Basic Management Accounting and Control Concepts

Managerial Accounting and Financial Accounting Managerial accounting provides

information for managers inside an organization who direct and control operations

Financial accounting provides information to stockholders, creditors and others who are outside the organization

Differences Between Financial and Managerial Accounting

Financial Accounting Managerial Accounting1. Users External persons who Managers who plan for

make financial decisions and control an organization

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance versus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis on timeliness precision timeliness

5. Subject Primary focus is on Focuses on segments the whole organization of an organization

6. Requirements Must follow GAAP Need not follow GAAPand prescribed formats or any prescribed format

International Competition Meeting world-class competition

demands a world-class management accounting system.

Managers must make decisions to plan, direct, and control a world-class organization.

Many U.S. companies derive more than 50% of their income from overseas operations

Evolution and Adaptation in Managerial Accounting

Service Vs. Mfg. Firms

Emergence of NewIndustries

Global Competition

Focus on the Customer

Lean Manufacturing

Continuous Improvement

Theory of Constraints

Information andCommunication

Technology

Product Life Cycles

Total QualityManagement

Time-Based Competition

Just-in-Time Inventory

Change

© The McGraw-Hill Companies, Inc.

E-Commerce

Computer-Integrated Mfg.

Six Sigma

Importance of Ethicsin Accounting

Ethical accounting practices build trust and promote loyal, productive relationships with users of accounting information.

Many companies and professional organizations, such as the Instituteof Management Accountants (IMA),have written codes of ethics whichserve as guides for employees. Code of Conduct for Management

Accountants

IMA Code of Ethics for Management Accountants

Four broad areas of responsibility: Maintain a high level of professional

competence treat sensitive matters with confidentiality Maintain personal integrity Be objective in all disclosures

Managerial Accounting Tools

Failed dot.com and other businesses might have benefited from the application of managerial accounting tools:

Cost concepts Cost-volume-profit Activity-based costing Budgeting Standard Costs Decision making Capital budgeting Transfer pricing Measuring Performance

Cost concepts Period Costs Product Costs Elements of Cost

Direct material Direct labor Manufacturing overhead

Cost concepts (continued) Basic Cost Management Concepts

Cost driver Variable and fixed costs Direct and indirect costs Controllable and uncontrollable costs

Sunk Costs Differential Costs Relevant Costs

Cost concepts (continued) Manufacturing overhead

Estimated – budgeted Applied – allocated Incurred – actual

Over- or Under-applied Overhead

Cost-Volume-Profit Break-even point Cost structure Operating leverage Airlines

Activity-based Costing Problems with a single factory-wide

overhead rate Many different cost drivers CD versus DVD units Change in cost allocation under

activity-based costing

Budgeting (Profit Planning and Control)

Budget – quantitative expression of management’s goals

Budget function Planning Communicating and coordinating Allocating limited resources Control Performance evaluation

Sales budget Behavioral impact of budgets

Standard Costs Managing costs Setting standards Variance analysis and investigation Behavioral impact of standard

costing Balanced scorecard

Decision-making (Special Decision Situations) Special orders Add or drop a service, product or

department Allocation of limited resources

Capital Budgeting Discounted cash flow

Net present value method Internal rate of return

Discount rate Other methods

Payback Project approval and Post Audit

Transfer Pricing Market-based prices Negotiated prices Cost-based prices Goal congruence

Measuring Performance Responsibility accounting Return on investment Residual income Economic value added

Sustainability Sustainability Reporting

Economic Environmental Social

Triple Bottom Line Integrated Reporting

Developments in Regulation

Sarbanes – Oxley Corporate Governance

Audit Committees Internal Control Evaluation Added Costs

Dodd-Frank