01- Managerial Accounting an Overview

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CHAPTER 1

MANAGERIAL ACCOUNTING: AN

OVERVIEW

This chapter explains why managerial accounting is important to the futurecareers of all business students. It answers three questions: (1) What ismanagerial accounting (!) Why does managerial accounting matter to

your career and (") What s#ills do managers need to succeed It alsodiscusses the importance of ethics in business and corporate socialresponsibility.

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i. Comparison

of financial

an

mana!"rial

acco#n$in!

2. %"&"n '"( iff"r"nc"s

ii. Us"rs

1. )inancial acco#n$in!reports are prepared

for "*$"rnal par$i"s, whereas managerial

accounting reports are prepared for in$"rnal#s"rs.

iii. Emp+asis on $+" f#$#r"

1. Financial accounting summarizes pas$

$ransac$ions. Managerial accounting has a

strong f#$#r" ori"n$a$ion.

iv. R"l"&anc" of a$a

1. Financial accounting data should be

o,-"c$i&" an &"rifia,l". Managerial

accountants focus on providing r"l"&an$

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a$aeven if it is not completely objective or

verifiable.

v. L"ss "mp+asis on pr"cision

1. Financial accounting focuses on pr"cision

when reporting to external parties.

Managerial accounting aids decision maers

by providing !oo "s$ima$"sas soon as

possible rather than waiting for precise data

later.

vi. %"!m"n$s of an or!ania$ion

1. Financial accounting is concerned with

reporting for the compan( as a /+ol".

Managerial accounting focuses more on the

s"!m"n$sof the company. !xamples of

segments include"

a. #roduct lines, sales territories,

divisions, departments, etc.

vii. G"n"rall( Acc"p$" Acco#n$in! Principl"s

0GAAP

1. Financial accounting conforms $o GAAP.

Managerial accounting is no$ ,o#n ,(

GAAP.

viii. Mana!"rial acco#n$in! 2 no$ mana$or(

1. Financial accounting is mana$or(because

various outside parties re$uire periodic

financial statements. Managerial accounting

is no$ mana$or(.

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T+" /or' of mana!"m"n$ an $+" n"" for mana!"rial

acco#n$in! informa$ion

Managers carry out three main activities & plannin!,

ir"c$in! an mo$i&a$in!, and con$rollin!.

Plannin!

'n important part of planning is to identify

alternatives and then to s"l"c$ from amon!

$+" al$"rna$i&"sthe one that does the best

job of furthering the organization(s

objectives.

)nce alternatives have been identified, the

plans of management are often expressed

formally in ,#!"$s.

a. *udgets are usually prepared under the

direction of the con$roll"r, who is the

manager in charge of the accounting

department.b. +ypically, budgets are prepared

ann#all(.

3ir"c$in! an mo$i&a$in!


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-n addition to planning for the future,

managers must o&"rs"" a(4$o4a(

ac$i&i$i"sto eep the organization

functioning smoothly.

Managerial accounting data, such as ail(

sal"s r"por$s, are often used in this type of

daytoday decision maing.

Con$rollin!

-n carrying out the con$rolfunction,

managers see to ensure that the plan isbeing followed. )"",ac', which signals

whether operations are on trac, is the ey to

effective control.

' p"rformanc" r"por$compares

,#!"$"to ac$#al results. -t suggests

where operations are not proceeding as

planned and where some parts of the

organization may re$uire additionalattention.

T+" plannin! an con$rol c(cl"

+he wor of management, which is nown

as the planning and control cycle, can be

depicted as shown.

Or!ania$ional s$r#c$#r"

2. 3"c"n$ralia$ion

ix. 3"c"n$ralia$ionis the "l"!a$ion of

"cision4ma'in! a#$+ori$( throughout an

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organization by giving managers the authority

to mae decisions relating to their area of

responsibility.

T+" f#nc$ional &i"/ of or!ania$ions

'n or!ania$ional c+ar$shows how

responsibility is divided among managers and

it shows formal lines of reporting and

communication.

Lin" an s$aff r"la$ions+ips

'n organization chart also depicts lin"and

s$affpositions in an organization.

1. ' person in a lin"position is ir"c$l(

involved in achieving the basic objectives of

the organization.

2. ' person in a s$affposition is inir"c$l(

involved in achieving those basic objectives.0taff positions support line positions, but

they do not have direct authority over line

positions.

T+" C+i"f )inancial Offic"r

+he C+i"f )inancial Offic"rF)3 is the

member of the top management team who is

responsible for providing timely and relevantdata to support plannin! an con$rol

ac$i&i$i"sand for pr"parin! financial

s$a$"m"n$sfor external users.

+he con$roll"rreports to the F).

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5ey definitions6concepts

' ,#sin"ss proc"ssis a series of steps that are

followed in order to carry out some tas in a

business.

' &al#" c+ainconsists of the major business

functions that add value to a company(s

products and services.

L"an pro#c$ion

-n a traditional manufacturing company, wor

is p#s+"through the system in order to

produce as much as possible and to eep

everyone busy7even if products cannot be

immediately sold.

+he 8push9 approach almost inevitably

results in large inventories of raw materials,

wor in process and finished goods.

a. Ra/ ma$"rialsare the materials that

are used to mae a product.

b. Wor' in proc"ssinventories consist of

units of product that are only partially

complete and will re$uire further worbefore they are ready for sale to the

customer.

c. )inis+" !oosconsist of units of

product that have been completed but

have not yet been sold to customers.

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T+" T+"or( of Cons$rain$s 0TOC

5"( "fini$ions6conc"p$s

' cons$rain$also called a ,o$$l"n"c'3 is

anything that prevents you from getting

more of what you want.

+he constraint in a system is

determined by the step that has the

small"s$ capaci$(.

+he T+"or( of Cons$rain$s 0TOCis basedon the insight that "ff"c$i&"l( mana!in! $+"

cons$rain$is the ey to success.

+he goal is to manage the constraint

with the intent of generating mor"

business rather than c#$$in!the

worforce.

+he +) offers a four step approach toproc"ss impro&"m"n$:

)irs$, identify the weaest lin in the chain,

which is the constraint.

%"con, do not place a greater strain on the

system than the weaest lin can handle & if

you do, the chain will brea.

T+ir, concentrate improvement efforts on

strengthening the weaest lin.)o#r$+, if the improvement efforts are

successful, eventually the weaest lin will

improve to the point where it is no longer

the weaest lin.

't this point, the new weaest lin

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must be identified and the

improvement process starts over again.

%i* %i!ma

5ey definitions6concepts

%i* %i!mais a process improvement method

that relies on c#s$om"r f"",ac'and fac$4

,as" a$a !a$+"rin! an anal(sis

T"c+ni7#"sto drive process improvement.

+he term 0ix 0igma refers to a process thatgenerates no more than 8.9 "f"c$s p"r

million oppor$#ni$i"s.

*ecause this rate of defects is so low,

0ix 0igma is sometimes associated

with the term "ro "f"c$s.

+he 3MAIC


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+he analyze stage often reveals non4

&al#"4a" ac$i&i$i"sthat should be

eliminated wherever possible.

+he impro&" s$a!"is where potential

solutions are developed, evaluated, and

implemented to eliminate nonvalueadded

activities and any other problems uncovered

in the analyze stage.

+he con$rol s$a!"ensures that problems

remain fixed and that the new methods areimproved over time.

T+" impor$anc" of "$+ics in ,#sin"ss

+he -M'(s %$a$"m"n$ of E$+ical Prof"ssional

Prac$ic" has two main parts & guidelines for ethical

behavior and guidelines for resolution of an ethicalconflict.

G#i"lin"s for "$+ical ,"+a&ior

%. Comp"$"nc"

a. Maintain professional competence.

b. Follow applicable laws, regulations,

and standards.

c. #rovide accurate, clear, concise, andtimely decision support information.

d. >ecognize and communicate

professional limitations that preclude

responsible judgment

. Confi"n$iali$(

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a.


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consider the board of directors or the

audit committee.

c. >emember that contact with levels

above immediate supervisor should

only be initiated with supervisor(snowledge, assuming the supervisor is

not involved.

d. !xcept where legally prescribed,

communication with individuals not

employed by the organization is not

appropriate.

e. larify relevant ethical issues with an

objective advisor such as a member ofthe -M'(s !thics ounseling 0ervice.

f. onsult an attorney regarding your

legal obligations.

W+( +a&" "$+ical s$anars

!thical standards are motivated by a very

practical consideration & if $+" s$anars ar"no$ follo/" in ,#sin"ss; $+"n $+" "conom(

an all of #s /o#l s#ff"r.

'bandoning ethical standards would lead to a

lo/"r s$anar of li&in!with lower$uality

goods and services, less to choose from, and

higher prices. -n short, ethical standards are

essential for the smooth functioning of an

advanced maret economy.

Compan( co"s of con#c$

Many companies have a formal code of

conduct. +hese codes are generally broad

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based statements of a company(s

responsibilities to its "mplo(""s, its

c#s$om"rs, its s#ppli"rs, and the

comm#ni$i"sin which the company operates.

Co"s of con#c$ on $+" in$"rna$ional l"&"l

+he Co" of E$+ics for Prof"ssional

Acco#n$an$s; iss#" ,( $+" -nternational

Federation of 'ccountants -F'3, governs

the activities of all professional accountants

throughout the world.

-n addition to outlining ethical re$uirements

in matters dealing with integrity and

objectivity, resolution of ethical conflicts,

competence, and confidentiality, the -F'(s

code also outlines the accountants ethical

responsibilities in matters relating to"

:. +axes.

;. -ndependence.

=. Fees and commissions.

1?. 'dvertising and solicitation.

11. +he handling of monies.

12. rossborder activities.

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Cas" s$#(

T+" %ar,an"s4O*l"( Ac$ of


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report contain an in$"rnal con$rol r"por$

that is accompanied by an opinion from the

company(s audit firm about the fairness of

that report.

+he 'ct establishes severe penalties forcertain behaviors, such as"

a. @p to 2? years in prison for altering or

destroying any documents that may

eventually be used in an official

proceeding.

b. @p to 1? years in prison for retaliating

against a 8whistle blower.9

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Documents

01- Managerial Accounting an Overview