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Managerial Accounting Summary - VUB Business Economics
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MANAGERIAL ACCOUNTINGCHAPTER 1: AN INTRODUCTION TO MANAGEMENT ACCOUNTING, THE BUSINESS
ORGANIZATION, AND PROFESSIONAL ETHICS
1.Financial Accounting versus Management Accounting
2.Rolesof Accounting Information
3.Planning and Control for Product Life Cycles and the Value Chain
4.Basic Organizational Structure
5.Accounting’sPositionin the Organization
6.Expanding and Changing Role of Management Accounting
7.Professional and Business Ethics
1. Financial vs Management accounting
Financial accounting= develops information for external decision-makers, such as
stockholders, suppliers, banks and government
- It results in remember useful paths in financial statements of a company, income
statement, statement of stockholders, equity, balance sheet and statement of cash flows
Managerial accounting = branch of accounting that produces information for mangers within
an organization or internal decision-makers who direct and control operations; helps
managers of a company to use business financial information as tools to make decisions
needed to be successful to ran the business better
- Planning -> managerial : strong future orientation, financial -> past financial transactions,
useful for planning but only to a certain point, the future is not simply a reflection of
what happened in the past
Changes are constantly taking place in economic conditions, all of them demand that
planning be based in larger parts of estimates of what will happen rather than on
summaries of what has already happened
Financial: data objective but internally managers want information that is relevant
even if it is not really objective (relevant = appropriate)
Timeliness is often more important than precision to managers, if a decision must be
made and a manager rather wants a good estimate now than wait a week for a
precise answer
- Financial : GAAP, external uses must have some assurance that the reports have been
prepared in accordance with some common set of ground rule -> enhance comparability, but
doesn’t necessarily lead to the type of reports that would be most useful in internal decision
making
,e.g: land in GAAP -> should be stated at its historical reports, however if manager wants to
sell it -> it has to know the current market value
- Financial accounting is mandatory, but managerial isn’t -> no regulatory body outside the
agency specifies what is to be done for that matter or whether anything has to be done
at all
- Financial is concerned to report for a company as a whole; managerial: forces on parts or
segments of the company -> segments: product-lines, sales territories, departments,… or
any other categorizations of companies activities that management finds useful
- Financial accounting does require breakdowns of revenues and costs by majors segments
in external reports, secondary emphasis in managerial accounting -> segment reporting
is a primary emphasis
Roles of accounting information
basic purpose of accounting information
- To help managers making decisions; decision-making is at the core of management
process, decisions range from routine (setting daily production schedules) to the non-
routine (launching a new product line) -> many of these decisions rely on accounting
information
o Accountants must make sure that they produce information that is useful for these
decisions, and managers must work with accountants to get the information that is
needed
o Moreover when managers understand how their decisions affects cost and revenues
they will be better decision makers
- To help managers plan and control their organization operations in practice planning and
control go hand in hand, it seems artificial to separate them -> instead in management
we find it useful to concentrate in either the planning face or controlling face to simplify
our analysis
o Planning refers to setting up objectives for an organization and outline how it will attain
them
o Controlling is monitoring the day-to-day operations and keeping the company on track,
but differently it refers to implementing plans and evaluating the results of the plans by
comparing the actual result to the expected results of the budget
Timely systematically counting information are a primary source of useful controlling
You could consider this management processes as a series of activities in a cycle of
planning and control (see slide) with decision making at the core
- All activities involve decision making which is choosing a more alternative courses of
actions to achieve some objectives
- First step in planning : to identify alternatives and then to select from among the
alternatives the one that does the best job on furthering the organization’s objectives
- Business goals could be varied: e.g.: a common goal of all businesses is to increase
operating income, to develop a new product -> as soon as an alternative has been
chosen, detailed plans are drawn up. But plans of management are often expressed in
budget, a budget is a quantitative expression of a plan of actions
- Without budget, planning may not get the focus it deserves
- To plan for the future, managers must oversee day-to-day activities and keep the
organization function smoothly, this requires the ability to motivate and effectively direct
people
,- In carrying out the control function managers seek to ensure that the plan is being
followed, the accounting system reports measures and classifies actions in order to
produce performance reports
- Performance reports provide feedback by comparing the results with plans, and by
highlighting variances -> deviations for plans
- Those reports suggest where operations are not proceeding as planned and when some
parts of the organization may require additional attention, managers use then those
reports for further planning and implementation
Example: Starbucks store
- First column; based on a predicted level of sales and estimated cost needed to support
that sales-> after managers and superiors agree on a budget -> it becomes the managers’
target for the month -> starbucks collects cost and revenue information and at the end of
each month the accounting department prepares a store level performance report such
as this (see example) -> managers use the performance report to help evaluate the
stores operations
- First report: shows that the store obtained its targeted sales but 2500 dollars variance
ingredients shows that these costs, are over budget
- Other variances show the store labor cost 400 dollars under budget , other labor: 50
above budget
- At first managers will focus on ingredients, because it has by far the largest unfavorable
variance, however it would be also good to look at the 400 dollars favorable variance ->
by investigating favorable variances managers may find better solutions
Performance reports per investigations of exceptions -> concentrating on items for which
actual amounts differ significantly from budgeted amounts; managers than revise operations
to comfort with the plans or revise the plans (=management by exception) -> concentrating
on areas that deviate from the plan and ignores areas that appear to be running smoothly
What kind of accounting information do managers actually need for decision making and
planning and control?
Good accounting info helps to answer 3 type of questions:
- Decision-making: problem-solving questions: alternatives being considered-> involves an
analysis of the impacts of each alternative to identify the best course to follow
(problem-solving: asses possible courses of actions) e.g: starbucks adding + menus ->
managers decide which item to add and which to leave, by looking at costs and revenues
etc
- For performance evaluation and control: helps to answer scorecard and attention
direction questions: e.g. scorecard : Is the company doing well or poorly? Scorekeeping is
the accumulation, classification and reporting of date that help to use and understand
organizational performance (scorekeeping questions: evaluate organizational
performance)
- E.g. of attention directing questions (compares actual results to expected): e.g.: routine
reports ; a manager who sees that a store has reported profits of 100.000 dollars when
budgeted profits was 150.000 -> we will look at explanations why the store didn’t
achieve expectations -> those questions help manager focus on operating problems,
imperfections, inefficiencies and opportunities
Accounting systems
Accounting systems = are a formal mechanism for gathering, organizing and communicating
information about an organization’s activities
, - In order to reduce costs and complexities, many organizations use a general purpose
accounting system-> attempts to meet the needs of external and internal users however
there are important differences between managerial and financial accounting
information
- Managers should keep 2 important ideas in mind regarding accounting systems:
o Cost-benefit balance: value of a system must been seen as exceeding its costs,
accounting systems are economics goods like supply of labor at various costs and
benefits -> the expected benefit come from improved decisions or better controls.
System must provide timely accurate reports useful to managers, too complex or too
late-> manager may not use the reports, reports that aren’t used creates no benefits
o Behavioral implications : system effect on the behavior and decisions, specifically the
decisions of managers. A system that managers believe in and trust, will be used more in
making decisions than one that is distrusted -> e.g.: performance report used by
managers; unfairly attribute excessive cost to managers operations ; managers may lose
confidence in the system and no future decisions are taken
Vision model
Show in a visual way what accountant really do; accountants take economic activity, use
their critical thinking skills and use their accounting judgements to determine what
should be done with this economic activity -> they turn this data into useful information -
> this is giving to uses accounting information so that they can make a good business
decision-> in turn has an impact on society and future economic activity (= how
accountants help to prosper society)
To effectively plan and control production of G&S, accountants and other managers must
consider the product life cycle and value chain:
Product life cycle:
- stages through which a product passes
- few months (clothes) to many years (automobiles), some products have long
development stages but short market lives and vice versa (airplanes)
- companies: wants to shorten the development phase, to reduce the time during which a
product generates no revenue and to bring products on the market on a more timely
basis
- each stage: different costs and potential returns
- planning process : managers must determine revenues and costs of the entire life cycle
accounting needs to track actual costs and revenues throughout the life cycle
- periodic comparisons during the processes of actual and expected costs and revenues
allow managers to assess the current profitability of a product; to determine the current
life cycle stage and needed strategy
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