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An electronic presentation by Douglas Cloud

Pepperdine University

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Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

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CHAPTER

Introduction: The Role, History, and Direction of Management Accounting

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Objectives
1. Discuss the need for management accounting After studying this information. chapter, you should 2. Differentiate between management accounting be able to: and financial accounting. 3. Provide a brief historical description of management accounting. 4. Identify the current focus of management accounting.
Continued

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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.

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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.

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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

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Management Process
The Management Process is defined by the following activities: Planning

Controlling
Decision Making

Planning requires setting objectives and identifying methods to achieve those objectives.

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Management Process
The Management Process is defined by the following activities: Controlling is Planning
the managerial activity of monitoring a plans implementation and taking corrective action as needed.

Controlling
Decision Making

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

Controlling
Decision Making

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

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

Controlling
Decision Making

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Differentiate Between Management Accounting and Financial Accounting

Management Accounting

Financial Accounting

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1. Internally focused

1. Externally focused

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

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Targeted Users
Financial accounting focuses on provided information for external users.

ABC Company Annual Report

Management Accounting

Financial Accounting

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1. Internally focused 2. No mandatory rules

1. Externally focused 2. Must follow externally imposed rules

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Restrictions on Inputs and Processes

Management accounting is not subject Financial accounting reporting must to the accounting procedures set followthe requirements of generally by accepted accounting FASB. the SEC and the principles.

Management Accounting

Financial Accounting

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1. Internally focused 2. No mandatory rules 3. Financial and nonfinancial information; subjective information possible

1. Externally focused 2. Must follow externally imposed rules 3. Objective financial information

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

Management Accounting

Financial Accounting

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1. Internally focused 2. No mandatory rules 3. Financial and nonfinancial information; subjective information possible 4. Emphasis on the future

1. Externally focused 2. Must follow externally imposed rules 3. Objective financial information 4. Historical orientation

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

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Time Orientation

Financial accounting records and reports events that have already happened.

Management Accounting

Financial Accounting

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1. Internally focused 2. No mandatory rules 3. Financial and nonfinancial information; subjective information possible 4. Emphasis on the future 5. Internal evaluation and decisions based on very detail information

1. Externally focused 2. Must follow externally imposed rules 3. Objective financial information 4. Historical orientation 5. Information about the firm as a whole

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

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Degree of Aggregation
Financial accounting focuses on overall firm performance.

Management Accounting

Financial Accounting

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1. Internally focused 2. No mandatory rules 3. Financial and nonfinancial information; subjective information possible 4. Emphasis on the future 5. Internal evaluation and decisions based on very detail information 6. Broad, multidisciplinary

1. Externally focused 2. Must follow externally imposed rules 3. Objective financial information 4. Historical orientation 5. Information about the firm as a whole 6. More self-contained

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

Historical Description of Management Accounting

1880 - 1925 Most of the product-costing and internal accounting procedures used in this century were developed Emphasis of inventory costing for external reporting

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1925

1950s/60s
1980s/90s

Effort to improve the managerial usefulness of traditional cost systems

Significant efforts have been made to radically change the nature and practice of management accounting

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Current Focus of Management Accounting

Activity-Based Management

Activity-based management is a system wide, integrated approach that focuses managements attention on activities with the objective of improving customer value and the resulting profit.

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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.

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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: 1) Cost leadership 2) Superior products through differentiation

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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.

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Value Chain: Apple Industry

Planting and Cultivating Harvesting Distribution of Apples

Firm B

Firm A
Product Disposal
End-Use Customer

Applesauce Production
Applesauce Distribution Supermarkets

Firm C

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

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

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

Partial Organization Chart, Manufacturing Company

President
Line Function
Production Vice President Production Supervisor

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Staff Function
Financial Vice President

Controller

Treasurer

Machining Foreman

Assembly Foreman

Internal Audit

Cost

Financial

Systems

Ta x

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Ethical Behavior
Michael Josephsons* Ten Ethical Values: Honesty Caring for others
Integrity Respect for others

Promise keeping
Fidelity Fairness

Responsible citizenship
Pursuit of excellence Accountability

*Michael Josephson, Teaching Ethical Decision Making and Principled Reasoning

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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.

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The CMA
Four areas emphasized on the exam:
1) Economics, finance, and management

2) Financial accounting and reporting

3) Management report, analysis, and behavioral issues 4) Decision analysis and information systems

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Chapter One

The End