Chapter 1 Management Accounting And the Business Organization

Objective 1 Describe the major users of accounting information

Purposes of Accounting Accounting was considered a process of recording, classifying, and summarizing business transactions. classifying, and summarizing business transactions. The function of accounting information as an aid to managers in planning and control was not widely recognized until 1940s. In 1966, the American Accounting Association (AAA) Published an important theoretical work, A Statement of Basic Accounting Theory (ASOBAT ), that asserts that: that asserts that:

 The objectives of accounting are to provide information for the following purposes: To make decisions concerning the use of limited resources, including the identification of crucial decision areas, and determination of objectives and goals To effectively direct and control an organization's human and material resources. To maintain and report on the custodianship of resources, and To facilitate social functions and controls. The traditional record – keeping function of accounting has been transformed into providing information for decision making.

 Users of Accounting Information External parties such as investors, government authorities, who use the information who use the information for making decisions about the company. In general, users of accounting information fall into two categories: fall into two categories: Internal managers who use the information for planning, controlling operations and making decisions. decisions.

Objective 2 Distinguish between financial Accounting and Management Accounting

Financial Accounting Management Accounting is the field of accounting that develops information for external decision makers such as stockholders, suppliers, banks, and government regulatory agencies. is the field of accounting that develops information to managers at various levels of organization, who use this information for planning, controlling operations and decision making.

financialaccounting management accounting Outside parties and also managers Internal managers 1)Primary users Constrained by GAAP No constraints, the basic question is "Is the information useful?" rather than "Does it conform to GAAP?" 2)Freedom of choice The major distinctions between management accounting and financial accounting are: accounting and financial accounting are:

financial accounting management accounting Past orientation Future orientation 3)Time focus Less flexible, usually one year or one quarter. Flexible, varying from hourly to years 4)Time Span Summary reports: concern primarily with entity as a whole. Detailed reports concern about details of parts of organization (products, departments, etc.) 5)Reports

financial accounting management accounting Lighter use of related disciplines. Heavier use of economics, decision sciences and behavioral sciences. 6) Use of other disciplines other disciplines More emphasis on precision Less emphasis on precision 7)Precision The financial statements include primarily monetary information. Deals with non monetary as well as monetary information. 8)Monetary and Non- monetary information and Non- monetary information

Objective 3 Name the types of questions an accounting system helps to answer. ( types of acc. information

The Need for Accounting systems Accounting system A formal mechanism for gathering, organizing and communicating information about an organization's activities. A good accounting system helps an organization achieve its goals and objectives by helping to answer three types of questions : to answer three types of questions :

1.Scorekeeping: Am I doing well or poorly?  Scorekeeping is the accumulation and classification of data.  This aspect of accounting enables both internal and external parties to evaluate organizational performance.

factory service department costs to production departments production departments Examples: Daily recording of material purchase vouchers Posting daily cash collections to customer's accounts Allocating factory service department costs to production departments Recording overtime hours of the Product finishing department. Recording overtime hours of the Product finishing department.

2.Attention directing: Which problems should I Look into? Attention directing means reporting and interpreting information that helps managers to focus on operating problem, imperfections, inefficiencies and opportunities. This aspect of accounting helps managers to concentrate on important areas of operations promptly enough for effective action.

Examples: Preparing a report of overtime labor costs by production departments. Analyzing deviations from the budget of the factory maintenance department Compiling data for a report showing the ratio of advertising expenses to sales for each branch store. Interpreting increases in nursing costs per patient-day in a hospital Investigating reasons for increased returns and allowances for purchases

3.Problem solving: Of the several ways of doing a job, which is the best? The problem solving aspect of accounting quantifies the likely results of possible courses of action and often recommends the best course to follow. Problem solving is commonly associated with nonrecurring, nonroutine decisions, situations that require special accounting reports.

Examples: Estimating the costs of moving corporate head-quarters to another city. head-quarters to another city. Estimating the costs of moving corporate head-quarters to another city. head-quarters to another city. Analyzing the costs of acquiring and using each of two alternate types and using each of two alternate types of equipment. of equipment. Analyzing the costs of acquiring and using each of two alternate types and using each of two alternate types of equipment. of equipment. Assisting in a study to determine whether to buy or make certain parts for manufacturing products for manufacturing products Assisting in a study to determine whether to buy or make certain parts for manufacturing products for manufacturing products

Notes: 1.The scorekeeping and attention- directive uses of information that closely relate the same information may serve as a scorekeeping function for a manage and an attention-directing function for the manager's superior. (e.g. performance reports) 2.Sometimes all three facets of accounting overlap, making it difficult to classify a particular accounting task as a scorekeeping, attention directing, a problem-solving task. Nevertheless, attempts to make these distinctions provide insight into the objectives and tasks of both accountants and managers

Internal versus External Accounting systems 1.Using one accounting system for both financial and management purposes sometimes creates problems.  Annual financial statements must adhere to a set of standards known as GAAP. Internal accounting reports need not be restricted by GAAP. For instance, GAAP requires accounting for assets according to historical cost. For internal purposes, an organization can account for its assets (economic resources) on the basis of their current values.  External forces (for example tax authorities) often limit management choices of accounting methods for external reports.

2.Many organizations develop systems primarily to satisfy legal requirements imposed by external parties. These systems often neglect the needs of internal users. 3.Organizations can create whatever kind of internal accounting system they want- provided they are willing to pay the cost of developing and operating the system.

Objective 4 Explain the role of management accounting in planning and control

The Management process and accounting is a series of activities in a cycle of planning and control. Decision making is the core of the management process. planning Control DecisionMaking The management process

: is the purposeful choice from among a set of alternative courses of action designed to achieve some objectives. Decisions within an organization are often divided into two types (1) planning decisions and (2) control decisions. : is the purposeful choice from among a set of alternative courses of action designed to achieve some objectives. Decisions within an organization are often divided into two types (1) planning decisions and (2) control decisions. :refers to setting objectives and outlining how they will be attained. Thus planning provides the answers to two questions: :refers to setting objectives and outlining how they will be attained. Thus planning provides the answers to two questions:  What is desired?  When and how is it to be accomplished? Decision making Planning

Accounting formalizes plans by expressing them as budgets. Budget is a quantitative expression of a plan of action ; it is also an aid to coordinating and implementing the plan. : refers to implementing plans and using feedback to attain objectives. Feedback is crucial to the cycle of planning and control. Planning determines action, action generates feedback, and feedback influences further planning. Timely, systematic reports provided by the internal accounting system are the main sources of useful feedback. : refers to implementing plans and using feedback to attain objectives. Feedback is crucial to the cycle of planning and control. Planning determines action, action generates feedback, and feedback influences further planning. Timely, systematic reports provided by the internal accounting system are the main sources of useful feedback. Controlling

Accounting formalizes control as performance reports, which provide feedback by comparing actual results with plans and by highlighting variances, which are deviations from plans. The accounting system records, measures, and classifies actions in order to produce performance reports. Performance reports are used to judge decisions and the productivity of organizational units and managers. Refer to Exhibits (1.4) and (1.5) for illustration of budgets and performance reports.

Performance reports stimulate investigation of exception- items for which actual amounts differ significantly from budgeted amounts. Operations are then brought into conformity with the plans, or the plans are revised this is often called management by exception. Management by exception means concentrating on areas that deviate from the plan and ignoring areas that presumed to be running smoothly. Thus the management-by- exception approach frees managers from needless concern with those phases of operations that are adhering to plans. Management by exception

Notice that although budgets aid planning and performance reports aid control, it is not accountants but other managers and their subordinates who actually plan and control operations. Accounting assists the managerial planning and control function by providing prompt measurements of actions and by systematically pinpointing trouble spots.

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