Managerial Accounting

Tools for Business Decision-Making

Sixth Canadian Edition
Weygandt Kimmel Aly

Chapter 1
Managerial Accounting

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Copyright ©2021 John Wiley & Sons Canada, Ltd.

Learning Objectives
1. Explain the distinguishing features of managerial
accounting.
2. Identify the three broad functions of management and
the role of management accountants in an organizational
structure.
3. Explain the importance of business ethics.
4. Identify changes and trends in managerial accounting.

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Managerial Accounting Basics (1 of 5)
Definition of Managerial Accounting:
A field of accounting that provides economic and financial
information for managers and other internal users.
Also called Management Accounting.

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Managerial Accounting Basics (2 of 5)

• Explain the field and substance of managerial

accounting (Chapter 1).
• Explain various managerial cost concepts useful in
planning, directing, and controlling including:
o cost flows and the process of cost accumulation in a
manufacturing environment
o how costs are reported in the financial statements
(Chapter 2).

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Managerial Accounting Basics (3 of 5)
• Calculate the cost of providing a service or
manufacturing a product (Chapters 3, 4 and 5).
• Analyze the effects of volume changes on the cost and
profit relationship within the company (Chapter 6).
• Accumulate and present relevant data for management
decision-making (Chapter 7).
• Evaluate the impact on decision-making of alternative
approaches for costing inventory (Chapter 8).

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Managerial Accounting Basics (4 of 5)
• Determine prices for external and internal transactions
(Chapter 9).
• Assist management in profit planning by preparing
budgets (Chapter 10).
• Provide a basis for controlling costs and expenses by
comparing actual results with budgeted numbers
(Chapters 11 and 12).
• Accumulate and present data for capital investment
decisions (Chapter 13).

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Managerial Accounting Basics (5 of 5)
• Distinguishing Features
o Applies to all types of businesses – service,
merchandising, and manufacturing; and not-for-profit
and profit- oriented
o Applies to all forms of businesses – proprietorships,
partnerships, and corporations
o More responsible for strategic cost management
o Team includes members from production, marketing,
engineering, etc.
o Aid in making critical decisions

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Comparing Managerial and Financial Accounting (1
of 2)
Similarities:
• Both deal with economic events of a business
• Both require that economic events be quantified and
communicated to interested parties
Differences:
• Managerial accounting focuses on the present and the
future; Financial accounting focuses on the past
• Primary users of managerial accounting information
are internal users

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Comparing Managerial and Financial Accounting (2 of 2)

Features Financial Accounting Managerial Accounting

Primary Users of Reports External users: shareholders, Internal users: officers and managers.
creditors, and regulators.
Types and Frequency of Financial statements. Internal reports.
Reports Quarterly and annually. As frequency as needed.
Purpose of Reports General-purpose. Special –purpose for specific decisions.
Content of Reports Pertains to business as a whole. Pertains to subunits of the business.
Highly aggregated (condensed). Very detailed.
Limited to double-entry accounting Extends beyond double-entry accounting
and cost data. to any relevant data.
Generally accepted accounting Standard is relevance to decisions.
principles.
Verification Process Audited by CPS (chartered No independent audits.
professional accountant).

Differences between financial and managerial accounting

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Let’s Review 1
Which of the following statements represents a similarity
between financial and managerial accounting?
a. Both provide information useful to external users.
b. Both are governed by IFRS/ASPE.
c. Both use data from the organization's accounting
system.
d. Both rely heavily on published financial statements.
e. Both are concerned solely with historical transactions.

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Let’s Review 1: Solution
Which of the following statements represents a similarity
between financial and managerial accounting?
a. Both provide information useful to external users.
b. Both are governed by IFRS/ASPE.
c. Both use data from the organization's accounting
system. (correct answer)
d. Both rely heavily on published financial statements.
e. Both are concerned solely with historical transactions.

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Management Functions

Management's activities and responsibilities can be

classified into the following three broad functions:
1. Planning
2. Directing
3. Controlling

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Management Functions: Planning

• Future Oriented – Looking ahead

• Establish objectives such as
o Maximize short-term profit and market share
o Commit to environmental protection
o Contributing to social programs

• Key Objective: Add value to the business

o Value measured by trading price of the common
shares and by potential selling price of the company

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Management Functions: Directing

• Coordinate diverse activities and human resources

• Implement planned objectives
• Provide incentives to motivate employees
• Hire and train employees including executives,
managers, and supervisors

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Management Functions: Controlling

• Keep activities on track

• Determine whether goals are met
• Decide on the changes needed to get back on track
• Typically use a formal system of evaluation
Good decision-making is the outcome of good
judgment in planning, directing, and controlling.

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Let’s Review 2
Each of the following statements describe a function of
management. Identify each as either Planning, Directing
or Controlling.
1. Preparing a budget and comparing that to actual
results achieved.
2. Examining the viability of expanding into a new
geographic market area.
3. Establishing a hiring committee to select a new CFO.

Copyright ©2021 John Wiley & Sons Canada, Ltd. 16

Let’s Review 2: Solution
Each of the following statements describe a function of
management. Identify each as either Planning, Directing
or Controlling.
1. Preparing a budget and comparing that to actual
results achieved. Controlling
2. Examining the viability of expanding into a new
geographic market area. Planning
3. Establishing a hiring committee to select a new CFO.
Directing

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Organizational Structure: Organizational
Chart
• Organizational charts identify the interrelationships
of activities, the delegation of authority and the
delegation of responsibility
• Responsibilities within the company are frequently
classified as either line or staff positions
o Line positions are directly involved in the company's
main revenue-generating operating activities
o Staff positions are involved in activities that support
the efforts of the line employees

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A Typical Company's Organizational Chart

Corporation organizational chart

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Organizational Structure and Functions
(1 of 2)
• Chief Executive Officer (CEO)
o Typically the highest position or office in an
organization
o Primary responsibilities include:
• Make major corporate strategic decisions
• Manages the overall operations and resources of the
company
• Acts as the main point of communication between the
Board of Directors (and shareholders) and corporate
operations and is often the public face of the company.

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Organizational Structure and Functions
(2 of 2)
• Chief Executive Officer (CEO)
o Responsible for all accounting and finance concerns
o Supported by:
• Controller
• Responsible for maintaining accounting records and
adequate internal control system and preparing all
financial reports
• Treasurer
• Maintains cash position; manages cash flows and short-
term investments

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Let’s Review 3
The officer responsible for all of the accounting and
finance issues a company faces is the:
a. Chief executive officer (CEO).
b. Chief financial officer (CFO).
c. Controller.
d. Treasurer.

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Let’s Review 3: Solution
The officer responsible for all of the accounting and
finance issues a company faces is the:
a. Chief executive officer (CEO).
b. Chief financial officer (CFO). (correct answer)
c. Controller.
d. Treasurer.

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Good Ethics – Good Business
• Major corporate scandals in the past decade have involved
mismanagement, alleged ethical lapses, and criminal
behavior.
• Some of the causes of these scandals include:
o Greedy corporate executives, lack of oversight by Board of
Directors, poor work by external auditors and lack of
oversight by audit committees, lack of sufficient probing by
financial analysts and the financial press, and overly
aggressive accounting.
• Result is a greater emphasis on the importance of ethical
behavior in organizations and the role of the management
accountant in effecting this.
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Creating Proper Incentives
• Monitoring and evaluating employees may produce
incentives to act unethically; for example, overly ambitious
budgets may produce unethical management actions to
meet targets
• Employees may feel that they must succeed no matter
what
• Ineffective and unrealistic controls may result in declining
quality of product
• Good ethics add value to a company's image

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Code of Ethical Standards
• Financial accounting information is geared towards external
users; hence stricter accounting and reporting principles and
standards
o Sarbanes-Oxley Act of 2002 (SOX)
o IFRS; ASPE
• Managerial accounting information is geared strictly for internal
users; ethical standards and practices are just as important
o CPA Canada: CPA Code of Conduct
Ethical conduct in its highest sense, however, is a product of personal
character — an acknowledgement by the individual that the standard to
be observed goes beyond that of simply conforming to the letter of a list
of prohibitions
https:/media.cpaontario.ca/stewardship-of-the-profession/pdfs/CPA-On
tario-Code-of-professional-conduct.pdf
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Corporate Social Responsibility
• Considers not only profitability but also the company's
efforts to employ sustainable business practices regarding
its employees and the environment
• Often referred to as the triple bottom line
o People
o Planet
o Profits

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Let’s Review 4
Triple bottom line does not include which of the
following?
a. People
b. Plants
c. Profit
d. Planet

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Let’s Review 4: Solution
Triple bottom line does not include which of the
following?
a. People
b. Plants(correct answer)
c. Profit
d. Planet

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Managerial Accounting Today: Service
Industry Trends
• In general the North American economy has shifted
towards more service industries
o Trend is expected to continue in the future
• New operating controls have been designed to improve
the quality and efficiency of specific services
• Many of the techniques developed for manufacturing
firms have been applied to service companies

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Managerial Accounting Today

Service industries and companies and the managerial accounting questions

they face
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Managerial Accounting Today: Value Chain

Value Chain: All activities associated with providing a

product or service, that add value to the product or
service.
An example of a manufacturing firm value chain:

A manufacturer’s value chain

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Managerial Accounting Today: Technological
Change
• Enterprise resource planning (ERP)
o Software systems that manage the value chain
o In large companies, an ERP system might replace as many as
200 individual software packages
• Computer-integrated manufacturing (CIM)
o Makes products untouched by human hands
• Business-to-business (B2B) e-commerce via internet

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Managerial Accounting Today: JIT

• Just-In-Time (JIT) Inventory Methods

o Inventory system where goods are manufactured or
purchased just in time for use
o Advantage is reduced inventory cost
o Requires close relationship with supplier(s) to ensure
delivery and quality

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Managerial Accounting Today: TQM

• Quality/TQM
o Total Quality Management (TQM) - a philosophy of zero
defects; all employees participate in managing quality
o Requires timely reporting on defective units, rework costs
and warranty costs
• Also non-financial information such as customer satisfaction,
service calls
o Ultimately leads to product or process redesign to reduce or
eliminate defects

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Managerial Accounting Today: ABC
• Activity-Based Costing (ABC)
o Traditionally, overhead allocated to a product or service unit
based on labor or machine hours
o As production methods have evolved, overhead allocation
needed to change as well
o With ABC, overhead is allocated based on each product's
use of economic resources as it undergoes various activities
(number of orders or number of machine set ups)
• Underlying concept: activities, rather than units, cause or
drive overhead
o Results in more accurate product costing and scrutiny of all
activities in the value chain
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Managerial Accounting Today: Theory of
Constraints
• Theory of constraints (TOC): process used to identify and
manage constraints within the production system
o Constraint: something that prevents a company from
producing as many units of product or service units as they
wish; puts a limit on profitability
• TOC helps to identify ‘bottlenecks’: constraints within the
value chain that limit a company’s profitability
• Helps achieve overall goals of the company, particularly
profits

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Managerial Accounting Today: Lean
Manufacturing (1 of 2)
• Today most products require little direct labour to
complete, due in large part to advancements in
automation.
• Customers now dictate requirements to suppliers and
often look for smaller quantities of individualized
products.
• Lean manufacturing was developed in response to this
changing manufacturing environment.
• Goal of lean manufacturing: eliminate waste and
concentrate on meeting customer needs

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Managerial Accounting Today: Lean
Manufacturing (2 of 2)
• Researchers have highlighted five basic principles that are
crucial to the lean thinking process:
1. Define value
2. Identify the value stream
3. Make the value stream flow
4. Implement a pull system
5. Strive for perfection

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Managerial Accounting Today: Balanced
Scorecard
• A performance-measurement approach to evaluate
operations in an integrated fashion
o Uses both financial and non-financial measures
• Balanced scorecard metrics: Financial; Internal Business
Process; Customer; Learning and Growth
• Links performance measures to overall company
objectives

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Let’s Review 5
All activities associated with providing a product or
service is referred to as:
a. the value chain.
b. total quality management systems.
c. just-in-time inventory methods.
d. activity-based costing.

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Let’s Review 5: Solution
All activities associated with providing a product or
service is referred to as:
a. the value chain. (correct answer)
b. total quality management systems.
c. just-in-time inventory methods.
d. activity-based costing.

Copyright ©2021 John Wiley & Sons Canada, Ltd. 42

Let’s Review 6
Which of the following is not one of the five principles of
lean manufacturing
a. Respond to customer demands
b. Aim for reduced defective units
c. Identify the value stream
d. Specify a value

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Let’s Review 6: Solution
Which of the following is not one of the five principles of
lean manufacturing
a. Respond to customer demands
b. Aim for reduced defective units (correct answer)
c. Identify the value stream
d. Specify a value

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Copyright
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