15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST1 Managerial Accounting Chapter 1

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST2 Managerial Accounting Fundamentals I.The Management Process in Organizations II.Objectives of Managerial Accounting III.Managerial Versus Financial Accounting: IV.Role of the Managerial Accountant

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST3 I. The Management Process in Organizations A.Generally: B.Not mandatory: C.What types of organizations use managerial accounting? D. What is managerial accounting? E. Management activities:

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST4 I. The Management Process in Organizations A. Generally: "Managerial accounting is concerned with providing information to managers—that is, to those who are inside an organization and who direct and control its operations. Managerial accounting can be contrasted with financial accounting, which is concerned with providing information to stockholders, creditors, and others who are outside an organization. Managerial accounting provides the essential data with which organizations are actually run. Financial accounting provides the scorecard by which a company’s past performance is judged

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST5 B. Not mandatory: "Financial accounting is mandatory; that is, it must be done. Various outside parties such as the Securities and Exchange Commission (SEC) and the tax authorities require periodic financial statements. Managerial accounting, on the other hand, is not mandatory. A company is completely free to do as much or as little as it wishes. There are no regulatory bodies or other outside agencies that specify what is to be done, or, for that matter, whether anything is to be done at all. [Because] managerial accounting is completely optional, the important question is always, ‘Is the information useful [i.e., does the benefit of having the information outweigh the cost of compiling the information]?’ rather than, ‘Is the information required?’.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST6 C. What types of organizations use managerial accounting? a. All types: All types of organizations including manufacturers, retailers, service industries, agribusiness, and non-profit firms use managerial accounting information. b.Uses: All organizations have goals for growth, profit, quality, leadership, etc. and they use managerial accounting information to set and access their completion of these goals. c.Needs: All organizations have informational needs in the financial, production, personnel, environmental, and legal areas. Managerial accounting provides some of this information.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST7 D.What is managerial accounting? a. Managerial accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization’s goals. b. Integral part of process: Managerial accounting is an integral part of the management process and managerial accountants are important strategic partners in an organization’s management team.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST8 c. Creating value: The management team seeks to create value for the organization by managing resources, activities, and people to achieve the organization’s goals effectively. d. Focus on internal personnel needs: The focus in managerial accounting is primarily on the needs of personnel within the organization

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST9 E. Management activities: The owners, directors, or trustees of an organization set its goals, often with the help of management. In pursuing its goals, an organization acquires resources, hires people, and then engages in an organized set of activities. It is up to the management team to make the best use of the organization’s resources, activities, and people in achieving the organization’s goals.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST10 The day-to-day work of the management team comprises four activities. 1.Decision making: Management teams often decide which of the available alternatives help the organization most efficiently attain their goals. 2.Planning: Planning of business operations involve developing detailed financial and operational descriptions of anticipated operations.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST11 3.Directing operational activities: This simply means running the organization on a day-to- day basis. a. Day-to-day work: The day-to-day work of management teams will typically include: (1) decision making; (2) planning; (3) directing operational activities; (4) controlling. 4. Controlling: Management must control business organization to: (1) assure consistent Operation with the management’s decisions; And (2) achieve desired goals.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST12 A. Providing information for decision making and planning: Virtually all major decisions by internal users (i.e., managers) rely largely on managerial accounting information. 1. Type of data: This information includes financial and no financial data to help managers with strategic planning and decision-making (e.g., the cost of products, budgets, cash flows). II. Objectives of Managerial Accounting

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST13 B. Assisting in directing and controlling: Directing and controlling day- to-day operations requires a variety of data about the process of providing a good or service. 1.Directing operational activities: The management team needs data about the cost of providing goods or services in order to set fees and prices. 2.Controlling operations : Management compares actual costs incurred with those specified in the budget (e.g., analyzing and comparing actual performance to budget plans). 3.Attention-directing functions : The attention- directing function of managerial accounting information directs managers’ attention to issues that need their attention (i.e., it highlights successful or problem areas).

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST14 a. No solutions, merely information: Managerial accounting reports rarely solve a decision problem, however, these reports often direct managers’ attention to an issue that requires their skills. A. Motivating managers and employees: A key purpose of managerial accounting is to motivate managers and other employees to direct their efforts toward achieving the organization’s goals. This motivates managers to achieve the organization’s goals by communicating the plans, providing a measurement of how well the plan was achieved, and prompting an explanation of deviations from the plan.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST15 1.Budgeting: One means of achieving goals is through budgeting. The budget indicates the top management’s desire to allocate resources and emphasize certain activities. a. Explain deviations: When actual operations do not conform to the budget, managers will be asked to explain the reasons for the deviation. This creates both an incentive to conform with the budget and possible negative consequences. 1.Empowerment: Another way to motivate employees to assist in achieving the organization’s goals is through empowerment. Employee empowerment is the concept of encouraging and authorizing workers to take the initiative to improve operations, product quality, customer service and reduce costs.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST16 A. Measuring performance: Another means of motivating employees’ toward the organization’s goals is to measure their performance in achieving their goals. Managerial accounting measures performance for both the entire organization, as in financial accounting, but also for many subunits as well (e.g., divisions, departments, managers). 1. Rewarding performance: Many large corporations compensate their executives, in part, on the basis of the profit achieved by the subunits they manage.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST17 B. Assessing the organization's competitive position: A crucial role of managerial accounting is to continually assess how an organization compares with the competition, with an eye toward continuously improving. 1.Evaluation: This allows the firm to evaluate its financial and internal performance, customer satisfaction, and innovation compared to other similar firms.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST18 III. Managerial Versus Financial Accounting: A. Internal focus of reports: The focus of managerial accounting is on the needs of managers within the organization, rather than interested parties outside the organization.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST19 B. External vs. internal users of information: 1.External users: Financial accounting is primarily intended for external users (i.e., investors, creditors, etc.) and concerned with external financial reporting. It is: (1) highly regulated by FASB (Financial Accounting Standards Board), SEC (Securities and Exchange Commission); (2) mandatory for publicly traded companies; (3) historic in nature. 2.Internal users: Managerial accounting is intended for internal users (i.e., managers); It is: (1) not highly regulated; (2) not mandatory but used when benefits exceed costs; (3) is future oriented.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST20 IV. Role of the Managerial Accountant A-Line and staff positions 1.Directly involved : Managers in line positions are directly involved in the provision of medical care or in the operation of the facilities. A. Examples: Managers of personnel, doctors and director of admissions (at a hospital), assembly workers (in a factory), teachers, director of purchasing. 2.Indirectly involved: Managers in staff positions supervise activities that support the hospital’s mission, but they are indirectly involved in the hospital’s operation. A. Examples: Controller, treasurer, in-house counsel (lawyer), human resources director, accountants.

15/7/2006 ENG.A/ RAHMAN A/GHAFAR MBA-G(3) /CETS-SUST21 B. Management accountants 1.Controller: This is the chief accountant responsible for the supervision of the accounting department, preparation of reports, and the interpretation of information to the line managers. 2.Treasurer: The treasurer is responsible for raising capital, managing cash, investments, insurance coverage, and the credit policy of an organization. 3.Internal auditor: This person reviews accounting procedures, reports, and performance on behalf of top management.