Chapter 1: Accounting As a Tool For Management – Flashcards

1) Define managerial accounting 2) Describe the differences between managerial and financial accounting - who are the primary users of financial accounting information? - who are the primary users of managerial accounting information? 3) List and describe the four functions of management - a large part of a marketing manager's, a human resources manager's, and a production manager's job is decision making (they need a wealth of good information, as much of that information will be the product of a managerial accounting system)

*The Institute of Management Accountants (IMA)* = the leading worldwide professional organization for management accountants and finance professionals, first defined managerial accounting in 1981 as "the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control within an organization and to assure appropriate use of and accountability for its resources." - December 2008, the IMA issued the following revised definition: 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. *Managerial Accounting* = is the generation and analysis of relevant information to support managers' strategic decision-making activities - Managerial accounting adds value to the organization by helping managers do their jobs more efficiently and effectively - Management accounting adds value to the organization "by providing leadership, by supporting a company's strategic management efforts, by creating operational alignment throughout an organization, and by facilitating continuous learning and improvement."

*Internal Vs. External Users* 1) External Users - The information contained in financial statements benefits those external users who otherwise would have no access to financial or operating information about a company. 2) Internal Users - Managerial accounting, on the other hand, benefits internal users. It includes reports and information prepared for a range of decision makers within the organization. These reports come in a variety of formats, each designed to provide the ultimate decision maker with the appropriate information. - The information provided by managerial accountants is not disseminated to the general public - To do so would be to provide competitors with vital information about corporate strategies and capabilities. *Lack of Mandated Rules* 1) Financial Accounting - General Accepted Accounting Principles (GAAP) = all public companies that are traded on a US stock exchange and governed by the Securities Exchange Commission (SEC) must prepare financial statements following this - GAAP "rules" govern how transactions are valued and recorded and how information about them is presented. - Since external users of financial statements have no way to verify the reported information, GAAP provides a level of protection or assurance that the reports will follow certain standards. 2) Managerial Accounting - Managerial accounting, on the other hand, has no comparable set of rules governing what information must be provided to decision makers or how that information is presented - Managerial accounting is completely optional—a company does not have to prepare managerial accounting reports. However, a company is unlikely to be successful in the long run without adequate managerial accounting information to support decision makers *Focus on Operating Segments* - GAAP-based financial statements present a picture of the financial health of the company as a whole. Think about how inventory is reported on the balance sheet. - Because most managerial decisions are made at an operating-segment level, managerial accounting information must focus on smaller units of the company. - Decision makers need to know about product lines, manufacturing plants, business segments, and operating divisions. *Focus on the Future* 1) Financial Accounting - Financial accounting exists to report the results of operations. The basic financial statements always report on transactions and events that have already occurred. Thus, the information contained in these financial statements is historical in nature 2) Managerial Accounting - Managerial accounting, too, reports historical information, often with the purpose of comparing actual results to budgeted results - Managerial accounting helps managers to make decisions that will affect the company's future by projecting the results of certain decisions. That is the only way to evaluate whether a decision will have a positive or negative effect on the company. *Emphasis on Timeliness* 1) Managerial Accounting - Because of the nature of many business decisions, managerial accountants place more emphasis on the timely delivery of information than on the delivery of information that is precise to the penny 2) Financial Accounting - Financial accountants, in contrast, record transaction amounts to the penny, and it often takes weeks or even months after the end of the period to gather all of the necessary information to prepare accurate reports for external users. - But sometimes they might need to sacrifice precision for timeliness and make a decision without all the information they want.

Someone with authority must take responsibility for making decisions and directing operations. That person is a manager. Managers are found throughout the organization, from the lower operational levels up to the chief executive officer's suite. - Managerial accounting is designed to assist managers with four general activities: planning, controlling, evaluating, and decision making - While this list may appear to imply a linear relationship between the four activities, in practice that is not the case. Frequent feedback from all four activities creates more of a circular decision-making process. *Planning* Managers participate in both short-term and long-term planning activities 1) Long-Term Planning = A management activity that establishes the direction in which an organization wishes to go; often referred to as strategic planning. - Managers must decide where the company is currently and where they want it to be in the future. - Typical questions asked during the strategic planning process include "Who are we?" "What do we do?" "What value do we deliver to our customers?" "Why do we do what we do?" and "Where do we want to go?" Many organizations prepare a formal strategic plan that documents the answers to these questions and provides direction for a five- to ten-year period. 2) Short-Term Planning/Operational Planning = A management activity that translates the long-term strategy into a short-term plan to be completed within the next year. - One of the primary products of this planning stage will likely be a budget that specifies how resources will be spent to achieve the organization's goals *Controlling and Evaluating* - After plans have been put in place and the organization has begun to move toward its goals, managers become involved in controlling activities. 1) Controlling Activities = One of a manager's responsibilities that requires monitoring operations to identify problems requiring corrective action. - One purpose of controlling activities is to monitor day-to-day operations to ensure that processes are operating as expected. - Without control activities, the organization will not be able to track its performance in implementing the strategic plan. - All other things held equal, the more frequent the controlling activity, the faster an out-of-control process can be corrected. And generally, the faster the process is corrected, the better the results. 2) Evaluating Activity = One of a manager's responsibilities that involves comparing actual results to planned results and assessing the performance of an individual or group of individuals who were responsible for the results. - The results of this evaluation may lead to changes in business processes, or even in strategy. To help managers with their evaluations, managerial accountants often perform variance analysis and prepare performance reports. The information they prepare is used by managers as the basis for evaluating employees and awarding bonuses. *Decision Making* Decision Making = The process of choosing a course of action after considering available alternatives. - A human resource manager must select the best health care plan for the company's employees. A sales manager must decide whether to pay the sales staff a salary or a commission. An advertising manager must choose the campaign that will deliver the best message to potential customers. An operations manager must select the best piece of equipment. Managers face such choices on a daily basis. Before making a decision, they need information about the available alternatives. Managerial accountants provide much of that information. *Management in Action* - One of the planning activities that occupies managers is inventory planning. - Inputs to the planning process include projected sales forecasts, projected cabbage supply and prices, and anticipated manufacturing capacity. The outcome of this planning process includes a production schedule and an operating budget. - Managers monitor actual production rates and output, checking them against the plan to ensure that the desired inventory levels will be there when needed. - If a machine breaks down, causing production to slip behind schedule, managers might ask employees to work overtime or shift to another production line for a time. At the end of the month, they compare actual production to the plan, evaluate the results, and make any necessary changes to the plan for the next month. - Throughout this process, decision making takes place almost automatically, as managers decide what to do based on their controlling and evaluating activities. Sometimes managers face unexpected events and must evaluate their alternatives for responding.

- preparers of managerial accounting information are no longer solely number crunchers, but active participants in the decision-making process. - Across the organization, their skill at analyzing and interpreting financial and operating data is becoming more valuable. - These accounting personnel reported that the time they spend analyzing information and making decisions has increased, and they expect it to continue to increase. They are also spending more time doing strategic planning and internal consulting and less time preparing standard financial reports than in the past

1) How does information assist in achieving corporate strategy? 2) How does corporate strategy influence the selection of information used in decision-making activities?

In his book Competitive Advantage, management strategy expert Michael Porter argues that one important characteristic of effective management is a set of clear strategic priorities. But if those priorities are to be realized, the organization must develop supporting business processes and information systems. Managers must also realize that as strategies change, so must the accounting information that is used to monitor their achievement. *Product Differentiation Vs. Low-Cost Production* - Porter developed a strategic framework in which the firm has two ways to develop a competitive advantage: product differentiation and low-cost production. 1) Product Differentiation = t will seek ways to set its products apart from those of its competitors in terms of quality, design, or service - companies will want information on quality, such as defect rates, percentage of on-time deliveries, and customer satisfaction - must monitor product costs because if too much money is spent on quality the sales price will be too high to be competitive 2) Low-Cost Production = the company will set itself apart from competitors in terms of a lower sales price. - managers will be more interested in monitoring the production process - even a low-cost producer must monitor product quality because consumers demand a certain level of quality. 3) Both - managers must monitor external information, such as competitor actions, to evaluate the likelihood of successfully implementing the strategy. *Market Share: Build, Hold, Harvest, or Divest* - Strategies can also be classified based on a firm's approach to market share growth,9 or the trade-off between short-term earnings and market share - 4 Strategies: build, hold, harvest, and divest 1) Build = a company aims to increase its market share and competitive position relative to others in the industry, even at the expense of short-term earnings and cash flows. 2) Hold = a company seeks to maintain its current market share and generate a reasonable return on investment. - Useful information for monitoring a hold strategy would include percentage of sales from repeat customers, market share, return on investment, and gross margin 3) Harvest = focuses on short-term profits and cash, even at the expense of market share. - To monitor a harvest strategy, managers will want to know about gross margin and cash sales. 4) Divest = is appropriate when a company desires to exit a particular market. - Companies that want to build market share need information about sales volumes, sales growth, market share growth, sales from new customers, and customer satisfaction

*The Balanced Scorecard* = A collection of performance measures that track an organization's progress toward achieving its goals. - The selection of performance measures to be included on the scorecard is driven by the organization's strategy. The balanced scorecard is then used to communicate the corporate strategy throughout the organization. - While the balanced scorecard uses some financial performance measures, it places equal emphasis on non-financial performance measures, such as customer satisfaction, on-time delivery percentage, and employee turnover - 4 Categories 1) Financial 2) Customer 3) Internal Business Processes 4) Learning and Growth - What is important to understand at this point is that managers should not be limited to what financial results or projections imply. Instead, financial data should be balanced by customer and operational data, and all data should be evaluated based on the company's strategy. - Although the balanced scorecard was originally developed to measure the performance of for-profit organizations, it has also been applied to nonprofit organizations, governmental units, and service organizations. *Supply Chain Management* - Supply Chain = A network of facilities that procure raw materials, transform them into intermediate goods and then into final products, and deliver the final products to customers through a distribution system. - The supply chain's goal is to get the right product to the right location, in the right quantities, at the right time, and at the right cost. - A simple supply chain may include as few as three trading partners—one supplier, one company, and one customer. - A more complex supply chain might include hundreds of trading partners including multiple raw materials producers, manufacturers, service providers, distributors, retailers, and end users. - 4 Major Operational Categories in the Supply Chain Operations Reference (SCOR) Model 1) Plan 2) Source 3) Make 4) Deliver - many companies have turned to supply chain management systems for economic or strategic advantage. - managers develop a strategy for managing all the resources needed to meet customer demand. - The systems include metrics, or performance measures, that enable managers to monitor the supply chain's efficiency and effectiveness. *Just-In-Time (JIT) Inventory* = An inventory strategy that focuses on reducing waste and inefficiency by ordering inventory items so that they arrive just when they are needed. - Since goods are produced to customer order, not to anticipated demand, they are put into production as soon as the order arrives - This strategy greatly reduces warehousing costs. - Just-in-time inventory systems eliminate that extra inventory. Some companies have found they can reduce inventory levels by as much as 50 to 60 percent without affecting their ability to meet customer demand for the final product. - managers have also reworked manufacturing processes to eliminate unnecessary steps and enhance efficiency. The end result is a shorter production cycle and reduced financial investment in inventory. - A quality program is also a must, since no safety stock is available in the event that several units are found to be defective. *Enterprise Resource Planning (ERP) Systems* = A system used by companies to provide information to decision makers on a companywide basis by integrating all data from the company's many business processes into a single information system. - use systems such as SAP and Oracle to accumulate data and provide information to decision makers on a companywide basis. - The result is a system that can easily share production data with the accounting department and sales data with the production department.

1) Why is it important for an organization to have a code of conduct? 2) How can an employee's unethical behavior affect an organization? *Ethical Behavior* = Knowing right from wrong and conducting yourself accordingly, so that your decisions are consistent with your own value system and the values of those affected by your decisions. *Three Simple Tests of an Ethical Business Decision* 1) "Do I mind others knowing what I have done?" 2) "Who does my decision affect or hurt?" 3) "Would my decision be considered fair by those affected?" - Ethical business behavior is not the same as mere compliance with the law. It is doing the right thing, not just doing what you are required to do. In ethical behavior, the spirit of the law is more important than the letter of the law, and moral values and codes are more important than rules and policies. *Code of Conduct* = A set of core values that are meant to guide employees' behavior. - Institute of Management Accountants (IMA) = the leading professional organization for managerial accountants, which offers the Certified Management Accountant (CMA®) designation - The IMA's statement is just one example of a professional code of conduct, however. Other organizations, such as the American Institute of Certified Public Accountants, the American Marketing Association, the Financial Executives Institute, the Financial Planning Association, and the Society for Human Resource Management, have similar codes of conduct. - Unfortunately, it takes more than a code of ethics to promote ethical business behavior. - Hence there are two parts of good government; one is the actual obedience of citizens to the laws, the other part is the goodness of the laws which they obey." - Based on the 2011 survey, the top four observed unethical behaviors are misuse of company time (33%), abusive or intimidating behavior (21%), lying to employees (20%), and company resource abuse (20%). These behaviors are observed almost twice as frequently in companies that are undergoing significant change, such as a merger. - Clearly, failing to follow a corporate code of ethics can lead to serious consequences.