CHAPTER 1The Accountant’s Role in the Organization

Readings:Chapter 1: Cost Accounting : The Managerial Emphasis 14th Edition By HorngrenChapter 1: Managerial Accounting 12th Edition By Garrison et.al

Accounting Discipline OverviewManagerial Accounting – measures, analyzes

and reports financial and nonfinancial information to help managers make decisions to fulfill organizational goals. Managerial accounting need not be GAAP compliant.

Financial Accounting – focus on reporting to external users including investors, creditors, and governmental agencies. Financial statements must be based on GAAP.

Major Differences Between Financial & Managerial Accounting

Managerial Accounting

Financial Accounting

Purpose Decision making Communicate financial position to outsiders

Primary Users

Internal managers External users

Focus/Emphasis

Future-oriented Past-oriented

RulesDo not have to follow GAAP; cost vs. benefit

GAAP compliant; CPA audited

Time SpanUltra current to very

long time horizons

Historical monthly, quarterly reports

Behavioral Issues

Designed to influence employee behavior

Indirect effects on employee behavior

Strategy & Management AccountingStrategy – specifies how an organization

matches its own capabilities with the opportunities in the marketplace to accomplish its objectives

Strategic Cost Management – focuses specifically on the cost dimension within a firm’s overall strategy

Strategy & Management AccountingManagement accounting helps answer

important questions such as:Who are our most important customers, and

how do we deliver value to them?What substitute products exist in the

marketplace, and how do they differ from our own?

What is our critical capability?Will we have enough cash to support our

strategy or will we need to seek additional sources?

Management Accounting and ValueCreating value is an important part of

planning and implementing strategyValue is the usefulness a customer gains from

a company’s product or service

Management Accounting and ValueValue Chain is the sequence of business

functions in which customer usefulness is added to products or services

The Value-Chain consists of:1. Research & Development2. Design3. Production4. Marketing5. Distribution6. Customer Service

The Value Chain Illustrated

A Value Chain Implementation

Key Success FactorsThe dimensions of performance that

customers expect, and that are key to the success of a company include:Cost and efficiencyQualityTimeInnovation

Planning & Control SystemsPlanning selects goals, predicts results,

decides how to attain goals, and communicates this to the organizationBudget – the most important planning tool

Control takes actions that implement the planning decision, decides how to evaluate performance, and provides feedback to the organization

A Five-Step Decision Making Process in Planning & Control

1. Identify the problem and uncertainties2. Obtain information3. Make predictions about the future4. Make decisions by choosing between

alternatives5. Implement the decision, evaluate

performance, and learn

Management Accounting GuidelinesCost – Benefit approach is commonly used:

benefits generally must exceed costs as a basic decision rule

Behavioral & Technical Considerations – people are involved in decisions, not just dollars and cents

Different definitions of cost may be used for different applications

A Typical Organizational Structure and the Management Accountant

Professional EthicsThe four standards of ethical conduct for

management accountants as advanced by the Institute of Management Accountants:CompetenceConfidentialityIntegrityObjectivity

Professional Ethics

Earnings management—deliberate accounting adjustments to “hit” profit targets

Often adjustments involve cost accounting—product costs and inventory valuations

Stretching legitimate accounting techniquesOutright fraud

Potential Ethical Issues

Earnings management Low cost production at any cost Whistleblower retaliation Fixing prices Bribery and other corruption Hiding managerial acts

Accountants Financial accountants provide information to external

parties Investors Creditors Regulators Donors

Managerial accountants provide information to internal users Managers

Cost accountants provide information to both internal and external users Product cost information

Accounting DifferencesFinancial External focus Whole organization Historical Quantitative Monetary Verifiable GAAP Formal

recordkeeping

Managerial Internal focus Segments or divisions Current/projected Quantitative/qualitative Monetary and nonmonetary Timely/reasonable estimate Benefits exceed costs Formal and informal

recordkeeping

Product Costs Upstream costs

Research Development Product design Supply chain

Downstream costs Marketing Distribution Customer service

Relationship of Financial, Management, and Cost

Accounting

FINANCIALACCOUNTING

MANAGEMENTACCOUNTING

COSTACCOUNTING

Product Costs

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Product Cost Information External parties - stockholders, creditors,

regulators, and donors For investment and credit decisions Complies with GAAP Enterprise focus

Internal parties - managers Planning, controlling, and decision making Evaluating performance Includes upstream and downstream costs Disaggregated

Accounting BodiesFinancial Public Company

Accounting Oversight Board (PCAOB)

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

Management Institute of Management

Accountants (IMA) Society of Management

Accountants of Canada Cost Accounting

Standards Board (CASB)

Organizational Strategy

1. Develop mission statement2. Implement strategy3. Deploy resources to create value for

customers and shareholders4. Recognize that each organization is unique

—thus unique strategies must be developed

Organizational Strategy

Five factors core competencies organizational structure management style and organizational

culture organizational constraints environmental constraints

Organizational Strategies

Core competency—critical function or activity providing a competitive advantage

Cost leadership strategy—undercut competitor prices

Product differentiation strategy—superior quality products or unique services sold at a premium

Organizational Structure

Distribution of authority and responsibility in an organizationAuthority—right to use resources

to accomplish a task or achieve an objective

Responsibility—obligation to accomplish a task or achieve an objective

Organizational Constraints

Four common organizational constraints Monetary capital Intellectual capital Technology Environmental constraints

Value ChainA set of value-adding functions and processes that converts inputs into

products/servicesResearch and DevelopmentProduct DesignSupplyProductionMarketingDistributionCustomer Service

Communicate strategy to all members of the value chain

Balanced Scorecard Learning and Growth

The organization’s intellectual capital Internal Business

Things to do well to meet customer needs and expectations

Customer Value How well the organization is doing relative to

important customer criteria such as quality, service and price.

Financial Performance Address stockholders’/stakeholders’ concerns

about profitability and organizational growth

Ethics and Legislation

Sarbanes-Oxley Act—CEOs and CFOs personally accountable for the accuracy of their organization’s financial reporting

False Claims Act—whistle-blower protection and penalties for failure to blow the whistle (disclose known financial frauds)

Dodd-Frank Act—encourages whistle-blowing with awards from 10 to 30 percent of amount recouped

Ethics & Management Accountants

Standards of Ethical Conduct for Management AccountantsCompetenceConfidentialityIntegrityCredibility

Ethics in Multinationals

Foreign Corrupt Practices Act—prohibits bribes to obtain/retain a business

Organization of Economic Cooperation and Development Convention—crime to offer, promise, or give bribes to obtain/retain internal business deals

QuestionsWhat is the relationship among financial,

management, and cost accounting?How is the balanced scorecard used to

implement an organization’s strategy?Where can an accountant find ethical

standards for cost accounting?

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End of Lecture 1