CHAPTER 1: MANAGERIAL ACCOUNTING BASICS

[Audio] CHAPTER 1: MANAGERIAL ACCOUNTING BASICS Objective: 1.1 Comparison between managerial accounting and financial accounting 1.2 Functions of management and roles of accounting information in management 1.3 Characteristics of managerial accounting information 1.4 Roles of management accountant 1.5 Code of Ethics in Management Accounting.

[Audio] 1.0 MANAGERIAL ACCOUNTING Managerial accounting or management accounting is the process of identifying, analyzing, recording and presenting financial information that is used internally by the management for planning, decision-making and control..

[Audio] 1.1 Differences between Financial and Managerial Accounting: i) Primary Users of Reports Financial accounting is for external users. Example, stockholders, creditors, and regulators. Management accounting is for Internal users. Example, officers and managers.

[Audio] 1.1 Differences between Financial and Managerial Accounting: Types and Frequency of Reports Financial accounting reports in the form of Financial Statement quarterly and annually. Management accounting reports in the form of Internal reports as frequently as needed..

[Audio] 1.1 Differences between Financial and Managerial Accounting: Purposes of Reports Financial accounting reports for general-purpose. Management accounting reports in special-purpose for specific decisions..

[Audio] 1.1 Differences between Financial and Managerial Accounting: Contents of Reports Financial accounting : ● Pertains to business as a whole ● Highly aggregated (condensed) ● Limited to double-entry accounting and cost data ● Required to follow Generally Accepted Accounting Principles (GAAP).

[Audio] 1.1 Differences between Financial and Managerial Accounting: Contents of Reports Management accounting: ● Pertains to subunits of the business. ● Very detailed. ● Extends beyond double entry ● Accounting to any relevant data ● Not required to follow GAAP.

[Audio] 1.1 Differences between Financial and Managerial Accounting: Verification of Reports Financial accounting reports are required to be published and audited by statutory auditors. Management accounting are neither published nor audited by statutory auditors..

[Audio] 1.2 MANAGEMENT FUNCTIONS Planning Planning requires managers to look ahead and to establish objectives. These objectives are often diverse: maximizing short-term profits and market share, maintaining a commitment to environmental protection, and contributing to social programs. For example, Hewlett-Packard, in an attempt to gain a stronger foothold in the computer industry, has greatly reduced its prices to compete with DELL. A key objective of management is to add value to the business under its control. Value is usually measured by the price of the company's share and by the potential selling price of the company..

[Audio] Directing Directing involves coordinating a company's diverse activities and human resources to produce a smooth-running operation. This function relates to implementing planned objectives and providing necessary incentives to motivate employees. For example, manufacturers such as Campbell Soup Company, General Motors, and Dell must coordinate purchasing, manufacturing, warehousing, and selling. Service corporations such as American Airlines, FedEx, and AT & T must coordinate scheduling, sales, service and acquisitions of equipment and supplies. Directing also involves selecting executives, appointing managers and supervisors, and hiring and training employees..

[Audio] Controlling Controlling is the process of keeping the company's activities on track. Controlling operations, managers determine whether planned goals are being met. When there are deviations from targeted objectives, managers must decide what changes are needed to get back on track. Scandals at companies like Enron, Lucent and Xerox attest to the fact that companies must have adequate controls to ensure that the company develops and distributes accurate information. How do managers achieve control? A smart manager in a small operation can make personal observations, ask questions, and know how to evaluate the answers. But using this approach in a large organization would result in chaos. Unless there is some record of what has happened and what is expected to occur, imagine the president of Dell attempting to determine whether the company is meeting its planned objectives. Thus, large businesses typically use a formal system of evaluation. These systems include such features as budgets, responsibility centers, and performance evaluation reports – all of which are features of managerial accounting. Decision making is not a separate management function. Rather, it is the outcome of the exercise of good judgement in planning, directing and controlling..

[Audio] Role of Management Accounting Information Decision making: The thought process of selecting a logical choice from the available options. Control and evaluate performance: A systematic exercise which is called as a process of checking actual performance against the standards or plans with a view to ensure adequate progress and also recording such experience as is gained as a contribution to possible future needs..

[Audio] Planning: Planning is deciding the best alternatives among others to perform different managerial operations in order to achieve the pre-determined goals. Budgeting: A budget forecasts the financial results and financial position of a company for one or more future periods. A budget is used for planning and performance measurement purposes, which can involve spending for fixed assets, rolling out new products, training employees, setting up bonus plans, controlling operations, and so forth..

[Audio] Stock evaluation: The process of calculating the value of goods or materials owned by a company or available for sale in a store at a particular time, or the value that is calculated. Determination of cost and prices of products or services: a process of calculating cost of goods sold/ cost of services and setting the price of the goods/ service in order to get profit of the business..

[Audio] 1.3 CHARACTERISTICS OF USEFUL INFORMATION MANAGEMENT ACCOUNTING Accuracy Accounting information must be capable of making a difference in a decision. Business owners need accounting information that is applicable to the business decision at hand. They can request financial statements, accounting schedules, reconciliations or cost-benefit analysis. For example, cost allocation reports may not provide sufficient information for business owners who must make a decision on hiring employees. Cost allocation usually refers to applying business costs to goods or services produced by the company, which has very little to do with human resources. Business owners should carefully request and review accounting information to ensure it provides the most useful information for the decision-making process..

[Audio] Timeliness Timeliness means having information available to decision-makers before it loses its capacity to influence decisions. Information is timely when it is available to users early enough to allow its use in the decision process. The need for timely information requires that companies provide information to external users on a periodic basis..

[Audio] Understandability Using terms that are easily understood to ensure that the information obtained can be used to make informed decisions. Understandability is the quality of information that enables users to perceive its significance. The benefits of information may be increased by making it more understandable and hence useful to a wider circle of users. Presenting information which can be understood only by sophisticated users and not by others, creates a bias which is inconsistent with the standard of adequate disclosure. Presentation of information should not only facilitate understanding but also avoid wrong interpretation of financial statements. Thus, understandable financial accounting information presents data that can be under-stood by users of the information and is expressed in a form and with terminology adopted to the user's range of understanding..

[Audio] Relevance Relevance is closely and directly related to the concept of useful information. Relevance implies that all those items of information should be reported that may aid the users in making decisions and/or predictions. To make a difference in the decision process, information must possess predictive value and/or feedback value. Generally, useful information will possess both qualities. For example, if net income and its components confirm investor expectations about future cash-generating ability, then net income has feedback value for investors. This confirmation can also be useful in predicting future cash-generating ability as expectations are revised in general, information that is given greater weight in decision-making is more relevant..

[Audio] Cost Effectiveness Producing good results without costing a lot of money. giving the most profit or advantage in exchange for the amount of money that is spent. For example, if a company wants to deliver its product it can either use delivery service or buy a lorry. The company will choose which alternative will give the highest profit with the lowest cost..

[Audio] Flexibility Information is not necessarily accurate, but it is easily adaptable to the needs of decisions to be made. It relates to accounting information systems. It describes an accounting system that is able to adapt to changes in the company, its operations, and needs of decision makers. Flexibility means that the system, which can deal with the changes in technology, competitive pressure, consumer, tastes, and regulations..

[Audio] 1.4 ROLES OF MANAGEMENT ACCOUNTANT Responsible for carrying out the task of helping the management. The information presented by managerial accountants is often used by managers to forecast and plan. Managers want to know what products are best to manufacture now, but also desire to know where they should focus their efforts in the future. Managers use the information to develop specific goals and strategies for the future. Planning requires that managers align the company's objectives with its available resources. A manager's ability to forecast and plan depends on the budgets developed by accountants..

[Audio] Provide information and accounting reports. Managers must often make decisions that require choosing between alternate products. For example, a manager of a manufacturing company may need to determine the best product to manufacture to remain profitable and the price to charge customers for the product. A major factor in determining the price of a product is the cost related to manufacturing the product. Managerial accountants often perform cost analysis for certain products and divisions, which include variable and fixed costs. The production decisions made by managers are a direct result of information received from managerial accountants..

[Audio] Assist departments in achieving the organization's objectives through preparing a budget. Preparing budgets is a basic activity for managerial accountants. Budgets express the company's plan of action using quantitative figures. The budgeting process allows managers to allocate resources to the most financially needy departments, and eliminate programs and departments that are not effectively using the resources. The particular budgets produced by managerial accountants depend on the needs of the organization. Common budgets prepared include the master, sales, production, material, labor and cash budgets..

[Audio] 1.5 CODE OF ETHICS IN MANAGEMENT ACCOUNTING 1. 5. 1 Describe about Ethics Managerial accounting is an internal business function responsible for managing a company's financial information. Business owners often use managerial accounting to allocate business costs to goods or services, prepare operational budgets and forecast production output or sales..

[Audio] 1.5 CODE OF ETHICS IN MANAGEMENT ACCOUNTING 1. 5. 2 Importance of Ethics in Management Accounting Ethics is an important part of managerial accounting, and companies follow a code of ethics or conduct that addresses ethical issues/ concerns for management accountants. The ethical dilemmas of managerial accountants are increasing in response to big data, artificial intelligence and other technologies, as reported in the September 2019 issue of the CPA Journal. Ethical codes of professional organizations provide helpful guidance..

[Audio] Institute of Management Accountants ( IMA) The Institute of Management Accountants (IMA) is a professional organization responsible for creating managerial accounting guidelines. The IMA provides managerial accounting ethics for licensed accountants, and non-licensed accountants also can use these ethical standards to govern their accounting career. The IMA's ethical principles are based on honesty, fairness, objectivity and responsibility. IMA members must use these ethical principles when engaging in accounting services for their company and the general public..

[Audio] IMA Professional Standards The IMA stresses four standards of ethical conduct for management accountants. IMA Statement of Ethical Professional Practice examples define how accountants should conduct themselves in their daily business affairs..

[Audio] Example: Competence. Accountants must possess the professional expertise they advertise, and they have to keep their accounting knowledge and skills fresh through continuing education. Confidentiality. Accountants can only disclose information at their supervisor's discretion. Integrity. Accountants are prohibited from engaging in unethical conduct. Credibility. Accounting information must be communicated fairly and objectively to all business stakeholders..

[Audio] Managerial ethics ensure that all financial information is reported to business owners, directors or managers. Accountants who fail to report negative information or use a company's internal financial information for personal gain can create serious legal situations for businesses. Business owners often require all information, whether good or bad, when reviewing business operations and making decisions. Accounting ethics also ensure that each employee can be trusted with sensitive business information..

[Audio] 1. 5. 3 Issues in Management Accounting Ethics Circumventing Unethical Behavior Companies may choose to act unethically in the business environment. Business owners may determine that unethical behavior is not necessarily illegal, a logic that creates a gray-shaded area in business. Managerial accountants constantly may push ethical limits when recording and reporting financial information. Companies should provide detailed explanations to those conducting external audits regarding questionable accounting procedures to ensure adherence to IMA standards of practice..

[Audio] Consequences of Unethical Actions Accountants who fail to abide by the IMA's accounting ethical code face a variety of punishments. Accountants may lose their professional certification, be removed from accounting positions and face legal penalties depending on their inappropriate actions. Managerial accountants who do not disclose inappropriate accounting operations in their company also can be held liable. Maintaining the general public's trust in companies is a primary responsibility of managerial accountants..

[Audio] THE END. THE END.