Basic Management Accounting and Control Concepts

Managerial Accounting and Financial Accounting Managerial accounting provides information for managers inside an organization who direct and control operations Financial accounting provides information to stockholders, creditors and others who are outside the organization

Differences Between Financial and Managerial Accounting

International Competition Meeting world-class competition demands a world-class management accounting system. Managers must make decisions to plan, direct, and control a world-class organization. Many U.S. companies derive more than 50% of their income from overseas operations

Evolution and Adaptation in Managerial Accounting Service Vs. Mfg. Firms Emergence of New Industries Global Competition Focus on the Customer Lean Manufacturing Continuous Improvement Theory of Constraints Information and CommunicationTechnology Product Life Cycles Total Quality Management Time-Based Competition Just-in-Time Inventory Change © The McGraw-Hill Companies, Inc. E-Commerce Computer-Integrated Mfg. Six Sigma

Importance of Ethics in Accounting Ethical accounting practices build trust and promote loyal, productive relationships with users of accounting information. Many companies and professional organizations, such as the Institute of Management Accountants (IMA), have written codes of ethics which serve as guides for employees. Code of Conduct for Management Accountants

IMA Code of Ethics for Management Accountants Four broad areas of responsibility: Maintain a high level of professional competence treat sensitive matters with confidentiality Maintain personal integrity Be objective in all disclosures

Managerial Accounting Tools Failed dot.com and other businesses might have benefited from the application of managerial accounting tools: Cost concepts Cost-volume-profit Activity-based costing Budgeting Standard Costs Decision making Capital budgeting Transfer pricing Measuring Performance

Cost concepts Period Costs Product Costs Elements of Cost Direct material Direct labor Manufacturing overhead

Cost concepts (continued) Basic Cost Management Concepts Cost driver Variable and fixed costs Direct and indirect costs Controllable and uncontrollable costs Sunk Costs Differential Costs Relevant Costs

Cost concepts (continued) Manufacturing overhead Estimated – budgeted Applied – allocated Incurred – actual Over- or Under-applied Overhead

Cost-Volume-Profit Break-even point Cost structure Operating leverage Airlines

Activity-based Costing Problems with a single factory-wide overhead rate Many different cost drivers CD versus DVD units Change in cost allocation under activity- based costing

Budgeting (Profit Planning and Control) Budget – quantitative expression of management’s goals Budget function Planning Communicating and coordinating Allocating limited resources Control Performance evaluation Sales budget Behavioral impact of budgets

Standard Costs Managing costs Setting standards Variance analysis and investigation Behavioral impact of standard costing Balanced scorecard

Decision-making (Special Decision Situations) Special orders Add or drop a service, product or department Allocation of limited resources

Capital Budgeting Discounted cash flow Net present value method Internal rate of return Discount rate Other methods Payback Project approval and Post Audit

Transfer Pricing Market-based prices Negotiated prices Cost-based prices Goal congruence

Measuring Performance Responsibility accounting Return on investment Residual income Economic value added

Sustainability Sustainability Reporting Economic Environmental Social Triple Bottom Line Integrated Reporting

Developments in Regulation Sarbanes – Oxley Corporate Governance Audit Committees Internal Control Evaluation Added Costs Dodd-Frank