chapter 1 managerial accounting in the information age cma

Chapter 1Managerial Accounting in the

Information Age

CMA

Presentation Outline

I. Goal of Managerial Accounting

II. Comparison of Managerial and Financial Accounting

III. Variable vs. Fixed Costs

IV. Other Cost Terminology

V. Key Issues in Managerial Accounting

VI. Other Topics

I. Goal of Managerial Accounting

The goal of managerial accounting is to provide information that managers need

for:

A. Planning

B. Control

C. Decision Making

A. PlanningPlan

Plans communicate goals to employees to coordinate functions such as sales and production. Financial plans are often expressed in the

form of budgets (i.e., profit, cash, production budgets)

Action taken toImplement plan

B. Control Plan

Performance reports compare actual with planned (budgeted) performance. Management by exception is used meaning that only significant deviations are investigated (see Illustration 1-3 on p. 5)


Results

Comparison of planned and actual

results

Evaluation

C. Decision Making Plan

The distinction between evaluating managers and evaluating the operations they control is important. For example, an evaluation of an operation can be negative even when the manager evaluation is

positive.


Results

Comparison of planned and actual

results

Evaluation

Decisions to reward or punish

managers

Decisions to change operations

or revise plans

II. Comparison of Managerial and Financial Accounting

A. The User of the Information

B. The GAAP Requirement

C. The Level of Detail

D. The Emphasis on Nonmonetary Information

E. The Time Frame of Focus

A. The User of the Information

Managerial Accounting

Primarily used by internal users such as company managers.

Financial Accounting

Primarily aimed at external users such as investors, creditors,

and government agencies.

B. The GAAP Requirement Managerial Accounting

Generally accepted accounting principles is optional. Use any reporting convention

that is useful to management.


Publicly traded companies and many private companies use

generally accepted accounting principles

for financial accounting.

GAAP only

C. The Level of Detail


Managers need detailed information to plan, control, and make

decisions about different organizational areas.


External users of information are often satisfied with more

summarized information.

D. The Emphasis on Nonmonetary Information


Monetary information is supplemented with

additional detail such as quantity of materials used, number of labor hours, etc.


Primarily includes information regarding

assets, liabilities, equity, revenues,

expenses, and cash flows.

E. The Time Frame of Focus


Uses past performance to the extent it is useful in making predictions

about the future.


Primarily presents the results of past transactions.

III. Variable vs. Fixed Costs

A. Variable Cost Per Unit

B. Variable Cost in Total

C. Fixed Cost Per Unit

D. Fixed Cost in Total

A. Variable Cost Per UnitVariable cost per unit remains constant.

$

Level of Activity

Variable cost per unit

B. Variable Cost in TotalTotal variable cost increases and decreases in

proportion to changes in the activity level.(See illustration on the bottom of page 7)

$

Level of Activity

Variable cost in total

C. Fixed Cost Per UnitFixed cost decrease per unit as the activity level

rises, and increase per unit as the activity level falls..

$

Level of Activity

Fixed cost per unit

D. Fixed Cost in TotalTotal fixed cost is not affected by changes in the activity

level within the relevant range (i.e., total fixed cost remains constant even if the activity level changes.

(See illustration in the middle of page 8)

$

Level of Activity

Total fixed cost

IV. Other Cost Terminology

A. Sunk Costs

B. Opportunity Costs

C. Direct and Indirect Costs

D. Controllable and Noncontrollable Costs

A. Sunk CostCosts that have been incurred in the past are

irrelevant. They are known as sunk costs and make no difference in future decisions

because they do not differ between alternative courses of action.

I have got to make this work out or I

will look bad!

B. Opportunity Cost

Opportunity costs are the benefits forgone when one decision alternative is selected over another. For example, extra floor space could be rented out or used to add production capacity. The decision must consider the lost rental income if the floor

space is used for production.

C. Direct and Indirect Costs

Direct costs are conveniently traceable to a cost object (i.e., product, activity, department).

Indirect costs cannot be conveniently traced to a cost object.

Note: The distinction between a direct and indirect cost depends on the object of the cost tracing.

(See Illustration 1-4 on page 9)

D. Controllable and Noncontrollable Costs

A manager can influence a controllable cost but cannot influence an uncontrollable cost. A cost is that is controllable at a higher management level may be uncontrollable when allocated to a lower

management level. A manager should not be evaluated unfavorably strictly because a

noncontrollable cost increases.

V. Key Ideas in Managerial Accounting

A. Incremental Analysis

B. You Get What You Measure

A. Incremental AnalysisIncremental analysis is the appropriate way to

approach the solution to all business problems. It involves the difference between the difference in

revenue versus the difference in cost between decision alternatives. Only differences are

relevant to a decision (See illustrations on pages 10 and 11)

Does the above statement means that fixed costs are always irrelevant and variable costs are always

relevant?

B. You Get What You Measure

Companies can select from a vast number of performance measures (profit, new customer sales,

number of defects, etc.)Since rewards will often depend on how well an

employee performs on a particular measure, employees direct their attention to what is measured

and may neglect what isn’t measured. For example, suppose employees were evaluated on

quantity of production with little concern for product quality.

VI. Other Topics

A. Ethical Behavior

B. The Roles of Company Officers

C. The Certified Management Accountant

A. Ethical Behavior

Ethical dilemmas are often complex and the situations managers face are often gray rather than black and

white. Codes of conduct are not always good guides to ethical

behavior since they often simply specify what cannot be done rather than what should be done. Many also

focus strictly on staying just within the law. Two important questions:

1. Am I comfortable with my decision?

2. Would I be comfortable in telling others about the decision?

B. The Roles of Company Officers

Controller – top management accounting position providing information for management decision making. (See

Illustration 1-6 on page 17)Treasurer – has custody of cash and funds invested in

various marketable securities.Chief information officer (CIO) – responsible for

company’s information technology and computer systems.Chief financial officer (CFO) – senior executive responsible

for both accounting and financial operations.

C. The Certified Management Accountant

Since 1973, the Institute of Management Accountants (IMA) has conducted a

comprehensive exam to test if persons have the knowledge needed by a management accountant in

today’s business world. Those who pass the examination become a

Certified Management Accountant (CMA) and can use the CMA designation on resumes and business

cards.

SummaryPlanning, Control, and Decision Making

Financial vs. Managerial Accounting (User, GAAP, Detail, Nonmonetary, Time Frame)

Variable vs. Fixed CostsSunk, Opportunity, Direct, Noncontrollable

CostsIncremental Analysis and Getting What

You MeasureEthical Conduct, Company Officers, CMA

chapter 1 managerial accounting in the information age cma

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