Introduction to Management Accounting (ACCT2102)

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Introduction to Managerial Accounting

Managerial Accounting Defined

The textbook provides one definition of managerial accounting and also discusses one of the principal organizations in the field - The Institute of Management Accountants (IMA). In August 2008, the IMA issued a proposal to revise the definition of management accounting and in January 2009 the Institute issued the finalized SMA - Definition of Management Accounting.

Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems,and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy.

Institute of Management Accountants, SMA - Definition of Management Accounting. January 2009.

<quiz display=simple> {Which of the following refers to accounting information developed for managers within an organization? |type="()"} - Internal auditing + Managerial accounting - Financial accounting - Tax accounting

{The primary users of management accounting information are: |type="()"} - bankers ||bankers rely on a combination of external financial statements and information provided by management. - governmental regulatory authorities ||governmental agencies rely on financial information prepared for the exclusive use of that authority. e.g. Tax forms filed with the IRS + internal decision makers ||correct! Managers make primary use of management accounting information for making various kinds of decisions effecting the entity. - suppliers ||suppliers will often rely on third party consolidators of financial information such as Dunn & Bradstreet.

{According to the SMA - Definition of Management Accounting cited above, management accountants are expected to play a role in which stages of the value chain? |type="()"} - business events and data - information and knowledge - decision making + all stages of the value chain ||correct! The role of the management accountant continues to expand in today's globally competitive and dynamic economy. Management accountants are now expected to play a role in all stages of the value chain. </quiz>

The Basic Business Model

Business model.jpg
  1. Debt & Equity Financing
    • Liabilities are economic obligations (debt) payable to an individual or organization outside the business. Examples include notes payable, bonds payable, credit cards payable, taxes payable, etc. Shareholders' Equity is the net assets (assets - liabilities) and represents the owner's net investment to the business enterprise
  2. People & Assets
    • The financial resources (debt and equity) are used to invest in physical assets (such as property, plant, equipment, inventory), intangible assets (such as patents, copyrights) and people to operate the business
  3. Revenues
    • Increases in ownership claims arising from delivery of goods or services.
  4. Profits
    • The excess of revenues over expenses.

Fundamentals of Management Accounting

There are three fundamental concepts of Management Accounting.

  1. Decision making relies on incremental analysis
    • incremental analysis (sometimes called marginal analysis) is the process of comparing the marginal revenues (MR) to marginal costs (MC) for a particular decision making situation. In general, if MR > MC, the opportunity is acceptable from a financial standpoint. For example, a manager evaluating the addition of a product line would need to consider (1) the additional revenues from this new product line, (2) any potential positive or negative effects on revenues of existing product lines, (3) additional costs associated with the new product line, and (4) any potential increases or decreases in costs associated with existing product lines. Are there any complimentary or competitive effects anticipated from the new product line? Does the new product line fit strategically with the current business model?
  2. Performance measurement influences management behavior and decision making.
    • Types of measures
      • Measures of Economy
        • Measures that focus on the inputs for an activity or process are measures of economy. These measures typically compare the resources used (or the costs of those resources) with planned resources. An example is the labor time (or cost) worked during the week compared to the budgeted labor time (or cost) for the week to operate a customer call center.
      • Measures of Effectiveness
        • Measures that focus on the output (results) or benefits of an activity or process are known as measures of effectiveness. An example of a measure of effectiveness is the number of customer calls handled during the week compared to the budgeted number of calls expected.
      • Measures of Efficiency (Productivity)
        • Measures of efficiency are ratios of inputs to outputs (either output/input or input/output). Measures or efficiency (also known as productivity) provide a more complete picture of the performance of an organization. An example of a measure of efficiency is the actual number of calls handled per labor hour compared to the budgeted number of calls handled per labor hour.
  3. Different information for different decisions
    • Each individual decision maker in an organization requires different information. A manager making daily pricing decisions requires one set of information while a manager making investment in fixed asset decisions requires a completely different information set. Management accountants need to provide appropriate information and the right time to support the decision making for a wide variety of circumstances.

Responsibility Centers

This course focuses on planning and analyzing the activities of three types of responsibility centers. Responsibility centers are segments of the organization that are responsible for a certain set of revenues, costs, and investment in assets.

  1. Investment Centers
    • A responsibility center whose success depends on both income and vested capital, perhaps measured by a ratio of income to the value of the capital employed.
    • Strategic planning and assessment through balanced scorecard
  2. Profit Centers
    • A responsibility center in which managers are responsible for revenues as well as costs (or expenses) - that is, profitability.
    • Operational planning and assessment through P&L reports
  3. Revenue Centers
    • A responsibility center in which managers are primarily responsible for revenues.
    • Operational planning and assessment through revenue analysis reports
  4. Cost Centers
    • A responsibility center in which managers are responsible for cost only.
    • Operational planning and assessment through cost reports

The Value Chain

  • The set of business functions or activities that add value to the products or services of an organization. These functions include:
  1. Research and development: the generation of, and experimentation with, ideas related to new products, services, or processes.
  2. Design of products, services, or processes: the detailed design and engineering of products, services, or processes.
  3. Production: the coordination and assembly of resources to produce a product or deliver a service. (Operations)
  4. Marketing: the manner by which individuals or groups learn about the value and features of products or services. (Marketing & Sales)
  5. Distribution: the mechanism by which a company delivers products or services to the customer. (Outbound Logistics)
  6. Customer service: the support activities provided to the customers. (Service)
  7. Support functions: the support activities provided by other internal business functions. (Firm Infrastructure, HR Management, Technology Development, Procurement)

For a detailed discussion of the Value Chain see the following article Wikipedia Value Chain and Quick MBA Value Chain

<quiz display=simple> {Gateway Computers has a major production center in North Sioux City, South Dakota. UPS has a collection area in this plant where products are packaged, labeled, and enter the UPS system. Gateway has opted to outsource this process of packaging, labeling, and delivering product to customers and is an example of: |type="()"} - Procurement or Support - HR Management or Support - Marketing & Sales + Distribution or Outbound Logistics

{Coca-Cola has it's headquarters here in Atlanta, Georgia. There are divisions all over the world, therefore it is necessary for the company to remain connected in all aspects of business. This is an example of: |type="()"} - Procurement - Human Resource Management - Firm Infrastructure + Technology Development

{Nike is a large company that is always looking for an advantage over the competition. They use different advertising strategies to attract customers to their products. This is closely related to |type="()"} - Human Resource - Distribution Center - Firm Infrastructure + Marketing and Sales

{If a company is always trying to come up with new product ideas, then they are concerned with |type="()"} - Human Resource - Distribution Center + Research and Development - Marketing and Sales

{The Geek Squad that Best Buy provides is an example of |type="()"} - Sales + Customer Service - R and D - Advertising </quiz>

The Planning & Control Cycle

Decision Making- the choice made from a set of alternative choices in order to reach a specific goal which is the core of the management process. Decisions range from the routine to the non-routine. There are 2 basic types of decisions within an organization:

  1. Planning
    • When you set the objectives for an organization and outline how it will attain them. It answers two questions: (1) What objectives want to be achieved? and (2) How will the objectives be achieved?
  2. Control
    • Implementing plans and using feedback to evaluate the attainment of objectives.

Example of the planning & control cycle:

  1. Identify Company Goals
    • Identify an overall, long-term goal that the firm would like to achieve. e.g. Several years ago in the annual report, Home Depot set a target of doubling revenue (a 100% increase in revenue) in a three year period time.
  2. Set Specific Objectives
    • Break the long-term goal into more well defined and more easily monitored short-term benchmarks. e.g. Home Depot could establish the objective of achieving 26% annual increase in revenues. With the effect of compounding, that will yield a 100% increase in three years. (see Rule of 72 for a short-cut on estimating the effect of compound interest rates in finance.)
    • Rule 72 is the number of years to double your money= 72/annual growth rate
  3. Develop Plans
    • Outline how each objective will be achieved. e.g. Home Depot may plan to achieve a 26% annual increase in revenues through a combination of activities such as opening new stores, mergers and acquisitions, service offering expansion, advertising, etc.
  4. Implement Plan and Control System
    • Put the plans to work so that each objective will be achieved. e.g. Home Depot may open new stores, buy local competition, start heavy advertising, etc.
  5. Evaluate Performance
    • This is where Management Accounting really begins to take a significant role. Number crunching starts.
  6. Modify Plans
    • Make adjustments to the plans to perform.

Apply Your Knowledge

Click below to download an Excel file with data from Apple's most recent quarterly results (Quarter 4, 2008) to analyze how the company is weathering the current economy.
Apple, Inc. Example Excel File - Performance Report

Lean Accounting Concepts

  • The supply chain (or value chain) is the set of value-creating activities undertaken to deliver goods and services to the customer
  • Lean management is the process of eliminating cost, reducing lead-time and a host of non-value added activities and processes from the supply chain
  • The Lean Model
    1. Identify supply chain constraints
    2. Decide how to exploit the constraint(s)
    3. Subordinate all other decisions
    4. Elevate the constraint
    5. Repeat from step 1
  • Advantages of the Lean Model
    • Decreased production lead times
    • Improved quality of products and services
    • Reduced inventory levels
    • Reduced bottlenecks
    • Increased profitability
    • Curbing of statistical fluctuations
    • Improved competitive position
    • Facilitate strategic marketing and operational decisions
    • Use of marginal pricing
    • Continuous improvement

The Institute of Management Accountants and the CMA

  • Institute of Management Accountants (IMA) is the largest U.S. professional organization focused on internal accounting and they oversee the CMA program.
  • IMA Mission Statement: To provide a dynamic forum for management accounting and finance professionals to develop and advance their careers through certification, research and practice development, education, networking, and the advocacy of the highest ethical and professional practices.
  • Certified Management Accountant (CMA) is the management accountant's counterpart to the certified public accountant (CPA).
    • CMA's must pass a four-part examination:
    • (1) Business analysis
    • (2) Management accounting and reporting
    • (3) Strategic management
    • (4) Business applications
  • The IMA is also responsible for the development and implantation of a professional code of conduct for management accountants. This statement can be found at the IMA's website here Statement of Ethical Professional Practice

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