2. Chapter One
Introduction

3. Outline of Chapter 1 Introduction
Managerial Accounting: Decision Making and Control
Design and Use of Cost Systems
Marmots and Grizzly Bears
Management Accountant’s Role in the Organization
Evolution of Management Accounting: A Framework for Change
Vortec Medical Probe Example
Outline of the Text

4. 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)

5. 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

6. 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)

7. Control - Incentives Assumptions
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

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

9. Acronyms – Understanding the Practicality and Applicability of these Concepts Matters
ABC – Activity-based cost systems
CAM – Computer-aided manufacturing
EDI – Electronic Data Interchange
ERP – Enterprise Resource Planning
JIT – Just-in-time
TQM – Total quality management

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

11. Design - External Reports
Users of external reports
Shareholders, bondholders, 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

12. 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

13. 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

14. 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.

15. 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.

16. 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.

17. 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

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

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

20. 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.
Production costs include:
fixed costs that do not change with volume
variable costs that do change with volume
Costs may increase when production volume is near or above normal operating capacity.

21. 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

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

23. 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

24. Outline of Text See Overview Figure in the preface. Chapters Theme
Use of accounting for decision making and control
Budgeting and cost allocations
Absorption costing and alternative costing methods
Integrative framework