Chapter 1 Accounting Information and Managerial Decisions

Beginning Topics for Today Accounting Information The Users of Accounting Information The Decision-Making Roles of Managers The Role of Managerial Accounting

Accounting Information OBJECTIVES: Describe a Traditional Accounting Information System Discuss an Enterprise Resource Planning System

Accounting Information Contents Key Concept Accounting information includes both financial (quantitative) and non-financial (qualitative) information used by decision-makers.

The Users of Accounting Information OBJECTIVES: Describe the users of accounting information Discuss their possible uses of accounting information

Users of Accounting Information External Stockholders Potential Investors Creditors Government Agencies Suppliers Customers Internal Employees Employee Teams Departments Regions Top Management

The Decision-Making Role of Managers OBJECTIVES: Discuss the decision-making role of managers Describe the planning, operating, and controlling activities involved in the process

Decision-Making Role Planning Short-term / operational Long-term / strategic Identify resources needed to achieve goals

Decision-Making Role Operating Activities Determining Day-to-day operations What to produce The selling price Who does what What to advertise

Decision-Making Role Controlling Are we attaining the organization’s goals? Are we motivating employees? Are we comparing actual outcomes to planned outcomes?

Decision-Making Role Pause and Reflect Identify some potential strategic planning decisions that would be made by a nonprofit organization whose mission is to provide medical services to the poor.

The Role of the Managerial Accountant Key Concept Managerial accountants facilitate management decision making.

Today’s Management Accountants …Instead of preparing financial statements, they interpret the financial information and explain the business implications to managers. They are doing more financial planning and more financial modeling. They work with managers to make informed business decisions. (Siegal and Kuleza, 1996, IMA)

The Role of the Managerial Accountant Marketing Managers Operations/Production Managers Finance Managers Human Resource Managers

The Role of the Managerial Accountant Key Concept Accounting information systems are constantly evolving to meet the changing demands of its users.

Accounting Information Needed by Internal vs. External Accountants More flexible Geared to specific company Doesn’t have to meet requirements of SEC, GAAP, IRS

Accounting Information Needed by Internal vs. External Accountants Forward-looking, emphasizing the future rather than the past More timely, may sacrifice accuracy Emphasizes segments of an organization rather than the company as a whole

What have we discussed today? Accounting Information The Users of Accounting Information The Decision-Making Roles of Managers The Role of the Managerial Accountant

A Decision-Making Discussion An Introduction A Decision-Making Model Relevant Factors and Decision Making Risk and Decision Making Ethics and Decision Making

How Did You Decide? What college to attend? Which big $$ item to purchase? Whether to accept a summer job? Whether to join a particular group?

Decision Making The process of identifying different courses of action and selecting one decision appropriate to a given situation. Requires using judgment.

Decision Making Pause and Reflect Outline as best you can the process you went through in selecting the last major item you purchased.

Decision Making OBJECTIVES: Recall and discuss a basic four-step decision- making model Explain the role of relevant factors and decision making Discuss the role of risk and decision making Discuss the role of ethics and decision making

The Decision-Making Model Step 1 Define the Problem

The Decision-Making Model Pause and Reflect In retrospect, should you have considered other options and variables when making your most recent big purchase?

The Decision-Making Model Step 2 Identify Objectives

The Decision-Making Model Step 3 Identify and analyze available options

The Decision-Making Model Step 4 Select the best option

The Decision-Making Model Pause and Reflect What were the risks in your decision to purchase a particular product?

The Decision-Making Model Implement the decision and evaluate the results. If the decision turns out to be less than optimal, go back to step one and repeat the process.

The Decision-Making Model Key Concept Never make decisions with just the numbers! Always consider non-numerical (qualitative) information.

The Decision-Making Model Pause and Reflect Evaluate your decision to purchase a product. Was your decision a good one?

Relevant Factors and Decision Making OBJECTIVE: Explain the role of relevant factors and decision making.

Relevant Factors and Decision Making Sunk Costs Costs that have already been incurred. Sunk costs are not relevant.

Relevant Factors and Decision Making Pause and Reflect Assume you are the manager of a consumer electronics manufacturing company that makes televisions and VCRs. What quantitative costs would be relevant in making the decision to stop producing VCRs?

Relevant Factors and Decision Making Key Concept Future costs that do not differ between alternatives are not relevant.

Relevant Factors and Decision Making Opportunity Costs The benefits foregone by choosing one alternative over another. Opportunity costs are relevant.

Relevant Factors and Decision Making Pause and Reflect In making the decision to stop producing VCRs, what opportunity costs might be involved? Consider, for example, alternative uses of the facilities and other products that might be manufactured instead of VCRs

Risk and Decision Making Is the decision maker a Risk Seeker or Risk Adverse?

Ethics and Decision Making Concept Question What ethical responsibilities does a company have to its shareholders, employees, customers, and the communities in which it is located?

Ethics and Decision Making Pause and Reflect The impact of changing prices on the number of units sold is usually not known with certainty. How might you has a manager take this risk into account in determining the selling price of your products?

Ben and Jerry’s Mission Statement Three Interrelated Parts Product: make, distribute and sell finest quality all-natural ice cream Economic: operate company on sound financial basis of profitable growth Social: initiating innovative ways to improve the quality of life of a broad community

Pause and Reflect Is adhering to laws and regulations sufficient to ensure ethical behavior in organizations? Ethics and Decision Making

Ethics and Company Objectives Step 3 of Decision Model Principles: integrity, honesty, respect Laws: IRC, Foreign Corrupt Practices Act Values: quality and safety of products, earn profit or protect one’s job

Ethics and Company Objectives Pause and Reflect A supplier offers to sell you aluminum used in the manufacture of aluminum baseball bats at a sizable discount. After inspecting the aluminum, you find that while it meets your technical qualifications, in some cases it shatters under extreme use. What objectives might you consider to explicitly take into account your company’s ethical responsibilities? What relevant factors should be considered?

Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management Standards of Ethical Conduct Competence Confidentiality Integrity Objectivity Resolution of Ethical Conflict Institute of Management Accountants

Resolution of Ethical Conflict Discuss problems with immediate superior except when superior is involved Clarify relevant ethical issues Consult your own attorney If the ethical conflict still exists after exhausting all levels of internal review, you may have to resign

Our Discussion of Decision Making An Introduction A Decision-Making Model Relevant Factors and Decision Making Risk and Decision Making Ethics and Decision Making

End of Chapter 1 What decision will you make today?