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The underlying premise of this text, Cost Accounting: A Managerial Emphasis, (12thed.), is the importance
of cost accounting data in making managerial decisions. Distinction is made between financial
accounting and managerial accounting. Financial accounting information is reported to external users,
following prescribed standards and formats, and used by investors, lenders, suppliers, and other external
stakeholders to evaluate and compare companies. In contrast, managerial accountants provide financial
and nonfinancial information to internal users using whatever format or costing approach will allow
managers to make the best possible business decisions in today’s competitive environment. Cost
accounting provides information for both financial accounting and management accounting; in this text the
terms “cost accounting” and “management accounting” are used interchangeably.

Successful management accounting systems capture and report information that helps managers make
decisions to fulfill organizational goals in an effective and efficient manner. Management accounting also
provides information critical to the planning and control decisions of managers. Guidelines used by
management accountants to assist managers in the planning and control process include the cost-benefit
approach, giving full recognition to both behavioral and technical considerations, and using different costs
for different purposes.

Three common roles of the management accountant are problem solving, scorekeeping, and attention
directing. Different decisions place different emphases on the three roles, and it can be difficult to
distinguish the roles because management accountants are often engaged in overlapping activities. In
addition to their traditional costing and reporting roles, management accountants are also playing an
increasingly important role in helping to develop and implement strategy.

Recent corporate scandals have resulted in a renewed emphasis on ethical behavior. Accountants in
particular must take special care to avoid the appearance of ethical improprieties since they are
responsible for the integrity of the financial information, which they prepare and report to external and
internal stakeholders. The Sarbanes-Oxley Act of 2002, passed in response to several large accounting
scandals, imposes strict ethical standards on accountants. Professional associations like the AICPA and
the IMA not only impose additional standards on their members but also provide resources that help
members identify ethical issues and possible courses of action when ethical dilemmas confront them.


LO #1: Describe how cost accounting supports management accounting and financial accounting

Cost accounting measures, analyzes, and reports financial and nonfinancial information relating to
the organization’s cost of acquiring or utilizing resources. Financial accounting takes that information,
measures, records, and reports it using generally accepted accounting principles (GAAP). The focus
of financial accounting is on reporting to external parties. Management accounting takes the same
financial and nonfinancial information but measures, records, and reports it using whatever method
best suits management’s decision-making needs.

(Exhibit 1-1 summarizes the main differences between financial and managerial accounting.)

Financial Accounting Managerial Accounting

Primary users External Internal
Primary organization focus Whole organization Parts or subsections: specific
Information characteristics Must be GAAP May be GAAP or non-GAAP
Historical Forecasted
Monetary Monetary or nonmonetary
Record keeping Mandatory Combination of formal and
Overriding criteria Consistency Situation relevant
Verifiability Extensive use of estimates
Uniformity Flexibility
Report “fairly” Cost-benefit
Serves Management

LO #2: Understand how management accountants affect strategic decisions

Effective strategies allow a company to distinguish itself from its competitors while also creating value for
customers and profits for its investors. Deciding between different strategies is a key function of
managers and executives. The management accountant provides input to managers and executives that
assists them in developing and implementing those strategies. Although the traditional viewpoint
perceived accountants as being just gatherers and reporters of information, in most companies today,
management accountants work closely with managers in formulating and redefining strategies.

LO #3: Describe the set of business functions in the value chain

The term “value chain” refers to the sequence of business functions that add customer usefulness (value)
to products or services. The term “value” is used because as the usefulness of the product or service is
increased, so it its value to the customer. Six common business functions through which companies add
value are research and development (R&D), design, production, marketing, distribution, and customer

(Exhibit 1-2 displays the interaction between management accounting and value-chain activities.)

Management accountants provide decision support for managers in the value chain.
1. Research and development (R&D) – the process that is conducted to generate and experiment with
ideas related to new products services or processes.
2. Design – the detailed planning and engineering of products, services, or processes.
3. Production – the acquisition, coordination, and assembly of resources to produce a product or deliver
a service.
4. Marketing – the manner by which companies promote and sell their products or services to customers
or prospective customers.
5. Distribution – the delivery of products or services to customers.
6. Customer service – the after-sale support activities provided to the customers.

LO # 4: Identify the dimensions of performance that customers are expecting of companies

The term “supply chain” refers to the flow of goods, services, and information from the initial sources of
product inputs to the delivery of the final product to consumers, regardless of whether these activities are
internal or external to the organization. Customers expect companies to use the value chain and supply
chain to continually improve performance in key areas such as cost and efficiency, quality, customer-
response or product-development time, and innovation. Management accountants help managers track
the performance of their company in these key areas relative to internal standards and external

(Exhibit 1-3 displays the supply chain for a typical bottling company.)
LO # 5: Distinguish between the planning and control decisions of managers
Planning involves evaluating and selecting organizational goals and objectives, deciding how to attain
those goals and then communicating the goals and plan of action throughout the company. Management
accountants work with managers during this planning process, helping managers make better decisions
and improving company performance.

The most important planning tool is the budget. A budget expresses the company’s plan of action in
quantitative terms and assists in both planning and control. Management accountants play an integral
part in the budgeting process because of their knowledge of the accounting systems and their
understanding of the financial impact of different actions.

Companies also require feedback on how well plans are being implemented and how effective the plans
are at helping the company achieve the chosen goals. This is the function of the control process. Control
involves not only taking actions to implement the plan but evaluating performance and providing feedback
that will improve future decision-making.

Planning and control are linked by feedback. Budgets serve as both planning and control tools because
they provide a benchmark against which performance can be measured.

(Exhibit 4 contains examples of the planning and control functions at the Daily News.)

LO #6: Distinguish among the problem-solving, scorekeeping, and attention-directing roles of

management accountants
Three common roles of the management accountant are problem solving, scorekeeping, and attention
directing. Different decisions place different emphases on the three roles, and it can be difficult to
distinguish the roles because management accountants are often engaged in overlapping activities. For
strategic and planning decisions, the problem solving role is most prominent. For control decisions,
management accountants are primarily engaged in scorekeeping and attention directing activities.
Feedback from scorekeeping and attention-directing often leads to revisions of planning decisions and
return to the problem solving role.

Problem solving involves comparative analysis for decision-making; this role asks, of the several
alternatives available, which is the best?

Scorekeeping involves accumulating data and reporting reliable results to all levels of management; this
role asks how is the business doing?

Attention directing involves helping managers to properly focus their attention; this role asks which
opportunities and problems should be emphasized first? Attention directing should focus on all
opportunities to add value to an organization, not just cost-reduction opportunities.

(Exhibit 5 reports advertising revenues at the Daily News as an example of the scorekeeping role.)

LO # 7: Describe three guidelines management accountants follow in supporting managers

Three guidelines used by management accountants to assist managers in the planning and control
process include the cost-benefit approach, giving full recognition to both behavioral and technical
considerations, and using different costs for different purposes.

Management accountants use the cost-benefit approach to help managers with resource-allocation
decisions. Resources should be spent if the expected benefits to be received from use of the resources
exceed the expected cost of the resources.
Behavioral and technical issues also need to be taken into consideration when managers make business
decisions. Managers need to consider the human or behavioral implications of their decisions, just as they
also need to consider technical capabilities and limitations when making their decisions. A management
accounting system should have two simultaneous missions for providing information:

1. To help managers make wise economic decisions

2. To help managers and other employees to aim and to strive for goals of the organization.

Throughout the text different ways of calculating costs are examined. The definition of product cost for
financial accounting purposes may be very different from the calculation of product cost for the purpose of
making decisions about whether to offer a new product line or discontinue an existing product. The
concept of different costs for different purposes is the management accounting version of “one size does
not fit all.”

LO # 8: Understand how management accounting fits into an organization’s structure

Two broad management categories are line management and staff management. Line managers, in
departments such as production, marketing, and distribution, are directly responsible for attaining the
goals of the organization. Staff managers, in such departments as accounting, human resources, and
information technology, exist to provide advice, assistance, and support to line managers. Many
organizations today are shifting away from the traditional line and staff organizational structure to a team
environment. These teams include both line and staff management so that decisions can be made with
fewer external inputs. As a result, the traditional distinctions between line and staff management are not
as clear-cut as they once were. In addition to being technically competent, management accountants
must also be able to work in team environments, and understand business and organizational behavior
issues, if they are to succeed in their careers.

The chief financial officer (CFO) is the company executive with primary oversight of the company’s
financial operations. The controller is the company executive with primary responsibility for the
organization’s accounting functions.

(Exhibit 1-6 displays the organizational structure for Nike.)

LO # 9: Understand what professional ethics means to management accountants

A series of corporate scandals in the past five years have focused the public’s attention on ethics like
never before. The events at Worldcom, Enron, Arthur Anderson, Ahold, Health South, and Tyco, and the
creative accounting by many of the dot-coms prior to their collapse, have eroded the public’s confidence
in corporate management and the auditors who reviewed the companies’ financial statements.
Employees at all levels and in all departments must comply with organizational and societal expectations
of ethical conduct.

Accountants are bound by particularly stringent ethical standards, since they are responsible for
maintaining the integrity of the accounting systems and the financial reports provided to internal and
external stakeholders. In addition to the standards of ethical conduct that members of professional
organizations like the Institute of Management Accountants (IMA) and the American Institute of Certified
Public Accountants (AICPA) must adhere to, recent legislation such as the Sarbanes-Oxley Act of 2002
also mandate ethical behavior by managers and accountants. Often however, the ethical issues involved
in a particular situation are not clear-cut, and accountants must seek the guidance of others in order to
determine the proper course of action.

(Exhibits 1-7 and 1-8 discuss Standards of Ethical Conduct for Management Accountants and Resolution of Ethical Conflict.)