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Introduction to Management Accounting Chapter 1 1 Copyright © 2007 Prentice-Hall. All rights reserved Introduction to Management Accounting Chapter 1 1 Copyright © 2007 Prentice-Hall. All rights reserved

Objective 1 Identify managers’ four primary responsibilities 2 Copyright © 2007 Prentice-Hall. All rights Objective 1 Identify managers’ four primary responsibilities 2 Copyright © 2007 Prentice-Hall. All rights reserved

Managers’ Responsibilities Planning Decision Making Setting goals and objectives Directing Overseeing day-today operations Controlling Managers’ Responsibilities Planning Decision Making Setting goals and objectives Directing Overseeing day-today operations Controlling Evaluating results of operations 3 Copyright © 2007 Prentice-Hall. All rights reserved

Objective 2 Distinguish financial accounting from management accounting 4 Copyright © 2007 Prentice-Hall. All Objective 2 Distinguish financial accounting from management accounting 4 Copyright © 2007 Prentice-Hall. All rights reserved

Primary Users? Management • Internal • Managers Financial • External • Investors, creditors, government Primary Users? Management • Internal • Managers Financial • External • Investors, creditors, government regulators 5 Copyright © 2007 Prentice-Hall. All rights reserved

Purpose of Information? Management • Help managers plan, direct, and control business operations Financial Purpose of Information? Management • Help managers plan, direct, and control business operations Financial • Help investors and creditors make investment and credit decisions 6 Copyright © 2007 Prentice-Hall. All rights reserved

Primary Accounting Product? Management Financial • Any internal • General-purpose accounting report financial statements Primary Accounting Product? Management Financial • Any internal • General-purpose accounting report financial statements deemed worthwhile by management 7 Copyright © 2007 Prentice-Hall. All rights reserved

What must be included? Management • Whatever management needs as long as benefits of What must be included? Management • Whatever management needs as long as benefits of using report exceeds cost of preparing it Financial • Determined by GAAP 8 Copyright © 2007 Prentice-Hall. All rights reserved

Underlying basis of the information? Management • Focus on future • Information on external Underlying basis of the information? Management • Focus on future • Information on external and internal transactions Financial • Based on historical transactions • External transactions 9 Copyright © 2007 Prentice-Hall. All rights reserved

Information characteristic emphasized? Management • Relevance Financial • Reliable and objective 10 Copyright © Information characteristic emphasized? Management • Relevance Financial • Reliable and objective 10 Copyright © 2007 Prentice-Hall. All rights reserved

Business unit? Management • Segments – products, geographical regions, customers Financial • Company as Business unit? Management • Segments – products, geographical regions, customers Financial • Company as a whole 11 Copyright © 2007 Prentice-Hall. All rights reserved

How often prepared? Management • Depends on management needs Financial • Annually and quarterly How often prepared? Management • Depends on management needs Financial • Annually and quarterly 12 Copyright © 2007 Prentice-Hall. All rights reserved

Verification? Management • No independent audits • Internal audits may occur Financial • Independent Verification? Management • No independent audits • Internal audits may occur Financial • Independent audits of publicly traded companies 13 Copyright © 2007 Prentice-Hall. All rights reserved

Required by outside group? Management • No Financial • Yes – SEC for publicly Required by outside group? Management • No Financial • Yes – SEC for publicly traded companies 14 Copyright © 2007 Prentice-Hall. All rights reserved

Concern over how reports affect employee behavior? Management • Yes Financial • Concern is Concern over how reports affect employee behavior? Management • Yes Financial • Concern is about adequacy of disclosure 15 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -10 a. Companies must follow GAAP in their Financial accounting __________ systems. E 1 -10 a. Companies must follow GAAP in their Financial accounting __________ systems. b. Financial accounting develops reports for external parties, such as _____ Creditors Shareholders and ________. c. When managers evaluate the company’s performance compared to the plan, they Controlling are performing the _____ role of management. 16 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -10 Managers d. _____ are decision makers inside a company. e. __________ E 1 -10 Managers d. _____ are decision makers inside a company. e. __________ provides Financial accounting information on a company’s past performance to external parties. Management accounting f. ___________ systems are not restricted by GAAP but are chosen by comparing the costs versus the benefits of the system. 17 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -10 g. Choosing goals and the means to Planning achieve them is E 1 -10 g. Choosing goals and the means to Planning achieve them is the _____ function of management. h. ___________ systems report Managerial accounting on various segments or business units of the company. Financial accounting i. __________ statements of public companies are audited annually by CPAs. 18 Copyright © 2007 Prentice-Hall. All rights reserved

Objective 3 Describe organizational structure and the roles and skills required of management accountants Objective 3 Describe organizational structure and the roles and skills required of management accountants within the organization 19 Copyright © 2007 Prentice-Hall. All rights reserved

Organizational Structure Board of Directors Audit Committee Chief Executive Officer Chief Operating Officer Vice Organizational Structure Board of Directors Audit Committee Chief Executive Officer Chief Operating Officer Vice Presidents of various operations Chief Financial Officer Treasurer Controller Internal Audit 20 Copyright © 2007 Prentice-Hall. All rights reserved

Management Accountants • Often part of cross-functional teams • Report to various vice-presidents of Management Accountants • Often part of cross-functional teams • Report to various vice-presidents of operations • Role is to analyze financial impact of business decisions • Internal consultants 21 Copyright © 2007 Prentice-Hall. All rights reserved

Roles of Management Accountants • Ensuring accurate financial records – Helping to design information Roles of Management Accountants • Ensuring accurate financial records – Helping to design information systems – Recording non-routine transactions – Making adjustments to financial records • Planning, analyzing, and interpreting accounting data • Providing decision support 22 Copyright © 2007 Prentice-Hall. All rights reserved

Required Skills • Knowledge of financial and managerial accounting • Analytical skills • Knowledge Required Skills • Knowledge of financial and managerial accounting • Analytical skills • Knowledge of how a business functions • Ability to work on a team • Oral and written communications skills 23 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -11 a. The _____ and the _____ report to the CFO COO E 1 -11 a. The _____ and the _____ report to the CFO COO CEO. b. The internal audit function reports to the audit committee CFO or _______ and the _______. CEO c. The _____ is directly responsible for controller financial accounting, managerial accounting, and tax reporting. Board of Directors d. The CEO is hired by the _______. 24 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -11 e. The _____ is directly responsible treasurer for raising capital and E 1 -11 e. The _____ is directly responsible treasurer for raising capital and investing funds. f. The _____ is directly responsible COO for the company’s operations. g. Management accountants often work cross functional teams with _____________. h. The subgroup of the board of directors is audit committee called the _________. 25 Copyright © 2007 Prentice-Hall. All rights reserved

Objective 4 Describe the role of the Institute of Management Accountants (IMA) and use Objective 4 Describe the role of the Institute of Management Accountants (IMA) and use its ethical standards to make reasonable ethical judgments 26 Copyright © 2007 Prentice-Hall. All rights reserved

IMA • Professional association for managerial accountants • Goal – Advance management accounting profession IMA • Professional association for managerial accountants • Goal – Advance management accounting profession – Educate society about role of managerial accountants • Certifications – Certified Management Accountant (CMA) – Certified Financial Managers (CFM) 27 Copyright © 2007 Prentice-Hall. All rights reserved

Ethics • Statement of Ethical Professional Practice (IMA) – Maintain professional competence – Preserve Ethics • Statement of Ethical Professional Practice (IMA) – Maintain professional competence – Preserve confidentiality of information – Uphold their integrity – Perform duties with credibility – Consult an attorney 28 Copyright © 2007 Prentice-Hall. All rights reserved

Steps to Resolve Ethical Dilemmas • Follow company’s policies for reporting unethical behavior • Steps to Resolve Ethical Dilemmas • Follow company’s policies for reporting unethical behavior • If not resolved – Discuss with immediate supervisor – Discuss with objective advisor 29 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -13 a. The ______ is the professional IMA association for management accountants. E 1 -13 a. The ______ is the professional IMA association for management accountants. b. The institute offers two types of certification: The _____ and _____. CMA CFM c. The _____ exam focuses on CMA managerial accounting topics, economics, and business finance. 30 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -13 CFM d. The ______ exam focuses on financial statement analysis, business E 1 -13 CFM d. The ______ exam focuses on financial statement analysis, business valuation, risk management, working capital policy, and capital structure. e. The institute’s monthly publication, called ________, addresses current Strategic Finance topics of interest to managerial accountants. 31 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -13 f. The institute says that approximately 85 _____ percent of accountants E 1 -13 f. The institute says that approximately 85 _____ percent of accountants work inside of organizations, rather than at CPA firms. 32 Copyright © 2007 Prentice-Hall. All rights reserved

Objective 5 Discuss trends in the business environment 33 Copyright © 2007 Prentice-Hall. All Objective 5 Discuss trends in the business environment 33 Copyright © 2007 Prentice-Hall. All rights reserved

Sarbanes-Oxley Act of 2002 • CEO and CFO - responsible for financial statements, internal Sarbanes-Oxley Act of 2002 • CEO and CFO - responsible for financial statements, internal control system, procedures for financial reporting • Audit committee – independent and should include a financial expert • CPA firms – limited non-audit services for audit clients and periodic quality review • Stiffer penalties for white-collar crimes 34 Copyright © 2007 Prentice-Hall. All rights reserved

Trends • Shift toward service economy • Competing in global marketplace • Time-based competition Trends • Shift toward service economy • Competing in global marketplace • Time-based competition – ERP systems – E-Commerce – Just-in-Time Management • Total Quality Management 35 Copyright © 2007 Prentice-Hall. All rights reserved

Trends • Cost-Benefit Analysis – weighing costs against benefits to help make decisions 36 Trends • Cost-Benefit Analysis – weighing costs against benefits to help make decisions 36 Copyright © 2007 Prentice-Hall. All rights reserved

Today’s Business Trends • Shift toward a service economy • Global competition • Time-based Today’s Business Trends • Shift toward a service economy • Global competition • Time-based competition – Advanced information systems – E-Commerce – Just-in-Time management • Total Quality Management 37 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -16 a. To account for uncertainty in the amounts of future costs E 1 -16 a. To account for uncertainty in the amounts of future costs and benefits, we compute expected value the _______ by multiplying the probability of each outcome by the dollar value of that outcome. b. To make a cost-benefit decision today, we present value must find the _______ of the costs and benefits that are incurred in the future. 38 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -16 c. The goal of _______ is to meet TQM customers’ expectations E 1 -16 c. The goal of _______ is to meet TQM customers’ expectations by providing them with superior products and services by eliminating defects and waste throughout the value chain. 39 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -16 d. Most of the costs of adopting ERP, JIT, expanding into E 1 -16 d. Most of the costs of adopting ERP, JIT, expanding into a foreign market, or improving quality are incurred in the present ____, but most of the benefits occur in the _______. future 40 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -16 e. ________ is the time between Throughput time buying raw materials E 1 -16 e. ________ is the time between Throughput time buying raw materials and selling the finished products. f. _____ serves the information needs ERP of people in accounting, as well as people in marketing and in the warehouse. g. Firms adopt _____ to conduct e-commerce business on the Internet. 41 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -16 h. Firms acquire the _______ ISO 9001: 2000 certification to demonstrate E 1 -16 h. Firms acquire the _______ ISO 9001: 2000 certification to demonstrate their commitment to quality. 42 Copyright © 2007 Prentice-Hall. All rights reserved

Objective 6 Use cost-benefit analysis to make business decisions 43 Copyright © 2007 Prentice-Hall. Objective 6 Use cost-benefit analysis to make business decisions 43 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -18 1. What are the total costs of adopting JIT? Employee training E 1 -18 1. What are the total costs of adopting JIT? Employee training $13, 500 Streamline production process 37, 000 Supplier identification 8, 000 Total costs $58, 500 44 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -18 2. What are the total benefits of adopting JIT? Savings in E 1 -18 2. What are the total benefits of adopting JIT? Savings in warehouse expenses Lower spoilage costs 46, 000 Total benefits $143, 000 $97, 000 45 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -18 3. Should Wild Rides adopt JIT? Why or why not? Expected E 1 -18 3. Should Wild Rides adopt JIT? Why or why not? Expected total benefits $143, 000 Expected total costs(58, 500) Excess of benefits over costs $ 84, 500 Wild Rides should adopt JIT because the expected benefits exceed the costs. 46 Copyright © 2007 Prentice-Hall. All rights reserved

S 1 -8 Expected value of additional benefits: Outcome Benefits Probability Expected value Moderately S 1 -8 Expected value of additional benefits: Outcome Benefits Probability Expected value Moderately successful $20 million 0. 85 = $17 million Extremely successful $80 million 0. 15 = $12 million $29 million 47 Copyright © 2007 Prentice-Hall. All rights reserved

S 1 -8 Total benefits: Benefits already realized $170 million Expected value of additional S 1 -8 Total benefits: Benefits already realized $170 million Expected value of additional benefits 29 million Total expected benefits $199 million Total costs $200 million 48 Copyright © 2007 Prentice-Hall. All rights reserved

S 1 -8 The costs of $200 million just exceed the total expected benefits S 1 -8 The costs of $200 million just exceed the total expected benefits of $199 million. Under these circumstances, the quality program does not appear to have been a worthwhile investment. 49 Copyright © 2007 Prentice-Hall. All rights reserved

End of Chapter 1 50 Copyright © 2007 Prentice-Hall. All rights reserved End of Chapter 1 50 Copyright © 2007 Prentice-Hall. All rights reserved