Copyright © by Houghton Mifflin Company. All rights reserved.1 Financial & Managerial Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson Multimedia Slides by: Harry Hooper Santa Fe Community College

Chapter 15 A Manager’s Perspective: The Changing Business Environment

Copyright © by Houghton Mifflin Company. All rights reserved.3 1.Define management accounting and distinguish between management accounting and financial accounting. 2.Explain the management cycle and its connection to management accounting. 3.Identify the management philosophies of continuous improvement and discuss the role of management accounting in implementing those philosophies. LEARNING OBJECTIVES

Copyright © by Houghton Mifflin Company. All rights reserved.4 4.Define performance measures, recognize the uses of those measures in the management cycle, and prepare an analysis of non-financial data. 5.Identify the important questions a manager must consider before requesting or preparing a management report. 6.Compare accounting for inventories and cost of goods sold in merchandising, and manufacturing organizations. 7.Identify the standards of ethical conduct for management accountants. LEARNING OBJECTIVES

Copyright © by Houghton Mifflin Company. All rights reserved.5 Definition of Management Accounting The Institute of Management Accountants (IMA): “The process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial (and nonfinancial) information used by management to plan, evaluate, and control within the organization and to assure appropriate use and accountability for its resources.

Introduction to Management Accounting OBJECTIVE 1 Define management accounting and distinguish between management accounting and financial accounting.

Copyright © by Houghton Mifflin Company. All rights reserved.7 Management Accounting u Management accounting is an extension of financial accounting and applies mainly to internal operations. u Management accounting focuses on the techniques and procedures for information gathering and reporting to management.

Copyright © by Houghton Mifflin Company. All rights reserved.8 Management Accounting  Managers need various types of timely, accurate information. 4 Product and service costing information. 4 Information for planning of and control over operations. 4 Special reports and analyses to assist in managerial decision making.

Copyright © by Houghton Mifflin Company. All rights reserved.9 Management Accounting u Management accounting is necessary for all forms and sizes of business. The types of data needed to ensure efficient operations do not depend on an organization’s size. All organizations can become more cost- effective and more profitable.

Copyright © by Houghton Mifflin Company. All rights reserved.10 What Is Management Accounting?  Management accounting differs from financial accounting in many respects. Report format. Purpose of reports. Primary users. Units of measure. Nature of information. Frequency of reporting.

Copyright © by Houghton Mifflin Company. All rights reserved.11 Comparison of Management and Financial Accounting Areas of Comparison Management Accounting Financial Accounting Report formatFlexible format, driven by user's needs Based on generally accepted accounting principles Purpose of reports Provides information for planning, control, performance measurement, and decision making Report on past performance Primary usersEmployees, managers, suppliers Owners, lenders, customers, government agencies

Copyright © by Houghton Mifflin Company. All rights reserved.12 Comparison of Management and Financial Accounting Areas of Comparison Management Accounting Financial Accounting Units of measure Historical or future dollar; physical measure in time or number of objects Historical dollar Nature of information Future-oriented; objective for decision making; more subjective for planning; relies on estimates Historical, objective Frequency of reports Prepared as needed; may or may not be on a regular basis Prepared on a regular basis (minimum of once a year)

Copyright © by Houghton Mifflin Company. All rights reserved.13 Q. Q.What three types of information does management receive from the management accountant? A. A.Product costing information, planning and control information, and special reports and analyses. Discussion

The Management Cycle OBJECTIVE 2 Explain the management cycle and its connection to management accounting.

Copyright © by Houghton Mifflin Company. All rights reserved.15 The Management Cycle u Management is expected to use resources wisely, operate profitably, pay debts, and abide by laws and regulations. u Expectations motivate managers to establish the objectives, goals, and strategic plans of the organization.

Copyright © by Houghton Mifflin Company. All rights reserved.16 The Management Cycle u Traditionally, management operates in four stages: 1.Planning 4Long and short term. 4To support decision-making and set expectations. 2.Executing 4Hiring, scheduling, acquiring assets (including inventory), reducing waster, generating revenues. 3.Reviewing 4Controlling operations. 4Comparing actual performance to plan. 4.Reporting 4To stockholders, creditors, other managers, other interested parties.

Copyright © by Houghton Mifflin Company. All rights reserved.17 The Management Cycle

Copyright © by Houghton Mifflin Company. All rights reserved.18 The Management Cycle u Management accounting services information needs of management by: 1.Developing plans and analyzing alternatives. 2.Communicating plans to key personnel. 3.Evaluating performance. 4.Reporting the results of activities. 5.Accumulating, maintaining, and processing an organization’s financial and nonfinancial information.

Copyright © by Houghton Mifflin Company. All rights reserved.19 Q. Q. What are the four stages of traditional management? A. A. 1. Planning. 2. Executing. 3. Reviewing. 4. Reporting.Discussion

Meeting the Demands of Global Competition OBJECTIVE 3 Identify the new management philosophies for continuous improvement and discuss the role of management accounting in implementing these philosophies.

Copyright © by Houghton Mifflin Company. All rights reserved.21 New Management Philosophies u Three significant new management philosophies are as follows: 1.Just-in-time (JIT) operating environment. 2.Total quality management (TQM). 3.Activity-based management (ABM).

Copyright © by Houghton Mifflin Company. All rights reserved.22 New Management Philosophies u All of these approaches are designed to: 1.Increase product quality. 2.Reduce waste and inefficiency. 3.Reduce cost. 4.Increase customer satisfaction.

Copyright © by Houghton Mifflin Company. All rights reserved.23 The Continuous Improvement Environment

Copyright © by Houghton Mifflin Company. All rights reserved.24 Theory of Constraints u Identify performance or production bottlenecks (limiting factors). u Overcome limitation. u Identify next bottleneck.

Copyright © by Houghton Mifflin Company. All rights reserved.25 The Goal: Continuous Improvement u Avoid complacency. u Constantly seek a better method. u Reduce defects or poor quality. u Reduce or eliminate nonvalue-adding activities. Results: Product/service costs and delivery times reduced. Quality and customer satisfaction increases.

Copyright © by Houghton Mifflin Company. All rights reserved.26 Q.What are the new management philosophies designed to accomplish? A.1. Increase product quality. 2. Reduce waste and inefficiency. 3. Reduce cost. 4. Increase customer satisfaction.Discussion

Performance Measures OBJECTIVE 4 Define performance measures, recognize the uses of those measures in the management cycle, and prepare an analysis of nonfinancial data.

Copyright © by Houghton Mifflin Company. All rights reserved.28 Performance Measures u Performance measures provide an indication of an organization’s performance in relation to a specific goal or an expected outcome.

Copyright © by Houghton Mifflin Company. All rights reserved.29 Examples of Performance Measures u Financial performance measures: 1.Return on investment. 2.Net income as a percentage of sales. 3.Costs of poor quality as a percentage of sales. u Nonfinancial performance measures: 1.Number of customer complaints. 2.Hours of inspection. 3.Time to fill an order.

Copyright © by Houghton Mifflin Company. All rights reserved.30 Performance Measures u Performance measures are useful in reducing waste in operating activities. u Management uses performance measures in all stages of the management cycle. 4 In planning to motivate. 4 In executing to guide, and assign costs. 4 In reviewing to improve future performance. 4 In reporting to communicate results.

Copyright © by Houghton Mifflin Company. All rights reserved.31 Analysis of Nonfinancial Data – Bank Kings Beach National Bank Summary of Number of Customers Served For the Quarter Ended December 31, 20xx Part ANumber of Customers Served WindowOctoberNovemberDecember Quarter Totals 15,4285,1865,16215,776 25,2804,8204,96015, ,593 4,494 4,58013,667 Totals15,30114,50014,70244,503

Copyright © by Houghton Mifflin Company. All rights reserved.32 The Balanced Scorecard u A framework that links the perspective of shareholders: 4 Investors 4 Employees 4 Customers with the organization’s mission, vision, plans, and resources. u Provides clear, measurable performance targets.

Copyright © by Houghton Mifflin Company. All rights reserved.33 Analysis of Nonfinancial Data u Performance targets and measurements of business process may be nonfinancial. u Quality related performance measures are often nonfinancial.

Copyright © by Houghton Mifflin Company. All rights reserved.34 Analysis of Nonfinancial Data – Bank Kings Beach National Bank Summary of Number of Customers Served For the Quarter Ended December 31, 20xx Part BNumber of Customers Served per Hour WindowOctoberNovemberDecember Quarter Averages Totals

Copyright © by Houghton Mifflin Company. All rights reserved.35 Q. Q.Give three examples of reports based on non-financial data that are useful to a bank manager. A. A.Teller transaction analysis. Drive-up window efficiency reports. Time needed to complete a loan transaction.Discussion

Management Accounting Reports and Analysis OBJECTIVE 5 Identify the important questions a manager must consider before requesting or preparing a management report.

Copyright © by Houghton Mifflin Company. All rights reserved.37 The Four W’s u Report preparation depends on: 4 Why? n Why are we preparing the report? 4 What? n What information is needed? 4 Who? n Who is the audience for the report? 4 When? n When is the report due?

Copyright © by Houghton Mifflin Company. All rights reserved.38 Q. Q.State and briefly explain the “four W’s” of preparing a managerial report. A. A.Why is the report being prepared? What information should be provided? For whom is the report intended? When is the report due?Discussion

Merchandising Versus Manufacturing Organizations OBJECTIVE 6 Compare accounting for inventories and cost of goods sold in service, merchandising, and manufacturing organizations.

Copyright © by Houghton Mifflin Company. All rights reserved.40 Comparison of Financial Statements for Service, Merchandising, and Manufacturing Organizations

Copyright © by Houghton Mifflin Company. All rights reserved.41 Service, Merchandising, and Manufacturing Organization u Different types of organizations have different financial reporting formats. Examples: 4 Service organizations maintain no inventories for sale. 4 Merchandising organizations only have one inventory account. 4 Manufacturing organizations use materials, work in process and finished goods inventory accounts.

Copyright © by Houghton Mifflin Company. All rights reserved.42 Merchandisers u Merchandisers purchase goods already manufactured, and resell them. 1.They accumulate the purchased cost of goods. 2.They have only one type of inventory (merchandise inventory.)

Copyright © by Houghton Mifflin Company. All rights reserved.43 Merchandising Organization Beginning Merchandise Inventory +Net Cost of Goods Purchased -Ending Merchandise Inventory =Cost of Goods Sold

Copyright © by Houghton Mifflin Company. All rights reserved.44Manufacturers u Manufacturers design and manufacture products for sale. 1.They must accumulate the costs of manufacturing products. 2.Their inventory consists of materials, work in process, and finished goods.

Copyright © by Houghton Mifflin Company. All rights reserved.45 Manufacturing Organization Beginning Finished Goods Inventory + Cost of Goods Manufactured - Ending Finished Goods Inventory = Cost of Goods Sold

Copyright © by Houghton Mifflin Company. All rights reserved.46 Service Companies Service Companies’ Cost of Sales = Net Cost of Services Sold

Copyright © by Houghton Mifflin Company. All rights reserved.47 Manufacturing Versus Merchandising u Both types of organizations report: 4 The cost of unsold goods on the balance sheet. 4 The cost of goods sold on the income statement.

Copyright © by Houghton Mifflin Company. All rights reserved.48 Q. Q.What three inventory accounts does a manufacturer maintain? A. A.1. Materials Inventory. 2. Work in Process Inventory. 3. Finished Goods Inventory.Discussion

Standards of Ethical Conduct OBJECTIVE 7 Identify the standards of ethical conduct for management accountants.

Copyright © by Houghton Mifflin Company. All rights reserved.50 Ethical Conflicts u May occur because different constituencies have different requirements. u Management must balance the needs of external partners.

Copyright © by Houghton Mifflin Company. All rights reserved.51 Ethical Standards u The management accountant’s ethical standards relate to: 4 Competence. 4 Confidentiality. 4 Integrity. 4 Objectivity.

Copyright © by Houghton Mifflin Company. All rights reserved.52 Competence Standards u Develop knowledge and skills on an ongoing basis. u Perform duties in accordance with relevant laws and technical standards. u Prepare complete and clear reports after appropriate analysis of information.

Copyright © by Houghton Mifflin Company. All rights reserved.53 Confidentiality Standards u Refrain from disclosing confidential information. u Make sure that subordinates refrain from disclosing confidential information. u Refrain from using confidential information for unethical or illegal advantage.

Copyright © by Houghton Mifflin Company. All rights reserved.54 Integrity Standards u Avoid actual or apparent conflicts of interest. u Avoid activities that would prejudice one’s ability to carry out duties ethically. u Refuse any gift or favor that might influence one’s actions. u Avoid activities that could discredit the profession.

Copyright © by Houghton Mifflin Company. All rights reserved.55 Integrity Standards u Avoid activities that could threaten the organization’s legitimate and ethical objectives. u Acknowledge any professional limitations relative to the performance of one’s job. u Communicate both favorable and unfavorable information and opinions.

Copyright © by Houghton Mifflin Company. All rights reserved.56 Objectivity Standards u Communicate information fairly and objectively. u Disclose fully all relevant information to users.

Copyright © by Houghton Mifflin Company. All rights reserved.57 Resolution of Ethical Conflict u Follow organizational policies. u If these do not resolve the conflict: 4 Discuss with the immediate superior, or next higher level authority involved. (Do not communicate with external parties.) 4 Clarify issues with an objective advisor. 4 Consult your own attorney about legal obligations and rights. 4 If ethical issues cannot be resolved, consider resignation.

Copyright © by Houghton Mifflin Company. All rights reserved.58 Q. Q. Management accountants must adhere to what four facets of ethical conduct? A. A. 1. Competence. 2. Confidentiality. 3. Integrity. 4. Objectivity.Discussion

Copyright © by Houghton Mifflin Company. All rights reserved.59 1.Define management accounting and distinguish between management accounting and financial accounting. 2.Explain the management cycle and its connection to management accounting. 3.Identify the management philosophies of continuous improvement and discuss the role of management accounting in implementing those philosophies. OK, LET’S REVIEW...

Copyright © by Houghton Mifflin Company. All rights reserved.60 CONTINUING OUR REVIEW... 4.Define performance measures, recognize the uses of those measures in the management cycle, and prepare an analysis of nonfinancial data. 5.Identify the important questions a manager must consider before requesting or preparing a management report.

Copyright © by Houghton Mifflin Company. All rights reserved.61 AND FINALLY... 6.Compare accounting for inventories and cost of goods sold in merchandising and manufacturing organizations. 7.Identify the standards of ethical conduct for management accountants.