Managerial Accounting: An Overview

Learning Objectives Define managerial accounting Identify major similarities and differences between managerial and financial accounting Explain what managers do (planning, controlling, decision making) and the information they use Explain the concept of ethics and understand its importance in an advanced market economy Explain the concept of corporate social responsibility Describe enterprise risk management process Explain the basic concept of lean production Describe various cognitive biases

What is Managerial Accounting? Financial accounting provides information to investors, creditors, and others who decide whether to invest in or lend money to the organization Managerial accounting provides information to managers of an organization who plan, direct, and control its operations

Comparison of Financial Accounting & Managerial Accounting Has to follow GAAP - e.g., HC, depreciation Doesn’t have to follow GAAP - e.g., CV no depreciation Is mandatory - e.g., SEC & NYSE Is not mandatory Data are basically monetary Data are both monetary and non-monetary Primarily past information, some are estimates Future, as well as some past information, mostly estimate

Comparison of Financial Accounting & Managerial Accounting Emphasizes objectivity and reliability - e.g., HC, depreciation Emphasizes relevance and flexibility - e.g., CV, estimates Emphasizes precision - annual, quarterly reports Emphasizes timeliness - daily, real-time reports Emphasizes the whole organization Emphasizes segments of the organization Draws on economics Draws on economics and on social psychology

Managers’ Work and Information Needs Planning – laying out (outlining) the activities for next quarter, year, etc., to attain the organization’s objective (e.g., maximize profit) Planning requires identifying alternatives and selecting from among them. e.g., What products should we produce next year? past revenue, cost, and profit data projected revenue, cost, and profit data state of the economy and industry, etc.

Managers’ Work and Information Needs Directing – overseeing day-to-day, routine, activities Directing requires assigning tasks to employees; answering their questions and supervising their work; solving on-the-spot problems; and making day-to-day decisions. hourly, daily, or weekly sales and expense reports production reports, including scraps, defects, etc.

Managers’ Work and Information Needs Controlling – ensuring that the plans are actually carried out and are modified as circumstances change Controlling requires measuring actual performance and comparing those with planned performance. actual and planned data

Summary of the Work of Management Formulating long- and short-term plans (Planning) Begins Implementing the plans (Directing) Decision making Comparing actual to planned performance (Controlling) Measuring performance (controlling)

Ethics Ethics in a philosophical sense refers to the set of moral standards for right or wrong that a person, a group, or a society develops. Most professions have a code of ethics because: Professions have a responsibility to provide quality service. The body of knowledge in a profession is complex. The public often cannot evaluate the quality of a professional’s service, and thus relies on the profession. By establishing a code of ethics, professions assume self-discipline beyond the requirements of law.

Code of Ethics for Management Accountants Management accountants are governed by a code of ethics issued by the Institute of Management Accountants (IMA), consisting of: Principles – Honesty, Fairness, Objectivity, and Responsibility Standards – Competence, Confidentiality, Integrity, and Credibility (communicate information fairly and objectively) Resolution of ethical conflict

Enterprise Risk Management A process used by a company to proactively identify and manage risk. Once a company identifies its risks, perhaps the most common risk management tactic is to reduce risks by implementing specific controls.

Corporate Social Responsibility (CSR) Companies are responsible for creating strategies that produce financial results that satisfy stockholders and serve other stakeholders, such as customers, employees, suppliers, and communities CSR extends beyond legal compliance to include voluntary actions that satisfy stakeholder expectations. Examples of CSR responsibilities and reporting include: Safe and humane working conditions Nondiscriminatory treatment and the right to organize Greenhouse gas emissions data Recycling and resource conservation data Child labor practices

Business functions making up the value chain Business Process A business process is a series of steps that are followed to carry out a specific task in a business. Business functions making up the value chain Product Customer R&D Design Manufacturing Marketing Distribution Service

Lean Thinking The lean thinking model is a five step approach.  Identify value in specific products/services.  Identify the business process that delivers value. The lean thinking model is a five step approach.  Organize work arrangements around the flow of the business process.  Pursue improvement in the business process.  Create a pull system that responds to customer orders.

Just-In-Time (JIT) System Receive customer orders Complete products just in time to ship to customers Schedule production Receive materials just in time for production Complete parts just in time for assembly into products

Cognitive Biases Cognitive biases or distorted thought processes: Anchoring – too much emphasis on an info. piece Optimism – being overly optimistic Self-enhancement – overestimating strength Confirmatory – focusing on information that confirms decision/view Overconfidence – failing to recognize alternatives Groupthink – placing emphasis on positions asserted by certain individual