CHAPTER 1

Managerial Accounting In the Information Age

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Managerial Accounting
 Managerial accounting is designed for internal users  The goal of Managerial Accounting is to provide the information managers need for - Planning - Control - Decision making

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Learning objective 1: State the primary goal of managerial accounting

Planning
Budgets for planning
 Profit budget - Indicates planned income  Cash flow budget - Indicates planned cash inflows and outflows  Production budget - Indicates the planned quantity of production and expected costs
Slide 1-3 Learning objective 2: Describe how budgets are used in planning

Planning

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Learning objective 2: Describe how budgets are used in planning

Control
Organizations achieve control by:
 Evaluating managers to determine how their performance should be rewarded or punished  Evaluating operations to provide information as to whether they should be changed or not

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Learning objective 3: Describe how performance reports are used in the control process

Planning and Control Process

Learning objective 3: Describe how performance reports are used in the control process Slide 1-6

Sample Performance Report

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Learning objective 3: Describe how performance reports are used in the control process

Managerial vs Financial Accounting

Unlike Financial Accounting, Managerial Accounting:  Is directed at internal users  May deviate from GAAP  Presents more detailed information  May present more nonmonetary information  Places more emphasis on the future

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Learning objective 4: Distinguish between financial and managerial accounting

Cost Terminology
Variable Costs - Change in proportion to changes in volume or activity

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Learning objective 5: Define cost terms used in planning, control, and decision making

Cost Terminology
Fixed Costs
- Do not change in response to changes in volume or activity

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Learning objective 5: Define cost terms used in planning, control, and decision making

Which of the following is most likely to be a variable cost? a. Depreciation b. Cost of materials c. Rent d. Advertising

Answer:
b. Cost of materials

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Learning objective 5: Define cost terms used in planning, control, and decision

Which of the following is most likely to be a fixed cost? a. Cost of materials b. Rent c. Assembly labor cost d. Commissions

Answer:
b. Rent

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Learning objective 5: Define cost terms used in planning, control, and decision making

Cost Terminology
Sunk Costs - Costs incurred in the past - Not relevant to present decisions Opportunity Costs - Values of benefits foregone when selecting one alternative over another

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Learning objective 5: Define cost terms used in planning, control, and decision making

Costs incurred in the past are: a. Opportunity costs b. Direct costs c. Sunk costs d. Variable costs

Answer:
c. Sunk costs

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Learning objective 5: Define cost terms used in planning, control, and decision making

Cost Terminology
 Direct and indirect costs
- Direct costs are directly traceable to a product, activity, or department, indirect costs are not traceable

 Controllable & noncontrollable costs

- A manager can influence controllable costs but cannot influence noncontrollable costs

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Learning objective 5: Define cost terms used in planning, control, and decision making

Direct and Indirect Cost

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Learning objective 5: Define cost terms used in planning, control, and decision making

In the past year, Williams Mold & Machine had sales of $8,000,000 and total production costs of $6,000,000. In the coming year, the company believes that production can be increased by 30%, but this will require adding a second shift to work from 4:00 pm to 1:00 am.
1. Indicate three production costs that are likely to increase because of adding a second production shift.

Material costs, workers salaries, and benefits are all likely to increase
Slide 1-17 Learning objective 5: Define cost terms used in planning, control, and decision making

In the past year, Williams Mold & Machine had sales of $8,000,000 and total production costs of $6,000,000. In the coming year, the company believes that production can be increased by 30%, but this will require adding a second shift to work from 4:00 pm to 1:00 am. 2. What production cost most likely will not increase when the second shift is added? Depreciation of the building will not increase

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Learning objective 5: Define cost terms used in planning, control, and decision making

Two Key Ideas in Managerial Accounting

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Learning objective 6: Explain the two key ideas in managerial accounting

Incremental Analysis
Incremental analysis:
 Differences in revenues and costs between alternatives are incremental  Incremental revenue minus incremental cost equals incremental profit

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Learning objective 6: Explain the two key ideas in managerial accounting

You Get What you Measure

Performance measures greatly influence the behavior of managers

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Learning objective 6: Explain the two key ideas in managerial accounting

You Get What you Measure

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Learning objective 6: Explain the two key ideas in managerial accounting

Information Age and Managerial Accounting

Advances in information technology have:  increased competition and also created opportunities and cost savings for firms that use information for strategic advantage  impacted information flows up and down the value chain (i.e. fundamental activities that a firm engages in to create value)

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Learning objective 7: Discuss the impact of information technology on competition, business processes and the interactions companies have with suppliers and customers

The Value Chain

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Learning objective 7: Discuss the impact of information technology on competition, business processes and the interactions companies have with suppliers and customers

Impact of Software Systems on the Value Chain

 Enterprise Resource Planning (ERP)
- Computerize inventory control and production planning

 Supply Chain Management (SCM)

- Organization of activities between a company and its suppliers

 Customer Relationship Management (CRM)

- Manages a variety of customer interactions

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Learning objective 7: Discuss the impact of information technology on competition, business processes and the interactions companies have with suppliers and customers

Customer Relationship Management

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Learning objective 7: Discuss the impact of information technology on competition, business processes and the interactions companies have with suppliers and customers

Ethical and Unethical Behavior

Examples of unethical behavior
 Enron managers mislead investors by hiding debt, i.e. Kenneth Lay, CEO, found guilty of fraud  WorldCom overstated profits, i.e. Bernard Ebbers, CEO, received a 25 year prison sentence  Dennis Kozlowski, head of Tyco, was charged with avoiding taxes  Sam Waksal, cofounder of IMClone, was charged with insider trading

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Learning objective 8: Describe a framework for ethical decision making

SarbanesSarbanes-Oxley Act
 Enacted by Congress in July 2002  Requires CEO and CFO to certify that the financial statements do not contain any untrue statements or omissions  Bans certain types of work by the companys auditors to ensure their independence  Provides for longer jail sentences and larger fines for executives (i.e. fines up to $5 million and jail terms up to 20 years)  Requires companies to report on the existence and reliability of internal controls
Slide 1-28 Learning objective 8: Describe a framework for ethical decision making

Framework for Ethical Decision Making

When evaluating a decision, ask:
1. What decision alternatives are available? 2. What individuals or organizations have a stake in the outcome of my decision? 3. Will an individual or an organization be harmed by any of the alternatives? 4. Which alternative will do the most good with the least harm? 5. Would someone I respect find any of the alternatives objectionable?
Slide 1-29 Learning objective 8: Describe a framework for ethical decision making

Framework for Ethical Decision Making

After deciding on a course of action, but before taking action, ask:
6. At a gut level, am I comfortable with the decision I am about to make? 7. Will I be comfortable telling my friends and family about this decision?

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Learning objective 8: Describe a framework for ethical decision making

Ethical Decision Making

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Learning objective 8: Describe a framework for ethical decision making

Institute of Management Accountants (IMA)

Professional organization which focuses on management accounting:  Developed Statement of Ethical Professional Practice  Maintains ethics helpline  Publishes Strategic Finance and Management Accounting Quarterly  Conducts comprehensive examination to test knowledge of management accountants
Slide 1-32 Learning objective 8: Describe a framework for ethical decision making

Duties of Officers
Controller
- Prepares reports to plan and evaluate

company activities - Provides information needed to make management decisions - Files all financial accounting reports and tax filings with IRS and other tax agencies - Coordinates activities of external auditors
Slide 1-33 Learning objective 9: Discuss the duties of the controller, the treasurer, the chief information officer, and the chief financial officer

Duties of Officers
Treasurer
 Manages cash and marketable securities  Prepare cash forecasts  Obtains financing from banks and other lenders  Maintain relationships with investors, banks, and other creditors

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Learning objective 9: Discuss the duties of the controller, the treasurer, the chief information officer, and the chief financial officer

Duties of Officers
Chief Information Officer (CIO)
 responsible for information technology and computer systems

Chief Financial Officer (CFO)

 responsible for accounting and finance operations

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Learning objective 9: Discuss the duties of the controller, the treasurer, the chief information officer, and the chief financial officer

Organizational Chart for the Controllers Office

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Learning objective 9: Discuss the duties of the controller, the treasurer, the chief information officer, and the chief financial officer

Decision Making

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