The Accountant’s Role in the Organization. Chapter 1. 1/31/05. Learning Objective 1. Describe how cost accounting supports management accounting and financial accounting. Management Accounting. It measures and reports financial and nonfinancial information that helps
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Describe how cost
and financial accounting.
It measures and reports financial and
nonfinancial information that helps
internal managers make decisions to
fulfill the goals of an organization.
Its focus is on reporting to external parties.
It measures and records business transactions.
It provides financial statements based on
generally accepted accounting principles.
It provides information for both management
accounting and financial accounting.
It measures and reports financial and
nonfinancial data relating to the cost of
acquiring or using resources of the firm.
It describes the activities of managers in
short-term and long-term planning
and control of costs.
It includes the continuous reduction of costs.
It is a key part of general management
strategies and their implementation.
Understand how management
Providing quality products at low cost
Providing unique products or services
Building resources and capabilities
Building resources and capabilities to meet
the firm’s objectives in the Marketplace
Patents, trademarks, research capability, distribution network
Machinery & Equip, Buildings, Computers, Software
Distinguish between the
planning and control
decisions of managers.
Management Accounting System
What is planning?
to attain goals
Communicating the goals to the entire organization
What is control?
What are budgets?
of a proposed
plan of action.
They aid in the
of the plan.
What are performance reports?
These are reports that
compare actual results
with budgeted amounts.
Evaluation of actual
performance versus budget
Boone Shop, July 2003
Revenues $59,000 $60,000 $1,000 F
Cost of goods sold 42,000 43,400 1,400 U
Wages 6,700 7,000 300 U
General 1,300 900 400 F
Fixed costs 5,000 5,000 0
Operating income $ 4,000 $ 3,700 $ 300 U
Actual cost of goods sold were
72% of revenues instead of the budgeted 71%.
Revenues $59,000 100 $60,000 100
Cost of goods sold 42,000 71 43,400 72
Gross margin $17,000 29 $16,600 28
This involves managers examining past performance
and systematically exploring alternative ways to
make better informed decisions in the future.
Why did cost of goods sold increase?
How can that be prevented in the future?
Distinguish among the problem-
solving, scorekeeping, and
attention-directing roles of
This involves comparative analysis
for decision making.
This role asks: Of the several alternatives
available, which is the best?
Which computer system should we buy?
Which product line should we emphasize?
Which plant should be shut down?
This involves accumulating data and
reporting reliable results to
all levels of management.
This role asks: How is the business doing?
Are we generating enough sales?
Are our costs under control?
Are we generating sufficient cash flow?
This involves helping managers
properly focus their attention.
This role asks: Which opportunities and
problems should be emphasized first.
Attention directing should focus on all
opportunities to add value to an organization,
not just cost-reduction opportunities.
Identify four themes managers
need to consider for
The challenge facing managers is to continue
investing sufficient (but not excessive)
resources in customer satisfaction
such that profitable customers
are attracted and retained.
Adding value for the customer.
i.e., frequent flyer miles
This theme has two related aspects:
1. Treat each of the business functions in the value
chain as an essential and valued contributor. See
Exhibit 1-4, page 10
2. Integrate and coordinate the efforts of all business
functions in addition to developing the capabilities
of each individual business function.
These are operational factors that directly affect
the economic viability of the organization.
are under continuous
pressure to reduce costs.
Quality – customers
are expecting higher
levels of quality.
Time – organizations are under pressure to
complete activities faster and to meet
promised delivery dates more reliably.
Innovation – there is now heightened recognition
that a continuing flow of innovative products
or services is a prerequisite to the ongoing
success of most organizations.
Continuous improvement by competitors creates
a never-ending search for higher levels of
performance within many organizations.
You must keep up or stay ahead!
Describe the set of business
functions in the value chain.
The term “value chain” refers to the sequence of
business functions in which usefulness is added
to the products or services of an organization.
The term “value” is used because as the usefulness
of the product or service is increased, so is its value
to the customer.
Management accountants provide
decision support for managers in the
following six business functions:
R & D
Research and Development
It is the process that is conducted to generate
and experiment with ideas related to new
products, services, or processes.
These ideas may or may not result
in new products.
It is the detailed planning and engineering
of ideas that will become new
products, services, or processes.
How to configure the product, how to
build it, what features it will have,
functionality, efficient use of resources, etc.
It is the acquisition, coordination, and
assembly of resources to produce
a product or deliver a service.
Raw materials, machinery and
equipment, facilities, skilled workers, etc.
It is the manner by which companies
promote and sell their products
or services to customers
or prospective customers.
Advertising, direct contact, market
research, beta sites, etc.
It is the delivery of products or
services to the customer.
Direct sales, distribution network,
retail outlets, E-Commerce, etc.
It is the after-sale support activities
provided to customers.
Includes warranty, product support,
updates to software, hotline for
problem solving, etc.
Describe three ways
1. Cost-benefit approach
2. Full recognition of behavioral as well as
3. Using different costs for different purposes
A cost-benefit approach should be used in order
to spend resources if they promote decision
making that better attains organization goals
in relation to the costs of those resources used.
For example, will I earn more than what it costs
me to make it? Would a new budget process
provide more benefit that it would cost?
A management accounting system should have two
simultaneous missions for providing information:
1. To help managers make wise economic decisions
2. To help managers and other employees to aim and
strive for goals of the organization, add value to
products and help employees perform better.
A cost concept used for the external reporting
purpose need not be the appropriate concept
for the purpose of internal routine reporting
to managers. We do not have to follow GAAP
for internal reporting purposes. So we can
use various non-GAAP cost systems to
evaluate performance within the firm.
Understand how cost management
accounting fits into an
professional ethics mean
to management accountants.