• Decision Making

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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)
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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)
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C. Decision Making
Plan
Action taken to Implement plan
Decisions to change operations or revise plans
Results
Decisions to reward or punish managers
Comparison of planned and actual 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.
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II. Comparison of Managerial and Financial
Accounting

1. The User of the Information
2. The GAAP Requirement
3. The Level of Detail
4. The Emphasis on Nonmonetary Information
5. The Time Frame of Focus

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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.

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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.

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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.

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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.

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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.

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III. Variable vs. Fixed Costs

• Variable Cost Per Unit
• Variable Cost in Total
• Fixed Cost Per Unit
• Fixed Cost in Total

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A. Variable Cost Per Unit

• Variable cost per unit remains constant.

Variable cost per unit
Level of Activity
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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
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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
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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
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IV. Other Cost Terminology

1. Sunk Costs
2. Opportunity Costs
3. Direct and Indirect Costs
4. Controllable and Noncontrollable Costs

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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!
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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.

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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)

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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.

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V. Key Ideas in Managerial Accounting

1. Incremental Analysis
2. You Get What You Measure

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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?

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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.

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VI. Other Topics

1. Ethical Behavior
2. The Roles of Company Officers
3. The Certified Management Accountant

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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
• Am I comfortable with my decision?
• Would I be comfortable in telling others about
  the decision?

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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.

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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.

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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