Managerial accounting

Exam 1

Managers three primary responsibilities

Planning, directing/leading, controlling

Planning

Setting goals, determining recourses, and developing strategies for achieving organizational objectives

Directing/Leading

Overseeing operations, motivating employees, and ensuring activities align with plans.

Controlling

Monitoring progress, comparing results to expectations, and making adjustments when needed.

Financial Accounting

Focused on creating reports (such as income statements, balance sheets) for external users like investors, creditors, and regulators. Governed by standards like GAAP or IFRS.

Managerial Accounting

Focused on providing detailed, often forward-looking information for internal decision-making by managers. More flexible, with an emphasis on relevance and timeliness rather than strict compliance.

Decision making is

at the hears of both topics (financial and managerial)- managers rely on relevant information, and accounting provides it.

External vs. Internal focus is

the biggest divider between financial and managerial accounting.

Management accounting involves:

• Partnering in management decision making

• Devising planning and performance management systems

• Providing expertise in finance reporting and control

Who are the primary users of the information in managerial accounting

Internal users such as managers

who are the primary users of the information in financal accounting

External users, such as creditors, stockholders, and government regulators.

What is the purpose of the information in managerial accounting?

To help managers plan, direct, and control business operations and make business decisions.

What is the purpose of the information in financial accounting?

To help external users make investing and lending decisions.

What is the primary accounting product in managerial?

Any internal accounting report deemed worthwhile by management.

What is the primary accounting product in financial?

Financial statements

What must be included in the report, and how must it be formatted for managerial?

Mangement determines what it wants in a report, and how it wants it formatted. Reports are prepared only when management believes the benefit of using the report exceeds the cost of preparing the report.

What must be included in the report, and how must it be formatted for financial?

Generally Accepted Accounting Principles (GAAP) determine the content and format of financial statements.

What is the underlying basis of the information for managerial?

While some info is based on past transactions, managerial accounting focuses on the future. It provides info on both external and internal transactions.

What is the underlying basis of the information for financial?

The info is based on historical transactions with external parties.

what info characteristic is emphasized in managerial?

The information must be relevant.

what info characteristic is emphasized in financial?

The info must be reliable and objective.

What business “Unit” is the managerial report about?

Segments of the business, such as products, customers, geographical regions, departments, and divisions.

What business “unit” is the financial report about?

The company as a whole (consolidated financial statements). Limited segment data is provided in the footnotes.

How often are the managerial reports prepared?

It depends on management’s needs. Some reports are prepared daily, while others may be prepared only one time.

How often are financial reports prepared?

Annually and quarterly

Does anyone verify the managerial information?

There are no independent audits. However, the company’s internal audit function may examine the procedures used in preparing the reports.

Does anyone verify the financial information?

Independent certified public accountants (CPAs) audit the annual financial statements of publicly traded companies and express an opinion on the fairness of the financial information they contain.

Is the information required by an outside group/ government agency for managerial?

No authoritative body requires managerial accounting reports.

Is the information required by an outside group/ government agency for financial?

Yes, the securities and Exchange Commision (SEC) requires publicly trades companies to issue annual audited financial statements.

Is there any concern over how the reports will affect employee behavior in managerial?

Management carefully considers behavioral implications when designing the managerial accounting system.

Is there any concern over how the reports will affect employee behavior in financial?

The concern is about adequacy of disclosure; behavioral implications are secondary.

Role of Management Accountants

• Use immense cirtial thinking, insight, and judgement

• Valued fincancil advisors

• Assist with making ctiritcal business decisions

Managerial accounting is important to all careers (T or F)

True

Institute of management accountants (IMA)

• Professional association for management accountants in the US

• Vision: to be the leading resource for developing, certifying, connecting, and supporting accountants and financial professionals who work with companies and organizations.

• Issues the Certified Management Accountant (CMA) certification

CMA requirements

• Rigorous two-part exam:

• Two years of work experience

• Continuing professional education

• Baccalaureate degree

• SMAs earn more than double the salary of their non-CMA peers

@ parts of the CMA exam

1. Financial reporting, planning Perfomance and analytics.

2. Strategic Financial managment

IMA’s Statement of Ethical Professional Practice

• Maintain professional completeness

• Uphold their integrity

• Preserve confidentiality

• Perform duties with creditability

Steps to resolve ethical dilemmas

• First, follow company’s established policies

• If still unresolves:

Discuss with immediate supervision or next higher up

Discuss with objective advisor

• IMA anonymous hotline

Consult an attorney

Unethical Versus illegal behavior

• Not all unethical behavior is illegal, but all illegal behavior is unethical

• The IMA’s ethical princiles include honesty, fairness, objectivies, and responsibility- much borader than what is considered illegal

Data Analytics and Critical thinking

• Unstructured data has changed the way businesses operate.

• Small business use ready-to-use accounting software

• Large companies use enterprise resource planning (ERP) systems.

Integrate all of a company’s worldwide functions, departments, and data

• Data cannot stand on its own, requires critical thinking

• Improving quality of thought by skillfully analyzing, assessing, and reconstructing it

Knowledge Economy

More people in the service sector than in retail merchandising, manufacuting, constructions, mining, and agriculture combined

Globalization Implications

• need more accurate and timely information

• need to be aware of regulations and laws in the countries where they do business

• New management techniques from international competitors

Sustainability

Ability to the needs of the present without compromising the ability of future generations to meet their own needs.

Three pillars of sustainability

Social, environmental, and Economic

Triple Bottom Line

Recognizes a company’s performance should be viewed in terms of people, planet, and profit.

Sarbanes-Oxley Act of 2002

• Response to corporate accounting scandals, such as Enron and Worldcom.

• Purpose: to restore trust in publicly traded corporations, management, financial statements, and auditors.

• Enhances internal control ,financial reporting, and regulations.

Data Analytics

Using data to make good business decisions by turning raw data into actionable insights.

Data analytics Benefits

• Data-driven decisions

• Quicker decisions

• Increased efficiency of internal operations

• Specifically tailored marketing efforts

• Drive company innovation

Data Analytics Process

1. Business Issue: What business question needs to be solved

2. Data: what types of data are needed to answer the question? Where will the data come from?

3. Tools and Technology: What type of tools/analysis to use?

4. Analysis and Insights: Obtain and clean the data, perform the analysis, develop insights and potential action plans.

5. Communicate: Communicate insights and possible action plans using visualization to simplify/summarize

6. Follow through: Choose and Implement action plan, monitor results.

Formatting Cells (Excel)

Always type in numbers without formatting and then use the formatting icons to change the way numbers look on the spreadsheet.

Mathematical Operations (Excel)

Follows the order of operations rules

Relative cell (Excel)

All cells are relative references- if you copy/paste a formula to another cell, Excel will shift cell references to right/left and up/down on worksheet according to how far way the destination cell is from original cell in formula.

Absolute reference to a cell (Excel)

-Excel will not automatically shift the cells referenced in the formula according to their relative locations.

-Place a dollar sign in from of the reference you wish to hold constant.

Balance Sheet

A financial statement that reports a company’s assets, liabilities, and equity at a specific point in time.

Board of Directors

A group of individuals elected by a corporations shareholders to oversee the company’s activities and protect the interests of shareholders. They set broad company policies, select top executives, and ensure that the organization is being managed effectively and ethically.

Budget

A financial plan that estimates income, expenses, and resource allocation over a specific period, used for planning and controlling operations.

CMA (Certified management accountant)

A professional certification issued by the IMA to individuals who meet educational and experience requirements and pass a two part exam covering advanced accounting and financial management topics.

Controller

The top accounting officer in an organization, responsible for overseeing all accounting functions, including managerial accounting, financial reporting, and tax compliance.

Controlling

A managerial function that involves monitoring performance, comparing actual results to goals, and taking corrective action to ensure objectives are met.

Critical Thinking

The ability to objectively analyze and evaluate information, ideas, and arguments to form a judgement or solve problems.

Data

Facts, figures, and statistics collected from various sources, servicing as the foundation for analysis and decision-making.

Data Analytics

The process of examining raw data to identify patterns, trends, and insights that support informed business decisions.

Directing

The process of managing and overseeing the daily operations of a business, coordinating employee and resources to implement plans.

Income Statement

A financial statement that shows a company’s revenues, expenses, and profit or loss over a specific period.

Planning

A managerial responsibility involving setting goals and objectives for the future and determining the resources and actions required to achieve them.

Treasurer

The top finance officer responsible for managing the organization’s financial assets, including capital structure, investments, risk management, and investor relations.

Service companies

Provide intangible services (e.g. law firms, consulting) and generally have no inventory. (0)

Merchandising companies

Buy finished goods from suppliers and resell them (e.g. retail stores). They hold merchandise inventory. (1)

Manufacturing Companies

Produce goods from raw materials. They have three inventory accounts: Raw Materials, Work in Process, Finished Goods.

Raw Materials

Basic inputs

Work in Process

Partially completed goods.

Finished goods

completed items ready for sale

The what chain represents all activities that add value to a product of service?

Value

Whats included in the value chain?

1. Research and development- creating new ideas

2. Design- specifying product features

3. Production or Purchases- manufacturing or buying products

4. Marketing- Promoting products

5. Distribution- delivering to customers

6. Customer Service- after sale support

Direct Costs

Can be traced directly to a cost object (e.g direct materials, direct labor)

Indirect costs

Cannot be easily traced to a specific cost object; instead, they are allocated.

Manufacturing Overhead (MOH)

All indirect manufacturing costs (e.g. factory rent, utilities, maintenance, depreciation on equipment.)

Product Costs

Costs tied to goods produced or purchased; recorded as inventory until sold (DM+DL+MOH for manufacturing)

Period costs

Non-production costs (Selling, general, and administrative expenses) expenses in the period incurred.

Service

Income statement lists revenues - operating expenses = Operating income. NO inventory accounts

Merchandising

• COGS= Beg. Inventory + Purchases - Ending Inventory

• Income statement includes sales revenue, COGS, gross profit and operating expenses.

Manufacturing

COGM Schedule: DM+DL+MOH to total manufacturing costs + Beg. WIP - Ending WIP = COGM

Beg. FG + CPGM - Ending FG = COGS

Income statement follows merchandising format but with COGS derived from production costs.

Relevant Costs

Future costs that differ between alternatives (e.g. avoidable costs, incremental costs).- only relevant costs should be considered in decision making

Irrelevant Costs

Do not affect the decision (e.g., sunk costs, costs that are teh same for all options).

Fixed Costs

Stay constant in total within a relevant range regardless of activity (e.g. rent).

Variable Costs

Change in total in proportion to activity levels but remain constant per unit (e.g., direct materials).

Mixed Costs

Contain both fixed and variable components

Total Cost calculation

total cost= Fixed Cost + (variable cost per unit x units sold) Hence; total costs = Fixed Cost + Total Variable Costs

Cost

a monetary measure of the resource given up to acquire a good or service. A cost represents a future benefit (resource or asset) to the firm until they are used.

Expense

expired cost, because once the benefit has been used up, it is said to have expired and must be reported in the income statement as an expense.

Price

The retail selling price of the product or service charged to a customer and used to calculate revenue.

Cost Object

Anything for which managers want to know the separate measure of cost.

Cost are BLANK as they are measured and recorded in the general journal

Accumulated

Assigning a cost

how costs are allocated or attached to a cost object

Direct Materials (DM)

raw inputs directly used in the product

Direct Labor (DL)

Wages of workers who physically make the product

Manufacturing overhead (MOH)

includes: FACTORY rent, utilities, equipment depreciation, indirect materials (Lubricants, cleaning supplies), Indirect labor (supervisions, maintenance).

• Costs that are indirectly associated with manufacture of the finished product, this includes manufactoring costs that cannot be classified as DM or DL.

Product Costs - continued

• Begin on the BS

• in manufacturing: DM + DL + MOH

• recorded as inventory (asset) until the product is sold

• Expensed as COGS when sold. COGS is presented on the IS

Period Costs -continued

• Expensed in the period they are incurred

• not tied to production

Indirect Material

Raw materials that do not physically become part of the finished product or cannot be traced because their physical association with the finished product is too small in terms of cost.