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Managerial Accounting

Chapter 1
Fundamental Concepts
Learning Objectives (Slide 1 of 2)
Distinguish between managerial and financial accounting.
Understand how managers can use accounting information to implement strategies.
Identify the key financial players in the organization.
Understand managerial accountants professional environment and ethical responsibilities.
Master the concept of cost.

Learning Objectives (Slide 2 of 2)

Compare and contrast income statements prepared for managerial use and those prepared for external reporting.
Understand the concepts useful for managing costs.
Describe how managerial accounting supports modern production environments.
Understand the importance of effective communication between accountants and users of managerial accounting
Understand the ethical standards that comprise the Institute of Management Accountants Code of Ethics.

Comparison of Financial and Managerial Accounting

Financial Accounting
Deals with reporting to parties outside the organization
Highly regulated
Primarily uses historical data
Managerial Accounting
Deals with activities inside an organization
May use projections about the future

Implementing Strategies
Managerial accounting system should help managers implement organizations strategy
System must be adapted to each organizations objectives, strategy and environment
Information required for decision making, planning, and other managerial activities often is not provided by the financial
accounting system

Key Financial Players

P a r t ia l O r g a n iz a t io n C h a rt

P r e s id e n t a n d

C h i e f O p e r a t i n g O ffi c e r

In d u s tr ia l S t a ff a n d
D e p a rtm e n ts A d m in is t r a tiv e D e p a r tm e n t s

F in a n c e O th e r
V ic e - P r e s id e n t V ic e - P r e s id e n ts
In c lu d in g E n g in e e r in g ,
L e g a l, E m p lo y e e R e la t io n s

T re a s u re r C o n t r o lle r In te r n a l A u d it

C ost F in a n c ia l Tax
A c c o u n tin g R e p o r tin g
Professional Environment
(Slide 1 of 2)

Institute of Management Accountants (IMA)

Sponsors Certified Management Accountant and Certified in Financial Management programs
Publishes a journal, policy statements and research studies on accounting issues
Certified Public Accountant
Cost Accounting Standards Board
Sets accounting standards for contracts between the U.S. government and defense contractors

Professional Environment
(Slide 2 of 2)
Ethical issues, while always important, have taken on added significance due to recent accounting failures
The IMA has developed a Code of Conduct mandating that management accountants have a responsibility to maintain the
highest levels of ethical conduct

Basis Cost Concepts (Slide 1 of 4)

A cost is a sacrifice of resources
You must know the context in which the word cost is used to know its meaning
Opportunity cost is the foregone income from using an asset in its best alternative

Basis Cost Concepts (Slide 2 of 4)

A cost is distinguished from an expense
An outlay of cash may lead to another resource taking its place
The term expense is reserved for external reporting under GAAP and for income tax reporting

Basis Cost Concepts (Slide 3 of 4)

A cost object is any item for which the manager wishes to measure cost
Costs directly related to the cost object are called direct costs
Other costs are called indirect costs

Basis Cost Concepts (Slide 4 of 4)

The distinction between fixed and variable costs is important since it affects strategic decision making
Variable costs change in total as the activity level changes
Fixed costs do not change in total when the activity level changes

Income Statement For External Reporting

Contribution Margin Format Income Statement

Managing Costs
Effective cost control requires managers to understand how producing a product involves activities and how those activities
generate costs
Activity-based Management studies the need for activities and whether they are operating efficiently

Value-Added Activities
Value-added activities increase the products service to customers
Managers try to eliminate non-value-added activities to reduce costs without reducing the products service
potential to customers
The value chain describes the linked set of activities that add value to the products or services of the organization

The Value Chain

Managerial Accounting in Modern Production Environments

Key developments that reshaped Managerial Accounting include:

Integrated information systems
Web hosting
Just-in-time and lean production
Total Quality Management
Theory of constraints
Benchmarking and continuous improvement

Dranrey Gaon