Chapter 1 Managerial Accounting in the Information Age CMA

Presentation Outline Goal of Managerial Accounting Comparison of Managerial and Financial Accounting Variable vs. Fixed Costs Other Cost Terminology Key Issues in Managerial Accounting Other Topics

I. Goal of Managerial Accounting The goal of managerial accounting is to provide information that managers need for: Planning Control Decision Making

A. Planning Plan Action taken to Implement plan Plans communicate goals to employees to coordinate functions such as sales and production. Financial plans are often expressed in the form of budgets (i.e., profit, cash, production budgets)

B. Control Plan Action taken to Implement plan Results Comparison of planned and actual results Evaluation Performance reports compare actual with planned (budgeted) performance. Management by exception is used meaning that only significant deviations are investigated (see Illustration 1-3 on p. 5)

C. Decision Making Plan Action taken to Decisions to Implement plan change operations or revise plans Results Decisions to reward or punish managers Comparison of planned and actual results Evaluation The distinction between evaluating managers and evaluating the operations they control is important. For example, an evaluation of an operation can be negative even when the manager evaluation is positive.

II. Comparison of Managerial and Financial Accounting The User of the Information The GAAP Requirement The Level of Detail The Emphasis on Nonmonetary Information The Time Frame of Focus

A. The User of the Information Managerial Accounting Primarily used by internal users such as company managers. Financial Accounting Primarily aimed at external users such as investors, creditors, and government agencies.

Managerial Accounting B. The GAAP Requirement Managerial Accounting Generally accepted accounting principles is optional. Use any reporting convention that is useful to management. Financial Accounting Publicly traded companies and many private companies use generally accepted accounting principles for financial accounting. GAAP only

Managerial Accounting C. The Level of Detail Managerial Accounting Managers need detailed information to plan, control, and make decisions about different organizational areas. Financial Accounting External users of information are often satisfied with more summarized information.

D. The Emphasis on Nonmonetary Information Managerial Accounting Monetary information is supplemented with additional detail such as quantity of materials used, number of labor hours, etc. Financial Accounting Primarily includes information regarding assets, liabilities, equity, revenues, expenses, and cash flows.

E. The Time Frame of Focus Managerial Accounting Uses past performance to the extent it is useful in making predictions about the future. Financial Accounting Primarily presents the results of past transactions.

III. Variable vs. Fixed Costs Variable Cost Per Unit Variable Cost in Total Fixed Cost Per Unit Fixed Cost in Total

A. Variable Cost Per Unit Variable cost per unit remains constant. $ Variable cost per unit Level of Activity

B. Variable Cost in Total Total variable cost increases and decreases in proportion to changes in the activity level. (See illustration on the bottom of page 7) $ Variable cost in total Level of Activity

C. Fixed Cost Per Unit Fixed cost decrease per unit as the activity level rises, and increase per unit as the activity level falls.. $ Fixed cost per unit Level of Activity

(See illustration in the middle of page 8) D. Fixed Cost in Total Total fixed cost is not affected by changes in the activity level within the relevant range (i.e., total fixed cost remains constant even if the activity level changes. (See illustration in the middle of page 8) $ Total fixed cost Level of Activity

IV. Other Cost Terminology Sunk Costs Opportunity Costs Direct and Indirect Costs Controllable and Noncontrollable Costs

I have got to make this work out or I will look bad! A. Sunk Cost Costs that have been incurred in the past are irrelevant. They are known as sunk costs and make no difference in future decisions because they do not differ between alternative courses of action. I have got to make this work out or I will look bad!

B. Opportunity Cost Opportunity costs are the benefits forgone when one decision alternative is selected over another. For example, extra floor space could be rented out or used to add production capacity. The decision must consider the lost rental income if the floor space is used for production.

C. Direct and Indirect Costs Direct costs are conveniently traceable to a cost object (i.e., product, activity, department). Indirect costs cannot be conveniently traced to a cost object. Note: The distinction between a direct and indirect cost depends on the object of the cost tracing. (See Illustration 1-4 on page 9)

D. Controllable and Noncontrollable Costs A manager can influence a controllable cost but cannot influence an uncontrollable cost. A cost is that is controllable at a higher management level may be uncontrollable when allocated to a lower management level. A manager should not be evaluated unfavorably strictly because a noncontrollable cost increases.

V. Key Ideas in Managerial Accounting Incremental Analysis You Get What You Measure

A. Incremental Analysis Incremental analysis is the appropriate way to approach the solution to all business problems. It involves the difference between the difference in revenue versus the difference in cost between decision alternatives. Only differences are relevant to a decision (See illustrations on pages 10 and 11) Does the above statement means that fixed costs are always irrelevant and variable costs are always relevant?

B. You Get What You Measure Companies can select from a vast number of performance measures (profit, new customer sales, number of defects, etc.) Since rewards will often depend on how well an employee performs on a particular measure, employees direct their attention to what is measured and may neglect what isn’t measured. For example, suppose employees were evaluated on quantity of production with little concern for product quality.

VI. Other Topics Ethical Behavior The Roles of Company Officers The Certified Management Accountant

A. Ethical Behavior Ethical dilemmas are often complex and the situations managers face are often gray rather than black and white. Codes of conduct are not always good guides to ethical behavior since they often simply specify what cannot be done rather than what should be done. Many also focus strictly on staying just within the law. Two important questions: Am I comfortable with my decision? Would I be comfortable in telling others about the decision?

B. The Roles of Company Officers Controller – top management accounting position providing information for management decision making. (See Illustration 1-6 on page 17) Treasurer – has custody of cash and funds invested in various marketable securities. Chief information officer (CIO) – responsible for company’s information technology and computer systems. Chief financial officer (CFO) – senior executive responsible for both accounting and financial operations.

C. The Certified Management Accountant Since 1973, the Institute of Management Accountants (IMA) has conducted a comprehensive exam to test if persons have the knowledge needed by a management accountant in today’s business world. Those who pass the examination become a Certified Management Accountant (CMA) and can use the CMA designation on resumes and business cards.

Summary Planning, Control, and Decision Making Financial vs. Managerial Accounting (User, GAAP, Detail, Nonmonetary, Time Frame) Variable vs. Fixed Costs Sunk, Opportunity, Direct, Noncontrollable Costs Incremental Analysis and Getting What You Measure Ethical Conduct, Company Officers, CMA