Understanding Managerial Accounting

Integrated Report
“An integrated report (IR) is a concise
communication about how an organization’s
strategy, governance, performance and prospects, in the
context of its external environment, lead to the creation
of value over the short, medium and long term”

(International Integrated Reporting Council (IIRC), 2013)

International Malaysian Institute

Integrated
Federation of of Accountants
Reporting
Accountants (IFAC) (MIA)
Integrated Reporting Framework

(IIRC, 2013)

Organizational overview and external environment

Governance

Business model
Integrated
Risks and opportunities
Report
Content Strategy and resource allocation
Elements Performance

Outlook

8 Basis of presentation
Learning Objectives
• Explain the major differences between managerial and financial
accounting.
• Define managerial accounting and describe management
accounting role in the management process.
• Explain four fundamental management processes that help
organizations attain their goals.
• Describe five objectives of managerial accounting activity.
• Explain the value chain concept.
• Describe ethical standards that apply to managerial accounting.
Comparison of Financial and Managerial
Accounting

5
 Managerial accounting
• The process of identifying, measuring, analyzing, interpreting, and
communicating information in pursuit of an organization’s goals.
• An integral part of the management process.
• Managerial accountants are important strategic partners in an
organization’s management team.
Work of Management
Decision
Making
Planning
Controlling

Directing
operational
activities

7
1. Decision Making
Decision making involves
making a selection among
competing alternatives.

What should
we be selling?
Who should
we be serving?
How should
we execute?
8
2. Planning

Establish Goals.

Specify How Goals

Will Be Achieved.

Develop Budgets.

9
3. Controlling
The control function gathers feedback to ensure
that plans are being followed.

Feedback in the form of performance reports that compare

actual results with the budget are an essential part of the
control function.

10
4. Directing operational activities
Running the organization on a day-to-day
basis.
s. Is the new
atio n product p
e sult s of oper rofitable?
e t he r
Obse r v
d? Have operations adhered to
h e
p lis the plans developed by
com
a l s ac management for achieving
e go
Ar the goals?
How Managerial Accounting Adds Value
to the Organization
Objectives of Managerial Accounting (MA) Activity

1. Providing information for decision making and planning.

2. Assisting managers in directing and controlling operational activities.
3. Motivating managers and other employees toward the organization’s goals.
4. Measuring the performance of activities, subunits, managers, and other
employees within the organization.
5. Assessing the organization’s competitive position, and working with other
managers to ensure the organization’s long-run competitiveness in its
industry.
1. Providing information for decision making
and planning
• Management rely on MA information.
• For example, the decision to establish a new theme park by ABC Lagoon
would be influenced by:
• estimates of the costs of designing and maintaining it.
• MA data in formulating plans for operations.
• Prominent in those plans would be a budget detailing the projected
revenues and costs of operating the theme park.
• Because of the complexity and importance of this decision,
managers and accountants would work together on teams as
decisions were made and plans formulated for the new plan’s
operations.
2. Assisting Managers in Directing and
Controlling Operational Activities
• Directing and controlling day-to-day operations require a variety of data about
the process of providing goods or services.
• For example:
• in directing operational activities, the theme park’s management would need
data about customer food-service demand patterns in order to make sure
appropriate staffing was provided in the theme park’s various food venues.
• In controlling operations, management would compare actual costs incurred
with those specified in the budget.
• MA information assists management through its attention directing function.
• It does not necessarily solve a decision problem, but direct managers’ attention to
an issue that requires their skills and provide the data that is relevant in helping
them to solve the problem.
Continued…
• For example:
• Company B incurred electricity costs that significantly exceeded the
budget. This fact does not explain why the budget was exceeded, nor
does it tell management what action to take, but it does direct
management’s attention to the situation.
• Upon further investigation, the accounting records reveal that the rate
Company B pays for electricity has increased substantially. This
information will help management in framing the decision problem.
• Should steps be taken to conserve electricity?
• Perhaps management should consider investing in a more sophisticated
air conditioning system to manage the heat
3. Motivating managers and other employees
toward the organization’s goals

• The goals of individuals are diverse -> not always match those of the
organization.
• A key purpose of MA is to motivate managers and other employees to direct
their efforts toward achieving the organization’s goals.
• One means of achieving this purpose is through budgeting.
• In establishing a budget top management indicates how resources are to
be allocated and what activities are to be emphasized.
• When actual operations do not conform to the budget, the MA system
will highlight the deviation from plan, and MA tools will help the
managers to analyze and explain the reasons for the deviation.
4. Measuring the Performance of Activities,
Subunits, Managers, and Other Employees
within the Organization
• One means of motivating people toward the organization’s goals is to
measure their performance in achieving those goals.
• Measurements for rewarding performance through positive feedback,
promotions, and pay raises.
• For example:
• compensate executives on the basis of the profit achieved by the
subunits they manage; on the basis of operational measures, such as
product quality, sales, or on-time delivery.
Continued…
• MA system also measures the performance of an organization’s subunits, such
as divisions, product lines, geographical territories, and departments.
• These measurements help the subunits’ managers obtain the highest
possible performance level in their units.
• Also, help management decide whether a particular subunit is a viable
economic investment.
5. Assessing the Organization’s Competitive
Position, and Working with Other Managers
to Ensure the Organization’s Long-Run
Competitiveness in Its Industry
• MA continually assess how an organization stacks up against the
competition.
• Questions asked:
• How well is the organization doing in its internal operations and business
processes?
• How well is the organization doing in the eyes of its customers? Are their needs
being served as well as possible?
• How well is the organization doing from the standpoint of innovation, learning, and
continuously improving operations? Is the organization a trendsetter that embraces
new products, new services, and new technology? Or is it falling behind?
• How well is the organization doing financially? Is the enterprise viable as a
continuing entity?
The Operational Context of Managerial
Accounting
• MA concepts and techniques are applied in many parts of a company:
accounting and finance, sales, marketing, production, supply chain,
customer service, product development, and human resource
management.
• Examples:
• value chain (how MA creates value that customers will pay for);
• capacity (the output that can result from the resources the company
spends money on to produce that value);
• data analytics (how the organization makes sense of the massive
amount of data generated by and relating to its operations)
Managerial Accounting and the Value Chain
• The set of linked, value-creating activities, ranging from securing basic raw
materials and energy to the ultimate delivery of products and services, is
called the value chain.
• Customers must perceive a benefit from the activities in a company’s value
chain.
• MA helps to understand the cost of the activities, to help assure that they
are being provided profitably.
• To achieve its goals -> important to understand the value chain.
Continue…
 Continue…
Research and development
(R&D)
Researching and developing
new or improved products or
services or the processes for
producing them.
Eg: invested heavily to create
unique product which
maximizes performance and
fuel efficiency.
Marketing:
Promotion of products or
services, such as the costs of
print ads and the costs of
attending product shows
Design
Detailed engineering of
products and services or
processes for producing them.
Distribution:
Delivery of products or services.
Eg: includes the costs of
trucking finished boats to
dealer/distributors
Production or purchases
Resources used to produce a
product or service or to
purchase finished merchandise.
The actual costs incurred to
make the products, including
materials, labor, and the cost of
the equipment.
Customer service:
Support provided for customers
after the sale. This includes
warranty service work
Continued… l y a
n on
o
te as
t ra
n c en such
ny co a i n,
m p a
u e ch
he co e val
l d t i n th
u
Sho w link ons?
o ti
narr l opera
et a i
r
Are there opportunities to acquire suppliers,
and good reasons to do so?
should it
expand i
include i ts operati
nstore p onal sco
roductio pe to
n?

24
 Continued…
• Cost-causing factors (cost
perform one or more drivers)
activities in the value -> characteristics of the value
chain at the same quality chain as production volume,
level as its competitors, sales volume, product mix,
to achieve a
but at a lower cost number of orders, number
sustainable
of production runs, number
competitive
of parts, types of service
advantage
provided, and so forth.
perform its value chain
• Cost relationship: the
activities at a higher
correlation (causal or not)
quality level than its
between costs and cost drivers.
competitors, and at no
greater cost
Capacity and Capacity Costs
• In providing useful MA information need to understand and analyze an
organization’s value-creating capacity and the costs of providing that
capacity.
• By capacity means the amount of resources a company applies to its value
chain and the upper limit on the amount of goods or services that an
organization can produce in a specified period of time using those
resources.
• For example, how many people can Company ABC Lagoon effectively
accommodate in a day?
Continued…
(1) What is an organization’s
Theoretical capacity
practical capacity?
• The upper limit on production of
goods or services, for the amount
of resources provided, if
(2) What are the costs of the
everything works perfectly.
resources supplied to provide
that capacity?
Practical capacity
• Allows for normal occurrences
such as equipment downtime and
(3) How have those resources been
worker fatigue or illness.
used in creating value?
 Big Data, Data Analytics, and Managerial
Accounting
How do
w
Vast data so muc e even begin The process of making sense of big data
h data? to proc and developing true and helpful
e ss
generated in insights from it - data analytics.
an
c h a la rge
organization, u re t h at su
n w e a s s
cc u ra te,
together with Ca a ta is a su ch a Making sure that so much data is
t o f d d i n
amoun d fo r m atte
the data it can m p l e te, an p ro c e sse d ? valid and usable - data governance.
co t ca n be
acquire to a t i
way th
supplement Organization’s process for making sure all
and provide What tools will help us to tease of this big data represents what it says it
insights from it?
context for its represents and that it can be relied upon to
n e c t t hose
internal data - e b e s t con be recorded quickly and accurately.
o w d o w e ra ti o ns?
big data. H
to o u r op
insight s
Continued…
•MA contribute to good data governance and effective part of a big data
environment if:
• well designed,
• capture accurate & timely data,
• provide the information that decision makers need

•If a company has poor data governance practices, decision

maker might worry that MA data receive is not what they
need for their decisions, or that it would arrive too late or
be inaccurate.
Managerial Accounting and the Ethical
Climate of Business
All Professional Management Accountants Bodies issue their own
Code of Conduct but they all share similar fundamental principles
and conceptual approaches as the one issued by the Institute of
Management Accountants (IMA).

The IMA Statement of Ethical Professional Practice consists of two

parts that offer guidelines for:
 Ethical behavior.
 Resolution for an ethical conflict.

30
 IMA Guidelines for Ethical Behavior
Recognize and communicate
professional limitations that
preclude responsible judgment.

Follow applicable
Maintain professional
COMPETENCE laws, regulations
competence.
and standards.

Provide accurate, clear, concise,

and timely decision support
information.
Continued…
Do not disclose confidential
information unless legally
obligated to do so.

Do not use confidential

information for unethical or CONFIDENTIALITY
illegal advantage.

Ensure that subordinates do not

disclose confidential information.

32
Continued…
Mitigate conflicts of interest
and advise others of potential
conflicts.

Refrain from conduct that

would prejudice carrying INTEGRITY
out duties ethically.

Abstain from activities that

might discredit the profession.

33
Continued…
Communicate information fairly and
objectively.

Disclose delays or deficiencies in

CREDIBILITY information timeliness, processing, or
internal controls.

Disclose all relevant information that

could influence a user’s understanding
of reports and recommendations.

34
IMA Guidelines for Resolution of an
Ethical Conflict
Follow employer’s established policies.
For an unresolved ethical conflict:
• Discuss the conflict with immediate supervisor or next highest uninvolved
manager.
• If immediate supervisor is the CEO, consider the board of directors or the audit
committee.
• Contact with levels above the immediate supervisor should only be initiated with
the supervisor’s knowledge, assuming the supervisor is not involved.
• Except where legally prescribed, maintain confidentiality.
• Clarify issues in a confidential discussion with an objective advisor.
• Consult an attorney as to legal obligations.

35
Why Have Ethical Standards?
Ethical standards in business are essential for a smooth
functioning economy.

Without ethical standards in business, the economy, and

all of us who depend on it for jobs, goods, and services,
would suffer.

Abandoning ethical standards in business would lead to a

lower quality of life with less desirable goods and services
at higher prices.
Company Codes of Conduct
Broad-based statements of a company’s
responsibilities to:

Employees Customers Suppliers

And to the communities in

which the company operates.

37
Discussion:

Ethics Case

Thank You!