Lecture (1)

Dr. Hassan Ouda

Office No. B5.329: Office Hours: Sunday 11:00-15:00.

Course Assessment: Midterm Exam 30% Final Exam 40% Quizzes 20% (Best 2 out of

3) Assignments 10% (Best 2 out of 3)

Recap and Ch. 1: Managerial accounting,

the Business Organization, and professional Ethics.

Ch 5: Relevant Information for Decision making With a Focus on Pricing Decisions.

Ch 6: Relevant Information for Decision making With a Focus on Operational Decisions.

Ch 7: Introduction to Budgets and Preparing the Master Budget.

Ch 8: Flexible Budgets and Variance Analysis

Ch 9 Management Control System and Responsibility Accounting

Introduction to Management Accounting,

by Horngren, Sundem, Stratton, Burgstahler and Schatzberg; Fourteenth Edition, Pearson-prentice Hall, 2008.

Recap and Chapter 1: Managerial Accounting, the Business Organization, and Professional Ethics.

Cost object: Anything for which a measurement of costs is desired: for example a product or service.

Direct Costs are related to a particular cost object and can be traced to that cost object in an economically feasible way. For ex. Cans or bottles is a direct cost of pepsi-colas.

The term Cost tracing: is used to describe the assignment of direct costs to a particular cost object.

Indirect Costs are related to a particular cost object but cannot be traced to it in an economically feasible way. For. Ex. Salaries of supervisors who oversee production of different products.

The term Cost allocation: is used to describe the assignment of indirect costs to a particular cost object.

Cost-allocation base: A cost-allocation base is the allocation basis used to allocate the costs in the cost pool to the cost object .

Cost allocation base can be either financial (such as direct labor costs) or non-financial ( such as number of machine-hours).

A cost pool is any grouping of cost items. Variable Cost: Changes in total in proportion

to changes in the related of total activity or volume.

Fixed cost: remains unchanged in total for a given time period.

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Variable Cost: Changes in total in proportion to changes in the related of total activity or volume.

Number of variable cost per total Variable cost Units produced Steering wheel of steering wheels (1) (2) (3) = (1) x (2)

---------------------------------------------- 1 $60 $ 60 1,000 60 60,000 3,000 60 180,000

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Fixed cost: Remains unchanged in total for a given time period.

Annual Total Number of Units fixed Leasing CostFixed leasing Costs produced per Unit (1) (2) (3)= (1) / (2) ---------------------------------------------- 100,000 10.000 10 100,000 20,000 5 100,000 50.000 2

Inventoriable cost: are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold.

Types of inventory:1- Direct materials inventory: direct material in stock and

awaiting use in the manufacturing process.2- Work-in-process inventory: goods partially worked on

but not yet completed.3- finished goods inventory: Goods completed by not yet

sold.4- Merchandise inventory: products that are held in their

original purchased form.

Period costs are all costs in the income statement other than cost of goods sold. They are treated as expenses of the accounting period in which they are incurred. For manufacturing companies, period costs in the income statement are all non-manufacturing costs (for example, design costs and distribution costs).

For merchandizing companies, period costs in the income statement are all costs not related to the cost of goods purchased for resale. Example, advertising costs.

- Users of Accounting information fall into two general categories:

1- Internal Users (internal managers): who use the information for day-to-day operating decisions and for long-range strategic decisions.

2- External Users: such as investors and government authorities, who use the information for making decisions about the company.

Internal managersInternal managers

Creditors: Creditors: Suppliers Suppliers

Bankers Bankers

Day-to-day operating decisionsDay-to-day operating decisionsLong-range strategic decisionsLong-range strategic decisions

Management AccountingManagement Accounting Financial AccountingFinancial Accounting

External UsersExternal Users

Investors: StockholdersInvestors: Stockholders

Government AuthoritiesGovernment Authorities

1- Management Accounting: measures, analyzes, and reports financial and non-financial information that helps managers make decisions to fulfill the goals of an organization.

Managers use management accounting information to choose, communicate, and implement strategy.

They also use management accounting information to coordinate product design, production and marketing decisions.

Management accounting focuses on: 1- internal reporting; 2- internal users and 3- It is future-oriented.

- The management accounting produces information for managers within an organization.

2- Financial Accounting focuses on reporting to external parties such as investors, government agencies, banks, and creditors. It measures and records business transactions and provides financial statements that are based on GAAP.

It is past-directed (reports on 2008 performance prepared in 2009).

The financial accounting produces information for external users.

- Why ethics are important to management accountants? (ex. car) (you can see the quality details of a car, but accounting information is different. You can’t see its quality).

- (Enron, Worldcom, Xerox)

- Why is integrity so important to accountants?

- The ethical habits you develop in your personal life will carry over into your life as a manager or accountant.

- Accountant and business leaders must insist on high ethical standards.

- - Integrity is hard to establish, but easy to lose.

No regulation can be as effective inNo regulation can be as effective inensuring reliability as high ethicalensuring reliability as high ethical

standards of accountants.standards of accountants.

IntegrityIntegrityTrustTrust

ReliabilityReliability

Can management accounting information apply to service and non-profit organization?

Service organization: are organizations that do not make or sell tangible goods (e. g., Public Accounting firms, law firms, management consultants, banks, insurance companies, etc.

Non-profit , organization, such as hospital, school, libraries, are also service organizations.

Managers and accountant raise and spend money. The prepare budgets and design and implement control systems., etc.

ServiceServiceorganizationsorganizations

NonprofitNonprofitorganizationsorganizations

Accounting firmsAccounting firmsLaw firmsLaw firms

Real estate firmsReal estate firmsBanksBanksHotelsHotels

HospitalsHospitalsSchoolsSchoolsLibrariesLibrariesMuseumsMuseums

Government agenciesGovernment agencies

Managers benefit when accounting provides information that helps them plan and control the organization’s operations.

Planning: refers to setting objectives for an organization and outlining how it will attain them.

Control: refers to implementing plans and using feedback to evaluate the attainment of objectives.

Decision making: the purposeful choice Decision making: the purposeful choice from among a set of alternative courses from among a set of alternative courses

of action designed to achieve some objective.of action designed to achieve some objective.

Planning: Setting Planning: Setting objectives and outlining objectives and outlining how the objectives will how the objectives will be obtained.be obtained.

Control: Implementing Control: Implementing plans and using plans and using feedback to evaluate feedback to evaluate the attainment of the attainment of objectives.objectives.

Budget: is a quantitative expression of a plan of action and aid to coordinating and implementing the plan.

Performance reports: provides feedback by comparing actual results with plans and by highlighting variances.

Management accountant is becoming a internal consultant on information-related issues– that is, an advisor for managers about:

- what information would be useful; - what information is available; and - how to analyze the information and use it in

decision making.

PreparesPreparesstandardized standardized

reportsreports

CollectsCollectsand compiles and compiles informationinformation

Interprets and Interprets and Analyzes informationAnalyzes information

Is Involved Is Involved In decision makingIn decision making

Internal Internal ConsultantConsultant

ManagementManagement

Because management accounting supports business decisions, accounting systems must adapt to changes in management practices.

- Just-in-time (JIT) Philosophy. - Computer-integrated manufacturing (CIM). - Total quality management (TQM).