Chapter 1 Managerial Accounting

Chapter 1: Introduction to Managerial Accounting Chapter Themes:  It’s all about using information to plan, control and make decisions.  Accountants produce information and managers use information.

Primary Goal of Managerial Accounting Effective managers must be adept at planning, controlling and decision making.

Planning Planning has to do with budgeting in a managerial context. It is in this way that a company’s goals are communicated to all employees. Budgets include profit budgets, cash-flow budgets, production budgets and many others.

Controlling The notion of managerial control has to do with measuring and evaluating the performance of both the manager and the operation(s) for which the manager is responsible. There is an important distinction to be made here. A manager is evaluated, at least in part, based on her overall performance. Each operation for which she is responsible is evaluated in order to optimize future goals and objectives.

Decision Making An integral part of the planning and controlling process, decision making includes both rewarding or punishing managers for their performance AND dropping, adding or otherwise changing some aspect of operations going forward.

A Comparison of Managerial and Financial Accounting Managerial accounting: 1. Is meant primarily for internal users while financial accounting is meant for external users. 2. Is not driven by GAAP. 3. May be much more detailed than financial (external) accounting reports. 4. May include much nonfinancial data. 5. Is forward looking rather than retrospective.

Similarities Between Financial and Managerial Accounting Although managerial accounting is meant for internal users (management) and financial accounting is meant for external users, managers DO make use of financial accounting information.

Cost Terms The term “cost” appears in many contexts and carries a number of meanings. Different categories of cost terms are merely different ways to look at costs or to slice and dice cost information. They are not necessarily complementary to or mutually exclusive of other cost categories.

Variable and Fixed Costs Variable costs: costs that increase or decrease (in total) relative to increases or decreases in the level of business activity. Fixed costs: costs that do not change (in total) relative to changes in business activity.

Sunk Costs Sometimes called “past costs.” These costs are NOT relevant to the decision making process.

Opportunity Costs These are the values of potential benefits foregone when a decision is made.

Direct and Indirect Costs Direct costs: costs that are directly traceable to some object such as a product, activity or department. Indirect costs: costs that are NOT directly traceable to a product, activity or department.

Controllable and Noncontrollable Costs Yet another way to slice and dice costs. This time it has to do with the degree of influence a manager has over the cost. If a management decision can impact the cost in the short term, it is considered controllable. Conversely, if a manager cannot influence (control) the cost in the short term, then it is noncontrollable. A manager’s performance should NOT include an assessment of noncontrollable costs.

Two Key Ideas in Managerial Accounting They are: 1. Decision making relies on incremental analysis—an analysis of revenues and costs that increase or decrease if a particular decision alternative is selected. 2. You get what you measure!

Decision Making Relies on Incremental Analysis Incremental means “difference.” Here decision making looks at the difference between revenues and expenses if selection (a) is made as opposed to selection (b).

You Get What You Measure Performance measurement impacts management behavior.

The Controller As the Top Management Accountant Controller: The top management accountant responsible for preparing information for planning, controlling and decision making. Treasurer: The treasury function is custodial in nature; custody of assets. Chief Financial Officer (CFO): The senior executive to whom both the controller and CFO report.

 By: Munawar Hameed