1: Chapter Introduction to Managerial Accounting
Cornerstones of Managerial Accounting, 4e
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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. 5. Explain the importance of ethical behavior for managers and managerial accountants. 6. Identify three forms of certification available to managerial accountants.
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Managerial Accounting is the provision of accounting information for a company's internal users. Unlike financial accounting, managerial accounting is not bound by any formal criteria such as generally accepted accounting principles (GAAP). Managerial accounting has three broad objectives:
The Meaning of Managerial Accounting
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Planning
The detailed formulation of action to achieve a particular end is the management activity called planning. Example
Setting objectives Improve Quality
Identifying methods to achieve those objectives
Supplier Evaluation Program
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Controlling
The managerial activity of monitoring a plan's implementation and taking corrective action as needed is referred to as controlling.
Compare Actual Performanc e Expected Performanc e
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Decision Making
The process of choosing among competing alternatives is called decision making.
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What Constitutes Managerial Accounting Information
You are the Costco executive who has been chosen to decide whether or not the company should continue its policy of sourcing its finest coffee from Rwanda. What types of information should you consider as you decide how best to structure and analyze this important long-term strategic decision? What challenges do you expect to face in making this decision?
You Decide
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What Constitutes Managerial Accounting Information
(continued)
You Decide
What constitutes managerial accounting information is growing considerably as organizations must make decisions that include the global consequences of their actions, as well as the impact on an increasingly large number of vocal, well-informed, and powerful stakeholders. Stakeholders include the company's customers, suppliers, employees, regulators, politicians, lawmakers, and local community members. Generally speaking, managerial accounting information can be financial in nature, such as sales revenue or cost of sales, or nonfinancial in nature, such as the number of quality defects or the percentage of manufacturing plants that are inspected for compliance with human rights policies. One of the most exciting--and yet daunting--aspects of managerial accounting is that one can choose to measure anything, assuming the resources, information technology, and creativity exist to capture the desired performance measure.
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What Constitutes Managerial Accounting Information (continued)
You Decide
As a Costco executive, one of the first nonfinancial factors you likely would consider measuring is the quality of the Rwandan coffee to ensure that it fulfills Costco's strategic goal of creating a competitive advantage by providing premium coffee to customers. Quality could be defined by the beans' taste, shelf life longevity, or other factors valued by customers. Other important nonfinancial performance measures might include the time required to ship the harvested beans from Rwanda to Costco stores around North America and the presence of a local farming workforce in Rwanda critical to successfully sustaining a long-term supply chain between Rwandan fields and Costco customers. One of the most important financial items to measure would be the importance to Costco's customers of purchasing premium quality coffee, which could be measured by the additional price they are willing to pay for Rwandan coffee over and above more average quality coffee. Other financial measures might include the cost of harvesting, inspecting, and shipping beans, as well as investments in Rwandan farming communities (e.g., physical infrastructure and schools) that ensure the relationship is sustainable for future generations.
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What Constitutes Managerial Accounting Information (continued)
You Decide
Finally, you should consider how the decision to continue sourcing premium coffee from Rwanda will be perceived by Costco's important stakeholders, including its customers who buy the coffee, suppliers who provide the coffee beans, and government officials in the United States and Rwanda who set trading policies between the two countries. Accurately measuring issues like stakeholder perceptions of such decisions can be difficult because the managerial accountant oftentimes must invent new measures, figure out where the data to create such measures might come from, and estimate how accurate these measures will be once collected. However, the managerial accountant's ability to inform executive decision makers by providing innovative, accurate, and timely performance measures can create an important competitive advantage for the organization by improving its key decisions.
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Financial Accounting is primarily concerned with producing information for external users, including investors, creditors, customers, suppliers, government agencies, and labor unions. Financial accounting's orientation is historical and is used for investment decisions, stewardship evaluation, monitoring activity, and regulatory measures. Financial statements must conform to certain rules and conventions defined by agencies like the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB).
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Financial Accounting and Managerial Accounting
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Financial Accounting and Managerial Accounting
(continued)
Managerial Accounting produces information for internal users, such as managers, executives, and workers. Thus, managerial accounting could be properly called internal accounting, and financial accounting could be called external accounting. Specifically, managerial accounting identifies, collects, measures, classifies, and reports financial and nonfinancial information that is useful to internal users in planning, controlling, and decision making.
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Comparison of Financial and Managerial Accounting
Financial Accounting
Externally focused Must follow externally imposed rules Objective financial information Historical orientation Information about the firm as a whole More self-contained
Managerial Accounting
Internally focused No mandatory rules
Financial and information; subjective information possible nonfinancial Emphasis on the future Internal evaluation and decisions based on very detailed information Broad, multidisciplinary
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Comparison of Financial and Managerial Accounting (continued)
The key point is flexibility-- the accounting system should be able to supply different information for different purposes.
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The business environment in which companies operate has changed dramatically over the past several decades. As a result, effective managerial accounting systems also have changed in order to provide information that helps improve companies' planning, control, and decision-making activities. Several important uses of managerial accounting resulting from these advances include: (1) new methods of estimating product and service cost and profitability, (2) understanding customer orientation, (3) evaluating the business from a cross-functional perspective, and (4) providing information useful in improving total quality.
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Current Focus of Managerial Accounting
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Today's companies need focused, accurate information on the cost of the products and services they produce. Activity-based costing (ABC) is a more detailed approach to determining 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 offer a service. Process-value analysis focuses on the way in which companies create value for customers. The objective is to find ways to perform necessary activities more efficiently and to eliminate those that do not create customer value. 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or part, in except for use as permitted in a
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New Methods of Costing Products and Services
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Customer Orientation
Customer value is a key focus because firms can establish a competitive advantage by creating better customer value for the same or lower cost than competitors or creating 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.
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Strategic Positioning
Effective cost information can help the company identify strategies that increase customer value. This is typically done through a couple of general strategies:
Cost Leadership: The objective of the cost leadership strategy is to provide the same or better value to customers at a lower cost than competitors. Superior products through differentiation: A differentiation strategy strives to increase customer value by providing something to customers not provided by competitors.
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Value Chain
Successful pursuit of cost leadership and/or differentiation strategies requires an understanding of a firm's value chain. The value chain is the set of activities required to design, develop, produce, market, and deliver products and services, as well as provide support services to customers.
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CrossFunctional 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, as well as manufacturing costs, and the costs of distribution, sales, and service.
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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.
Continuous improvement is fundamental for establishing excellence.
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.
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Total Quality Management (continued)
For example, many 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. 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.
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Time As A Competitive Element
Time is a crucial element in all phases of the value chain. World-class firms reduce time to market by compressing design, implementation, and production cycles. These firms 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). Interestingly, decreasing nonvalue-added time appears to go hand in hand with increasing quality.
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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; furthermore, production of output must be related to the inputs required, and the overall financial effect of productivity changes should be calculated.
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The role of managerial accountants in an organization is one of support. They assist those individuals who are responsible for carrying out an organization's basic objectives. Positions that have direct responsibility for the basic objectives of an organization are referred to as line positions. Positions that are supportive in nature and have only indirect responsibility for an organization's basic objectives are called staff positions. The controller supervises all accounting functions and reports directly to the general manager and chief operating officer. 2012 Cengage Learning. All Rights Reserved. May not be controller is separatepart, except for use as scanned, or in from the In larger companies, the copied,otherwise on aduplicated, in whole orwebsite for classroom use.permitted in a license distributed with a certain product or service or password-protected treasury department. The treasurer is responsible for the
The Role of the Managerial Accountant
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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.
Managerial Accounting and Ethical Conduct
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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. 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.
Company Codes of Ethical Conduct
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Standards of Ethical Conduct for Managerial Accountants
In addition to organizations establishing 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. Professional accountants are bound by these codes of conduct. Perhaps the biggest challenge with ethical dilemmas is that when they arise, employees frequently do not realize (1) that such a dilemma has arisen or (2) the ``correct'' action that should be duplicated, in to or in part, except for use 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or taken whole rectify the as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. dilemma.
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Certification
Certificate in Management Accounting Certificate in Public Accounting Certificate in Internal Auditing
The accounting profession offers three major forms of certification to managerial accountants:
Each certification offers particular advantages to a managerial accountant. All three certifications offer evidence that the holder has achieved a minimum level of professional competence.
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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
The Certified Management Accountant (CMA)
The parts of the CMA examination reflect a more interdisciplinary flavor.
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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. 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.
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The Certified Public Accountant (CPA)
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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.
The Certified Internal Auditor (CIA)
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