1

Chapter M1 Accounting
and
Management
Decisions
PowerPoint Presentation by
Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© Copyright 2005 South-Western, a
division of Thomson Learning.
All rights reserved.

Task Force Image Gallery clip art included in

this electronic presentation is used with the
permission of NVTech Inc.
 2

Managerial accounting is the process

of preparing, reporting, and interpreting
accounting information for use by an
organization’s internal decision makers.
 3

Once you have completed this

chapter, you should be able to:

Objective 1
Explain the purpose of managerial
accounting and why it is important.
 4

Types of Users and Information Needs

External Users
Stockholders, creditors

They need summary information about

performance for a period of time
(financial accounting).
 5

Types of Users and Information Needs

Top Management
Board of Directors
Chief executive officers

They need information for evaluating

performance, for establishing goals,
and for devising plans to meet goals
(financial and managerial accounting).
 6

Types of Users and Information Needs

Functional and Division Managers
Accounting
Finance
Information systems
Marketing
Operations
Product and territory sales managers
Plant managers
 7

Types of Users and Information Needs

They need timely and

detailed information
for evaluating
performance and
implementing plans
(primarily managerial
accounting).
 8

Types of Users and Information Needs

Middle Managers
Sales representatives
Production managers
Purchasing managers
Service managers
Middle managers need very timely
and detailed information for day-to-
day decisions to achieve company
goals (managerial accounting).
 9

Responsibility

Typically, the higher the managers are in

the structure, the more responsibility
they have for results and the more
authority they have to make decisions.
 10

Financial accounting provides

information that conforms with GAAP.

Managerial accounting does not have to

conform with GAAP. Managerial
accounting information is used only
within a company to meet the particular
needs of a company’s managers.
 11

An accountant who produces

managerial accounting
information for a specific
company is referred to as a
managerial accountant.
 12
The Changing Needs of Business
Changing management philosophies frequently
involve:
 New marketing strategies directed at global
markets
 Emphasis on customer satisfaction, including a
focus on product quality and variety
 Large investments in new production
technologies, including increased reliance on
robotics and computerized manufacturing

Continued
 13
The Changing Needs of Business
 New relationships between management and labor
that emphasize a greater role for labor in many
decisions
 Creation of management teams to make key
business decisions with representatives from the
various functional areas of business, including
accounting
 Development of real-time (immediate) business
information systems, including use of the Internet
to facilitate communication within a company and
between a company and its stakeholders
 14
The Quality of Accounting
Information
These questions should be asked when assessing
the adequacy of managerial accounting systems:
 What is the intended use of the information
produced by a system?
 How accurate does the information need to
be?
 Is greater accuracy worth the additional
cost?
 15

Once you have completed this

chapter, you should be able to:

Objective 2
Explain the role of managerial
accounting in planning and control
decisions.
 16

The Planning and

Control Process
Identify Set Specific Develop Plans
Company Objectives (b) to Achieve
Goals (a) Objectives (c)

Modify goals Evaluate Implement

or Plans as Performance Plans and
Needed (f) (e) Control
Actions (d)
Exhibit 2
 17

Planning

Strategic planning involves identifying a

company’s long-run goals and developing
plans for achieving these goals.
 18

Planning
Operational planning involves
identifying objectives for day-to-
day activities. It also involves
setting performance objectives,
which are standards for the desired
performance of various divisions of
a company.
 19

Levels of Planning
Planning Time
Type of Planning Horizon

Operational budgets Monthly to

quarterly

Master budget Annual

Several years
Strategic financial plan
in the future
 20

Levels of Planning
Nature of Planning
Type of Planning
Provides
Providesa
Operational budgets one-year
specific inputs
to financial
the masters
master plan
budget.
Master budget linking long-
range planning
Sets major
Strategic financial plan withgoals
financial
operational
planning.
 21

Management Accountants
Involvement With Ongoing Decision
 to continue producing a product or to
drop it from a product line
 to retain or close a branch or plant
facility
 to accept or reject a special product order
from a customer
Continued
 22

Management Accountants
Involvement With Ongoing Decision
 to complete a product or sell it partially
completed at a lower price
 to produce more of one product or more
of another
 to keep, reduce, or eliminate certain costs
 23

Control
Control involves
identifying and
rewarding behavior
that encourages
desired outcome and
detecting and
correcting behavior
that does not.
 24

Control
Identification and detection can be accomplished
using three methods:
 Observing behavior to assess the quantity
and quality of effort
 Measuring the outcomes of behavior
 Establishing informal work environment
habits (corporate culture) that guide
behavior
 25
Role of Incentives and Measurement
in Planning and Control
COMPANY
GOALS
Incentives to Rewards for
Meet Meeting
Expectations Expectations

EXPECTED ACTUAL
BEHAVIOR Evaluation BEHAVIOR

Exhibit 4
 26

Once you have completed this

chapter, you should be able to:

Objective 3
Discuss ways in which managerial
accounting interacts with marketing
and operations.
 27

Interaction Between Departments

Accounting
How many units do
we expect to sell?
Performance Data

Marketing

Exhibit 5
 28

Departments Working Together

Accounting

Sales Projections

Is the product
profitable?

Marketing

Exhibit 5
 29

Departments Working Together

Accounting

Will operations
change?
Cost Analysis

Operations

Exhibit 5
 30

Departments Working Together

Accounting

Planned Changes

Have we met our cost

projections?

Operations

Exhibit 5
 31

Why is accounting
information so
important in
marketing decisions?
 32

For companies to be competitive

in the new business environment,
they require accurate and timely
information to support their
marketing efforts.
 33

The sales force

rely on up-to-date
accounting
information to
monitor and
control sales
activities.
 34

What is operations
and how do
production managers
use accounting
information?
 35

Operations refers to the

actions necessary to create and
delivery products or services.
Production managers need
accounting information about
the costs of production, such
as labor and materials.
 36

Once you have completed this

chapter, you should be able to:

Objective 4
Explain the scope of managerial
accounting.
 37

The Role of Managerial Accounting

in Business Organizations

Managerial Accounting Systems

Business
-Financial reporting system
Activities
-Operational reporting system

Exhibit 6 Continued
 38

The Role of Managerial Accounting

in Business Organizations
Managerial Accounting Systems
-Financial reporting system
-Operational reporting system
Business Decisions
-External
Exhibit 6 -Internal
 39

Managers rely on
operational reporting
systems to understand
certain dynamics of their
processes.
 40

Operational reporting systems

capture nonfinancial
information such as…
• number of units produced,
• time required for production, and
• defect rates.
 41

Accounting measurement, especially

in the contemporary business
environment, includes quantitative and
qualitative data about the effectiveness
and efficiency of business activities.
 42

Operations managers
can reduce product
cost by eliminating
waste, scrap, and
spoilage in the
production process;
product defects; and
activities that do not
add value.
 43

Quality is a major factor in

determining the success of most
business organizations.
 44

Chapter M1

THE
END
45