Chapter McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Nature of Management Accounting 15

15-2 Financial Accounting  Focuses on preparation of FS required by GAAP:  Prepared for use by external users  Provides an overall picture of an entity’s financial condition and results of activities

15-3 Management accounting Process that provides info used by managers for: –Planning, implementing, and controlling Applies to all organizations  Management needs more detailed info  Accounting systems provide operating info needed for operating decisions  Managers are interested in summaries

15-4 Certified Management Accountants (CMA)  Professional designation for management accountants  Four part exam, continuing education, code of ethics  Administered by Institute of Certified Management Accountants, affiliated with Institute of Management Accountants (IMA)

15-5 Accounting Jobs  Management accountant:  Members of an organization who design and operate management accounting system  Controller:  Highest level accountant; has financial and management accounting responsibility reports to Chief Financial Officer (CFO)  Treasurer:  Responsible for cash management, that is, raising cash when needed by borrowing, issuing stock or issuing bonds and investing excess cash

15-6 Management vs. financial accounting Necessity:  Financial Accounting (FA): SEC (or banks or suppliers) requires publicly traded companies to publish financial statements according to GAAP  Management accounting (MA) is optional  Purpose:  FA: Produce financial statements for outside users  MA: Help managers plan, implement and control

15-7 Management vs. financial accounting (continued)  Users:  FA: External users, present or potential shareholders  MA: Known managers who influence information needs  Underlying structure:  FA: Built around: Assets = Liabilities + Stockholders’ Equity  MA: Measurement, control, and alternative choice decisions

15-8 Management vs. financial accounting (continued)  Source of principles:  FA: GAAP  MA: Whatever managers believe useful  Time orientation:  FA: Historical  MA: Future oriented

15-9 Management vs. financial accounting (continued)  Information content:  FA: Summary of primarily monetary events  MA: Non-monetary as well as monetary info  Information precision:  FA: Uses approximations but as a generalization is more precise than MA  MA: Management needs info rapidly to be useful in decision making and therefore precision is sometimes sacrificed

15-10 Management vs. financial accounting (continued)  Report frequency:  FA: Publicly traded, SEC: quarterly, with more detailed info annually  MA: Up to management  Report timeliness:  FA: Usually, several weeks to months after fiscal close of accounting period  MA: Quickly to be useful for decision making

15-11 Management vs. financial accounting (continued)  Report entity:  FA: Organization as a whole  MA: Relatively small parts (profit / cost centers such as departments, product lines, divisions, subsidiaries as well as organization as a whole)  Liability potential:  FA: May be sued by shareholders if believed to be misleading  MA: Used internally unlikely to give rise to legal liability

15-12 Similarities Most elements of financial accounting also found in management accounting:  Same considerations that make sense for GAAP also make sense for MA  Systems are designed to provide info for both FA & MA  Both are used for decision making, one by investors and one by managers

15-13 Types of management accounting info and their uses  Purposes of MA system: Measurement of revenues, costs, and assets Control  Aid decisions among alternative courses of action  For each purpose there is a set of principles and generalizations

15-14 Characterization of Management Accounting Reporting Historical information: –Score keeping (How are we doing?) or –Attention directing (What problems require looking into?) Future estimates: –Problem solving (What is best way to deal with a problem?) –Influencing impact (influences actions of managers)

15-15 Measurement Full cost accounting measures resources used in performing some activity  Full cost of producing goods or providing services = direct costs + indirect costs:  Direct costs = costs directly traced to goods or services  Indirect costs = fair share of costs incurred jointly in producing goods or services

15-16 Control Costs (also, revenues and assets) are identified to and measured by profit / cost center:  A manager heads each profit / cost center  Corrective action can only be taken by individuals  To help identify problems, actual costs are measured and compared to a benchmark (budget, last year, industry average)

15-17 Alternative choice decisions Differential costs of alternative possible actions are developed  Management may only consider direct costs for some short run decisions

Chapter McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. End of Chapter 15 15