Prepared by Debby Bloom-Hill CMA, CFM

Managerial Accounting CHAPTER 1 Managerial Accounting In the Information Age

Managerial Accounting Managerial accounting is designed for internal users. The goal of Managerial Accounting is to provide the information managers need for: Planning. Control. Decision making.

Planning Planning is a key activity for all companies. Communicates a company’s goals to employees. Aids coordination of various functions such as sales and production. Specifies the resources needed to achieve company goals.

Planning Budgets for planning: Profit budget: Cash flow budget: Indicates planned income. Cash flow budget: Indicates planned cash inflows and outflows. Production budget: Indicates the planned quantity of production and expected costs.

Control Organizations achieve control by: Evaluating managers to determine how their performance should be rewarded or punished. Evaluating operations to determine whether they should be changed or not.

Planning and Control Process

Cost Terminology Variable Costs: Change in proportion to changes in volume or activity.

Cost Terminology Fixed Costs: Do not change in response to changes in volume or activity.

Cost Terminology Sunk Costs: Opportunity Costs: Costs incurred in the past. Not relevant to present or future decisions. Opportunity Costs: Values of benefits foregone when selecting one alternative over another. Always relevant to present or future decisions.

Cost Terminology Direct and indirect costs: Direct costs are directly traceable to a product, activity, or department, indirect costs are not traceable. Controllable and non-controllable costs: A manager can influence controllable costs but cannot influence non- controllable costs.

Two Key Ideas in Managerial Accounting

Incremental Analysis Incremental analysis: Differences in revenues and costs between alternatives are incremental. Incremental revenue minus incremental cost equals incremental profit.

You Get What You Measure Performance measures greatly influence the behavior of managers.

Information Age and Managerial Accounting Advances in information technology have: Increased competition and information technology have also created oppor-tunities and cost savings for firms that use information for strategic advantage. Impacted information flows up and down the value chain (i.e. fundamental activities that a firm engages in to create value).

Ethical and Unethical Behavior Examples of unethical behavior: Enron managers mislead investors by hiding debt, i.e., Kenneth Lay, CEO, found guilty of fraud. WorldCom overstated profits. Bernard Ebbers, CEO, received a 25-year prison sentence. Dennis Kozlowski, head of Tyco, was charged with avoiding taxes.

Sarbanes-Oxley Act Enacted by Congress in July 2002. Requires CEO and CFO to certify that the financial statements do not contain any untrue statements or omissions. Bans certain types of work by the company’s auditors to ensure their independence.

Sarbanes-Oxley Act Provides for longer jail sentences and larger fines for executives (i.e., fines up to $5 million and jail terms up to 20 years), Requires companies to report on the existence and reliability of internal controls.

Framework for Ethical Decision Making When evaluating a decision, ask: What decision alternatives are available? 2. What individuals or organizations have a stake in the outcome of my decision? Will an individual or an organization be harmed by any of the alternatives? Which alternative will do the most good with the least harm? 5. Would someone I respect find any of the alternatives objectionable?

Framework for Ethical Decision Making After deciding on a course of action, but before taking action, ask: At a gut level, am I comfortable with the decision I am about to make? 7. Will I be comfortable telling my friends and family about this decision?

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