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Main point: Accounting reports are used for multiple purposes. ... Supplement historical cost accounting data with other knowledge ...

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Accounting for decision making and control second edition l.jpg

Accounting for Decision Making and Control, Second Edition

Jerold L. Zimmerman

Alumni Distinguished Professor

William E. Simon Graduate School of Business Administration

University of Rochester

Published by Richard D. Irwin, Inc.

1997

Slide 1-01 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Outline of Chapter 1 Introduction

Purposes of Managerial Accounting (pp. 4-6)

  • Decision Making

  • Control

    Design of Accounting Systems (pp. 7-16)

  • Design and Use of Systems

  • Evolution

  • Firm’s Organizational Structure

    Example of Decision Making (pp. 17-20)

    Outline of Text (pp. 20-21)

    Slide 1-02 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Decision Making - Product Management

Examples

  • Add new product

  • Terminate an existing product line

  • Accept or reject special order

    Related Topics

  • Operations management

  • Budgeting - capital and operating

  • Just-in-time (JIT)

    Slide 1-03 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Decision Making - Pricing

Examples

  • Set selling price to achieve desired profits

  • Set selling price to achieve positive cash flow

    Related Topics

  • Marketing

  • Microeconomics - Price Theory

  • Corporate Finance

    Slide 1-04 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Decision Making - Cost Control

Examples

  • Adding new equipment

  • Changing production process

  • Make internally versus buy externally (outsource)

    Related Topics

  • Process engineering

  • Management information systems

  • Activity-based costing (ABC)

    Slide 1-05 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Control - Incentives (p. 5)

Assumptions

  • Individuals maximize their own self-interest

  • Owners of firm want to maximize firm value

  • Maximizing firm profits maximizes firm value

    Incentives

  • Design performance incentives based on internal accounting measures to motivate employees to take actions that will maximize firm value

    Slide 1-06 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Control - Performance Evaluation

Examples

  • Performance bonuses depend on accounting results

  • Benchmarking: comparisons to industry leaders

    Related Topics

  • Organizational behavior

  • Human resources management

    Slide 1-07 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Design - Multiple Role of Accounting

Study Figure 1-1 at page 8.

Main point: Accounting reports are used for multiple purposes.

Slide 1-08 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Design - External Reports (p. 9)

Users of external reports

  • Shareholders, bondholders, and analysts (SEC, FASB)

  • Taxing authorities (IRS, states, etc.)

  • Regulatory authorities (GASB, etc.)

  • Board of directors

    Objectives in external reporting

  • Comparability between firms

  • Historical accounting

  • Auditors can verify reports

    Slide 1-09 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Design - Internal Reports (pp. 9-10)

Users of internal reports

  • Managers at all levels

    Objectives of internal reporting

  • Useful for decision making about future activities

  • Measure performance that is relevant to the firm

  • Focus on projects or processes within a firm

    Slide 1-10 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Design - Conflicting Goals (pp. 9-12)

Control

  • Incentives to motivate behavior changes

  • Tendency to ignore information not specifically included in incentive system

  • Report “good” numbers to satisfy top management

    Decision making

  • Want to avoid distorted information

  • Estimates useful to plan future activities

    Slide 1-11 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Design - Evolution (pp. 12-13)

Economic Darwinism:

Over the long term systems survive in competitive markets when the benefits exceed or equal the costs of maintaining those systems.

Survival does not imply optimality.

Better systems may exist, but have not yet been discovered.

Slide 1-12 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Design - Figure 1-2 (p. 14)

Study Figure 1-2 at page 14.

Main Point: In a typical corporation, the corporate controller is responsible for all internal and external accounting reports. There are also controllers in the operating divisions.

Slide 1-13 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Design - Organizational Structure (pp. 14-16)

Controller

  • Reports to chief financial officer (CFO)

  • Administers internal and external accounting

  • Budget planning

  • Controls financial data collection and reporting

    Balance providing information to other managers for decision making against providing monitoring information used to control behavior of lower-level managers.

    Slide 1-14 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Example - Vortec Special Order (pp. 17-18)

CurrentWith OrderIncremental

Units produced and sold100,000105,0005,000

Total Revenue and Costs

Sales ($5.00 regular, $4.00 special)$ 500,000$520,000$20,000

Direct labor and materials -300,000-315,000-15,000

Other factory costs -150,000-153,300-3,300

Administrative expenses- 26,000- 26,000 0

Net profit before taxes$ 24,000$25,700$ 1,700

Average Costs Per Unit

Sales$ 5.00$ 4.952$ 4.00

Factory (labor, materials, other)- 4.50-4.460- 3.66

Administrative- 0.26-0.248- 0.00

Incremental profit per unit$ 0.24$ 0.244$ 0.34

Slide 1-15 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Example - Beware of average costs (p. 19)

Average cost per unit at current production volume is usually not an accurate estimate of the cost per unit at other levels of production.

Production costs include:

  • fixed costs that do not change with volume

  • variable costs that do change with volume

    Costs may increase when production volume is near or above normal operating capacity.

    Slide 1-16 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Example - Consider opportunity costs (p. 20)

  • Opportunity costs measure what the firm forgoes when it chooses a specific action

  • Consider what a firm forgoes by accepting a special order

    Slide 1-17 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Example - Supplement accounting data (p. 20)

  • Supplement historical cost accounting data with other knowledge

  • Such as expected customer demands, competitors’ plans, future technology, and government regulation

    Slide 1-18 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Example - Accounting data for evaluation (p. 20)

When managers have incentives to maximize performance on one particular accounting measure, firm profits are not necessarily maximized.

  • Reducing average manufacturing costs per unit does not always maximize profit

  • Maximizing total revenue does not always maximize profit

    Slide 1-19 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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Outline of Text (pp. 20-21)

See Overview Figure at page vii in the preface.

ChaptersTheme

2-5Use of accounting for decision making and control

6-8Budgeting and cost allocations

9-13Absorption costing and alternative costing methods

14Integrative framework

Slide 1-20 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997


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