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Introduction. Chapter One. Outline of Chapter 1 Introduction. Managerial Accounting: Decision Making and Control Design and Use of Cost Systems Marmots and Grizzly Bears Management Accountant’s Role in the Organization Evolution of Management Accounting: A Framework for Change

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Introduction

Chapter One


Outline of Chapter 1 Introduction

  • Managerial Accounting: Decision Making and Control

  • Design and Use of Cost Systems

  • Marmots and Grizzly Bears

  • Management Accountant’s Role in the Organization

  • Evolution of Management Accounting: A Framework for Change

  • Vortec Medical Probe Example

  • Outline of the Text


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)


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


Decision Making - Cost Control

Examples

  • Add new equipment

  • Change production process

  • Make internally versus buy externally (outsource)

    Related Topics

  • Process engineering

  • Management information systems

  • Activity-based costing (ABC)


Control - Incentives

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


Control - Performance Evaluation

Examples

  • Performance bonuses depend on accounting results

  • Benchmarking: comparisons to industry leaders

    Related Topics

  • Organizational behavior

  • Human resources management


Acronyms – Understanding the Practicality and Applicability of these Concepts Matters

  • ABC – Activity-based cost systems

  • CAM – Computer-aided manufacturing

  • EDI – Electronic Data Interchange

  • ERP – Enterprise Resource Planning

  • JIT – Just-in-time

  • TQM – Total quality management


Design - Multiple Role of Accounting

Study Figure 1-1.

Main point: Accounting reports are used for multiple purposes.


Design - External Reports

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


Design - Internal Reports

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


Design - Conflicting Goals

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


Design - Evolution

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.


Design - Figure 1-2

Study Figure 1-2.

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.


Design - Organizational Structure

Controller

  • Reports to chief financial officer (CFO)

  • Administers internal and external accounting

  • Budget planning

  • Controls financial data collection and reporting

  • Growing role as internal consultants or business analysts to the point of being viewed as business partners

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


Evolution of Management Accounting:A Framework for Change

Business Environment

Business Strategy

  • Organizational Architecture

  • Decision-Right Assignment

  • Performance Evaluation

  • Reward System

Incentives and Actions

Firm Value


Example - Vortec Special OrderWith no overtime and congestion

Current With Order Incremental

Units produced and sold 100,000102,000 2,000

Total Revenue and Costs

Sales ($5.00 regular,

$4.00 special) $ 500,000 $508,000 $ 8,000

Cost of sales ($4.50, $4.47)450,000 455.940 -5,940

Administrative expenses - 27,500 - 27,500 0

Net profit before taxes $ 22,500$ 24,560$ 2,060

Incremental revenue (2,000 units x $4.00)$8,000

Total cost @ 102,000 units (102,000 x $4.47) $455,940

Total cost @ 100,000 units (100,000 x $4.50) 450.000

Incremental cost of 2,000 units -5,940

Incremental profit of 2,000 units$2,060


Example - Vortec Special OrderWith overtime and congestion

Current With Order Incremental

Units produced and sold 100,000102,000 2,000

Total Revenue and Costs

Sales ($5.00 regular,

$4.00 special) $ 500,000 $508,000 $ 8,000

Cost of sales ($4.50, $4.08 on

additional 2,000)450,000 458,160 -8,160

Administrative expenses - 27,500 - 27,500 0

Net profit before taxes $ 22,500$ 22,340$ - 160

Incremental revenue (2,000 units x $4.00) $8,000

Total cost @ 102,000 units (100,000 x $4.50)

plus (2,000 x $4.08) 458,160

Total cost @ 100,000 units (100,000 x $4.50) 450.000

Incremental cost of 2,000 units -8,160

Incremental profit of 2,000 units - 160


Example - Beware of Average Costs

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.


Example - Consider Opportunity Costs

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

  • Consider what a firm forgoes by accepting a special order


Example - Supplement Accounting Data

  • Supplement historical cost accounting data with other knowledge

  • Could include:

    • expected customer demands

    • competitors’ plans

    • future technology

    • government regulation


Example - Accounting Data for Evaluation

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


Outline of Text

See Overview Figure in the preface.

ChaptersTheme

2-5 Use of accounting for decision making and control

6-8 Budgeting and cost allocations

9-13 Absorption costing and alternative costing methods

14 Integrative framework


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