Managerial Accounting [6 ed.] 0759314071, 9780759314078

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Managerial Accounting

THOrvlSoN C(JSTOIVI PTJBLISHTNG

Pie e L. Titad, Ph.D.,

CPA

2004,ThomsonLearnnq

2003,pp1324,tthDrDeanDGreqoro

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accounting' The ns and how it relates to financial

iiformatiqn and rvhy minagerial accountlng

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nizations.

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RF OF }L\NAGEtu'1'L

Accousuxc ng' communic

calle t can make is used Pri often

the firrn The oses;

it

maY o

)ourse-

[yp"s o{ Decisions

to*n

or to buy it from an outside

"" It t to make an item is often diff rcult' ata.

related to a iuoe of decision' The expansion may be this.tvpe or mrking go about a firm ;.;s ;#-;;; provides management wlth oata

nug.taf accounting

must be made rcgTeg ttre tirnfug of equipment reptarermnt, re nmH.as rhe type of new equiprnent to be bought. The use of wnagerial xeounting provides informatioo for rhisdacision-making

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taik.^ rnanagtt'smostiE{fifiantjobsis that of evaluating sr$odirm managers. This type of decision omotions. The use of interml information assists in the ce. Thus, it is virally importarit ement maie p."pr rrr"f

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It is important toreahze thatinti:mal accounting information des ns

but merely provides

a

make decisions for management

basis

for accountants. In cach ex do this in a reasonabh, rati As a potential fuure rnanagil,

Iur

need to un

faced with exactly- rbe sarne typs of decisions illustrate the concepa Eessaryfumaking variou These conciprs appEaOitiry that you silrratisns \Yhi.t facehe

financial i ent, the ba of chsh fl

statemen6 may varys&newhat from one firm to another but theyhalrthr same relative format. A financial aceoun[Dg course ftr]rcs detaih for accumulating informalion and rcporting it through these four formal

financial statements

Many principles, financial st

in confonni Ap

provide

ally accepted accounting

nst which outside users of differencesareorg firms. Firms registered with the Securities and Exch*p Conraission, (SEC), as well as -."y .rher-nrr' , must have their hnancial stalements audited hy certihed public accountants. CPAs repfrt oft tle fairness of financial statement presentation i 1ly accepted accounting prin€ipl€s Owners 2 5 firm are interested in ard nql often use the infonnation reported in formal financial statemenrs- llowever, the primary p atements is to communicate to individuals:rndinticsredparriesoutside thefirm. With th ation, outside parties rnake.such decisions as to whetr*to erterdcredit to the firm and whether to fuwsf in the hrm by buying stock or to are variols f,rrrm. ro decide which firm appears to be a

le in tbe groxth of our economic system.

The

anagerial* is irnccsrate, because there is no conflict icates informatiqr fordecision-making. The decision-

roprovide inromratioarorborhcsrrnunicarionneeds

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[ct us exuntittc some of the drurv data from the samc sotrrces. with this in rnind' ofc'llch are basc'd peculiaritic's that typcs offlccounting. reuliz-ing l.lcrcnccs nntl sinrilarities bctwcsn thc two t the informlttion ncL'ds of thc usr:rs'

1,.,...rr*o. Both rn;.r;-

i:i!-,,.:I:,-.-: externrl ii'i' ' 1i;'t''"'i ' 4t irancialstatenrentsofpubliclyreportec!compcnieslrreprepirredinconfaccePted sPecirlc and difterenc.s of

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ovide enough stlndardization in external reporting a Frrm brsed on its financial statements'

cision-making. Managers can use a variety o[ ons. The information and format for reporting desires of management. The use of generally rial accounting' Management can develop and

ncerned with the presentation of exteinal financial

provi .r.iof in,.*"r hnancial information r deteimine their fai rness of presentat

:atements. Nlany CPA firms do

ting

s

PA is epted

of the CPA' )ilnrgerial irccounting cloes not normally fall under the scrutiny i-- -.,,,!r.;, Finon.ialaccountingterminologyisretltivelystandardized.Someprinciples,concepts' 'statement of term, irrch as "balance sheet" and nd llnancial statements mry be kno*n b-y mor" than one preferred cases' many in and' standardization; ,nancial position." Neverthlless, there ii a fair degree of :rminologY exists. body' its terminology is less Since managerial uccounting does not have a fornurl rule-making uscd differently in different terms uccounting managerial tandardized. As a result, you sometitnes wilt find ituations.

accounting. from a practical standpoint- the economic counting than on financia[ accountingwhat tements are based on historical cost and reflect predicting of an idea with information the ents look at

Tlan man

lhat accounting. Firms nectl to make decisions about the precise than historical facts.

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i'-''"r--Fm.ucialaccounting,forthenrc'stprrt-npclsonthebusinessasawtole

ialthough the FASB, es rell as the SEC, require certain informaion to h reported exrernallv based on operating units).' r\'Iarryoial accounting may involve the busircss a a *trdc- but it also includes details of predictions and perforrnan-e ofspecific operating units ofa Frr4. a utfl asperformanca ofindiriduals.

:', ,;i.-,.lI:... -l':ic .\croi:r:ii i;g i-'-.ter-,:. Many differences exist be twen fimsdal accountin_s and rmnagerial accounting' but a properll desi-ened accounting system accumulatel inforud-ion that can be used forLth The accounting system isdesigned oo gather information for financial reporling purposes. It is required to do so- How'ever, the irforsntion also is u.sed as part of the manageric process. As'necessary. the accounting system can provide adtiticnal information for m magerial purposes To illustrate' man"-uerirl accounting often invoh'es projections of sales-A first step in projecting sales is to analyze past saler Information on past sales is reported io a lcdgerrcrount and in p..riors finlancial statements' aod it is redilyavailable formanagerial purposes. Manassrial accurnting, however, is concemed not ooly with tota! sa ith the,breakdownof sales iuto$ch elements as geopaphical areas: Product lines; jndividual stores, niamgeri zrd salesperson.. Tha ,r".a fo,

prodrrt-line

keakdo

ween

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provided by each maydifftr, but both represent sourcei of inforrnrion famers.

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Any organization for rhich financial informarion is needed

p sed in norfor-p tives, but their

is called

tions. To this

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en

tcd

t\

g,.riiz a tion

ar enliry.. Thi.s term covers both [med to accounring forbusiness Tbese two types ofentities have

re quite similar.

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are referred to as busincss fnms These Erms sell products or proride nue. In so doing, they incur expeases. Tlx difference between s either net incorne or net loss over the long-run, afirn's income must exceed its losses m i[ udl goortof business. Furtherrnore, net tlrcorle musl provide a rate of return on the frrm'S in

r.r*r"

ctive of:ibusiness e,

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if

ma.rimi-zation

to thke a back sea

inactionsthatmight objectives, inclriin-e concern for lhe ervironment, for lheir employees,

'-Discjoswe aboul smmols.ran Enterprise ard Rdared hrormation CT: SroaarOJBoild. nme t994.

{Norck

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d Fnadal Accounfing staodei]s

No-

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Responsibility PRACTICE APPLICATION: Corporate Social MITSUBISHI MOTORS CORP. il it had been consider how mtlch better otl the tirm would have been Read about Mitsubishi's problem below and honest and ethical early on.

years, defects,w fixed on a For

shi.never reported complaints by Japanese consume tueileaks' malfunctioning clutches and fuel tanks P-ro any humitiating recalls' Milsubishi acknowledged the

it announced another recall.

Mitsubishiislikelyto(aceanUphillbattlegainingconsumers'Shatteredfaithinitsethics..lt'sdefinitelyanother itt"t proper steps to rectifv its mistakes'"' probrem ror Mitsubishi Morors. liU;"ffi; ililts".r "[Jiuiiitv "n." ".

ts is based on an accounting system that reports

iI.,t-f,rt-Pro{i: Ord-I:tizations entities as schools; hospitals: Iibraries; charitable Not-for-profit organizations are tlpified by such The primary objective of these entities is to provide governmentsfederal and

I

prganizations; and local, state,

;ervices. he Since the role of managerial accounting is to These organizations' not-for-profit in blace it has or charges (such as hospital bills) t

:ontributions,

:ut this text. i

[*

FiR][ O*.-,4N1ZATI9N jr-i:{o }IAn**\GEI\1ENT A BLISINESS process, rt is useful to- discuss managelllcnt Since managcr.ial accounting is part of th.e-managelnent accountrng' before lJoking at specific applicatio.s of managerial ;;;;;i;a,ions

Auqusl 23' 2000 3C' 4C Yuri Kageyama, Fhe (Baton Bouge' La I Advocale'

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The threebasic forrns of hxinrss organizations are singlepoprietorship, partnenhip. and corporatiorL Managerial accounting is importaat in all three types of orgaizations, wtrcther small or large. As stated earlier, the erternal hnancial .statemnts of a busine ss reptrt tEe financial poriti,on and results of operatiorl{ for the business as a tr,hole.,Howewr, internally, managemefr mrst have information regarding all of the individual pats of the business

Seg':erer:i.=

"{

nrl L}rg*nizaiion

of an organization i5 x egment-an area of activity about which accounting information is mtual names given rosgElents vary among firmq they me-v be called departments, branches. divisions, or the like. DBpartrrcd slores usually are dirriM into depannrents, such as the furniture Each part

desired. The

departrnent, the housewares and the appliatrce department- Hcwever, Sears, Roebuck and Company designates its depatnm as divisions. Yet, for Crencral lt4otors, divisions represeftt majs segments, such as Chevrolet Dfvisi& Cadillac Division, and Buick Division. Thus, tirles do not give an-v indication of a segment's size.

Illustratia- o{ S"..t}r*.* Foool St.rr*" I

accounting concepts, atr shown in Exhibit I - l.

nc

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from internal reports on variousse,gnentsin order to maki: decisionsabout

tlrrn

Segrnent reporting is

a

pan

of what is called responsibiEty mounting-a system of rrounting under which managers are gilea decision-making authority and respnsibility for activities occErrirrg within specific areas of a compary. Authori|* is tIre power or right to sake decisions; responsilility, is the reguirement to be answerable or accountable for the results of decisio*s- A manager shorrld nercr begiven responsibility without authority.

-

and authority always entails respormibitity. Thus, a manager vho has au:hority to make decisions about a particular segrnent also has reryn-6i1iry for the ultimate resr*ts of that segrnenl. For example, Southernt Slrevryrt area manager is given a.rthority to make certain decisions that allow theareastorestomeetprofitg@ls- Thesedecisions would typicallyirrclude such items'as hours of operation, riumbe r of erryloyees, p ut. If the S has a problem meeting proht goals, the area manager is resp the reason m and.to take the neceiiary .steps to solve the problem. Ultimatety, the *ea manager must be ablc to explain both successes and failures to top management- In some cases, tbe n cessary steps the autho-ity of .the area manager. For example, if an individual store nee& substantial r ract customers; the decision to incur the costs of such renovations woukgwrally come from top maqement. . ..The concept of responsibility aeounting is an important prt of managerial accounting. This concept is dlscussed nrore fully in Chafier 6il

)(HlBlT 1-1

South€rn Food Stores, Inc' Organizalion Chari

lanat'crnent ConcePts who direct the operations Nlanngement is detlned as an indiviclual or a collective group of individuals who has thc authority to nlakc decisiorrs is iln incliviclual manlgcl a firm. any business ln cntity. an if -icg,rnli^g nsi s. As lire viously trtentionc(1, \4'ith iiu sgrccifi. urg,".,,

n,in"g.r-, ,rre consi6ered l"vnribl" or unfavorablc. t'unctiorrs

tbr clccisions within their irreas of t.rnt tlrrt clcar lincs of authority b

of nranagerial accounting is to providc infortnatiorr, based

svrlualiott of rrtanagerial per[ornlancc'

th

o[ ty.

the owner, *,ho ir are needed to nrlrkr,

terminology is nor gement, (2) mitldle

Soufiern Food Storesl for example, .lower_ sponsibilities for rlrcir particuf ur.os.

*

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u;rctions of $ar.age,rnent theorists divide managenrent activity into appticabiliry to rnanaleriat *i;;;;;,'(t;

a

e, isoldrion

same'tirne,

,

Exarlples of types of decisions in whictr manrgerill accounting is particularly helplul were pror idr-'d in Irn earlier scction. Spe'cific manugerial accounting aprplications in decision-making nre iIlustr.rted in Llter chaptcrs.

l.l:iL: i,r-,. For u firm to be successtul, ruirnilgcrncnt ntust sei organizittionill golls. P/trrrrrirr.q is determining in aclvancc wlut steps are needed to sttisty these goals. [t includes short-run planning. such as to w(rrk on a deciding how late ttr sray

long-ra called trgonizitional goals. Plan

s-

lparticulir day. an,l ,,olannins often

Lon-s-range

lchier.in-s, il, ion on horv to

is

lachieve a particular objective. - rr ! .plans. It is imp,ortartt in o r r t :.i. l', ...4.. Comrdlling is a function that insures adherence to managen)ent C i iboth small and large organizations and at all levels of management. when middle and top managers are unable to personally ' Controlling becomes particularly significant segment. Thus, they rely.extensively on internal reports. business ofeach operations everyday all the ,observe Reports of actual results are compared with planned results. When signi{icant deviations occur, management rakes steps to determine the reason for such deviations and provide! corrective action, if appropriate. The information provided management in these reports is often called/eedbat:k. For example, assume that the planned sales for a particular month for the Jackson area of the Southem Food Stores are $3 million but that ihe state operations manager for Mississippi receives a sales report shorving actual monthly sales of Sl.5 million. The manager must take steps to determine why the expected result was not achieved and. depending on the reasons, must nrake decisions re-Earding the Jackson area. Unless management compares results with expcctations in this manner, the planning Process is not as effective as it could be. .

l-je c'.srr, i: - )- i ,r Li . r *.. AII funcrions of nranagement include decision-ntaking. Managerial accounting is designed to provide i"nog"*.nt with information for accomplishing the functions of planning and controlling: however. it also focuses on specific types ofdecisions, as previously discussed.

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vers i-r:: ])ece n ir:rlizatiol

A centralized jinn is one in which top management makes all the decisions and middle and lo*er management carry them out.ln a highly centralized firm, middle and lower management have linle authority: their primary responsibility is to follow the dictates of top management. In a decentralized fizn, managers at the lower levels have more authority to make decisions regarding their particular operations. Therefore,

they are responsible for the results of these decisions. There are degrees of centralization and decentralization, and most finns fall somewhere in the middle between highly centralized and highly decentralized. A primary advantage of centralization is that it enables top management to insure that the firm's policies and procedures are adhered to in attempting to accomplish the company's goals. Also, lower-level managers who are not censidered to be as competent as they should be pose a smaller risk when decisions are ning rvhether to decentralize operations. One major

wcrlevel managers. When given more authority, these ses. Decentralized firms often ar'e able to attract toP

,

In a deccnt

norrnally no Anothcr fa

lThcy

control over operations. esponsible lor rnaking thc dccisiohs are closer to thc problcms. helps thenr to make bctier tlccisions lhan someone at a higher

situation. ion is that top managcmerrt (l()cs not have to bc concernccl *itlt' : the day-to-duy opcrations. Top ntanagemcnt ciln dcvotc its lintc irtttl cnergy to strategic planning and ver a shorter range of activity than a traditional fixerl cost. This rvpe of cost is most commonly represented by certain types of sellinj and administrative expenses tlrat do not change in direct proportion to changes in sales, such as salaries for sales managers and office clerks. Manulacturing firms may incur step-variable costs in the salaries of maintenlnce personnel and factory supervlsors. To illustrate, assume lhat each of lhe Southern Food Stores describcd in Chapter I hires checkout clerks on the brsis of sales volurne. An increase in sales requires more clerks, but the number of clerks needed is not in direct proportion to dollar sales. Each checkout clerk'ispai