Financial & Managerial
Accounting 2002e
Belverd E. Needles, Jr.
Marian Powers
Susan Crosson
----------Multimedia Slides by:
Harry Hooper
Santa Fe Community College
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1
Chapter 15
A Manager’s
Perspective: The
Changing Business
Environment
LEARNING OBJECTIVES
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.
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3
LEARNING 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.
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4
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.
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Introduction to
Management Accounting
OBJECTIVE 1
Define management accounting and
distinguish between management
accounting and financial accounting.
Management 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.
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Management Accounting
 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.
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Management Accounting
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 costeffective and more profitable.
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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.
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Comparison of Management and Financial
Accounting
Areas of
Comparison
Management
Accounting
Financial
Accounting
Report format
Flexible format, driven by
user's needs
Based on generally
accepted accounting
principles
Purpose of
reports
Provides information for
planning, control,
performance
measurement, and
decision making
Report on past
performance
Primary users
Employees, managers,
suppliers
Owners, lenders,
customers,
government agencies
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Comparison of Management and Financial
Accounting
Areas of
Comparison
Management
Accounting
Financial
Accounting
Units of
measure
Historical or future dollar;
physical measure in time
or number of objects
Historical dollar
Nature of
information
Future-oriented; objective
for decision making; more
subjective for planning;
relies on estimates
Historical, objective
Frequency of
reports
Prepared as needed; may
or may not be on a
regular basis
Prepared on a regular
basis (minimum of
once a year)
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Discussion
Q. What three types of information
does management receive from the
management accountant?
A. Product costing information,
planning and control information,
and special reports and analyses.
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The Management Cycle
OBJECTIVE 2
Explain the management cycle and its
connection to management
accounting.
The Management Cycle
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.
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The 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.
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16
The Management Cycle
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The Management Cycle

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.
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Discussion
Q.
What are the four stages of traditional
management?
A.
1. Planning.
2. Executing.
3. Reviewing.
4. Reporting.
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Meeting the Demands
of 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
Philosophies

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).
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New Management
Philosophies

All of these approaches are designed to:
1. Increase product quality.
2. Reduce waste and inefficiency.
3. Reduce cost.
4. Increase customer satisfaction.
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The Continuous Improvement Environment
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Theory of Constraints
Identify
performance or production
bottlenecks (limiting factors).
Overcome limitation.
Identify next bottleneck.
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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.
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Discussion
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.
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Performance 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
Performance
measures provide an
indication of an organization’s
performance in relation to a specific
goal or an expected outcome.
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Examples 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.
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Performance Measures
 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.
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Analysis of Nonfinancial Data – Bank
Kings Beach National Bank
Summary of Number of Customers Served
For the Quarter Ended December 31, 20xx
Part A
Number of Customers Served
October
November
December
Quarter
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
Window
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The 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.
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Analysis of Nonfinancial Data
Performance
targets and
measurements of business process may
be nonfinancial.
Quality related performance measures
are often nonfinancial.
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Analysis of Nonfinancial Data – Bank
Kings Beach National Bank
Summary of Number of Customers Served
For the Quarter Ended December 31, 20xx
Part B
Window
Number of Customers Served per Hour
Quarter
Averages
October
November
December
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
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Discussion
Q. Give three examples of reports
based on non-financial data that are
useful to a bank manager.
A. Teller transaction analysis.
Drive-up window efficiency reports.
Time needed to complete a loan
transaction.
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Management Accounting
Reports and Analysis
OBJECTIVE 5
Identify the important questions a
manager must consider before
requesting or preparing a management
report.
The 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?




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Discussion
Q. State and briefly explain the “four W’s” of
preparing a managerial report.
A. Why is the report being prepared?
What information should be provided?
For whom is the report intended?
When is the report due?
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Merchandising Versus
Manufacturing 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
Manufacturing Organizations
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Service, Merchandising, and
Manufacturing 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.
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Merchandisers

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.)
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Merchandising Organization
+
-
Beginning Merchandise Inventory
Net Cost of Goods Purchased
Ending Merchandise Inventory
=
Cost of Goods Sold
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Manufacturers

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.
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Manufacturing Organization
Beginning Finished Goods Inventory
+
Cost of Goods Manufactured
-
Ending Finished Goods Inventory
=
Cost of Goods Sold
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45
Service Companies
Service Companies’ Cost of Sales = Net Cost of Services Sold
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Manufacturing
Versus Merchandising

Both types of organizations report:
 The
cost of unsold goods on the
balance sheet.
 The
cost of goods sold on the income
statement.
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Discussion
Q. What three inventory accounts
does a manufacturer maintain?
A. 1. Materials Inventory.
2. Work in Process Inventory.
3. Finished Goods Inventory.
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Standards of Ethical Conduct
OBJECTIVE 7
Identify the standards of ethical
conduct for management accountants.
Ethical Conflicts
May
occur because different
constituencies have different
requirements.
Management must balance the needs of
external partners.
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Ethical Standards
The
management accountant’s ethical
standards relate to:
 Competence.
 Confidentiality.
 Integrity.
 Objectivity.
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Competence 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.
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52
Confidentiality 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.
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Integrity 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.
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Integrity 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.
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Objectivity Standards
Communicate
information fairly and
objectively.
Disclose
fully all relevant
information to users.
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Resolution 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.
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57
Discussion
Q. Management accountants must adhere to
what four facets of ethical conduct?
A. 1. Competence.
2. Confidentiality.
3. Integrity.
4. Objectivity.
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58
OK, LET’S REVIEW . . .
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.
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59
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.
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60
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.
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61