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Chapter 1 Managerial Accounting in the Information Age

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Management by exception is used meaning that only significant deviations are ... Financial vs. Managerial Accounting (User, GAAP, Detail, Nonmonetary, Time Frame) ... – PowerPoint PPT presentation

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Title: Chapter 1 Managerial Accounting in the Information Age


1
Chapter 1Managerial Accounting in the
Information Age
2
Presentation Outline
  • Goal of Managerial Accounting
  • Comparison of Managerial and Financial Accounting
  • Variable vs. Fixed Costs
  • Other Cost Terminology
  • Key Issues in Managerial Accounting
  • Other Topics

3
I. Goal of Managerial Accounting
  • The goal of managerial accounting is to provide
    information that managers need for
  • Planning
  • Control
  • Decision Making

4
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)
5
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)
6
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.
7
II. Comparison of Managerial and Financial
Accounting
  • The User of the Information
  • The GAAP Requirement
  • The Level of Detail
  • The Emphasis on Nonmonetary Information
  • The Time Frame of Focus

8
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.

9
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.

10
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.

11
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.

12
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.

13
III. Variable vs. Fixed Costs
  • Variable Cost Per Unit
  • Variable Cost in Total
  • Fixed Cost Per Unit
  • Fixed Cost in Total

14
A. Variable Cost Per Unit
  • Variable cost per unit remains constant.


Variable cost per unit
Level of Activity
15
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
16
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
17
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
18
IV. Other Cost Terminology
  • Sunk Costs
  • Opportunity Costs
  • Direct and Indirect Costs
  • Controllable and Noncontrollable Costs

19
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!
20
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.

21
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)

22
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.

23
V. Key Ideas in Managerial Accounting
  • Incremental Analysis
  • You Get What You Measure

24
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?

25
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.

26
VI. Other Topics
  • Ethical Behavior
  • The Roles of Company Officers
  • The Certified Management Accountant

27
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?

28
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.

29
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.

30
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
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