1 CHAPTER M1 Management Accounting: Its Environment and Future © 2007 Pearson Custom Publishing

2 Learning Objective 1: Describe management accounting and contrast it with financial accounting. © 2007 Pearson Custom Publishing

3 Management Accounting The process of The process of identification, identification, measurement, measurement, accumulation, accumulation, analysis, analysis, preparation, preparation, interpretation, and interpretation, and communication of financial information used by management to plan, evaluate, and control an organization. communication of financial information used by management to plan, evaluate, and control an organization. © 2007 Pearson Custom Publishing

4 Cost Accounting Cost accounting is a subset of management accounting, although the two terms are often used interchangeably. Cost accounting is a subset of management accounting, although the two terms are often used interchangeably. Cost accounting deals with the theories and procedures related to determining the cost of a particular product, service, or activity. Cost accounting deals with the theories and procedures related to determining the cost of a particular product, service, or activity. © 2007 Pearson Custom Publishing

5 Management or Financial Accounting? There are several major differences between the worlds of management accounting and financial accounting. There are several major differences between the worlds of management accounting and financial accounting. Although these differences exist, it is important to keep in mind that they both play important roles in the total accounting picture. Although these differences exist, it is important to keep in mind that they both play important roles in the total accounting picture. © 2007 Pearson Custom Publishing

6 Focus on Users Financial accounting is particularly intended to provide information to external users, such as shareholders, bankers, other creditors, suppliers, and the like. Financial accounting is particularly intended to provide information to external users, such as shareholders, bankers, other creditors, suppliers, and the like. Management accounting is particularly intended to provide information to internal users, such as managers, directors, administrators, and the like. Management accounting is particularly intended to provide information to internal users, such as managers, directors, administrators, and the like. © 2007 Pearson Custom Publishing

7 Accounting Rules The financial accountant is governed by GAAP (generally accepted accounting principles). The financial accountant is governed by GAAP (generally accepted accounting principles). The management accountant need follow no such rules. The management accountant has much greater flexibility in deciding what information to report, when and how to report it, and to whom. The management accountant need follow no such rules. The management accountant has much greater flexibility in deciding what information to report, when and how to report it, and to whom. © 2007 Pearson Custom Publishing

8 Level of Detail Financial accounting statements are known as general purpose statements comprised of highly aggregated information. Many different external users rely on the same statements. Financial accounting statements are known as general purpose statements comprised of highly aggregated information. Many different external users rely on the same statements. Management accounting reports are typically much more detailed, possibly dealing only with the information related to one particular decision. Management accounting reports are typically much more detailed, possibly dealing only with the information related to one particular decision. © 2007 Pearson Custom Publishing

9 Timeliness Timeliness is an important characteristic of useful information. Management releases financial accounting information to external users on a quarterly and annual basis. Timeliness is an important characteristic of useful information. Management releases financial accounting information to external users on a quarterly and annual basis. Managers, on the other hand, need daily, hourly, weekly, or monthly internal accounting reports. Managers, on the other hand, need daily, hourly, weekly, or monthly internal accounting reports. © 2007 Pearson Custom Publishing

10 Future Orientation Financial accounting provides information about past results. Predictive value is desired, but not required. Financial accounting provides information about past results. Predictive value is desired, but not required. Management accounting information is used primarily for decision making, and these decisions affect the future of the firm. Management accounting information is used primarily for decision making, and these decisions affect the future of the firm. © 2007 Pearson Custom Publishing

11 Management Positions in Accounting For most firms, the controller is the chief accountant, the person ultimately in charge of the accounting system. For most firms, the controller is the chief accountant, the person ultimately in charge of the accounting system. The treasurer is typically responsible for managing the company’s cash, credit, and investments. The treasurer is typically responsible for managing the company’s cash, credit, and investments. © 2007 Pearson Custom Publishing

12 Learning Objective 2: Explain major historical developments that have affected management accounting. © 2007 Pearson Custom Publishing

13 The Growth of Management Accounting Four major factors have had an impact: Four major factors have had an impact: Emergence of permanent employees Emergence of permanent employees The industrial revolution The industrial revolution Scientific management Scientific management Diversification Diversification © 2007 Pearson Custom Publishing

14 Emergence of Permanent Employees When firms primarily hired independent contractors, no formal communication system was needed. It was also relatively easy to determine the cost of producing a product. When firms primarily hired independent contractors, no formal communication system was needed. It was also relatively easy to determine the cost of producing a product. Permanent employees and the development of the “factory” concept contributed to greater control over production. Permanent employees and the development of the “factory” concept contributed to greater control over production. © 2007 Pearson Custom Publishing

15 Industrial Revolution As organizations grew in size and complexity, the ability of the owners to supervise all aspects of the business started to shrink. As organizations grew in size and complexity, the ability of the owners to supervise all aspects of the business started to shrink. The creation of various levels of management resulted in a need for a formal communication system for the managers. The creation of various levels of management resulted in a need for a formal communication system for the managers. © 2007 Pearson Custom Publishing

16 Scientific Management One of the major features of the scientific management philosophy was that workers need to be evaluated in comparison to a standard for performance. One of the major features of the scientific management philosophy was that workers need to be evaluated in comparison to a standard for performance. The philosophy created a need for an entire army of data collectors and cost analysts. Time and motion studies and engineering reports became commonplace. The philosophy created a need for an entire army of data collectors and cost analysts. Time and motion studies and engineering reports became commonplace. © 2007 Pearson Custom Publishing

17 Learning Objective 3: Describe how changes in management accounting affect today’s businesses. © 2007 Pearson Custom Publishing

18 Diversification Early in the 20th century, companies began to diversify. More managers with skills in different areas were needed. There was also an increase in the delegation of authority. Early in the 20th century, companies began to diversify. More managers with skills in different areas were needed. There was also an increase in the delegation of authority. More information was needed from the various business operations to allow top managers and owners to plan, control, and evaluate performance. More information was needed from the various business operations to allow top managers and owners to plan, control, and evaluate performance. © 2007 Pearson Custom Publishing

19 The Emergence of Management Accounting Institute of Management Accountants (IMA) founded in 1919 Institute of Management Accountants (IMA) founded in 1919 Leaner management practices led to: Leaner management practices led to: Just-in-time inventory (JIT) Just-in-time inventory (JIT) Activity-based management (ABM) Activity-based management (ABM) Activity-based costing (ABC) Activity-based costing (ABC) Design for manufacturing (DFM) Design for manufacturing (DFM) © 2007 Pearson Custom Publishing

20 Learning Objective 4: Explain how businesspeople use management accounting information and skills. © 2007 Pearson Custom Publishing

21 Consumers of Management Accounting Management accounting information is always forward-looking. Management accounting information is always forward-looking. The future contains uncertainty. The future contains uncertainty. Management accounting allows the user to formulate models to reduce uncertainty by planning, using reliable information. Management accounting allows the user to formulate models to reduce uncertainty by planning, using reliable information. © 2007 Pearson Custom Publishing

22 The End of Chapter M1