Chapter 1

PART I
An Introduction to Management
Accounting, Cost Terms and Cost
Behavior
TABLE OF CONTENTS
PART I
PART I – An Introdution to Management Accounting, Cost

Terms and Cost Behavior
Chapter 1. Managerial Accounting, the Business Organization, and

Professional Ethics
Chapter 2. An Introduction to cost terms, concepts and

classifications
Chapter 3. Cost Behavior
Managerial Accounting
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Chapter 1
Managerial Accounting, the
Business Organization, and
Professional Ethics
Text Book: Chapter 1 (P. 20-53)
TABLE OF CONTENTS
CHAPTER 1
PART I – An Introdution to Management Accounting
Chapter 1. Managerial Accounting, the Business Organization, and

Professional Ethics
1. Financial Accounting versus Management Accounting

2. Roles of Accounting Information
3. An Accounting Framework for Planning and Control
4. Planning and Control for Product Life Cycles and the Value Chain
5. Basic Organizational Structure
6. Accounting’s Position in the Organization
7. Expanding and Changing Role of Management Accounting
8. Professional and Business Ethics
9. Short Quiz
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1. FINANCIAL ACCOUNTING VERSUS MANAGEMENT ACCOUNTING
USERS OF ACCOUNTING INFORMATIONS
In general, users of accounting information fall into two general categories:
1) Internal managers who use information for

day-to-day operating decisions and for Management Accounting
long-range strategic decisions, and
2) External parties, such as investors and

government authorities, who use the Financial Accounting
information for making decisions about the
company.
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USERS OF ACCOUNTING INFORMATIONS
Financial Accounting Management Accounting
Process of identifying,
Develops information for measuring, accumulating,
external decision makers: analyzing, preparing,
interpreting, and
communicating
information used by:
Stockholders,
Suppliers,
Banks, Government
Authorities Managers
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MAJOR DISTINCTIONS BETWEEN FINANCIAL AND MANAGERIAL ACCOUNTING INFORMATION
Relevance and precision of data
+ Managerial accounting is not mandatory
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2. ROLES OF ACCOUNTING INFORMATION
ACCOUNTING IS ESSENTIAL FOR DECISION MAKERS AND MANAGERS
✓ 2 basic purposes of accounting:
1) Accounting information is used in decision making

▪ New and continually changing set of decisions, and many of these decisions rely on
accounting information
▪ When you understand how your decisions affect costs and revenues, you will be a better
decision maker
2) Plan and control the organization’s operations

▪ Plans describe how the organization will achieve its objectives
▪ Control is the process of implementing plans and evaluating whether your organization is
achieving its objectives
▪ When you understand how people respond to the incentives created by performance
evaluation and control systems, you will be better able to assess which system creates the
most appropriate incentives
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ACCOUNTING INFORMATION SYSTEM
✓ To address the 2 major purposes,

organizations design and implement
accounting systems
✓ Accounting. Systems are formal

mechanisms for gathering,
organizing, and communicating
information about an organization’s
activities
EX. American Medical Systems of Ohio for managing a medical practice. With this system,
users enter a piece of information only once and the system automatically integrates it with
billing, insurance claims, and patient history records. Such a system is efficient and is subject to
few errors, but should it be purchased?
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Managers should keep two important ideas in mind when designing accounting systems

COST-BENEFIT AND BEHAVIORAL CONSIDERATIONS
Cost-benefit Behavioral
balance implications
The system must provide accurate, timely budgets

and performance reports in a form useful to managers.
The expected benefit come from improved decisions or better controls.
Weigh estimated Consider the system’s effect

costs against on employees’ decisions
probable benefits and behavior
A system that managers believe

Managers must use accounting in and trust will be used more in
reports, or the reports making decisions than one
create no benefits they distrust
For example, consider a performance report that a manager’s

superiors use to evaluate the operations for which the manager is responsible. If the report Managerial Accounting
unfairly attributes excessive costs to the manager’s operations, the manager may lose confidenc 14-2-2020 | 10
. If a report is too complex, too difficult to use, or arrives too late, the manager may not use the report in making decisions. A report that
goes unused creates no benefits.

THE WORK OF MANAGEMENT AND THE NEED FOR MANAGEMENT ACCOUNTING
✓ Good accounting information helps answer three types of questions
Problem Solving Questions: Assess Starbucks experiments with adding various items to its menu. After an analysis of how a
possible courses of action new product will affect revenues and costs, management decides which items to add and
which to delete.
Scorekeeping Questions: Evaluate

organizational performance
For example, Starbucks produces numerous reports to evaluate results for stores and divisions
Attention Directing Questions: Compare

actual results to expected
Starbucks store has reported profits of $120,000 when budgeted
profit was $150,000 will look for explanations as to why the store did not achieve its budget
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THE WORK OF MANAGEMENT AND THE NEED FOR MANAGEMENT ACCOUNTING
✓ For decision making - choosing among alternative courses of action to achieve some
objective – accounting information helps answer:
1. Problem-Solving Questions (Of the several ways of doing the job, which one is
best?)—quantifies the likely results of possible courses of action for long-range planning
✓ For performance evaluation and control, accounting helps answer scorecard and
attention-directing questions:
2. Scorecard Questions (Am I doing well or poorly?)—accumulation and classification

of data.
3. Attention-Directing Questions (Which problems should I look into?)—focuses on

operating problems and opportunities
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DECISION MAKING
Accounting information helps managers making decisions
✓ Decision making is the core of the

management process.
✓ Decisions range from the routine

(setting daily production schedules)
to the non-routine (launching a new
product line)
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PLANNING AND CONTROL
Accounting information helps managers

plan and control the organization’s operations.
Planning: Setting objectives Control: Implementing plans

and outlining how the and using feedback and
objectives will be obtained performance reports to
evaluate the attainment of
objectives
Increase operating income Managers can compare actual results to

Develop new product expected/targeted results
Begin operations in new territory
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PLANNING AND CONTROL CYCLE
▪ The work of management can be

summarized in a model:
▪ The model, which depicts the

planning and control cycle,
illustrates the smooth flow of
management activities from
planning through directing and
motivating, controlling, and then
back to planning again. All of these
activities involve decision making,
so it is depicted as the hub around
which the other activities revolve.
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PATHWAYS VISION MODEL
• Managers review information

about economic activities and
then use critical thinking and
accounting judgment to create
useful information.
• This useful information helps

managers make good decisions
that in turn have an impact on
society and future economic
activity, thus creating a circular
flow of cause and effect.
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3. AN ACCOUNTING FRAMEWORK FOR PLANNING AND CONTROL
BUDGETS AND PERFORMANCE REPORTS
▪ The accounting system formalizes

plans by expressing them as
budgets and produces
performance reports that aid to
control
▪ Budget: quantitative expression

of a plan of action
▪ Performance reports:
▪ compare actual results with
budgeted amounts
▪ provide feedback by
comparing results with plans
▪ highlight variances (=
deviations from plans)
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3. AN ACCOUNTING FRAMEWORK FOR PLANNING AND CONTROL
PERFORMANCE REPORT
Mayfair Starbucks Store, March 31, 20X1

Management by Exception
Budget Actual Variance
Sales $50,000 $50,000 0 ▪ Concentrating on areas that
Less: need attention and ignoring
Ingredients 22,000 24,500 $2,500 U areas that appear to be running
smoothly.
Store labor 12,000 11,600 400 F
Other labor 6,000 6,050 50 U ▪ Managers use performance
Utilities, etc. 4,500 4,500 0 reports to investigate exceptions
Total expenses $44,500 $46,650 $2,150 U (i.e., items for which actual
amounts differ significantly from
Operating income $ 5,500 $ 3,350 $2,150 U
budgeted amounts). Operations
are then brought into conformity
U= Unfavorable – actual exceeds budget with plans, or the plans are
F – Favorable – actual is less than budget revised.
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4. PLANNING AND CONTROL FOR PRODUCT LIFE CYCLES AND THE VALUE CHAIN
PRODUCT LIFE CYCLE
To effectively plan and control production of goods or services,

accountants and managers must consider the product’s life cycle
Product life cycle refers

to the various
stages through which
a product passes
value-chain function should focus on activities that create value for the customer. Successful businesses never lose sight of the importance of maintaining a
Product life cycles range from
focus on the needs of their customers
a few months (for fashion clothing)
to many years (refrigerator) At each stage, managers
face differing costs
and potential returns
Then accounting systems track actual costs and revenues throughout

the life cycle. Periodic comparisons between planned costs Managerial Accounting
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4. PLANNING AND CONTROL FOR PRODUCT LIFE CYCLES AND THE VALUE CHAIN
THE VALUE CHAIN
▪ The Value Chain set of business functions that add value to the
products or services of an organization
▪ Accountants play a role in supporting all the value-chain

functions, for example:
▪ In the production stage, accountants facilitate cost planning and

control through the use of budgets and performance reporting and
help track the effects of continuous improvement programs
▪ In the pre-production stage, accountants provide estimated

revenue and cost data during the research and development stage
and during the design stage of the value chain
▪ At the marketing level, accountants analyze the trade-off between

the increased revenue expected from a marketing program and its
cost
▪ At the distribution level, accounting information can influence

decisions about distributing products or services to customers
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5. BASIC ORGANIZATIONAL STRUCTURE
ORGANIZATIONAL CHART
▪ Managers occur in all different parts of a company’s structure
✓ Decentralizations is the delegation of decision-making authority throughout an

organization
✓ Some organizations are more decentralized than others
▪ Most companies structure their organization along departments or divisions.
▪ A company’s organizational chart helps show the relationship between

departments and divisions and the managers that are responsible for each section.
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5. BASIC ORGANIZATIONAL STRUCTURE Support
Departments
BOARD OF DIRECTORS AND CEO
▪ The Board of Directors is listed at the

top of the organizational chart.
▪ The Board of Directors is elected by the

shareholders, the owners of the
company, and is responsible for
developing the strategic goals of the
corporation.
▪ The Board selects the president – chief

executive officer (CEO)
▪ The CEO is ultimately responsible for

developing a plan to meet the company’s
short- and long-term plans. The CEO is
the liaison between the board of directors
and the management of the company
Organizational Chart of Happybuy Ltd
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THE ROLE OF THE AUDITOR
▪ The board of directors is the link between the owners

(stockholders) and the actual managers. Stockholders
▪ The board has the responsibility to ensure that management

acts in the interests of the stockholders.
Elect
▪ An other way to solve the credibility problem is to Board of

Directors Auditor
introduce an honorable, expert third party:
▪ The auditor examines the information that managers use Appoint
to prepare the financial statements and provides
assurances about the credibility of the statements.
Managers
▪ These assurances should make the investors more
comfortable about using the information to guide their
investing activity.
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LINE AND STAFF AUTHORITY
▪ Each position in a company can be classified as either a line or staff position:
✓ Line positions are directly involved with making and selling products or
services
✓ Staff positions support the line positions as advisors, they provide

assistance. They do not have direct authority over line positions.
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LINE AND STAFF AUTHORITY
▪ Since the basic objective of Happybuy Ltd is to

sell recorded merchandise at a profit, those
managers whose areas of responsibility are
directly related to the sales effort occupy line
positions. These positions, which are shown in
green in the exhibit.
▪ By contrast, the manager of the central

Purchasing Department occupies a staff
position, since the only function of the
Purchasing Department is to support and serve
the line departments by doing their purchasing
for them. The finance function, which is
responsible for the organization’s management
accounting, is also seen as a staff position. Organizational Chart of Happybuy Ltd
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6. ACCOUNTING’S POSITION IN THE ORGANIZATION
MANAGEMENT ACCOUNTANT’S ACTIVITIES
Management accountant’s role as consultant
Collects Prepares
and compiles standardized
information reports
Interprets and Is involved

analyzes information in decision making
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CONTROLLER AND TREASURER FUNCTION
▪ The employees carrying out

Chief Financial Officer (CFO) management accounting
functions have a variety of
titles
Controller Functions Treasurer Functions
▪ Controller and treasurer fill a
staff role whereas sales and
➢ Provision of capital production executives and their
➢ Planning for control subordinates fill line roles
➢ Investor relations
➢ Reporting and interpreting
➢ Short-term financing ▪ Although controllers have a staff
➢ Evaluating and consulting
➢ Banking and custody role, they are generally
➢ Tax administration
➢ Credits and collections empowered by the firm’s president
➢ Government reporting to approve, install, and oversee
➢ Investments
➢ Protection of assets the organization’s accounting
➢ Risk management
➢ Economic appraisal system to assure uniform
➢(insurance) accounting and reporting methods
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CPA VERSUS CMA
✓ Certified Public Accountant versus Certified Management Accountant:
▪ Certified Management Accountant (CMA) is a

professional certification credential in the management accounting and
financial management fields. A CMA has expertise in financial accounting and
strategic management, allowing them to make business decisions for their
employer based on financial information.
▪ Certified Public Accountant (CPA) is the title of qualified accountants in

numerous countries in the English-speaking world. In the United States,
the CPA is a license to provide accounting services to the public, A CPA is
uniquely qualified as an accounting expert and performs audits and signs audit
reports
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7. EXPANDING AND CHANGING ROLE OF MANAGEMENT ACCOUNTING
HISTORY
▪ Management accounting has its roots in the industrial revolution of the 19th century
▪ Most firms were controlled by a few owner–managers → little need for financial reports
▪ Management accounting was relatively sophisticated and provided the essential information
needed to manage the early large-scale production of textiles, steel and other products
▪ After the turn of the 20th century

▪ Financial accounting requirements 
▪ The practice of management accounting stagnated
▪ In the early part of the 20th century

▪ Production  → forwardlooking companies such saw a renewed need for management
oriented reports that were separate from financial reports
▪ However, in most companies, management accounting practices up through the mid-1980s
were largely indistinguishable from practices that were common prior to the First World War
▪ In recent years, however, new economic forces have led to many important innovations in
management accounting.
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7. EXPANDING AND CHANGING ROLE OF MANAGEMENT ACCOUNTING
CURRENT TRENDS IN MANAGEMENT ACCOUNTING
Four major business trends are influencing management accounting today
1. Shift from a manufacturing-based to a service-based economy

▪ Common characteristics of service organizations
a. Labor is a major component of costs.
b. Output is usually difficult to measure.
c. Service organizations cannot store their major inputs and outputs.
2. Increased global competition
3. Advances in technology
▪ Affects both the production and the use of accounting information. A major effect of technology on accounting
systems has been the growing use of enterprise resource planning systems (ERP).
4. Changes in business process management

▪ Some companies implement sweeping changes in operations through business process reengineering, the
fundamental rethinking and radical redesign of business processes to improve performance in areas such as cost,
quality, service, and speed. (E.g. Just-in-time (JIT); Total Quality Management (TQM))
IT referred to an inventory system that minimized inventories by arranging for materials and subcomponents to arrive just as they were needed for production and
for goods to be made just in time to ship them to customer
TQM minimizes costs by maximizing quality. It focuses on prevention of defects and customer satisfaction
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8. PROFESSIONAL AND BUSINESS ETHICS
ETHICAL CONDUCT
Ethics
Competence confidentiality Credibility Integrity
No regulation can be as effective in ensuring reliability

as high ethical standards of accountants.
Why is it so important?
As you can’t see the quality of accounting, users rely on the integrity of accountants
to assure the integrity of information. If you cannot trust the information, it is worthless
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9. SHORT QUIZ
QUESTION 1
Which of the following should be considered in the selection

of an accounting system?
a. behavioral effects of the system on managers
b. costs of buying and operating the system
c. improved decision-making power resulting from the system
d. all of the above
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9. SHORT QUIZ
QUESTION 2
Concentrating on areas that need attention and ignoring areas

that appear to be running smoothly is called _____.
a. variance analysis
b. management by exception
c. management smoothing
d. budget analysis
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9. SHORT QUIZ
QUESTION 3
The functions of planning for control, evaluating and consulting, and

governmental reporting are typically assumed within organizations by
_____.
a. the company treasurer
b. the company controller
c. the company vice president of marketing
d. external auditors
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PART I

PART I – An Introdution to Management Accounting, Cost

Chapter 1. Managerial Accounting, the Business Organization, and

Chapter 2. An Introduction to cost terms, concepts and

Chapter 3. Cost Behavior

PART I – An Introdution to Management Accounting

Chapter 1. Managerial Accounting, the Business Organization, and

1. Financial Accounting versus Management Accounting

In general, users of accounting information fall into two general categories:

1) Internal managers who use information for

2) External parties, such as investors and

Financial Accounting Management Accounting

Relevance and precision of data

+ Managerial accounting is not mandatory

✓ 2 basic purposes of accounting:

1) Accounting information is used in decision making

2) Plan and control the organization’s operations

✓ To address the 2 major purposes,

✓ Accounting. Systems are formal

2. ROLES OF ACCOUNTING INFORMATION

The system must provide accurate, timely budgets

Weigh estimated Consider the system’s effect

A system that managers believe

For example, consider a performance report that a manager’s

2. ROLES OF ACCOUNTING INFORMATION

✓ Good accounting information helps answer three types of questions

Scorekeeping Questions: Evaluate

Attention Directing Questions: Compare

2. Scorecard Questions (Am I doing well or poorly?)—accumulation and classification

3. Attention-Directing Questions (Which problems should I look into?)—focuses on

Accounting information helps managers making decisions

✓ Decision making is the core of the

✓ Decisions range from the routine

Accounting information helps managers

Planning: Setting objectives Control: Implementing plans

Increase operating income Managers can compare actual results to

▪ The work of management can be

▪ The model, which depicts the

• Managers review information

• This useful information helps

▪ The accounting system formalizes

▪ Budget: quantitative expression

Mayfair Starbucks Store, March 31, 20X1

To effectively plan and control production of goods or services,

Product life cycle refers

Then accounting systems track actual costs and revenues throughout

▪ Accountants play a role in supporting all the value-chain

▪ In the production stage, accountants facilitate cost planning and

▪ In the pre-production stage, accountants provide estimated

▪ At the marketing level, accountants analyze the trade-off between

▪ At the distribution level, accounting information can influence

▪ Managers occur in all different parts of a company’s structure

✓ Decentralizations is the delegation of decision-making authority throughout an

▪ Most companies structure their organization along departments or divisions.

▪ A company’s organizational chart helps show the relationship between

▪ The Board of Directors is listed at the

▪ The Board of Directors is elected by the

▪ The Board selects the president – chief

▪ The CEO is ultimately responsible for

▪ The board of directors is the link between the owners

▪ The board has the responsibility to ensure that management

▪ An other way to solve the credibility problem is to Board of

▪ Each position in a company can be classified as either a line or staff position: