Chapter 1

Introduction to Managerial Accounting So far – financial accounting For whom are financial accounting reports prepared primarily? Managerial – internal users.

Definition of Managerial Accounting A field of accounting that provides economic and financial information for managers and other internal users. Also called Management Accounting

The activities of managerial accounting

Managerial Accounting Activities Explain manufacturing and non manufacturing costs and how they are reported Compute cost of providing a service or manufacturing a product. Determine behavior of costs and expenses as activity changes.

Assist management in profit planning and formalizing these plans in the form of budgets. Help to control costs by comparing actual results with planned objectives and standard costs. Accumulate and present data for making decisions.

Distinguishing Features of Managerial Accounting

Applies to all types of business (Service, Merchandising, and Manufacturing) Applies to all forms of businesses (Proprietorships, Partnerships, and Corporations) Applies to not-for-profit and profit oriented companies

More responsible for strategic cost management Teams with people from production, marketing, engineering, etc. Aid in making critical decisions

Distinguish between financial accounting management accounting. and management accounting.

Comparing Managerial and Financial Accounting Similarities Differences

Similarities Both deal with economic events of a business ( interests overlap) Both require that economic events be quantified and communicated to interested parties Determining unit cost is part of managerial accounting, Reporting cost of goods manufactured is a part of financial accounting

Differences

Primary Users Financial Management Investors Creditors Government authorities Management Internal managers of the business

Purpose of Information Financial Help investors, creditors, and others make investment, credit, and other decisions Management Help managers plan and control business operations

Focus and Time Dimension Financial Reliability, objectivity, and focus on the past Management Relevance

Type of Report Management Financial Internal reports not restricted by GAAP; determined by cost-benefit analysis Financial Financial statements restricted by GAAP Cost benefit analysis Weighing costs against benefits But must always consider qualitative factors as well

Verification Financial Management Annual independent audit by CPAs No independent audit

Scope of Information Management Financial Detailed reports on parts of the company Financial Summary reports primarily on the company as a whole

Behavioral Implications Management Concern about how reports will affect employees behavior Financial Concern about adequacy of disclosure

Management Functions Management’s activities and responsibilities can be classified into the following three broad functions: Planning Directing Controlling

Planning Look ahead and establish objectives such as Maximize short-term profit Commit to environmental protection Key Objective: Add value to the business Value measured by trading price of stock and by potential selling price of the company

Directing Coordinate diverse activities and human resources Implement planned objectives Provide incentives to motivate employees Hire and train employees including executives, managers, and supervisors Produce smooth-running operation

Controlling Keep activities on track Determine whether goals are met Decide changes needed to get back on track May use an informal or formal system of evaluations

Good decision making is the outcome of good judgment in planning, directing, and controlling.

Planning and Control Cycle

Begin Decision Making Formulating Long-and Short-Term Plans (Planning) Implementing the Plans (Directing and Motivating) Begin Decision Making Comparing Actual to Planned Performance (Controlling) Measuring Performance (Controlling)

Questions

True/False Questions 1. Although financial and managerial accounting differ in many ways, they are similar in that both rely on the same underlying financial data.

Answer: True

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