CHAPTER 4

Managerial Accounting Concepts

and
Principles

Chapter
19-1
 Managerial Accounting Basics

Definition of Managerial Accounting

A field of accounting that provides economic and

financial information for managers and other
internal users.

Also called Management Accounting

Chapter
19-2
 Managerial Accounting Basics

Managerial Accounting Activities

Explain manufacturing and nonmanufacturing costs and

how they are reported.

Compute cost of providing a service or manufacturing

a product.

Determine behavior of costs and expenses as activity

changes.

Chapter
19-3
 Managerial Accounting Basics

Managerial Activities: Continued

Assist management in profit planning and formalizing

these plans in the form of budgets.

Help to control costs by comparing actual results with

planned objectives and standard costs.

Accumulate and present data for making decisions.

Chapter
19-4
 Managerial Accounting Basics

Distinguishing Features

Applies to all types of business -

Service, Merchandising, and Manufacturing

Applies to all forms of businesses –

Proprietorships, Partnerships, and Corporations

Applies to not-for-profit and profit oriented companies

Chapter
19-5
 Managerial Accounting Basics

Continued, Distinguishing Features

More responsible for strategic

cost management

Teams with people from production,

marketing, engineering, etc.

Aid in making critical decisions

Chapter
19-6
 Comparing Managerial and Financial Accounting

Similarities

Both deal with economic events of a business –

Thus, interests overlap

Both require that economic events be

quantified and communicated to
interested parties –
Determining unit cost is part of
managerial accounting,
Reporting cost of goods manufactured
is a part of financial accounting

Chapter
19-7
 Comparing Managerial and Financial Accounting

Differences

Chapter
19-8
 Limitations of Financial Accounting
 The following are some of the limitations of financial
accounting, among others:
1. It shows only overall performance: Financial
accounting provides information about profit, loss,
cost etc. of the collective activities of the business as a
whole. It does not give data regarding departments,
products, processes and sales territories, etc.
2. Historical in nature. Financial accounting is
historical in nature, since the data are summarized
only at the end of the accounting period.

Chapter
19-9
 Cont’d

3. No performance appraisal. In financial accounting,

there is no system of developing norms and standards
to appraise the efficient use of materials, labor and
other costs by comparing the actual performance
with what should have accomplished during a given
of time.
4. Financial accounting is not future oriented

Chapter
19-10
 Managerial Accounting Basics

Review Question

Managerial accounting:

a. Pertains to the entity as a whole and is highly

aggregated.
aggregated
b. Places emphasis on special-purpose information.
c. External user .
d. Is governed by generally accepted accounting
principles.

Chapter
19-11
 Managerial Accounting Basics

Management Functions

Management’s activities and responsibilities can be

classified into the following three broad functions:

Planning
Directing
Controlling

Chapter
19-12
 Management Functions

Planning

Look ahead and establish objectives such as –

Maximize short-term profit

Key Objective: Add value to the business

Value measured by trading price of stock
and by potential selling price of the company

Chapter
19-13
 Management Functions

Directing

Coordinate diverse activities and human resources

Implement planned objectives

Provide incentives to motivate employees

Hire and train employees including

executives, managers, and supervisors

Produce smooth-running operation

Chapter
19-14
 Management Functions

Controlling

Keep activities on track

Determine whether goals are met

Decide changes needed to get back on track

May use an informal or formal system of evaluations

Good decision making is the outcome of good judgment

in planning, directing, and controlling.

Chapter
19-15
 Management Functions

Review Question

The management of an organization performs several

broad functions. They are:

a. Planning, directing, and selling.

selling
b. Directing, manufacturing, and controlling.
c. Planning, manufacturing, and controlling.
d. Planning, directing, and controlling.

Chapter
19-16
 Management accounting Cont’d
guidelines
 In every managerial process, certain guidelines
(directives) are necessary for the purpose of allocating
scarce resources, achieving targets and making sound
decisions.
 Accordingly, there are three important guidelines that
help management accountants in providing the most
valuable information. These are:
1. Cost benefit approach
 Management accountants continually face decisions of
resource allocation. A cost benefit approach should be
used in these decisions.
 Resources should be spent if they promote decision
making that better attains organizational goals in
relation to the costs of those resources.
Chapter
19-17
 Cont’d
2. Behavioral considerations:
 A management accounting system should have two
simultaneous missions for providing information:
1. Management is primarily a human activity that
focuses on how to help individuals do their jobs
better; that is understand the behaviors of employees
in making decisions.
2. To help managers make wise economic decisions,
and to motivate managers and employees to aim and
strive to achieve goals.

Chapter
19-18
 Cont’d

3. Different costs for different purposes

 The different costs for different purposes theme is
the management version of the all shoe does not fit
all notion.

Chapter
19-19
 Cont’d
Limitations of Management accounting
1. Limitation of basic records
 Management accounting derives its information from
financial accounting and other records. The strength
and weakness of the information provided by
management accountants depends on the strength
and weakness of these basic records (the source).
2. Persistent efforts: The conclusions drawn by the
management accountant are not executed
automatically because there is a need for the
managerial accountants to convince people at all
levels.
Chapter
19-20
 Cont’d

3. Wide Scope:
 Management accounting has a very wide scope
incorporating many disciplines.
 It considers both monetary as well as non-monetary
factors.
 This all brings inexactness and subjectivity in the
conclusions obtained through it.

Chapter
19-21
 Managerial Accounting Today

Managerial Accounting Practices

Just-In-Time (JIT) Inventory Methods

Inventory system in which goods are manufactured
or purchased just in time for use

Quality
Increased emphasis on product quality because
goods are produced only as needed
Total Quality Management (TQM)
- a philosophy of zero defects -
Chapter
19-22
 Managerial Accounting Today
Managerial Accounting Practices

Activity-Based-Costing (ABC)
Allocates overhead based on use of activities
Results in more accurate product costing and
scrutiny of all activities in the value
chain

Balanced Scorecard
Evaluates operations in an integrated fashion
Uses both financial and non-financial measures
Links performance measures to overall company
Chapter
objectives
19-23 LO 8 Identify trends in management accounting.
 Managerial Accounting Today

Review Question

Which of the following managerial accounting techniques

attempts to allocate manufacturing overhead in a more
meaningful manner?
a. Just-in-time inventory.
b. Total-quality management.
c. Balanced scorecard.
d. Activity-based costing.

Chapter
19-24
 End of Chapter 4

Chapter
19-25