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The Crucial Role of Managerial Accounting in a Dynamic Business Environment

Chapter 1

McGraw-Hill/Irwin

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Chapter 1: The Crucial Role of Managerial Accounting in a Dynamic Business Environment

Learning Objective 1-1 – Define managerial accounting and describe its role in the management process.

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Learning Objective 1-1. Define managerial accounting and describe its role in the management process.

Managerial accounting is the process of:

Identifying

Measuring

Analyzing

Interpreting

Communicating information

Managerial Accounting: A Business Partnership with Management

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Managerial accounting is an integral part of the management process. It is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization’s goals. (LO 1-1)

Learning Objective 1-2 – Explain four fundamental management processes that help organizations attain their goals.

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Learning Objective 1-2. Explain four fundamental management processes that help organizations attain their goals.

Managing Resources, Activities, and People

An organization . . .

Organized set

of activities

Planning

Directing

Decision Making

Controlling

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Acquires Resources: (i.e. funding, patents, and buildings)

Hires People

The owners, directors, or trustees of an organization set its goals, generally with the help of management. In pursuing its goals, an organization acquires resources, hires people, and then engages in an organized set of activities. It is up to the management team to make the best use of the organization’s resources, activities, and people in achieving the organization’s goals. The day-to-day work of the management team comprises four activities:

Decision making

Planning

Directing operational activities

Controlling

(LO 1-2)

Learning Objective 1-3 – List and describe five objectives of managerial accounting activity.

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Learning Objective 1-3. List and describe five objectives of managerial accounting activity.

Objectives of Managerial Accounting Activity

Providing information for decision making and planning.

Assisting managers in directing and controlling activities.

Motivating managers and other employees toward the organization’s goals.

Measuring performance of subunits, activities, managers, and other employees within the organization.

Assessing the organization’s competitive position and working with other managers to ensure the organization’s long-run competitiveness in its industry.

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Managerial accounting adds value to an organization by providing information, assisting in directing and controlling activities, motivating managers and employees towards the organization’s goals, measuring performance of subunits, activities, managers, and other employees within the organization. Managerial accounting also helps in assessing the organization’s competitive position and working with other managers to ensure the organization’s long-run competiveness in its industry. (LO 1-3)

How Managerial Accounting Adds Value to the Organization

Shortly after its IPO, Facebook shares were trading 50% below their initial share price. Management accountants analyzed the costs and benefits of different courses of action to help improve the company’s monetization. By mid-2018, the stock was trading at five to six times the IPO price.

Though slow to embrace online sales because of their investment in brick-and-mortar stores, Walmart sees an opportunity in providing what Amazon cannot with their physical networks. Management accounting helps identify cost efficiencies from using Walmart’s massive existing supply chain to innovatively deliver products.

REI see an opportunity to monetize the Internet in conjunction with their stores as well. They offer events and skills clinics to draw consumers in. When services are provided free of charge, it must be demonstrated that this will lead to increased sales and net profit. Managerial accounting tools help provide that insight.

News organizations that were built on print ad revenues are trying to monetize their online presences in a world where online content is generally free. Managerial accounting techniques help to divide costs and allocate revenue among different channels to better understand profitability.

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Many companies have started to use managerial accounting to monetize the internet. Monetizing means finding a way to generate revenues from users in order to make a profit after the costs of providing the internet service or content. This slide shows real-world companies using managerial accounting to increase profits. (LO 1-3)

The Balanced Scorecard

Financial Perspective

Goals Measures

Customer Perspective

Goals Measures

Operations Perspective

Goals Measures

Innovation Perspective

Goals Measures

How do we look to owners?

How do customers see us?

How can we continue to improve and create value?

In which activities must we excel?

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The balanced scorecard is one example of a managerial accounting tool that is used to assess competitive position and ensure long-run competiveness. It is a model of business performance evaluation that balances measures of financial performance, internal operations, innovation and learning, and customer satisfaction. If an organization is to remain viable in a changing and ever more competitive business environment, its managers need to continually ask the questions emphasized in the balanced scorecard. (LO 1-3)

Learning Objective 1-4 – Explain the major differences between managerial and financial accounting.

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Learning Objective 1-4. Explain the major differences between managerial and financial accounting.

Managerial versus Financial Accounting

Accounting System

(accumulates financial and

managerial accounting data in the cost accounting system)

Managerial Accounting

Information for decision

making, planning, and controlling an organization’s

operations.

Financial Accounting

Published financial

statements and other

financial reports.

Internal

Users

External

Users

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Both managerial and financial accounting information draw upon data from an organization’s basic accounting system. One part of that system, the cost accounting system, accumulates cost data for both managerial and financial accounting. Managerial accounting information is used for decision making, planning, directing and controlling an organization's operations, and assessing its competitive position. It is intended for managers of all levels within the organization. Financial accounting information is used to prepare the published financial statements and other financial reports. It is intended for external users, such as stockholders, financial analysts, lenders, unions, consumer groups, and governmental agencies. (LO 1-4)

Users of Information

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This exhibit summarizes the differences between managerial and financial accounting. Managerial accounting reports are intended for managers within the organization and are not subject to any regulation. The data are drawn from the basic accounting system as well as other sources. The reports often focus on departments or subunits and are based on historical data, estimates, and future projections. Financial accounting reports are intended for external users and are subject to regulation. The data are drawn almost completely from the basic accounting system and are almost exclusively historical. (LO 1-4)

Learning Objective 1-5 – Describe the accounting and finance structure in an organization.

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Learning Objective 1-5. Describe the accounting and finance structure in an organization.

Line and Staff Positions

A line position is directly involved in the provision of goods or services.

Example: A production supervisor in a manufacturing plant

A staff position supports and assists line positions.

Example: A cost accountant in the manufacturing plant

CEO

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Every manager must have an understanding of basic managerial accounting concepts and tools. Line positions are directly involved in providing goods and services while staff positions support the line positions. Management accountants are staff positions that need to work closely with line management. (LO 1-5)

Learning Objective 1-6 – Describe the roles of an organization’s chief financial officer (CFO) or controller, treasurer, and internal auditor.

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Learning Objective 1-6. Describe the roles of an organization’s chief financial officer (CFO) or controller, treasurer, and internal auditor.

CFO or Controller

The chief managerial and financial accountant is responsible for:

Supervising accounting personnel

Preparation of information and managerial and financial reports

Analysis of accounting information

Planning and decision making

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The chief financial officer, also known as the controller, is the title given to the top managerial and financial accountant. This person is responsible for accounting personnel and preparing the information and reports used in both managerial and financial accounting. The CFO is an integral member of the management team, often involved in planning and decision making at all levels and across all functional areas of the enterprise. (LO 1-6)

Treasurer

Responsible for raising capital and safeguarding the organization’s assets.

Supervises relationships with financial institutions

Works with investors and potential investors

Manages investments

Establishes credit policies

Manages insurance coverage

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The treasurer typically is responsible for raising capital and safeguarding the organization’s assets. In addition, the treasurer manages the organization’s investments, its credit policy, and its insurance coverage. (LO 1-6)

Internal Auditor

Responsible for reviewing accounting procedures, records, and reports in both the controller’s and the treasurer’s areas of responsibility

Expresses an opinion to top management regarding the effectiveness of the organization’s accounting system and its system of internal controls

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The internal auditor is responsible for reviewing the accounting procedures, records, and reports in both the controller’s and the treasurer’s areas. The internal auditor expresses an opinion to top management about the effectiveness of the accounting system. (LO 1-6)

Learning Objective 1-7 – Understand and explain the value chain concept.

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Learning Objective 1-7. Understand and explain the value chain concept.

Product

Design

Research

and

Development

Strategic Cost Management and the Value Chain

Securing raw

materials and

other resources

Production

Marketing

Distribution

Customer

Service

Start

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Usually many activities are involved in securing basic raw materials and turning them into valuable products or services. The set of linked, value-creating activities, ranging from securing basic raw materials and energy to the ultimate delivery of products and services, is called the value chain. Although there may be only one organization involved in a particular value chain, usually there are many. This exhibit shows a typical list of activities that most businesses need to coordinate in the value chain. (LO 1-7)

Learning Objective 1-8 – Explain how investments in capacity affect managerial decision making.

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Learning Objective 1-8. Explain how investments in capacity affect managerial decision making.

Theoretical capacity is the upper limit on the amount of goods or services if everything works perfectly.

Practical capacity allows for normal occurrences such as cash register downtime and cashier fatigue or illness.

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Capacity

A key challenge in providing useful information is understanding and correctly analyzing an organization’s capacity and the cost of providing capacity. By capacity we mean the upper limit on the amount of goods or services that an organization can produce in a specified period of time.

Theoretical capacity is the upper limit on the amount of goods or services if everything works perfectly.

Practical capacity allows for normal occurrences such as cash register downtime and cashier fatigue or illness.

Most managers believe that practical capacity is a much more useful measure of capacity. (LO 1-8)

Questions about Capacity

Important questions for the managerial accounting system to address are:

What is an organization’s practical capacity?

What are the costs of the resources supplied to provide that capacity?

How have those resources been used in creating value?

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Important questions for the managerial accounting system to address are (1) What is an organization’s practical capacity? (2) What are the costs of the resources supplied to provide that capacity? and (3) How have those resources been used in creating value?

Unfortunately, it is not uncommon for managers to mistakenly act like all the money spent on production should be divided up over the products or services produced, without considering whether some of that spending was for resources supplied but unused. (LO 1-8)

Managing Capacity

Cost of resources supplied

Cost of resources used

Cost of resources unused (unused capacity)

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It is very important to distinguish among the cost of resources supplied, the cost of resources used, and the cost of resources unused, which is the same as the cost of unused capacity. An important task for any management team is to understand and manage the cost of capacity. Providing them data about the costs of unused capacity gives them an important tool. (LO 1-8)

Learning Objective 1-9 – Understand and explain big data and data analytics and how they interact with managerial accounting.

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Learning Objective 1-9. Understand and explain big data and data analytics and how they interact with managerial accounting.

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Big Data, Data Analytics, and Managerial Accounting

Big Data

Data Analytics

Data Governance

Data Science

How do we even begin to process the massive volume of both structured and unstructured data available to management today (Big Data)? Can we assure that such a large amount of data is accurate, complete, and formatted in such a way that it can be processed? What tools will help us to tease insights from it? And how do we best connect those insights to our operations? The process of making sense of big data and developing true and helpful insights from it is called data analytics.

One of the primary challenges of big data relates to making sure that so much data is valid and usable. This is called data governance. The other key challenge of big data is to analyze such a large volume of data and draw insights from it that are useful for decision makers. The process of doing this is called data science. (LO 1-9)

Learning Objective 1-10 – Discuss the professional organizations and certifications in the field of managerial accounting.

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Learning Objective 1-10. Discuss the professional organizations and certifications in the field of managerial accounting

Managerial Accounting as a Career

Professional Organizations

Institute of Management Accountants (IMA)

Publishes

Management

Accounting

and research

studies.

Administers

Certified

Management

Accountant (CMA)

program

Develops

Standards of

Ethical

Conduct for

Management

Accountants

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Managerial accountants are providers of information and are often in touch with the heartbeat of the organization. They frequently interact with sales personnel, finance specialists, production people, and managers at all levels. To keep up with new developments in their field, management accountants often belong to one or more professional organizations. The largest is the Institute of Management Accountants. The IMA publishes journals, administers the Certified Management Accountant program, and develops ethical standards for its members. A recent study of managerial accountants practicing in the U.S.A. showed professionals with a certification earning almost 50% more in average total compensation than their noncertified peers. (LO 1-10)

Learning Objective 1-11 – Describe the ethical responsibilities and ethical standards that apply to managerial accounting.

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Learning Objective 1-11. Describe the ethical responsibilities and ethical standards that apply to managerial accounting.

Ethical Climate of Business

“Ethical behavior by managers in general, and accountants in particular, is not a luxury or a discretionary ‘good thing to do.’ It is an absolute necessity for the smooth functioning of the economy.”

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The stream of corporate scandals has taught us that not only is unethical behavior in business wrong in a moral sense, but it also can be disastrous to the business and the economy. There will most likely be reforms in corporate governance and accounting. The Sarbanes-Oxley Act is one example. This act, among other things, requires companies to establish, assess, and regularly report on their internal controls over financial reporting. This legislation also created the PCAOB or the Public Company Accounting Oversight Board to establish auditing standards and provide for an audit quality review process.

These scandals have served as a wake-up call to focus more on ethical issues in practice and teaching. (LO 1-11)

Professional Ethics

Competence

Confidentiality

Integrity

Credibility

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IMA Statement of Ethical Professional Practice

As professionals, managerial accountants have an obligation to themselves, their colleagues, and their organizations to adhere to high standards of ethical conduct. In recognition of this obligation, the IMA has developed ethical standards for its members, who are practitioners of managerial accounting and financial management. In addition, it includes a section on resolving ethical conflicts. (LO 1-11)

End of Chapter 1

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Managerial AccountingFinancial Accounting

Users of

Information

Managers, within the organization.

Interested parties, outside the

organization.

RegulationNot required and unregulated, since it

is intended only for management.

Required and must conform to

generally accepted accounting

principles. Regulated by the Financial

Accounting Standards Board, and, to

a lesser degree, the Securities and

Exchange Commission.

Source of

Data

The organization's basic accounting

system, plus various other sources,

such as rates of effective products

manufactured, physical quantities of

material and labor used in production,

occupancy rates in hotels and

hospitals, and average take-off delays.

Almost exclusively drawn from the

organization's basic accounting

system, which accumulates financial

information.

Nature of

Reports and

Procedures

Reports often focus on subunits within

the organization, such as departments,

divisions, geographical regions, or

product lines. Based on a combination

of historical data, estimates, and

projections of future events.

Reports focus on the enterprise in its

entirety. Based almost exclusively on

historical transaction data.

Sheet1

	Managerial Accounting	Financial Accounting
Users of Information	Managers, within the organization.	Interested parties, outside the organization.
Regulation	Not required and unregulated, since it is intended only for management.	Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.
Source of Data	The organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delays.	Almost exclusively drawn from the organization's basic accounting system, which accumulates financial information.
Nature of Reports and Procedures	Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events.	Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Discussion

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