Chapter one is a broad interview of managerial accounting. The purpose of financial accounting would be to provide useful information to external users such as investors and creditors. For managerial accounting the decisions are for the internal decision makers such as managers and board of directors. You need information to solve and evaluate information.
We have three objectives for managerial accounting:
A ) To provide information for costing products, services and other objects of interest to management
B) To provide information for planning , control and performance evaluation.
C) Providing information for decision making.
Managers need accounting information, why?
1) How are the information being used
2) Managers can identify problems , solve problems and evaluate performance
3) Accounting information used in all organizations: Manufacturing, Merchandising, service, non profit and government
Imagine you are a CEO of gap store and what are the types of information they need and what decisions going to help you make.
What are the types of information:
Sales Volume, Expense ect
Conceptual framework of management accounting
Four legs of management accounting
1) Planning 2) Control 3) Performance evaluation 4) decision making
Planning : short term planning vs long term planning
Long term planning is more of a strategic plan , what do you want to achieve in the future whereas short term planning is more of a budjet.
For example Telus, beating shaw with optic tv, stealing business from shaw. Strategic planning .
Control : Am i sticking to my plan? We compare actual results to planned results ( budjeted result and material differences ( performance report)
For example new year resolution . I want to work out 5 times a week in the upcoming year but if i only work out 2 times in one week there is huge difference.
For big businesses with large volume we have to delegate decisions making authority since management and CEO cant really delegate authority. Delegation creates a need for performance evaluation.
The planning and the Control cycle
We plan long term and short term first , then implement plans ( directing and motivating) , Then we measure the performance ( controlling ) , after then we evaluate the differences between plans and actual performances.
Professional judgment , we say that the results is material if its >= 5 % of budget.
(Actual – budget) / budget >= 5 % , then we say that the results is significant
Decision making
-In order to make decision there must be choices, thus decision making must be choosing among competing alternatives
– because of information asymmetry ( managers know more about current condition and future prospects of firm than outside investors/ owners and cant be observed continuously.
Managers not always act in the best interest of the company. ( Goal in congruence)
Management accounting
Cost accounting systems
Knowing how cost behave is crucial for successful enterprise
Knowing how cost behave is important for flexible budgeting and cost volume profit analysis ( cvp ) and decision making
Cost behaviour can be fixed vs Variable
Fixed can be rent and salary whereas variable can be commissions and such
Knowing how cost behave can help us plan and its only variable cost will change as output changes.Imagine your are ceo of air Canada and last minute i want to go to vegas. The ceo of air Canada is there and i run to him for a private conversation. 20 $ take it or leave it to go to vegas. What would be decision of CEO?
1) Accept if the price is greater than the variable cost, exess capacity , request is a special order
Now i say , ill give ceo nothing and just put me on the plane. Take it or leave it?
Knowing the cost going up and down , you will make your decision on this request.
Cost of making , increase in revenue vs increase in cost. Cost going up would be variable cost.
Comaparison of Financial vs Managerial accounting ( purpose is the same )
Providing ( Useful information to users for decision making )
Financial accounting focus on external users : Investors and creditors
Managerial accounting : Management and board of directors
Financial accounting use gap for external report, but management accounting dont have to use it only guided by usefulness to managers
The structure of practice tends to be rigid whereas managerial accounting is relatively flexible.
From comm 294 class and Libby