1. Basic Management Accounting Concepts
CHAPTER 1
Basic Management Accounting Concepts

2. Objectives Discuss the need for management accounting information.
Differentiate between management accounting and financial accounting.
Provide a brief historical description of management accounting.
Identify the current focus of management accounting.
Continued

3. Objectives
5. Describe the role of management accountants in an organization.
6. Explain the importance of ethical behavior for managers and management accountants.
7. List three forms of certification available to management accountants.

4. Objectives Describe the cost assignment process.
Define tangible and intangible products and explain why there are different product cost definitions.
Prepare income statements for manufacturing and service organizations.
Outline the differences between functional-based and activity-based management accounting systems.

5. The managerial accounting system has three broad objectives:
1. To provide information for costing out services, products, and other objects of interest to management.
2. To provide information for planning, controlling, evaluating, and continuous improvement.
3. To provide information for decision making.

6. Personal Communication
Management Accounting Information System
Collecting
Measuring
Storing
Analyzing
Reporting
Managing
Special Reports
Product Costs
Customer Costs
Budgets
Performance Reports
Personal Communication
Economic Events
Inputs
Processes
Outputs
Users

7. Management Process Planning Controlling Decision Making
The Management Process is defined by the following activities:
Planning requires setting objectives and identifying methods to achieve those objectives.
Planning
Controlling
Decision Making

8. Management Process Planning Controlling Decision Making
The Management Process is defined by the following activities:
Controlling is the managerial activity of monitoring a plan’s implementation and taking corrective action as needed.
Planning
Controlling
Decision Making

9. Management Process Planning Controlling Decision Making
The Management Process is defined by the following activities:
Planning
Controlling
Decision Making
Control is usually achieved with the use of feedback.

10. Management Process
Feedback is information that can be used to evaluate or correct the steps being taken to implement a plan.

11. Management Process Planning Controlling Decision Making
The Management Process is defined by the following activities:
Planning
Controlling
Decision Making
Decision making is the process of choosing among competing alternatives.

12. Differentiate Between Management Accounting and Financial Accounting

13. Management Accounting
Financial Accounting
1. Internally focused
1. Externally focused

14. Targeted Users
Management accounting focuses on providing information for internal users.

15. ABC Company Annual Report
Targeted Users
ABC Company Annual Report
Financial accounting focuses on provided information for external users.

16. Management Accounting
Financial Accounting
1. Internally focused
1. Externally focused
2. No mandatory rules
2. Must follow externally imposed rules

17. Restrictions on Inputs and Processes
Financial accounting reporting must follow the accounting procedures set by the SEC and the FASB.
Management accounting is not subject to the requirements of generally accepted accounting principles.

18. Management Accounting
Financial Accounting
1. Internally focused
1. Externally focused
2. No mandatory rules
2. Must follow externally imposed rules
3. Financial and nonfinancial informa-tion; subjective information possible
3. Objective financial information

19. Types of Information
For management accounting, the financial or nonfinancial information may be much more subjective in nature.
The restrictions imposed on financial accounting tend to produce objective and verifiable financial information.

20. Management Accounting
Financial Accounting
1. Internally focused
1. Externally focused
2. No mandatory rules
2. Must follow externally imposed rules
3. Financial and nonfinancial informa-tion; subjective information possible
3. Objective financial information
4. Emphasis on the future
4. Historical orientation

21. Time Orientation
Management accounting strongly emphasizes providing information about future events.

22. Time Orientation
Financial accounting records and reports events that have already happened.

23. Management Accounting
Financial Accounting
1. Internally focused
1. Externally focused
2. No mandatory rules
2. Must follow externally imposed rules
3. Financial and nonfinancial informa-tion; subjective information possible
3. Objective financial information
4. Emphasis on the future
4. Historical orientation
5. Internal evaluation and decisions based on very detail information
5. Information about the firm as a whole

24. Degree of Aggregation
Management accounting provides measures and internal reports used the evaluate performance of entities, product lines, departments, and managers.

25. Financial accounting focuses on overall firm performance.
Degree of Aggregation
Financial accounting focuses on overall firm performance.

26. Management Accounting
Financial Accounting
1. Internally focused
1. Externally focused
2. No mandatory rules
2. Must follow externally imposed rules
3. Financial and nonfinancial informa-tion; subjective information possible
3. Objective financial information
4. Emphasis on the future
4. Historical orientation
5. Internal evaluation and decisions based on very detail information
5. Information about the firm as a whole
6. Broad, multidisciplinary
6. More self-contained

27. Management accounting is much broader than financial accounting.
Breadth
It includes aspects of managerial economics, industrial engineering, and management science.
Management accounting is much broader than financial accounting.

28. Historical Description of Management Accounting
Most of the product-costing and internal accounting procedures used in this century were developed
1925 Emphasis of inventory costing for external reporting
1950s/60s Effort to improve the managerial usefulness of traditional cost systems
1980s/90s Significant efforts have been made to radically change the nature and practice of management accounting

29. Current Focus of Management Accounting
Activity-Based Management
Activity-based management is a system wide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the resulting profit.

30. Current Focus of Management Accounting
Customer Orientation
Customer value is the difference between what the customer receives (customer satisfaction) and what the customer gives up (customer sacrifice).
What is received is called the total product.

31. Current Focus of Management Accounting
Strategic Positioning
Strategic cost management is the use of cost data to develop and identify superior strategies that will produce a sustainable competitive advantage.
Strategies:
Cost leadership
Superior products through differentiation

32. Current Focus of Management Accounting
Value-Chain Framework
The internal value chain is the set of activities required to design, develop, produce, market, and deliver products and services to customers.
The industrial value chain is the linked set of value-creating activities from basic raw materials to the disposal to the final products by end-use customers.

33. Value Chain: Apple Industry
Firm A
Planting and Cultivating
Harvesting
Distribution of Apples
Firm B
Value Chain: Apple Industry
Applesauce Production
Applesauce Distribution
Firm C
Product Disposal
Supermarkets
End-Use Customer

34. Managing the value chain means that a management accountant must understand many functions of the business, from manufacturing to marketing.

35. This emphasis on quality has created a demand for management accounting systems that provide financial and nonfinancial information about quality.
The philosophy of total quality management is to manufacture perfect products.

36. The role of management accountants in an organization is one of support.

37. Partial Organization Chart, Manufacturing Company
President
Production Vice President
Line Function
Financial Vice President
Staff Function
Production Supervisor
Machining Foreman
Assembly Foreman
Controller
Treasurer
Internal Audit
Cost
Financial
Systems
Tax

38. Ethical Behavior Michael Josephson’s* Ten Ethical Values: Honesty
Integrity
Promise keeping
Fidelity
Fairness
Caring for others
Respect for others
Responsible citizenship
Pursuit of excellence
Accountability
*Michael Josephson, “Teaching Ethical Decision Making and Principled Reasoning”

39. Professional Certifications
CMA: One of the main purposes of the CMA was to establish management accounting as a recognized, professional discipline, separate from the profession of public accounting.
CPA: The responsibility of a CPA is to provide assurance concerning the reliability of financial statements.
CIA: The focus of the CIA is to recognize competency in internal auditing rather than external auditing as with the CPA.

40. The CMA Four areas emphasized on the exam:
Economics, finance, and management
Financial accounting and reporting
Management report, analysis, and behavioral issues
Decision analysis and information systems

41. Exactly what is meant by “cost”?
Cost is the cash or cash-equivalent value sacrificed for goods and services that is expected to bring a current or future benefit to the organization.
I see… It’s a dollar measure of the resources used to achieve a given benefit.
Cost Assignment
Exactly what is meant by “cost”?

42. Cost Assignment
A cost object is any item such as products, customers, departments, projects, activities, and so on, for which costs are measured and assigned.
Example: A bicycle is a cost object when you are determining the cost to produce a bicycle.
An activity is a basic unit of work performed within an organization.
Example: Setting up equipment, moving materials, maintaining equipment, designing products, etc.

43. Cost Assignment
Traceability is the ability to assign a cost to a cost object in an economically feasible way by means of a cause-and-effect relationship.
Direct costs are those costs that can be easily and accurately traced to a cost object.
Example: If a hospital is the cost object,
the cost of heating and
cooling the hospital is
a direct cost.

44. Cost Assignment
Indirect costs are those costs that cannot be easily and accurately traced to a cost object.
Example: The salary of a plant manager, where departments within the plant are defined as the cost objects.

45. Cost Assignment
Tracing is the actual assignment of costs to a cost object using an observable measure of the resources consumed by the cost object. Tracing costs to cost objects can occur in the following two ways:
Direct tracing is the process of identifying and assigning costs that are exclusively and physically associated with a cost object to that cost object.
Driver tracing is the use of drivers to assign costs to cost objects. Drivers are observable causal factors that measure a cost object’s resource consumption.

46. Cost Assignment Methods
Cost of Resources
Direct
Tracing
Driver
Allocation
Physical
Observation
Causal
Relationship
Assumed
Cost Objects

47. Interface of Services with Management Accounting
Services cannot be stored.
No patent protection.
Cannot display or communicate services.
Price difficult to set.
1. Intangibility
2. Perishability
3. Inseparability
4. Heterogeneity
Services benefits expire quickly.
Services may be repeated often for one customer.
Customer directly involved with production of service.
Centralized mass production of services difficult.
Wide variation in service products possible.
Derived Properties

48. Interface of Services with Management Accounting
No inventories.
Strong ethical code.
Price difficult to set.
Demand for more accurate cost assignments.
1. Intangibility
2. Perishability
3. Inseparability
4. Heterogeneity
No inventories.
Need for standards and consistent high quality.
Costs often accounted for by customer type.
Demand for measure-ment and control of quality to maintain consistency.
Productivity and quality measurement and control must be ongoing.
Total quality manage-ment critical.
Impact on Management Accounting

49. Product cost is a cost assignment that supports a well-specified managerial object. Thus, what product cost means depends on the managerial objective being served.

50. Design
Service
Develop
Produce
Distribute
Market

51. Product Costing Definitions
Research and
Development
Production
Marketing
Customer Service
Value-Chain Product Costs
Production
Marketing
Customer Service
Operating Product Costs
Traditional Product Costs
Production
Managerial objectives served
Pricing Decisions
Product-Mix Decisions
Strategic Profitability
Analysis
Strategic Design Decisions
Tactical Profitability
Analysis
External Financial
Reporting

52. Production Costs
Direct materials are those materials that are directly traceable to the goods or services being produced.
Steel in an automobile
Wood in furniture
Alcohol in cologne
Denim in jeans
Braces for correcting teeth

53. Production Costs
Direct labor is the labor that is directly traceable to the goods or services being produced.
Workers on an assembly line at Chrysler
A chef in a restaurant
A surgical nurse attending an open heart operation
Airline pilot

54. Production Costs Overhead are all other production costs.
Depreciation on building and equipment
Maintenance
Supplies
Supervision
Power
Property taxes

55. Nonproduction Costs
Noninventoriable (period) costs are expensed in the period in which they are incurred.
Salaries and commissions of sales personnel (marketing)
Advertising (marketing)
Legal fees (administrative)
Printing the annual report (administrative)

56. Production Costs Prime Cost :
Direct Materials Costs + Direct Labor Costs
Conversion Cost:
Direct Labor Costs + Overhead Costs

57. External Financial Statements

58. Manufacturing Organization Income Statement For the Year Ended December 31, 2006
2-20
Sales $2,800,000
Less cost of goods sold:
Beginning finished goods inventory $ 500,000
Add: Cost of goods manufactured 1,200,000
Cost of goods available for sale $1,700,000
Less: Ending finished goods inventory , ,400,000
Gross margin $1,400,000
Less operating expenses:
Selling expenses $ 600,000
Administrative expenses , ,000
Income before taxes $ 500,000

59. continued on next slide
Statement of Cost of Goods Manufactured For the Year Ended December 31, ,2006
2-21
Direct materials:
Beginning inventory $200,000
Add: Purchases ,000
Materials available $650,000
Less: Ending inventory ,000
Direct materials used $ 600,000
Direct labor 350,000
Manufacturing overhead:
Indirect labor $122,500
Depreciation 177,500
Rent 50,000
Utilities 37,500
Property taxes 12,500
Maintenance , ,000
Total manufacturing costs added $1,400,000
continued on next slide

60. Total manufacturing costs added $1,400,000
Add: Beginning work in process ,000
Total manufacturing costs $1,600,000
Less: Ending work in process ,000
Cost of goods manufactured $1,200,000
Work in process consists of all partially completed units found in production at a given point in time.

61. Service Organization Income Statement For the Year Ended December 31, 2006
2-23
Sales $300,000
Less expenses:
Cost of services sold:
Beginning work in process $ 5,000
Service costs added:
Direct materials $ 40,000
Direct labor 80,000
Overhead 100, ,000
Total $225,000
Less: Ending work in process , ,000
Gross margin $ 85,000
Less operating expenses:
Selling expenses $ 8,000
Administrative expenses , ,000
Income before income taxes $ 55,000

62. Functional-Based Management Model
Resources
Functions
Products
Cost View
Efficiency Analysis
Performance Analysis
Operational View

63. Activity-Based Management Model
Resources
Activities
Products and Customers
Cost View
Driver Analysis
Performance Analysis
Process View
Why?
What?
How Well?

64. Functional-Based Activity-Based
1. Unit-based drivers
2. Allocation-intensive
3. Narrow and rigid product costing
4. Focus on managing cost
5. Sparse activity information
6. Maximization of individual unit performance
7. Use of financial measures of
performance
1. Unit- and nonunit-based drivers
2. Tracing intensive
3. Broad, flexible product costing
4. Focus on managing activities
5. Detailed activity information
6. Systematic performance maximization
7. Use of both financial and nonfinancial measures of
performance

65. Chapter Two
The End