Accounting Principles, Ninth Edition Chapter 19 Managerial Accounting Accounting Principles, Ninth Edition

Study Objectives Explain the distinguishing features of managerial accounting. Identify the three broad functions of management. Define the three classes of manufacturing costs. Distinguish between product and period costs. Explain the difference between a merchandising and a manufacturing income statement. Indicate how cost of goods manufactured is determined. Explain the difference between a merchandising and a manufacturing balance sheet. Identify trends in managerial accounting. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Managerial Accounting Basics Definition of Managerial Accounting A field of accounting that provides economic and financial information for managers and other internal users. Also called Management Accounting

Managerial Accounting Basics Managerial Accounting Activities Explain manufacturing and nonmanufacturing costs and how they are reported. (Chapter 19) Compute cost of providing a service or manufacturing a product. (Chapters 20 and 21) Determine behavior of costs and expenses as activity changes. (Chapter 22)

Managerial Accounting Basics Managerial Accounting Activities (continued) Assist management in profit planning and formalizing these plans in the form of budgets. (Chapter 23) Help to control costs by comparing actual results with planned objectives and standard costs. (Chapters 24 and 25) Accumulate and present data for making decisions. (Chapter 26)

Managerial Accounting Basics Distinguishing Features Applies to all types of business - Service, Merchandising, and Manufacturing Applies to all forms of businesses – Proprietorships, Partnerships, and Corporations Applies to not-for-profit and profit oriented companies

Managerial Accounting Basics Distinguishing Features: Continued More responsible for strategic cost management Teams with people from production, marketing, engineering, etc. Aid in making critical decisions

Comparing Managerial and Financial Accounting Similarities Both deal with economic events of a business – Thus, interests overlap Both require that economic events be quantified and communicated to interested parties – Determining unit cost is part of managerial accounting, Reporting cost of goods manufactured is a part of financial accounting SO 1 Explain the distinguishing features of managerial accounting.

Comparing Managerial and Financial Accounting Differences Illustration 19-1 SO 1 Explain the distinguishing features of managerial accounting.

Comparing Managerial and Financial Accounting Review Question Managerial accounting: a. Pertains to the entity as a whole and is highly aggregated. b. Places emphasis on special-purpose information. c. Is limited to cost data. d. Is governed by generally accepted accounting principles. SO 1 Explain the distinguishing features of managerial accounting.

SO 2 Identify the 3 broad functions of management. Management Functions Management Functions Management’s activities and responsibilities can be classified into the following three broad functions: Planning Directing Controlling SO 2 Identify the 3 broad functions of management.

SO 2 Identify the 3 broad functions of management. Management Functions Planning Look ahead and establish objectives such as – Maximize short-term profit Commit to environmental protection Key Objective: Add value to the business Value measured by trading price of stock and by potential selling price of the company SO 2 Identify the 3 broad functions of management.

SO 2 Identify the 3 broad functions of management. Management Functions Directing Coordinate diverse activities and human resources Implement planned objectives Provide incentives to motivate employees Hire and train employees including executives, managers, and supervisors Produce smooth-running operation SO 2 Identify the 3 broad functions of management.

SO 2 Identify the 3 broad functions of management. Management Functions Controlling Keep activities on track Determine whether goals are met Decide changes needed to get back on track May use an informal or formal system of evaluations Good decision making is the outcome of good judgment in planning, directing, and controlling. SO 2 Identify the 3 broad functions of management.

Review Question Management Functions The management of an organization performs several broad functions. They are: a. Planning, directing, and selling. b. Directing, manufacturing, and controlling. c. Planning, manufacturing, and controlling. d. Planning, directing, and controlling. SO 2 Identify the 3 broad functions of management.

Good Ethics – Good Business Business Ethics Business scandals caused massive investment losses and employee layoffs. Corporate fraud has increased 13% in last 5 years. Employee fraud – 60% of all fraud Intentional misstatement of financial reports Aka financial reporting fraud Most costly to companies SO 2 Identify the 3 broad functions of management.

Good Ethics – Good Business Creating Proper Incentives Systems to monitor and evaluate employees may produce incentives for unethical actions. Employees may feel that they must succeed no matter what. Ineffective and unrealistic controls may result in declining product quality. SO 2 Identify the 3 broad functions of management.

Good Ethics – Good Business Code of Ethical Standards Sarbanes-Oxley Act of 2002 Clarifies management’s responsibilities. Certifications by CEO and CFO - fairness of financial statements and adequacy of internal control Selection criteria for Board of Directors and Audit Committee Substantially increased penalties for misconduct IMA Statement of Ethical Professional Practices SO 2 Identify the 3 broad functions of management.