A value-adding continuous improvement process of planning, designing, measuring and operating both nonfinancial information systems and financial information systems that guides management action, motivates behavior, and supports and creates the cultural values necessary to achieve an organization’s strategic, tactical and operating objectives
Aims of management accounting Planning Feedback Controlling Acting
Distinguish between financial accounting and management accounting
Information of management
accounting is used for internal purposes only, not for external reports
Management accounting has a future perspective and helps managers in making decisions.
Differences between Financial Acc. and Management Accounting Primary Users Financial Accounting Management Accounting External Internal Investors, Creditors, Government authorities Mangers of the business
Differences between Financial Acc. and Management Accounting Purpose of Information Financial Accounting Management Accounting Help investors, creditors, and others make investment, credit, and other decisions Help managers plan and control business operations
Differences between Financial Acc. and Management Accounting Behavioral Implications Financial Accounting Management Accounting Concern about adequacy of disclosure Concern about how reports will affect employees behavior
Your monthly basic telephone bill is probably fixed and does not change when you make more local calls.
Number of Local Calls Monthly Basic Telephone Bill
Step-Variable Costs Activity Cost Total cost remains constant within a narrow range of activity.
Step-Variable Costs Activity Cost Total cost increases to a new higher cost for the next higher range of activity.
The Linearity Assumption and the Relevant Range Activity Total Cost Economist’s Curvilinear Cost Function Relevant Range A straight line closely approximates a curvilinear variable cost line within the relevant range. Accountant’s Straight-Line Approximation (constant unit variable cost)
Cost Behavior Merchandisers Cost of Goods Sold Manufacturers Direct Material, Direct Labor, and Variable Manufacturing Overhead Merchandisers and Manufacturers Sales commissions and shipping costs Service Organizations Supplies and travel Examples of normally variable costs Examples of normally fixed costs Merchandisers, manufacturers, and service organizations PBB taxes, Insurance, Sales salaries Depreciation, Advertising
Types of Fixed Costs Examples Advertising and Research and Development Examples Depreciation on Buildings and Equipment Discretionary May be altered in the short-term by current managerial decisions Committed Long-term, cannot be reduced in the short term.
Fixed Costs and Relevant Range Rent Cost in Thousands of Dollars 0 1,000 2,000 3,000 Rented Area (Square Feet) 0 30 60 90 Relevant Range Total cost doesn’t change for a wide range of activity, and then jumps to a new higher cost for the next higher range of activity.
Semivariable Costs Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost A semivariable cost has both fixed and variable components. Consider the example of utility cost. Total semivariable cost X Y
Semivariable Costs Fixed Monthly Utility Charge Variable Cost per KW Activity (Kilowatt Hours) Total Utility Cost Total semivariable cost Y = a + bX X Y
The Analysis of Semivariable Costs 1. High-Low Method 3. Least-Square Regression Method 2. Scattergraph Method
The Scattergraph Method Plot the data points on a graph (total cost vs. activity). 0 1 2 3 4 * Total Cost in 1,000’s of Rs 10 20 0 * * * * * * * * * Activity, 1,000’s of Units Produced X Y
The Scattergraph Method (2) 0 1 2 3 4 * Total Cost in 1,000’s of Rs 10 20 0 * * * * * * * * * Activity, 1,000’s of Units Produced X Y Intercept is the estimated fixed cost (a) = Rs10,000 Draw a line through the data points with about an equal numbers of points above and below the line.
The Scattergraph Method (3) 0 1 2 3 4 * Total Cost in 1,000’s of Rs 10 20 0 * * * * * * * * * Activity, 1,000’s of Units Produced X Y The slope is the estimated variable cost per unit. Slope = Change in cost ÷ Change in units Vertical distance is the change in cost. Horizontal distance is the change in activity.
Software can be used to fit a regression line through the data points.
The cost analysis objective is the same: Y = a + bx
Least-Squares Regression Method Least-squares regression also provides a statistic, called the R 2 , that is a measure of the goodness of fit of the regression line to the data points.
Least-Squares Regression Method 0 1 2 3 4 Total Cost 10 20 0 Activity * * * * * * * * * * R 2 is the percentage of the variation in total cost explained by the activity. R 2 for this relationship is near 100% since the data points are very close to the regression line. X Y
Management accountants must understand and anticipate the reactions of individuals to information and measurements
An analysis of the behavioral and organizational reactions to the measurements must accompany the design and introduction of new measurements and systems
More importantly, when the measurements are used not only for information, planning, and decision-making but also for control, evaluation, and reward, employees and managers place great pressure on the measurements themselves
Ethics With Conclusion ~ Ethics is the activity of man directed to secure the inner perfection of his own personality. ~ Albert Schweizer
The way an individual responds to pressure derives from inner values and beliefs, but individuals are strongly influenced by their view of organizational standards
If individuals see unethical or illegal behavior practiced by the organization’s leaders and superiors or coworkers, they may feel that such behavior is accepted and sanctioned
An individual without a strong set of personal beliefs and values may find it difficult to withstand the pressure to “go along with the flow” and participate in this behavior when a difficult or conflicting situation arises
Such as being asked to misrepresent an organization unit’s performance potential when the unit is being offered for sale