1. Stern School of Business Managerial Accounting Summer 2005 Instructor: Francois Brochet

2. An Introduction to Managerial Accounting How Managers Use Managerial Accounting Information

3. The Managerial Accounting Function n Provides Information for Product and Service Costing n Provides Information for Planning And Decision Making n Provides Information for Performance Evaluation

4. Information to Determine the Cost of Products and Services n Provides Information to determine the cost of manufactured products and services

5. Information for Decision Making n Calculate the financial consequences of alternatives and see how costs will differ among the alternatives. n Managerial accounting has little to do with recording past costs, and much to do with estimating future costs.

6. Information for Planning and Performance Evaluation Cost accountants help management develop effective planning tools and methods to evaluate the performance of responsibility centers.

7. Managerial Accountants Record, measure, determine and analyze costs Analyze operations and costs to find ways to improve operations and product quality while reducing costs

8. Managerial Accounting and GAAP n The primary purpose of financial accounting is to provide stakeholders information regarding company and management performance. n The financial data prepared for this purpose are governed by GAAP. Generally Accepted Accounting Principles (GAAP) are the rules, standards, and conventions that guide the preparation of financial statements for stockholders.

9. Managerial Accounting and GAAP n Cost data for managerial use need not comply with GAAP. n Management is free to set its own definitions for Managerial Accounting Information. n Decision makers often require different information than that provided in financial statements to shareholders.

10. Differences Between Financial and Managerial Accounting

11. Creating Value in Organizations Each step of the development, production, and distribution process should add value to the product or service offered.

12. Using Managerial Accounting Information to Increase Value n Nonvalue-added activities – activities that do not add value to the product or service. Nonvalue- added activities IdentifyEliminate

13. Cost-Benefit Analysis The process of comparing benefits with costs associated with a proposed change within an organization. Costs Benefits

14. Strategic Cost Analysis n If a company can eliminate nonvalue-added activities, it can reduce costs without reducing product value. n Reduced costs, with no loss in value, means the company has a competitive advantage.

15. Global Strategies n A strategic advantage exists when your company has invested resources that make it difficult for competitors to match. n New entry into the market is difficult because of the magnitude of investment required.

16. E-Commerce During 2001, many dot.com businesses failed that might have benefited from the application of managerial accounting tools: –cost concepts (Chap. 2) –cost measurement (Chap. 4) –cost estimation (Chap. 5) –cost-volume-profit (Chap. 6) –activity-based costing (Chap. 8) –budgeting (Chap. 9) –decision-making (Chap. 13)

17. Focusing on Customers n Without customers, the organization loses its ability to exist. n Customers provide the organization with its focus. n Many companies identify customers’ needs before designing and producing products.

18. Users of Managerial Accounting Who are the “customers” of cost accounting?

19. Users of Managerial Accounting Production needs cost information to control and improve operations.

20. Users of Managerial Accounting Mid-level managers need cost information that serves as a warning signal when operations are different from expectations.

21. Users of Managerial Accounting I know that senior managers use some cost information to assess overall performance of the company.

22. Managerial Accounting in High- Tech Production Settings n Many companies have installed computer-assisted methods of –Manufacturing products, –Merchandising products, or –Providing services. n New technologies have had a major impact on Managerial Accounting.

23. Just-in-Time Method In production or purchasing, each unit is purchased or produced just in time for its use.

24. Lean Production n Companies eliminate inventories between production departments... –Making the quality and efficiency of production the highest priority, –Providing the flexibility to change quickly from one product to another, and –Emphasizing training and worker skills.

25. Total Quality Management The organization is managed to excel on all dimensions and quality is ultimately defined by the customer.

26. Benchmarking and Continuous Improvement n Benchmarking – The continuous process of measuring one’s own products, services and activities against the best levels of performance. n Continuous – Managers and employees are not satisfied with a particular performance but seek ongoing improvement.

27. Theory of Constraints n Every organization usually has at least one bottleneck that limits production. n Management focuses on maximizing profits by identifying constraints and increasing capacity.

28. 4. Coordinate processes 1. Measure process capacity 2. Identify process constraints 3. Use bottlenecks effectively. Only actions that strengthen the weakest link in the “chain” improve the process. Theory of Constraints

29. Activity-Based Costing and Management A product costing method that is useful in industries where overhead is high relative to other costs. Activity-based costing assigns costs to products based on several different activities whereas traditional costing methods only assign costs to products on one or two different activities. ABC

30. Activity-Based Costing and Management A product costing method that is useful in industries where overhead is high relative to other costs. ABC Traditional method Products Activities “cost drivers”

31. Importance of Ethics in Accounting n Ethical accounting practices build trust and promote loyal, productive relationships with users of accounting information. n Many companies and professional organizations, such as the Institute of Management Accountants (IMA), have written codes of ethics which serve as guides for employees. –Code of Conduct for Management Accountants

32. IMA Code of Ethics for Management Accountants Four broad areas of responsibility: n Maintain a high level of professional competence n treat sensitive matters with confidentiality n Maintain personal integrity n Be objective in all disclosures

33. Competence IMA Code of Ethics for Management Accountants Follow applicable laws, regulations and standards. Maintain professional competence. Prepare complete and clear reports after appropriate analysis.

34. Confidentiality IMA Code of Ethics for Management Accountants Do not disclose confidential information unless legally obligated to do so. Ensure that subordinates do not disclose confidential information. Do not use confidential information for personal advantage.

35. IMA Code of Ethics for Management Accountants Avoid conflicts of interest and advise others of potential conflicts. Recognize and communicate personal and professional limitations. Do not subvert organization’s legitimate objectives. Integrity

36. IMA Code of Ethics for Management Accountants Integrity Avoid activities that could affect your ability to perform duties. Communicate unfavorable as well as favorable information. Refrain from activities that could discredit the profession. Refuse gifts or favors that might influence behavior.

37. IMA Code of Ethics for Management Accountants Communicate information fairly and objectively. Disclose all information that might be useful to management. Objectivity

38. Resolution of Ethical Conflict Follow established policies. For unresolved ethical conflicts: –Discuss the conflict with immediate superior. –If immediate superior is the CEO, consider the board of directors or the audit committee. –Except where legally prescribed, maintain confidentiality. IMA Code of Ethics for Management Accountants

39. Resolution of Ethical Conflict Clarify issues in a confidential discussion with an objective advisor. Consult an attorney as to legal obligations. The last resort is to resign. IMA Code of Ethics for Management Accountants