1. Chapter McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. The Nature of Management Accounting 15

2. 15-2 Financial Accounting  Focuses on preparation of FS required by GAAP.  Prepared for use by external users.  Provides an overall picture of an entity’s financial condition and results of activities.

3. 15-3 Management accounting Process that provides info used by managers for: –Planning, implementing, and controlling. Applies to all organizations.  Management needs more detailed info.  Accounting systems provide operating info needed for operating decisions.  Managers are interested in summaries.  In general, management accounting is summary information.

4. 15-4 Certified Management Accountants (CMA)  Professional designation for management accountants.  Four part exam, continuing education, code of ethics.  Administered by Institute of Certified Management Accountants, affiliated with Institute of Management Accountants (IMA).

5. 15-5 Accounting Jobs  Management accountant:  Members of an organization who design and operate management accounting system.  Controller  Highest level accountant; has financial and management accounting responsibility reports to Chief Financial Officer (CFO).  Treasurer  Responsible for cash management, that is, raising cash when needed by borrowing, issuing stock or issuing bonds and investing excess cash.

6. 15-6 Management vs. financial accounting (page 1 of 6) Necessity  Financial Accounting (FA): SEC (or banks or suppliers) requires publicly traded companies to publish financial statements according to GAAP.  Management accounting (MA) is optional.  Purpose.  FA: Produce financial statements for outside users.  MA: Help managers plan, implement and control.

7. 15-7 Management vs. financial accounting (2 of 6)  Users.  FA: faceless group, external users, present or potential shareholders.  MA: Known managers who influence information needs.  Underlying structure.  FA: built around: Assets = Liabilities + Stockholders’ Equity.  MA: 3 purposes each with its own set of concepts and constructs (addressed later).

8. 15-8 Management vs. financial accounting (3 of 6)  Source of principles.  FA: GAAP.  MA: whatever managers believe useful.  Time orientation.  FA: historical, tell it like it was.  MA: future/decision oriented, tell it like it will be. (However, past is often a good predictor of future.)

9. 15-9 Management vs. financial accounting (4 of 6)  Information content.  FA: summary of primarily monetary events  MA: non-monetary as well as monetary info.  Information precision.  FA: Uses approximations but as a generalization is more precise than MA.  MA: Management needs info rapidly to be useful in decision making and therefore precision is sometimes sacrificed.

10. 15-10 Management vs. financial accounting (5 of 6)  Report frequency:  FA: Publicly traded, SEC: quarterly, with more detailed info annually.  MA: Up to management.  Report timeliness.  FA: Usually, several weeks to months after fiscal close of accounting period.  MA: Quickly to be useful for decision making.

11. 15-11 Management vs. financial accounting (6 of 6)  Report entity.  FA: Organization as a whole.  MA: Relatively small parts (responsibilities centers such as departments, product lines, divisions, subsidiaries as well as organization as a whole.)  Liability potential.  FA: May be sued by shareholders if believed to be misleading.  MA: Used internally unlikely to give rise to legal liability.

12. 15-12 Similarities Most elements of financial accounting also found in management accounting.  Same considerations that make sense for GAAP also make sense for MA.  Systems are designed to reduce redundancies and provide info for both FA & MA.  Both are used for decision making, one by investors and one by managers, so there are similarity of uses.

13. 15-13 Types of management accounting info and their uses  Purposes of MA system: Measurement of revenues, costs, and assets. Control.  Aid decisions among alternative courses of action.  For each purpose there is a set of principles and generalizations.

14. 15-14 Characterization of Management Accounting Reporting Historical information: –Score keeping (How are we doing?) or –Attention directing (What problems require looking into?) Future estimates: –Problem solving (What is best way to deal with a problem?) –Influencing impact (influences actions of managers).

15. 15-15 Measurement Full cost accounting measures resources used in performing some activity.  Full cost of producing goods or providing services = direct costs + indirect costs.  Direct costs = costs directly traced to goods or services.  Indirect costs = fair share of costs incurred jointly in producing goods or services.

16. 15-16 Control Costs (also, revenues and assets) are identified to and measured by responsibility center.  A manager heads each responsibility center.  Corrective action can only be taken by individuals.  To help identify problems (and opportunities) actual costs are measured and compared to a benchmark (budget, last year, industry average).

17. 15-17 Alternative choice decisions Differential costs of alternative possible actions are developed.  Management may only consider direct costs for some short run decisions.

18. 15-18 Databases Spreadsheets: –Two dimensional arrays of data. Database systems: –n-dimensional arrays and tailor made reports. –Allows linkages among data, various manipulations and sorts of data, and quickly available reports to help decision making.

19. 15-19 General observations on MA Different numbers for different purposes. –Many different types of costs: historical, standard, overhead, variable, fixed, differential, marginal, opportunity, direct, estimated, full, etc.  Clarify which type you are talking about.  Accounting numbers are approximations.  Best that we can with incomplete data.  Accounting evidence is only partial evidence other factors help make decisions.  People not numbers get things done. How you use the numbers is as important as how the numbers are produced.

20. Chapter McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. End of Chapter 15 15