1 CHAPTER M1 Management Accounting: Its Environment and Future © 2007 Pearson Custom Publishing

1

CHAPTER M1CHAPTER M1

Management Management Accounting: Its Accounting: Its Environment Environment and Futureand Future

© 2007 Pearson Custom Publishing© 2007 Pearson Custom Publishing

2

Learning Objective Learning Objective 1:1:

Describe Describe management management

accounting and accounting and contrast it with contrast it with

financial financial accounting.accounting.© 2007 Pearson Custom Publishing© 2007 Pearson Custom Publishing

3

Management Management AccountingAccounting

The process of The process of identification, identification, measurement, measurement, accumulation, accumulation, analysis, analysis, preparation, preparation, interpretation, and interpretation, and communication of financial information used communication of financial information used

by management to plan, evaluate, and control by management to plan, evaluate, and control an organization.an organization.


4

Cost AccountingCost Accounting Cost accountingCost accounting is a subset of is a subset of

management accounting, although the management accounting, although the two terms are often used two terms are often used interchangeably.interchangeably.

Cost accounting deals with the theories Cost accounting deals with the theories and procedures related to determining and procedures related to determining the cost of a particular product, service, the cost of a particular product, service, or activity.or activity.


5

Management or Management or Financial Financial

Accounting?Accounting? There are several major differences There are several major differences

between the worlds of management between the worlds of management accounting and financial accounting.accounting and financial accounting.

Although these differences exist, it is Although these differences exist, it is important to keep in mind that they both important to keep in mind that they both play important roles in the total accounting play important roles in the total accounting picture.picture.


6

Focus on UsersFocus on Users Financial accounting is particularly Financial accounting is particularly

intended to provide information to intended to provide information to externalexternal users, such as shareholders, bankers, users, such as shareholders, bankers, other creditors, suppliers, and the like.other creditors, suppliers, and the like.

Management accounting is particularly Management accounting is particularly intended to provide information to intended to provide information to internal internal users, such as managers, directors, users, such as managers, directors, administrators, and the like.administrators, and the like.


7

Accounting RulesAccounting Rules The financial accountant is governed by The financial accountant is governed by

GAAP (generally accepted accounting GAAP (generally accepted accounting principles).principles).

The management accountant need follow The management accountant need follow no such rules. The management no such rules. The management accountant has much greater flexibility in accountant has much greater flexibility in deciding what information to report, when deciding what information to report, when and how to report it, and to whom.and how to report it, and to whom.


8

Level of DetailLevel of Detail Financial accounting statements are known Financial accounting statements are known

as general purpose statements comprised as general purpose statements comprised of highly aggregated information. Many of highly aggregated information. Many different external users rely on the same different external users rely on the same statements.statements.

Management accounting reports are Management accounting reports are typically much more detailed, possibly typically much more detailed, possibly dealing only with the information related to dealing only with the information related to one particular decision.one particular decision.

© 2007 Pearson Custom © 2007 Pearson Custom PublishingPublishing

9

TimelinessTimeliness Timeliness is an important characteristic of Timeliness is an important characteristic of

useful information. Management releases useful information. Management releases financial accounting information to external financial accounting information to external users on a quarterly and annual basis.users on a quarterly and annual basis.

Managers, on the other hand, need daily, Managers, on the other hand, need daily, hourly, weekly, or monthly internal hourly, weekly, or monthly internal accounting reports.accounting reports.


10

Future OrientationFuture Orientation Financial accounting provides information Financial accounting provides information

about past results. Predictive value is about past results. Predictive value is desired, but not required.desired, but not required.

Management accounting information is Management accounting information is used primarily for decision making, and used primarily for decision making, and these decisions affect the future of the these decisions affect the future of the firm.firm.


11

Management Management Positions Positions

in Accountingin Accounting For most firms, the For most firms, the controllercontroller is the chief is the chief

accountant, the person ultimately in accountant, the person ultimately in charge of the accounting system.charge of the accounting system.

TheThe treasurertreasurer is typically responsible for is typically responsible for managing the company’s cash, credit, and managing the company’s cash, credit, and investments.investments.


12


Explain major Explain major historical historical

developments that developments that have affected have affected management management accounting.accounting.© 2007 Pearson Custom Publishing© 2007 Pearson Custom Publishing

13

The Growth of The Growth of Management Management AccountingAccounting

Four major factors have had an impact:Four major factors have had an impact: Emergence of permanent employeesEmergence of permanent employees The industrial revolutionThe industrial revolution Scientific managementScientific management DiversificationDiversification


14

Emergence of Emergence of Permanent Permanent EmployeesEmployees

When firms primarily hired independent When firms primarily hired independent contractors, no formal communication system contractors, no formal communication system was needed. It was also relatively easy to was needed. It was also relatively easy to determine the cost of producing a product.determine the cost of producing a product.

Permanent employees and the development Permanent employees and the development of the “factory” concept contributed to greater of the “factory” concept contributed to greater control over production.control over production.


15

Industrial Industrial RevolutionRevolution

As organizations grew in size and As organizations grew in size and complexity, the ability of the owners to complexity, the ability of the owners to supervise all aspects of the business supervise all aspects of the business started to shrink.started to shrink.

The creation of various levels of The creation of various levels of management resulted in a need for a management resulted in a need for a formal communication system for the formal communication system for the managers.managers.


16

Scientific Scientific ManagementManagement

One of the major features of the scientific One of the major features of the scientific management philosophy was that workers management philosophy was that workers need to be evaluated in comparison to a need to be evaluated in comparison to a standardstandard for performance. for performance.

The philosophy created a need for an entire The philosophy created a need for an entire army of data collectors and cost analysts. army of data collectors and cost analysts. Time and motion studies and engineering Time and motion studies and engineering reports became commonplace.reports became commonplace.


17


Describe how Describe how changes in changes in

management management accounting affect accounting affect

today’s businesses.today’s businesses.© 2007 Pearson Custom Publishing© 2007 Pearson Custom Publishing

18

DiversificationDiversification Early in the 20th century, companies began Early in the 20th century, companies began

to diversify. More managers with skills in to diversify. More managers with skills in different areas were needed. There was different areas were needed. There was also an increase in the delegation of also an increase in the delegation of authority. authority.

More information was needed from the More information was needed from the various business operations to allow top various business operations to allow top managers and owners to plan, control, and managers and owners to plan, control, and evaluate performance.evaluate performance.


19

The Emergence of The Emergence of Management Management AccountingAccounting

Institute of Management Institute of Management Accountants (IMA) founded in 1919Accountants (IMA) founded in 1919

Leaner management practices led to:Leaner management practices led to: Just-in-time inventory (JIT)Just-in-time inventory (JIT) Activity-based management (ABM)Activity-based management (ABM) Activity-based costing (ABC)Activity-based costing (ABC) Design for manufacturing (DFM)Design for manufacturing (DFM)


20


Explain how Explain how businesspeople use businesspeople use

management management accounting information accounting information

and skills.and skills.


21

Consumers of Consumers of Management Management AccountingAccounting

Management accounting information is Management accounting information is always always forward-lookingforward-looking..

The future contains The future contains uncertaintyuncertainty.. Management accounting allows the user Management accounting allows the user

to formulate models to reduce uncertainty to formulate models to reduce uncertainty by planning, using reliable information.by planning, using reliable information.


22

The End of Chapter The End of Chapter M1M1

Documents

1 CHAPTER M1 Management Accounting: Its Environment and Future © 2007 Pearson Custom Publishing