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2 -2
1. Discuss the need for management accounting information.
2. Differentiate between management accounting and financial accounting.
3. Provide a brief historical description of management accounting.
4. Identify the current focus of management accounting.
ObjectivesObjectivesObjectivesObjectives
ContinuedContinuedContinuedContinued
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5. Describe the role of management accountants in an organization.
6. Explain the importance of ethical behavior for managers and management accountants.
7. List three forms of certification available to management accountants.
ObjectivesObjectivesObjectivesObjectives
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8. Describe the cost assignment process.9. Define tangible and intangible products and
explain why there are different product cost definitions.
10.Prepare income statements for manufacturing and service organizations.
11.Outline the differences between functional-based and activity-based management accounting systems.
ObjectivesObjectivesObjectivesObjectives
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1. To provide information for costing out services, products, and other objects of interest to management.
2. To provide information for planning, controlling, evaluating, and continuous improvement.
3. To provide information for decision making.
The managerial accounting system has three broad objectives:
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OutputsOutputsProcessesProcessesInputsInputs
Economic Events
CollectingMeasuring
StoringAnalyzingReportingManaging
Special ReportsProduct Costs
Customer CostsBudgets
Performance ReportsPersonal Communication
UsersUsers
Management Accounting Information System
Management Accounting Information System
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The Management Process is defined by the following activities:
Planning
Controlling
Decision Making
Planning requires setting objectives and identifying methods to achieve those objectives.
Management ProcessManagement Process
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The Management Process is defined by the following activities: Controlling is
the managerial activity of monitoring a plan’s implementation and taking corrective action as needed.
Planning
Controlling
Decision Making
Management ProcessManagement Process
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The Management Process is defined by the following activities:
Planning
Controlling
Decision Making
Control is usually achieved with the use of feedback.
Management ProcessManagement Process
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Feedback is information that can be used to
evaluate or correct the steps being taken to implement a plan.
Feedback is information that can be used to
evaluate or correct the steps being taken to implement a plan.
Management ProcessManagement Process
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The Management Process is defined by the following activities:
Decision making is the process of choosing among competing alternatives.
Planning
Controlling
Decision Making
Management ProcessManagement Process
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Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting
1. Internally focused 1. Externally focused
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Management accounting focuses on providing
information for internal users.
Targeted UsersTargeted Users
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ABC Company Annual Report
Financial accounting focuses
on provided information for external users.
Financial accounting focuses
on provided information for external users.
Targeted UsersTargeted Users
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Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting
1. Internally focused 1. Externally focused
2. No mandatory rules 2. Must follow externally imposed rules
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Restrictions on Inputs and ProcessesRestrictions on Inputs and ProcessesRestrictions on Inputs and ProcessesRestrictions on Inputs and Processes
Management accounting is not subject to the requirements of generally accepted accounting
principles.
Management accounting is not subject to the requirements of generally accepted accounting
principles.
Financial accounting reporting must follow the accounting procedures set
by the SEC and the FASB.
Financial accounting reporting must follow the accounting procedures set
by the SEC and the FASB.
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Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting
1. Internally focused 1. Externally focused
2. No mandatory rules 2. Must follow externally imposed rules
3. Financial and nonfinancial informa-tion; subjective information possible
3. Objective financial information
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Types of Information
The restrictions imposed on financial accounting tend to
produce objective and verifiable financial information.
The restrictions imposed on financial accounting tend to
produce objective and verifiable financial information.
For management accounting, the financial or nonfinancial
information may be much more subjective in nature.
For management accounting, the financial or nonfinancial
information may be much more subjective in nature.
2 -20
Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting
1. Internally focused 1. Externally focused
2. No mandatory rules 2. Must follow externally imposed rules
3. Financial and nonfinancial informa-tion; subjective information possible
3. Objective financial information
4. Emphasis on the future 4. Historical orientation
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TimeTime OrientationOrientationTimeTime OrientationOrientation
Management accounting strongly
emphasizes providing information about
future events.
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Financial accounting records and reports events that have already
happened.
TimeTime OrientationOrientationTimeTime OrientationOrientation
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Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting
1. Internally focused 1. Externally focused
2. No mandatory rules 2. Must follow externally imposed rules
3. Financial and nonfinancial informa-tion; subjective information possible
3. Objective financial information
4. Emphasis on the future 4. Historical orientation5. Internal evaluation and
decisions based on very detail information
5. Information about the firm as a whole
2 -24
Management accounting provides
measures and internal reports used the
evaluate performance of entities, product lines,
departments, and managers.
Degree of AggregationDegree of AggregationDegree of AggregationDegree of Aggregation
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Financial accounting focuses
on overall firm performance.
Degree of AggregationDegree of AggregationDegree of AggregationDegree of Aggregation
2 -26
Management AccountingManagement AccountingManagement AccountingManagement Accounting Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting
1. Internally focused 1. Externally focused
2. No mandatory rules 2. Must follow externally imposed rules
3. Financial and nonfinancial informa-tion; subjective information possible
3. Objective financial information
4. Emphasis on the future 4. Historical orientation5. Internal evaluation and
decisions based on very detail information
5. Information about the firm as a whole
6. Broad, multidisciplinary 6. More self-contained
2 -27
Management accounting is much broader than financial accounting.
Management accounting is much broader than financial accounting.
It includes aspects of managerial economics, industrial engineering,
and management science.
It includes aspects of managerial economics, industrial engineering,
and management science.
BreadthBreadthBreadthBreadth
2 -28 Historical Description ofManagement Accounting
1880 - 1925 Most of the product-costing and internal accounting procedures used in this century were developed
1925 Emphasis of inventory costing for external reporting
1950s/60s Effort to improve the managerial usefulness of traditional cost systems
1980s/90s Significant efforts have been made to radically change the nature and practice of management accounting
2 -29
Current Focus of Management AccountingCurrent Focus of Management Accounting
Activity-Based ManagementActivity-Based ManagementActivity-Based ManagementActivity-Based Management
Activity-based management is a system wide, integrated approach that focuses
management’s attention on activities with the objective of improving customer value and
the resulting profit.
2 -30
Current Focus of Management AccountingCurrent Focus of Management Accounting
Customer OrientationCustomer OrientationCustomer OrientationCustomer Orientation
Customer value is the difference between what the customer receives (customer
satisfaction) and what the customer gives up (customer sacrifice).
What is received is called the total product.
2 -31
Current Focus of Management AccountingCurrent Focus of Management Accounting
Strategic PositioningStrategic PositioningStrategic PositioningStrategic Positioning
Strategic cost management is the use of cost data to develop and identify superior strategies that
will produce a sustainable competitive advantage.
Strategies:1) Cost leadership
2) Superior products through differentiation
2 -32
Current Focus of Management AccountingCurrent Focus of Management Accounting
Value-Chain FrameworkValue-Chain FrameworkValue-Chain FrameworkValue-Chain Framework
The internal value chain is the set of activities required to design, develop, produce, market,
and deliver products and services to customers.
The industrial value chain is the linked set of value-creating activities from basic raw
materials to the disposal to the final products by end-use customers.
2 -33
SupermarketsSupermarkets
Value Chain: Apple Industry
Planting and Planting and CultivatingCultivating
HarvestingHarvesting
Distribution of Distribution of ApplesApples
Applesauce Applesauce ProductionProduction
Applesauce Applesauce DistributionDistribution
Firm B
Firm C
Firm A
Product Disposal
End-Use Customer
2 -34
Managing the value chain means that a management accountant
must understand many functions of the business, from
manufacturing to marketing.
Managing the value chain means that a management accountant
must understand many functions of the business, from
manufacturing to marketing.
2 -35
The philosophy of total quality management is to
manufacture perfect products.
The philosophy of total quality management is to
manufacture perfect products.
This emphasis on quality has created a demand for management accounting systems that provide
financial and nonfinancial information about quality.
This emphasis on quality has created a demand for management accounting systems that provide
financial and nonfinancial information about quality.
2 -36
The role of The role of management management
accountants in an accountants in an organization is organization is one of support.one of support.
The role of The role of management management
accountants in an accountants in an organization is organization is one of support.one of support.
2 -37 Partial Organization Chart, Manufacturing Company
PresidentPresident
Production Production Vice PresidentVice President
Line Function
Financial Financial Vice PresidentVice President
Staff Function
Production Production SupervisorSupervisor
Machining Machining ForemanForeman
Assembly Assembly ForemanForeman
ControllerController TreasurerTreasurer
Internal Internal AuditAudit CostCost FinancialFinancial SystemsSystems
TaTaxx
2 -38
Ethical BehaviorEthical
Behavior
Michael Josephson’s* Ten Ethical Values:Honesty
Integrity
Promise keeping
Fidelity
Fairness
Caring for others
Respect for others
Responsible citizenship
Pursuit of excellence
Accountability
*Michael Josephson, “Teaching Ethical Decision Making and Principled Reasoning”
2 -39
CMA: One of the main purposes of the CMA was to establish management accounting as a recognized, professional discipline, separate from the profession of public accounting.
CPA: The responsibility of a CPA is to provide assurance concerning the reliability of financial statements.
CIA: The focus of the CIA is to recognize competency in internal auditing rather than external auditing as with the CPA.
Professional CertificationsProfessional Certifications
2 -40
The CMAThe CMA
Four areas emphasized on the exam:1) Economics, finance, and management
2) Financial accounting and reporting
3) Management report, analysis, and behavioral issues
4) Decision analysis and information systems
2 -41
Exactly what is meant by “cost”?
Exactly what is meant by “cost”?
Cost is the cash or cash-equivalent value sacrificed for goods and services
that is expected to bring a current or future benefit to the organization.
Cost is the cash or cash-equivalent value sacrificed for goods and services
that is expected to bring a current or future benefit to the organization.
I see… It’s a dollar measure of the
resources used to achieve a given
benefit.
I see… It’s a dollar measure of the
resources used to achieve a given
benefit.
2 -42
A cost objectcost object is any item such as products, customers, departments, projects, activities, and so on, for which costs are measured and assigned.
ExampleExample: A bicycle is a cost object when you are determining the cost to produce a bicycle.
An activityactivity is a basic unit of work performed within an organization.
Example:Example: Setting up equipment, moving materials, maintaining equipment, designing products, etc.
2 -43
Traceability Traceability is the ability to assign a cost to a cost object in an economically feasible way by means of a cause-and-effect relationship.Direct costsDirect costs are those costs that can be easily and accurately traced to a cost object.
Example:Example: If a hospital is the cost object,the cost of heating andcooling the hospital is a direct cost.
2 -44
Indirect costsIndirect costs are those costs that cannot be easily and accurately traced to a cost object.
Example:Example: The salary of a plant manager, where departments within the plant are defined as the cost objects.
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Tracing Tracing is the actual assignment of costs to a cost object using an observable measure of the resources consumed by the cost object. Tracing costs to cost objects can occur in the following two ways:
Direct tracingDirect tracing is the process of identifying and assigning costs that are exclusively and physically associated with a cost object to that cost object.
Driver tracingDriver tracing is the use of drivers to assign costs to cost objects. DriversDrivers are observable causal factors that measure a cost object’s resource consumption.
2 -46
Cost Assignment MethodsCost Assignment Methods
Cost of ResourcesCost of Resources
DirectDirectTracingTracing
DriverDriverTracingTracing
AllocationAllocation
PhysicalPhysicalObservationObservation
CausalCausalRelationshipRelationship
AssumedAssumedRelationshipRelationship
Cost ObjectsCost Objects
2 -47 Interface of Services withManagement Accounting
1. Intangibility
2. Perishability
3. Inseparability
4. Heterogeneity
Services cannot be stored.No patent protection.Cannot display or
communicate services.Price difficult to set.
Services cannot be stored.No patent protection.Cannot display or
communicate services.Price difficult to set.
Derived PropertiesDerived PropertiesDerived PropertiesDerived Properties
Services benefits expire quickly.
Services may be repeated often for one customer.
Services benefits expire quickly.
Services may be repeated often for one customer.
Customer directly involved with production of service.
Centralized mass production of services difficult.
Customer directly involved with production of service.
Centralized mass production of services difficult.
Wide variation in service products possible.
Wide variation in service products possible.
2 -48 Interface of Services withManagement Accounting
No inventories.Strong ethical code.Price difficult to set.Demand for more accurate
cost assignments.
No inventories.Strong ethical code.Price difficult to set.Demand for more accurate
cost assignments.
Impact on Management Impact on Management AccountingAccounting
Impact on Management Impact on Management AccountingAccounting
No inventories.Need for standards and
consistent high quality.
No inventories.Need for standards and
consistent high quality.
Costs often accounted for by customer type.
Demand for measure-ment and control of quality to maintain consistency.
Costs often accounted for by customer type.
Demand for measure-ment and control of quality to maintain consistency.
Productivity and quality measurement and control must be ongoing.
Total quality manage-ment critical.
Productivity and quality measurement and control must be ongoing.
Total quality manage-ment critical.
1. Intangibility
2. Perishability
3. Inseparability
4. Heterogeneity
2 -49
Product cost is a cost assignment that supports a well-specified managerial
object. Thus, what product cost means depends on the managerial
objective being served.
2 -51 Product Costing Definitions
Pricing DecisionsProduct-Mix DecisionsStrategic Profitability
Analysis
Strategic Design DecisionsTactical Profitability
Analysis
External FinancialReporting
Research andResearch andDevelopmentDevelopment
ProductionProduction
MarketingMarketing
Customer Customer ServiceService
Value-Chain Product Costs
ProductionProduction
MarketingMarketing
Customer Customer ServiceService
Operating Product Costs
Traditional Product Costs
ProductionProduction
Man
ager
ial o
bjec
tive
s se
rved
2 -52
Direct materials are those materials that are directly traceable to the goods or services being produced.
Steel in an automobile
Wood in furniture
Alcohol in cologne
Denim in jeans
Braces for correcting teeth
2 -53
Direct labor is the labor that is directly traceable to the goods or services being produced.
Workers on an assembly line at Chrysler
A chef in a restaurant
A surgical nurse attending an open heart operation
Airline pilot
2 -54
Overhead are all other production costs.
Depreciation on building and equipment
Maintenance
Supplies
Supervision
Power
Property taxes
2 -55
Noninventoriable (period) costs are expensed in the period in
which they are incurred.
Noninventoriable (period) costs are expensed in the period in
which they are incurred.
Salaries and commissions of sales personnel (marketing)
Advertising (marketing) Legal fees (administrative) Printing the annual report
(administrative)
2 -56
Prime Cost :Direct Materials Costs + Direct Labor
Costs
Conversion Cost:Direct Labor Costs + Overhead Costs
2 -58 Manufacturing OrganizationManufacturing OrganizationIncome StatementIncome Statement
For the Year Ended December 31, 2006For the Year Ended December 31, 2006
Sales $2,800,000
Less cost of goods sold:
Beginning finished goods inventory $ 500,000
Add: Cost of goods manufactured 1,200,000
Cost of goods available for sale $1,700,000
Less: Ending finished goods inventory 300,000 1,400,000
Gross margin $1,400,000
Less operating expenses:
Selling expenses $ 600,000
Administrative expenses 300,000 900,000
Income before taxes $ 500,000
2-202-20
2 -59
Direct materials:Beginning inventory $200,000Add: Purchases 450,000Materials available $650,000Less: Ending inventory 50,000Direct materials used $ 600,000
Direct labor 350,000Manufacturing overhead:
Indirect labor $122,500Depreciation 177,500Rent 50,000Utilities 37,500Property taxes 12,500Maintenance 50,000 450,000
Total manufacturing costs added $1,400,000
Statement of Cost of Goods ManufacturedStatement of Cost of Goods ManufacturedFor the Year Ended December 31, ,2006For the Year Ended December 31, ,2006
2-212-21
continued on next slidecontinued on next slidecontinued on next slidecontinued on next slide
2 -60
Total manufacturing costs added $1,400,000Add: Beginning work in process 200,000Total manufacturing costs $1,600,000Less: Ending work in process 400,000Cost of goods manufactured $1,200,000
Work in process consists of all partially completed units found in
production at a given point in time.
2 -61 Service OrganizationService OrganizationIncome StatementIncome Statement
For the Year Ended December 31, 2006For the Year Ended December 31, 2006Sales
$300,000Less expenses:Cost of services sold:
Beginning work in process $ 5,000Service costs added:
Direct materials $ 40,000Direct labor 80,000Overhead 100,000 220,000
Total $225,000Less: Ending work in process 10,000
215,000Gross margin
$ 85,000Less operating expenses: Selling expenses $ 8,000 Administrative expenses 22,000
30,000Income before income taxes
$ 55,000
2-232-23
2 -62
Functional-Based Management ModelFunctional-Based
Management Model
Efficiency Efficiency AnalysisAnalysis
Performance Performance AnalysisAnalysis
Operational View
ResourcesResources
FunctionsFunctions
ProductsProducts
Cost View
2 -63
Activity-Based Management Model
Activity-Based Management Model
ResourcesResources
ActivitiesActivities
Products and Products and CustomersCustomers
Cost View
Driver Driver AnalysisAnalysis
Performance Performance AnalysisAnalysis
Process View
Why? What? How Well?
2 -64
1. Unit-based drivers
2. Allocation-intensive
3. Narrow and rigid product costing
4. Focus on managing cost
5. Sparse activity information
6. Maximization of individual unit performance
7. Use of financial measures of performance
1. Unit- and nonunit-based drivers
2. Tracing intensive
3. Broad, flexible product costing
4. Focus on managing activities
5. Detailed activity information
6. Systematic performance maximization
7. Use of both financial and nonfinancial measures of performance
Functional-Based Activity-BasedFunctional-Based Activity-Based