The Changing Role of Managerial

Accounting in a Dynamic Business

Chapter 1
 Objectives

Define managerial accounting and describe its role in the management

Describe the roles of an organization’s chief financial officer (CFO) or controller,

treasurer, and internal auditor.

 Understand and explain the value chain concept.

 Explain how investments in capacity affect managerial decision making.

 Discuss the professional organizations and certifications in the field of managerial

accounting.

 Describe the ethical responsibilities and ethical standards that apply to managerial

accounting
Managerial Accounting: A Business Partnership with Management

Managerial accounting: is the process of identifying, measuring, analyzing, interpreting, and

Managerial accounting is an integral part of the management process, and managerial accountants
are important strategic partners in an organization’s management team. But note that the actions
listed above are not done just by accountants: all managers use the tools of managerial accounting.

Managerial accountants: are specialists in using the tools of managerial accounting to help the organization
and its managers run the operation effectively.
Fundamental management processes that help organizations attain their goals.

1. Decision making
2. Planning
3. Directing operational activities

4. Controlling
 Decision making

Several years ago, Disney’s board of directors decided that one of the company’s
growth objectives would be to expand its theme park operations in Florida. It was not
immediately clear, however, what would be the best way to accomplish that goal.
How would each of these alternative courses of action mesh with the company’s
other goals of bringing the best in creative entertainment to its customers and
maintaining sound financial discipline
 Planning
Disney’s top management team decided to expand the company’s Florida operations by
building an entirely new theme park named Disney’s Animal Kingdom.

What food and beverage operations would be appropriate? How many employees
would be needed on a day-to-day basis? What supplies would be required to run the
park? How much would electricity and other utilities cost? How much would running
the park during a typical year cost?
Disney’s management team had to plan for running the Animal Kingdom, which meant
developing a detailed financial and operational description of anticipated operations
 Directing Operational Activities
Running the organization on a day-to-day basis.

How many cashiers should be on duty on Saturday morning? How much food should be ordered each day? How
much cash will be needed to meet the payroll, pay the utility bills, and buy maintenance supplies next month?
 Controlling
Means ensuring that the organization operates in the intended manner and achieves
its goals
Is the company’s goal being accomplished?
have the theme park’s operations adhered to the plans developed by management for
achieving the goal?
 How Managerial Accounting Adds
Value to the Organization
Objectives of Managerial Accounting Activity: Managerial accounting activity comprises a set of tools,
systems and perspectives that add value to an organization by supporting five major objectives:
1. Providing information for decision making and planning.( decision to establish the new investment )
2. Assisting managers in directing and controlling operational activities. ( Attention directing function).
3. Motivating managers and other employees toward the organization’s goals and what activities are to be emphasized .
(indicates how resources are to be allocated)
4. Measuring the performance of activities, subunits, managers, and other employees within the organization. (such
measurements then can be used as the basis for rewarding performance through positive feedback, promotions,
and pay raises)
5. Assessing the organization’s competitive position, and working with other managers to ensure the organization’s
long-run competitiveness in its industry . (continually assess how an organization stacks up against the competition,
with an eye toward continuously improving)
Continued..
the questions asked in assessing an organization’s competitive position are the following:
How well is the organization doing in its internal operations and business processes?
How well is the organization doing in the eyes of its customers? Are their needs being served as well as possible?
How well is the organization doing from the standpoint of innovation, learning, and continuously improving
operations? Is the organization a trendsetter that embraces new products, new services, and new technology? Or
is it falling behind?

How well is the organization doing financially? Is the enterprise viable as a continuing entity?
 The Balanced Scorecard
balanced scorecard: Tool that is used to assess competitive position and ensure long-run competitiveness.

balanced scorecard is a model of business performance evaluation that includes several types of financial and
nonfinancial performance measures.
The Balanced Scorecard
Managerial versus Financial Accounting
The focus of managerial accounting is on the needs of managers within the organization, rather than interested parties outside the
organization.

Financial accounting: by contrast, is the use of accounting information for reporting to parties outside the organization.

cost accounting system: accumulates data about the costs of producing goods and services. These data are used in both
managerial and financial accounting.
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Differences between Managerial and Financial Accounting
 Organization Chart
line positions are directly involved in the provision of goods or services.
staff positions supervise activities that support the overall mission, but they are only
indirectly involved in operational activities. (,e.g. CFO)
CFO or Controller (chief financial officer): is the organization’s top managerial
and financial accountant. The CFO has responsibility for supervising the accounting
and finance specialists throughout the company and for preparing the information
and reports used in both managerial and financial accounting.
 Organization Chart
Treasurer: The treasurer typically is responsible for raising capital and safeguarding the
organization’s assets. In addition, the treasurer is responsible for management of the organization’s
cash and investments, its credit policy, and its insurance coverage.

Internal auditor: who in larger organizations is the director of an internal audit department, is
responsible for reviewing the accounting procedures, records, and reports in both the managerial and
financial accounting areas of responsibility.
 Managerial Accounting and the Value
Chain
Many activities are involved in securing basic raw materials and turning them into valuable products
or services.
Value chain: The set of linked, value-creating activities, ranging from securing basic raw materials
and energy to the ultimate delivery of products and services.
Customers must “value” the activities in the value chain, because unless customers are willing to pay
the cost of those activities plus an appropriate amount of profit, the company will fail
Managerial Accounting and the Value
Chain
In order for a company to achieve a sustainable competitive
advantage:
1. perform one or more activities in the value chain at the same quality level as its competitors, but at a lower cost
2. perform its value chain activities at a higher quality level than its competitors, but at no greater cost.

cost drivers: Understanding the value chain, and the factors that cause costs to be incurred in each activity in the

value chain.

strategic cost management: The overall recognition of the importance of cost relationships among the activities in

the value chain, and the process of managing those cost relationships to the firm’s advantage
 Capacity and Capacity Costs
A key challenge in providing useful managerial accounting information is understanding and correctly
analyzing an organization’s capacity and the costs of providing that capacity
Capacity: he upper limit on the amount of goods or services that an organization can produce in a
specified period of time.
This means that no cashiers miss time for illness, no cash registers break down, there are no
unexpected interruptions such as power outages or severe storms, and so forth.
practical capacity, which allows for normal occurrences such as equipment downtime and worker
fatigue or illness.
Important questions for the managerial accounting system to address are: (1) What is an organization’s
practical capacity? (2) What are the costs of the resources supplied to provide that capacity? (3) How
have those resources been used?
 pizza Example
Some of Whole Foods Market’s bigger stores include a “pizza bar,” where pizzas can be purchased whole or
by the slice. Let’s suppose you have taken a part-time job there making pizzas. You work the 6:00 to 8:00 p.m.
shift three evenings a week, Monday, Wednesday, and Friday. you receive a wage of $11 an hour. So each
evening that you work, you make $22. After some training and a little experience, you can make a pizza in
about six minutes. Making a pizza with “the works” takes longer than a plain cheese pizza, but for the typical
combination of pizzas made on a typical evening, it averages out to 6 minutes. Also, the 6 minute average time
required per pizza allows for occasional mistakes, retrieving more toppings from the deli when they run out,
taking short cell-phone calls, and other normal disruptions. You have no scheduled break during your short
two-hour shift, so on a busy evening you could make as many as 20 pies (120 minutes available ÷ the average
6 minutes per pizza). So, using the terminology discussed above, the cost of the labor resources supplied for
your two-hour shift is $22, and the practical capacity of that two-hour shift is 20 pizzas made.
 Continued
Now suppose that during the first week of October, you experience very different levels of demand on your three evening
shifts. Monday night football causes a steady demand for pizzas, and you make 20 of them that evening. Wednesday
evening is pretty slow, and you make just 10 pizzas. Friday evening, which is normally very busy, is unusually slow
because of a traffic jam that keeps many customers from reaching the store. You make just one pizza. Now we can
calculate the cost of your labor for a pizza during each of your three shifts. One fairly simple answer is to divide your labor
cost per shift by the number of pizzas you made in each shift, as follows: (according to Capacity concept)
Continued (according to practical capacity concept)
 Continued
The second method is the correct on because its take into consideration the spending was
for resources supplied but unused
he moral of the story is that it is very important to distinguish among the cost of resources
supplied [column (b) above], the cost of resources used [column (c) above], and the cost
of resources unused [column (e) above], which is the same as the cost of unused capacity.
 Cost Management Systems
many companies have moved away from a historical cost accounting perspective and toward a proactive
cost management perspective

cost management system is a management planning and control system with the following objectives.
Measure the cost of the resources consumed in performing the organization’s significant activities and
measure the unused capacity of those resources.
Identify and eliminate non-value-added costs. These are the costs of activities that can be eliminated
with no deterioration of product quality, performance, or perceived value.
Determine the efficiency and effectiveness of all major activities performed in the enterprise.
Identify and evaluate new activities that can improve the future performance of the organization.
activity-based costing (ABC):
managerial accountants have developed a system for determining the cost of producing goods or services

In an ABC system, the costs of the organization’s significant activities are accumulated and then assigned
to goods or services in accordance with how the activities are used in the production of
those goods and services.

An ABC system helps management understand the causal linkages between activities and costs.

activity-based management (ABM): Using an activity-based costing system to improve the operations of an
organization
 Managerial Accounting as a Career
Professional Organizations
Many managerial accountants and members of the corporate finance and accounting team are
Certified Public Accountants (CPAs) and members of the American Institute of CPAs.
the CPA designation was designed primarily to assure the competence of those working outside of
companies and passing judgments about the reliability of accounting reports for the “public,”
particularly investors and regulators.
 The managerial accounting profession also has its own certifications and organizations. The Institute
of Management Accountants (IMA)