Introduction to Management Accounting Chapter 1 1 Copyright

Objective 1 Identify managers’ four primary responsibilities 2 Copyright © 2007 Prentice-Hall. All rights

Managers’ Responsibilities Decision Making Planning Setting goals and objectives Directing Overseeing day-today operations Controlling

Objective 2 Distinguish financial accounting from management accounting 4 Copyright © 2007 Prentice-Hall. All

Primary Users? Management • Internal • Managers Financial • External • Investors, creditors, government

Purpose of Information? Management • Help managers plan, direct, and control business operations Financial

Primary Accounting Product? Management Financial • Any internal • General-purpose accounting report financial statements

What must be included? Management • Whatever management needs as long as benefits of

Underlying basis of the information? Management • Focus on future • Information on external

Information characteristic emphasized? Management • Relevance Financial • Reliable and objective 10 Copyright ©

Business unit? Management • Segments – products, geographical regions, customers Financial • Company as

How often prepared? Management • Depends on management needs Financial • Annually and quarterly

Verification? Management • No independent audits • Internal audits may occur Financial • Independent

Required by outside group? Management • No Financial • Yes – SEC for publicly

Concern over how reports affect employee behavior? Management • Yes Financial • Concern is

E 1 -10 a. Companies must follow GAAP in their Financial accounting __________ systems.

E 1 -10 Managers are decision makers inside d. _____ a company. e. __________

E 1 -10 g. Choosing goals and the means to Planning function achieve them

Objective 3 Describe organizational structure and the roles and skills required of management accountants

Organizational Structure Board of Directors Audit Committee Chief Executive Officer Chief Operating Officer Vice

Management Accountants • Often part of cross-functional teams • Report to various vice-presidents of

Roles of Management Accountants • Ensuring accurate financial records – Helping to design information

Required Skills • Knowledge of financial and managerial accounting • Analytical skills • Knowledge

E 1 -11 a. The _____ CFO and the _____ COO report to the

E 1 -11 e. The _____ treasurer is directly responsible for raising capital and

Objective 4 Describe the role of the Institute of Management Accountants (IMA) and use

IMA • Professional association for managerial accountants • Goal – Advance management accounting profession

Ethics • Statement of Ethical Professional Practice (IMA) – Maintain professional competence – Preserve

Steps to Resolve Ethical Dilemmas • Follow company’s policies for reporting unethical behavior •

E 1 -13 a. The ______ IMA is the professional association for management accountants.

E 1 -13 CFM exam focuses on financial d. The ______ statement analysis, business

E 1 -13 f. The institute says that approximately 85 percent of accountants work

Objective 5 Discuss trends in the business environment 33 Copyright © 2007 Prentice-Hall. All

Sarbanes-Oxley Act of 2002 • CEO and CFO - responsible for financial statements, internal

Trends • Shift toward service economy • Competing in global marketplace • Time-based competition

Trends • Cost-Benefit Analysis – weighing costs against benefits to help make decisions 36

Today’s Business Trends • Shift toward a service economy • Global competition • Time-based

E 1 -16 a. To account for uncertainty in the amounts of future costs

E 1 -16 c. The goal of _______ TQM is to meet customers’ expectations

E 1 -16 d. Most of the costs of adopting ERP, JIT, expanding into

E 1 -16 e. ________ Throughput time is the time between buying raw materials

E 1 -16 h. Firms acquire the _______ ISO 9001: 2000 certification to demonstrate

Objective 6 Use cost-benefit analysis to make business decisions 43 Copyright © 2007 Prentice-Hall.

E 1 -18 1. What are the total costs of adopting JIT? Employee training

E 1 -18 2. What are the total benefits of adopting JIT? Savings in

E 1 -18 3. Should Wild Rides adopt JIT? Why or why not? Expected

S 1 -8 Expected value of additional benefits: Outcome Benefits Probability Expected value Moderately

S 1 -8 Total benefits: Benefits already realized $170 million Expected value of additional

S 1 -8 The costs of $200 million just exceed the total expected benefits

End of Chapter 1 50 Copyright © 2007 Prentice-Hall. All rights reserved

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Managers’ Responsibilities Decision Making Planning Setting goals and objectives Directing Overseeing day-today operations Controlling Evaluating results of operations 3 Copyright © 2007 Prentice-Hall. All rights reserved

Purpose of Information? Management • Help managers plan, direct, and control business operations Financial • Help investors and creditors make investment and credit decisions 6 Copyright © 2007 Prentice-Hall. All rights reserved

Primary Accounting Product? Management Financial • Any internal • General-purpose accounting report financial statements deemed worthwhile by management 7 Copyright © 2007 Prentice-Hall. All rights reserved

What must be included? Management • Whatever management needs as long as benefits of using report exceeds cost of preparing it Financial • Determined by GAAP 8 Copyright © 2007 Prentice-Hall. All rights reserved

Underlying basis of the information? Management • Focus on future • Information on external and internal transactions Financial • Based on historical transactions • External transactions 9 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -10 a. Companies must follow GAAP in their Financial accounting __________ systems. b. Financial accounting develops reports for external parties, such as _____ Creditors Shareholders and ________. c. When managers evaluate the company’s performance compared to the plan, they Controlling role of are performing the _____ management. 16 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -10 Managers are decision makers inside d. _____ a company. e. __________ Financial accounting provides information on a company’s past performance to external parties. Management accounting systems are f. ___________ not restricted by GAAP but are chosen by comparing the costs versus the benefits of the system. 17 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -10 g. Choosing goals and the means to Planning function achieve them is the _____ of management. h. ___________ Managerial accounting systems report on various segments or business units of the company. Financial accounting i. __________ statements of public companies are audited annually by CPAs. 18 Copyright © 2007 Prentice-Hall. All rights reserved

Organizational Structure Board of Directors Audit Committee Chief Executive Officer Chief Operating Officer Vice Presidents of various operations Chief Financial Officer Treasurer Controller Internal Audit 20 Copyright © 2007 Prentice-Hall. All rights reserved

Management Accountants • Often part of cross-functional teams • Report to various vice-presidents of operations • Role is to analyze financial impact of business decisions • Internal consultants 21 Copyright © 2007 Prentice-Hall. All rights reserved

Roles of Management Accountants • Ensuring accurate financial records – Helping to design information systems – Recording non-routine transactions – Making adjustments to financial records • Planning, analyzing, and interpreting accounting data • Providing decision support 22 Copyright © 2007 Prentice-Hall. All rights reserved

Required Skills • Knowledge of financial and managerial accounting • Analytical skills • Knowledge of how a business functions • Ability to work on a team • Oral and written communications skills 23 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -11 a. The _____ CFO and the _____ COO report to the CEO. b. The internal audit function reports to the audit committee CFO or _______ CEO and the _______. c. The _____ is directly responsible for controller financial accounting, managerial accounting, and tax reporting. Board of Directors d. The CEO is hired by the _______. 24 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -11 e. The _____ treasurer is directly responsible for raising capital and investing funds. f. The _____ is directly responsible COO for the company’s operations. g. Management accountants often work cross functional teams with _____________. h. The subgroup of the board of directors is audit committee called the _________. 25 Copyright © 2007 Prentice-Hall. All rights reserved

IMA • Professional association for managerial accountants • Goal – Advance management accounting profession – Educate society about role of managerial accountants • Certifications – Certified Management Accountant (CMA) – Certified Financial Managers (CFM) 27 Copyright © 2007 Prentice-Hall. All rights reserved

Ethics • Statement of Ethical Professional Practice (IMA) – Maintain professional competence – Preserve confidentiality of information – Uphold their integrity – Perform duties with credibility – Consult an attorney 28 Copyright © 2007 Prentice-Hall. All rights reserved

Steps to Resolve Ethical Dilemmas • Follow company’s policies for reporting unethical behavior • If not resolved – Discuss with immediate supervisor – Discuss with objective advisor 29 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -13 a. The ______ IMA is the professional association for management accountants. b. The institute offers two types of certification: The _____ and _____. CMA focuses CFM c. The _____ exam on CMAaccounting topics, managerial economics, and business finance. 30 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -13 CFM exam focuses on financial d. The ______ statement analysis, business valuation, risk management, working capital policy, and capital structure. e. The institute’s monthly publication, called ________, addresses current Strategic Finance topics of interest to managerial accountants. 31 Copyright © 2007 Prentice-Hall. All rights reserved

Sarbanes-Oxley Act of 2002 • CEO and CFO - responsible for financial statements, internal control system, procedures for financial reporting • Audit committee – independent and should include a financial expert • CPA firms – limited non-audit services for audit clients and periodic quality review • Stiffer penalties for white-collar crimes 34 Copyright © 2007 Prentice-Hall. All rights reserved

Trends • Shift toward service economy • Competing in global marketplace • Time-based competition – ERP systems – E-Commerce – Just-in-Time Management • Total Quality Management 35 Copyright © 2007 Prentice-Hall. All rights reserved

Today’s Business Trends • Shift toward a service economy • Global competition • Time-based competition – Advanced information systems – E-Commerce – Just-in-Time management • Total Quality Management 37 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -16 a. To account for uncertainty in the amounts of future costs and benefits, we compute expected value by multiplying the _______ probability of each outcome by the dollar value of that outcome. b. To make a cost-benefit decision today, we present value must find the _______ of the costs and benefits that are incurred in the future. 38 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -16 c. The goal of _______ TQM is to meet customers’ expectations by providing them with superior products and services by eliminating defects and waste throughout the value chain. 39 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -16 d. Most of the costs of adopting ERP, JIT, expanding into a foreign market, or improving quality are incurred in the present ____, but most of the benefits occur in the _______. future 40 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -16 e. ________ Throughput time is the time between buying raw materials and selling the finished products. f. _____ serves the information needs ERP of people in accounting, as well as people in marketing and in the warehouse. g. Firms adopt _____ e-commerce to conduct business on the Internet. 41 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -18 1. What are the total costs of adopting JIT? Employee training $13, 500 Streamline production process 37, 000 Supplier identification 8, 000 Total costs $58, 500 44 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -18 2. What are the total benefits of adopting JIT? Savings in warehouse expenses Lower spoilage costs 46, 000 Total benefits $143, 000 $97, 000 45 Copyright © 2007 Prentice-Hall. All rights reserved

E 1 -18 3. Should Wild Rides adopt JIT? Why or why not? Expected total benefits $143, 000 Expected total costs(58, 500) Excess of benefits over costs $ 84, 500 Wild Rides should adopt JIT because the expected benefits exceed the costs. 46 Copyright © 2007 Prentice-Hall. All rights reserved

S 1 -8 Expected value of additional benefits: Outcome Benefits Probability Expected value Moderately successful $20 million 0. 85 = $17 million Extremely successful $80 million 0. 15 = $12 million $29 million 47 Copyright © 2007 Prentice-Hall. All rights reserved

S 1 -8 Total benefits: Benefits already realized $170 million Expected value of additional benefits 29 million Total expected benefits $199 million Total costs $200 million 48 Copyright © 2007 Prentice-Hall. All rights reserved

S 1 -8 The costs of $200 million just exceed the total expected benefits of $199 million. Under these circumstances, the quality program does not appear to have been a worthwhile investment. 49 Copyright © 2007 Prentice-Hall. All rights reserved