Stern School of Business
Managerial Accounting
Summer 2005
Instructor:
Francois Brochet
An Introduction to Managerial
Accounting
How Managers Use Managerial Accounting
Information
The Managerial Accounting
Function

Provides Information for Product
and Service Costing

Provides Information for Planning
And Decision Making

Provides Information for
Performance Evaluation
Information to Determine the
Cost of Products and Services

Provides Information to determine the cost of
manufactured products and services
Information for Decision Making


Calculate the financial consequences of alternatives and
see how costs will differ among the alternatives.
Managerial accounting has little to do with recording
past costs, and much to do with estimating future costs.
Information for Planning and
Performance Evaluation
Cost accountants help management develop
effective planning tools and methods to
evaluate the performance of responsibility
centers.
Managerial Accountants
Record, measure,
determine and
analyze costs
Analyze operations and costs
to find ways to improve
operations and product
quality while reducing costs
Managerial Accounting and
GAAP
The primary purpose of
financial accounting is to
provide stakeholders
information regarding
company and management
performance.
 The financial data prepared
for this purpose are
governed by GAAP.

Generally Accepted
Accounting
Principles (GAAP)
are the rules,
standards, and
conventions that
guide the
preparation of
financial statements
for stockholders.
Managerial Accounting and
GAAP



Cost data for managerial use
need not comply with GAAP.
Management is free to set its
own definitions for Managerial
Accounting Information.
Decision makers often require
different information than that
provided in financial statements
to shareholders.
Differences Between Financial
and Managerial Accounting
Financial Accounting
Managerial Accounting
External persons who
make financial decisions
Managers who plan for
and control an organization
Historical perspective
Future emphasis
3. Verifiability
versus relevance
Emphasis on
verifiability
Emphasis on relevance
for planning and control
4. Precision versus
timeliness
Emphasis on
precision
Emphasis on
timeliness
5. Subject
Primary focus is on
the whole organization
Focuses on segments
of an organization
6. Requirements
Must follow GAAP
and prescribed formats
Need not follow GAAP
or any prescribed format
1. Users
2. Time focus
Creating Value in Organizations
Each step of the development, production, and
distribution process should add value to the
product or service offered.
Using Managerial Accounting
Information to Increase Value

Nonvalue-added activities – activities that
do not add value to the product or service.
Identify
Nonvalueadded
activities
Eliminate
Cost-Benefit Analysis
The process of comparing benefits with costs
associated with a proposed change within
an organization.
Costs
Benefits
Strategic Cost Analysis
If a company can eliminate nonvalue-added
activities, it can reduce costs without
reducing product value.
 Reduced costs, with no loss in value, means
the company has a competitive advantage.

Global Strategies
A strategic advantage exists when your
company has invested resources that make
it difficult for competitors to match.
 New entry into the market is difficult
because of the magnitude of investment
required.

E-Commerce
During 2001, many dot.com businesses
failed that might have benefited from
the application of managerial
accounting tools:
– cost concepts (Chap. 2)
– cost measurement (Chap. 4)
– cost estimation (Chap. 5)
– cost-volume-profit (Chap. 6)
– activity-based costing (Chap. 8)
– budgeting (Chap. 9)
– decision-making (Chap. 13)
Focusing on Customers
Without customers, the
organization loses its ability
to exist.
 Customers provide the
organization with its focus.
 Many companies identify
customers’ needs before
designing and producing
products.

Users of Managerial Accounting
Who are the
“customers” of cost
accounting?
Users of Managerial Accounting
Production needs cost
information to control
and improve
operations.
Users of Managerial Accounting
Mid-level managers
need cost information that
serves as a warning signal when
operations are different
from expectations.
Users of Managerial Accounting
I know that senior
managers use some
cost information to
assess overall
performance of the
company.
Managerial Accounting in HighTech Production Settings

Many companies have installed
computer-assisted methods of
– Manufacturing products,
– Merchandising products, or
– Providing services.

New technologies have had a
major impact on Managerial
Accounting.
Just-in-Time Method
In production or purchasing, each unit is purchased or
produced just in time for its use.
Lean Production

Companies eliminate inventories between
production departments . . .
– Making the quality and efficiency of production
the highest priority,
– Providing the flexibility to change quickly from
one product to another, and
– Emphasizing training and worker skills.
Total Quality Management
The organization is managed to excel on all
dimensions and quality is ultimately defined
by the customer.
Benchmarking and
Continuous Improvement


Benchmarking – The
continuous process of
measuring one’s own
products, services and
activities against the best
levels of performance.
Continuous – Managers and
employees are not satisfied
with a particular performance
but seek ongoing
improvement.
Theory of Constraints
Every organization usually has at least one
bottleneck that limits production.
 Management focuses on maximizing profits
by identifying constraints and increasing
capacity.

Theory of Constraints
Only actions
that strengthen
the weakest link
in the “chain”
improve the
process.
2. Identify
process
constraints
1. Measure
process
capacity
3. Use
bottlenecks
effectively.
4. Coordinate
processes
Activity-Based Costing
and Management
A product costing method that is useful in
industries where overhead is high relative to
other costs.
Activity-based costing assigns costs to
products based on several different
activities whereas traditional costing
methods only assign costs to products on
ABC
one or two different activities.
Activity-Based Costing
and Management
A product costing method that is useful in
industries where overhead is high relative to
other costs.
Traditional
method
ABC
Activities
“cost drivers”
Products
Products
Importance of Ethics
in Accounting


Ethical accounting practices build trust and
promote loyal, productive relationships with
users of accounting information.
Many companies and professional
organizations, such as the Institute
of Management Accountants (IMA),
have written codes of ethics which
serve as guides for employees.
– Code of Conduct for Management Accountants
IMA Code of Ethics for
Management Accountants
Four broad areas of
responsibility:
 Maintain a high level of
professional competence
 treat sensitive matters with
confidentiality
 Maintain personal integrity
 Be objective in all disclosures
IMA Code of Ethics for
Management Accountants
Follow applicable laws,
regulations and
standards.
Maintain
professional
competence.
Competence
Prepare complete and clear
reports after appropriate
analysis.
IMA Code of Ethics for
Management Accountants
Do not disclose confidential
information unless legally
obligated to do so.
Do not use
confidential
information for
personal
advantage.
Confidentiality
Ensure that subordinates do
not disclose confidential
information.
IMA Code of Ethics for
Management Accountants
Avoid conflicts of interest
and advise others of
potential conflicts.
Do not subvert
organization’s
legitimate
objectives.
Integrity
Recognize and
communicate personal and
professional limitations.
IMA Code of Ethics for
Management Accountants
Avoid activities that could
affect your ability to
perform duties.
Refrain from
activities
that could
discredit the
profession.
Integrity
Communicate
unfavorable as well as
favorable information.
Refuse gifts
or favors
that might
influence
behavior.
IMA Code of Ethics for
Management Accountants
Communicate information
fairly and objectively.
Objectivity
Disclose all information
that might be useful to
management.
IMA Code of Ethics for
Management Accountants
Resolution of Ethical Conflict
Follow established policies.
For unresolved ethical conflicts:
– Discuss the conflict with immediate superior.
– If immediate superior is the CEO, consider
the board of directors or the audit committee.
– Except where legally prescribed, maintain
confidentiality.
IMA Code of Ethics for
Management Accountants
Resolution of Ethical Conflict
Clarify issues in a confidential discussion
with
an objective advisor.
Consult an attorney as to legal obligations.
The last resort is to resign.