CORNERSTONES of Managerial Accounting, 5e

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CHAPTER 1: INTRODUCTION TO MANAGERIAL ACCOUNTING Cornerstones of Managerial Accounting, 5e

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 1. Explain the meaning of managerial accounting. 2. Explain the differences between managerial accounting and financial accounting. 3. Identify and explain the current focus of managerial accounting. 4. Describe the role of managerial accountants in an organization.

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 5. Explain the importance of ethical behavior for managers and managerial accountants. 6. Identify three forms of certification available to managerial accountants.

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Meaning of Managerial Accounting  Managerial accounting is providing accounting information for a company’s internal users.  Is not bound by generally accepted accounting principles (GAAP).  Managerial accounting has three broad objectives: LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Meaning of Managerial Accounting LO-1 1 To provide information for planning the organization’s actions. 2 To provide information for controlling the organization’s actions. 3 To provide information for making effective decisions.

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Improve Quality Planning  The detailed formulation of action to achieve a particular end is the management activity called planning. Setting objectives Identifying methods to achieve those objectives Example Supplier Evaluation Program LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Controlling  The managerial activity of monitoring a plan’s implementation and taking corrective action as needed is controlling. Compare Actual Performance Expected Performance LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Decision Making  The process of choosing among competing alternatives is called decision making. ???? ???? ?? LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. What Constitutes Managerial Accounting Information LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Financial Accounting and Managerial Accounting  Financial Accounting provides information for external users:  Investors, creditors, customers, suppliers, government agencies, and labor unions.  Financial accounting is historical:  Investment decisions, stewardship evaluation, monitoring activity, and regulatory measures. LO-2

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Financial Accounting and Managerial Accounting (cont.)  Financial statements must follow rules defined by:  Securities and Exchange Commission (SEC)  Financial Accounting Standards Board (FASB)  International Accounting Standards Board (IASB).  Managerial Accounting produces information for internal users, such as managers, executives, and workers. LO-2

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Financial Accounting and Managerial Accounting (cont.)  Managerial accounting Internal accounting  Financial accounting External accounting  Managerial Accounting identifies, collects, measures, classifies, and reports financial and nonfinancial information to internal users in planning, controlling, and decision making. LO-2

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Comparison of Financial and Managerial Accounting Financial AccountingManagerial Accounting Externally focusedInternally focused Must follow externally imposed rulesNo mandatory rules Objective financial informationFinancial and information; subjective information possible nonfinancial Historical orientationEmphasis on the future Information about the firm as a wholeInternal evaluation and decisions based on very detailed information More self-containedBroad, multidisciplinary LO-2

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Current Focus of Managerial Accounting  The business environment in which companies operate has changed  Effective managerial accounting systems provide information that helps improve companies’ planning, control, and decision-making activities. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Current Focus of Managerial Accounting (cont.) Important uses of managerial accounting: 1. New methods of estimating product and service cost and profitability 2. Understanding customer orientation 3. Evaluating the business from a cross-functional perspective 4. Providing information useful in improving total quality management. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. New Methods of Costing Products and Services  Today’s companies need focused, accurate information on the cost of products and services produced.  Activity-based costing (ABC) is a more detailed approach to determine the cost of goods and services.  ABC improves costing accuracy by emphasizing the cost of the many activities or tasks that must be done to produce a product or service. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. New Methods of Costing Products and Services (cont.)  Process-value analysis focuses on the way in which companies create value for customers.  Find ways to perform necessary activities more efficiently and eliminate those that do not create customer value. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Customer Orientation  Customer value is a key focus  Firms can establish a competitive advantage by creating better customer value for the same or lower cost than competitors  Create equivalent value for lower cost than that of competitors.  Customer value is the difference between what a customer receives and what the customer gives up when buying a product or service. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Strategic Positioning  Effective cost information can help increase customer value.  Cost Leadership: Provide the same or better value to customers at a lower cost than competitors.  Superior products through differentiation: Increase customer value by providing something to customers not provided by competitors. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Value Chain  Successful pursuit of cost leadership and strategies  The value chain is the set of activities required to design, develop, produce, market, and deliver products and services, and provide support services to customers. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Value Chain LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cross-Functional Perspective  In managing the value chain, a managerial accountant must understand and measure many functions of the business.  Contemporary approaches to costing may include:  initial design and engineering costs  manufacturing costs  costs of distribution  sales and service. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Total Quality Management  Continuous improvement is the continual search for ways to increase the overall efficiency and productivity of activities by reducing waste, increasing quality, and managing costs.  Fundamental for establishing excellence. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Total Quality Management (cont.)  A philosophy of total quality management, in which manufacturers strive to create an environment that will enable workers to manufacture perfect (zero-defect) products.  Has created a demand for a managerial accounting system that provides information about quality. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Total Quality Management (cont.)  Companies attempt to increase organizational value by eliminating wasteful activities that exist throughout the value chain.  This has led to a change in accounting, referred to as lean accounting, which organizes costs according to the value chain and collects both financial and nonfinancial information. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Total Quality Management (cont.)  A more recent charge of managerial accountants is to help carry out the company’s enterprise risk management (ERM) approach.  ERM is a formal way for managerial accountants to identify and respond to the most important threats and business opportunities facing the organization. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Time As A Competitive Element  Time is a crucial element in all phases of the value chain.  Firms reduce time to market by compressing design, implementation, and production cycles.  Deliver products or services quickly by eliminating nonvalue-added time, which is time of no value to the customer (e.g., the time a product spends on the loading dock).  Decreasing nonvalue-added time appears to go hand in hand with increasing quality. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Efficiency  Improving efficiency is also a vital concern.  Both financial and nonfinancial measures of efficiency are needed.  Cost is a critical measure of efficiency.  For these efficiency measures to be of value, costs must be properly defined, measured, and assigned  Production of output must be related to the inputs required, and the overall financial effect of productivity changes should be calculated. LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Role of the Managerial Accountant  The role of managerial accountants is one of support.  Assist those who are responsible for carrying out an organization’s basic objectives.  Positions that have direct responsibility for the basic objectives of an organization are line positions. LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Role of the Managerial Accountant (cont.)  Positions that are supportive in nature and have only indirect responsibility for an organization’s basic objectives are staff positions.  The controller supervises all accounting functions and reports directly to the general manager and chief operating officer.  In larger companies, the controller is separate from the treasury department. The treasurer is responsible for the finance function. LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Managerial Accounting and Ethical Conduct  The objective of profit maximization should be constrained by the requirement that profits be achieved through legal and ethical means.  Ethical behavior involves choosing actions that are right, proper, and just.  Behavior can be right or wrong; it can be proper or improper; and the decisions we make can be fair or unfair.  Companies in business for the long term find that it pays to treat all of their constituents with honesty and loyalty. LO-5

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Company Codes of Ethical Conduct  To promote ethical behavior by managers and employees, organizations commonly establish standards of conduct referred to as Company Codes of Conduct.  A quick review of various corporate codes of conduct shows some common ground. LO-5

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Company Codes of Ethical Conduct (cont.)  Important parts of corporate codes of conduct are integrity, performance of duties, and compliance with the rule of law.  They also uniformly prohibit the acceptance of kickbacks and improper gifts, insider trading, and misappropriation of corporate information and assets. LO-5

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Standards of Ethical Conduct for Managerial Accountants  Organizations establish standards of conduct for their managers and employees, professional associations also establish ethical standards.  Both the American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA) have established ethical standards for accountants. LO-5

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Standards of Ethical Conduct for Managerial Accountants (cont.)  Professional accountants are bound by these codes of conduct.  The biggest challenge with ethical dilemmas is that when they arise, employees frequently do not realize  (1) that such a dilemma has arisen  (2) the ‘‘correct’’ action that should be taken to rectify the dilemma. LO-5

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Certification  Three major forms of certification for managerial accountants:  Certificate in Management Accounting  Certificate in Public Accounting  Certificate in Internal Auditing  Each certification offers particular advantages to a managerial accountant.  All three certifications offer proof of achievement at a minimum level of professional competence. LO-6

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Certified Management Accountant (CMA)  The Certificate in Management Accounting is designed to meet the specific needs of managerial accountants.  Four areas are emphasized in the qualifying examination for the CMA. They are:  economics, finance, and management;  financial accounting and reporting;  management reporting, analysis, and behavioral issues; and  decision analysis and information systems LO-6

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Certified Public Accountant (CPA) (cont.)  The Certificate in Public Accounting is the oldest and most well-known certification in accounting.  The purpose of the certificate is to provide minimal professional qualification for external auditors.  Only a Certified Public Accountant (CPA) is permitted (by law) to serve as an external auditor. LO-6

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Certified Public Accountant (CPA) (cont.)  CPAs must pass a national examination and be licensed by the state in which they practice.  Although the Certificate in Public Accounting does not have a managerial accounting orientation, many managerial accountants also hold this certificate. LO-6

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Certified Internal Auditor (CIA)  Internal auditing differs from external auditing and managerial accounting, and many internal auditors felt a need for a specialized certification.  The Certified Internal Auditor (CIA) has passed a comprehensive examination designed to ensure technical competence and has two years’ experience. LO-6