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Module 14

Managerial Accounting for MBAs

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Financial Accounting• Defined as the preparation of financial

statements and other data for parties external to the firm.

• External parties include shareholders, creditors, tax authorities, regulatory bodies, other stakeholders.

• Governed by generally accepted accounting principles (GAAP) and legal requirements (SEC).

• Primarily concerned with reporting historical data.• Information provided relates to the organization

as a whole.

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Managerial Accounting• Defined as the collection and transformation of

cost and related information for use by parties internal to the firm.

• Not governed by GAAP; no legal requirements.• A future rather than historical orientation.• Provides both financial and non-financial

information.• Emphasis on subunits of the firm rather than on

the firm as a whole.• Integrates a number of business disciplines.• Relevant, subjective data is encouraged.

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Objectives of Managerial Accounting

• Providing managers with information for planning future activities – goals and strategies like expansion, budgeting, borrowing, etc.

• Assisting managers in organizing decisions regarding company interactions like scheduling, ordering, outsourcing, advertising, etc.

• Assisting managers in directing and controlling operational activities to meet company goals, including evaluation of performance of employees, managers, segments.

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Terminology for Analysis

• Activity - a unit of work (ex: seating customer, taking order, preparing food, delivering food to customer.

• Cost driver - factor that causes or influences costs.

• Activity Cost Drivers:

– Examples of activity cost drivers include: number of meals served, number of employees in the service area, number of cooks, training needed for new employees, any activity that influences cost.

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Terminology for Analysis

• Structural cost drivers - broader than activity cost drivers, involve decisions about the structure of the company. Examples include: number, size and location of restaurants; appearance/construction of the restaurants; menus and foods to be served in the restaurants.

• Organizational cost drivers - decisions regarding the types of activities and costs of activities performed to satisfy customer needs. Examples include: selection of suppliers for quality of product; training employees to improve customer satisfaction.

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Use of Cost Drivers• Detailed analysis of a company’s cost

structure, resource consumption, capacity utilization, customer satisfaction, etc., allow the company to find the weak links and make changes where necessary.

• Macro reporting (for external purposes) will not aid a company in making continual and timely strategic decisions to improve every aspect of its business model.

• Managerial accounting supplies managers with the timely, specific information that is needed to make these strategic decisions.

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Ethics and Decision Making

• Managers must make decisions in an ethical framework.

• Development of this framework is the responsibility of the company and the individual.

• Ethics versus legal guidelines, page 15.

• Whistle-blowing: World-Com