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Lecture Notes
Chapter theme: This chapter explains why managerial accounting is important to the future careers of all business students. It answers three questions: (1) What is managerial accounting? (2) Why does managerial accounting matter to your career? and (3) What skills do managers need to succeed? It also discusses the importance of ethics in business and corporate social responsibility.
I. What is managerial accounting?
A. Financial and managerial accounting: seven key differences
i. Users
1. Financial accounting reports are prepared for external
parties , whereas managerial accounting reports are prepared for internal users.
ii. Emphasis on the future
1. Financial accounting summarizes past activities.
Managerial accounting has a strong future orientation.
iii. Relevance of data
1. Financial accounting data should be objective and
verifiable. Managerial accountants focus on providing relevant data even if these data are not completely
1.2. objective or verifiable.
iv. Less emphasis on precision
1. Financial accounting focuses on precision when reporting
to external parties. Managerial accounting aids decision makers by providing good estimates as soon as possible rather than waiting for precise data later.
v. Segments of an organization
1. Financial accounting is concerned with companywide
reports. Managerial accounting focuses on segment reports. Examples of segments include:
a. Product lines, sales territories, divisions,
departments, etc.
vi. Managerial accounting – no externally imposed rules
1. Financial accounting conforms to GAAP and IFRS.
Managerial accounting is not bound by GAAP and IFRS.
vii. Managerial accounting – not mandatory
1. Financial accounting is mandatory because various outside
parties require periodic financial statements. Managerial accounting is not mandatory.
c. How should we execute? II. Why does managerial accounting matter to your career? A. Business majors
i. Marketing majors
1. Planning
a. How much should we budget for TV, print, and internet advertising? b. How many salespeople should we plan to hire to serve a new territory?
2. Controlling
a. Is the budgeted price cut increasing unit sales as expected? b. Are we accumulating too much inventory during the holiday shopping season?
3. Decision making
a. Should we sell our services as one bundle or sell them separately? b. Should we sell directly to customers or use a distributor?
ii. Operations management majors
1. Planning
a. How many units should we plan to produce next period? b. How much should we budget for next period’s utility expense?
2. Controlling
a. Did we spend more or less than expected for the
units we actually produced?
b. Are we achieving our goal of reducing the number
of defective units produced?
- Decision making a. Should we buy a new piece of equipment or upgrade our existing machine? b. Should we redesign our manufacturing process to lower inventory levels? iii. Human resource management majors
1. Planning
a. How much should we plan to spend for occupational safety training? b. How much should we plan to spend on employee recruitment advertising?
2. Controlling
a. Is our employee retention rate exceeding our goals?
b. Are we meeting our goal of completing timely
performance appraisals?
3. Decision making
a. Should we hire an on-site medical staff to lower our healthcare costs? b. Should we hire temporary workers or full-time employees?
B. Accounting majors i. The IMA estimates that more than 80% of professional accountants in the United States work in non-public accounting environments.
III. What skills do managers need to succeed?
A. Strategic management skills
i. Definition
- A strategy is a “game plan” that enables a company to attract customers by distinguishing itself from competitors.
ii. Customer value propositions
- Companies that adopt a customer intimacy strategy respond to individual customer needs better than competitors. Examples of companies that pursue this strategy include: a. Ritz-Carlton, Nordstrom, and Virtuoso
- Companies that adopt an operational excellence strategy strive to deliver products and services faster, more conveniently, and at a lower price than competitors. Examples of companies that pursue this strategy include: a. Southwest Airlines, Wal-Mart, and the Vanguard Group
- Companies that adopt a product leadership strategy strive to offer higher quality products than competitors. Examples of companies that pursue this strategy include: a. Apple, BMW, and Cisco Systems
B. Enterprise risk management
i. Enterprise risk management is a process used by a company to proactively identify the risks that it faces and manage those risks.
ii. Once a company identifies its risks, the most common risk management tactic is to reduce risks by implementing specific controls.
1. This slide contains a subset of the business risks and
controls shown in Exhibit 1-5 of the textbook. Collectively, these examples illustrate the diversity of risks that companies can face.
C. Process management skills
i. Key definitions
1. A business process is a series of steps that are followed in
order to carry out some task in a business.
2. A value chain consists of the major business functions that
add value to a company’s products and services.
2.3. constraint is the key to success.
a. The goal is to manage the constraint with the intent
of generating more business rather than cutting the workforce.
- The TOC offers a four-step approach to process improvement: a. First , identify the weakest link in the chain, which is the constraint. b. Second , do not place a greater strain on the system than the weakest link can handle – if you do, the chain will break. c. Third , concentrate improvement efforts on strengthening the weakest link. d. Fourth , if the improvement efforts are successful, eventually the weakest link will improve to the point where it is no longer the weakest link. At this point, the new weakest link must be identified and the improvement process starts over again.
D. Measurement skills i. The question you are trying to answer defines what you’ll measure and how you analyze it. For example:
1. If the question you wish to answer is what net income
should my company report to its stockholders, then you’ll be measuring and reporting historical financial data that complies with applicable rules.
2. If you are trying to determine how your company is serving
its customers, then you’ll be measuring and analyzing mostly non-financial, process-oriented data.
3. If you want to predict whether your company will need to
borrow money, then your measurement efforts will focus on estimating future cash flows.
ii. The primary purpose of this course is to teach you measurement skills that managers use every day to support their planning, controlling, and decision making activities. E. Leadership skills
i. To be an effective leader, you’ll need to develop six skills :
- You’ll need technical competence within your area of expertise and with respect to operations outside your functional area of expertise.
- You must be a person of high integrity.
- You’ll need to understand how to implement organizational change.
- You’ll need strong communication skills.
- You’ll need to be capable of motivating and mentoring other people.
- You’ll need to effectively manage team-based decision processes.
4. Credibility
a. Communicate information fairly and objectively.
b. Disclose all relevant information that could
influence a user’s understanding of reports and recommendations.
c. Disclose delays or deficiencies in information
timeliness, processing, or internal controls.
ii. Guidelines for resolution of an ethical conflict
1. Follow the organization’s established policies for resolving
ethical conflict. If this does not work, consider the following:
a. Discuss the conflict with immediate supervisor or
next highest uninvolved managerial level.
b. If immediate supervisor is the CEO, consider the
board of directors or the audit committee.
c. Contact above immediate supervisor should only be
initiated with supervisor’s knowledge, assuming the supervisor is not involved.
d. Except where legally prescribed, communication
with individuals not employed by the organization is not appropriate.
e. Clarify relevant ethical issues with an objective
advisor, such as a member of the IMA’s Ethics Counseling Service.
f. Consult an attorney regarding your
f.g. legal obligations.
B. Why have ethical standards?
i. Ethical standards are motivated by a very practical consideration— if the standards are not followed in business, then the economy and all of us would suffer.
ii. Abandoning ethical standards would lead to a lower standard of living with lower-quality goods and services, less to choose from, and higher prices.
V. Corporate social responsibility
A. Key definitions/concepts
i. Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions. CSR extends beyond legal compliance to include voluntary actions that satisfy stakeholder expectations.
ii. Stakeholders include groups, such as customers, employees, suppliers, communities, and envrionmental and human rights advocates, whose interests are tied to the company’s performance.
1. This slide presents examples of corporate social
responsibilities that are of interest to the six stakeholder groups just mentioned.
