CHAPTER 1 Fundamental Concepts PowerPoint Presentation by LuAnn Bean Professor of Accounting Florida Institute of Technology © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Managerial Accounting 11E Maher/Stickney/Weil 1 ☼ CHAPTER GOAL ☼ This chapter provides the groundwork for the book, including tying strategic cost analysis to the value chain. 2 LO 1 FINANCIAL ACCOUNTING: Definition Reports to users (shareholders, creditors, financial analysts, etc.) outside the organization. 3 LO 1 MANAGERIAL ACCOUNTING: Definition Reports results of activities to insiders (managers, etc.). 4 LO 2 When a product is a “commodity” how do you compete to achieve/maintain profitability? Compete by differentiating yourself from competition. Focus on order fulfillment, cutting costs, etc. 5 LO 2 Can/should the financial or tax accounting systems be used for managerial accounting purposes? NO! The objectives and therefore the information available for decision making is different. 6 LO 3 FINANCIAL PROFESSIONALS Financial VP: in charge of all accounting and finance Controller: manages cost and managerial accounting Treasurer: manages cash flows; raises cash Cost accountants/managers: analyze, manage costs Internal audit: provides auditing, consulting services 7 LO 4 ETHICAL, REGULATORY FRAMEWORK Standard setting Cost Accounting Standards Board sets cost accounting standards Professional organizations Institute of Management Accounts (IMA) sponsors professional certifications Certifications Certified Management Accountant (CMA) Certified Public Accountant (CPA) Canadian certifications Chartered Accountant (CA) Certified General Accountant (CGA) 8 LO 4 PREVENTING WHITE COLLAR CRIME Sarbanes-Oxley Act Passed in the aftermath of the Enron scandal Includes Making CEOs and CFOs sign and accept responsibility for financial statements Making CEOs and CFOs responsible for the company’s system of internal controls Creating the Public Company Accounting Oversight Board to oversee public auditors 9 LO 5 TYPES OF COSTS Opportunity costs Is the forgone income from using an asset in its best alternative Direct costs Relate directly to the cost object for which cost is to be measured Indirect costs Are indirectly related to the cost of a cost object Variable costs Change in total as the level of activity changes Fixed costs Do not change in total with changes in the level of activity 10 LO 5 How do costs and expenses differ? While a cost is the sacrifice of resources, an expense is a “gone” asset. 11 LO 6 Variable and fixed costs lumped together for financial purposes. EXHIBIT 1.3 EXHIBIT 1.2 Variable and fixed costs are presented separately for managerial purposes. 12 LO 7 ACTIVITY BASED MANAGEMENT (ABM): Definition Examines activities and their associated costs as a means of developing efficiencies and reducing non-value-added costs. 13 LO 7 What are “non-valueadded” activities? Non-value-added activities are activities that can be eliminated without reducing a product’s service potential to the customer. What are “value-added” activities? Value-added activities are activities that increase a product’s service to the customer. 14 LO 7 VALUE CHAIN: Definition Describes a linked set of activities that increase the usefulness (value) of products/services of an organization. 15 LO 7 Functions of the value chain help management identify value-added activities. EXHIBIT 1.4 16 LO 7 How do strategic and tactical cost management decisions differ? Strategic decisions choose between production alternatives. Tactical decisions make a particular production alternative more cost efficient. 17 LO 7 STRATEGY and VALUE CHAIN Strategic cost analysis identifies parts of the value chain that generate most profits, enabling management to position their business at the best profit points. 18 LO 7 ECONOMIC DEPRECIATION: Definition Measures decline in value of assets during a period using either sales value or replacement cost. 19 LO 7 COST OF CAPITAL: Definition Is the amount a firm could earn on its assets by putting them to their best alternative use. 20 LO 8 KEY DEVELOPMENTS IN MANAGERIAL ACCOUNTING Integrated information systems Tie managerial accounting, financial reporting, customer databases, supply chain management and other databases together Examples: ERPS, SAP Web hosting Allows companies to focus on core competencies while outsourcing portions of information systems Just-in-Time (JIT) and lean production Eliminate inventory between production departments and focus on quality and efficiency Continued 21 LO 8 KEY DEVELOPMENTS IN MANAGERIAL ACCOUNTING (cont.) Total quality management (TQM) Measures product reliability and service delivery as well as profitability while attempting excelling in all dimensions Theory of constraints (TOC) Identifies the weakest part of the process chain (constraint) and attempts to improve it Benchmarking and continuous improvement Benchmarking: continuous process of measuring products, services, activities against best performance levels, engaging in continuous improvement Fads 22 LO 9 INFORMATION Information is not free. Management must consider costs and benefits of information when designing an optimal accounting system. 23 LO 10 The Institute of Management Accountants promulgated the following standards of ethical conduct for management accountants. 1. 2. 3. 4. COMPETENCE - ongoing development of their knowledge and skills in preparing complete reports with relevant and reliable information. CONFIDENTIALITY – do not disclose confidential information acquired in the course of their work, except when authorized. INTEGRITY - Avoid actual or apparent conflicts of interest. OBJECTIVITY - Communicate information fairly and objectively. 24 LO 10 RESOLUTION OF ETHICAL CONFLICT 1. Discuss such problems with the immediate superior except when it appears that the superior is involved, in which case the problem should be presented initially to the next higher managerial level. 2. If the immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. 3. Clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible courses of action. 4. If the ethical conflict still exists after exhausting all levels of internal review, the management accountant may have no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization. 25 End of CHAPTER 1 26