1. Chapter One Introduction McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Decision Making - Product Management
Examples
Add new product
Terminate an existing product line
Accept or reject special order
Related Topics
Operations management
Budgeting - capital and operating
Just-in-time (JIT)

3. Decision Making - Pricing
Examples
Set selling price to achieve desired profits
Set selling price to achieve positive cash flow
Related Topics
Marketing
Microeconomics - Price Theory
Corporate Finance

4. Decision Making - Cost Control
Examples
Add new equipment
Change production process
Make internally versus buy externally (outsource)
Related Topics
Process engineering
Management information systems
Activity-based costing (ABC)

5. Control - Incentives Assumptions Incentives
Individuals maximize their own self-interest
Owners of firm want to maximize firm value
Maximizing firm profits maximizes firm value
Incentives
Design performance incentives based on internal accounting measures to motivate employees to take actions that will maximize firm value

6. Control - Performance Evaluation
Examples
Performance bonuses depend on accounting results
Benchmarking: comparisons to industry leaders
Related Topics
Organizational behavior
Human resources management

7. Design - Multiple Roles of Accounting
Study Figure 1-1.
Main point:
Accounting reports are used for multiple purposes.

8. Design - External Reports
Users of external reports
Shareholders, bondholders, banks, and analysts (SEC, FASB)
Taxing authorities (IRS, states, etc.)
Regulatory authorities (GASB, etc.)
Board of directors
Objectives in external reporting
Comparability between firms
Historical accounting
Auditors can verify reports

9. Design - Internal Reports
Users of internal reports
Managers at all levels
Objectives of internal reporting
Useful for decision making about future activities
Measure performance that is relevant to the firm
Focus on projects or processes within a firm

10. Design - Conflicting Goals
Control
Incentives to motivate behavior changes
Tendency to ignore information not specifically included in incentive system
Report “good” numbers to satisfy top management
Decision making
Want to avoid distorted information
Estimates useful to plan future activities

11. Design - Evolution Economic Darwinism:
Over the long term systems survive in competitive markets when the benefits exceed or equal the costs of maintaining those systems.
Survival does not imply optimality.
Better systems may exist, but have not yet been discovered.

12. Design - Figure 1-2 Study Figure 1-2. Main Point:
In a typical corporation, the corporate controller is responsible for all internal and external accounting reports. There are also controllers in the operating divisions.

13. Design - Organizational Structure
Controller
Reports to chief financial officer (CFO)
Administers internal and external accounting
Budget planning
Controls financial data collection and reporting
Growing role as internal consultants or business analysts to the point of being viewed as business partners
Balance providing information to other managers for decision making against providing monitoring information used to control behavior of lower-level managers.

14. Evolution of Management Accounting: A Framework for Change
Business Environment
Business Strategy
Organizational Architecture
Decision-Right Assignment
Performance Evaluation
Reward System
Incentives and Actions
Firm Value

15. Example - Vortec Special Order With no overtime and congestion
Current
With Order
Incremental
Units produced and sold Total Revenue and Costs
100,000
102,000
2,000
Sales ($5.00 regular, $4.00 special)
$ 500,000
$508,000
8,000
Cost of sales ($4.50, $4.47)
450,000
Administrative expenses
- 27,500
27,500
Net profit before taxes
$ 22,500
$ 24,560
$ 2,060
Incremental revenue (2,000 units x $4.00)
$8,000
Total 102,000 units (102,000 x $4.47)
$455,940
Total 100,000 units (100,000 x $4.50)
Incremental cost of 2,000 units
-5,940
Incremental profit of 2,000 units
$2,060

16. Example - Vortec Special Order With overtime and congestion
Current
With Order
Incremental
Units produced and sold
Total Revenue and Costs
100,000
102,000
2,000
Sales ($5.00 regular, $4.00 special)
$ 500,000
$508,000
8,000
Cost of sales ($4.50, $4.08 on
additional 2,000)
450,000
458,160
-8,160
Administrative expenses
- 27,500
27,500
Net profit before taxes
$ 22,500
$ 22,340
$ -160
Incremental revenue (2,000 units x $4.00)
$8,000
Total 102,000 units (102,000 x $4.50)
plus (2,000 x $4.08)
$458,160
Total 100,000 units (100,000 x $4.50)
Incremental cost of 2,000 units
-8,160
Incremental profit of 2,000 units
-160

17. Example - Beware of Average Costs
Average cost per unit at current production volume is usually not an accurate estimate of the cost per unit at other levels of production.
Average costs include:
fixed costs that do not change with volume
variable costs per unit that can change with volume
Cost per unit may increase when production volume is near or above normal operating capacity.

18. Example - Consider Opportunity Costs
Opportunity costs measure what the firm forgoes when it chooses a specific action
Consider what a firm forgoes by accepting a special order

19. Example - Supplement Accounting Data
Supplement historical cost accounting data with other knowledge
Could include:
expected customer demands
competitors’ plans
future technology
government regulation

20. Example - Accounting Data for Evaluation
When managers have incentives to maximize performance on one particular accounting measure, firm profits are not necessarily maximized.
Reducing average manufacturing costs per unit does not always maximize profit
Maximizing total revenue does not always maximize profit