Chapter 1Managerial Accounting Concepts and Principles

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Conceptual Learning ObjectivesC1: Explain the purpose and nature of managerial accounting.C2: Describe the lean business model.C3: Describe fraud and the role of ethics in managerial accounting. C4: Describe accounting concepts useful in classifying costs.C5: Define product and period costs and explain how they impact financial statements.C6: Explain how the balance sheets and income statements for manufacturing and merchandising companies differ.C7: Explain manufacturing activities and the flow of manufacturing costs.

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Managerial and Financial AccountingC 1

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Nature of Managerial AccountingC 1

Sheet1

Financial AccountingManagerial Accounting

1. Users andInvestors, creditors andManagers, employees and

decision makersother external usersother internal users

2. Purpose ofMaking investment, creditPlanning and

informationand other decisionscontrol decisions

3. FlexibilityStructured and oftenRelatively flexible

of practicecontrolled by GAAP(no GAAP constraints)

4. Timeliness ofOften available onlyAvailable quickly without

informationafter audit is completeneed to wait for audit

5. Time dimensionHistorical informationMany projections

with some predictionsand estimates

6. Focus ofEmphasis onProjects, processes and

informationwhole organizationsegments of an organization

7. Nature ofMonetaryMonetary and

informationinformationnonmonetary information

&A

Page &P

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Lean Business ModelCustomer OrientationGlobalEconomyLean Business ModelC 2

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Lean PracticesC 2

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Quality improvementapplied to all aspects ofbusiness activities.Seek and uncover waste.Employees encouraged to try new methods to improve quality.Company emphasizes value of quality through quality awards.Total Quality ManagementC 2

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Complete products just in time to ship to customers.Complete parts just in time for assembly into products.Receive materials just in time for production.Schedule production.Receive customer orders.Just-In-Time (JIT) ManufacturingC 2

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Just-In-Time (JIT) ManufacturingC 2To accomplish just-in-time manufacturing:Processes must be aligned to eliminate delays and inefficienciesCompanies must establish good relations with suppliers

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Implications of Lean ManufacturingC 2Understand the nature and sources of costMeasure value provided to customersDetermine price customers pay

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Fraud in AccountingFraud is the use of ones job for personal gain through the deliberate misuse of the employers assets.It is estimated that 5% of annual revenues are lost to fraud.All fraud is committed to provide direct or indirect benefit to the perpetrator, violates the employees duty to his/her employer, costs the employer money, and is carried out in secret.C 3

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Ethics in AccountingEthics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior.The IMAs Statement of Ethical Professional Practice requires management accountants to be competent, maintain confidentiality, act with integrity, and communicate information in a fair and credible manner.The Sarbanes-Oxley Act requires each issuer ofsecurities to disclose whether it has adopted a code of ethics for its senior officers and the content of that code.C 3

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Managerial Cost ConceptsC 4

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Cost behavior means how a cost will react to changes in the level of business activity.Classification by BehaviorC 4A fixed cost does not change with changes in the volume of activityA variable cost changes in proportion to changes in the volume of activityA mixed cost refers to a combination of fixed and variable

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Classification by TraceabilityC 4

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The degree of control depends on the level of management in the organization.More ControlMore ControlVery little controlClassification by ControllabilityC 4

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All costs incurred in the past that cannot be avoided or changed.Sunk costs should not be considered in decisions. Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost.Classification by Relevance:Sunk CostsC 4

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Classification by Relevance:Out-of-Pocket CostsC 4 A cost that requires a future outlay of cash.Out-of-pocket costs should be considered in decisions. Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend the $25,000 or not in the future

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The potential benefit lost by choosing a specific action from two or more alternatives

Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.Classification by Relevance: Opportunity CostsC4

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Cost BehaviorHow costs respond to a change in activity level within the relevant range.Relevant range?Range of activity where the total fixed costs or the unit variable costs remain unchanged.

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Fixed CostsCosts ($)Activity level

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Variable CostsCost ($)Activity level

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Semivariable CostsCosts ($)Activity level

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Step CostsCosts ($)Activity level

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End of Chapter 1

This chapter discusses the purpose of managerial accounting, cost concepts, and reporting of manufacturing activities. We also look at how these concepts help managers gather, organize, and use this information.

In this chapter, you will learn the following conceptual objectives:C1: Explain the purpose and nature of managerial accounting.C2: Describe the lean business model.C3: Describe fraud and the role of ethics in accounting.C4: Describe accounting concepts useful in classifying costs.C5: Define product and period costs and explain how they impact financial statements.C6: Explain how the balance sheets for manufacturing and merchandising companies differ.C7: Explain manufacturing activities and the flow of manufacturing costs.

The purpose of both managerial and financial accounting is providing useful information to decision makers. Both areas of accounting report monetary information, although managerial accounting includes the practice of reporting non-monetary information. The focus of managerial and financial accounting are different, however.Here we see a detailed comparison of financial accounting and managerial accounting. In addition to the focus on internal decisions, note particularly that managerial accounting information may follow a flexible format, involves frequent, timely reports, and may contain more estimates and projections than financial accounting.By meeting customer needs in an efficient manner, a lean business model provides a positive return to its owners. Todays customers have many choices, both domestic and foreign. To be successful, a business must deliver quality products and services to customers in a cost efficient manner. Lean business practices include total quality management and just-in-time manufacturing. The central focus is always on the customer.

Continuous improvement rejects the notion of good enough or acceptable and challenges employees and managers to continuously experiment with new and improved business practices. This has led to adopting practices such as total quality management and just-in-time manufacturing.

Total quality management focuses on quality improvement and applies this standard to all aspects of business activities. Awards such as the Malcolm Baldrige National Quality Awards encourage an emphasis on quality.

A just-in-time manufacturer acquires inventories and produces goods only when needed. Companies manufacture products only after they receive an order (a demand-pull system) and then deliver the customers requirements on time. Managerial accounting has an important role to play by providing accurate cost and performance information. Companies must understand the nature and sources of cost and develop systems that capture costs accurately. Developing such a system is important to measuring the value provided to customers. The price that customers pay is an important determinant of value. In turn, the costs a company incurs are key determinants of price. All else being equal, the better a company is at controlling its costs, the better its performance.Fraud, and the role of ethics in reducing fraud, are important factors in running business operations. The most common type of fraud, where employees steal or misuse the employers resources results in an average loss of $150,000 per occurrence. There are many types of fraud. In all cases, fraud increases a businesss costs. Combating fraud and other dilemmas requires ethics in accounting. Identifying the correct ethical path can be difficult. The preferred path is a course of action that avoids casting doubt on ones decisions. A code of ethical beliefs can be used to resolve ethical conflicts.Managers often need different cost classifications for different decisions. We will discuss each of these types of cost classifications individually.Classification of costs by behavior is helpful in cost-volume-profit analyses and short-term decision making. These are discussed in future chapters.Cost objects may be products, services, departments, or customers to which costs are assignedManagers at higher levels in the organization have a greater degree of control over costs than do managers at lower levels in the organization. Classifying costs by controllability is an important part of assigning cost, responsibility, and evaluating a managers cost control performance. Costs can be classified by relevance by identifying it as a sunk cost or an out-of-pocket costOpportunity costs are always relevant to a selection decision.*****Now that we have mastered some of the basic concepts and principles of managerial accounting, we are ready to put this knowledge to work.