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

Chapter 1 - 1

Introduction: Introduction: The Role, History, and The Role, History, and

Direction of Direction of Management Management AccountingAccounting

CHAPTERCHAPTER

1 -2

1. Discuss the need for management accounting information.

2. Differentiate between management accounting and financial accounting.

3. Provide a brief historical description of management accounting.

4. Identify the current focus of management accounting.

ObjectivesObjectivesObjectivesObjectives

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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.

ObjectivesObjectivesObjectivesObjectives

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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.

The managerial accounting system has three broad objectives:

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OutputsOutputsProcessesProcessesInputsInputs

Economic Events

CollectingMeasuring

StoringAnalyzingReportingManaging

Special ReportsProduct Costs

Customer CostsBudgets

Performance ReportsPersonal Communication

UsersUsers

Management Accounting Information System

Management Accounting Information System

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The Management Process is defined by the following activities:

Planning

Controlling

Decision Making

Planning requires setting objectives and identifying methods to achieve those objectives.

Management ProcessManagement Process

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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

Management ProcessManagement Process

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The Management Process is defined by the following activities:

Planning

Controlling

Decision Making

Control is usually achieved with the use of feedback.

Management ProcessManagement Process

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Feedback is information that can be used to

evaluate or correct the steps being taken to implement a plan.

Feedback is information that can be used to

evaluate or correct the steps being taken to implement a plan.

Management ProcessManagement Process

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The Management Process is defined by the following activities:

Decision making is the process of choosing among competing alternatives.

Planning

Controlling

Decision Making

Management ProcessManagement Process

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Differentiate Between Management Accounting and

Financial Accounting

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Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting

1. Internally focused 1. Externally focused

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Management accounting focuses on providing

information for internal users.

Targeted UsersTargeted Users

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ABC Company Annual Report

Financial accounting focuses

on provided information for external users.

Financial accounting focuses

on provided information for external users.

Targeted UsersTargeted Users

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Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting

1. Internally focused 1. Externally focused

2. No mandatory rules 2. Must follow externally imposed rules

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Restrictions on Inputs and ProcessesRestrictions on Inputs and ProcessesRestrictions on Inputs and ProcessesRestrictions on Inputs and Processes

Management accounting is not subject to the requirements of generally accepted accounting

principles.

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.

Financial accounting reporting must follow the accounting procedures set

by the SEC and the FASB.

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Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial 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

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Types of Information

The restrictions imposed on financial accounting tend to

produce objective and verifiable financial 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.

For management accounting, the financial or nonfinancial

information may be much more subjective in nature.

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Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial 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. Emphasis on the future 4. Historical orientation

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TimeTime OrientationOrientationTimeTime OrientationOrientation

Management accounting strongly

emphasizes providing information about

future events.

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Financial accounting records and reports events that have already

happened.

TimeTime OrientationOrientationTimeTime OrientationOrientation

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Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial 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. Emphasis on the future 4. Historical orientation5. Internal evaluation and

decisions based on very detail information

5. Information about the firm as a whole

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Management accounting provides

measures and internal reports used the

evaluate performance of entities, product lines,

departments, and managers.

Degree of AggregationDegree of AggregationDegree of AggregationDegree of Aggregation

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Financial accounting focuses

on overall firm performance.

Degree of AggregationDegree of AggregationDegree of AggregationDegree of Aggregation

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Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial 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. Emphasis on the future 4. Historical orientation5. Internal evaluation and

decisions based on very detail information

5. Information about the firm as a whole

6. Broad, multidisciplinary 6. More self-contained

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Management accounting is much broader than financial accounting.

Management accounting is much broader than financial accounting.

It includes aspects of managerial economics, industrial engineering,

and management science.

It includes aspects of managerial economics, industrial engineering,

and management science.

BreadthBreadthBreadthBreadth

1 -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

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Current Focus of Management AccountingCurrent Focus of Management Accounting

Activity-Based ManagementActivity-Based ManagementActivity-Based ManagementActivity-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.

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Current Focus of Management AccountingCurrent Focus of Management Accounting

Customer OrientationCustomer OrientationCustomer OrientationCustomer 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.

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Current Focus of Management AccountingCurrent Focus of Management Accounting

Strategic PositioningStrategic PositioningStrategic PositioningStrategic Positioning

Strategic cost management is the use of cost data to develop and identify superior strategies that

will produce a sustainable competitive advantage.

Strategies:1) Cost leadership

2) Superior products through differentiation

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Current Focus of Management AccountingCurrent Focus of Management Accounting

Value-Chain FrameworkValue-Chain FrameworkValue-Chain FrameworkValue-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.

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SupermarketsSupermarkets

Value Chain: Apple Industry

Planting and Planting and CultivatingCultivating

HarvestingHarvesting

Distribution of Distribution of ApplesApples

Applesauce Applesauce ProductionProduction

Applesauce Applesauce DistributionDistribution

Firm B

Firm C

Firm A

Product Disposal

End-Use Customer

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Managing the value chain means that a management accountant

must understand many functions of the business, from

manufacturing to marketing.

Managing the value chain means that a management accountant

must understand many functions of the business, from

manufacturing to marketing.

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The philosophy of total quality management is to

manufacture perfect products.

The philosophy of total quality management is to

manufacture perfect products.

This emphasis on quality has created a demand for management accounting systems that provide

financial and nonfinancial information about quality.

This emphasis on quality has created a demand for management accounting systems that provide

financial and nonfinancial information about quality.

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The role of The role of management management

accountants in an accountants in an organization is organization is one of support.one of support.

The role of The role of management management

accountants in an accountants in an organization is organization is one of support.one of support.

1 -36 Partial Organization Chart, Manufacturing Company

PresidentPresident

Production Production Vice PresidentVice President

Line Function

Financial Financial Vice PresidentVice President

Staff Function

Production Production SupervisorSupervisor

Machining Machining ForemanForeman

Assembly Assembly ForemanForeman

ControllerController TreasurerTreasurer

Internal Internal AuditAudit CostCost FinancialFinancial SystemsSystems

TaTaxx

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Ethical BehaviorEthical

Behavior

Michael Josephson’s* Ten Ethical Values:Honesty

Integrity

Promise keeping

Fidelity

Fairness

Caring for others

Respect for others

Responsible citizenship

Pursuit of excellence

Accountability

*Michael Josephson, “Teaching Ethical Decision Making and Principled Reasoning”

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CMA: One of the main purposes of the CMA was to establish management accounting as a recognized, professional discipline, separate from the profession of public accounting.

CPA: The responsibility of a CPA is to provide assurance concerning the reliability of financial statements.

CIA: The focus of the CIA is to recognize competency in internal auditing rather than external auditing as with the CPA.

Professional CertificationsProfessional Certifications

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The CMAThe CMA

Four areas emphasized on the exam:1) Economics, finance, and management

2) Financial accounting and reporting

3) Management report, analysis, and behavioral issues

4) Decision analysis and information systems