Managerial Accounting Overview

The Meaning of Managerial Accounting

  • Definition: Managerial accounting is the provision of accounting information for a company's internal users.

  • Key Characteristics:

    • Not bound by generally accepted accounting principles (GAAP).

Three Broad Objectives of Managerial Accounting

  1. Provide Information for Planning:

    • Involves the detailed formulation of action to achieve specific ends.

    • Requires setting objectives and identifying methods to achieve them.

  2. Provide Information for Controlling:

    • Involves monitoring plans during implementation.

    • Takes corrective actions as needed, usually achieved by comparing actual performance with expected performance.

  3. Provide Information for Decision Making:

    • Involves the process of choosing among competing alternatives which is intertwined with planning and control.

Information Needs of Managers and Other Users

  • Comprehensive and Up-to-Date Information Needed For:

    • Planning

    • Controlling

    • Decision-making

Relationship Between Financial Accounting and Managerial Accounting

  • Basic Types of Accounting Information Systems:

    1. Financial Accounting

    2. Managerial Accounting

  • An accounting system should be designed to provide both financial and managerial accounting information.

  • Flexibility: The system should supply different information for different purposes.

Financial Accounting

  • Focus: Primarily concerned with producing information for external users (investors, creditors, customers, suppliers, government agencies, and labor unions).

  • Regulations: Financial statements must conform to specific rules defined by:

    • Securities and Exchange Commission (SEC)

    • Financial Accounting Standards Board (FASB)

    • International Accounting Standards Board (IASB)

  • Characteristics:

    • Externally focused

    • Must follow externally imposed rules

    • Objective financial information

    • Historical orientation

Managerial Accounting

  • Focus: Identifies, collects, measures, classifies, and reports financial and non-financial information useful to internal users in planning, controlling, and decision-making.

  • Characteristics:

    • Internally focused

    • No mandatory rules

    • Provides financial and non-financial information

    • Subjective information possible

    • Emphasis on the future

    • Internal evaluation and decisions based on very detailed information

Current Focus of Managerial Accounting

  • Business environments are constantly changing, requiring effective managerial accounting systems to advance in providing information to improve planning, control, and decision-making activities.

Important Uses of Managerial Accounting

  • Emergent Trends:

    • New methods of estimating product and service costs and profitability.

    • Growing use of data analytics in conducting and communicating managerial accounting analyses.

    • Understanding customer orientation across functional perspectives.

    • Providing information to improve total quality and measuring organizational performance's timeliness and efficiency.

Activity-Based Costing (ABC)

  • Definition: A more detailed approach to determining the cost of goods and services.

  • Purpose: Improves costing accuracy by emphasizing the cost of the many activities or tasks that must be conducted to produce a product or offer a service.

Data Analytics in Managerial Accounting

  • Managerial accounting analyses utilize various data analytic perspectives and techniques to create financial insights for improved decision-making across the company.

  • Managerial accountants utilize analytics to communicate their decision recommendations to decision-makers across the company.

Institute of Management Accountants (IMA) Framework

  • Explains exciting roles and interconnected skills, including:

    • Data Governance: Ensuring data integrity and security.

    • Data Analytics: Gathering and analyzing data to improve decision-making.

    • Data Visualization: Graphical or other presentation of data to improve interpretation.

Customer Orientation and Value

  • Definition of Customer Value: The difference between what a customer receives and what the customer gives up when buying a product or service.

  • Companies can establish a competitive advantage by creating better customer value at the same or lower cost than competitors.

Strategic Positioning

  • Effective cost information helps the company increase customer value and create a sustainable competitive advantage.

  • Leadership involves providing the same or better value at lower costs than competitors by different strategies (cost leadership, differentiation).

Value Chain Management

  • Definition: The set of activities required to design, develop, produce, market, and deliver products and services.

  • Involves understanding and measuring many functions of the business, including:

    • Initial design and engineering costs

    • Manufacturing costs

    • Distribution, sales, and service costs

Total Quality Management (TQM)

  • Definition: Continuous improvement involves the continual search for ways to increase efficiency and productivity by reducing waste, increasing quality, and managing costs.

  • Philosophy: Refers to manufacturers striving to create an environment that enables workers to produce perfect (zero-defect) products. This has replaced the acceptable quality attitudes of the past.

  • Role of Managerial Accounting: Provides information about quality to help enhance overall performance.

Lean Accounting

  • Purpose: Organizes costs according to the value chain and collects both financial and non-financial information.

Enterprise Risk Management (ERM)

  • Definition: A formal way to identify and respond to significant threats and business opportunities facing the organization.

  • Importance: Increasingly recognized for its role in long-term success.

Time as a Competitive Element

  • Time is considered crucial in all phases of the value chain:

    • Firms reduce time-to-market by compressing design, implementation, and production cycles.

    • Importance of delivering products or services quickly by eliminating non-value-added time, which goes hand-in-hand with increasing quality.

Role of the Managerial Accountant

  • Plays a critically important decision-making support role within an organization.

    • Helps those responsible for achieving the organization’s basic objectives by providing various types of performance measurement information.

    • Individuals in managerial positions have direct responsibility for the basic objectives, while other staff positions have indirect responsibilities.

Managerial Accounting and Ethical Conduct

  • Objective: Profit maximization should be constrained by the requirement that profits be achieved through legal and ethical means.

  • Ethical Behavior: Involves choosing actions that are right, proper, and just; behavior can be categorized as right or wrong, proper or improper.

  • Challenges: Employees may not realize ethical dilemmas when they arise.

Corporate Codes of Conduct

  • Organizations commonly establish standards of conduct often referred to as company codes of conduct.

    • Important parts include integrity, performance of duties, and compliance with the rules of law.

    • Uniformly prohibits acceptance of bribes, improper gifts, insider trading, and misappropriation of corporate information and assets.

Standards of Ethical Conduct for Managerial Accountants

  • Organizations establish standards of conduct for their managers and employees, while professional associations (AICPA and IMA) set ethical standards for accountants.

  • Professional accountants are bound by these codes of conduct.

Four Important Ethical Pillars

  1. Competence

  2. Confidentiality

  3. Integrity

  4. Credibility

Certification for Managerial Accountants

  • Forms of Certification:

    1. Certified Management Accountant (CMA)

    • Meets specific needs of managerial accountants and requires a rigorous qualifying examination, experience requirement, and continuing education.

    1. Certified Public Accountant (CPA)

    • Oldest and most recognized certification; ensures minimal professional qualification for external auditors. Only a CPA can legally serve as an external auditor, requiring a national examination and state licensing.

    1. Certified Internal Auditor (CIA)

    • Special certification for internal auditors ensuring technical competence and experience through a comprehensive examination.

Advantages of Certifications

  • Each certification offers particular advantages to a managerial accountant, evidencing the holder's professional competence level.

  • There is a connection between managerial accounting, internal auditing, and public accounting due to overlapping competencies and standards.