ACC406 Chapter 1 Publisher Notes

Chapter 1: Introduction to Managerial Accounting

Learning Objectives

• Explain the meanings and functions of managerial accounting as a critical tool for internal business decision-making.

• Differentiate between financial accounting, which focuses on external reporting, and managerial accounting, which supports internal management processes.

• Identify the evolving focus of managerial accounting in response to changes in technology, market conditions, and corporate governance.

• Describe the multi-faceted role of managerial accountants in organizations, highlighting their contributions to strategic planning, performance measurement, and operational efficiency.

• Explain the significant role of ethical behavior in the practices of managers and accountants, emphasizing accountability and transparency.

• Identify three former accounting designations in Canada that have been consolidated into the CPA designation.

CPA Competencies

• Evaluates management information requirements (Competency 3.1.1), ensuring the organization has the necessary data to inform strategic decisions.

• Analyzes implications of management incentive schemes (Competency 3.7.1), which align employee objectives with organizational goals to improve performance.

What Is Managerial Accounting?

• Definition: Managerial accounting provides relevant accounting information specifically for internal users, primarily management, to facilitate informed decision-making.

• Guidelines: Managerial accounting is not bound by Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), allowing flexibility in reporting.

• Objectives:

  • Provide timely and relevant information for planning actions, such as budget forecasting and resource allocation.

  • Offer data for controlling actions, enabling businesses to monitor performance and take corrective measures when necessary.

  • Support effective decision-making by presenting alternatives and outcomes.

Information Needs for Planning, Controlling, and Decision Making

• Planning: Involves detailed formulation of actions to achieve specific objectives, exemplified by supplier evaluation programs to ensure quality and cost-effectiveness.

• Controlling: Encompasses monitoring the implementation of a plan and taking corrective action as needed by comparing actual performance against expected performance metrics.

• Decision Making: Centers on choosing among competing alternatives, often requiring a thorough analysis of costs, benefits, and risks associated with each option.

Comparison of Managerial and Financial Accounting

• Target Users:

  • Financial Accounting: Primarily serves external users such as investors, creditors, and regulatory agencies.

  • Managerial Accounting: Targets internal users, including management at various levels of the organization.

• Restrictions:

  • Financial Accounting: Must adhere to externally imposed guidelines and standards, ensuring transparency for external stakeholders.

  • Managerial Accounting: Does not have obligatory guidelines, allowing for tailored reports to meet internal needs.

• Differences between Managerial and Financial Accounting:

  • Type of Information:

    • Financial Accounting: Emphasizes objective and verifiable historical information records.

    • Managerial Accounting: Primarily focuses on anticipated future events to guide decision-making.

  • Degree of Aggregation:

    • Financial Accounting: Concentrates on overall firm performance and financial health.

    • Managerial Accounting: Examines performance granularly, including at the departmental and product line levels.

  • Breadth:

    • Financial Accounting: Functions as a self-contained discipline.

    • Managerial Accounting: Engages with multiple disciplines such as economics and operations management to inform strategies.

  • Time Orientation:

    • Financial Accounting: Reports past events and outcomes.

    • Managerial Accounting: While it may include historical data, it centers on future projections and forward-looking analysis.

Accounting System

• Accounting systems should be designed to be versatile in calculating both financial and managerial accounting information, balancing compliance and strategic planning needs.

Triple Bottom Line (TBL)

• Definition: TBL represents a holistic framework encompassing financial, social, and environmental objectives that organizations must consider in their strategies.

• Pillars of TBL:

  • Profits: Financial impact and sustainability

  • People: Social impact, including community engagement and labor practices

  • Planet: Environmental sustainability and ecological stewardship

Current Focus of Managerial Accounting

• Changes in Focus: The practice has evolved due to advancements in technology, enhanced transportation, and improved communication systems.

• New Focus Areas:

  • Activity-based costing, which provides more accurate cost allocation.

  • Customer orientation emphasizing the importance of adding customer value.

  • Cross-functional evaluation to ensure collaboration across departments for greater efficiency.

  • Total quality management (TQM), focusing on continuous improvement and excellence in processes.

  • Emphasis on efficiency and speed in delivering products or services

New Methods of Costing Products and Services

• Activity-Based Costing (ABC): This methodology involves detailed cost allocation based on activities required to produce goods or services, providing insight into resource utilization and profitability.

Customer Orientation

• Customer Value: Focus on delivering value to customers is essential for achieving competitive advantage.

• Strategies to Increase Value:

  • Cost Leadership: Establishing a market position by offering the same or superior value at a lower cost.

  • Superior Products: Developing unique offerings that set the organization apart and attract customers.

  • Value Chain: Understanding all activities needed to design, develop, produce, market, and deliver products or services efficiently.

Cross-Functional Perspective

• Comprehending how various business functions interrelate is critical for enhancing overall quality and efficiency. Management accountants should be well-versed in knowledge spanning multiple business disciplines (e.g., finance, marketing, supply chain).

Total Quality Management (TQM)

• Continuous Improvement: A commitment to continually enhancing efficiency and quality through refined processes.

• Lean Accounting: This approach organizes costs according to the value chain and emphasizes waste reduction.

• Enterprise Risk Management (ERM): A structured approach for identifying, assessing, and responding to potential threats and opportunities in business operations.

Time as a Competitive Element

• Importance: The ability to deliver products and services timely adds significant value, while non-value-added time should be minimized to enhance overall performance.

Efficiency

• Assessment of Operational Efficiency: Defined, measured, and assigned costs provide crucial insights for evaluating operational efficiency and making informed strategic enhancements.

Management Accounting for Service and Not-for-Profit Organizations

• Concepts of management accounting apply not only to businesses but also to service organizations and non-profit entities, adapting the principles to fit unique operational contexts.

Role of the Management Accountant

• Support Role: Management accountants support the achievement of organizational objectives through sound financial practices and analyses providing key insights.

• Positions:

  • Line positions: Involve direct responsibility for achieving organizational goals.

  • Staff positions: Provide supportive, indirect contributions toward goal achievement.

Sarbanes-Oxley Act of 2002

• This act was enacted for enhanced oversight of public companies, focusing on key aspects such as:

  • Auditor Independence: Ensuring unbiased audit practices and reducing conflicts of interest.

  • Corporate Governance Regulation: Establishing frameworks for corporate accountability and ethics.

  • Management Control: Reinforcing management's responsibility for internal controls and financial reporting accuracy.

  • Internal Control Assessments: Mandating comprehensive evaluations of internal controls to promote reliability in financial statements.

  • Corporate Ethics Attention: Elevating the importance of ethical conduct within organizations.

Ethical Behaviour

• Profit maximization must be pursued while adhering strictly to both legal and ethical standards; businesses succeed by fostering trustworthy relationships with all stakeholders through integrity and transparency.

Core Values of Ethical Behaviour

• Honesty

• Integrity

• Promise keeping

• Fidelity

• Fairness

• Caring for others

• Respect for others

• Responsible citizenship

• Pursuit of excellence

• Accountability

Company Codes of Ethical Conduct

• Many organizations establish standardized codes of conduct to promote ethical behavior among employees. Key areas include integrity in decision-making, performance excellence, and unwavering compliance with laws.

Standards of Ethical Conduct for Managerial Accountants

• Professional associations, including CPA and IMA (Institute of Management Accountants), emphasize four core principles for managerial accountants:

  • Competence: Maintaining professional expertise to provide valuable services.

  • Confidentiality: Safeguarding the confidentiality of information acquired in the course of work.

  • Integrity: Upholding independence and avoiding conflicts of interest.

  • Credibility or Objectivity: Providing unbiased information that stakeholders can trust.

Challenges with Ethical Dilemmas

• Employees may not always recognize ethical dilemmas when they arise or may struggle to determine the correct actions to take in difficult situations, underscoring the need for ongoing ethical training and awareness.

Accounting Designations in Canada

• Certification: Serves as formal evidence of professional competence and emphasizes the enforcement of ethical behavior among practitioners.

• New Structure: The establishment of CPA Canada in 2013 involved the merging of three distinct accounting organizations, enhancing the profession’s cohesiveness.

Former Accounting Designations in Canada

• Certified Management Accountant (CMA)

• Chartered Accountant (CA)

• Certified General Accountant (CGA)These have now been amalgamated into the CPA (Chartered Professional Accountant) designation, nurturing a unified accounting profession.

Rationale for Amalgamation

• The merger aimed to strengthen the voice and representation of Canadian accountants in a progressively globalized business environment, ensuring consistency and professional standards across the country.