Introduction to Management Accounting Introduction to Management Accounting C H A P T E R 1

Learning Objective 1 Understand the essential differences between management and financial accounting as illustrated by managerial use of the ROI formula.

A Little History n What made the DuPont problem interesting? n What did Donaldson Brown introduce to management accounting? n Discuss the birth of management accounting.

Why Have Management Accounting? The only reason for management accounting is to satisfy a competitive need.

Summarizing DuPont First company to combine different types of industry, creating - a huge management hierarchy. - a complicated production process. - a geographically dispersed business. - an inventory that needed to be turned over rapidly. DuPont developed - extensive budgets to coordinate the flow of resources from raw materials to the final customer. - calculation for return on investment (ROI).

Return on Investment (ROI) y Combined cost management with asset management. y A measure of operating performance and efficiency in utilizing assets. y What is the formula for ROI? Net income Average total assets

Learning Objective 2 Understand that successfully managing a company requires good information that supports effective planning, controlling, and evaluating processes.

Management Processes Decision Making Planning Controlling Evaluating Planning Controlling Evaluating Planning Controlling Evaluating - Identify problems - Identify alternatives - Choose and implement best alternatives - Evaluate alternatives - Establish expectations - Create performance measures - Gather results - Compute variances Analyze results, Provide feedback, Reward performance, Identify problems

The Management Process— What are three performance measures of controlling? A process of 1.establishing expectations 2.creating performance measures 3.gathering results 4.computing variances CostQualityTime

Learning Objective 3 Know how the concepts of fixed and variable costs are used in C-V-P analysis in the management planning process.

Define Variable and Fixed Costs Fixed Costs: costs that remain constant in total, regardless of activity level. Variable Costs: costs that change in direct proportion to changes in some particular activity level.

Provide Examples of Variable and Fixed Costs Fixed product costs: plant depreciation and supervisors’ salaries. Fixed period costs: institutional advertising, insurance, and executives’ salaries. Variable product costs: costs of direct materials which vary proportionately with the number of units sold. Variable period costs: sales commissions, which vary proportionately with sales volume.

Learning Objective 4 Realize how the product cost classifications of direct materials, direct labor, and overhead are used in the management controlling process.

Period Costs ManufacturingMerchandisingService Usually not associated with inventory or any other asset. Selling (sales salaries, advertising, and delivery costs). Administrative (salaries of executives, depreciation and taxes on assets, and miscellaneous office expenditures). Always expensed on the income statement in the same period as incurred. Costs incurred that cannot be assigned to a product or service.

Manufacturing overhead —all costs incurred in the manufacturing process other than direct materials and direct labor. Define the Three Manufacturing Product Costs Direct labor —wages paid to those who physically work on the direct materials to transform them to a finished product and are traceable to those products. Direct materials —materials that become part of the product and are traceable to it.

Match Product Costs to Type of Business Manufacturing Merchandising Service Labor, supplies, and other costs directly related to provide services. Costs necessary to create finished goods ready for sale. All costs related to production. Costs incurred to purchase goods and get them ready for resale to customers. Costs associated with products or services offered.

Learning Objective 5 Be able to perform a simple segment analysis using the concepts of direct, indirect, and opportunity costs in the management evaluating process.

Define Direct and Indirect Costs Indirect costs: costs normally incurred for the benefit of several segments within the organization (common costs). Indirect costs: costs normally incurred for the benefit of several segments within the organization (common costs). Direct costs: costs that are specifically traceable to a unit of business or segment being analyzed. Direct costs: costs that are specifically traceable to a unit of business or segment being analyzed.

Define Differential and Sunk Costs Differential costs: future costs that change as a result of a decision (incremental or relevant costs). Sunk costs: costs, such as depreciation, that are past costs and do not change as the result of a future decision.

Define Out-of-Pocket and Opportunity Costs Out-of-pocket costs: costs that require an outlay of cash or other resources. Opportunity costs: the benefits lost or forfeited as a result of selecting one alternative course of action over another.

Learning Objective 6 Understand that management accounting still continues to evolve.

What Does Just-in-Time Inventory Do? JIT inventory has changed the cost structures of many manufacturing firms. Concentrates on improving product quality and timely deliveries. Inventories are kept to a minimum or eliminated.

- Engineering cost Performance - Production efficiency - Rework and scrap costs How are the New Measures of Cost, Quality, and Time Evaluated? - New product development cycle time - Master schedule stability - Manufacturing cycle time - On-time delivery Cost Measures Time Measures - Vendor supply quality - Manufacturing first-pass yield - Warranty returns Quality Measures