ACC 5301 DB II

ACC 5301, Management Applications of Accounting 1

Course Learning Outcomes for Unit I Upon completion of this unit, students should be able to:

3. Analyze accounting information used to make strategic business decisions. 3.1 Define managerial accounting. 3.2 Compare and contrast managerial and financial accounting. 3.3 Define strategic business decisions. 3.4 Analyze accounting information.

Required Unit Resources Chapter 1: Managerial Accounting in the Information Age, pp. 1-1 – 1-23

Unit Lesson

Introduction Welcome to Unit I. Accounting is often referred to as the language of business since it is used, universally, to help managers understand the financial aspects of their business. As with learning any new foreign language, you need to start with vocabulary, or in the case of accounting, common business and accounting terminology. Then you need to become familiar with "rules" or principles/concepts of accounting just like learning the grammar rules of a foreign language. As you become more confident with the terminology and principles/concepts of accounting, you will find that the work will become easier—just like learning any new language. In this unit, we are going to define managerial and financial accounting so that you can see the basic difference between the two types of accounting information provided and the uses of financial and managerial accounting. Next, we are going to define strategic decision-making, and finally, we are going to discuss how managerial accounting information, including cost information, is used to make strategic business decisions by providing some examples to demonstrate this process.

Types of Accounting Managerial accounting stresses how accounting information can be used internally by managers for planning, controlling, and decision-making (Jiambalvo, 2020). Reporting in managerial accounting is often requested for a specific purpose. Very detailed reports are prepared when needed, in other words, not necessarily at set intervals like monthly or annually. For example, a manager may want to see a report detailing a cost comparison between two products or between two divisions of a company to see which product or division has been more profitable over the last six months. In contrast, financial accounting is primarily used by external users such as banks, stockholders, creditors, and regulators. Financial accounting reporting is more general in nature and looks at the business as a whole using a very specific format for reporting purposes that follows generally accepted accounting principles (GAAP). The information used in financial accounting is prepared on a consistent basis such as monthly or quarterly, and the information contained in financial accounting reports is subject to audit by a certified public accountant (CPA) (Kimmel, Weygandt, & Kieso, 2016). For example, a company may provide an audited income statement, balance sheet, and statement of cash flows to a bank to obtain a loan in order to expand its factory or purchase more inventory. Below is a comparison table of the differences between managerial and financial accounting:

UNIT I STUDY GUIDE

Managerial Accounting in the Information Age

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Accounting’s Connection to the Mission and Vision

Strategic decision-making looks at aligning short-term and long-term goals of an organization. This starts with a clear understanding of the mission and vision of the company and provides solutions to meet those goals (Gartenstein, 2019). For example, if the mission of the organization is to maximize profit, managerial accounting information can be used to assist managers at all levels in the planning, controlling, and decision- making process to ensure the company is maximizing profits. From a planning perspective, managers use accounting information to see where operations may be performing less efficiently than the company would expect. The manager can then implement policies as part of the control process based on that information in an attempt to eliminate or minimize those inefficiencies. Finally, by looking at managerial accounting information, managers can track the outcomes of the changes that were implemented to determine if the changes were, in fact, effective in meeting the company's mission to maximize profit.

Terminology As we look at the effective use of managerial accounting information in making decisions, we also need to discuss cost terminology. Typically, you may be used to thinking of cost in terms of how much something will cost you to purchase a product or service; however, in accounting, costs take on a whole new meaning. Remember, we look at costs from the perspective of the company and how much it costs the company to make the product or service it is selling. For example, there are variable and fixed costs, sunk and opportunity costs, direct and indirect costs, and controllable and non-controllable costs (Jiambalvo, 2020). Each of these costs is unique, and understanding their characteristics is essential to ensuring you are making appropriate decisions using managerial accounting information. Variable Costs and Fixed Costs Starting off with variable and fixed costs, these are costs that change in total and per unit or do not change in total and per unit as the level of production changes. In the case of fixed costs, for example, if you are a salaried employee and make $50,000 a year, it does not matter if you work 100 hours or 3,000 hours this year, you still get paid $50,000 a year. This means the per-hour cost will decrease the more hours you work and will increase the few hours you work. In our example, if you work 100 hours this year, you make $500 per hour, which is great. If you work 3,000 hours this year, you only make $16.67 per hour. Remember, you still make your same $50,000 per year, but the per-hour rate changes based on the number of hours worked for the year.

Comparison of the differences between managerial and financial accounting.

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In the case of variable costs, the total cost will increase or decrease with the level of production. Looking at a similar example to fixed costs, if you are paid based on an hourly wage of $20 per hour, you will always get paid $20 per hour (assuming no overtime in this example). So your per hour rate will stay the same, but the more hours you work, the more you will get paid. If you work only 10 hours a week you will get paid $200 at the end of the week. If you work 40 hours a week you will get paid $800 a week. Your total pay will increase the more hours you work, but your per-hour rate will remain the same.

Sunk Costs and Opportunity Costs Next, we want to look sunk costs and opportunity costs. Sunk costs are not relevant to current decisions since the costs happened in the past. For example, you may have paid for a land survey 10 years ago to determine if a section of land was large enough to build your factory and then decided it was not the right time to build. You cannot include the cost of the survey that happened 10 years ago in your decision regarding the cost of the land now that you are thinking about buying land to build your factory this year. Opportunity costs are, sometimes, more subjective since these costs look at the value of the benefit given up when another alternative is selected. For example, going back to our land purchase, you selected land track A rather than land track B to build your factory. Track A was closer to the highway and more expensive than track B to purchase. In this case, you are looking at giving up the lower cost track of land in favor of being closer to the highway. Being closer to the highway will decrease your shipping costs over time. Direct and Indirect Costs

Direct and indirect costs are the next set of costs identified in managerial accounting used to make decisions. Direct costs are directly associated with producing a product or providing a service. For example, the cost of the wood and the wages of the workers used to assemble a table would be classified as direct costs. In contrast, minor costs such as the small amount of glue used to put the bar code on the finished table for tracking purposes would be an indirect cost since it is a very minor part of assembling a table. Controllable and Non-Controllable Costs

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Finally, we look at controllable and non-controllable costs. For a cost to be controllable, it needs to have significant management influence. For example, a production manager can control the hours the employees work each week making the tables. However, an example of a non-controllable cost is when that same production manager does not have control over the amount the county charges for property taxed on the factory.

Conclusion Now that we have defined managerial accounting and the various cost terminology associated with managerial accounting information, let's look at some specific examples of how managerial accounting can be used to assist managers in making decisions. One example may be to determine if the cost for a particular product or service has increased significantly over time. You can also use managerial accounting to determine if you should close a division of your company, expand your factory, hire more workers, and more. Keep in mind, managerial accounting information is customized to the need or needs of the particular manager making the request. As stated in the beginning of this lesson, accounting is the language of business, and it takes time and practice to become proficient in understanding and using accounting concepts. The more you practice, the easier it will become, and soon, you too will be speaking the language of business.

References Gartenstein, D. (2019). What is strategic decision making? https://smallbusiness.chron.com/strategic-

decision-making-23782.html Jiambalvo, J. (2020). Managerial accounting (7th ed.). Wiley.

https://bookshelf.vitalsource.com/#/books/9781119577706 Kimmel, P., Weygandt, J., & Kieso, D. (2016). Accounting tools for business decision making (6th ed.). Wiley.

Suggested Unit Resources View the following videos by accessing the Unit I Additional Unit Resources folder in the unit. The video What is Managerial Accounting? will give you an overview of what managerial accounting is and how it is used to make business decisions. You can access a transcript for this video by hovering over the PDF button at the bottom of the video and then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video to turn on closed captions. The video Pizza Hut: Managerial Accounting Today will present how managerial accounting is used at Pizza Hut to focus on improving company operations. This includes how to determine accurate cost information for its products. You can access a transcript for this video by hovering over the PDF button at the bottom of the video and then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video to turn on closed captions.

Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. After watching both videos in the Suggested Unit Resources, you may want to study the Flash Cards for Chapter 1 found in the Additional Unit Resources folder to reinforce the material presented in this unit.