Chapter 1 Uses of Accounting Information and the Basic Financial ...

Financial & Managerial Financial & Managerial Accounting 2002eAccounting 2002e

Belverd E. Needles, Jr.Belverd E. Needles, Jr.Marian PowersMarian PowersSusan CrossonSusan Crosson

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Harry Hooper Santa Fe Community College

Chapter 15Chapter 15A Manager’s A Manager’s

Perspective: The Perspective: The Changing Business Changing Business

EnvironmentEnvironment

1. Define management accounting and distinguish between management accounting and financial accounting.

2. Explain the management cycle and its connection to management accounting.

3. Identify the management philosophies of continuous improvement and discuss the role of management accounting in implementing those philosophies.

LEARNING OBJECTIVESLEARNING OBJECTIVES

4. Define performance measures, recognize the uses of those measures in the management cycle, and prepare an analysis of non-financial data.

5. Identify the important questions a manager must consider before requesting or preparing a management report.

6. Compare accounting for inventories and cost of goods sold in merchandising, and manufacturing organizations.

7. Identify the standards of ethical conduct for management accountants.

LEARNING OBJECTIVESLEARNING OBJECTIVES

Definition of Management Accounting Definition of Management Accounting

The Institute of Management Accountants (IMA): “The process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial (and nonfinancial) information used by management to plan, evaluate, and control within the organization and to assure appropriate use and accountability for its resources.

Introduction to Introduction to Management AccountingManagement Accounting

OBJECTIVE 1

Define management accounting and distinguish between management accounting and financial accounting.

Management AccountingManagement Accounting

Management accounting is an extension of financial accounting and applies mainly to internal operations.

Management accounting focuses on the techniques and procedures for information gathering and reporting to management.

Managers need various types of timely, accurate information.

Product and service costing information.

Information for planning of and control over operations.

Special reports and analyses to assist in managerial decision making.

Management accounting is necessary for all forms and sizes of business. The types of data needed to ensure efficient

operations do not depend on an organization’s size.

All organizations can become more cost-effective and more profitable.

What Is Management Accounting?What Is Management Accounting?

Management accounting differs from financial accounting in many respects. Report format.

Purpose of reports.

Primary users.

Units of measure.

Nature of information.

Frequency of reporting.

Comparison of Management and Financial Comparison of Management and Financial AccountingAccounting

Areas ofComparison

ManagementAccounting

FinancialAccounting

Report format Flexible format, driven byuser's needs

Based on generallyaccepted accountingprinciples

Purpose ofreports

Provides information forplanning, control,performancemeasurement, anddecision making

Report on pastperformance

Primary users Employees, managers,suppliers

Owners, lenders,customers,government agencies

Comparison of Management and Financial Comparison of Management and Financial AccountingAccounting

Areas ofComparison

ManagementAccounting

FinancialAccounting

Units ofmeasure

Historical or future dollar;physical measure in timeor number of objects

Historical dollar

Nature ofinformation

Future-oriented; objectivefor decision making; moresubjective for planning;relies on estimates

Historical, objective

Frequency ofreports

Prepared as needed; mayor may not be on aregular basis

Prepared on a regularbasis (minimum ofonce a year)

Q.Q. What three types of information does management receive from the management accountant?

A.A. Product costing information, planning and control information, and special reports and analyses.

Discussion Discussion

The Management CycleThe Management Cycle

OBJECTIVE 2

Explain the management cycle and its connection to management accounting.

Management is expected to use resources wisely, operate profitably, pay debts, and abide by laws and regulations.

Expectations motivate managers to establish the objectives, goals, and strategic plans of the organization.

The Management CycleThe Management Cycle Traditionally, management operates in four stages:

1. Planning Long and short term. To support decision-making and set expectations.

2. Executing Hiring, scheduling, acquiring assets (including inventory),

reducing waster, generating revenues.

3. Reviewing Controlling operations. Comparing actual performance to plan.

4. Reporting To stockholders, creditors, other managers, other interested

parties.

Management accounting services information needs of management by:

1. Developing plans and analyzing alternatives.

2. Communicating plans to key personnel.

3. Evaluating performance.

4. Reporting the results of activities.

5. Accumulating, maintaining, and processing an organization’s financial and nonfinancial information.

Q.Q. What are the four stages of traditional

management?

A.A. 1. Planning.

2. Executing.

3. Reviewing.

4. Reporting.

Meeting the DemandsMeeting the Demandsof Global Competitionof Global Competition

OBJECTIVE 3

Identify the new management philosophies for continuous improvement and discuss the role of management accounting in implementing these philosophies.

New Management New Management PhilosophiesPhilosophies

Three significant new management philosophies are as follows:

1. Just-in-time (JIT) operating environment.

2. Total quality management (TQM).

3. Activity-based management (ABM).

New Management New Management PhilosophiesPhilosophies

All of these approaches are designed to:

1. Increase product quality.

2. Reduce waste and inefficiency.

3. Reduce cost.

4. Increase customer satisfaction.

The Continuous Improvement EnvironmentThe Continuous Improvement Environment

Theory of Constraints Theory of Constraints

Identify performance or production bottlenecks (limiting factors).

Overcome limitation. Identify next bottleneck.

The Goal: Continuous Improvement The Goal: Continuous Improvement Avoid complacency. Constantly seek a better method. Reduce defects or poor quality. Reduce or eliminate nonvalue-adding

activities.

Results: Product/service costs and delivery times reduced. Quality and customer satisfaction increases.

Q. What are the new management philosophies designed to accomplish?

A. 1. Increase product quality.

2. Reduce waste and inefficiency.

3. Reduce cost.

4. Increase customer satisfaction.

Performance MeasuresPerformance Measures

OBJECTIVE 4

Define performance measures, recognize the uses of those measures in the management cycle, and prepare an analysis of nonfinancial data.

Performance measures provide an

indication of an organization’s

performance in relation to a specific

goal or an expected outcome.

Examples of Performance MeasuresExamples of Performance Measures

Financial performance measures:1. Return on investment.

2. Net income as a percentage of sales.

3. Costs of poor quality as a percentage of sales.

Nonfinancial performance measures:1. Number of customer complaints.

2. Hours of inspection.

3. Time to fill an order.

Performance measures are useful in reducing waste in operating activities.

Management uses performance measures in all stages of the management cycle.

In planning to motivate.

In executing to guide, and assign costs.

In reviewing to improve future performance.

In reporting to communicate results.

Analysis of Nonfinancial Data – BankAnalysis of Nonfinancial Data – Bank

Kings Beach National BankSummary of Number of Customers ServedFor the Quarter Ended December 31, 20xx

Part A Number of Customers Served

Window October November DecemberQuarter

Totals

1 5,428 5,186 5,162 15,776

2 5,280 4,820 4,960 15,060

3 4,593 4,494 4,580 13,667

Totals 15,301 14,500 14,702 44,503

The Balanced ScorecardThe Balanced Scorecard

A framework that links the perspective of shareholders: Investors Employees Customers

with the organization’s mission, vision, plans, and resources.

Provides clear, measurable performance targets.

Analysis of Nonfinancial Data Analysis of Nonfinancial Data

Performance targets and measurements of business process may be nonfinancial.

Quality related performance measures are often nonfinancial.

Analysis of Nonfinancial Data – BankAnalysis of Nonfinancial Data – Bank

Kings Beach National BankSummary of Number of Customers ServedFor the Quarter Ended December 31, 20xx

Part B Number of Customers Served per Hour

Window October November DecemberQuarter

Averages

1 31.93 30.51 30.36 30.93

2 31.06 28.35 29.18 29.53

3 27.02 26.44 26.94 26.80

Totals 90.01 85.30 86.48 87.26

Q.Q. Give three examples of reports based on non-financial data that are useful to a bank manager.

A.A. Teller transaction analysis.

Drive-up window efficiency reports.

Time needed to complete a loan transaction.

Management Accounting Management Accounting Reports and AnalysisReports and Analysis

OBJECTIVE 5

Identify the important questions a manager must consider before requesting or preparing a management report.

The Four W’sThe Four W’s Report preparation depends on:

Why? Why are we preparing the report?

What? What information is needed?

Who? Who is the audience for the report?

When? When is the report due?

Q.Q. State and briefly explain the “four W’s” of preparing a managerial report.

A.A. Why is the report being prepared?

What information should be provided?

For whom is the report intended?

When is the report due?

Merchandising Versus Merchandising Versus Manufacturing OrganizationsManufacturing Organizations

OBJECTIVE 6

Compare accounting for inventories

and cost of goods sold in service,

merchandising, and manufacturing

organizations.

Comparison of Financial Statements for Service, Merchandising, and Comparison of Financial Statements for Service, Merchandising, and Manufacturing OrganizationsManufacturing Organizations

Service, Merchandising, and Service, Merchandising, and Manufacturing OrganizationManufacturing Organization

Different types of organizations have different financial reporting formats.

Examples: Service organizations maintain no inventories

for sale. Merchandising organizations only have one

inventory account. Manufacturing organizations use materials,

work in process and finished goods inventory accounts.

MerchandisersMerchandisers

Merchandisers purchase goods already manufactured, and resell them.

1. They accumulate the purchased cost of goods.

2. They have only one type of inventory (merchandise inventory.)

Merchandising Organization Merchandising Organization

Beginning Merchandise Inventory

+ Net Cost of Goods Purchased

- Ending Merchandise Inventory

= Cost of Goods Sold

ManufacturersManufacturers

Manufacturers design and

manufacture products for sale.1. They must accumulate the costs of

manufacturing products.

2. Their inventory consists of materials, work

in process, and finished goods.

Manufacturing OrganizationManufacturing Organization

Beginning Finished Goods Inventory

+ Cost of Goods Manufactured

- Ending Finished Goods Inventory

= Cost of Goods Sold

Service Companies Service Companies

Service Companies’ Cost of Sales = Net Cost of Services Sold

ManufacturingManufacturingVersus MerchandisingVersus Merchandising

Both types of organizations report:

The cost of unsold goods on the balance sheet.

The cost of goods sold on the income statement.

Q.Q. What three inventory accounts does a manufacturer maintain?

A.A. 1. Materials Inventory.

2. Work in Process Inventory.

3. Finished Goods Inventory.

Standards of Ethical ConductStandards of Ethical Conduct

OBJECTIVE 7

Identify the standards of ethical

conduct for management accountants.

Ethical ConflictsEthical Conflicts

May occur because different constituencies have different requirements.

Management must balance the needs of external partners.

Ethical StandardsEthical Standards

The management accountant’s ethical

standards relate to:

Competence.

Confidentiality.

Integrity.

Objectivity.

Competence StandardsCompetence Standards

Develop knowledge and skills on an ongoing basis.

Perform duties in accordance with relevant laws and technical standards.

Prepare complete and clear reports after appropriate analysis of information.

Confidentiality StandardsConfidentiality Standards

Refrain from disclosing confidential information.

Make sure that subordinates refrain from disclosing confidential information.

Refrain from using confidential information for unethical or illegal advantage.

Integrity StandardsIntegrity Standards Avoid actual or apparent conflicts of

interest.

Avoid activities that would prejudice one’s ability to carry out duties ethically.

Refuse any gift or favor that might influence one’s actions.

Avoid activities that could discredit the profession.

Integrity StandardsIntegrity Standards

Avoid activities that could threaten the organization’s legitimate and ethical objectives.

Acknowledge any professional limitations relative to the performance of one’s job.

Communicate both favorable and unfavorable information and opinions.

Objectivity StandardsObjectivity Standards

Communicate information fairly and

objectively.

Disclose fully all relevant

information to users.

Resolution of Ethical ConflictResolution of Ethical Conflict

Follow organizational policies. If these do not resolve the conflict:

Discuss with the immediate superior, or next higher level authority involved. (Do not communicate with external parties.)

Clarify issues with an objective advisor. Consult your own attorney about legal

obligations and rights. If ethical issues cannot be resolved, consider

resignation.

Q.Q. Management accountants must adhere to what four facets of ethical conduct?

A.A. 1. Competence.

2. Confidentiality.

3. Integrity.

4. Objectivity.

1. Define management accounting and distinguish between management accounting and financial accounting.

2. Explain the management cycle and its connection to management accounting.

3. Identify the management philosophies of continuous improvement and discuss the role of management accounting in implementing those philosophies.

OK, LET’S REVIEW . . .

CONTINUING OUR REVIEW . . .

4. Define performance measures, recognize the uses of those measures in the management cycle, and prepare an analysis of nonfinancial data.

5. Identify the important questions a manager must consider before requesting or preparing a management report.

AND FINALLY . . .

6. Compare accounting for inventories and cost of goods sold in merchandising and manufacturing organizations.

7. Identify the standards of ethical conduct for management accountants.

Chapter 1 Uses of Accounting Information and the Basic Financial ...

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