Chapter Themes:
 It’s all about using
information to plan,
control and make
decisions.
 Accountants produce
information and managers
use information.
Effective managers must be
adept at planning, controlling
and decision making.
Planning has to do with
budgeting in a managerial
context. It is in this way that a
company’s goals are
communicated to all
employees.
Budgets include profit
budgets, cash-flow budgets,
production budgets and
many others.
The notion of managerial control
has to do with measuring and
evaluating the performance of
both the manager and the
operation(s) for which the
manager is responsible.
There is an important distinction
to be made here. A manager is
evaluated, at least in part, based
on her overall performance. Each
operation for which she is
responsible is evaluated in order
to optimize future goals and
objectives.
An integral part of the
planning and controlling
process, decision making
includes both rewarding or
punishing managers for their
performance AND dropping,
adding or otherwise changing
some aspect of operations
going forward.
Managerial accounting:
1.
Is meant primarily for
internal users while
financial accounting is
meant for external users.
2.
Is not driven by GAAP.
3.
May be much more
detailed than financial
(external) accounting
reports.
4.
May include much
nonfinancial data.
5.
Is forward looking rather
than retrospective.
Although managerial
accounting is meant for
internal users (management)
and financial accounting is
meant for external users,
managers DO make use of
financial accounting
information.
The term “cost” appears in
many contexts and carries a
number of meanings.
Different categories of cost
terms are merely different
ways to look at costs or to
slice and dice cost
information. They are not
necessarily complementary
to or mutually exclusive of
other cost categories.
Variable costs: costs
that increase or
decrease (in total)
relative to increases or
decreases in the level of
business activity.
Fixed costs: costs that
do not change (in total)
relative to changes in
business activity.
Sometimes called “past
costs.” These costs are NOT
relevant to the decision
making process.
These are the values of
potential benefits foregone
when a decision is made.
Direct costs: costs that are
directly traceable to some
object such as a product,
activity or department.
Indirect costs: costs that are
NOT directly traceable to a
product, activity or
department.
Yet another way to slice and dice
costs. This time it has to do with
the degree of influence a
manager has over the cost. If a
management decision can
impact the cost in the short term,
it is considered controllable.
Conversely, if a manager cannot
influence (control) the cost in the
short term, then it is
noncontrollable. A manager’s
performance should NOT include
an assessment of
noncontrollable costs.
They are:
1.
2.
Decision making relies
on incremental
analysis—an analysis of
revenues and costs that
increase or decrease if a
particular decision
alternative is selected.
You get what you
measure!
Incremental means
“difference.” Here decision
making looks at the
difference between revenues
and expenses if selection (a)
is made as opposed to
selection (b).
Performance measurement
impacts management
behavior.
Controller: The top management
accountant responsible for
preparing information for
planning, controlling and
decision making.
Treasurer: The treasury function
is custodial in nature; custody of
assets.
Chief Financial Officer (CFO):
The senior executive to whom
both the controller and CFO
report.

By: Munawar Hameed