Introduction: The Role, History, and Direction of Management Accounting

1. Introduction: The Role, History, and Direction of Management Accounting CHAPTER

2. Objectives • Discuss the need for management accounting information. • Differentiate between management accounting and financial accounting. • Provide a brief historical description of management accounting. • Identify the current focus of management accounting. Continued

3. Objectives 5. Describe the role of management accountants in an organization. 6. Explain the importance of ethical behavior for managers and management accountants. 7. List three forms of certification available to management accountants.

4. The managerial accounting system has three broad objectives: 1. To provide information for costing out services, products, and other objects of interest to management. 2. To provide information for planning, controlling, evaluating, and continuous improvement. 3. To provide information for decision making.

5. Processes Outputs Inputs Users Management Accounting Information System Collecting Measuring Storing Analyzing Reporting Managing Special Reports Product Costs Customer Costs Budgets Performance Reports Personal Communication Economic Events

6. Planning requires setting objectives and identifying methods to achieve those objectives. Management Process The Management Process is defined by the following activities: • Planning • Controlling • Decision Making

7. Management Process The Management Process is defined by the following activities: Controlling is the managerial activity of monitoring a plan’s implementation and taking corrective action as needed. • Planning • Controlling • Decision Making

8. Control is usually achieved with the use of feedback. Management Process • The Management Process is defined by the following activities: • Planning • Controlling • Decision Making

9. Management Process Feedback is information that can be used to evaluate or correct the steps being taken to implement a plan.

10. Decision making is the process of choosing among competing alternatives. Management Process The Management Process is defined by the following activities: • Planning • Controlling • Decision Making

11. Differentiate Between Management Accounting and Financial Accounting

12. Management Accounting Financial Accounting 1. Internally focused 1. Externally focused

13. Targeted Users Management accounting focuses on providing information for internal users.

14. ABC Company Annual Report Targeted Users Financial accounting focuses on provided information for external users.

15. Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules

16. Restrictions on Inputs and Processes Management accounting is not subject to the requirements of generally accepted accounting principles. Financial accounting reporting must follow the accounting procedures set by the SEC and the FASB.

17. Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information

18. Types of Information The restrictions imposed on financial accounting tend to produce objective and verifiable financial information. For management accounting, the financial or nonfinancial information may be much more subjective in nature.

19. Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information 4. Historical orientation 4. Emphasis on the future

20. TimeOrientation Management accounting strongly emphasizes providing information about future events.

21. TimeOrientation Financial accounting records and reports events that have already happened.

22. Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information 4. Historical orientation 4. Emphasis on the future 5. Internal evaluation and decisions based on very detail information 5. Information about the firm as a whole

23. Degree of Aggregation Management accounting provides measures and internal reports used the evaluate performance of entities, product lines, departments, and managers.

24. Degree of Aggregation Financial accounting focuses on overall firm performance.

25. Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information 4. Historical orientation 4. Emphasis on the future 5. Internal evaluation and decisions based on very detail information 5. Information about the firm as a whole 6. More self-contained 6. Broad, multidisciplinary

26. Breadth It includes aspects of managerial economics, industrial engineering, and management science. Management accounting is much broader than financial accounting.

27. Historical Description ofManagement Accounting 1880 - 1925 Most of the product-costing and internal accounting procedures used in this century were developed 1925 Emphasis of inventory costing for external reporting 1950s/60s Effort to improve the managerial usefulness of traditional cost systems 1980s/90s Significant efforts have been made to radically change the nature and practice of management accounting

28. Current Focus of Management Accounting Activity-Based Management Activity-based management is a system wide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the resulting profit.

29. Current Focus of Management Accounting Customer Orientation Customer value is the difference between what the customer receives (customer satisfaction) and what the customer gives up (customer sacrifice). What is received is called the total product.

30. Current Focus of Management Accounting Strategic Positioning Strategic cost management is the use of cost data to develop and identify superior strategies that will produce a sustainable competitive advantage. Strategies: • Cost leadership • Superior products through differentiation

31. Current Focus of Management Accounting Value-Chain Framework The internal value chain is the set of activities required to design, develop, produce, market, and deliver products and services to customers. The industrial value chain is the linked set of value-creating activities from basic raw materials to the disposal to the final products by end-use customers.

32. Planting and Cultivating Harvesting Firm B Distribution of Apples Firm A Applesauce Production Firm C Product Disposal Applesauce Distribution End-Use Customer Supermarkets Value Chain: Apple Industry

33. Managing the value chain means that a management accountant must understand many functions of the business, from manufacturing to marketing.

34. This emphasis on quality has created a demand for management accounting systems that provide financial and nonfinancial information about quality. The philosophy of total quality management is to manufacture perfect products.

35. The role of management accountants in an organization is one of support.

36. Partial Organization Chart, Manufacturing Company Line Function Staff Function Production Vice President Financial Vice President Production Supervisor Controller Treasurer Machining Foreman Assembly Foreman Internal Audit Cost Financial Systems Tax President