1. The Manager and Management Accounting
CHAPTER 1
The Manager and Management Accounting
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2. Chapter 1 Learning objectives
Distinguish financial accounting from management accounting
Understand how management accountants help firms make strategic decisions
Describe the set of business functions in the value chain and identify the dimensions of performance that customers are expecting of companies
Managers at companies large and small must understand how revenues and costs behave or they risk losing control of the performance of their firms.
Our first 3 of 7 learning objectives are:
1. Distinguish financial accounting from management accounting
2. Understand how management accountants help firms make strategic decisions
3. Describe the set of business functions in the value chain and identify the dimensions of performance that customers are expecting of companies
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3. Chapter 1 Learning objectives, concluded
Explain the five-step decision-making process and its role in management accounting
Describe three guidelines management accountants follow in supporting managers
Understand how management accounting fits into an organization’s structure
Understand what professional ethics mean to management accountants
Managers use cost accounting information to make decisions about research and development, budgeting, production planning, pricing, and the products or services to offer customers.
The remaining learning objectives for this chapter are:
4. Explain the five-step decision-making process and its role in management accounting
5. Describe three guidelines management accountants follow in supporting managers
6. Understand how management accounting fits into an organization’s structure
7. Understand what professional ethics mean to management accountants
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4. Accounting Discipline Overview
Management accounting—measures, analyzes, and reports financial and nonfinancial information to help managers make decisions to fulfill organizational goals. Management accounting need not be GAAP compliant.
Financial accounting—focuses on reporting to external users including investors, creditors, banks, suppliers, and governmental agencies. Financial statements must be based on GAAP.
Accounting systems are used to record economic events and transactions such as sales and the purchases of materials and then process the data into a format that is helpful for managers and others.
Management accounting is the process of measuring, analyzing and reporting financial and nonfinancial information that helps managers make decisions.
Financial accounting has a focus on the financial information that is disseminated to external parties such as investors, government agencies, banks and suppliers.
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5. Accounting Discipline Overview, concluded
Cost accounting – measures, analyzes and reports financial and nonfinancial information related to the costs of acquiring or using resources in an organization.
Today, most accounting professionals take the position that cost information is part of management accounting; therefore, the distinction between the two is not clear-cut and in this book, we often use the terms interchangeably.
Cost accounting provides information for both management and financial accounting professionals has its focus on the costs of acquiring or using resources in the organization.
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6. Major differences between management and financial accounting
In this slide, a graphical representation highlighting the major differences between management and financial accounting is presented. The categories compared are the:
Purpose of the information, Primary users, Focus and emphasis, Rules of measurement and reporting (for example, Financial Accounting must follow GAAP whereas management accounting information is based on a cost-benefit analysis.), Time span and type of reports and Behavioral implications. This is Exhibit 1-1 page 4.
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7. Strategy and Management Accounting
Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace.
There are two broad strategies: cost leadership or product differentiation
Strategic cost management—describes cost management that specifically focuses on strategic issues.
Deciding between the two broad strategies of cost leadership or product differentiation is a critical part of what managers do. Management accountants work closely with managers in various departments to formulate strategies by providing information about the sources of competitive advantage, such as (1) their company’s cost, productivity or efficiency advantage relative to competitors or (2) the premium prices a company can charge relative to the costs of adding features that make its products or services distinctive.
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8. Strategy and Management Accounting, concluded
Management accounting helps answer important questions such as:
Who are our most important customers, and how can we be competitive and deliver value to them?
What substitute products exist in the marketplace, and how do they differ from our own?
What is our most critical capability?
Will adequate cash be available to fund the strategy or will additional funds need to be raised?
Management accounting information helps managers formulate strategy by answering questions such as the following:
Who are our most important customers, and how can we be competitive and deliver value to them?
What substitute products exist in the marketplace, and how do they differ from our own?
What is our most critical capability?
Will adequate cash be available to fund the strategy or will additional funds need to be raised?
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9. Management Accounting and Value
Creating value is an important part of planning and implementing strategy.
Value is the usefulness a customer gains from a company’s product or service. The entire customer experience determines the value a customer derives from a product.
Customers demand much more than just a fair price – they expect quality products delivered in a timely manner. That experience is the VALUE derived from purchasing a particular product or service.
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10. Management Accounting and Value, concluded
The Value chain is the sequence of business functions in which a product is made progressively more useful to customers.
The Value chain consists of:
Research & development
Design of Products and Processes
Production
Marketing
Distribution
Customer service
The Value chain is the sequence of business functions in which a product is made progressively more useful to customers.
The Value chain consists of:
Research & development (generating and experimenting with ideas related to new products, services or processes)
Design of Products and Processes (detailed planning, engineering and testing of products and processes)
Production (procuring, transporting and storing, coordinating and assembling resources to produce a product or deliver a service)
Marketing (promoting and selling products or services)
Distribution (processing orders and shipping products or services to customers)
Customer service (providing after-sales service to customers)
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11. The Value Chain Illustrated
Here we have a pictorial view of the value chain. In addition to each of our functions previously discussed, you see “administration” as an additional function. This includes accounting, human resources, information technology and supports the six primary business functions.
Management accounting provides information to inform each of these functions in the value chain.
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12. A Value Chain Implementation
Part of management accounting emphasizes integrating and coordinating activities across all companies in the supply chain to improve their performance and reduce costs.
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13. Supply-chain analysis
Production and Distribution are the parts of the value chain associated with producing and delivering a product or service.
These two functions together are known as the Supply-Chain
The supply chain describes the flow of goods, services and information from the initial sources of materials, services, and information to their delivery regardless of whether the activities occur in one organization or in multiple organizations.
Production and Distribution are the parts of the value chain associated with producing and delivering a product or service.
These two functions together are known as the Supply-Chain
The supply chain describes the flow of goods, services and information from the initial sources of materials and services to their delivery regardless of whether the activities occur in one organization or in multiple organizations.
To increase efficiency in these areas, in other words to increase performance and reduce costs, suppliers may be asked to deliver small quantities of materials frequently instead of one larger shipment.
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14. Key Success Factors
Customers want companies to use the value chain and supply chain to deliver ever- improving levels of performance when it comes to several (or even all) of the following:
Cost and efficiency
Quality
Time
Innovation
Sustainability
The key success factors to improve performance are shown here in this slide:
Cost and efficiency-understanding the activities that cause costs to arise and managing them allows managers to react to the continuous pressure to reduce costs
Quality-customers expect high levels of quality
Time-two important dimensions of time are new-product development and customer-response time
Innovation-a constant flow of innovative products or services is the basis for the ongoing success of a company.
Sustainability-the development and implementation of strategies to achieve long-term financial, social and environmental goals.
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15. A Five-Step Decision Making Process in Planning and Control
Identify the problem and uncertainties.
Obtain information.
Make predictions about the future.
Make decisions by choosing between alternatives.
Implement the decision, evaluate performance, and learn.
Here are the five steps in the decision making process in planning and control. The first four of these steps fall under Planning; step five is the Control.
Identify the problem and uncertainties.
Obtain information.
Make predictions about the future.
Make decisions by choosing between alternatives.
Implement the decision, evaluate performance, and learn.
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16. Planning and Control Systems
Planning selects goals and strategies, predicts results, decides how to attain goals, and communicates this to the organization.
Budget—the most important planning tool-is the quantitative expression of a plan of activity by management and is an aid to coordinating what needs to be done to execute that plan.
Control takes actions that implement the planning decision, evaluates performance, and provides feedback and learning to the organization.
Of the five steps in decision making, the first four are planning and the fifth is control. The most important planning tool when implementing strategy is a budget.
Planning selects goals, predicts results, decides how to attain goals and communicates this to the organization.
Control takes actions that implement the planning decision, evaluates performance and provides feedback to the organization.
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17. Management Accounting Guidelines
Three guidelines help management accountants provide the most value to the strategic and operational decision- making of their companies:
Cost–benefit approach: benefits of an action/purchase generally must exceed costs as a basic decision rule.
Behavioral and technical considerations: people are involved in decisions, not just dollars and cents.
Different Costs for Different Purposes: Managers use alternative ways to compute costs in different decision-making situations.
The guidelines shown here help management accountants provide the most value to the strategic and operational decision-making of their companies.
Cost–benefit approach: benefits of an action/purchase generally must exceed costs as a basic decision rule.
Behavioral and technical considerations: people are involved in decisions, not just dollars and cents.
Different Costs for Different Purposes: Managers use alternative ways to compute costs in different decision-making situations.
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18. A Typical Organizational Structure and the Management Accountant
The organizational structure depicted here shows the details of the CFO (Chief Financial Officer) position who generally reports to the Chief Executive Officer.
The CFO is sometimes also called the Finance Director and is the executive responsible for overseeing the financial operations of an organization. Exhibit 1-6 page 15.
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19. Professional Ethics
The four standards of ethical conduct for management accountants as advanced by the Institute of Management Accountants are:
Competence
Confidentiality
Integrity
Objectivity
There are four standards of ethical conduct for management accountants as advanced by the Institute of Management Accountants. They are:
Competence
Confidentiality
Integrity
Objectivity
Ethics are the foundation of a well-functioning economy. Accountants have special ethical obligations given that they are responsible for the integrity of the financial information provided to internal and external parties.
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20. Sarbanes-oxley act (sox)
The Sarbanes-Oxley legislation was passed in in response to a series of corporate scandals. The act focuses on improving:
Internal controls
Corporate governance
Monitoring of managers
Disclosure practices of public companies
As part of the SOX act, CEOs and CFOs must certify that the financial statements of their firms fairly represent the results of their operations.
The act focuses on improving:
Internal controls
Corporate governance
Monitoring of managers
Disclosure practices of public companies
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21. Terms to learn TERMS to LEARN Page Number Reference Budget Page 11
Chief Financial Officer
Page 14
Control
Controller
Cost Accounting
Page 4
Cost-Benefit approach
Page 12
Cost Management
Customer Relationship Management (CRM)
Page 7
Customer Service
Page 6
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22. Terms to learn, cont’d TERMS to LEARN Page Number Reference
Design of products and processes
Page 6
Distribution
Finance Director
Page 14
Financial Accounting
Page 3
Learning
Page 12
Line Management
Management Accounting
Page 4
Marketing
Planning
Page 11
Production
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23. Terms to learn, concluded
Page Number Reference
Research & Development (R&D)
Page 6
Staff Management
Page 14
Strategic Cost Management
Page 5
Strategy
Supply Chain
Page 7
Sustainability
Page 8
Total Quality Management (TQM)
Value Chain
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24. Copyright © 2015 Pearson Education, Inc. All Rights Reserved.