Introduction to

Managerial Accounting

Cost Accounting:
Foundations and Evolutions, 8e
Kinney ● Raiborn

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Learning Objectives
 What are the relationships among financial, management, and cost
accounting?
 What are the the sources of authoritative pronouncements for the
practice of cost accounting?
 What are the sources of ethical standards for cost accountants?
 What is a mission statement, and why is it important to
organizational strategy?
 What must accountants understand about an organization’s
structure and business environment in order to perform effectively in
that organization?
 What is a value chain, and what are the major value chain
functions?
 How is a balanced scorecard used to implement an organization’s
strategy?
 Why is ethical behavior so important in organizations?

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Accountants
 Financial accountants provide information to
external parties
 Investors
 Creditors
 Regulators
 Managerial accountants provide information to
internal users
 Managers
 Cost accountants provide information to both
internal and external users
 Product cost information

Accounting is the language of business.

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Types of Accounting

Financial
Management
 Meet internal
externalinformation
informationneeds
needs
 Comply
Does notwith
haveGAAP
to comply with GAAP

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Comparing Managerial and
Financial
Feature Financial Accounting Managerial Accounting
Primary Users External users: stockholders, Internal users: officers and
of Reports creditors, and regulators. managers.
Types and Frequency Financial statements. Internal reports.
of Reports Quarterly and annually. As frequently as needed.
Special-purpose for
Purpose of Reports General-purpose.
specific decisions.
Pertains to subunits of the
Pertains to business as a whole.
business. Very detailed.
Highly aggregated (condensed).
Extends beyond double-entry
Content of Reports Limited to double-entry accounting
accounting to any relevant
and cost data. Generally accepted
data. Evaluated based on
accounting principles.
relevance to decisions.
Verification Process Audited by CPA. No independent audits.

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Financial versus Managerial

Financial
Managerial
 Internal focus
External focus
 Whole organization
Segments or divisions
 Historical
Current/projected
 Quantitative
Quantitative/qualitative
 Monetary and nonmonetary
 Verifiable
Timely/reasonable estimate
 GAAP exceed costs
Benefits
 Formal and
recordkeeping
informal recordkeeping

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Relationship of Financial,
Management, and Cost Accounting
Product
Costs

FINANCIAL COST MANAGEMENT

ACCOUNTING ACCOUNTIN ACCOUNTING
G

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Product Cost Information
 External parties—stockholders, creditors, and
regulators
 For investment and credit decisions
 Complies with GAAP
 Enterprise focus
 Internal parties
 Planning, controlling, and decision making
 Evaluating performance
 Includes upstream and downstream costs
 Disaggregated
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Accounting Bodies

Management
Financial
 Institute
Public Company
of Management
Accounting
Accountants
Oversight(IMA)
Board
 (PCAOB)
Society of Management Accountants of Canada
 Securities
 and Exchange
Cost Accounting Commission
Standards (SEC)
Board (CASB)
 Financial Accounting Standards Board (FASB)

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A Typical Organizational Chart

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Controller vs Treasurer

 Controller  Treasurer
 Maintains accounting  The position entails
records responsibility for
 Maintains adequate corporate liquidity
system of internal and investments that
control pertains to the
 Prepares FS, tax company’s financial
returns, internal activities.
reports

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Management Accounting
Organizations
 IMA
 Statements on Management Accounting
 (not legally binding)
 Society of Management Accountants of
Canada
 Management Accounting Guidelines
 (not legally binding)
 Cost Accounting Standards Board (CASB)
 Government contracting standards
 (legally binding)

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Professional Ethics

 Earnings management—deliberate
accounting adjustments to “hit” profit targets
 Often adjustments involve cost accounting
 Product costs
 Inventory valuations
 Stretching legitimate accounting techniques
 Outright fraud

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Ethics and Legislation
 Sarbanes-Oxley Act—CEOs and CFOs
personally accountable for the accuracy of
their organization’s financial reporting
 False Claims Act—whistle-blower protection
and penalties for failure to blow the whistle
(disclose known financial frauds)

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Ethics and Management Accounting

 Standards of Ethical Conduct for

Management Accountants
 Competence
 Confidentiality
 Integrity
 Credibility

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Organizational Strategy

1. Develop mission statement

2. Implement strategy
3. Deploy resources to create value for
customers and shareholders
4. Recognize that each organization is unique
—thus unique strategies must be developed

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 Organizational Strategy
1. Develop mission statement
2. Implement strategy

Develop,
Establish implement, and
appropriate monitor
measures of necessary
accomplishment information
systems
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Five Factors in Organizational
Strategy
 Core competencies
 Organizational structure
 Management style and organizational culture
 Organizational constraints
 Environmental constraints

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 Organizational Strategies
 Core competency—critical function or
activity providing a competitive advantage
 Cost leadership strategy—undercut
competitor prices
 Product differentiation strategy—superior
quality products or unique services sold at
a premium

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Strategy Questions
 Who are your five most important  What are your customers’ most
competitors? important purchase criteria?
 Is your firm more or less profitable  How do you and your competitors
than these firms? rate on these purchase criteria?
 Compare prices for equivalent  What are your main strengths and
products/services. competencies? Are they appreciated
 Are they higher or lower? Explain by the market?
the difference. Is it customers,
costs, or profit requirements?  Which are your priority segments?
 Are your costs higher or lower than  Where is it most important that you
those of main competitors? Where gain market share?
are the differences most  What is your competitive
pronounced? advantage?
 What segment(s) of your business
represents 80% profits?
 For each business segment above,
how large are you relative to the
largest competitors? Are you gaining
or losing relative market share?

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Organizational Structure
 Distribution of authority and responsibility in an
organization
 Authority—right to use resources to accomplish a

task or achieve an objective

 Responsibility—obligation to accomplish a task or

achieve an objective
 Line manager works directly toward attaining
organizational goals
 Staff employees give assistance and advice to line
managers
 Treasurer and Controller

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Value Chain
 A set of value-adding functions and
processes that converts inputs into
products or services
 Research and  Marketing
Development  Distribution
 Product Design  Customer Service
 Supply
 Production

Communicate strategy to all members of the value chain.

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Components of the Value Chain

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Balanced Scorecard

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Balanced Scorecard Perspectives
 Learning and Growth
 Use the organization’s intellectual capital to adapt to changing
customer needs or to influence new customers’ needs and
expectations through product or service innovations
 Internal Business
 Things to do well to meet customer needs and expectations
 Customer Value
 How well the organization is doing relative to important
customer criteria
 Financial
 Address stockholders/stakeholders concerns about
profitability and organizational growth

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Balanced Scorecard Measures

 Short-term and long-term

 Internal and external
 Financial and nonfinancial

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Ethics in Multinationals
 Foreign Corrupt Practices Act—prohibits
bribes to obtain/retain business
 Organization of Economic Cooperation and
Development Convention—crime to offer,
promise, give bribes to obtain/retain internal
business deals

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Questions

 What is the relationship among financial,

management, and cost accounting?
 How is the balanced scorecard used to
implement an organization’s strategy?
 Where can an accountant find ethical
standards for cost accounting?

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Potential Ethical Issues

 Earnings management
 Low-cost production at any cost
 Whistle-blower retaliation
 Fixing prices
 Bribery and other corruption
 Hiding managerial acts

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