Chapter 1: Introduction to Managerial Accounting

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

- Maintain their professional competence.

A Road Map: How Managerial Accounting Fits In

1. Managerial Accounting Building Blocks: Chapter 1 helps you understand more about the management accounting profession and today's business environment. Chapter 2 teaches you some of the language that is commonly used in managerial accounting. 2. Determining Unit Cost (Product Costing): To run a business profitably, managers must be able to identity 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 locations. Managers must have this information so that they can set prices high enough to cover costs and generate an adequate profit. 3. Making Decisions: Before Harold Schultz opened the first Starbucks coffee house, he must have thought about the volume of sales needed just to break even - that is, just to cover costs. In order to do so, he had to first identity and estimate the types of costs the coffee house would incur, as well as the profit that would be generated on each beverage served. 4. Planning: Budgets are management's primary tool for expressing its plans. 5. Controlling and Evaluating: Management uses many different performance evaluation tools to determine whether individual segments of the business are reaching company goals.

What Role do Management Accountants Play?

1. What is the business issue, event, or problem, and how can accounting help to solve it? 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. 2. What are the "gray areas"? In other words, what differences in methods, assumptions, estimates, measurement choices, and judgement calls might impact the information used for decision making? Because of the gray areas and judgement involved, accounting numbers are rarely as precise as they may seem. 3. What are the implications for the business if the accounting information used in the decision is "wrong"? Because of the gray areas, it's difficult to say that accounting information is ever "wrong." However, judgement 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?

Managerial Accounting Is Important to All Careers

Entrepreneurs: If you are planning to be an entrepreneur, you'll first want to know if your business idea makes financial sense. 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. Marketing and Sales: If you are planning to be in marketing and sales, your marketing strategy, assumptions, and predictions will be the the driving force behind the company's entire budget. 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 consequence to you.

Manager's Three Primary Responsibilities

Managerial accounting helps managers fulfill their three primary responsibilities: planning, directing, and controlling. Planning involves setting goals and objectives for the company and determining how to achieve them. For example, one of Starbucks's goal is to generate more sales. One strategy to achieve this goal is to open more retail locations. For example, the company opened 731 new company-operated stores in fiscal 2015, roughly half in the U.S. and half in China and the Asia-Pacific. Another strategy is to develop new products and new distribution channels (selling coffee through grocery stores and warehouse clubs). Directing means overseeing the company's day-to-day operations. Management uses sales and costs information by store, region, and distribution channel, to run daily business operations. 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 uses that info to adjust offerings, marketing strategies, and retail expansion decisions. Controlling means evaluating the results of business operations against the plan and making adjustments to keep the company pressing toward its goals. Starbucks uses performance reports to compare each store's actual performance against the budget and then based on that feedback take corrective actions if needed. If actual costs are higher than planned, or actual sales are lower than planned, then management may revise its plans or adjust operations.

Differences Between Managerial Accounting and Financial Accounting

Starbuck's financial accounting system is geared toward producing annual and quarterly consolidated financial statements that will be used by investors and creditors to make investment and lending decisions. Starbuck's managerial accounting system is designed to provide internal managers with the accounting information needed to plan, direct, and control operations.

Management accounting

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.