‘Alter studying Chapter 1, you should be able: @ Epa te meaning of managerial accounting Eilon the diferences between ‘managerial accounting and fancih decouning @ dently and explain the curent focus of manager counting © Descibe the role of managerial accountants inn erganzaion @ Evohinthe importance of tical toda for managers and managerial secourants © seer th forms of criication alae to managerial accountants Introduction to Managerial Accounting The gre biggest tion the vali. the iy thelr e exganiz forman challen nalyee unders chain ¢ the o produc bution, Sin has ble tion at costural EXPERIENCE MANAGERIAL DECISIONS with BuyCostumes.com The greatest benefitof managerial accounting is also ts biggest challenge—to provide managers with informa tion thet improves decisions and creates organizational valle. This information helps inforn managers about the impact of various strategic and operational deci- sions on key nonfinancial performance measures and their eventual impact on the corganization’s financial, per formance. The information is challenging to prepare and analyze beeause it equires an Understanding of all value chain components thet affect the organization, including research and development, production, marketing, dist bation, and customer service. Since its inception in 1999, BuyCostumes.com has blended the right managerial accounting informa. tion and an innovative business model to provide ‘costumes to customers in over 50 counties, Using “Using the Internet and marketing creativity, BuyCostumes.com serves a market of 150 million U.S. consumers who spend $3.6 billion on costumes each year.” the Intomet and marketing treaty, BuyCostumes com serves a market of 150 million U.S. consumers ‘who spend $3.6 billion on costumes each yeer. According to CEO Jalem Getz, BuyCostumes.com measures key performance indicators to guide Its de- cision making. For example, managerial accountants analyze measures of cus- tomer satisfaction, aver- age time between order placement and costume artval for each shipping method, and the profit: ability of individual cus- tomer types. As customer ‘trends change, competi- ‘tors emerge, and techno logical advances occur, BuyCostumes.com's managerial ‘accounting information adapts to provide crucial insight into the company’s performance and how its strategy should evolve to remain the world’s largest intemet costume retailer,ossectve plain the meaning of managerial accountng Chapter 1 Inroduetion vo Managerial Accounting THE MEANING OF MANAGERIAL ACCOUNTING ‘What do we mesn by managerial accountng? Quite simply, managerial accounting sth provi- sion of accounting information for a company’s internal uses, tis Ue lem’ intemal acount- ing system and i designed to support the information needs of managers. Unlike financial accounting, managerial accountng is not bound by any formal criteria such as generally accepted accountng prncipes (GAAP). Managerial accounting has tree broad objectives ‘+ To provide information for planning the organization's actions. ‘+ To provide information for controlling the organization's actions. ‘+ To provide information for making effective decisions. Using reset examples from many companies i both the f sectors, this texcbook explains how all manufacturing (eg. aircraft prodwcer—Bosing Corporation), merchandising (eg, clothiog rtaler—American Eagle Oufies) and ser vice (eq, healthcare provider—Cleveland Clinic, or online realer Amazon.com) organi zations use managerial accomnting information and concep. People in all types of positions—ftom corporate preidents to graphic designers to hospital adminisrators— an improve ther managerial ls by being well-grounded in the basic concepts and use of managerial accounting infomation for planning, controlling, and deison making. Furthermore, thousands of companies increasingly release to the public (i, suppl ers, regulators, employees, human rights organizations environmental group, custom - ers, tc) very lage quantities of managerial accounting information that traditionally sither did net exist or wo released only intemal. This information ie releazed through optional reports known as corporate sustainability reports (e.g, Starbucs, MeDonalt's), social responsiblity reports (€., Apple, Chiquita, or cizenship reports (4, General Eetric). The rdease of these reports often occurs because firms want to ‘manage their reputation by preparing and releasing suc information themselves, rather than having Internet bloggers, newspapers, and cable news networks publish theie own estimates of such inzormation. Some leading companies (¢.. PepsiCo, Novo Nordisk, Brith Telecom) have even moved so far a§ to combine their sustainability report wth their annual repo, thereby resling in single, integrated report contain- ing both traditions nancial secountng information aswell as managerial accouating information. The exciting rality i that the importance and scope of managerial accountng information is growing rapidly around the globe, As a result, the demand {or business people who possess the ability to create, understand, use and communicate ‘managerial accountng information continues to grow profit and not-for-profit, Information Needs of Managers and Other Users Managerial accounting information is needed by a number of individuals, In particular, managers and empowered woskers need comprehensive, up-to-date information for the following activities: + planning + controling + decision making Planning “The detailed formulation of action to achieve a pantcula end i the management atv- ity called plaming. Panning reqites sting objectnes and identhing methods to * ecamor nap deaden ol ened conte, 8 Rober cis nd Mckee, One ‘eshte arg fra Srinrale Sentey an Vey & Ses pe Healer G01 9 ran Blo, Dee tletges wed Coc a, Aarourng fart eames Cyc” 218, ee to he hers te Slowetes ble Acorns nants wn scp crgireaeselernretensoierria! “Iicadsdeanconartssnaabisynapans seauneng oe he naronneay eectsxount- ancial erally profit Bocing ad ser organi- pes of tors ad use 8 supplie sstom- ‘nally eased ‘bucks, ports vant to selves, vublish Novo ability ontain- unting geval mand tnicate icular, for the activ- ads fo Chapter Introduction to Managerial Accounting achieve those objectives. For example, a firm may set the objective of increasing its short-term and long-term profitability by improving the overall quality of its products DaimlerChryster drastically improved the quality and profitability ofits Chrysler auto- ‘mobile division during the beginning of the 21st century to the point where its quality surpassed that of Mereedes-Bing (so owned by DaimlerChrysler). By improving prod- uct quality, firms like DaimlerChrysler should be able to reduce serap and rework, Gecrease the mumber of customer complaints and warranty work, reduce the resources ‘curently assigned to inspection, and so on, thus increasing profitability. To realize these benefits, management must develop some specific methods that, when implemented, wil lead to the achievement of the desired objective. A plant manager, for example, may start a supplier evaluation program to identify and select suppliers who are willing and able to supply defect fee parts. Empowered workers may be able to identiy prociction causes of defects and to create new metheds for producing a product that will reduce serap and rework and the need for inspection. The new methods should be clearly speci fied and detailed, Controlling Prong ig only half the bate, Once a pani cea it mus be implemented and its implementation monitored by managers and workers fo nsue that te pian being carried out as intended. The managerial activity of monitoring a plan's implementation tnd taking comsstivession as needed is refered (oss emrling. Conte stusly chioved by comparing actel performance wth expected performance This forme. ton canbe weed fo evlate or fo coret te steps being taken Complement 3 plan Buse onthe feedback, amnager (or worker) may decile tot the pla contin take coretve ation of same type to put He actions back in harmony withthe orga Bian odo some misteam replaming “he managerial accounting information sed fr planning and contol purposes can be ether financial or nonnancial in nature, For example, Dally To! and Stamping saved $14,300 per year by redesigning a press operation.” In one department, completed parts (nade by apres) came down & chute and ell int a ports tub, When the tb became fl press operators id to top operation while he stock operator moved the fain and reac ic with au empty one. Worker redesigned he petton $0 hat each press bad chute witht branches “each lading oa ferent tub. Now when fone sb fl competed parts re routed into the ete ub The $1430 savings ae fanaa measure ofthe steces ofthe redesign. ‘The fedesign also eliminated med downtime and neeased the umber of units reduced per hour (operational eedback), both of which are examples of ronnanclperormanee, Both types of measures com vey important information, Offs final ane nonfiaanclfeecheck pen to nan. fern the form of performance reports that compare ie etal data ‘wth panned da or oterbenchmaris Decision Making The proces of choosing among competing alternatives is clled decion making Tis smanagerial funtion i intertwined with paoning and contol in ita manager eareot "ocesfilly plan or contol te organization's actions without making decions egad ing competing ateratves, Fo instance, i BW contemplates the possi of eer ing sca that rus on gsoine and hydrogen, is ultimate deson would be improved infomation abot the atternativss( prsning to gasoline Yeras hydrogen esos Iorid combinations of there vo autorsobie fe options) gathered and made av 2hle to managers, One of te mor roles ofthe managers accounting information 57 tems to supply ifonnation that alates desson making * GeogeF Has, “Seeence eons ete,” Manager Acsuning Feb 1:256 ‘Chapter 1 Introdveton to Managerial Acounting YOQUDECIDE what constitutes Managerial Accounting Information? ‘You are the Costeo exocutive who has been choten to decide whether or not the compary shoul continue its policy of soure- ing ts finest coffee from Randa, What types of information should you consider as you dec hhow best to structure ancl analyze this important long:term strategie decision? What challenges do you expect to face in ‘making this decision? What constiutes managerial accounting information is growing considerably as organizations must make decisions tht include the global consequences of ther actions, aswell as the impact on {an inroasinly large numer of voea,wellinformad, and power ful stakeholders. Stakeholders include the company’s customers, suppliers, employees, regulators, politicians, lawmakers, and local community members. Generally speaking, managerial accounting information can be facial in netuee, such as aoles revenue of cost of sales, or nonfinancial in nature, such 2s the qumber of ‘ualiy defects or the percentage of manufacturing plant that are Inspected for compliance with human rights policies. One of the ‘mest excting—end yet daunting—aspects of managerial account- Ing if that ono can choose to measure anything, assuming the resource, information technology, and creatiity exit to capture the desired performance measure, fs» Costco enecutiva, one ofthe fest nonfinancal factors you Tkely would consider measuring is the quality ofthe Rwandan cof fac to ensure that it fulfils Costa's strategie goal of creating @ competive advantage by providing premium coffes to custom ‘ess, Quality could bo defined by the bears’ taste, shelf fe lon- ‘geviy, oF other factors valued by customers. Other important renfnancal performance messures might include the time required to ship the hawvested beans from Rwanda to Costco, stores around North America and the presence ofa local farming ‘woréoree in Rwanda ertca to successful sustaining a long-tem supply chain between Rwondan feds and Costco customers ‘One of the most important financial tems to measure would be the importance to Costa's customers of purchasing premiums culty cofle, which could be measured by the additonal price they are wiling to pay for Rwandan coffee over end above more average quality coffee. Other financial measures might inchade the cost of harvesing, inspecting, and shipping beans, ‘98 wo as investments in Rwandan farming communkies (2), piyca infastucture and schools) thet ensute the relationship i ‘sustinable for future generations Finaly, you should consider how the decision to continue souring premium coffee from Rwanda will be perceived by Costo's important stakeholders, including its customers who buy the coffe, suppliers who provide the coffee beans, and govers- tment officials in the United States and Rwanda who eet trading policies between the two counties, Accuetely measuring issues lie stakeholder perceptions of such decisions can be dificult Dbeceuse the managerial accountant oftentimes must Invent new measures, figure out where the data to create such measures right come from, and estimate haw accurte these measures will be ence collected. ‘The managerial accountant’s ability to inform oxceutive doc- sion makers by providing innovative, accurate, and tinely per- formance meatures can create an important competitive advantage for the organization by improving its key decisions. onsectve @ Explain thedifrences betveon tranageral accountng and enc aocourtng FINANCIAL ACCOUNTING AND MANAGERIAL ACCOUNTING ‘There are two basic kinds of accounting information systems: financial accounting and managerial accounting. Financial Accounting ! Financial accounting is primary conceroed with producing infomation (nancial stte- mens) for evloma user, inlicing investor, creditors, customers, supplies, gover- tment agencies (Food and Deus Administration, Fedral Communiatons Comision ete), and labor ions. Tis information has historical orientation and is used for soch things as investment decisions, stewardship evalustion, monitoring activity. and regulatory measures, Financial statements must conform to certain rues and con- ventions that re defined by various agenie, such as the Secures ond Exchange Com ion (SEC), the Finareial Accounting Standards Board (FASB), and the Inter- national Accounting Standards Board (IASB). These rules pertain to issues such as the recognition of revenues, timing of expenses; and recor stockholders’ equity of assets, Habilities, and Ma The calle Spee finan trol Co: Whe cant ExhiChapter 1 ta onto Manage Accounting Managerial Accounting “The managerial accounting system produces infomation for dite uses, such 8s ee ‘managers, executives, and workers. Thus, managerial accounting could be properly aaa Called nernal accountng id financial accounting cout be elle external accountng be ae Specify, managerial accounting identifies, colts, measures, clases, and reports oe financial and nonfinancial information that i weil ineral users in planing. con- ae: tolling, and deision making ee Comparison of Financial and Managerial Accounting ert When comparing financial accounting to manggerial accounting. several diflerenes : sel price can be ented. Some ofthe more important diferences follow and ae summarized in P shove Exhibit 1 ws might foes + Targeted wors. Managerial accountng focuses on providing information for interal ea ‘use, while nancial accountng focuses on providing information for extemal ues stp + Reanetios on npts and processes. Managerial accounting isnot subject to the requirements of generally accepted cecoumting principles tt by the SEC and the conenue FASB that mist be felloved for financial reporting. The inputs and processes of ved by financial accounting are well defined. Only certain kinds of economic events qualify ‘who buy ‘as inputs, and processes must follow generally accepted methods. Unlike financial ete accounting, managerial accounting has no official body that prescribes the format, uading ‘content, and rules for:selecting iaputs and processes and preparing reports. ‘syssues + Type of information. The resictions imposed by financial aecounting tend to 7 produce objective and verifable financial information. For managesal accountng, a Information may be financial or nonfinancal and may be much more subjective in sree nature + Tine orientation. Fivancial accounting has a istorcal orientation (ie, looking through the rer view minor). Tt records and reports events that have already We dec: happened. Although managerial accounting also records and reports events that tay por have alteady occured, it strongly emphasizes providing information about future veetitve events (ie, looking chrough the front windshield). Management, for example, may ‘want 10 Know what it will cost to produce a product next’ year. This future ‘sientation is necessary for planning and decision making + Degwe of agregaion. Managerial accounting provides measures and intemal reports sed to evaluate the performance of ents, proc ines, departments, and manager Esseialy, dette infomation is nesded and provided. Financial accounting, on the ther hand, eeuses on overall fm performance, providing a more aggregated viewpoint + Breadth. Managerial accounting is musi broader than financial aecounting. It : includes aspects of managerial economics, industrial engineering, and management ting ond seience as wells numerous other areas. (nti 1) Comparison of Financial and Managerial Accounting ia sate gover Fane Accounting Managerial courting sat = Extemally focused + Internally focused used for Must oléwrentotlyimposbel ras 1°" 75/"No mantic) filer’ activity, Objective francial nfonnaton ‘+ Fnanelal and feniinaelalinfonmlon? and on: ‘nijecive infrmaton pose xetange + rea oataton + Enphostson etre mele 2 fometon shout the fimasavhole + ‘itera enluton ard deca fhasthe nso on voy dota inforton ies, and + Moce se contained + Broad, muledlcplinayconvective @ Identify and explain the curent focus of managerial accounting, Chapter 1 Introdvoton to Managsst Accounting ‘The accounting system should be designed to provide both financial and managerial accounting information. The Ley point here is fexibility—the system should be able 10 supply different information fr different purposes CURRENT FOCUS OF MANAGERIAL ACCOUNTING ‘The business environment in which companies operate has changed dramatically over the past several decades, For instance, advances in technology, the Internet, the opening of markets around the world, inereased competitive pressures and increased complexity of strategy (¢., alliances between McDonal’s and The Walt Disney Company for pro ‘motional tie-ins) and operations all have combined to produce a global business envi- ronment. Effective managerial accounting systems also have changed in order to provide information that helps improve companies’ plonning, control, and decision- ‘making activities, Several important uses of managerial accounting resulting from these advances include new methods of estimating product and service cost and profitability, understanding customer oriertation, evaluating the business from a cross-functional perspective, and providing information useful in improving total quality, New Methods of Costing Products and Services ‘Todiay’s companies need focused, accurate information on the cost ofthe produets and services they produce. In the rast, a company might have produced a few products that ‘were roughly similar to one another: Only the cost of materials and labor might have differed from one product to another and figuring out the cost of each unit was tela- tively easy. Now, with the increase in technology and automation, i is more difficult to ‘generate the costing information needed by management. As Peter Drucker, interna- tionally respected management guru, points out: Traditional cost accounting in manufacturing does not record the cost of nonproducing scl as the cost of faulty quality, ot of a machine being out of order, or of needed parts not being on hand. Yer there unrecorded and tacontroled costs in some plans ran as high as the casts that tradifonal accounting does record. By contrast, a nes method of cost accounting developed 'a the last 10 years—man- Dw the ro Vice Bresnelf B ~ Sales 8 Marketing ss,and } Product § : aa vote) ee ca pin) sea | ee os integr Ciineier) ‘iniemmaicay SEVIS, CRA responsibility for internal auditing, cost accounting, financial accounting (including SEC reports and financial statements), systems accounting (inluding analysis, design, BR and internal controls), and taxes. The duties and organization of the controller's office ‘vary from firm to fim. For example, in some firms, the internal audit department may report directly to the financial vice president; similarly, the systems department may report direc tothe financial vice president or some other vice president, In larger companies, the controller is separate from the treasury department, The assist ‘easurer is responsible forthe finance funetion. Specifically, the treasurer raises capital objec- and manages cash and investments, The treasurer may also be in charge of exedit and vation collection and insurance. : ‘No matter which postion managerial accountants hold, they must support manage- ‘ment in all phases of business decision making. As specialists in accounting, they must be intelligent, well prepared, up-o-date with new developments, and familiar with the customs and practices ofall countries in which ther firms operate. They also should be ions. knowledgeable about the legal environment of business including important financial Jaws and regulations, such as the Dodd-Frank Act and the Sarbanes-Oxley Act.onsective @ Explain the importance of ethical behavior for managers and ‘managerial accountants. Chapter 1 Inteeduction to Mangal Accounting MANAGERIAL ACCOUNTING AND ETHICAL CONDUCT Virtually all managerial accousting practices were developed to assist managers in max- mizing profits. Traditionally, actions regarding the economic performance of the firm. hhave been the overriding concern. Yet managers and managerial accountants should not become so focused on profs that they develop a belief thatthe only goal of a busi- ress is maximizing its net worth, The objective of profit maximization should be con- strained by the requirement that profits be achieved through legal and ethical means. Ethical Behavior Ethical behavior involves choosing actions that are right, proper, and just. Behavior can be right or wrong; it can be proper or improper; and the decisions we make ean be fair ‘or unfair. Though people often differ in their views of the meaning of the ethical terms cited, there seems to be « eommon principle underlying all ethical systems, This prin ple is expressed by the belie trat each member of a group bears some responsibility for the well-being of other members. Willingness to sacrifice one's selfinterest for the well- being of the group is the heart af ethical action. ‘This notion of sacrifice produces some core values—valves that describe what is meant by right and wrong in tiore concrete terms. James W. Braekner, writing for the “Ethics Column” in Managermt Accounting, made the following observation: For moral or exkicaleducattn to have mecning, there must be agreement on the values that are considered “right.” Ten of these values are identified and described by Michael Josephson in “Teechiag Eihieal Decision Making and Principled Reason- ing." The study of history, philosophy, and religion reveals a strong consensus as to certain wniversal and timeless values essential tthe ethical life. These 10 core values yield a series of principles thae delineate right and wrong it general terms. Therefore, they prove a guide to betavor.”” ‘The 10 core values refezred to in the quotation include the following: Honesty Integrity Pros Fidelity keeping 1 3 4 5. Fairness 6. Caring for others 17. Respect for others 8, Responsible citizenship 9. Pursuit of excellence 0. Accountability Many of the well-known recounting scandals, such as those involving. Adephia, WorkiCom, HealtiSouth, Parmalat, and MeKessou, provide evidence of the pressures faced by top managers and accountants to produce large net income numbers, especially in the short term. Unfortunatay, such individuals often give into these pressures seen faced with questionable revenuc- and costrelated judgments. For example, the scandal at WorldCom was committed beaause the CEO, Bernie Ebbers, coerced several of the top ‘ocountants at WorldCom to wrongfully record journal entries in the company's books that capitalized millions of dollars in costs as asses (ie, on the balance sheet) rather than as expenses (i.e., on the income statement) that would have dramatically lowered current petiod net income. Eventually, WorldCom was forced to pay hundreds of millions of sana W Sains "oneal Sod Be Tug” Maregeman Accu hag 192 19. For8 mer ‘ingle tsvtacn eth 1a wlth oa ena ata Teac Eee Cees Vary 2nd Fried taromng Hs Es So Tan Done he Jsepan ey Wate ov Ages CX TRH 2-20. dolk add acti cons clea and and bigg ig us em sho Ce Om ‘ui ily thexe firm should 1 busi ims, be fair terms princi- ity for well- ‘rat is for the values ved by sas to ‘ong tn ‘lpia, sures cially when vdal at he top. Dooks than urrent ons of Chapter 1 ntrodurtion to Managerial Accounting dollars tothe U.S. government and to shareholders for its illegal and unethical actions. Ja addition, several of the top executives were sentenced to extensive prison time for their actions. The recent subprime mortgage crisis also highlights the importance of ethical considerations as some banks tried to inerease their profits either by lending individuals more money than they could reasonably afford or using terms that were intentionally less clear, or transparent, than many outsiders thought they should be* ‘Congress passed the Sarbanes-Oxley Act (SOX) in an attempt to limit securities frauds and accounting misconduct scandals like those associated with Enron, WorldCom, Adelphia, and HealtiSouth, SOX led to inerensed attention on coxporate ethics. While sucessful on ‘many fronts, SOX has not prevented all subsequent frauds Evidence isin the Allen Stanford securities fraud and the Bernard Madd ponz scheme, which atthe time was the world’s biggest fraud, allegedly swindling investors out ofa total of $5 billion ‘Although it may seem contradictory, scrficing self interest for the collective good ‘might not only b right and bring a sense of individual worth but might also make good business sense. Companies with a strong code of ethies ean create strong customer and employee loyalty. While irs and cheats may win on occasion, their vietores often are short-lived. Companies in business forthe long term find that it pays to treat all of their constituents with honesty and loyalty Company Codes of Ethical Conduct (ne needs oly to ear the ume “ton” fo be reminded ofthe importance of etic conduct. To promote ethial behav by managers and employees, organizations com monly establish standards of conduct refered to as Company Codes of Conduct. A ik review of various corporate codes of conduct shows some common ground. For example, Coca-Cola's list of corporate values’ includes eadership, collaboration, integ- rity, accountability, passion, diversity, and quality. Bocing’s Code of Conduct" states. that it wll "conduct its business fii, impatally, in an ethical and proper manner, and in fll compliance with allaplcnble laws and regulations.” All employees must sign the code. andthe company’ “requires that they understmd te code, and ask que tions, seek puidance, report stapected violations, and express concems regarding Com fiance with ths policy andthe related procedures." Important pars of eorporte codes of conduct are integrity, perfomance of dts, and compliance withthe re of lw. They aso uniformly prohibit the aceptance of kkbacks an! improper git insider trang, and rnisappropriaon of corporate information and assets, Some such as Guagle,'* outline employee responsibilities to each other, customers, sup- ples, busines partners, sharsholders governments, commie, and competitors ell sth proces an personnel contact wen they havea coe related question or concer, Standards of Ethical Conduct for Managerial Accountants In addition to organizations establishing standards of condet for teie managers and employees, profesional associations also eiablh etal standarés Both ie American Institute of Cethed Public Accountants (AICPA) andthe lnstiute of Mnagement Accountants IMA) have established ethical standards for aecountnts, Profesional accountants are bound by these codes of conduct." Both the AICPA and IMA stress the importance of eompstene,confentaty inter. nd recibir abjetvy- soe Seen, ‘Fens Het ound Serve ty Wi 4 Copan Under eiaion, asa Scant tn Section Macon” ysnenfcek Crna Jovy 3,208) Ther von py sears coa8 00 dracon enone SET om the Cocn-Calo abst: i cea-locomponycomeueamparyirisenviesies ec Peeaneott Rai ti Boone ett, hits ocing con/oceralgelandie employees costed Jour i 20, BSihtmtheeoglucate peor sco conterptedectccrsatan ced ray 8,28, ‘Tag ARhA Ea cll Cod cobs bnod us kia i to eae tte papel ip.owsecve@ Identify three forms ofcetfcation availabe to managerial (Chapter 1 trrodveton to Managerial Acoumting In 2005, the IMA revised its Standards of Ethical Conduct for Management Account- ‘ans to reflect the impact of the Sarbanes-Oxley Act. Now called the Statement of Ethical Professional Practice, the revised code considers global issues and incorporates the princi= ples ofthe code of the International Federation of Accountants, which isthe global asso- ciation of professional accountng groups. In this statement, managerial accountants are fold that “they shall not commit acts contrary to these standards nor shall they condone the commission of such acts by others in their organizations.” The standards and the 1 ‘ommended resolution of ethical conflicts are presented in Exhibit 14 Suppose a manager's bonus is linked to reported profits, with the bonus increasing as profits increase. Thus, the manager has an incentive to find ways to increase profits, inlud- ing unethical approaches. A minager could delay promotions of deserving employees ot use cheaper parts to produce a prod, In either case, ifthe motive is simply to ineease the bonvs, the bebavior could te labeled as unethical. Neither action isin the best interest ‘of the company or its employees, Yet where should the blame be assigned? Afterall, the reward system strongly encouraes the manager to inerease profits. Is the reward system at fault, ors the manager who chooses to increase profits at Faull Or both? In realty, both the manager and reward system are probably at fault, Itisimportant to {design evaluation and reward systems so that inceatives to pursue undesirable behavior are ‘minimized. Yet designing a peret reward system is nota realistic expectation. Managers also have an obligation to avoic abusing the system. Standard Il-l of the code reminds us that members have “a responsiilty to (1) mitigate actual conficts of interest... and to] ‘advise all partes of any potential conficts.” Basically, the prospect of an ineeased bonus (@.2,,afavor) should not influensea manager toengagein unethical actions. ‘Can ethics be taught? Philosophers and ethicists from Socrates to those stulying business ethics today agree that ethics can be taught and, even more importanty, Jeamed, In fact, the IMA now requires continuing education in ethics, as do many of the state boards of accountancy. Perhaps the biggest challenge with ethical dilemmas is that when they arise, employets frequently do not realize (1) that such a dilemma has arisen or 2) the “corzeet” actien that should be taken to rectify the dilemma, Therefore, rather than attempt to study numerous ethical issues in one place, each chapter of this {ext includes an ethical dilemma or situation designed to inevease awaceness ofthe types ‘of conduct considered unethical in business. CERTIFICATION ‘As withthe legal and medical professions, the accounting profession relies on cetifia ‘ton to help promote ethical behavior, as Well as to provide evidence thatthe certificate hholder has achieved a minimum level of professional competence, The accounting pro- {ession offers three major forms of certification to managerial aosountants: + Certificate in Management Accounting + Certificate in Public Accounting + Certificate in Internal Auciting Each certification offers particular advantages to a managerial accountant, In each case, an applicant must meet specific educational and experience requirements and pass ‘a qualifying examination to become certified. Thus, all three certifications offer evidence that the hokéer has achieved a mininaum level of professional competence. Furthermore, all three certifications require the holders to engage in continuing professional education in order to maintain certification. Recause certification reveals a commitment to profes- sional competency, most orgaizations encourage thelr managerial agcountants t0 become certified. In addition an increasing number of accountants also consider becoming a Certified Fraud Examiner (CFE),"” which allows them to conduct expert work in the areas of fraud prevention, detection, and deterence.!® ° Forma omaton saute CFE ics se tpn omfle-cedei apni O_ festnodovclabxceues any 1225 Frelenm areas ihe gomng walang we Canby Hage a Sth, From ore loesiganve coving hed eh. #|tifa iicate 1 pro- each 1 pass ence ation roles: ts to vsider rxpert Chapter 1 Intnsction to Managerial A hh exert 14) Statemont of Ethical Professional Practice Merbar of IMA shall bahave etic & commitment to wie! prlasina patie ineludes ‘vorcching principles tat expres our vous and stndds that guide cur ear PRINCIPLES IMAs verarching hel rinsples include: Honesty, Foines, Objoctty, and Rasponsibiy, Member sal ac in accordanen with these rincpls and shall encourege oes within hae ‘organizations to adhare to tem, STANDARDS : ‘Amor flare to coma with the fellow ards may alin doi aeior. |. COMPETENCE Each member hes exponsibity o 41 Malia an appropiate vel ol profesion!cxperte by continu developing rowed fete 2, Perr proesional duis ccordonce with alovnt a equations ae eenicelstondods 3 Provde decison oppor nformaton and recommendations hat are agers, dear, cane, ad ely 4. Recognize and communicate oteson ination of xher consis tt would proce responsible judgment or sueeasl performance ofan activity. N.CONFIDENTIALITY Each member has espotsbily to 1. Keep information confidential excep hen clcoae fs tthoried or legny aired 2. eam oll olvant pros egardng appropriate uso of confidential nfermation, Monto borate’ aces en conn 3, Refln kor using concent ifomatin for neta re ackantago, W. INTEGRITY veh mambarhas a esponsibi 1. Miigoe acta confics of intres, guy commniat wth business execs ood apparent conficsofintrast Adana patos of any potent conic 2. Relrsin kormengagingin any conc ht would presen coming ut dition ecay. 2. Alcan ro engaging nor supporting any act tat might diced the pofeson \V. CREDIBLITY ath member ropponatliy to: 1. Communist information iy ane object 2, Banove al leant ost that coud reasonably be expacted to ifunce an intend isers understanding of th por, orale, o tcortmaeaions. 3. Disloe doles er deionces ninfonmaton, elie, processing, tana ool in ‘confeamance vith erganation pay eer apical. RESOLUTION OF ETHICAL CONFLICT In epphing the Standard of Ec! ProlessonlProetizo, you may encounter problems ies ing meted! behave or vsoling on etl conf, When laces wth tial ave, you souk a low your ergniion's establened paces on th recuton of sad cont I these poles Go rolreclve the ates conti, you should eqstor ta flowing courses of acon: 1. Diss th sue wth your dhe pene xcept hen it appears that he superar iwc to tot cave, pene theless to the nat evel H yu eonnck achieve » satslectry . reson, submit hols to the next management lye your immediate superior i the ‘he eecatv ofc reqnaer, te aceptale raviewng mthoriy may be orp such {the adit cormite, executive conmmitee, box of doctors, boa af tons, ener. ‘Contact it levels above te mediate sper shell be nat any wth your spear fivanlage, essuring he of she ie ot evolved. Communication of such probloms to ‘uthoriioe or inias 0ot omployed a engaged by the erganzaton Is not considered Sport, unless you belive theres 9 oar vation of tho le 2, Goiyrlovant otal easy itating o coir acuron with an 4A EhiesCounslie ‘recor iar advinr to obten a beter understanding of posible our of acton, 23, Comat you eum atiorey 91 lag Sblgstons and rghts concerning the eta cent, cy oetgnt ant con ethno aeChapter 1 Inreduction to Managerial Accounting ‘The Certified Management Accountant ‘The Cerifeate in Mansgemeat Accouming is designed to mt the specie needs of managerial acsoustants, A Ceried Management Account (CMA) hes posed svg ros qualifing examination, met an experience requtement, nd petites cos fining education. One ofthe ey reqiremens for obaining the CMA is pasing «qualifying exami- sation, Tae following four aes st emphases + economics, nance, and management + nancial acounting and eepoing + management reporting, anys, and behavioral ses + dedon analysand iformation systems, ‘The parts fo the examination reflect the needs of managerial accounting and underscore the earlier observation that managerial accounting has more of an interdsciplinary flax vor than other areas of accounting. One of the main purposes ofthe CMA was to establish managerial accounting as a recognized, professional discipine, separate from the profession of public accounting, Since its inception, the CMA program has been quite successful. Many firms now Sponsor and pay for clases that prepare their managerial accountants fo the gual ing examination as well as provide other financial incentives to encourage acquisition of the CMA, The Certified Public Accountant ‘The Certificate in Public Accounting isthe oldest and most well-known cesta i ‘accounting. The purpose of the certificate is to provide minimal professional qualiica- tion for external auditors. The responsibility of auditors is to provide assurance con- ceraing the reliability of a fimn’s financial statements, Only a Certified Public Accountant (CPA) is permitted by aw) to serve as an external auditor. CPAS must pass { national examination and be licensed by the state in which they practice. Although the Cectificate in Public Accounting does not have a managerial accounting orientation, ‘any managerial accountants also hold this certificate. The Certified Internal Auditor - ‘The other certification availabé to intemal accountants isthe Certicate in Internal Auditing. lotersal auditing difrs from exteroal auditing and managerial accounting, ‘and many intemal auditors fet a need for a specialized certification. The Cert Internal Auditor (CTA) has passed a comprehensive examination designed to ensure technical competence and has 2 years’ experience. SUMMARY OF LEARNING OBJECTIVES LO 1. Explain the meaning of managerial accounting, + Managerial accounting informati ‘evaluate performance, * Managerial accounting information helps managers in planning, controlling, and decision making. + Planning is the detailed formulation of action to achieve a particular end + Controling is the monitoring ofa plan's implementation + Decision making is choosing among competing alternatives {s used to identify problems, solve problems, and Lo 1 u oe mmnaAnaaaa: (Captor 1 Tatedaction to Managerial Accounting ial 10.2, Explain the differences between managerial accounting and financial accountng, eds of + Managerial accounting is aris. j + intended for internal users. Goa + not subject to rules for external financial reporting (e.¢., GAAP and SEC regulations). + subjective nem + able to use both financial and nonfinancial measures of performance, i j + able to give a broader, inlarisiplinay perspective + Finaneal accounting is + directed toward extemal wer } + subject to externally imposed rules (e.g, GAAP and SEC regulations). 7 ft + able to provide audited, objective financial information. a 109. ey and capa tice of anal seine “Tapper angen os om one al Quy magne. abd vasa toeba compen Sin + Tsmaton sav cala ees nd ome il ach pot pte 0 cay nels an ode sll, an. « Ry ed agen mar nae raps to dean fr re ‘ioe fcc nd lt nna cnn fronton «Tare fog eng ttn aon ny end on Ue siege poate of * Cot taucsip arty - van + rau deter ney ts + Henscoung & 104. este eo of nia coun ina omzon = “Tey ae regen fr eiig alcing, meting, ong, epi, sh incptng an comming ton sn, « Teja bese elnomaon ms of mages + Tejometsolfmcatct Ue orgtato an a part Mage LOS. xp epic of tie bebo ng nd magi eset a + Aston hos eee et alr tangs sonora at = tay pat on nts te on prormanc ited + Many firms have a writen code of ethics or code of conduct. pa “+ The IMA has a code of ethics for managerial accountants. 10.6, Identify three forms of certification available to managerial accountants. + The Centficate of Management Accounting serves managerial accountants. + The Certificate of Public Accounting serves and is required for those who practice public accounting, + The Certificate of Internal Aueiting serves internal auditors. KEY TERMS and Certified Internal Auditor (CIA), 18 ‘Lean accounting, 11 | and Certified Management Accountant (CMA), 18 Line positions, 12 | Certified Public Accountant (CPA), 18 ‘Managerial accounting, 4 I Continuous improvement, 10 Planning, 4 | Controller, 13 Sarbanes-Oxley Act (SOX), 15 Controling, 5 Staff positions, 12 Decision making, 5 ‘otal quality management, 10 | Ethical behavior, 4 ‘Treasurer, 13 | Financial accounting, 6 Value chain, 9‘Chapter 1 Introdetion to Managerial Accounting, DISCUSSION QUESTIONS ‘What is managerial accounting? ‘What are the three broad objectives of managerial accounting? Who are the users of managerial accounting information? 4. Should a managerial accounting system provide both financial and nonlinancial informa tion? Explain, 5. What is meant by controling? 6. Describe the connection between planning, feedback, and controling. 1. 8 How do managerial accounting and financial accounting differ? Explain the role of financial reporting in the development of managerial aecounting. Why hs this changed in recent years? 9. Explain the meaning of customer velue, How is focusing ‘agetial accounting? 10. Whatis the value chain? Why i it important? |. Explain why today’s managerial accountant must have a eross-fanctional perspective, 12. Briefly explain the practice of entersrse risk management and the role that can be played by managerial accountants in enterprise risk management 13, What isthe difference between a sta postion and a line position? |4, The controler should be a member ofthe top management staff. Do you agree or disagree? Explain 15. What is ethical behavior? Is it possible to teach ethical behavior in a manager accountng course? 16, Briefly describe some of the common themes or pressures faced by executives who commit corporate fraud. 7, Identify the three forms of ecounting cerification, Which form of eerifcation do you believe is best for a managerial accountant? Why? ceustomer value changing man- MULTIPLE-CHOICE QUESTIONS ‘141 The provision of accounting information for internal users is known as a. accounting, b. financial accounting, ©. managerial accounting, 4. information provision, © accounting for planning and costrol, 1 1-2 The users of managerial accounting information include a. for-profit companies, b. not-for-profit organizations. ©. city governments. 4. educational institutions. Alf these Set 1-3 ‘Sctting objectives and identifying methods to achieve those objectives is called planning b. decision making, © controling. 4. performance evaluation. None of these w a 4 14 1“ EX Exe morrma Why layed gree? suse? amit you Chapter 1 Inteodueion to Managerial Accounting 4.4. The process of choosing among competing alternatives i called planning decision making. controlling. performance evaluation, ‘None of these. 4-5 Which ofthe following is a characteristic of managerial accounting? ‘There isan internal focus. Subjective information may be used. ‘There isan emphasis on the future. : It is broad-based and multidisciplinary. Allof these 4-6 An effective managerial eocounting system should track information about an organiza- tion's activites in which of the following areas? Development Marketing Production Desiga Al of these 447 In teams of strategie positioning, which two general strategies may be chosen by company? ‘a, Revenue production and cost enhancement bb. Activity-based costing and value chain emphasis ¢. Increasing customer value and decreasing supplier orientation Cost leadership and product differentiation Product differentiation and cost enhancement 4-8 Which of the following is nora common form of certification for managerial accountants? ‘a, Certificate in Internal Auditing b. Certificate in External Auditing ‘e. Certfcate in Public Accounting 4. Certificate in Management Accounting 4-9 ‘The chief accounting oficer for a frm isthe chief executive oficer. i. chief operating officer. ©. vice president of sales. production head. controller. 440 Which ofthe following is typically found in a comporation’s code of ethics? 2. Compliance wih ter of Be nepy © Honesty 4 Competace & Allontiese EXERCISES xorg 1-11 The Managerial Process ooecte@ Each ofthe following scenarios requires the use of accounting information to carry out one or __ more managerial accounting objective (Continued) t | |onece Chapter 1 Tniroduction to Managerial Accounting Laboratory Manager: An HMO approached me recently and offered us its entire range of blood tests. It provided a price list revealing the amount i is willing to pay for each tes. In ‘many eases, the prices are below what we normally charge. I need to know the costs of the individual tsts to assess the feasibility of accepting its offer and perhaps suggest some price adjustments on some of the tests. '. Operating Manager: This report indisates that we have 30% more defects than originally targeted. An investigation into the ease nas revealed the problem. We were using a lower- «quality material than expected, and the waste has been higher than normal, By switeling to the quality evel originally specified, we can reduce the defets to the planned level © Divisional Manager: Our market share has inereased because of higher-quality products, Current projections indicate that we should sell 25% moze units than lst year. I want a pro: Jeetioh of the eect that this increase in sales will have on profits. I also want to know ou expected cash receipts and cash expenditures on a month-by-month basis. I have a feeling that some short-term borrowing may be necessary. 4. Plant Manager: Forcign competitors are producing goods with lower costs and delivering ‘hom more rapidly than we can to customers in our markets. We need to decrease the eycle tite and increase the efficiency of our manufacturing process. There are two proposals that Should help us accomplish these goals, both of whic involve investing in computer-nided ranufacturing. I need to know the future cash flows associated with cach system and the cffect each system has on unit costs and eyele time, Manager: At the Inst board meeting, we established an objective of earning a 25% return on sales. I need to know how many units of our product we need to sell to meet this objective. Once | have the estimated sales in units, we need to outline a promotional campaign that will fake us where we want to be. However, in order to compute the targeted sales in mits, I reed to Know the expected unit price aud a Tot of cost information, £ Manager: Perhaps the Harrison Medical Clini should not offer a full range of medical serv- ices, Some services seem to be having a difficult time showing any kind of profit. Iam par- ticularly concerned about the mental heath servee. It has not showa a profit since the eligie ‘opened. T want to know what costs cum be avoided if | drop the service. [also want some ‘assessment of the impact on the other services we offer. Some of ou patients may choose this clinic because we offer a fll range of services. Require Select the managerial accounting objectives) that are applicable for each scenario: planning, controlling (including performance evaluation), or decision making, Exercise 112 Differences between Menagerial Accounting and Financial Accounting Jenna Suarez the controller for Arben Company, has faced the followi two weeks: situations inthe past Ben Heald, head of production, wordered whether it would be more cost effective to ‘buy parts partially assembled or to buy individual parts and assemble them at the Arben factory, ». The president of Arben reminded Jenna that the stockholders’ meeting was coming up, and hie needed her to prepare a PowerPoint presentation showing the income statement and ‘balance sheet information for last year ©. Ellen Johnson, vice president of sles, has decided to expand the sales ofices for next year. ‘She sent Jenna the information on next year’s rent and depreciation information for budget. ing purposes. 4. Jenna's assistant, Mike, received the information from Ellen on depreciation and added it to ‘depreciation expenses and accumulated depreciation on office equipment, Jenna compared the budgeted spending on materials used in production with the actual spending on materials used in production. Materials spending was signficenty higher than ‘expected, She set up a meeting to discuss this outcome with Ben Heald so that be could explain it. Deter Adviar 10 owo hard-d wares pice f ‘mainte ‘and m mainte produ ‘han [ Requi w a cScena Chapter 1 Introduction to Managers] Accounting os ite range of nee zach tet In : ari Dri whether ach request i lately moe manera ccouing reed ox fae ae accountng ovkened 1 orginally Exercise 1-13 Customer Value, Strategic Positioning onsective nga lower ‘Adriana Alvarado has decided to purchase & personal computer. She has natrowed the choices witching to to two: Drantex and Confiar. Both brands have the same processing speed, 64 gigabytes of 1 hard-disk capacity, two USB ports, x DVDRW drive, and each comes with the same basi soft- ‘ware support package. Both come from mail-order companies with good reputations. The sellin (Redes, ones rie tat, Afer some ois, Aarons det a “eta po Irinting Dat nea yen Fred ane ee es ene ey om {nl sno cons Se cage ie Dacor aS eee fulness The geno Cakes To a ne her oeng a oo Pott adhe er ee te one ne ee rs rt of he oebeine thon Drom) cele ote Ado ee ee ee ee me pet ter aide Etat ase 1, Whats the total product purchased by Adana? 2 COntceerUAL CONNECTION Tow See testes postong dite or He wo return on companies? ‘uo 3 COREERTUAL.CONNECTION ven sed wy sh dia 0 buy Coa, Adana ore tiponfd “nk st Cntr ai sons a Sein Cee, ane 7 ing information system? a 4, CONCEPTUAL SONECTION sup thst Adan’ kon yas romped aly by ees thet lores econ ay a ae ed aby tan pr Insti ores terse ca ee a coe Be wt ne iorncnets de mami dasa ea eee The prot Consisy coy tne dens Sor Sen a rs Exercise 1-14 Line versus Staff convective @ a Telling dose ob pani of to employes of anny Menlc Joan Denison, Cost Accounting Manager. Joan is responsible for measuring and collecting costs ee associated with the manuficture of the garden hose product fine, She is also responsible for | ‘preparing revo rept that compare he acta costs wth Plane cass Thse repos ae pode be clive to Ivoduton ine managers nthe plant manage Joan eps explain aid ep op # Arben ‘Steven Swasey, Production Manager. Steven is responsible for the manufacture of the high- unlit aiden hose. He superset line worker, Rls to devel the prediction sede ‘up, and ‘and is responsible for seeing that production quotas are met. He is also held accountable for ent and controlling manufacturing costs. wt year Roquires budget. CONCEPTUAL CONNECTION Identify Joan and Steven as line or staff and explain your oe posi co Exarco 1.15. Ethical Behavior oaucerne @ an Conse he following scenario between Dave. prints, nd Steve an aitn inthe oa un in ser athe department (Continued)(Chapter 1 Introduction to Managerial Accounting Steve: Dave, our department needs to have 10,000 posters printed for the basketball team for nest year. Here's the mock-up, and we'll need them in a month, How much will you charge? Dave: Well, given the costs Thave for ink and paper, I can come in at around $5,000. ‘Steve: Great, here's what I want you to do. Print me up an invoiee for $7,500. That's our budget, ‘Then, when they pay you, you give me z check for $2,500. I'l make sure that you get the job. Required: CONCEPTUAL CONNECTION Is Stevss proposal ethical? What should Dave do? Exercise 1-16 Ethical Behavior ‘Manager: If I can reduce my costs by $40,000 during this last quarter, my division will show a profit that is 10% above the planned level, and I will receive a $10,000 bonus, However, given ‘the projections for the fourth quarter, t does not look promising, I really nced that $10,000. | know of one way that I can qualify. All T have to do is lay off my three most expensive sales: People. Afterall, most of the orders ate in for the fourth querter, and I can always hite new sales personnel at the beginning of the next year Requires CONCEPTUAL CONNECTION What is the right choive forthe manager to make? Why did the sthica! dilemma arise? Is there any way to redesign the accounting eporting system to discour- ‘age the type of behavior thatthe manager is contemplating? Exercise 1-17 Ethical Issues ‘The following statements have appeared in newspaper editorials: 1, Business students come from all segments of society. If they have not been taught etbies by thei families and by their elementary and secondary schools, a business school can have lit. Ue effect. Sacifcing sel-interest forthe coliective good won't happen unless a majority of Americans also accept this premise, 3. Competent executives manage peopl and resourees for the good of society, Monetary bene fits and tiles are simply the by-products of doing a good job, 4. Unethical fms and individuals, lke high rollers in Las Vegas, are eventually wiped out financially, Required: CONCEPTUAL CONNECTION Assess nd comment on each ofthe statements. Exercise 1-18 Ethical Issues ‘The Bedron Company isa closely held investment service group that has been quite successful over the past 5 years, consistently provicing most members of the top management group with 50% bonuses. In addition, both the chief financial officer and the chief executive officer have received 100% bonuses. Bedron expects this trend to continue. Recently, Bedron’s top management group, which holds 35% of the outstanding shares of common stock, has learned that a major corporation is interested in acquiring Bedron. The ‘other corporation's initial offer is attractive and is several dollars per share higher than Bedron’s jeurrent share price, One member of masagement told a group of employees under him about ‘he potential offer. He suggested that they might want to purchase more Bedron stock at the cur- rent price in anticipation ofthe takeover offer. Re cc Be th: x Us Re ce He1 for eet owa fiven 000. ales the sby fit. sful vith Chapter 1 Introduction to Manageril Accounting Required: CONCEPTUAL CONNECTION Do you think that the employees should take the action sug gested by thelr boss? Suppose the action is prohibited by Bedron’s code of ethies. Now suppose that i is not prohibited by Bedron’s code of ethies. Is the action aeceptable in that case? Exercise 1-19 Company Codes of Conduct ossectve @ ‘Using the Internet, locate the code of conduct for thee diferent companies, Required: CONCEPTUAL CONNECTION Briefly describe each code of conduct. How are they simi How are they different?