CA Summary
Chapter 1: The Manager and Management Accounting
Financial accounting, management accounting, and cost accounting
Financial Accounting
Financial accounting and management accounting have different goals. financial accounting focuses
on reporting financial information to external parties such as investors, government agencies, banks,
and suppliers based on Generally Accepted Accounting Principles (GAAP).
Management Accounting
Management accounting is the process of measuring, analyzing, and reporting financial and
nonfinancial information that helps managers make decisions to fulfill the goals of an organization.
Managers use management accounting information to:
1. develop, communicate, and implement strategies,
2. coordinate product design, production, and marketing decisions and evaluate a company’s
performance.
Management accounting information and reports do not have to follow set principles or rules. The
key questions are always (1) how will this information help managers do their jobs better, and (2) do
the benefits of producing this information exceed the costs?
Cost Accounting
Cost accounting provides information for both management accounting and financial accounting
professionals. Cost accounting is the process of measuring, analyzing, and reporting financial and
nonfinancial information related to the costs of acquiring or using resources in an organization.
Strategic Decisions and the Management Accountant
A company’s strategy specifies how the organization matches its own capabilities with the
opportunities in the marketplace. In other words, strategy describes how an organization creates
value for its customers while distinguishing itself from its competitors. Management accountants
work closely with managers in various departments to formulate strategies by providing information
about the sources of competitive advantage, such as (1) the company’s cost, productivity, or
efficiency advantage relative to competitors or (2) the premium prices a company can charge over its
costs from distinctive product or service features. Strategic cost management describes cost
management that specifically focuses on strategic issues. The best-designed strategies and the best-
developed capabilities are useless unless they are effectively executed.
Value-chain and Supply-chain Analysis and Key success Factors
Customers demand much more than just a fair price; they expect quality products (goods or services)
delivered in a timely way. The entire customer experience determines the value a customer derives
from a product.
Value-Chain Analysis
The value chain is the sequence of business functions by which a product is made progressively more
useful to customers. The different parts of the value chain consist of six primary business functions:
research and development (R&D), design of products and processes, production, marketing,
,distribution, and customer service. In addition to the six primary business functions, an
administration function, which includes accounting and finance, human resource management, and
information technology and supports the six primary business functions. Managers track costs
incurred in each value-chain category. Their goal is to reduce costs to improve efficiency or to spend
more money to generate even greater revenues.
Supply-Chain Analysis
The parts of the value chain associated with producing and delivering a product or service—
production and distribution—are referred to as the supply chain. The supply chain describes the flow
of goods, services, and information from the initial sources of materials and services to the delivery
of products to consumers, regardless of whether those activities occur in one organization or in
multiple organizations.
Key Success Factors
Customers want companies to use the value chain and supply chain to deliver ever-improving levels
of performance when it comes to several (or even all) of the following: Cost and efficiency, Quality,
Time, Innovation, and Sustainability. Sustainability is important to attract and inspire employees, to
attract investors (they care about sustainability), to avoid a boycott (customers prefer companies
that are sustainable).
Decision making, planning, and Control: The five-step decision-making process
1. Identify the problem and uncertainties
2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing among alternatives
5. Implement the decision, evaluate performance, and learn
Key Management Accounting Guidelines
Three guidelines help management accountants provide the most value to the strategic and
operational decision making of their companies: (1) employ a cost–benefit approach, (2) give full
recognition to behavioral and technical considerations, and (3) use different costs for different
purposes.
Cost-benefit Approach
Managers continually face resource-allocation decisions. They use a cost–benefit approach when
making these decisions. Managers should spend resources if the expected benefits to the company
exceed the expected costs. Managers rely on management accounting information to quantify
expected benefits and expected costs.
Behavioral and technical considerations
When utilizing the cost–benefit approach, managers need to keep in mind a number of technical and
behavioral considerations. Technical considerations help managers make wise economic decisions by
providing desired information in an appropriate format. However, management is not confined to
technical matters. Management is primarily a human activity that should focus on encouraging
individuals to do their jobs better.
, Different costs for different purposes
managers use alternative ways to compute costs in different decision-making situations because
there are different costs for different purposes. A cost concept used for the purposes of external
reporting may not be appropriate for internal, routine reporting. Because costs in external reporting
should be reported according to GAAP.
Organization structure and the management accountant
Line and Staff relationships
Organizations distinguish between line management and staff management. Line management, such
as production, marketing, and distribution management, is directly responsible for achieving the
goals of the organization. Staff management, such as management accountants and information
technology and human-resources management, provides advice, support, and assistance to line
management.
The Chief Financial Officer and the Controller
The chief financial officer (CFO)—also called the finance director in many countries—is the executive
responsible for overseeing the financial operations of an organization. The responsibilities of the CFO
vary among organizations, but they usually include the following areas: Controllership, Tax, Treasury,
Risk management, Investor relations, Strategic planning. The controller (also called the chief
accounting officer) is the financial executive primarily responsible for management accounting and
financial accounting.
Management Accounting beyond the numbers
The successful management accountant possesses several skills and characteristics that reach well
beyond basic analytical abilities.
Management accountants must work well in cross-functional teams and as a business
partner.
Management accountants must promote fact-based analysis and make tough-minded,
critical judgments without being adversarial.
They must lead and motivate people to change and be innovative.
They must communicate clearly, openly, and candidly.
They must have high integrity.
Professional Ethics
Ethics are the foundation of a well-functioning economy. When ethics are weak, suppliers bribe
executives to win supply contracts rather than invest in improving quality or lowering costs. In the
absence of ethical conduct, customers have little confidence in the quality of products produced and
become reluctant to buy them, causing markets to fail. Prices of products increase because of higher
prices paid to suppliers and fewer products being produced and sold. Investors are unsure about the
integrity of financial reports, affecting their ability to make investment decisions, resulting in a
reluctance to invest and a misallocation of resources.
Institutional Support
Accountants have special ethical obligations, given that they are responsible for the integrity of the
financial information provided to internal and external parties. The Sarbanes–Oxley legislation in the
United States was passed in 2002 in response to a series of corporate scandals. The act focuses on
