Managerial Accounting
Seventh Edition
James Jiambalvo
Chapter 1
Managerial Accounting in the Information
Age
Copyright ©2020 John Wiley & Sons, Inc.
Chapter Outline
Learning Objectives
LO 1 Explain the primary goal of managerial accounting and distinguish between
financial and managerial accounting.
LO 2 Define cost terms used in planning, control, and decision making.
LO 3 Explain the two key ideas in managerial accounting.
LO 4 Discuss the impact of information technology on business processes and
the interactions companies have with suppliers and customers.
LO 5 Describe a framework for ethical decision making and discuss the duties of
the controller.
LO 1
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Learning Objective 1
Explain the primary goal of managerial accounting and
distinguish between financial and managerial accounting.
LO 1
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Goal of Managerial Accounting
•
•
Managerial accounting is designed for internal users
The goal of Managerial Accounting is to provide the
information managers need for
o
o
o
LO 1
Planning
Control
Decision making
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Planning
•
•
Planning is a key activity for all companies
Communicates a company’s goals to employees
o
•
LO 1
Aids coordination of various functions such as sales and
production
Specifies the resources needed to achieve company goals
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Budgets for Planning
•
Budgets for planning
o
Profit budget
•
o
Cash flow budget
•
o
Indicates planned cash inflows and outflows
Production budget
•
LO 1
Indicates planned income
Indicates the planned quantity of production and expected
costs
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Production Cost Budget
LO 1
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Control
•
Organizations achieve control by:
o
o
Evaluating managers to determine how their performance
should be rewarded or punished
Evaluating operations to provide information as to whether
they should be changed or not
•
Managers can compare actual with planned results and
decide on corrective action
LO 1
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Planning and Control Process
LO 1
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Sample Performance Report
LO 1
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Managerial vs. Financial Accounting
•
Unlike Financial Accounting, Managerial Accounting:
o
o
o
o
o
LO 1
Is directed at internal users
May deviate from GAAP
Presents more detailed information
May present more nonmonetary information
Places more emphasis on the future
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Learning Objective 2
Define cost terms used in planning, control, and decision
making.
LO 2
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Full Costing Income Statement – Production
Equals Sales
•
Variable Costs
o
Increase or decrease in proportion to changes in volume or
activity
•
LO 2
Materials and labor are generally considered to be variable
costs
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Cost Terminology – Fixed Costs
•
Fixed Costs
o
Do not change in response to changes in volume or activity
•
LO 2
Depreciation and rent are examples of fixed costs
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Test Your Knowledge 1
Which of the following is most likely to be a variable cost?
a) Depreciation
b) Cost of materials←
c) Rent
d) Advertising
Answer:
b) Cost of materials
LO 2
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Test Your Knowledge 2
Which of the following is most likely to be a fixed cost?
a) Cost of materials
b) Rent←
c) Assembly labor cost
d) Commissions
Answer:
b) Rent
LO 2
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Cost Terminology – Sunk Costs
•
Sunk Costs
o
o
•
Opportunity Costs
o
LO 2
Costs incurred in the past
Not relevant to present decisions
Values of benefits foregone when selecting one alternative
over another
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Test Your Knowledge 3
Costs incurred in the past are:
a) Opportunity costs
b) Direct costs
c) Sunk costs←
d) Variable costs
Answer:
c) Sunk costs
LO 2
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Cost Terminology
•
Direct and indirect costs
o
o
•
Controllable and non-controllable costs
o
LO 2
Direct costs are directly traceable to a product, activity, or
department
Indirect costs are not traceable
A manager can influence controllable costs but cannot
influence non- controllable costs
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Direct and Indirect Cost
LO 2
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Test Your Knowledge 4
In the past year, Williams Mold & Machine had sales of $8,000,000
and total production costs of $6,000,000. In the coming year, the
company believes that production can be increased by 30%, but
this will require adding a second shift to work from 4:00 pm to 1:00
am.
1. Indicate three production costs that are likely to increase
because of adding a second production shift.
Material costs, workers’ salaries, and benefits are all likely to
increase.
LO 2
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Test Your Knowledge 5
In the past year, Williams Mold & Machine had sales of $8,000,000
and total production costs of $6,000,000. In the coming year, the
company believes that production can be increased by 30%, but
this will require adding a second shift to work from 4:00 pm to 1:00
am.
2. What production cost most likely will not increase when the
second shift is added?
Depreciation of the building will not increase.
LO 2
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Learning Objective 3
Explain the two key ideas in managerial accounting.
LO 3
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Two Key Ideas in Managerial Accounting
1. Decision making relies on incremental analysis—an
analysis of the revenues that increase (decrease) and the
costs that increase (decrease) if a decision alternative is
selected.
2. You get what you measure !
LO 3
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Incremental Analysis
•
Incremental analysis:
o
o
LO 3
Differences in revenues and costs between alternatives are incremental
Incremental revenue minus incremental cost equals incremental profit
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You Get What you Measure
Performance measures greatly influence the behavior of
managers
You Get What You Measure !
Performance Measures Drive Behavior
LO 3
Performance Measures
Potential Actions of Managers
Customers satisfaction at
auto repair shop
Give customers a loaner car while
auto is being repaired
Injuries on the job at home
construction site
Develop training program for new
employees at construction site
Sales to new customers of
office supply company
More sales calls on potential versus
current customers
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Test Your Knowledge 6
•
Jason Deen is the owner of Deen’s Custom Motorcycles. Recently, his
cousin, Jake, crashed his bike and brought it in for repairs. Jason
offered to fix the bike and charge his cousin for just the incremental
costs.
o
Which of the following is an incremental cost associated with the repair
job?
Depreciation on tools
b. Salary paid to the accountant at Deen’s
c.
Required parts←
d. Utilities (e.g., heat and electricity)
Answer:
c.
Required parts
a.
LO 3
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Learning Objective 4
Discuss the impact of information technology on business
processes and the interactions companies have with suppliers
and customers.
LO 4
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Information Age and Managerial Accounting
• Advances in information technology have:
o
o
LO 4
Increased competition and also created opportunities and
cost savings for firms that use information for strategic
advantage
Impacted information flows up and down the value chain
(i.e. fundamental activities that a firm engages in to create
value)
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The Value Chain
LO 4
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Impact of Software Systems on the Value
Chain
• Enterprise Resource Planning (ERP)
o
Computerize inventory control and production planning
• Supply Chain Management (SCM)
o
Organization of activities between a company and its
suppliers
• Customer Relationship Management (CRM)
o
LO 4
Manages information related to a variety of customer
interactions
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Big Data, Data Analytics and Artificial
Intelligence
• Big data is the term used to define the extremely large data
sets available to businesses
• Two important types of data analytics are descriptive and
predictive analytics
o
o
Descriptive summarizes past data
Predictive makes predictions about the future
• Artificial intelligence mimics human intelligence to perform
data analysis
LO 4
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Learning Objective 5
Describe a framework for ethical decision making and discuss
the duties of the controller.
LO 5
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Ethical and Unethical Behavior
• Examples of unethical behavior
o
o
Enron managers mislead investors by hiding debt, i.e.
Kenneth Lay, CEO, found guilty of fraud
WorldCom overstated profits
•
o
LO 5
Bernard Ebbers, CEO, received a 25-year prison sentence
Dennis Kozlowski, head of Tyco, was charged with avoiding
taxes
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Sarbanes-Oxley Act
• Enacted by Congress in July 2002
• Requires CEO and CFO to certify that the financial
statements do not contain any untrue statements or
omissions
• Bans certain types of work by the company’s auditors to
ensure their independence
o
LO 5
For example, bookkeeping services and designing financial
information systems are banned
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Sarbanes-Oxley Act Provisions
• Provides for longer jail sentences and larger fines for
executives (i.e. fines up to $5 million and jail terms up to
20 years)
• Requires companies to report on the existence and
reliability of internal controls
• Cost of compliance has been substantial
o
LO 5
Average cost of compliance was $7.8 million
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Framework for Ethical Decision Making
(1 of 2)
• When evaluating a decision, ask:
What decision alternatives are available?
2. What individuals or organizations have a stake in the
outcome of my decision?
3. Will an individual or an organization be harmed by any of
the alternatives?
4. Which alternative will do the most good with the least
harm?
5. Would someone I respect find any of the alternatives
objectionable?
1.
LO 5
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Framework for Ethical Decision Making
(2 of 2)
• After deciding on a course of action, but before taking
action, ask:
7.
8.
LO 5
At a gut level, am I comfortable with the decision I am
about to make?
Will I be comfortable telling my friends and family about
this decision?
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Institute of Management Accountants (IMA)
• Professional organization which focuses on management
accounting:
o
o
o
o
LO 5
Developed Statement of Ethical Professional Practice
Maintains ethics helpline
Callers are assigned a code number to preserve anonymity
Referred to a counselor
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Controller as Top Management Accountant
• Controller
o
o
o
o
LO 5
Prepares reports to plan and evaluate company activities
Provides information needed to make management
decisions
Files all financial accounting reports and tax filings with IRS
and other tax agencies
Coordinates activities of external auditors
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Duties of Officers (1 of 2)
• Treasurer
o
o
o
o
LO 5
Manages cash and marketable securities
Prepare cash forecasts
Obtains financing from banks and other lenders
Maintain relationships with investors, banks, and other
creditors
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Duties of Officers (2 of 2)
• Chief Information Officer (CIO)
o
Responsible for information technology and computer
systems
• Chief Financial Officer (CFO)
o
LO 5
Responsible for accounting and finance operations
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Organization Chart for the Controller’s Office
LO 5
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Decision Making Insight
Decision Making Insight
As discussed in this chapter, decisions are made to reward or punish
managers and to change operations or revise plans. Should a company
add a new product? Should it drop an existing product? Should a
company outsource a business process or perform it internally? What
should a company charge for a new product? Appropriate answers to
these types of questions are critical to firm profitability, and much of this
book will focus on how to address them. While gut feeling will always
play a role in decision making, so too will careful analysis. The type of
analysis we focus on is called incremental analysis, which is an analysis of
the costs and revenues that change when one decision alternative is
selected over another.
LO 5
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Copyright
Copyright © 2020 John Wiley & Sons, Inc.
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or from the use of the information contained herein.
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