chapter 1

Where should management accountants be placed within the organizational structure?

In the past, most management accountants worked in accounting departments. Now, over 50% of management accountants work on cross-functional teams across the organization, where they serve in an advisory role.

What Is Managerial Accounting?

Managerial accounting, also referred to as management accounting, focuses on the financial insight needed for an organization to achieve success.

To resolve ethical dilemmas, the IMA suggests that management accountants first follow their company's established policies for reporting unethical behavior. If the conflict is not resolved through the company's procedures, the management accountant should:

Discuss the unethical situation with the immediate supervisor unless the supervisor is involved in the unethical situation. If so, notify the supervisor at the next higher managerial level. If the immediate supervisor involved is the CEO, notify the audit committee or board of directors. Discuss the unethical situation with an objective advisor. The IMA offers a confidential "Ethics Hotline" to its members. Members may call the hotline and discuss their ethical dilemma. The ethics counselor will not provide a specific resolution but will clarify how the dilemma relates to the IMA's Statement of Ethical Professional Practice shown in Exhibit 1-7. Consult an attorney regarding legal obligations and rights.

Planning

involves setting goals and objectives for the company and determining how to achieve them.

Controlling

means evaluating the results of business operations against the plan and making adjustments to keep the company pressing toward its goals.

The Institute of Management Accountants (IMA)

the professional association for management accountants in the United States; Its mission is to provide a forum for research, practice development, education, knowledge sharing, and advocacy of the highest ethical and best practices in management accounting andfinance. The IMA also educates society about the role management accountants play in organizations. According to the IMA, about 85 to 90% of accountants work in organizations, performing the roles discussed earlier. The IMA publishes a monthly journal called Strategic Finance that addresses current topics of interest to management accountants and helps them keep abreast of recent techniques and trends.

budgets

the quantitative expression of a plan

As you can see in the exhibit, the ability to use technology and common software, such as Microsoft Excel, is a critical skill management accountants need to possess.

true

Because of the gray areas, it's difficult to say that accounting information is ever "wrong." However, judgment in these gray areas could lead to financial estimates that are on the high side or on the low side. What are the consequences of numbers that are too high or too low? Would estimates that are "off" in one direction be worse than the other direction?

true

View Exhibit 1-4 for some of the top skills they need to help their organizations achieve success.

true - section 1.2

Many managerial accounting practices were first developed to meet the needs of manufacturers during the industrial age of the early twentieth century. However, since the U.S. economy has shifted away from manufacturing, managerial accounting has EXPANDED to meet the needs of merchandising companies and service firms as well as manufacturers.

true, not just manufacturers now

today's accountants are professionals who use an immense amount of critical thinking, insight, and judgment to capture the reality of today's complex economic events.

true; As valued financial advisors, managerial accountants partner with management to make critical business decisions that have widespread and significant consequences for the business and for society.

companies are beginning to address the sustainability of their operations, by measuring, reporting, and minimizing the negative impact of their operations on people and the environment.

true; As you saw in the opening story, some of Starbucks's primary business concerns are to use ethically sourced coffee, contribute to local communities, and provide superior employee benefits to part-time as well as full-time employees.

managers use managerial accounting information to guide their actions and decisions.

true; For Starbucks, these decisions might include opening new stores, adding new products, or even providing new employee benefits, such as Starbucks's new tuition reimbursement plan.

Not all unethical behavior is illegal, but all illegal behavior is unethical.

true; The competence standard states that management accountants have a responsibility to provide decision support information that is accurate, clear, concise, and timely. Failure to follow this standard is unethical but in most cases not illegal.

management accounting is a profession

true; in a later section, we'll describe the professional organizations that represent management accountants

"To survive in the global marketplace, businesses must quickly respond to customer demand, providing high-quality products and services at a reasonable price."

true; this is another reason that globalization is important

cost-benefit analysis

weighing costs against benefits to help make decisions

Management accountants are now more often looked upon as internal business advisors rather than "bean counters" recording historical transactions.

true

Management accountants often work in cross-functional teams throughout the organization.

true

Management analyzes the budgets before proceeding to determine whether its expansion plans make financial sense.

true

In the words of the Institute of Management Accountants, Management accounting is

a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization's strategy.

One nice feature of the CMA exam is that you don't have to wait until you graduate from college to take it. Thus, you can start working on valuable credentials that will earn you a higher salary even before you graduate from college. A recent global survey conducted by the IMA revealed that, globally, CMAs earn 61% higher salaries than their non-CMA peers.

true

Outsourcing

A decision by a corporation to turn over much of the responsibility for production to independent suppliers. (having someone else produce the product)

What skills should management accountants possess?

Because of their expanding role within the organization, management accountants need both technical skills (such as managerial and financial accounting knowledge and technology skills) and nontechnical skills (such as ethics, communication, critical thinking, and leadership).

Advantages of ERP (enterprise resource planning) systems include the following:

Companies streamline their operations before mapping them into ERP software. Streamlining operations saves money. ERP helps companies respond quickly to changes. A change in sales instantly ripples through the ERP's purchases, production, shipping, and accounting systems. An ERP system can replace hundreds of separate software systems, such as different software in different regions, or different payroll, shipping, and production software.

Nonbusiness Majors

Even if you are planning to be a nurse, engineer, musician, or fashion designer, the information you learn in this course will be of consequence to you. All organizations, including nonprofits and governmental agencies, use cost and revenue information to guide their plans, actions, and decisions. No matter what your career path, every activity you engage in will impact the costs and revenues of your organization. That holds true, whether you are tending to sick patients, designing bridges, managing a symphony orchestra, or designing clothes. Management will expect you to operate under limited resources and will often look to you for revenue and expense estimates for specific projects or for specific periods of time. Management may also hand you budgets, cost data, and performance reports and expect you to understand it and use it for making decisions. The more you understand the underlying financial information, the better prepared you will be.

managers must be able to identify the costs associated with manufacturing its products or delivering its services.

For example, Starbucks's managers need to know the cost of producing each beverage on the menu as well as the cost of operating each retail location. Managers must have this information so that they can set prices high enough to cover costs and generate an adequate profit; we will be shown how businesses determine these costs; also shows how managers can effectively control costs by eliminating wasteful activities and focusing on quality.

What is the primary purpose and focus of managerial accounting?

Managerial accounting provides information that helps managers plan, direct, and control operations. By focusing on relevant information, managerial accounting assists managers in formulating and implementing the organization's strategy and making good business decisions.

What should managers take into consideration when designing managerial accounting systems?

Managers need to weigh the costs of the system (for example, collecting and analyzing data) with the benefits that are expected from using the information to make better decisions. Managers must carefully consider the behavioral effects of the system since employees tend to focus on those aspects of performance that are measured.

The CMA exam consists of two parts. Each part of the exam is 4 hours long and consists of 100 multiple-choice questions as well as two essay questions. As shown in the following, most of the topics on the exam are introduced in this textbook:

Part 1-Financial Reporting, Planning, Performance and Control—Financial Reporting (the financial statements, including the Statement of Cash Flows, Chapter 13); Planning, Budgeting and Forecasting (Chapters 9 and 6), Performance Management (Chapters 10 and 11); Cost Management (Chapters 2, 3, 4, 5, and 6); and Internal Controls.; Part 2-Financial Decision Making—Financial Statement Analysis (Chapter 14); Corporate Finance; Risk Management; Decision Analysis (Chapters 7 and 8); Investment Decisions (Chapter 12); and Professional Ethics (Chapter 1).

!!!! By what ethical principles and standards should management accountants abide?

The IMA's overarching ethical principles include the following: Honesty Objectivity Fairness Responsibility The IMA's ethical standards include the following: Competence Integrity Confidentiality Credibility

What professional associations advocate for management accountants in the United States?

The Institute of Management Accountants (IMA) is the premier organization advocating strictly for the advancement of the management accounting profession. The IMA also issues the CMA certification. In addition, the American Institute of Certified Public Accountants (AICPA) has launched a specialized credential (the CGMA) for CPAs who have experience in industry, business, and government.

Shifting Economy

The U.S. economy is becoming a "knowledge economy" in which more and more people are being employed for their intellectual capital than for their ability to provide manual labor in agricultural and manufacturing roles.

Big Data, Data Analytics, and Critical Thinking

The collection of data from sensors, social media, GPS signals, texts, pictures, customer reward cards, and so forth is increasing at an unprecedented rate. In fact, over 90% of the world's data has been created in the last two years.7 Big, unstructured data, coupled with traditional business transaction data, are changing the ways in which companies operate. Although the power of much of this data still remains untapped, companies are using data visualization software, such as Tableau, and predictive modeling to become more cost-efficient, to better target their sales markets, to uncover fraud, and to innovate.

Determining Unit Cost (Product Costing)

To run a business profitably, managers must be able to identify the costs associated with manufacturing its products or delivering its services.

As you go through each topic in this book, keep the blue picture in Exhibit 1-3 in mind, and ask yourself the following questions:

What is the business issue, event, or problem, and how can accounting help to solve it? (because accounting always starts with one), What are the "gray areas"? (differences in methods and measurement choices), What are the implications for the business if the accounting information used in the decision is "wrong"?

Critical thinking

can be described as improving the quality of thought by skillfully analyzing, assessing, and reconstructing it. (list of questions to improve critical thinking in section 1.3)

lean thinking

is both a philosophy and a business strategy of operating WITHOUT WASTE; The more wasteful activities that can be eliminated, the lower the company's costs. The more wasted time that can be removed between receiving an order and delivering the product or service, the faster the customer response time. And the more defects that can be prevented or removed from the process, the less costly the production process and the higher the customer satisfaction.

enterprise resource planning (ERP)

large companies use these systems that can integrate ALL of a company's worldwide functions, departments, and data. ERP systems such as SAP and Oracle gather company data into a centralized data warehouse. The system feeds the data into software for ALL of the company's business activities, from budgeting and purchasing to production and customer service.

Directing

means overseeing the company's day-to-day operations.

Managerial Accounting Building Blocks

more about the management accounting profession; language that is commonly used in managerial accounting. Just as musicians must know the notes to the musical scale, management accountants andmanagers must have a common understanding of these terms to communicate effectively with one another.

Managers' Three Primary Responsibilities

planning, directing, and controlling (Integrated throughout these responsibilities is decision making - identifying alternative courses of action and choosing among them)

soft-skills

the ability to motivate, to inspire trust, to communicate with others (nontechnical competencies - nontechnical skills)

Six Sigma

the goal of producing near perfection (with less than 3.4 defects per million opportunities) (it often goes hand in hand with lean thinking.)

Because such a large percentage of goods are now produced overseas rather than domestically, retailers must now consider foreign currency translation, shipping costs, and import tariffs when determining the cost of imported products. Managers of merchandising companies also need cost and revenue information about operating their brick and mortar locations as well as their online sales platforms. All of this information helps managers make more strategic and profitable decisions.

true

Companies are constantly faced with decisions about investing in technological innovations that could potentially save money.

true

For business transaction data, many small businesses use ready-to-use accounting software packages, such as QuickBooks or Sage 50, to track their costs and to develop the information that owners and managers need to run the business. But large companies use enterprise resource planning (ERP) systems that can integrate all of a company's worldwide functions, departments, and data.

true

Gone are the days when decisions are made based on gut feelings. Data-driven decision making is here to stay.

true

There is such a huge overlap in business between managerial accounting and finance that both are often referred to as the "finance function," and the people who work in this function, regardless of whether they were accounting or finance majors, are often referred to as analysts.

true

To be competitive in the global market, companies need to be acutely aware of their costs, customer response time, and quality. Market share goes to any company that can do the same thing cheaper, faster, or better. To address these issues, many companies espouse lean thinking.

true

We've chosen to highlight just a few specific business career tracks here, but many of the same issues will pertain to all business careers, including those in logistics, supply chain management, production, and finance.

true

With rapidly changing technology and continual business innovation, the role of accountants has drastically changed from what it used to be. In fact, management accountants are rarely referred to by that name any more; instead, they are usually referred to as business advisors, analysts, or finance professionals.

true

You can also become a student member of the IMA for a significantly reduced annual fee, which will give you access to its job posting website as well as all of its publications. Finally, the IMA hosts an annual three-day student leadership conference at a different location in the United States each year.

true

becoming as proficient as you can with Excel during this course will help you become more marketable and more valuable to your future employer.

true

data cannot stand on their own; they require analysis and interpretation if they are to be of use to management.

true

ethical behavior encompasses more than simply following the law. The IMA's ethical principles include honesty, fairness, objectivity, and responsibility—principles that are much broader than what is codified in the law.

true

management accountants are expected to possess both technical AND critical thinking skills.

true

management accountants don't fit the stereotypical accountant portrayed in movies and shows. Because of their expanding role, management accountants have truly become trusted and valued internal business advisors.

true

management accounting always begins with some relevant business issue!!

true

managerial accounting helps managers fulfill their responsibilities.

true

managerial accounting is very different from financial accounting.

true

managers use accounting information for much more than preparing annual financial statements

true

should have honesty, fairness, objectivity, and responsibility

true

the competence standard also requires you to continually develop knowledge and skills. CPAs and CMAs are required to complete annual continuing professional education (about 40 hours per year) to fulfill this responsibility.

true

Data are only data, unless they are turned into useful information. The way to turn big data into information is to use critical thinking skills in conjunction with technological skills, such as competency in Excel, SAP, and Tableau.

true (can have the information but need to elaborate on it and understand it in order for it to be useful and to be helpful in making decisions)

Management uses sales and costs information by store, region, and distribution channel, to run daily business operations.

true; For example, Starbucks managers use sales data to determine which beverages on the menu and products in the stores are generating the most sales. They use that information to adjust product offerings, marketing strategies, and retail expansion decisions.

The IMA also issues the Certified Management Accountant (CMA) certification.

true; Over 50,000 people around the globe have become CMAs. To become a CMA, you must pass a rigorous examination, gain two years of relevant professional experience, and maintain continuing professional education. You must also have a baccalaureate degree, although the degree does not need to be in accounting.

Financial accounting focuses on providing stockholders and creditors with the information they need to make investment and lending decisions.

true; This information takes the form of financial statements: the balance sheet, income statement, statement of shareholders' equity, and statement of cash flows.

The average salaries of management accountants reflect their large skill set. Naturally, salaries will vary with the accountant's level of experience, his or her specific job responsibilities, and the size and geographical location of the company. However, to give you a general idea, in 2015, the average base salary (before benefits, profit sharing, or bonuses) of all IMA members in the United States was $115,022, while the median base salary of IMA members in the United States with only one to five years of experience was $64,900.

true; Those professionals in the United States with the CMA or CPA certification earned 31% more in total compensation than members with no certification, while those who held both the CMA and CPA certifications earned 45% more than noncertified members.

Business trends and regulations are continually changing. To remain competitive, companies need to be nimble and adaptable.

true; business trends and regulations that are significantly affecting management accounting.

what differences in methods, assumptions, estimates, measurement choices, and judgment calls might impact the information that is used for decision making? Because of the gray areas and judgment involved, accounting numbers are rarely as precise as they may seem.

true; gray areas

GLOBALIZATION: The barriers to international trade have fallen over the past decades, allowing foreign companies to compete with domestic companies. Firms that are not highly efficient, innovative, and responsive to business trends will vanish from the global market. However, global markets also provide highly competitive domestic companies with great opportunities for growth.

true; have to keep up with business trends and a changing environment (in this case, knowing that foreign companies compete with domestic companies)

Globalization has several implications for managerial accounting:

1. Stiffer competition means managers need more accurate and timely information to make wise business decisions. Companies can no longer afford to make decisions by the "seat of their pants." Detailed, accurate, and real-time cost information has become a necessity for survival., 2. Companies must decide whether to expand sales and/or production into foreign countries. To do so, managers need comprehensive estimates of the costs of running international operations and the benefits that can be reaped. They also need to be aware of regulations and laws in other countries that could impact their operations. For example, England and Europe tend to have much stricter environmental protection laws than the United States., 3. Companies can learn new management techniques by observing their international competitors. For example, lean thinking, which is discussed next, was developed in Japan by Toyota. Lean practice has now been adopted, expanded upon, and refined by U.S. companies.

Business Management

If you are planning to be a general business manager, not a day will go by in which you don't consider the financial ramifications of your decisions. You'll need to have a firm grasp on the costs of obtaining or manufacturing every product you sell and/or every service you deliver. You'll also want to understand how costly every activity within the company is to perform and have specific strategies in hand for controlling and reducing those costs. You'll need to understand which costs will increase as your volume increases and which costs will be unaffected by changes in volume. Cost information will drive many, if not all, of your decisions about where to locate, what to produce, which suppliers to use, whether to outsource, which products to emphasize, whether to implement quality improvement initiatives, whether to automate some of your processes, how to price your products or bid for jobs, whether to discontinue certain products or operations, and so forth. Every business decision you make will be rooted in revenue and cost information, so it will be important for you to understand how those costs were obtained and what they include. Different costs will be used for different purposes.

Entrepreneurs

If you are planning to be an entrepreneur, you'll first want to know if your business idea makes financial sense.How high will volume have to be for your business to at least break even? How high will it have to be for your business to earn the level of profit that you want to achieve? As you begin to implement your business plan, should you negotiate sales contracts that are more fixed (flat fee) or variable (fee per activity)? What about costs? Would having more fixed costs or variable costs be better? How sensitive will your profits be to changes in volume if the economy booms or if it takes a turn for the worse? How will you decide whether to invest in new equipment and technology? As your business grows in size, how will you divide it into manageable segments and relinquish oversight of day-to-day operations to others, while at the same time retain control? How can you design systems to ensure your managers will make decisions that are consistent with your goals? And if you decide to raise capital or sell your business, what will potential investors want to see when they analyze your financial statements and study your statement of cash flows?

Marketing and Sales

If you are planning to be in marketing and sales, your marketing strategy, assumptions, and predictions will be the driving force behind the company's entire budget. As a result, you will be intimately involved with developing the budget. Product-line profitability reports will show you which products are most profitable and will guide your decisions about which products to emphasize. Cost information will drive many of your pricing decisions, as well as decisions about whether to accept special orders at reduced sales prices or give volume discounts. The company's stance on sustainability may impact your ability to attract various customers and target different markets.

The IMA's Statement of Ethical Professional Practice requires management accountants to do the following:

Maintain their professional competence. Preserve the confidentiality of the information they handle. Uphold their integrity. Perform their duties with credibility. (These ethical standards are summarized in Exhibit 1-6, while the full Statement of Ethical Professional Practice appears in Exhibit 1-7. section 1.2 of book)

In 2012, the American Institute of Certified Public Accountants (AICPA), the world's largest association representing the accounting profession, joined forces with England's Chartered Institute of Management Accountants (CIMA) to launch a separate specialized credential geared toward members who work, or have worked, in accounting roles in business, industry, or government. The Chartered Global Management Accountant (CGMA)designation, which is available to qualifying AICPA and CIMA members, is meant to recognize the unique business and accounting skill set possessed by those certified public accountants (CPAs) who fill, or have filled, accounting roles within an organization, as opposed to strictly public accounting roles. The CGMA has issued a "Competency Framework" that covers many of the same technical and nontechnical skills shown in Exhibit 1-4. Currently, 36% of AICPA members work in management accounting rather than public accounting.5 Qualification for the CGMA designation is based on examination and professional experience.

true

Management accountants continually face ethical challenges. The IMA has developed principles and standards to help management accountants deal with these challenges. The principles and standards remind us that society expects professional accountants to exhibit the highest level of ethical behavior.

true

Management accountants should be proficient in Excel.

true

Management accounting always begins with some relevant business issue that management is facing or some economic event that occurred in the past or might occur in the future. Management accounting is used to shed light on the issue and direct management's path.

true

Management accounting information helps management decide whether any or all of these actions will help accomplish the company's ultimate goals.

true

Management uses many different performance evaluation tools to determine whether individual segments of the business are reaching company goals.

true

Managerial Accounting Is Important to All Careers

true

Managerial accounting provides the financial insight needed to help make these decisions.

true

Managerial accounting translates these plans into budgets

true

Manufacturers still need to know how much each unit of their product costs to produce. In addition to using this information for inventory valuation and pricing decisions, manufacturers also use cost information to determine whether they should outsource production to another company or to an overseas location, or even whether they should reshore (relocate) it back in the United States.

true

Most corporations are too large to be governed directly by their stockholders. Therefore, stockholders elect a board of directors to oversee the company.

true

No matter what your eventual career, you will be using managerial accounting information. As is often said, accounting is the language of business, so the more you know about it, the more valuable you will be to your organization.

true

Now, consider the integrity standard. It states that management accountants must abstain from any activity that might discredit the profession. A management accountant who commits an illegal act is violating this ethical standard.

true

On the other hand, managerial accounting focuses on identifying, interpreting, analyzing, and implementing the financial information internal management needs to run the company efficiently, effectively, and profitably. This information takes many forms depending on management's needs.

true

Outside of government, more people are now employed in the service sector of the U.S. economy (77 million) than in retail and wholesale merchandising (21 million); manufacturing, construction, and mining (19 million); and agriculture (2 million) combined.10 Service companies provide health care, communication, transportation, banking, professional consulting, education, hospitality and leisure activities, and other important benefits to society.

true

Robert Half International, Inc., is another good source for salary information. Robert Half publishes a free yearly guide to average salaries for all types of finance professionals. The guide also provides information on current hiring trends. In addition, Robert Half offers a free online interactive salary calculator, which allows you to drill down to salary information by zip code, years of experience, job title, and company size. To explore salaries in the fields of accounting and finance, do a web search on the phrase, "Robert Half Salary Guide and Calculator."

true

Service companies also need cost information to make decisions. For example, health care providers need to know the cost of performing procedures and running lab tests; hotel managers need to know the cost of providing rooms and amenities to guests; cell phone carriers and Internet service providers need to know the cost of providing texts, data, and cloud computing services; and entrepreneurs that develop apps, such as Uber and Airbnb, need to have a good understanding of their cost structure and how they will monetize the site. No matter what the service, cost information helps managers make vital business decisions, such as pricing decisions, marketing decisions, decisions to invest in new technology, and market expansion decisions.

true

Since management accountants work in a professional advisory role, they need a vast array of skills. Some of these skills are technical, whereas others are nontechnical competencies, which are often referred to as "soft-skills."

true

Starbucks uses management accounting to make operating decisions that focus on corporate responsibility, while also keeping the company financially strong

true

The CMA exam topics reinforce the technical skills, shown in Exhibit 1-4, that management accountants are expected to have.

true

The board members meet only periodically, so they hire a chief executive officer (CEO) to manage the company on a daily basis.

true

The internal audit function reports to the audit committee of the board of directors.

true