CHAPTER Introduction: The Role, History, and Direction of Management Accounting Chapter 1 -

Objectives Discuss the need for management accounting information. Differentiate between management accounting and financial accounting. Provide a brief historical description of management accounting. Identify the current focus of management accounting.

Objectives 5. Describe the role of management accountants in an organization. 6. Explain the importance of ethical behavior for managers and management accountants. 7. List three forms of certification available to management accountants.

The managerial accounting system has three broad objectives: 1. To provide information for costing out services, products, and other objects of interest to management. 2. To provide information for planning, controlling, evaluating, and continuous improvement. 3. To provide information for decision making.

Personal Communication Management Accounting Information System Collecting Measuring Storing Analyzing Reporting Managing Special Reports Product Costs Customer Costs Budgets Performance Reports Personal Communication Economic Events Inputs Processes Outputs Users

Management Process Planning Controlling Decision Making The Management Process is defined by the following activities: Planning requires setting objectives and identifying methods to achieve those objectives. Planning Controlling Decision Making

Management Process Planning Controlling Decision Making The Management Process is defined by the following activities: Controlling is the managerial activity of monitoring a plan’s implementation and taking corrective action as needed. Planning Controlling Decision Making

Management Process Planning Controlling Decision Making The Management Process is defined by the following activities: Planning Controlling Decision Making Control is usually achieved with the use of feedback.

Management Process Feedback is information that can be used to evaluate or correct the steps being taken to implement a plan.

Management Process Planning Controlling Decision Making The Management Process is defined by the following activities: Planning Controlling Decision Making Decision making is the process of choosing among competing alternatives.

Differentiate Between Management Accounting and Financial Accounting

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused

Targeted Users Management accounting focuses on providing information for internal users.

ABC Company Annual Report Targeted Users ABC Company Annual Report Financial accounting focuses on provided information for external users.

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules

Restrictions on Inputs and Processes Financial accounting reporting must follow the accounting procedures set by the SEC and the FASB. Management accounting is not subject to the requirements of generally accepted accounting principles.

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information

Types of Information For management accounting, the financial or nonfinancial information may be much more subjective in nature. The restrictions imposed on financial accounting tend to produce objective and verifiable financial information.

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information 4. Emphasis on the future 4. Historical orientation

Time Orientation Management accounting strongly emphasizes providing information about future events.

Time Orientation Financial accounting records and reports events that have already happened.

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information 4. Emphasis on the future 4. Historical orientation 5. Internal evaluation and decisions based on very detail information 5. Information about the firm as a whole

Degree of Aggregation Management accounting provides measures and internal reports used the evaluate performance of entities, product lines, departments, and managers.

Financial accounting focuses on overall firm performance. Degree of Aggregation Financial accounting focuses on overall firm performance.

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information 4. Emphasis on the future 4. Historical orientation 5. Internal evaluation and decisions based on very detail information 5. Information about the firm as a whole 6. Broad, multidisciplinary 6. More self-contained

Management accounting is much broader than financial accounting. Breadth It includes aspects of managerial economics, industrial engineering, and management science. Management accounting is much broader than financial accounting.

Historical Description of Management Accounting 1880 - 1925 Most of the product-costing and internal accounting procedures used in this century were developed 1925 Emphasis of inventory costing for external reporting 1950s/60s Effort to improve the managerial usefulness of traditional cost systems 1980s/90s Significant efforts have been made to radically change the nature and practice of management accounting

Current Focus of Management Accounting Activity-Based Management Activity-based management is a system wide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the resulting profit.

Current Focus of Management Accounting Customer Orientation Customer value is the difference between what the customer receives (customer satisfaction) and what the customer gives up (customer sacrifice). What is received is called the total product.

Current Focus of Management Accounting Strategic Positioning Strategic cost management is the use of cost data to develop and identify superior strategies that will produce a sustainable competitive advantage. Strategies: Cost leadership Superior products through differentiation

Current Focus of Management Accounting Value-Chain Framework The internal value chain is the set of activities required to design, develop, produce, market, and deliver products and services to customers. The industrial value chain is the linked set of value-creating activities from basic raw materials to the disposal to the final products by end-use customers.

Value Chain: Apple Industry Firm A Planting and Cultivating Harvesting Distribution of Apples Firm B Value Chain: Apple Industry Applesauce Production Applesauce Distribution Firm C Product Disposal Supermarkets End-Use Customer

Managing the value chain means that a management accountant must understand many functions of the business, from manufacturing to marketing.

This emphasis on quality has created a demand for management accounting systems that provide financial and nonfinancial information about quality. The philosophy of total quality management is to manufacture perfect products.

The role of management accountants in an organization is one of support.

Partial Organization Chart, Manufacturing Company President Production Vice President Line Function Financial Vice President Staff Function Production Supervisor Machining Foreman Assembly Foreman Controller Treasurer Internal Audit Cost Financial Systems Tax

Ethical Behavior Michael Josephson’s* Ten Ethical Values: Honesty Integrity Promise keeping Fidelity Fairness Caring for others Respect for others Responsible citizenship Pursuit of excellence Accountability *Michael Josephson, “Teaching Ethical Decision Making and Principled Reasoning”

Professional Certifications CMA: One of the main purposes of the CMA was to establish management accounting as a recognized, professional discipline, separate from the profession of public accounting. CPA: The responsibility of a CPA is to provide assurance concerning the reliability of financial statements. CIA: The focus of the CIA is to recognize competency in internal auditing rather than external auditing as with the CPA.

The CMA Four areas emphasized on the exam: Economics, finance, and management Financial accounting and reporting Management report, analysis, and behavioral issues Decision analysis and information systems