Managerial Accounting OverviewMcGraw-Hill/Irwin
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The Changing Role of Managerial Accounting in a Dynamic Business Environment
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An organization . . .
Acquires Resources
Hires People
Organized set
of activities
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Managers carry out three main activities – planning, directing and motivating, and controlling.
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Planning
Identify
alternatives.
organization’s objectives.
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An important part of planning is to identify alternatives and then to select from among the alternatives the one that does the best job of furthering the organization’s objectives. Once alternatives have been identified, the plans of management are often expressed formally in budgets. Budgets are usually prepared under the direction of the controller, who is the manager in charge of the accounting department. Typically, budgets are prepared annually.
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Directing and motivating involves managing day-to-day activities to keep the organization running smoothly.
Employee work assignments.
Routine problem solving.
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In addition to planning for the future, managers must oversee day-to-day activities to keep the organization functioning smoothly. Managerial accounting data, such as daily sales reports, are often used in this type of day-to-day decision making.
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Controlling
Feedback in the form of performance reports
that compare actual results with the budget
are an essential part of the control function.
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In carrying out the control function, managers seek to ensure that the plan is being followed. Feedback, which signals whether operations are on track, is the key to effective control. A performance report compares budgeted to actual results. It suggests where operations are not proceeding as planned and where some parts of the organization may require additional attention.
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Measuring
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The work of management, which is known as the planning and control cycle, can be depicted as shown. The process is a continuous loop in many organizations. Once plans are made, they are implemented. The controlling process starts with measuring actual performance and then comparing those results with planned performance. Corrective action may be necessary if actual results differ significantly from the plan. In some cases, new information may result in altering the plan before the cycle is repeated. Note that decision making is involved in all management activities.
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Providing information for decision making and planning.
Assisting managers in directing and controlling activities.
Motivating managers and other employees towards organization’s goals.
Measuring performance of activities, managers, and other employees.
Assessing the organization’s competitive position.
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How do customers see us?
How can we continue to improve?
In which activities must we excel?
Financial Perspective
Goals Measures
Customer Perspective
Goals Measures
Operations Perspective
Goals Measures
Innovation Perspective
Goals Measures
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There are seven key differences between managerial accounting and financial accounting:
Users: Financial accounting reports are prepared for external parties, whereas managerial accounting reports are prepared for internal users.
Emphasis on the future: Financial accounting summarizes past transactions. Managerial accounting has a strong future orientation.
Relevance of data: Financial accounting data should be objective and verifiable. Managerial accountants focus on providing relevant data even if these data are not completely objective and verifiable.
Less emphasis on precision: Financial accounting focuses on precision when reporting to external parties. Managerial accounting aids decision makers by providing good estimates as soon as possible rather than waiting for precise data later.
Segments of an organization: Financial accounting is concerned with reporting for the company as a whole. Managerial accounting focuses more on the segments of the company. Examples of segments include: product lines, sales territories, divisions, departments, etc..
Generally Accepted Accounting Principles (GAAP): Financial accounting conforms to GAAP. Managerial accounting is not bound by GAAP.
Managerial accounting – not mandatory: Financial accounting is mandatory because various outside parties require periodic financial statements. Managerial accounting is not mandatory.
Sheet1
Not required because for internal use only
Required. Must comform to GAAP which is regulated by FASB and SEC.
Source of Data
Nature of Reports and Procedures
Reports often focus on subunits. Based on a combination of historical data, estimates, and projections of future events.
Reports focus on the enterprise in its entirety. Based on historical transactions.
Sheet2
Sheet3
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Line and Staff Positions
A line position is directly involved in achieving the basic objectives of an organization.
Example: A production supervisor in a manufacturing plant.
A staff position supports and assists line positions.
Example: A cost accountant in the manufacturing plant.
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Controller
Financial planning and analysis.
Responsible for raising capital and safeguarding the organization’s assets.
Supervises relationships with financial institutions.
Work with investors and potential
investors.
Responsible for reviewing accounting procedures, records, and reports in both the controller’s and the treasurer’s area of responsibility.
Expresses an opinion to top
management regarding the
effectiveness of the
Managerial
Accounting
Information
Service Vs. Manufacturing
Identify and eliminate non-value-added costs.
Cost
Management
System
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Identify and evaluate new activities that can improve performance.
Objectives
Identify and eliminate non-value-added costs.
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Product
Design
Research
and
Development
Securing raw
materials and
other resources
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Manufacturing costs are usually grouped into three main categories: direct materials, direct labor, and manufacturing overhead. These costs are incurred to make a product.
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Direct Materials
Raw materials that become an integral part of the product and that can be conveniently traced directly to it.
Example: A radio installed in an automobile
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Direct materials are raw materials that become an integral part of the finished product and whose costs can be conveniently traced to it. Examples include the aircraft engines on a Boeing 777, the Intel processing chip in a personal computer, the blank video cassette in a pre-recorded video, and a radio in an automobile.
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Direct Labor
Those labor costs that can be easily traced to individual units of product.
Example: Wages paid to automobile assembly workers
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Direct labor consists of that portion of labor cost that can be easily traced to a product. Direct labor is sometimes referred to as “touch labor,” since it consists of the costs of workers who “touch” the product as it is being made.
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Manufacturing costs that cannot be traced directly to specific units produced.
Manufacturing Overhead
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Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. These costs cannot be easily traced to specific units produced (also called indirect manufacturing cost, factory overhead, and factory burden).
Manufacturing overhead includes indirect materials that are part of the finished product, but that cannot be easily traced to it. It includes indirect labor costs that cannot be conveniently traced to the creation of products.
Other examples of manufacturing overhead include: maintenance and repairs on production equipment, heat and light, property taxes, depreciation and insurance on manufacturing facilities, etc.
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A manufacturing company incurs many other costs in addition to manufacturing costs. For financial reporting purposes, most of these other costs are typically classified as selling costs and administrative costs. These costs are also called selling, general and administrative costs, or SG&A. Selling and administrative costs are incurred in both manufacturing and merchandising firms.
Selling costs include all costs necessary to secure customer orders and get the finished product into the hands of the customer. These costs are also referred to as order-getting and order-filling costs. Examples of selling costs include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses.
Administrative costs include all executive, organizational, and clerical costs associated with the general management of an organization. Examples of administrative costs include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall general administration of the organization as a whole.
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Product costs include direct materials, direct labor, and manufacturing overhead.
Period costs include all selling costs and administrative costs.
Inventory
Costs can also be classified as product or period costs.
Product costs include all the costs that are involved in acquiring or making a product. More specifically, it includes direct materials, direct labor, and manufacturing overhead. Consistent with the matching principle, product costs are recognized as expenses when the products are sold. This can result in a delay of one or more periods between the time in which the cost is incurred and when it appears as an expense on the income statement. Product costs are also known as inventoriable costs. The discussion in the chapter follows the usual interpretation of GAAP in which all manufacturing costs are treated as product costs.
Period costs include all selling costs and administrative costs. These costs are expensed on the income statement in the period incurred. All selling and administrative costs are typically considered to be period costs. The usual rules of accrual accounting apply to period costs. For example, administrative salary costs are “incurred” when they are earned by the employees and not necessarily when they are paid to employees.
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Quick Check
Which of the following costs would be considered a period rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
C. Direct materials costs.
facility.
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Which of the following costs would be considered a period rather than a product cost in a manufacturing company?
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Quick Check
Which of the following costs would be considered a period rather than a product cost in a manufacturing company?
A. Manufacturing equipment depreciation.
C. Direct materials costs.
facility.
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Property taxes on corporate headquarters and sales commissions are period costs. All of the other costs listed are product costs.
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Two more cost categories are often used in discussions of manufacturing costs—prime cost and conversion cost. Prime cost is the sum of direct materials cost and direct labor cost. Conversion cost is the sum of direct labor cost and manufacturing overhead cost. The term conversion cost is used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product.
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Merchandisers . . .
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MegaLoMart
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Merchandising companies purchase finished goods from suppliers for resale to customers. Manufacturing companies purchase raw materials from suppliers and produce and sell finished goods to customers.
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Now, let’s consider similarities and differences on the balance sheet for merchandising and manufacturing companies. Both merchandising and manufacturing companies will likely have Cash and Receivables. However, merchandising companies do not have to distinguish between raw materials, work in process, and finished goods. They report one inventory number on their balance sheets, labeled merchandise inventory. Manufacturing companies report three types of inventory on their balance sheets: raw materials, work in process, and finished goods.
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Merchandiser
Raw materials are the materials used to make the product.
Part II
Work in process consists of units of product that are partially complete, but will require further work to be saleable to customers.
Part III
Finished goods consists of units of product that have been completed, but not yet sold to customers.
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Theory of Constraints
A sequential process of identifying and removing constraints in a system.
Restrictions or barriers that impede
progress toward an objective
Professional Organizations
Publishes
Management
Accounting
Ethical business practices build trust and promote loyal, productive relationships with customers, employees and suppliers.
Many companies have written codes of ethics which serve as guides for employees to follow.
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Prepare complete and clear reports after appropriate analysis.
Maintain professional competence.
Confidentiality
Do not disclose confidential information unless legally obligated to do so.
Ensure that subordinates do not disclose confidential information.
Do not use confidential information for personal advantage.
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Avoid conflicts of interest and advise others of potential conflicts.
Recognize and communicate personal and professional limitations.
Do not subvert organization’s legitimate objectives.
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Avoid activities that could affect your ability to perform duties.
Refrain from activities that could discredit the profession.
Communicate unfavorable as well as favorable information.
Refuse gifts or favors that might influence
behavior.
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Disclose all information that might be useful to management.
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If unresolved or if policy does not exist:
Clarify relevant concepts in a confidential discussion with an objective advisor to explore possible courses of action.
Discuss problem with immediate supervisor.
Professional Ethics
Resolution of Ethical Conflict
If immediate supervisor is involved in the unethical behavior, discuss at the next level.
If problem is not resolved, the last resort is to resign.
Generally, do not communicate ethical conflicts to outsiders.
Professional Ethics
make financial decisionsand control an organization
2. Time focusHistorical perspectiveFuture emphasis
3. VerifiabilityEmphasis onEmphasis on relevance
versus relevanceverifiabilityfor planning and control
4. Precision versusEmphasis on Emphasis on
timelinessprecisiontimeliness
the whole organizationof an organization
6. GAAP Must follow GAAPNeed not follow GAAP
and prescribed formatsor any prescribed format
7. RequirementMandatory forNot
Regulation
use only
FASB and SEC.
Source of Data
historical data, estimates, and
projections of future events.
historical transactions.
Organization Chart