Chapter 1 managerial accounting in the information age

The Level of Detail Managerial Accounting Managers need detailed information to plan, control, and make decisions about different organizational areas.. Variable Cost Per UnitVariabl

Chapter 1 Managerial Accounting in the

Information Age

CMA

Presentation Outline

I Goal of Managerial Accounting

II Comparison of Managerial and Financial

AccountingIII Variable vs Fixed Costs

IV Other Cost Terminology

V Key Issues in Managerial Accounting

VI Other Topics

A Planning

Plan

Plans communicate goals to employees to coordinate functions such

as sales and production Financial plans are often expressed in the

form of budgets (i.e., profit, cash, production budgets)

Action taken to Implement plan

Comparison of planned and actual

results Evaluation

Comparison of planned and actual

results Evaluation

Decisions to reward or punish

managers

Decisions to change operations

or revise plans

II Comparison of Managerial

and Financial Accounting

A The User of the Information

B The GAAP Requirement

C The Level of Detail

D The Emphasis on Nonmonetary

Information

E The Time Frame of Focus

A The User of the Information

agencies.

B The GAAP Requirement

Financial Accounting

Publicly traded companies and many private companies use generally accepted accounting principles

for financial accounting.

GAAP only

C The Level of Detail

Managerial Accounting

Managers need detailed

information to plan,

control, and make

decisions about different

organizational areas.

Financial Accounting External users of information are often satisfied with more

summarized information.

D The Emphasis on Nonmonetary Information

Managerial Accounting

Monetary information is

supplemented with

additional detail such as

quantity of materials used,

number of labor hours, etc.

Financial Accounting Primarily includes information regarding assets, liabilities, equity, revenues, expenses, and cash

flows.

E The Time Frame of Focus

Managerial Accounting

Uses past performance to

the extent it is useful

in making predictions

about the future.

Financial Accounting Primarily presents the

results of past transactions.

III Variable vs Fixed Costs

A Variable Cost Per Unit

B Variable Cost in Total

C Fixed Cost Per Unit

D Fixed Cost in Total

A Variable Cost Per Unit

Variable cost per unit remains constant

$

Level of Activity

Variable cost

per unit

B Variable Cost in Total

Total variable cost increases and decreases in

proportion to changes in the activity level

(See illustration on the bottom of page 7)

$

Variable cost

in total

C Fixed Cost Per Unit

Fixed cost decrease per unit as the activity level rises, and increase per unit as the activity level

falls

$

Level of Activity

Fixed cost per unit

D Fixed Cost in Total

Total fixed cost is not affected by changes in the activity

level within the relevant range (i.e., total fixed cost remains constant even if the activity level changes.

(See illustration in the middle of page 8)

$

Total fixed

cost

IV Other Cost Terminology

A Sunk Costs

B Opportunity Costs

C Direct and Indirect Costs

D Controllable and Noncontrollable Costs

A Sunk Cost

Costs that have been incurred in the past are irrelevant They are known as sunk costs and make no difference in future decisions

because they do not differ between

alternative courses of action

I have got to make this work out or I will look bad!

B Opportunity Cost

Opportunity costs are the benefits forgone when one

decision alternative is selected over another For example, extra floor space could be rented out or used to add production capacity The decision must consider the lost rental income if the floor

space is used for production

C Direct and Indirect Costs

object (i.e., product, activity, department).

cost object.

Note: The distinction between a direct and indirect

cost depends on the object of the cost tracing

(See Illustration 1-4 on page 9)

D Controllable and Noncontrollable

Costs

A manager can influence a controllable cost but cannot influence an uncontrollable cost A cost is that is controllable at a higher management level may be uncontrollable when allocated to a lower management level A manager should not be evaluated unfavorably strictly because a

noncontrollable cost increases

V Key Ideas in Managerial

Accounting

A Incremental Analysis

B You Get What You Measure

A Incremental Analysis

Incremental analysis is the appropriate way to

approach the solution to all business problems It involves the difference between the difference in revenue versus the difference in cost between

decision alternatives Only differences are relevant

to a decision (See illustrations on pages 10 and 11)

Does the above statement means that fixed costs are

always irrelevant and variable costs are always

relevant?

B You Get What You Measure

Companies can select from a vast number of

performance measures (profit, new customer sales,

number of defects, etc.)

Since rewards will often depend on how well an

employee performs on a particular measure, employees direct their attention to what is measured

and may neglect what isn’t measured

For example, suppose employees were evaluated on

quantity of production with little concern for

product quality

VI Other Topics

A Ethical Behavior

B The Roles of Company Officers

C The Certified Management Accountant

A Ethical Behavior

managers face are often gray rather than black and

white.

behavior since they often simply specify what cannot

be done rather than what should be done Many also

focus strictly on staying just within the law.

1 Am I comfortable with my decision?

2 Would I be comfortable in telling others about the

decision?

B The Roles of Company

Officers

information for management decision making (See

Illustration 1-6 on page 17)

various marketable securities.

company’s information technology and computer systems.

for both accounting and financial operations

C The Certified Management

Accountant

Accountants (IMA) has conducted a comprehensive exam to test if persons have the knowledge needed by a management accountant in

today’s business world

Certified Management Accountant (CMA) and can use the CMA designation on resumes and business

cards.

Planning, Control, and Decision Making

Financial vs Managerial Accounting (User, GAAP, Detail, Nonmonetary, Time Frame)

Variable vs Fixed Costs

Sunk, Opportunity, Direct, Noncontrollable