Chapter 1Chapter 1Management Accounting And the Management Accounting And the

Business OrganizationBusiness Organization

Objective 1Objective 1Describe the major Describe the major users of accounting users of accounting

informationinformation

Purposes of AccountingPurposes of AccountingPurposes of AccountingPurposes of Accounting

Accounting was considered a process of recording,Accounting was considered a process of recording, classifying, and summarizing business transactions.classifying, and summarizing business transactions.

The function of accounting information as an aid to The function of accounting information as an aid to

managers in planning and control was not widely managers in planning and control was not widely

recognized until 1940srecognized until 1940s . .

In 1966 , the American Accounting Association (AAA) In 1966 , the American Accounting Association (AAA)

Published an important theoretical work , Published an important theoretical work ,

A Statement of Basic Accounting Theory (ASOBAT ), A Statement of Basic Accounting Theory (ASOBAT ),

that asserts that:that asserts that:

The objectives of accounting are to provide The objectives of accounting are to provide information for the following purposes:information for the following purposes:

To make decisions concerning the use of limited To make decisions concerning the use of limited resources, including the identification of crucial resources, including the identification of crucial decision areas , and determination of objectives and decision areas , and determination of objectives and goals goals

To effectively direct and control an organization's To effectively direct and control an organization's human and material resources .human and material resources .

To maintain and report on the custodianship of To maintain and report on the custodianship of resources , and resources , and

To facilitate social functions and controls .To facilitate social functions and controls .

The traditional record–keeping function of The traditional record–keeping function of accounting has been transformed into accounting has been transformed into

providing information for decision making.providing information for decision making.

Users of Accounting InformationUsers of Accounting Information

External parties External parties

such as investors, such as investors,

government authorities,government authorities,

who use the information who use the information

for making decisions about for making decisions about

the company.the company.

In general, users of accounting informationIn general, users of accounting information

fall into two categories:fall into two categories:

Internal managers Internal managers

who use the information who use the information

for planning, controlling for planning, controlling

operations and makingoperations and making

decisions.decisions.

Objective 2Objective 2Distinguish between financial Distinguish between financial Accounting and Management Accounting and Management

AccountingAccounting

Financial AccountingFinancial Accounting

Management AccountingManagement Accounting

is the field of accounting that developsis the field of accounting that develops

information for external decision makers information for external decision makers

such as stockholders, suppliers, banks,such as stockholders, suppliers, banks,

and government regulatory agencies.and government regulatory agencies.

is the field of accounting that develops is the field of accounting that develops

information to managers at various levels information to managers at various levels

of organization, who use this information of organization, who use this information

for planning, controlling operations and for planning, controlling operations and

decision making.decision making.

management management accountingaccounting

financialfinancial

accountingaccounting1)1) Primary Primary

users users Internal managersInternal managers Outside parties Outside parties

and also and also managers managers

2)2) Freedom Freedom of choice of choice

No constraints, the No constraints, the basic question is "Is basic question is "Is

the information the information useful?" rather than useful?" rather than "Does it conform to "Does it conform to

GAAPGAAP"?"?

Constrained by Constrained by GAAPGAAP

The major distinctions between managementThe major distinctions between management accounting and financial accounting areaccounting and financial accounting are::

management management accountingaccounting

financial financial accountingaccounting

3)3) Time Time focusfocus

Future orientationFuture orientation Past orientationPast orientation

4)4) Time Time SpanSpan

Flexible, varying Flexible, varying from hourly to 10-15 from hourly to 10-15

yearsyears

Less flexible, Less flexible, usually one year usually one year

or one quarteror one quarter . .

5)5) ReportsReports Detailed reports Detailed reports concern about concern about

details of parts of details of parts of organization organization (products, (products,

departments, etc.)departments, etc.)

Summary Summary reports: concern reports: concern

primarily with primarily with entity as a wholeentity as a whole . .

management accounting

financial accounting

6)6) Use ofUse of

other other disciplines disciplines

Heavier use of economics, decision

sciences and behavioral sciences.

Lighter use of related

disciplines.

7)7) PrecisionPrecision Less emphasis on precision

More emphasis on precision

8)8)MonetaryMonetary and Non- and Non- monetary monetary

informationinformation

Deals with non monetary as well as

monetary information.

The financial statements

include primarily monetary

information.

Objective 3Objective 3Name the types of questions Name the types of questions an accounting system helps an accounting system helps

to answer . ( types of acc. to answer . ( types of acc. informationinformation

The Need for Accounting systemsThe Need for Accounting systems

Accounting systemAccounting system

A formal mechanism for gathering , A formal mechanism for gathering ,

organizing and communicating information organizing and communicating information

about an organization's activities .about an organization's activities .

A good accounting system helps an organization A good accounting system helps an organization

achieve its goals and objectives by helpingachieve its goals and objectives by helping

to answer three types of questions :to answer three types of questions :

1.1. Scorekeeping: Am I doing well Scorekeeping: Am I doing well or poorly?or poorly?

Scorekeeping is the accumulation and Scorekeeping is the accumulation and classification of data . classification of data .

This aspect of accounting enables both This aspect of accounting enables both internal and external parties to evaluate internal and external parties to evaluate organizational performance.organizational performance.

factory servicefactory service department costs todepartment costs to production departmentsproduction departments

Examples:Examples:

DailyDaily recording of material recording of material purchase voucherspurchase vouchers

Posting daily cash collections toPosting daily cash collections to customer's accountscustomer's accounts

Allocating factory service department Allocating factory service department costs to production departmentscosts to production departments

Recording overtime hours of the Product Recording overtime hours of the Product finishing departmentfinishing department..

Recording overtime hours of theRecording overtime hours of the Product finishing departmentProduct finishing department..

2.2. Attention directing: Which problems Attention directing: Which problems should I Look into?should I Look into?

Attention directing means reporting Attention directing means reporting and interpreting information that helps and interpreting information that helps managers to focus on operating problem, managers to focus on operating problem, imperfections, inefficiencies and imperfections, inefficiencies and opportunities.opportunities.

This aspect of accounting helps This aspect of accounting helps managers to concentrate on important managers to concentrate on important areas of operations promptly enough for areas of operations promptly enough for effective action.effective action.

Examples:Examples:Preparing a report of overtime labor Preparing a report of overtime labor

costs by production departments.costs by production departments.

Analyzing deviations from the budget of Analyzing deviations from the budget of the factory maintenance department the factory maintenance department

Compiling data for a report showing the Compiling data for a report showing the ratio of advertising expenses to sales ratio of advertising expenses to sales for each branch store .for each branch store .

Interpreting increases in nursing costs Interpreting increases in nursing costs per patient-day in a hospital per patient-day in a hospital

Investigating reasons for increased Investigating reasons for increased returns and allowances for purchases returns and allowances for purchases

3.3. Problem solving: Of the several ways of Problem solving: Of the several ways of doing a job, which is the best?doing a job, which is the best?

The problem solving aspect of The problem solving aspect of accounting quantifies the likely results of accounting quantifies the likely results of possible courses of action and often possible courses of action and often recommends the best course to follow.recommends the best course to follow.

Problem solving is commonly Problem solving is commonly associated with nonrecurring, nonroutine associated with nonrecurring, nonroutine decisions, situations that require special decisions, situations that require special accounting reports.accounting reports.

ExamplesExamples::

Estimating the costs of moving corporateEstimating the costs of moving corporate head-quarters to another cityhead-quarters to another city..

Estimating the costs of moving corporateEstimating the costs of moving corporate head-quarters to another cityhead-quarters to another city..

Analyzing the costs of acquiringAnalyzing the costs of acquiring and using each of two alternate typesand using each of two alternate types

of equipment.of equipment.

Analyzing the costs of acquiringAnalyzing the costs of acquiring and using each of two alternate typesand using each of two alternate types

of equipment.of equipment.

Assisting in a study to determine Assisting in a study to determine whether to buy or make certain partswhether to buy or make certain parts

for manufacturing productsfor manufacturing products

Assisting in a study to determine Assisting in a study to determine whether to buy or make certain partswhether to buy or make certain parts

for manufacturing productsfor manufacturing products

Notes:Notes: 1.1. The scorekeeping and attention- directive uses The scorekeeping and attention- directive uses

of information that closely relate the same of information that closely relate the same information may serve as a scorekeeping information may serve as a scorekeeping function for a manage and an attention-directing function for a manage and an attention-directing function for the manager's superior. (e.g. function for the manager's superior. (e.g. performance reports)performance reports)

2.2. Sometimes all three facets of accounting Sometimes all three facets of accounting overlap, making it difficult to classify a particular overlap, making it difficult to classify a particular accounting task as a scorekeeping, attention accounting task as a scorekeeping, attention directing, a problem-solving task.directing, a problem-solving task.

Nevertheless, attempts to make these Nevertheless, attempts to make these distinctions provide insight into the objectives distinctions provide insight into the objectives and tasks of both accountants and managers and tasks of both accountants and managers

Internal versus External Accounting Internal versus External Accounting systemssystems

1.1. Using one accounting system for both financial Using one accounting system for both financial and management purposes sometimes creates and management purposes sometimes creates problems.problems.

Annual financial statements must adhere to a set Annual financial statements must adhere to a set of standards known as GAAP. Internal of standards known as GAAP. Internal accounting reports need not be restricted by accounting reports need not be restricted by GAAP. For instance, GAAP requires accounting GAAP. For instance, GAAP requires accounting for assets according to historical cost. For for assets according to historical cost. For internal purposes, an organization can account internal purposes, an organization can account for its assets (economic resources) on the basis for its assets (economic resources) on the basis of their current values.of their current values.

External forces (for example tax authorities) External forces (for example tax authorities) often limit management choices of accounting often limit management choices of accounting methods for external reports.methods for external reports.

2.2. Many organizations develop systems Many organizations develop systems primarily to satisfy legal requirements primarily to satisfy legal requirements imposed by external parties. These imposed by external parties. These systems often neglect the needs of systems often neglect the needs of internal users.internal users.

3.3. Organizations can create whatever kind Organizations can create whatever kind of internal accounting system they want-of internal accounting system they want-provided they are willing to pay the cost provided they are willing to pay the cost of developing and operating the system.of developing and operating the system.

Objective 4Objective 4Explain the role of managementExplain the role of management

accounting in planning and controlaccounting in planning and control

The Management process and accountingThe Management process and accounting

is a series of activities in a cycle of is a series of activities in a cycle of planning and control. Decision making is planning and control. Decision making is the core of the management process.the core of the management process.

planningplanning

ControlControl

DecisionDecisionMakingMaking

The management processThe management process

: is the purposeful : is the purposeful choice from among a set of alternative courses choice from among a set of alternative courses of action designed to achieve some objectives. of action designed to achieve some objectives. Decisions within an organization are often Decisions within an organization are often divided into two types (1) planning decisions divided into two types (1) planning decisions and (2) control decisions.and (2) control decisions.

:refers to setting objectives :refers to setting objectives and outlining how they will be attained. Thus and outlining how they will be attained. Thus planning provides the answers to two questions:planning provides the answers to two questions:

What is desired?What is desired?

When and how is it to be accomplishedWhen and how is it to be accomplished??

Decision makingDecision making

PlanningPlanning

Accounting formalizes plans by expressing Accounting formalizes plans by expressing

them as budgets. Budget is a quantitative them as budgets. Budget is a quantitative

expression of a plan of action ; it is also an aid to expression of a plan of action ; it is also an aid to

coordinating and implementing the plan.coordinating and implementing the plan.

: : refers to implementing refers to implementing plans and using feedback to attain objectives. plans and using feedback to attain objectives. Feedback is crucial to the cycle of planning and Feedback is crucial to the cycle of planning and control. Planning determines action, action control. Planning determines action, action generates feedback, and feedback influences generates feedback, and feedback influences further planning. Timely, systematic reports further planning. Timely, systematic reports provided by the internal accounting system are the provided by the internal accounting system are the main sources of useful feedback.main sources of useful feedback.

ControllingControlling

Accounting formalizes control as Accounting formalizes control as performance reportsperformance reports,, which provide feedback by which provide feedback by comparing actual results with plans and by comparing actual results with plans and by highlighting variances, which are deviations from highlighting variances, which are deviations from plans.plans.

The accounting system records, measures, and The accounting system records, measures, and classifies actions in order to produce classifies actions in order to produce performance reports. Performance reports are performance reports. Performance reports are used to judge decisions and the productivity of used to judge decisions and the productivity of organizational units and managers.organizational units and managers.

Refer to Exhibits (1.4) and (1.5) for illustration of Refer to Exhibits (1.4) and (1.5) for illustration of budgets and performance reports.budgets and performance reports.

Performance reports stimulate investigation Performance reports stimulate investigation of exception- items for which actual amounts of exception- items for which actual amounts differ significantly from budgeted amounts. differ significantly from budgeted amounts. Operations are then brought into conformity with Operations are then brought into conformity with the plans, or the plans are revised this is often the plans, or the plans are revised this is often called called management by exception.management by exception.

Management by exception means Management by exception means concentrating on areas that deviate from the plan concentrating on areas that deviate from the plan and ignoring areas that presumed to be running and ignoring areas that presumed to be running smoothly. Thus the management-by- exception smoothly. Thus the management-by- exception approach frees managers from needless concern approach frees managers from needless concern with those phases of operations that are adhering with those phases of operations that are adhering to plans.to plans.

Management by exceptionManagement by exception

NoticeNotice that although budgets aid planning that although budgets aid planning

and performance reports aid control, it is not and performance reports aid control, it is not

accountants but other managers and their accountants but other managers and their

subordinates who actually plan and control subordinates who actually plan and control

operations. Accounting assists the managerial operations. Accounting assists the managerial

planning and control function by providing planning and control function by providing

prompt measurements of actions and by prompt measurements of actions and by

systematically pinpointing trouble spots.systematically pinpointing trouble spots.

Thank youThank you