Introduction to Managerial Accouting

Overview

Welcome to the study of cost accounting. This introductory chapter explains the intertwining roles of managers and management accountants in choosing an organization’s strategy, and in planning and controlling its operations. Unlike the remainder of the textbook, this chapter has no “number crunching.” Its main purpose is to emphasize the management accountant’s role in providing information for managers.

Review Points

1.It is important to distinguish management accounting from financial accounting.

• Management accounting measures and reports financial information and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. Management accounting (a) emphasizes the future, (b) aims to influence the behavior of managers and employees in achieving the goals of an organization, and (c) is not particularly constrained by generally accepted accounting principles (GAAP).
• Financial accounting focuses on reporting to external parties. It measures and records business transactions and provides financial statements—the balance sheet, income statement, statement of cash flows, and statement of retained earnings—based on GAAP.

2. Cost accounting measures and reports financial information and nonfinancial information relating to the cost of acquiring or utilizing resources in an organization. Cost accounting includes those parts of both management accounting and financial accounting in which cost information is collected or analyzed.

3. Cost management is the approaches and activities of managers in short-run and long-run planning and control decisions that increase value for customers and lower costs of products and services. For example, rearranging the production-floor layout might reduce manu-facturing costs, or additional product design costs might be incurred in an effort to increase revenues and profits.


4. Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. In other words, strategy describes how an organization will compete and the opportunities its employees should seek and pursue. Companies follow one of two broad strategies:

• Sell quality products or services at low prices. An example is Southwest Airlines.
• Sell relatively unique products or services at higher prices than charged by competitors. An example is Ralph Lauren.

Choosing between these strategies is among the most important decisions that managers make. The term strategic cost management is often used to describe cost management that specifically focuses on strategic issues.

5. Management accounting facilitates planning and control. Planning comprises (a) selecting organization goals, predicting results under various alternative ways of achieving those goals, deciding how to attain the desired goals, and (b) communicating the goals and how to attain them to the entire organization. Control comprises (a) taking actions that implement the planning decisions, and (b) deciding how to evaluate performance and what feedback to provide that will help future decision making. Control in one accounting period is linked to planning for the next period by means of feedback. Managers use feedback to examine past performance (the control function) and systematically explore alternative ways of making better informed decisions and plans in the future (the planning function).

6. Budgeting is essential for planning and control. A budget is the quantitative expression of a proposed plan of action by management for a specified period and is an aid to coordinating what needs to be done to implement that plan. A key input used in developing budgets is past financial and nonfinancial information routinely recorded in the management accounting system.

7. Management accountants perform three important roles: problem solving, scorekeeping, and attention directing. Problem solving uses comparative analysis for decision making. Scorekeeping entails accumulating data and reporting results—to all levels of management—describing how the organization is doing. Attention directing helps managers focus on opportunities and problems. Often these roles are simultaneously performed due to the ongoing interaction among strategic decisions, planning decisions, and control decisions.

8. The value chain refers to the sequence of six business functions in which usefulness (value to the customer) is added to the products or services of a company. These business functions are research and development (R&D); design of products, services, or processes; production; marketing; distribution; and customer service. Managers in each of these business functions of the value chain are customers of management accounting information. Rather than proceeding sequentially through the value chain, companies can realize significant gains when various parts of the value chain work together. For example, additional spending on R&D and product design might be more than offset by lower costs of production and customer service.

9. The design and operation of management accounting systems are guided by four themes that are important to managers: customer focus, key success factors (cost and efficiency, quality, time, innovation), continuous improvement and benchmarking, and value-chain and supply-chain analysis. The term supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to customers, regardless of whether those activities occur in the same organization or in other organizations. Collectively, the four themes direct the company toward attracting and retaining profitable customers who are satisfied.

10. Three important guidelines help management accountants provide the most value in performing their problem solving, scorekeeping, and attention-directing roles:

a. Employ the cost-benefit approach. This approach guides decision making: resources should be spent if they are expected to better attain company goals in relation to the expected costs of those resources. For example, consider budgeting systems as economic goods. The expected costs of a proposed budgeting system (such as personnel, software, and training) should be compared with its expected benefits, which are the collective decisions of managers that will better attain the company’s goals. In particular, measurement of the expected benefits is seldom easy.
b. Give full recognition to behavioral as well as technical considerations. A management accounting system should have two simultaneous missions for providing information: (i) to help managers make wise economic decisions (the technical mission), and (ii) to help motivate managers and employees to strive for the company’s goals (the behavioral mission). Management is primarily a human activity; the emphasis needs to be on how to help individuals do their jobs better.
c. Use different costs for different purposes. To illustrate this guideline, consider how to account for advertising. For the purpose of preparing financial statements under GAAP, advertising is an expense in the accounting period when it is incurred. For the purpose of determining a product’s selling price, its advertising costs, along with its other costs from all business functions of the value chain, should be taken into account.

11. Most organizations distinguish line management from staff management. Line management is directly responsible for attaining the goals of an organization. Staff management exists to provide advice and assistance to line management. When organizations rely on teams for attaining their goals, the traditional distinction between line and staff management is less clear-cut.

12. The chief financial officer (CFO), a staff management function, is the executive responsible for overseeing the financial operations of an organization, which typically include controllership, treasury, risk management, taxes, and internal audit. The controller, also a staff management function, is the financial executive primarily responsible for both management accounting and financial accounting. In performing the problem-solving and attention-directing roles, the controller “controls” by exerting an influence that helps managers make better informed decisions.


13. Accountants consistently rank high in public opinion surveys on the ethics exhibited by members of different professions. Professional accounting organizations such as the Institute of Management Accountants (IMA), the largest association of management accountants in the United States, play an important role in promoting high ethical standards. For example, the IMA has identified four standards of ethical conduct for management accountants: competence, confidentiality, integrity, and objectivity.