introduction to managerial accounting pdf

introduction to managerial accounting pdf

An Introduction to Managerial Accounting: Principles and Applications

1. 1. Understanding Managerial Accounting

In a business organization, management is responsible for making critical decisions. All decisions that managers make can be classified into three broad categories: planning, directing or coordinating operational activities, and controlling. These functions are performed in order to achieve the organization’s objectives. Nonbusiness organizations—such as state or local government units, colleges and universities, and hospitals—generally have objectives that focus on services to the public rather than earning profits. Yet, these nonbusiness organizations also use management accounting information to plan, control, and evaluate their programs, services, and resources.

Managerial accounting, also called management accounting, is a field of accounting that provides economic and financial information for managers and other internal users. Unlike financial accounting, which is primarily concerned with summarizing and reporting information for external users such as creditors, investors, and regulatory agencies, managerial accounting supports the decision-making needs of internal users. As you will see throughout this book, managerial accounting focuses on various aspects of identifying, measuring, accumulating, analyzing, interpreting, and communicating information that helps managers fulfill the organization’s objectives.

2. 2. Key Concepts and Techniques in Managerial Accounting

An Introduction to Managerial Accounting: Managerial accounting supports management in performing three critical activities: planning, controlling, and decision making. Planning activities include budgeting, developing products, and deciding which customers to serve. The “budgeting” aspect of planning involves developing a blueprint, composed of both financial and nonfinancial information, that specifies the economic consequences of upcoming business activities if the firm hits its production targets. In other words, the budget must describe the activities and economic resources required to achieve the firm’s strategies. The budget is then used as a yardstick to encourage employees to meet the firm’s objectives. Controls are devices that help ensure that expected results are achieved by operating within expectations. For example, feedback on performance is a control mechanism that improves the planning process and helps to diagnose weaknesses within the operational system. If performance is not satisfactory, feedback alerts managers to the problem area so that appropriate corrective action can be taken. Decision-making involves selecting from competing alternatives, values capital investments and responding to changes in exchange rates or business systems. The most successful organizations use cost accounting information extensively to help facilitate the performance of these activities.

Objectives: 1. Discuss the nature of managerial accounting. 2. Provide an overview of defining characteristics and internal uses of cost accounting information. 3. Define product costs. 4. Define opportunity, direct, and indirect costs.

We begin with an introduction to some of the fundamental characteristics of managerial accounting and important internal uses of accounting information. Next, we discuss product and relevant costing and, finally, review some techniques that you will use frequently in this course such as contribution margin and responsibility accounting. Attention to key concepts and techniques at this juncture will ensure a smoother and more efficient learning of the material to follow.

3. 3. Cost Behavior and Decision Making

The categories of fixed, variable, and mixed costs are used in analyses essential in managerial decision making. They are also present in one form or another in all firm cost accounting systems. Throughout this chapter, examples of the various types of costs in different companies attempt to help you understand the “how-to” task of linking the behavior of direct materials, labor, and factory overhead to finished products, processes, or departments. Such an understanding of cost behavior is basic to managerial accounting.

Budgeting and Control Decisions Make-or-Buy Decisions Special Order Decisions Joint Products Decisions Determining the Selling Price of a Product Cost-volume-profit relationships

Understanding the behavior of costs is one of the major topics in managerial accounting. Decisions in many areas are affected by cost behavior. Many cost accounts contain costs that behave in specific ways and in different uses of these costs in cost accounting models. Some of the major uses of cost behavior include the following:

4. 4. Budgeting and Performance Evaluation

To budget properly, the performance-related goals of the organization should be set out clearly. Specific statements about long-range goals, short-term objectives, short-term policies, and resource allocations are required. The budget structure usually will reflect the organization charts of the company. Separate budgets will be established for each department. Usually, there will be a person responsible for each budget, and consolidated financial budgets also will be prepared at the top. Upon approval of these budgets, they will be used to compare actual results during the period. Responsibility accounting, a most important aspect of the budgeting process, involves developing the detailed actions necessary to see that department heads of operating departments are held responsible for operating results. The inspection and analysis of actual performance results are the essential task of the budgeting process.

Budgets are used in companies to plan and control the operation of the business. Budgeting is the process of seeing that the business operates as it was designed to operate (as it was budgeted to operate). Without budgets, procedures are lax, waste and inefficiency become problems, and financial results often suffer. In budgeting, a person or a department specifically responsible for the budgeting is given the authority to see that the business operates according to the established plan. This person or department must possess the necessary power to direct the activities of other segments of the company whose activities are of primary significance in budget achievement. The budgeting authority will usually be a person employed in the operating segment of the company where the plans or budgets are to be implemented.

5. 5. Managerial Accounting in Practice: Case Studies

Managerial accounting has the same ethical responsibility as financial accounting to be relevant and faithful. The relevance of the information is particularly important as we are often dealing with the future rather than the past. Because businesses are comprised of people, managing a business often involves managing people. Providing good managerial information to assist in this endeavor is one reason managerial accounting is important to the economy and why there is such demand for accountants.

According to census data presented by the National Student Clearinghouse in September 2018, of the 2.5 million students that graduated with a Bachelor’s degree that spring, Accounting was second only to Business Management as the preferred major. What is accounting and why is it so popular? Accounting is biased reporting. Despite this, most people expect the reporting of this information to have an ethical foundation and to provide information necessary to assist decision-makers in effective and efficient resource allocation.