CORNERSTONES

of Managerial Accounting, 5e
 CHAPTER 1:
INTRODUCTION TO
MANAGERIAL ACCOUNTING
Cornerstones of Managerial
Accounting, 5e

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 Learning Objectives
1. Explain the meaning of managerial accounting.
2. Explain the differences between managerial
accounting and financial accounting.
3. Identify and explain the current focus of
managerial accounting.
4. Describe the role of managerial accountants in
an organization.

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Learning Objectives
5. Explain the importance of ethical behavior for
managers and managerial accountants.
6. Identify three forms of certification available to
managerial accountants.

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 The Meaning of
Managerial Accounting
Managerial accounting is providing accounting
information for a companys internal users.
Is not bound by generally accepted accounting
principles (GAAP).
Managerial accounting has three broad
objectives:

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 The Meaning of
Managerial Accounting
To provide information for planning the organizations
actions.
1

To provide information for controlling the organizations

actions.
2

To provide information for making effective decisions.

3

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 Planning
The detailed formulation of action to achieve a
particular end is the management activity called
planning.
Example
Setting objectives Improve Quality

Identifying methods to Supplier Evaluation

achieve those objectives Program
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 Controlling
The managerial activity of monitoring a plans
implementation and taking corrective action as
needed is controlling.
Compare

Actual Expected
Performance Performance

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 Decision Making
The process of choosing among competing
alternatives is called decision making.

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 What Constitutes Managerial
Accounting Information

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 Financial Accounting
and Managerial Accounting
Financial Accounting provides information for
external users:
Investors, creditors, customers, suppliers, government
agencies, and labor unions.
Financial accounting is historical:
Investment decisions, stewardship evaluation,
monitoring activity, and regulatory measures.

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 Financial Accounting
and Managerial Accounting (cont.)
Financial statements must follow rules defined by:
Securities and Exchange Commission (SEC)
Financial Accounting Standards Board (FASB)
International Accounting Standards Board (IASB).
Managerial Accounting produces information for
internal users, such as managers, executives,
and workers.

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 Financial Accounting
and Managerial Accounting (cont.)
Managerial accounting Internal accounting

Financial accounting External accounting

Managerial Accounting identifies, collects,

measures, classifies, and reports financial and
nonfinancial information to internal users in
planning, controlling, and decision making.

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 Comparison of Financial and
Managerial Accounting
Financial Accounting Managerial Accounting
Externally focused Internally focused
Must follow externally imposed rules No mandatory rules

Objective financial information Financial and information; subjective

information possible nonfinancial

Historical orientation Emphasis on the future

Information about the firm as a whole Internal evaluation and decisions
based on very detailed information

More self-contained Broad, multidisciplinary

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 Current Focus of Managerial
Accounting
The business environment in which companies
operate has changed

Effective managerial accounting systems provide

information that helps improve companies
planning, control, and decision-making activities.

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 Current Focus of Managerial
Accounting (cont.)
Important uses of managerial accounting:
1. New methods of estimating product and service
cost and profitability
2. Understanding customer orientation
3. Evaluating the business from a cross-functional
perspective
4. Providing information useful in improving total
quality management.

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 New Methods of Costing
Products and Services
Todays companies need focused, accurate
information on the cost of products and services
produced.
Activity-based costing (ABC) is a more detailed
approach to determine the cost of goods and
services.
ABC improves costing accuracy by emphasizing the
cost of the many activities or tasks that must be done to
produce a product or service.

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 New Methods of Costing Products
and Services (cont.)
Process-value analysis focuses on the way in
which companies create value for customers.
Find ways to perform necessary activities more
efficiently and eliminate those that do not create
customer value.

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 Customer Orientation
Customer value is a key focus
Firms can establish a competitive advantage by
creating better customer value for the same or
lower cost than competitors
Create equivalent value for lower cost than that of
competitors.
Customer value is the difference between what a
customer receives and what the customer gives
up when buying a product or service.
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 Strategic Positioning
Effective cost information can help increase
customer value.
Cost Leadership: Provide the same or better value to
customers at a lower cost than competitors.
Superior products through differentiation: Increase
customer value by providing something to customers
not provided by competitors.

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 Value Chain
Successful pursuit of cost leadership and
strategies
The value chain is the set of activities required to
design, develop, produce, market, and deliver
products and services, and provide support
services to customers.

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 Value Chain

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 Cross-Functional Perspective
In managing the value chain, a managerial
accountant must understand and measure many
functions of the business.
Contemporary approaches to costing may
include:
initial design and engineering costs
manufacturing costs
costs of distribution
sales and service.

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 Total Quality Management
Continuous improvement is the continual
search for ways to increase the overall efficiency
and productivity of activities by reducing waste,
increasing quality, and managing costs.
Fundamental for establishing excellence.

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 Total Quality Management (cont.)
A philosophy of total quality management, in
which manufacturers strive to create an
environment that will enable workers to
manufacture perfect (zero-defect) products.
Has created a demand for a managerial
accounting system that provides information
about quality.

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 Total Quality Management (cont.)
Companies attempt to increase organizational
value by eliminating wasteful activities that exist
throughout the value chain.
This has led to a change in accounting, referred
to as lean accounting, which organizes costs
according to the value chain and collects both
financial and nonfinancial information.

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 Total Quality Management (cont.)
A more recent charge of managerial accountants
is to help carry out the companys enterprise risk
management (ERM) approach.
ERM is a formal way for managerial accountants
to identify and respond to the most important
threats and business opportunities facing the
organization.

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 Time As A Competitive Element
Time is a crucial element in all phases of the
value chain.
Firms reduce time to market by compressing
design, implementation, and production cycles.
Deliver products or services quickly by eliminating
nonvalue-added time, which is time of no value to
the customer (e.g., the time a product spends on
the loading dock).
Decreasing nonvalue-added time appears to go
hand in hand with increasing quality. LO-3
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 Efficiency
Improving efficiency is also a vital concern.
Both financial and nonfinancial measures of
efficiency are needed.
Cost is a critical measure of efficiency.
For these efficiency measures to be of value,
costs must be properly defined, measured, and
assigned
Production of output must be related to the inputs
required, and the overall financial effect of
productivity changes should be calculated. LO-3
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 The Role of the Managerial
Accountant
The role of managerial accountants is one of
support.
Assist those who are responsible for carrying out
an organizations basic objectives.
Positions that have direct responsibility for the
basic objectives of an organization are line
positions.

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 The Role of the Managerial
Accountant (cont.)
Positions that are supportive in nature and have
only indirect responsibility for an organizations
basic objectives are staff positions.
The controller supervises all accounting
functions and reports directly to the general
manager and chief operating officer.
In larger companies, the controller is separate
from the treasury department. The treasurer is
responsible for the finance function.
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 Managerial Accounting
and Ethical Conduct
The objective of profit maximization should be
constrained by the requirement that profits be
achieved through legal and ethical means.
Ethical behavior involves choosing actions that
are right, proper, and just.
Behavior can be right or wrong; it can be proper
or improper; and the decisions we make can be
fair or unfair.
Companies in business for the long term find that
it pays to treat all of their constituents with
honesty and loyalty.
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 Company Codes of
Ethical Conduct
To promote ethical behavior by managers and
employees, organizations commonly establish
standards of conduct referred to as Company
Codes of Conduct.
A quick review of various corporate codes of
conduct shows some common ground.

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 Company Codes of
Ethical Conduct (cont.)
Important parts of corporate codes of conduct are
integrity, performance of duties, and compliance
with the rule of law.
They also uniformly prohibit the acceptance of
kickbacks and improper gifts, insider trading, and
misappropriation of corporate information and
assets.

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 Standards of Ethical Conduct for
Managerial Accountants
Organizations establish standards of conduct for
their managers and employees, professional
associations also establish ethical standards.
Both the American Institute of Certified Public
Accountants (AICPA) and the Institute of
Management Accountants (IMA) have established
ethical standards for accountants.

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 Standards of Ethical Conduct for
Managerial Accountants (cont.)
Professional accountants are bound by these
codes of conduct.
The biggest challenge with ethical dilemmas is
that when they arise, employees frequently do not
realize
(1) that such a dilemma has arisen
(2) the correct action that should be taken to
rectify the dilemma.

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 Certification
Three major forms of certification for managerial
accountants:
Certificate in Management Accounting
Certificate in Public Accounting
Certificate in Internal Auditing
Each certification offers particular advantages to
a managerial accountant.
All three certifications offer proof of achievement
at a minimum level of professional competence.
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 The Certified Management
Accountant (CMA)
The Certificate in Management Accounting is
designed to meet the specific needs of
managerial accountants.
Four areas are emphasized in the qualifying
examination for the CMA. They are:
economics, finance, and management;
financial accounting and reporting;
management reporting, analysis, and behavioral issues;
and
decision analysis and information systems
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 The Certified Public Accountant
(CPA) (cont.)
The Certificate in Public Accounting is the oldest
and most well-known certification in accounting.
The purpose of the certificate is to provide
minimal professional qualification for external
auditors.
Only a Certified Public Accountant (CPA) is
permitted (by law) to serve as an external auditor.

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 The Certified Public Accountant
(CPA) (cont.)
CPAs must pass a national examination and be
licensed by the state in which they practice.
Although the Certificate in Public Accounting does
not have a managerial accounting orientation,
many managerial accountants also hold this
certificate.

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 The Certified Internal
Auditor (CIA)
Internal auditing differs from external auditing and
managerial accounting, and many internal
auditors felt a need for a specialized certification.
The Certified Internal Auditor (CIA) has passed
a comprehensive examination designed to
ensure technical competence and has two years
experience.

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