1. Principles of Accounting 2002e
Belverd E. Needles, Jr.
Marian Powers
Susan Crosson
Multimedia Slides by:
Harry Hooper
Santa Fe Community College
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2. Chapter 19 A Manager’s Perspective: The Changing Business Environment

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LEARNING OBJECTIVES
Define management accounting and distinguish between management accounting and financial accounting.
Explain the management cycle and its connection to management accounting.
Identify the management philosophies of continuous improvement and discuss the role of management accounting in implementing those philosophies.
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LEARNING OBJECTIVES
Define performance measures, recognize the uses of those measures in the management cycle, and prepare an analysis of non-financial data.
Identify the important questions a manager must consider before requesting or preparing a management report.
Compare accounting for inventories and cost of goods sold in merchandising, and manufacturing organizations.
Identify the standards of ethical conduct for management accountants.
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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.
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6. Introduction to Management Accounting
OBJECTIVE 1
Define management accounting and distinguish between management accounting and financial accounting.

7. Management Accounting
Management accounting is an extension of financial accounting and applies mainly to internal operations.
Management accounting focuses on the techniques and procedures for information gathering and reporting to management.
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8. Management Accounting
Managers need various types of
timely, accurate information.
Product and service costing information.
Information for planning of and control over operations.
Special reports and analyses to assist in managerial decision making.
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9. Management Accounting
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.
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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.
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11. Comparison of Management and Financial Accounting
Areas of
Comparison
Management
Accounting
Financial
Report format
Flexible 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
Primary users
Employees, managers,
suppliers
Owners, lenders,
customers,
government agencies
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12. Comparison of Management and Financial Accounting
Areas of
Comparison
Management
Accounting
Financial
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)
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Discussion
Q. What three types of information does management receive from the management accountant?
A. Product costing information, planning and control information, and special reports and analyses.
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14. The Management Cycle OBJECTIVE 2
Explain the management cycle and its connection to management accounting.

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The Management Cycle
Management is expected to use resources wisely, operate profitably, pay debts, and abide by laws and regulations.
Expectations motivate managers to establish the objectives, goals, and strategic plans of the organization.
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The Management Cycle
Traditionally, management operates in four stages:
Planning
Long and short term.
To support decision-making and set expectations.
Executing
Hiring, scheduling, acquiring assets (including inventory), reducing waster, generating revenues.
Reviewing
Controlling operations.
Comparing actual performance to plan.
Reporting
To stockholders, creditors, other managers, other interested parties.
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The Management Cycle
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The Management Cycle
Management accounting services information needs of management by:
Developing plans and analyzing alternatives.
Communicating plans to key personnel.
Evaluating performance.
Reporting the results of activities.
Accumulating, maintaining, and processing an organization’s financial and nonfinancial information.
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Discussion
Q. What are the four stages of traditional management?
A. 1. Planning.
2. Executing.
3. Reviewing.
4. Reporting.
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20. 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.

21. New Management Philosophies
Three significant new management philosophies are as follows:
Just-in-time (JIT) operating environment.
Total quality management (TQM).
Activity-based management (ABM).
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22. New Management Philosophies
All of these approaches are designed to:
Increase product quality.
Reduce waste and inefficiency.
Reduce cost.
Increase customer satisfaction.
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23. The Continuous Improvement Environment
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Theory of Constraints
Identify performance or production bottlenecks (limiting factors).
Overcome limitation.
Identify next bottleneck.
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25. The Goal: Continuous Improvement
Avoid complacency.
Constantly seek a better method.
Reduce defects or poor quality.
Reduce or eliminate nonvalue-adding activities.
Results: Product/service costs and delivery times reduced. Quality and customer satisfaction increases.
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Discussion
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.
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27. Performance Measures OBJECTIVE 4
Define performance measures, recognize the uses of those measures in the management cycle, and prepare an analysis of nonfinancial data.

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Performance Measures
Performance measures provide an indication of an organization’s performance in relation to a specific goal or an expected outcome.
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29. Examples of Performance Measures
Financial performance measures:
Return on investment.
Net income as a percentage of sales.
Costs of poor quality as a percentage of sales.
Nonfinancial performance measures:
Number of customer complaints.
Hours of inspection.
Time to fill an order.
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Performance Measures
Performance measures are useful in reducing waste in operating activities.
Management uses performance measures in all stages of the management cycle.
In planning to motivate.
In executing to guide, and assign costs.
In reviewing to improve future performance.
In reporting to communicate results.
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31. Analysis of Nonfinancial Data – Bank
Kings Beach National Bank
Summary of Number of Customers Served
For the Quarter Ended December 31, 20xx
Part A
Number of Customers Served
Window
October
November
December
Quarter
Totals 1
5,428
5,186
5,162
15,776 2
5,280
4,820
4,960
15,060 3
4,593
4,494
4,580
13,667
15,301
14,500
14,702
44,503
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32. The Balanced Scorecard
A framework that links the perspective of shareholders:
Investors
Employees
Customers
with the organization’s mission, vision, plans, and resources.
Provides clear, measurable performance targets.
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33. Analysis of Nonfinancial Data
Performance targets and measurements of business process may be nonfinancial.
Quality related performance measures are often nonfinancial.
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34. Analysis of Nonfinancial Data – Bank
Kings Beach National Bank
Summary of Number of Customers Served
For the Quarter Ended December 31, 20xx
Part B
Number of Customers Served per Hour
Window
October
November
December
Quarter
Averages 1
31.93
30.51
30.36
30.93 2
31.06
28.35
29.18
29.53 3
27.02
26.44
26.94
26.80
Totals
90.01
85.30
86.48
87.26
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Discussion
Q. Give three examples of reports based on non-financial data that are useful to a bank manager.
A. Teller transaction analysis.
Drive-up window efficiency reports.
Time needed to complete a loan transaction.
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36. Management Accounting Reports and Analysis
OBJECTIVE 5
Identify the important questions a manager must consider before requesting or preparing a management report.

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The Four W’s
Report preparation depends on:
Why?
Why are we preparing the report?
What?
What information is needed?
Who?
Who is the audience for the report?
When?
When is the report due?
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Discussion
Q. State and briefly explain the “four W’s” of preparing a managerial report.
A. Why is the report being prepared?
What information should be provided?
For whom is the report intended?
When is the report due?
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39. Merchandising Versus Manufacturing Organizations
OBJECTIVE 6
Compare accounting for inventories and cost of goods sold in service, merchandising, and manufacturing organizations.

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Comparison of Financial Statements for Service, Merchandising, and Manufacturing Organizations
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41. Service, Merchandising, and Manufacturing Organization
Different types of organizations have different financial reporting formats.
Examples:
Service organizations maintain no inventories for sale.
Merchandising organizations only have one inventory account.
Manufacturing organizations use materials, work in process and finished goods inventory accounts.
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Merchandisers
Merchandisers purchase goods already manufactured, and resell them.
They accumulate the purchased cost of goods.
They have only one type of inventory (merchandise inventory.)
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43. Merchandising Organization
Beginning Merchandise Inventory
+ Net Cost of Goods Purchased
- Ending Merchandise Inventory
= Cost of Goods Sold
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Manufacturers
Manufacturers design and manufacture products for sale.
They must accumulate the costs of manufacturing products.
Their inventory consists of materials, work in process, and finished goods.
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45. Manufacturing Organization
Beginning Finished Goods Inventory
Cost of Goods Manufactured
Ending Finished Goods Inventory
= Cost of Goods Sold
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Service Companies
Service Companies’ Cost of Sales = Net Cost of Services Sold
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47. Manufacturing Versus Merchandising
Both types of organizations report:
The cost of unsold goods on the balance sheet.
The cost of goods sold on the income statement.
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Discussion
Q. What three inventory accounts does a manufacturer maintain?
A. 1. Materials Inventory.
2. Work in Process Inventory.
3. Finished Goods Inventory.
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49. Standards of Ethical Conduct
OBJECTIVE 7
Identify the standards of ethical conduct for management accountants.

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Ethical Conflicts
May occur because different constituencies have different requirements.
Management must balance the needs of external partners.
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Ethical Standards
The management accountant’s ethical standards relate to:
Competence.
Confidentiality.
Integrity.
Objectivity.
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Competence Standards
Develop knowledge and skills on an ongoing basis.
Perform duties in accordance with relevant laws and technical standards.
Prepare complete and clear reports after appropriate analysis of information.
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53. Confidentiality Standards
Refrain from disclosing confidential information.
Make sure that subordinates refrain from disclosing confidential information.
Refrain from using confidential information for unethical or illegal advantage.
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Integrity Standards
Avoid actual or apparent conflicts of interest.
Avoid activities that would prejudice one’s ability to carry out duties ethically.
Refuse any gift or favor that might influence one’s actions.
Avoid activities that could discredit the profession.
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Integrity Standards
Avoid activities that could threaten the organization’s legitimate and ethical objectives.
Acknowledge any professional limitations relative to the performance of one’s job.
Communicate both favorable and unfavorable information and opinions.
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56. Objectivity Standards
Communicate information fairly and objectively.
Disclose fully all relevant information to users.
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57. Resolution of Ethical Conflict
Follow organizational policies.
If these do not resolve the conflict:
Discuss with the immediate superior, or next higher level authority involved. (Do not communicate with external parties.)
Clarify issues with an objective advisor.
Consult your own attorney about legal obligations and rights.
If ethical issues cannot be resolved, consider resignation.
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Discussion
Q. Management accountants must adhere to what four facets of ethical conduct?
A. 1. Competence.
2. Confidentiality.
3. Integrity.
4. Objectivity.
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OK, LET’S REVIEW . . .
Define management accounting and distinguish between management accounting and financial accounting.
Explain the management cycle and its connection to management accounting.
Identify the management philosophies of continuous improvement and discuss the role of management accounting in implementing those philosophies.
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CONTINUING OUR REVIEW . . .
Define performance measures, recognize the uses of those measures in the management cycle, and prepare an analysis of nonfinancial data.
Identify the important questions a manager must consider before requesting or preparing a management report.
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AND FINALLY . . .
Compare accounting for inventories and cost of goods sold in merchandising and manufacturing organizations.
Identify the standards of ethical conduct for management accountants.
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