Accounting as a Tool for Managers

1. Accounting as a Tool for Managers

Figure 1.1 Business Honor Society Student Meeting.

You have been elected as the coordinator of committees for your school's business honor society. In essence, this makes you the manager of all the committees. This is a new position that was created because the committees have never been evaluated for their effectiveness within the organization. Your job in this position is to ensure that the committees-such as recruiting, fundraising, community service, professional activities, and regional and national conference presentations-are operating within the goals put forth in the society's mission statements, as well as to assess the effectiveness and efficiency of each committee in meeting the organization's goals. Your starting point is to understand the overriding mission – the strategic direction and purpose of the society. Next, you want to understand how each committee fits into the strategic goal of the society and then identify the separate goals of each committee. Once you understand the purpose and goal of each committee, it will be necessary to know how each committee is going about meeting its goals. Last, you will evaluate each committee to see if the goals are being met.

Notice that in performing your role as the coordinator of committees, you will need financial information, such as budgets and financial statements, along with other non-financial information, for example, the society's mission statement, each committee's strategy statement, and records of their activities and meetings. To help assess how well the honor society and its committees are meeting their goals, you need more information than can be obtained from simply looking at the various financial documents assembled by each committee within the organization. The same is true in any business organization. Managers and other internal decision-makers need more information than is available in the basic financial statements: they need information generated by the managerial accounting system.

Source: https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 License.

1.1. Define Managerial Accounting and Identify the Three Primary Responsibilities of Management

The financial accounting process provides a useful level of detail for external users, such as investors and creditors, but it does not provide enough detailed information for the types of decisions made in the day-to-day operation of the business or for the types of decisions that guide the company long term. Managerial accounting is the process that allows decision-makers to set and evaluate business goals by determining what information they need to make a particular decision and how to analyze and communicate this information. Let's explore the role of managerial accounting in several different organizations and at different levels of the organization, and then examine the primary responsibilities of management.

Three friends who are recent graduates from business school, Alex, Hana, and Gillian, have each just begun their first postgraduation jobs. They meet for lunch and discuss what each of their jobs entails. Alex has taken a position as a market analyst for a Fortune 500 company that operates in the shipping industry. Her first assignment is to suggest and evaluate ways the company can increase the revenue from shipping contracts by 10 percent for the year. Before tackling this project, she has a number of questions. What is the purpose of this analysis? What type of information does she need? Where would she find this information? Can she get it from a basic income statement and balance sheet? How will she know if her suggestions for pricing are creating more shipping contracts and helping to meet the company's goal? She begins with an analysis of the company's top fifty customers, including the prices they pay, discounts offered, discounts applied, frequency of shipments, and so on, to determine if there are price adjustments that need to be made to attract those customers to use the company's shipping services more frequently.

Hana has a position in the human resources department of a pharmaceutical company and is asked to research and analyze a new trend in compensation in which employers are forgoing raises to employees and are instead giving large bonuses for meeting certain goals. Her task is to ascertain if this new idea would be appropriate for her company. Her questions are similar to Alex's. What information does she need? Where would she find this information? How would she determine the impact of this type of change on the business? If implemented, what information would she need to assess the success of the plan?

Gillian is working in the supply chain area of a major manufacturer that produces the various mirrors found on cars and trucks. Her first assignment is to determine whether it is more cost-effective and efficient for her company to make or purchase a bracket used in the assembly of the mirrors. Her questions are also similar to her friends' questions. Why is the company considering this decision? What information does she need? Where would she find this information? Would choosing the option with the lowest cost be the correct choice?

The women are surprised by how similar their questions are despite how different their jobs are. They each are assigned tasks that require them to use various forms of information from many different sources to answer an important question for their respective companies. Table 1.1 provides possible answers to each of the questions posed in these scenarios.

Managerial Accounting and Various Business Roles

Table 1.1

The questions the women have and the answers they require show that there are many types of information that a company needs to make business decisions. Although none of these individuals is given the title of manager, they need information to help provide management with the information necessary to make decisions to move the company forward with its strategic plan. The scenarios of the three women are not unique. These types of questions occur every day in businesses across the world.

Some decisions will be more clearly appropriate for higher-level management. For example, Lynx Boating Company produces three different lines of boats (sport boats, pontoon boats, and large cruisers). All three boat lines are profitable, but the pontoon boat line seems to be less profitable than the other two types of boats. Management may want to consider abandoning the pontoon line and using that additional capacity to produce one of the other more profitable lines. They would need detailed financial information in order to make such a decision.

Service organizations also face decisions that require more detailed information than is available in financial accounting statements. A company's financial statements aggregate information for the company as a whole, but for most managerial decisions, information must be gathered in a timely manner at a product, customer, or division level. For example, the management of City Hospital is considering the purchase of four new magnetic resonance imaging (MRI) machines that scan three times faster than their current machines and thus would allow the hospital's imaging department to evaluate eight additional patients each day. Each machine costs $425,000 and will last five years before needing to be replaced. Would this be a wise investment for City Hospital? Hospital management would need the appropriate information to assess the alternatives in order to make this decision. Throughout your study of managerial accounting, you will learn about the types of information needed to make these decisions, as well as techniques for analyzing this information. First, it is important to understand the various roles managers play in the organization in order to understand the types of information and the level of detail that is needed. Most of the job responsibilities of a manager fit into one of three categories: planning, controlling, or evaluating.

The model in Figure 1.2 sums up the three primary responsibilities of management and the managerial accountant's role in the process. As you can see from the model, the function of accomplishing an entity's mission statement is a circular, ongoing process.

Figure 1.2 The Process of Adhering to the Mission Statement.

Planning

One of the first items on a new company's agenda is the creation of a mission statement. A mission statement is a short statement of a company's purpose and focus. This statement should be broad enough that it will encompass future growth and changes in the company. Table 1.2 contains the mission statement of three different types of companies: a manufacturer, an e-commerce company, and a service company.

Sample Mission Statements

Table 1.2

Once the mission of the company has been determined, the company can begin the process of setting goals, or what the company expects to accomplish over time, and objectives, or the targets that need to be met in order to meet the company's goals. This is known as planning. Planning occurs at all levels of an organization and can cover various periods of time. One type of planning, called strategic planning, involves setting priorities and determining how to allocate corporate resources to help an organization accomplish both short-term and long-term goals. For example, one hotel may want to be the low-price, no-frills, clean alternative, while another may decide to be the superior quality, high-price luxury hotel with many amenities. Obviously, to be successful, either of these businesses must determine the goals necessary to meet their particular strategy.

Typically, a strategic plan will span any number of years an organization chooses (three, five, seven, or even ten years), and often companies will have multiple strategic plans, such as one for three years, one for five years, and one for ten years. Given the time length involved in many plans, the organization also needs to factor in the potential effects of changes in their senior executive leadership and the composition of the board of directors.

What types of objectives are part of a strategic plan? Strategic objectives should be diverse and will vary from company to company and from industry to industry, but some general goals can include maximizing market share, increasing short-term profits, increasing innovation, offering the best value for the cost, maintaining a commitment to community programs, and exceeding environmental protection mandates.

From a managerial accounting perspective, planning involves determining steps or actions to meet the strategic or other goals of the company. For example, Daryn's Dairy, a major producer of organic dairy products in the Midwest, has made increasing the market share of its products one of its strategic goals. However, to be truly effective, the goals need to be defined specifically. For example, the goals might be stated in terms of percentage growth, both annually and in terms of the number of markets addressed in their growth projections.

Also, Daryn's planning process would include the steps the company plans to use to implement to increase market share. These plans may include current-year plans, five-year plans, and ten-year plans.

The current-year plan may be to sell the company's products in 10 percent more stores in the states in which it currently operates. The five-year plan may be to sell the products internationally in three countries, and the ten-year plan may be to acquire their chief competitor and, thus, their customers. Each of these plans will require outlining specific steps to reach these goals and communicating those steps to the employees who will carry out or have an impact on reaching these goals and implementing these plans.

Planning can involve financial and non-financial processes and measures. One planning tool discussed in Budgeting is the budgeting process, which requires management to assess the resources – for example, time, money, and number and type of employees needed – to meet current-year objectives. Budgeting often includes both financial data, such as worker pay rates, and nonfinancial data, such as the number of customers an employee can serve in a given time period.

A retail company can plan for the expected sales volume, a hospital can plan for the number of x-rays they expect to administer, a law firm can plan the hours expected for the various types of legal services they perform, a manufacturing firm can plan for the level of quality expected in each item produced, and a utility company can plan for the level of air pollutants that are acceptable. Notice that in each of these examples, the aspect of the business that is being planned and evaluated is a qualitative (nonfinancial) factor or characteristic. In your study of managerial accounting, you will learn about many situations in which both financial and nonfinancial data or information are equally relevant. However, the qualitative aspects are typically not quantified in dollars but evaluated using some other standards, such as customers served or students advised.

While these functions are initially stated in qualitative terms, most of these items would at some point be translated into a dollar value or dollar effect. In each of these examples, the managerial accounting function would help to determine the variables that would help appropriately measure the desired goal as well as plan how to quantify these measures. However, measures are only useful if tracked and used to determine their effectiveness. This is known as the control function of management.

Controlling

To measure whether plans are meeting objectives or goals, management must put in place ways to assess success or lack of success. Controlling involves the monitoring of the planning objectives that were put into place. For example, if you have a retail store and you have a plan to minimize shoplifting, you can implement a control, such as antitheft tags that trigger an alarm when someone removes them from the store. You could also install cameras in the ceiling that provide a different view of customers shopping and therefore may catch a thief more easily or clearly. The antitheft tags and cameras serve as your controls against shoplifting.

Managerial accounting is a useful tool in the management control function. Managerial accounting helps determine the appropriate controls for measuring the success of a plan. There are many types of controls that a company can use. Some controls can be in the form of financial measures, such as the ratio for inventory turnover, which is a measure of inventory control and is defined as Cost of Goods Sold ÷ Average Inventory, or in the form of a performance measure, such as decreasing production costs by 10 percent to help guide or control the decisions made by managers. Other controls can be physical controls, such as fingerprint identification or password protection. Essentially, the controlling function in management involves helping to coordinate the day-to-day activities of a business so that these activities lead to meeting corporate goals.

Without controls, it is very unlikely a plan would be successful, and it would be difficult to know if your plan was a success. Consider the plan by Daryn's Dairy to increase market share. The plan for the first year was to increase market share by selling the company's products in 10 percent more stores in the states in which the company already operates. How will the company implement this plan? The implementation, or carrying out, of the plan will require the company to put controls in place to measure which new stores are successfully selling the company's products, which products are being sold the most, what the sales volume and dollar value of the new stores are, and whether the sales in these new stores are affecting the volume of sales in current stores. Without this information, the company would not know if the plan is reaching the desired result of increased market share.

The control function helps to determine the courses of action that are taken in the implementation of a plan by helping to define and administer the steps of the plan. Essentially, the control function facilitates coordination of the plan within the organization. It is through the system of controls that the actual results of decisions made in implementing a plan can be identified and measured. Managerial accounting not only helps to determine and design control measures, but it also assists by providing performance reports and control reports that focus on variances between the planned objective performance and the actual performance. Control is achieved through effective feedback, or information that is used to assess a process. Feedback allows management to evaluate the results, determine whether progress is being made, or determine whether corrective measures need to be taken. This evaluation is in the next management function.

Evaluating

Managers must ultimately determine whether the company has met the goals set in the planning phase. Evaluating, also called assessing or analyzing, involves comparing actual results against expected results, and it can occur at the product, department, division, and company levels. When there are deviations from the stated objectives, managers must decide what modifications are needed.

The controls that were put into place to coordinate the implementation of a particular company plan must be evaluated so that success can be measured, or corrective action can be taken. Consider Daryn's Dairy's one-year plan to increase market share by selling products in 10 percent more stores in the states in which the company currently operates. Suppose one of the controls put into place is to measure the sales in the current stores to determine if selling the company's products in new stores is adding new sales or merely moving sales from existing stores. This control measure, same-store sales, must be evaluated to determine the effect of the decision to expand the selling of products within the state. This control measure will be evaluated by comparing sales in the current year in those stores to sales from the prior year in those same stores. The results of this evaluation will help guide management in their decision to move forward with their plan, modify the plan, or scrap the plan.

As discussed previously, not all evaluations will involve quantitative or financial measures. In expanding market share, the company wants to maintain or improve its reputation with customers and does not want the planned increased availability or easier access to its products to decrease customer perceptions of the products or the company. They could use customer surveys to evaluate the perceived effect on the company's reputation as a result of implementing this one-year plan. However, there are many ways that companies can evaluate various controls. In addition to the financial gauges, organizations are now measuring efficiencies, customer development, employee retention, and sustainability.

Managers spend their time in various stages of planning, controlling, and evaluating. Generally, higher-level managers spend more time on planning, whereas lower-level managers spend more time on evaluating. At any level, managers work closely with the managerial accounting team to help in each of these stages. Managerial accountants help determine whether plans are measurable, what controls should be implemented to carry out a plan, and what are the proper means of evaluation of those controls. This would include the type of feedback necessary for management to assess the results of their plans and actions. Management accountants generate the reports and information needed to assess the results of the various evaluations, and they help interpret the results.

To put this in context, think about how you will spend your weekend. First, you are the manager of your own time. You must plan based on your workload and on how much time you will spend studying, exercising, sleeping, and meeting with friends. You then control how your plan is implemented by setting self-imposed or possibly group meeting–imposed deadlines, and last, you evaluate how well you carried out your plan by gathering more data—such as grades on assignments, personal fulfillment, and number of hours of sleep—to determine if you met your plans (goals). Not planning, controlling, and evaluating often results in less-than-desirable outcomes, such as late assignments, too little sleep, or bad grades. In this scenario, you did not need a separate managerial accountant to help you with these functions, because you could manage planning, controlling, and evaluating on your own. However, in the business world, most businesses will have both managers and managerial accountants. Table 1.3 illustrates some examples.

Relating Managerial Accounting Functions to Various Business Majors

Table 1.3

Your Turn

Evaluating On-Campus versus Off-Campus Living

The principal purpose of managerial accounting is to deliver information useful for management decision-making. Many of the techniques used in managerial accounting are useful for decisions in your everyday life. In choosing whether to live on-campus or off-campus, how might you use planning, controlling, and evaluating in your decision-making process? What types of financial and nonfinancial information might you need?

Solution

Planning:

• Creating a list of financial and nonfinancial goals to be accomplished in your next year in college
• Determining how much each alternative will cost, including utilities, food, and transportation, and creating a budget

Controlling:

• Using an expense recording app to monitor your expenses
• Monitoring the effectiveness of your study time as reflected in your grades
• Monitoring your physical health to measure if your living arrangements are conducive to staying healthy

Evaluating:

• Assessing the effectiveness of your living arrangements by measuring your grades, bank account, and general happiness

Financial:

• Cost of staying in a dorm versus the cost of an apartment or house
• Estimate of differences in other costs, such as utilities, food, and additional transportation

Nonfinancial:

• The convenience of the location of dorm versus apartment or house
• Quality of living experience including number of roommates, ability to have own room, study environment differences
• Length of rental term of dorm versus apartment or house
• Where you plan to live in the summer, what you plan to do during that time

Think It Through

US Small Business Administration

Many students who study managerial accounting will work for a small business, and some may even own a small business. In order to operate a small business, you need an understanding of managerial accounting, among other skills. The US Small Business Administration is an agency within the federal government that has the sole purpose of supporting small businesses. You can find a plethora of information on their website, https://www.sba.gov/.

1. What are some of the steps in creating a small business?
2. What are the top ten reasons given for a business failure?
3. How could an understanding of managerial accounting help a small business owner?

1.2. Distinguish between Financial and Managerial Accounting

Now that you have a basic understanding of managerial accounting, consider how it is similar to and different from financial accounting. After completing a financial accounting class, many students do not look forward to another semester of debits, credits, and journal entries. Thankfully, managerial accounting is much different from financial accounting. Also known as management accounting or cost accounting, managerial accounting provides information to managers and other users within the company in order to make more informed decisions. The overriding roles of managers (planning, controlling, and evaluating) lead to the distinction between financial and managerial accounting. The main objective of management accounting is to provide useful information to managers to assist them in the planning, controlling, and evaluating roles.

Unlike managerial accounting, financial accounting is governed by rules set out by the Financial Accounting Standards Board (FASB), an independent board made up of accounting professionals who determine and publicize the standards of financial accounting and reporting in the United States. Larger, publicly traded companies are also governed by the US Securities and Exchange Commission (SEC), in the form of the generally accepted accounting principles (GAAP), the common set of rules, standards, and procedures that publicly traded companies must follow when they are composing their financial statements.

Financial accounting provides information to enable stockholders, creditors, and other stakeholders to make informed decisions. This information can be used to evaluate and make decisions for an individual company or to compare two or more companies. However, the information provided by financial accounting is primarily historical and therefore is not sufficient and is often synthesized too late to be overly useful to management. Managerial accounting has a more specific focus, and the information is more detailed and timelier. Managerial accounting is not governed by GAAP, so there is unending flexibility in the types of reports and information gathered. Managerial accountants regularly calculate and manage "what-if" scenarios to help managers make decisions and plan for future business needs. Thus, managerial accounting focuses more on the future, while financial accounting focuses on reporting what has already happened. In addition, managerial accounting uses nonfinancial data, whereas financial accounting relies solely on financial data.

For example, Daryn's Dairy makes many different organic dairy products. Daryn's managers need to track their costs for certain jobs. One of the company's top-selling ice creams is their seasonal variety; a new flavor is introduced every three months and sold for only a six-month period. The cost of these specialty ice creams is different from the cost of the standard flavors for reasons such as the unique or expensive ingredients and the specialty packaging. Daryn wants to compare the costs involved in making the specialty ice cream and those involved in making the standard flavors of ice cream. This analysis will require that Daryn track not only the cost of materials that go into the product, but also the labor hours and cost of the labor, plus other costs, known as overhead costs (rent, electricity, insurance, etc.), that are incurred in producing the various ice creams. Once the total costs for both the specialty ice cream and the standard flavored ice cream are known, the cost per unit can be determined for each type. These types of analyses help a company evaluate how to set pricing, evaluate the need for new or substitute ingredients, manage product additions and deletions, and make many other decisions. Figure 1.3 shows an example of a materials cost analysis by Daryn's Dairy used to compare the materials cost for producing 500 gallons of their best-selling standard flavor-vanilla-with one of their specialty ice creams-Very Berry Biscotti.

Figure 1.3 Material Cost Analysis. Daryn's Dairy materials cost comparison analysis between best-selling standard vanilla ice cream and Very Berry Biscotti, a limited-edition specialty ice cream.

Financial and Managerial Accounting Comparative

Managerial and financial accounting are used by every business, and there are important differences in their reporting functions. Those differences are detailed in Figure 1.4.

Figure 1.4 Comparing Reports between Financial and Managerial Accounting.

Users of Reports

The information generated from the reports of financial accountants tends to be used primarily by external users, including the creditors, tax authorities and regulators, investors, customers, competitors, and others outside the company, who rely on the financial statements and annual reports to access information about a company in order to make more informed decisions. Since these external people do not have access to the documents and records used to produce the financial statements, they depend on Generally Applied Accounting Principles (GAAP). These outside users also depend greatly on the preparation of audits that are done by public accounting firms, under the guidelines and standards of either the American Institute of Certified Public Accountants (AICPA), the US Securities and Exchange Commission (SEC), or the Public Company Accounting Oversight Board (PCAOB).

Managerial accounting information is gathered and reported for a more specific purpose for internal users, those inside the company or organization who are responsible for managing the company's business interests and executing decisions. These internal users may include management at all levels in all departments, owners, and other employees. For example, in the budget development process, a company such as Tesla may want to project the costs of producing a new line of automobiles. The managerial accountants could create a budget to estimate the costs, such as parts and labor, and after the manufacturing process has begun, they can measure the actual costs, thus determining if they are over or under their budgeted amounts. Although outside parties might be interested in this information, companies like Tesla, Microsoft, and Boeing spend significant amounts of time and money to keep their proprietary information secret. Therefore, these internal budget reports are only available to the appropriate users. While you can find a cost of goods sold schedule in the financial statements of publicly traded companies, it is difficult for outside parties to break it down in order to identify the individual costs of products and services.

Types of Reports

Financial accounting information is communicated through reporting, such as the financial statements. The financial statements typically include a balance sheet, income statement, cash flow statement, retained earnings statement, and footnotes. Managerial accounting information is communicated through reporting as well. However, the reports are more detailed and more specific and can be customized. One example of a managerial accounting report is a budget analysis (variance report) as shown in Figure 1.5. Other reports can include cost of goods manufactured, job order cost sheets, and production reports. Since managerial accounting is not governed by GAAP or other constraints, it is important for the creator of the reports to disclose all assumptions used to make the report. Since the reports are used internally, and not typically released to the general public, the presentation of any assumptions does not have to follow any industry-wide guidelines. Each organization is free to structure its reports in the format that organizes its information in the best way for it.

Figure 1.5 Example of a Budget (Variance) Analysis. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

This type of analysis helps management to evaluate how effective they were at carrying out the plans and meeting the goals of the corporation. You will see many examples of reports and analyses that can be used as tools to help management make decisions.

Think It Through

Projection Error

You are working as the accountant in the special projects and budgets area of Sturm, Ruger & Company, a law firm that currently specializes in bankruptcy law. In order to serve their customers better and more efficiently, the company is trying to decide whether or not to expand its services and offer credit counseling, credit monitoring, credit rebuilding, and identity protection services. The president comes to you and asks for some sales and revenue projections. He would like the projections in three days' time so that he can present the results to the board at the annual meeting.

You work tirelessly for two straight days compiling projections of sales and revenues to prepare the reports. The report is provided to the president just before the board is to arrive.

When you return to your office, you start clearing away some of the materials that you used in your report, and you discover an error that makes all of your projections significantly overstated. You ask the president's administrative assistant if the president has presented the report to the board, and you find that he has mentioned it but has not given the full report as of yet.

What would you do?

• What are the ethical concerns in this matter?
• What would be the results of telling the president of your error?
• What would be the results of not telling the president of your error?

Frequency of Reports

The financial statements are typically generated quarterly and annually, although some entities also require monthly statements. Much work is involved in creating the financial statements, and any adjustments to accounts must be made before the statements can be produced. A physical count inventory must be done to adjust the inventory and cost of goods sold accounts, depreciation must be calculated and entered, all prepaid asset accounts must be reviewed for adjustments, and so forth. The annual reports are not finalized for several weeks after the year-end, because they are based on historical data; for a company that is traded on one of the major or regional stock exchanges, it must have an audit of the financial statements conducted by an independent certified public accountant. This audit cannot be completed until after the end of the company's fiscal year, because the auditors need access to all of the information for the company for that year. For companies that are privately held, an audit is not normally required. However, potential lenders might require an independent audit.

Conversely, managers can quickly attain managerial accounting information. No external, independent auditors are needed, and it is not necessary to wait until the year-end. Projections and estimates are adequate. Managers should understand that in order to obtain information quickly, they must accept less precision in the reporting. While there are several reports that are created on a regular basis (e.g., budgets and variance reports), many management reports are produced on an as-needed basis.

Purpose of Reports

The general purpose of financial statement reporting is to provide information about the results of operations, financial position, and cash flows of an organization. This data is useful to a wide range of users in order to make economic decisions. The purpose of the reporting done by management accountants is more specific to internal users. Management accountants make available the information that could assist companies in increasing their performance and profitability. Unlike financial reports, management reporting centers on components of the business. By dividing the business into smaller sections, a company is able to get into the details and analyze the smallest segments of the business.

An understanding of managerial accounting will assist anyone in the business world in determining and understanding product costs, analyzing break-even points, and budgeting for expenses and future growth (which will be covered in other parts of this course). As a manager, chief executive officer, or owner, you need to have information available at hand to answer these types of questions:

• Are my profits higher this quarter than last quarter?
• Do I have enough cash flow to pay my employees?
• Are my jobs priced correctly?
• Are my products priced correctly in order for me to make the profit I need to make?
• Who are my most productive and least productive employees?

In the world of business, information is power; stated simply, the more you know, typically, the better your decisions can be. Managerial accounting delivers data-driven feedback for these decisions that can assist in improving decision-making over the long term. Business managers can leverage this powerful tool in order to make their businesses more successful because management accounting adds value to common business decision-making. All of this readily available information can lead to great improvements for any business.

Focus of Reports

Because financial accounting typically focuses on the company as a whole, external users of this information choose to invest or loan money to the entire company, not to a department or division within the company. Therefore, the global focus of financial accounting is understandable.

However, the focus of management accounting is typically different. Managerial reporting is more focused on divisions, departments, or any component of a business, down to individuals. The mid-level and lower-level managers are typically responsible for smaller subsets within the company.

Managers need accounting reports that deal specifically with their division and their specific activities. For instance, production managers are responsible for their specific area and the results within their division. Accordingly, these production managers need information about results achieved in their division, as well as individual results of departments within the division. The company can be broken into segments based on what managers need-for example, geographic location, product line, customer demographics (e.g., gender, age, race), or any of a variety of other divisions.

Nature of Reports

Both financial reports and managerial reports use monetary accounting information, or information relating to money or currency. Financial reports use data from the accounting system that is gathered from the reporting of transactions in the form of journal entries and then aggregated into financial statements. This information is monetary in nature. Managerial accounting uses some of the same financial information as financial accounting, but much of that information will be broken down to a more detailed level. For example, in financial reporting, net sales are needed for the income statement. In managerial accounting, the quantity and dollar value of the sales of each product are likely more useful. In addition, managerial accounting uses a significant amount of nonmonetary accounting information, such as the quantity of material, number of employees, number of hours worked, and so forth, which does not relate to money or currency.

Verification of Reports

Financial reports rely on structure. They are generated using accepted principles that are enforced through a vast set of rules and guidelines, also known as GAAP. As mentioned previously, companies that are publicly traded are required to have their financial statements audited on an annual basis, and companies that are not publicly traded also may be required to have their financial statements audited by their creditors. The information generated by the management accountants is intended for internal use by the company's divisions, departments, or both. There are no rules, guidelines, or principles to follow. Managerial accounting is much more flexible, so the design of the managerial accounting system is difficult to standardize, and standardization is unnecessary. It depends on the nature of the industry. Different companies (even different managers within the same company) require different information. The most important issue is whether the reporting is useful for planning, controlling, and evaluation purposes.

Your Turn

Daryn's Dairy

Figure 1.6 Assorted Ice Cream Flavors.

Suppose you have been hired by Daryn's Dairy as a market analyst. Your first assignment is to evaluate the sales of various standard and specialty ice creams within the Midwest region where Daryn's Dairy operates. You also need to determine the best-selling flavors of ice cream in other regions of the United States as well as the selling patterns of the flavors. For example, do some flavors sell better than others at different times of the year, or are some top sellers sold as limited-edition flavors? Remember that one of the strategic goals of the company is to increase market share, and the first step in meeting this goal is to sell their product in 10 percent more stores within their current market, so your research will help upper-level management carry out the company's goals. Where would you gather the information? What type of information would you need? Where would you find this information? How would the company determine the impact of this type of change on the business? If implemented, what information would you need to assess the success of the plan?

Solution

Answers will vary. Sample answer:

Where would you gather the information? Where would you find this information?

• Current company sales information would be obtained from internal company reports and records that detail the sale of each type of ice cream including volume, cost, price, and profit per flavor.
• Sales of ice cream from other companies may be more difficult to obtain, but the footnotes and supplemental information to the annual reports of those companies being analyzed, as well as industry trade journals, would likely be good sources of information.

What types of information would you need?

• Some of the types of information that would be needed would be the volume of sales of each flavor (number of gallons), how long each flavor has been sold, whether seasonal or limited-edition flavors are produced and sold only once or are on a rotating basis, the size of the market being examined (number of households), whether the other companies sell similar products (organic, all-natural, etc.), the median income of consumers or other information to assess the consumers' willingness to pay for organic products, and so forth.

How would Daryn's Dairy determine the impact of this type of change on the business?

• Management would evaluate the cost to expand into new stores in their current market compared to the potential revenues from selling their products in those stores in order to assess the ability of the potential expansion to generate a profit for the company.

If implemented, what information would Daryn's Dairy need to assess the success of the plan?

• Management would measure the profitability of selling any new products, expanding into new stores in their current market, or both to determine if the implementation of the plan was a success. If the plan is a success and the company is generating profits, the company will continue to figure out ways to improve efficiency and profitability. If the plan is not a success, the company will determine the reasons (cost to produce too high, sales price too high, volume too low, etc.) and make a new plan.

1.3. Explain the Primary Roles and Skills Required of Managerial Accountants

It is clear that management accountants must have a solid foundation in accounting, in both financial and managerial accounting, but other than accounting skills, what makes good managerial accountants?

• They must have knowledge of the business in which they are working. Commercial awareness is knowing how a business is run and how it is influenced by the external environment and knowing and understanding the overall industry within which the business is operating.
• Collaboration, which involves working in cross-functional teams and earning the trust and respect of colleagues in order to complete a task, is vital to improving managerial accounting talents. They should be "team players".
• Management accountants should have effective communication skills that allow them to convey accounting information in both written and oral forms in a way that the intended audience can understand. Being able to gather the data quickly and accurately is important, but the data is meaningless if it is not presented in an intuitive style that the audience can understand.
• Strong technology skills are also essential. These skills include not only accounting and reporting software but also other programs that would assist in automating processes, improving efficiencies, and adding value to the company. For many companies, additional software and accompanying technology are often needed for both their financial and managerial accounting functions. For example, enterprise resource planning (ERP) systems often play a major role in the creation of comprehensive accounting systems. This additional support is often provided by outside suppliers such as Hyperion, Cognos, Sage, SAP, PeopleSoft, and Oracle.
• Managerial accountants must possess extensive analytical skills. They must regularly work with financial analysts and management personnel to find ways to reduce expenses and analyze budgets. These skills include the ability to envision, verbalize, conceptualize, or solve both multifaceted and simplistic problems by making choices that make sense with the given information.
• Managerial accountants must have ethics and values. They should be an example to others and encourage them to follow internal control practices and procedures. Ethics is discussed in more detail in Describe the role of the Institute of Management Accountants and the use of ethical standards.

Managers at all levels make many different types of decisions every day, but to make most decisions, they need specific information. Some information is easily obtainable, and some is not. Managers do not always know what information they need or what is available, and they need to know if the decisions they make are having the desired outcome and meeting specific goals.

To this point, we've described managerial accounting as a process. The following definition considers it a profession. Management accountants are the individuals who help management with this information. The Institute of Management Accountants (IMA) defines management accounting as "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".

The IMA also reports that nearly 75 percent of financial professionals work in business as management accountants in positions such as financial analysts, accounting managers, controllers, and chief financial officers. These professionals have a significant impact on businesses through influencing the decision-making process and business strategy.

Management accountants work at various levels of the organization, from the project level to the division level to the controller and chief financial officer. Often, management accountants work where they are needed and not necessarily at corporate headquarters. They tend to be hands-on in the decision-making process. They need many types of information to inform the many decisions they must make.

Continuing Application

Who Uses Managerial Accounting?

When most people think of an accounting job, they think of someone who does taxes or who puts together financial statements. However, almost all jobs use accounting information, particularly managerial accounting information. Table 1.4 shows how certain professions might use managerial accounting information. Can you think of other examples?

Use of Managerial Accounting Information

Table 1.4

Organizational Structure

Most companies have an organizational chart that displays the configuration and the delegation of authority in the decision-making processes (Figure 1.7). The structure helps define roles and responsibilities. The organizational charts provide guidance to employees and other stakeholders by outlining the official reporting affiliations that direct the workflow within the organization. If the company is particularly efficient, it also will include contact information within the chart. This is a convenient directory to circulate among employees. It helps them find a particular person in a certain position, or determine whom to speak to about certain areas within the company, or even identify a specific person's supervisor to report positive or negative work behavior.

Figure 1.7 Sample Organizational Chart. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Stockholders of a company are the owners; however, they elect a board of directors to manage that company for them. The board selects the officers who will implement the policies and strategic goals that the board has set in place. The chief executive officer (CEO) is the corporation officer who has the overall responsibility for the management of the company. The person overseeing all of the accounting and finance concerns is the chief financial officer (CFO). This individual is in charge of the financial planning and record-keeping of the organization and reports to the CEO. The controller is responsible for the accounting side of the business (accounting records, financial statements, tax returns, and internal reports) and reports to the CFO. Also reporting to the CFO is the treasurer, who is in control of the finance side of the business (cash position, corporation funds). An additional area that sometimes falls under the control of the CFO is the internal audit staff. Internal auditors supply independent assurance that a company's internal control processes are effective. However, there is strong support for keeping the internal audit staff outside of the CFO, because of a possible conflict of interest.

Think It Through

Managing Cash Flow

Assume you are the managerial accountant at Anchor Head Brewery, a Midwest craft brewery that distributes nationwide. Its year-end is December 31. Because of poor cash flow management, the CFO has some concerns about having enough cash to be able to pay the tax bill that is expected. In early December, the purchasing department bought excess hops, barley, malt, oats, and yeast in anticipation of brewing more beer for the holiday and Super Bowl seasons. In order to decrease the company's net income, thereby reducing their taxable income, the CFO tells you to enter the purchase of this inventory as part of the "Supplies Expense" in the current year.

1. In which account should these materials be recorded?
2. How should you reply to this request?
3. Should you bring this matter to another executive officer?

Careers

The field of managerial accounting, or corporate accounting, is composed of the financial and accounting responsibilities required to operate any type of business. Managerial accountants are employed within organizations to monitor costs, sales, budgets, and spending; conduct audits; predict future requirements; and aid the executive leaders of the organization with financial decision-making.

Figure 1.8 lists approximate salaries for several financial and managerial accounting employment positions. In reviewing the salary information, be aware that there are often major variances in salaries based on geographical locations. For example, a cost accountant manager in San Francisco, California, would typically be paid significantly more than an accountant in a similar position in Fayetteville, Arkansas. However, the cost of living, especially housing costs, in San Francisco is also significantly higher than the cost of living in Fayetteville.

Figure 1.8 Accounting Position Salaries. Salaries are shown for some entry-level and advanced-level jobs available with an accounting degree. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Managerial accountants find employment opportunities in a wide variety of settings and industries. Professionals in this discipline are in high demand from public and private companies, government agencies, and not-for-profit entities (NFPs). Some areas of management accounting are versatile to any sector (corporate, government, or NFP).

• A financial analyst assists in preparing budgets, tracking actual costs, examining task performance, scrutinizing different types of variances, and supporting other management personnel in organizing forecasts and projections.
• A budget analyst arranges and manages the master budget and compares master budget projections to actual results. This individual must be vastly aware of all operations in the budget and work closely with the rest of the accounting staff as well as management personnel.
• An internal auditor typically reports to high-level executives within the company. An internal auditor is often called on to investigate budget variances, industrial sabotage, poor work quality, fraud, and theft. He or she also safeguards the internal controls and confirms they are working and effective.
• A cash-management accountant has responsibilities that include transferring monies between accounts, monitoring deposits and payments, reconciling cash balances, creating and tracking cash forecasts, and performing all other cash-related financial processes.

Other areas of managerial accounting are specific to the sector in which accountants work. For example, the area of cost accounting is more specific to the corporate or manufacturing sector. These cost accountants amass large sums of data, checking for accuracy and then formulating the cost of raw materials, work in process, finished goods, labor, overhead, and other associated manufacturing costs.

Governmental entities also use accounting to communicate with their constituents. Government agencies include all levels of government, federal, state, county, and city, including military, law enforcement, airports, and school systems. Government accountants deal with budgets, auditing, and payroll, the same as all other managerial accountants. However, they must follow a different set of accounting rules called the Governmental Accounting Standards Board (GASB).

Nonprofit (not-for-profit) organizations are tax-exempt organizations that serve their communities in a variety of areas, such as religion, education, social services, health care, and the arts. Managerial accountants in this area are most often focused on budgets. The biggest difference between a corporate budget analyst and a nonprofit budget analyst is that the nonprofit analyst works the budget backward, compared to the corporate analyst. For example, if a corporation was selling widgets, its budget would start with a sales forecast of how many widgets the company thinks it can sell. This gives the company a forecast of how much it can spend on expenses and fixed assets. The nonprofit budget analysts often start with the expenses. They forecast how much the expenses will be in order to continue to offer their service to the community. From there, they then adjust how much they will need to obtain through fundraising, donations, grants, or other sources to meet their expenses.

Your Turn

Career Planning

All companies need to plan ahead in order to continuously move forward. Their top management must take into consideration where they want the company to be in the next three to five years. Just like a company, you also need to consider where you want to be in three to five years, and you need to start taking strides now to accomplish what it is you need to in order to get there (Figure 1.9).

Figure 1.9 Career Planning. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Answer the following:

1. What job would you like to be doing in three to five years? What is your plan for getting there? Identify five to ten steps needed.
2. Do you have a specific company you would like to be working for in the next three to five years? What are the reasons you want to work for them?
3. In order to acquire the position you want, at the company you want, you need a résumé. Your résumé is like the company report of "you". It needs to offer reliable information about your experiences and achievements. What are the basic elements of a résumé, and how will you provide reassurance that the information on your résumé is trustworthy?

Solution

Answers will vary. Sample answer:

1. I would like to own my own home remodeling company. Steps to get there include the following:
A. complete double major in business and building construction
B. in the summers before graduation, work for a local handyman franchise
C. after graduation, work for a home builder as a project manager
D. while working, save money for five years to be used to start my own company
E. put together a business plan

F. start my own business six years after graduation
2. I would like to work for a national home builder such as Pulte or Toll Brothers. Ideally, I would have an internship with one of them during college. I would like to work for a national builder or a large regional builder because they already have a good business model and I could learn how that works.
3. My résumé needs to contain my education information such as the degree and my majors as well as classes that are pertinent to my career. It should also indicate all of my work experience and any particular skills or certifications I have achieved, such as Eagle Scout. An example of how this information may be presented on a résumé can be seen in Figure 1.10.

    Figure 1.10 Sample Résumé. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Certifications

The Certified Public Accountant (CPA) is considered the top tier in accounting certifications. Many companies or positions require CPA certification. For example, most employees at accounting firms earn a CPA certificate within the first few years of graduation. Some positions, such as controller or CFO, often require CPA certification. In the United States, each state has different educational and experience requirements in order to obtain the CPA. The certification requires passing the four-part CPA exam as well. This is administered by the American Institute of Certified Public Accountants (AICPA). There are four parts to the exam: Financial Accounting and Reporting (FAR), Auditing and Attestation (AUD), Regulation (REG), and Business Environment and Concepts (BEC). Each part is graded on a 100-point scale. A score of seventy-five or greater must be achieved in order to pass each section. The exams can be intimidating, as it is a difficult process to go through. As of 2017, the AICPA reported a pass rate of less than 50 percent, which may contribute to its high regard around the world. After passing the CPA exam, candidates must work for one year under the supervision of a licensed CPA before their own license is approved by a state regulatory agency. Those certified in public accounting work in all areas of accounting. However, do not assume that being a CPA is the only way to secure an excellent position in accounting.

The Certified Management Accountant (CMA) is another top-tiered certification for accountants. The CMA title identifies the individual as a specialist in corporate accounting management. The CMA has some overlap with the CPA, but the CPA is focused more on compliance, tax, and controls. CMAs favor financial analytics, budgeting, and strategic assessment. This certification requires the minimum of a bachelor's degree from an accredited college or university, two years of work experience, and successfully passing both parts of the exam. Part one of the exam covers financial reporting, planning, performance, and controls. Part two focuses on financial decision-making. The exam is administered by the IMA and has a 50 percent passing rate globally.

Not as popular in the United States as the CPA, the Certified Financial Analyst (CFA) certification is more in demand throughout Europe and Asia. This certification prepares accountants for a career in the finance and investment domains. Requirements of this credential include a bachelor's degree or four years' worth of experience, plus passing all three sections of the exam. The exam is administered by the CFA Institute. There are three separate exams, each one taking up to six hours to complete. The exams must be completed in succession. This credential is considered one of the more rigorous ones to obtain, with a passing rate of less than 45 percent.

The Enrolled Agent (EA) credential focuses on a career in taxation, whether it is working in tax preparation for the public, internally for a corporation, or for the government at the Internal Revenue Service (IRS). The EA certification was created by the IRS to signify significant knowledge of the US tax code and the ability to apply the concepts of that code. Enrolled agents have the privilege of being able to sign tax returns as paid preparers, and they are able to represent their clients in front of the IRS. The EA certification can be obtained by passing a three-part exam covering all types of individual and business tax returns. Once the certification is obtained, enrolled agents must follow strict ethical standards and complete 72 hours of continuing education courses every three years.

The Certified Internal Auditor (CIA) is a credential offered by the Institute of Internal Auditors (IIA) and is one of the only certifications that is accepted worldwide. CIAs tend to be employed in auditing areas within government agencies, banking, finance, or corporations. They examine financial documents to investigate deficiencies in internal controls. Requirements for this certification include a bachelor's degree, two years of work experience in a related field, and passing the three sections of the examination. Also required are providing character references, following a code of ethics, and continuing education.

The Certified Fraud Examiner (CFE) certification signifies proven proficiency in fraud prevention, detection, and deterrence. CFEs are instructed in how to identify the red flags that may indicate fraudulent actions. The designation is awarded by the Association of Certified Fraud Examiners (ACFE) after applicants have met the following requirements: bachelor's degree, two years of work-related experience, moral character references, and the passing of four separate exams.

The Certified Government Auditing Professional (CGAP) designation is exclusively for auditors employed throughout the public sector (federal, state, local) and is offered by the IIA. Requirements for this credential are the same as for the CIA. The exam has 115 multiple-choice questions and covers four areas focusing on proficiency in generally accepted government auditing standards (GAGAS).

These certifications lead to different job responsibilities and different career paths. As indicated, each of the certifications requires varying degrees of education and has exams that are unique to that particular certification. All of these certifications also require a certain number of hours of continuing education in order to keep the certification active. This ensures that the certificate holder is up to date on changes in the field. There are always many opportunities throughout the year to obtain continuing education credits through seminars, webinars, symposiums, and online and in-person classes.

1.4. Describe the Role of the Institute of Management Accountants and the Use of Ethical Standards

As you've learned, unlike the specific rules set forth by GAAP and the SEC that govern financial accounting, managerial accounting does not have specific rules and is considered flexible, as the reporting stays internal and does not need to follow external rules. Managers of a business need detailed information in a timely manner. This means that a managerial accountant needs to understand many detailed aspects of how the company operates in addition to financial accounting methods, because the framework of typical management reports often comes from the financial statements. However, the reports can be individualized and customized to the information the manager is seeking. Each company has different strategies, timing, and needs for information.

The Institute of Management Accountants (IMA), the professional organization for management accountants, provides research, education, a means of knowledge sharing, and practice development to its members. The IMA also issues the Certified Management Accountant (CMA) certification to those accountants who meet the educational requirements, pass the rigorous two-part exam, and maintain continuing professional education requirements. The CMA exam covers essential managerial accounting topics as well as topics on economics and finance. Many accountants hold both CMA and CPA certifications.

Business Ethics

The IMA also develops standards and principles to help management accountants deal with ethical challenges. Trust is an important cornerstone of business interactions, both internal and external. When there is a lack of trust, it changes how decisions are made. Trust develops when there are good ethics: when people know right from wrong. Consider these three questions as put forth by the Institute of Business Ethics: (1) Do I mind others knowing what I have done? (2) Who does my decision affect or hurt? (3) Would my decision be considered fair to those affected? These questions can help evaluate the ethics of a decision.

Ethics is more than simply obeying laws; it involves doing the right thing as well as the legal thing. Many companies have a code of conduct to help guide their employees. For example, Google has a code of ethics that they expect all of their employees and board members to follow. Failing to do so can cause termination of employment. The preface of the code includes "Don't be evil". They use that to show all employees and other shareholders within Google that they are serious about ethics-that trust and respect are essential in providing a great service to their customers.

The IMA has its own Statement of Ethical Professional Practice for its members. Managerial accountants should never commit acts that violate the standards of ethics, and they should never ignore such deeds by others within their companies. Many other professional organizations, across many different professions, have codes of ethics. For example, there are codes of ethics for the AICPA, ACFE, Financial Executives International, American Marketing Association, National Society of Professional Engineers, and the American Nurses Association.

Ethical Considerations

Institute of Management Accountants (IMA) Ethical Standards

Four standards of ethical conduct in management accountants' professional activities were developed by the Institute of Management Accountants. The four standards are competence, confidentiality, integrity, and credibility. Credibility is a key standard that is based on an accountant communicating information with fairness and objectivity, disclosing all information that is relevant to the intended users understanding, and disclosing "delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law".

Often, when we think of unethical behavior, we imagine large-scale scenarios involving tens of thousands of dollars or more, but ethical issues are more likely faced on a small scale. For example, suppose you work for an organization that makes and sells virtual reality headsets. Because of competition, your company has decreased their forecasted sales for next year by 20 percent over the current year. In a meeting, the CEO expressed concern over the effect of the decreased sales on the bonuses of upper-level executives, since their bonus is tied to meeting income projections. The vice president of marketing suggested in the meeting that if the company simply continued to produce the same number of headsets as they had in the previous year, income levels may still be achieved in order for the bonuses to be awarded. This would involve the company producing excess inventory with hopes of selling them, in order to achieve income levels sufficiently adequate to be able to pay bonuses to executives. While a conflict of interest might not be intuitively obvious, the company (and thus its managerial accountants) has an obligation to many stakeholders such as investors, creditors, employees and the community. The obligation of a corporation to these stakeholders depends somewhat on the stakeholder. For example, the primary obligation to a creditor may be to make timely payments, the obligation to the community may be to minimize negative environmental impact. Most stakeholders do not have access to internal information or decisions and thus rely on management to be ethical in their decision-making. The company may indeed be able to sell all that it produces, but given the forecasted drop in sales, producing the same number of units as during the current year will likely lead to unsellable inventory, the need to sell the units at a significant discount in order to dispose of them, or both. Following the recommendation to produce more than forecasted sales might hurt the value of the company's stock, which could hurt many categories of stakeholders who depend on the accountants and financial analysts to protect their financial interests.

In addition to managing production and inventory, a budget and the entire budget process have an impact on managerial decision-making. Suppose you are the manager of the research department of a pharmaceutical company. Your budget includes the costs for various types of training for your staff. Because of the amount of time spent in development of a highly promising medication to treat diabetes, your staff has not had time to complete as much training during the current year as you had allowed for in the budget. You are concerned that if you do not use the training money, your training budget will be decreased in the next budget cycle. To prevent this from happening, you arrange for several online training sessions for your staff. These training sessions are on the basics of laboratory safety. All of your staff is very experienced and current on this topic and can likely go straight to the course completion quiz and complete it in a matter of minutes without actually watching any of the ten modules. What would encourage a manager to schedule and spend money on training that is not useful for the employees? While it is expected to stay within the budget, many managers will spend any "excess" amounts remaining in the budget at the end of the fiscal year. This practice is known as "use it or lose it". Managers do this to avoid having their budgets cut in the next fiscal year. Stated simply, management spends everything in their budget regardless of the value added or the necessity. This is not ethical behavior and is usually the result of a budgetary process that needs to be modified so that the possibility of being able to pad the budget is removed or at least minimized.

All employees within a company are expected to act ethically within their business actions. This can sometimes be difficult when the company itself almost promotes the idea of unethical actions. For example, Wells Fargo started offering incentives to their employees who succeeded in selling to current customers other services and products that the bank had to offer. This incentive created an unethical culture. Employees manufactured fake accounts, credit cards, and other services in order to qualify for the bonuses. In the end, 5,300 employees lost their jobs, and everyone learned a lesson on creating proper incentives. Executives who aspire to run an ethical company can do so, if they change reward systems from "pay for performance" to more holistic values. Examples of proper incentives include attendance rewards, merit rewards, team bonuses, overall profit sharing, and stock options.

Ethics Legislation

In response to several corporate scandals, the United States Congress passed the Sarbanes-Oxley Act of 2002 (SOX), also known as the "public company accounting reform". It is a federal law (http://www.soxlaw.com/) that was a far-reaching reform of business practices. Its focus is primarily on public accounting firms that act as auditors of publicly traded corporations. The act intended to protect investors by enhancing the accuracy and reliability of corporate financial statements and disclosures. Thousands of corporations now must confirm that their accounting processes comply with SOX. The act itself is fairly detailed, but the most significant issues for compliance are as follows:

• Section 302. The CEO and CFO must review all financial reports and sign the report.
• Section 404. All financial reports must be audited on an annual basis and must be accompanied by an internal control audit.
• Section 806. Whistleblowers, or those who provide evidence of fraud, are afforded special protections.
• Section 906. The criminal penalties for a fraudulent financial report are increased from pre-SOX. Penalties can be up to $5 million in fines and up to 25 years in prison.

Individuals who work throughout the accounting profession have a significant responsibility to the general public. Financial accountants deliver information about companies that the public uses to make major financial decisions. There must be a level of trust and confidence in the ethical behavior of these accountants. Just like others in the business world, accountants are confronted endlessly with ethical dilemmas. A high standard of ethical behavior is expected of those employed in a profession. While ethical codes are helpful guidelines, the rationale to act ethically must originate from within oneself, from personal morals and values. There are steps that can provide an outline for examining ethical issues:

1. Recognize the ethical issue at hand and those involved (employees, creditors, vendors, and community).
2. Establish the facts of the situation (who, what, where, when, and how).
3. Recognize the competing values related to the issue (confidentiality and conflict of interest).
4. Determine alternative courses of action (do not limit yourself).
5. Evaluate each course of action and how each relates to the values in step 3.
6. Recognize the possible consequences of each course of action and how each affects those involved in step 1.
7. Make a decision, and take a course of action.
8. Evaluate the decision. (Is the issue solved? Did it create other issues?)

Ethical Considerations

Ethical Dilemma

You are about to sign a new client to a very large contract worth over $900,000. Your supervisor is under a lot of pressure to increase sales. He calls you into his office and tells you his future with the company is in jeopardy, and he asks you to include the revenue for the new contract in the sales figures for the quarter that ends today. You know the contract is a certainty, but the client is out of town and cannot possibly sign for at least a week. Use the eight steps in examining an ethical situation to determine how you would react to this situation.

One of the issues with ethics is that what one person, community, or even country considers unethical or wrong may not be problematic for another person, community, or country, who see it as a way of doing business. For example, bribery in the world of business happens when an organization or representative of an organization gives money or other financial benefits to another individual, business, or official in order to gain favor or to manipulate a business decision. Bribery in the United States is illegal. However, in Russia or China, a bribe is sometimes one cost of doing business, so it is part of their culture and completely ordinary.

The Foreign Corrupt Practices Act (FCPA) was implemented in 1977 in the aftermath of disclosures of bribery of foreign bureaucrats by more than 400 US corporations. The law is broken down into two parts: the anti-bribery section and the accounting section. The anti-bribery section specifically prohibits payments to foreign government officials to aid in attaining or retaining business. This provision applies to all US persons and foreign firms acting within the United States. It also requires corporations that are listed in the United States to converge their accounting records with certain accounting provisions. These include making and keeping records that fairly represent the transactions of the company and maintaining an acceptable system of internal controls. Companies doing business outside the United States are obligated to follow this law and dedicate resources to its compliance.

The accounting section of the FCPA requires a company to have good internal controls so a slush fund to pay bribes cannot be created and maintained. A slush fund is a cash account that is often created for illegal activities or payments that are not typically recorded on the books.

More details on the SOX and the FCPA are covered in such courses as auditing, intermediate accounting, cost accounting, and business law.

Your Turn

Logistics Analyst

As a corporate accountant, it is very important to understand both financial and managerial aspects of the company and industry in which you are working. In order to assist management in their roles of planning, controlling, and evaluating, an accountant needs to be aware not only of GAAP but also of the products or services offered by the company, the processes by which those products or services are produced, and pertinent facts about suppliers, customers, and competitors. Not having this knowledge not only makes it more difficult for the corporate or managerial accountant to perform any assigned duties, but there is also an ethical responsibility to be knowledgeable in order to offer assistance, analysis, or recommendations to management or customers.

Assume you have been hired by Triumph Motorcycles as a new logistics analyst. In this position, you will carry out such tasks as obtaining and analyzing information about your company's goods or services; monitoring the production, service, and information processes and flow; and looking for ways to improve efficiency of operations.

How would you go about obtaining the knowledge and understanding you will need to work for this company? How would financial and managerial accounting concepts help you in understanding the company and the industry as a whole?

Solution

Answers will vary. Sample answer:

Ways to learn about the company and industry include the company website, press or news releases, industry trade journals, company internal documents such as procedure manuals and job descriptions, and conversations or interviews with fellow employees at various levels of the organization. The more knowledge you have regarding financial and managerial accounting, the better you can link the operations of the organizations to financial results and the more easily you can ascertain both efficiencies and inefficiencies in the organization.

1.5. Describe Trends in Today's Business Environment and Analyze Their Impact on Accounting

The business environment never rests. Regulations are always changing, global competition continues to increase, and technology provides continual disruption. Management accounting is always evolving due to changes in the business environment. The types of information needed and obtainable have changed significantly over time.

Many areas of employment are impacting businesses and the managerial accounting function today. For example, more than 60 percent of workers in the United States are employed within service industries, such as government agencies, marketing firms, accounting firms, and airlines. The health-care and social service industries have doubled in size. However, as the number of service jobs has increased, the number of manufacturing jobs, as a percentage of all jobs, has been decreasing.7 One of the primary reasons for the decline in manufacturing jobs is automation and other technological changes.

How are service industries different from manufacturing organizations? The fundamental difference is the product they sell. The service company, such as a marketing, legal, or consulting firm, produces intangible goods, meaning that the product has no physical substance. Manufacturing companies produce tangible goods, which customers can handle and see. This leads to another significant difference between manufacturing companies and service firms: inventory. Service firms, unlike manufacturing, do not have large inventories, because there is no tangible product. Manufacturing will have inventories of raw materials, of goods that are in the process of being produced and goods that have been completed but not yet sold. Managerial accountants must track all of this information for manufacturing companies. However, managerial accountants are still needed within service-based firms to track time, materials, and overhead. For example, Boeing Company is a manufacturer of airplanes. Their accountants must track several different types of inventory categories, direct labor, and overhead costs, among other things. One of Boeing's customers, Delta Air Lines, is a service-based company. The managerial accountants for the airline also are responsible for following costs, but their reports are targeted toward industry-specific measures such as operating margins, revenue from passenger miles, load factors, and passenger yield, among others.

Much of managerial accounting focuses on manufacturing. However, the techniques used for cost accounting for manufacturing companies also can be applied to service-based organizations. The former would develop a cost of goods manufactured schedule, and the latter would need a cost of service schedule. The structure of the reports is principally the same, but section headings would reflect the type of organization.

Technology

Business entities always look for ways to leverage technology. Any type of technology that can increase production, reduce costs, or increase safety will attract attention from the business world. There are many areas of technology that businesses have used already, but to continue reaping those benefits, these companies need to adjust quickly with the ever-advancing business technology.

Companies have the ability to integrate many of their business processes through enterprise resource planning (ERP) systems, which help companies streamline their operations and help management respond quickly to change. Although they are expensive, these systems help alleviate the complications that arise from business systems that do not coordinate with one another. For example, a company may have many different individual systems for each function: human resources may have a system to track employees' insurance benefits, training, and retirement programs, while payroll may have a program that tracks employees' earnings, taxes, deductions, and direct deposit information. Much of the information human resources and payroll collect is the same. Having one system with different silos is much more efficient than having two separate systems. Management must be aware of and adapt to whichever type of system that the business has—either one ERP or several independent systems that may not coordinate information (Figure 1.11).

Figure 1.11 Eight Primary Components of Enterprise Resource Planning (ERP). The diagram shows the role of ERP in streamlining a business by coordinating the various components of that business.

Businesses have been on the forefront of advancing technology. As computer systems developed throughout the twentieth century, they brought with them the potential for many benefits, but the business world needed to adapt and transform their infrastructure. Over the last forty years, tangible assets (buildings, machinery, and vehicles) have declined from 80 percent of a company's value to 15 percent, while intangible assets (trademarks, patents, and competencies) are now at an average of 85 percent of a company's value. It can be difficult to put a value on some of the intangible assets, but it is not hard to realize they do have worth. JetBlue has the number one brand loyalty of all North American airlines. Apple has built a kingdom around brand loyalty. Intangible assets can give a company a competitive edge, entice consumers, and protect the organization's brain trust.

Technological advances can directly affect managerial accounting reports, through estimates of overhead costs. Historically, overhead was typically calculated on the basis of relatively straightforward relationships, such as direct labor costs or direct labor hours. With the advancements through automation, in many instances, direct labor costs are much lower and no longer relevant in computing overhead costs. Automation is a method of using systems such as computers or robots to operate different processes and machinery to improve efficiencies and lower direct labor costs. Companies use automation to remove the complex, superfluous stages from a process in order to streamline the practice. In essence, labor is being traded for machine production. Such industries as auto production are excellent examples. This exchange of direct labor for greater costs in overhead for such factors as machinery depreciation will be addressed in Job Order Costing and Process Costing on calculating production costs.

With the growth of the Internet and the speed by which information is shared, businesses can now communicate with employees from around the world within seconds. This has made outsourcing common in certain sectors. Outsourcing is hiring workers outside of the company who perform their tasks inside or outside of the country. Most of the exported jobs have gone to less-developed countries, where there are lower labor costs. Outsourcing saves the company money on labor and overhead costs and has become a major trend over the past several years. More and more organizations, both large and small, are now using outsourcing as a way of growing their entities without adding additional labor and overhead costs. Outsourcing allows a company to focus on its own competencies and hire those outside sources to handle other duties.

Another technology that is quickly becoming widespread is radio-frequency identification (RFID). This technology uses electromagnetic fields to routinely identify and trace inventory tags that have been attached to objects. The tags contain information that has been stored by electronic means. The RFID tags can be made into many shapes and sizes and enclosed in many different materials. These tiny devices have advantages over the common bar code. They do not need to be positioned precisely over the scanner and cannot be manipulated like barcodes. This technology has been used for many years in identifying and tracking lost pets, but it was considered too expensive for more extensive use in industry. With the advancements over the last several years, RFID devices are now seen as "throwaway" control devices. One company recently signed a contract to sell 500 million RFID tags at a cost of about ten cents per device. Other current uses include antitheft tags attached to merchandise, credit card chips, and heavy-duty transponders used in shipping containers. New uses being investigated include RFID chips in passports, food, and people.

Think It Through

Outsourcing

With the increase in global businesses and competition, there has been an increased focus on outsourcing in order to reduce costs. As you've learned, outsourcing involves hiring an outside company to provide services or products rather than having them produced internally.

For example, you are the vice president of operations for a manufacturing firm. Other firms similar to yours have outsourced some of the product assembly. You estimate that you could save a significant amount of money on wages and benefits, as you would let go approximately ten workers if you outsource. Would you outsource? Why or why not?

Lean Practices

All companies want to be successful. This requires continuously trying to improve the function of the organization. A lean business model is one in which a company strives to eliminate waste in its products, services, and processes, while still fulfilling the company's mission. This type of model was originally implemented by the Japanese automaker, Toyota Motor Corporation, soon after the end of World War II. The implications of an organization adopting a lean business model can be overall business improvement, but a lean business model can be difficult to implement because it often requires all systems and procedures that an organization follows to be readjusted and coordinated. Managerial accounting plays a vital role in the success and implementation of a lean business model by providing accurate cost and performance evaluation information. Entities must comprehend the nature and sources of costs and develop systems that encapsulate costs accurately. The better an organization is at controlling costs, the more it can improve its overall financial performance. Continuous improvement is the manufacturing process that rejects the ideas of "good enough". It is an ongoing effort to improve processes, products, services, and practices. This philosophy has led organizations to adopt practices such as total quality management, just-in-time manufacturing, and Lean Six Sigma. The fundamental ideas of all of these involve continuous improvement; they differ only in focus.

Total quality management (TQM) concentrates on quality improvement and applies this benchmark to all aspects of business activities. In TQM, management and employees look to reveal waste and errors, streamline the supply chain, improve customer relations, and confirm that employees are informed and properly trained. The objective of TQM is continuous improvement by concentrating on systematic problem-solving and customer service. Scientific methods are used to study what succeeds and what does not, and then the best practices are implemented throughout the organization.

However, the pursuit of total quality will cost the company money. With the help of management accountants, companies can track these costs and forecast whether or not the improvements will eventually save the organization money down the road.

Just-in-time (JIT) manufacturing is an inventory system that companies use to increase efficiency and decrease waste by receiving goods only as they are needed within the production process, thereby reducing warehousing costs. This method requires accurate forecasting. Managerial accountants work together with purchasing and production schedulers in keeping the flow of materials accurate and efficient.

This method was initiated by Toyota Motor Corporation, and it has expanded to many other manufacturing organizations throughout the world. Toyota set the example by controlling their inventory levels by relying on their supply chain to deliver the raw materials it needed to build their cars. The parts arrived just as they were needed, not before or after.

One major advantage of JIT manufacturing is reducing costs by eradicating warehouse storage needs. Organizations, in turn, tend to spend less money on raw materials because of a reduction in spoilage and waste. Another advantage is that companies can easily move from the assembly of one product to the assembly of another.

Disadvantages of JIT manufacturing start with its complexity. In moving from a traditional manufacturing approach to a JIT approach, management must reconfigure the entire flow of the production process, from the initial use of the raw materials to the output of the final finished good. Another disadvantage of JIT manufacturing is that it makes organizations more susceptible to disruptions in the supply chain. If a supplier of raw materials has a labor strike, weather problems, a breakdown of machinery, or some other catastrophe and cannot deliver the materials on time, that one supplier can shut down an entire production process and delay delivery of finished goods. An example of this occurred in 2011 after a tsunami and earthquake hit Japan and disrupted production at a critical supplier of auto parts. General Motors (GM) facilities in the United States announced they would have to shut down assembly plants where they could not continue production without the parts from Japan.

Lean Six Sigma (LSS) is a quality control program that depends on a combined effort of many team members to enhance performance by analytically removing waste and diminishing variations between products. The lean component of LSS is the concept that anything that is not needed in a product or service, or any unnecessary steps that exist, add cost to the product or service and therefore should be considered waste and eliminated. The Six Sigma component of LSS has to do with the elimination of defects. Essentially, as a company becomes leaner, it should also be able to reduce defects in manufacturing or in providing a service. Fewer defects add to cost savings through the need for fewer reworked products, fewer repeat service calls, and therefore, more satisfied customers. It was developed by Motorola in 1986 and emphasized cycle-time improvement and the reduction of defects. This process has shown to be a powerful way of improving business efficiency and effectiveness. As organizations continue to modify and update their processes for optimal productivity, they must be flexible. As of 2017, LSS had developed into a business management way of thinking that focused on customer needs, customer retention, and improvement of business products and services. There are many establishments, including Motorola, that now do LSS training. There are certifications including white belt, yellow belt, green belt, black belt, and master black belt. The belts signify an employee's knowledge regarding LSS. For example, a white belt understands the terminology, structure, and idea of LSS and reports issues to green or black belts. A green belt typically manages LSS projects, and a master black belt works with upper-level management to find the areas in the business where LSS needs to be implemented, leads several LSS teams, and oversees implementation of those projects.

Kaizen (Japanese for change for the better) is another process that is often linked to Six Sigma (Figure 1.12). The two concepts are often used together for process improvements, as they both are designed for continuous improvement by eliminating waste and increasing efficiencies. The concept of kaizen comes from an ancient Japanese philosophy that involves continuously working toward perfection in all areas of one's life. It was adopted in the business world after World War II in an effort to rebuild Japan. It centers on making small, day-to-day changes that develop into major improvements over time. The key behind the success of kaizen comes from requiring all employees—from the CEO at the top, all the way down to the shop-floor janitors—to participate by making recommendations to improve the organization. From the start of the process, it must be well defined that all recommendations are appreciated and that there will be no adverse results for participating. Workers, instead, should be rewarded for any modifications that advance the workplace. Employees become more self-assured and invested when they help improve the company.

Figure 1.12 Kaizen Board Showing Kaizen Process and Some Related Tactics.

Another lean practice, the theory of constraints (TOC), involves recognizing and removing bottlenecks within the value chain that may be limiting an organization's profitability. This philosophy, developed by Dr. Eliyahu M. Goldratt, is a valuable instrument for improving the flaws in processes. The main goal of this methodology is to remove obstructions, or constraints, which are referred to as "bottlenecks". There are several types of bottlenecks that organizations must deal with endlessly. One example occurs at the grocery store when it is crowded and there are only three checkout lanes open but ten people in each line. Obviously, the bottleneck is created by having too few checkout lanes open. The bottleneck can be mitigated by opening more checkout lanes. Other examples are listed in Table 1.5.

Examples of Constraints

Table 1.5

There are five steps in the cycle of continuous improvement under TOC:

1. Identify the system constraint.
2. Decide how best to exploit the constraint and make quick changes using existing resources.
3. Subordinate everything else to the process to ensure alignment with and support of the needs of the constraint.
4. Elevate the system's constraint, and determine if the constraint has shifted to another area in the process.
5. Repeat the process.

This is a continuous cycle; therefore, once a bottleneck is solved, the next bottleneck should be addressed immediately (Figure 1.13).

Figure 1.13 Five Focusing Steps of the Theory of Constraints in Its Cyclical Process. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Balanced Scorecard

The balanced scorecard (BSC) approach uses both financial and nonfinancial measures in evaluating all attributes of the organization's procedures. This approach differs from the traditional approach of only using financial measures to evaluate a company. While financial measures are essential, they are only a portion of what needs to be evaluated. The balanced scorecard focuses on both high-level and low-level measures, using the company's own strategic plan. This method assesses the organization in four separate perspectives:

• Financial. The financial measures are the major focus of the BSC—but not the only measures. This perspective asks questions like whether the organization is making money or whether the stockholders are pleased.
• Customer. The BSC also evaluates how the organization is perceived, from the customer's perspective. This measures customer satisfaction, new customer growth, and market share.
• Internal process. The internal procedures and processes perspective observes how smoothly things are running. This perspective will examine quality, efficiency, and waste as they relate directly to the products or services.
• Learning and growth/capacity. This area evaluates the entity and its performance from the standpoint of human capital, infrastructure, culture, technology, and other areas. Are employees collaborating and sharing information? Does everyone have access to the latest trends in training and continuing education in their areas?

The main advantage of this approach is that it offers organizations a way to see the cause-and-effect in the objectives. For example, if an organization would like to make more money in order to pay higher dividends to its stockholders, the organization will need to increase market share, improve customer satisfaction, or grow its customer base. In order to make customers happier or gain new customers, the organization could try to reduce defects and increase overall quality of the products; to accomplish that, the organization could retrain or offer new training to its employees.

Globalization

The development of business through international influence or extending social and cultural aspects around the world is known as globalization. It has expanded our competitive borders, giving customers more alternatives. Customers can order an item from another country with the click of a button and have that item delivered in a few days or less. How has globalization affected companies? Not only must they choose between ordering goods or components globally, but they must decide in which countries to sell their goods, and in which companies they may be able to establish factories.

Globalization affects management accountants in several ways. Companies need real-time, accurate information to make good decisions, so more timely and accurate information is needed. As companies expand globally, managers need to know the cost of operating internationally, as well as the laws, rules, and customs. Globalization also can expose companies to improvements in running a business.

Debates continue as to the positive and negative consequences of globalization in all of its contexts. The advantages of globalization include helping developing countries in creating jobs, developing industries, differentiating and expanding their markets, and bettering their standard of living for their citizens. Some believe the expansion of pop culture around the globe to be an advantage of cultural globalization. It has multiplied the interchange of ideas, music, art, language, and cultural ideals. On the other side of the debate, one common criticism of globalization is that it has enhanced wealth disparity and, further, that organizations of the Western world have benefited much more than those anywhere else. There is also the argument that globalization is improving standards of living worldwide as industrialization is expanding, but it is causing global warming and climate change, due to the greenhouse gasses the factories emit. Additionally, in some areas it has led to the abuse and misuse of natural resources and caused other detrimental consequences.

How do these various globalization debates affect businesses? A successful company must be profitable to stay in business, but profitability is not the single key to success. A successful company must also consider the environment in which it operates—culturally, socially, environmentally, and economically—which requires companies to evolve and adjust as each of these environments changes. This evolution means that companies must continually evaluate themselves and their impact on all of their stakeholders, which include investors, creditors, management, employees, customers, governments, and, either directly or indirectly, the world. What companies used as measures of success forty years ago are different from the measures used twenty years ago, and those are different from those that are used today and still different from what will be needed in the future. Management accounting is the area in which many of these changing measures are either generated or evaluated. Such measures not only evaluate the cost effectiveness of products or services, but determine the best way to evaluate and reward employees and evaluate the cost-benefit of environmental protections, the impact of automation versus outsourcing, and the cost of training and educating employees.

Ethical Considerations

Global Ethics

In an article in Business 2 Community, Kate Gerasimova draws on her experience within the Russian and American business environments to discuss the role of ethics in global business endeavors. Ethics are the principles, and the values that underlie them, that allow us to determine what is right and wrong. According to Gerasimova, ethics fall into three categories: "code and compliance, destiny and values, and social outreach". In the global business context, she also emphasizes the importance of respecting differences in values held by coworkers, communicating honestly in business dealings, and building trust. To assist in the application of the organization's ethical approach to doing business in a different culture, it needs to develop a set of "core values as the basis for global policies and decision-making". Gerasimova notes that organizations also need to consider that "clients and coworkers may have a different perspective on ethics and proper behavior than those to which you are accustomed". To address the different perspectives, an organization should train its employees to be culturally sensitive while balancing the need for rules and policies with the ability for employees to be flexible and to use their imagination.

Social Responsibility and Sustainability

What is sustainability, and what does it have to do with businesses? The United Nations definition is "the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs". Usually, sustainability is viewed as having three components: economic, social, and environmental. Obviously, a business cannot continue into the future unless it is economically sound; however, if it maintains its economic status by depleting too many natural resources or paying illegal wages, then that company is not practicing good social responsibility.

Corporate social responsibility (CSR) is an organization's programs that evaluate and take responsibility for the organization's effects on environmental and social welfare. There are many aspects of corporate social responsibility, including the types, locations, and wages of the labor employed; the ways in which renewable and nonrenewable resources are utilized; how charitable organizations or local areas in which the company operates are helped; and setting corporate employee policies such as maternity and paternity leave that promote family well-being. Although the causes and cures of climate change are open to discussion, most will agree that everyone, including corporations, should do their part to avoid further damage and improve any negative impact on the environment.

Concepts In Practice

Corporate Social Responsibility at New Belgium Brewing

As New Belgium Brewing Company states on their website: "We're New Belgium and we pollute. There. We said it. We are not perfect and we know it". But New Belgium Brewing has become a leader in sustainability. They preach it in every aspect of the company: production, marketing, employees, and customers. The company makes the point that being energy efficient is not only being environmentally responsible, it is being financially responsible through their "internal energy efficiency tax". The company uses many different metrics to track and improve its impact on the environment. For example, the company measures its energy usage and taxes itself on energy consumption and then saves those internal tax dollars to implement further energy savings by installing new processes and techniques. They divert 99.9 percent of the waste from their brewery away from landfills. The company makes enough in recycling revenues to pay four salaries. These are just a few ways in which New Belgium Brewing faces the challenges of social responsibility. Read more at http://www.newbelgium.com/Sustainability/Environmental-Metrics.

In late 2016, the Paris Agreement (Paris Accord) brought together nations for the common cause of combating climate change. There were 197 nations in attendance, and until recently, all 197 ratified or agreed to the effort. It requires all partners to pursue specific endeavors to keep the global temperature rise to 2 degrees Celsius above that of pre-industrial levels. This would be accomplished by voluntarily reducing greenhouse gas emissions. In early 2017, US President Donald Trump announced that the United States would withdraw from the agreement. At that time, only Syria and Nicaragua were holdouts. Since then, both have signed the agreement, leaving the United States now as the lone holdout, although it will take several years for the formal withdrawal. In spite of the president's announcement, there have been representatives from cities, states, corporations, and universities around the United States that have pledged to continue with the agreement and meet the greenhouse gas emission targets as set out in the Paris Accord. Many of the corporations who have promised to move forward with reducing greenhouse gasses have expressed that the Paris Accord expands markets for groundbreaking clean technologies and that it creates employment opportunities alongside economic growth.

In terms of managerial accounting, sustainable business practices create many issues. Organizations need to decide what elements will be measured. For example, minimizing electricity consumption, maximizing employee safety, or reducing greenhouse gasses may be the biggest issue of concern for a company. Then, the company needs to determine ways of measurement that make sense regarding those items. Companies are becoming more aware of their impact on the world, and many are creating social responsibility reports in addition to their annual reports. This type of reporting requires different types of information and analysis than the typical financial measures gathered by companies. This is sometimes referred to as the triple bottom line, as it assesses an organization's performance not only relating to the profit, but also relating to the world and its people, and will be covered in Sustainability Reporting.

Your Turn

Zaley's Machining Division

Zaley is an aerospace manufacturing firm in the southwest United States. They manufacture several products used in the aviation and aerospace industry. The company has been steadily growing over the past ten years in both sales and personnel. The engineering and design team uses computerized aided drafting (CAD) to design the various products that are produced by the machining division.

The machining division recently implemented significant technological improvements by installing an advanced technique using hard-metal and aluminum high-speed machining. The following managers are involved with the machining division:

• Alex Freedman, technical specialist (supervises all computer programs)
• Emma Vlovski, sales manager (supervises all sales agents)
• Kayla McClaughley, cost accounting director (supervises all cost accountants)
• Mwangi Kori, lead test engineer (oversees all new-product testing and design)
• Torek Sanchez, production director (supervises all manufacturing employees)

Each of these managers needs information to make decisions needed to carry out the respective jobs.

Think about what might be involved in the job of each of these managers and the types of decisions they may be required to make in order to meet the goals of the company. What information would be needed by each of the managers?

Solution

Answers will vary. Sample answer:

• Alex Freeman, technical specialist (supervises all computer programs), needs information on the hours and type of usage possibly by department or by individual to ascertain if the equipment is being used effectively or if the programs used by the company are appropriate or additions or deletions need to be made. In addition, this information is needed to address how much and what type of staffing he needs in his department.
• Emma Vlovski, sales manager (supervises all sales agents), would want information about the level and type of sales for the company as a whole as well as for the individual sales agents. She would want to know which products are selling well, which ones are not, which sales agents are being the most successful, and why they are more successful than the others. Emma would also want information on how the agents are compensated, as this may be tied to the sales agent's efforts to meet sales goals.
• Kayla McClaughley, cost accounting director (supervises all cost accountants), would want to know what tasks the cost accountants perform, how much time they spend on these tasks, and whether there are any redundancies in workload so that improvements in efficiency can be made. If any of the accountants has certifications such as CPA or CMA, she would want to know if they are keeping their certifications current through continuing professional education.
• Mwangi Kori, lead test engineer (oversees all new-product testing and design), would need information on the efficiency and effectiveness of each of the products tested, including success and failure rates. She would want information on how well the policies and procedures for design changes are being followed and if those policies and procedures need updating or rewriting.
• Thomas Sanchez, production director (supervises all manufacturing employees), would want information on hours worked, pay rates, and training (past and ongoing) for the manufacturing employees. She would also want information on how each individual employee performs his or her role in the manufacturing environment. For example, are there particular employees who have fewer defects or down time in their part of the process than others?

1.6. Key Terms

automation

method of using systems such as computers or robots to operate different processes, and machinery to improve efficiencies and lower direct labor costs

balanced scorecard

tool used to evaluate performance using qualitative and non-qualitative measures

board of directors

group of individuals elected by the shareholders of a company with the role of placing management, supervising management, and making key decisions on major issues of the company

bribery

when an organization or representative of an organization gives money or other financial benefits to another individual, business, or official in order to gain favor or to manipulate a business decision

budget analyst

someone who arranges and manages the master budget and compares master budget projections to actual results

cash-management accountant

someone with responsibilities that include transferring monies between accounts, monitoring deposits and payments, reconciling cash balances, creating and tracking cash forecasts, and performing all other cash-related financial processes

Certified Financial Analyst (CFA)

certification for a career in the finance and investment domains; requirements include a bachelor's degree or four years' experience and passing all three sections of the exam

Certified Fraud Examiner (CFE)

signifies proven proficiency in fraud prevention, detection, and deterrence; requirements include bachelor's degree, two years of work-related experience, moral character references, and passing of four separate exams

Certified Government Auditing Professional (CGAP)

designation exclusively for auditors employed throughout the public sector (federal, state, local); requirements are the same as for the CIA, but with a different exam

Certified Internal Auditor (CIA)

credential offered by the Institute of Internal Auditors (IIA) and one of the only certifications accepted worldwide; requirements include a bachelor's degree, two years of work experience in a related field, and passing the three sections of the examination

Certified Management Accountant (CMA)

certification for a specialist in corporate accounting management, including financial analytics, budgeting, and strategic assessment; requires a bachelor's degree, two years of work experience, and successfully passing both parts of the exam

Certified Public Accountant (CPA)

top tier in accounting certifications; in the United States, each state has different educational and experience requirements, and certification requires passing the four-part CPA administered by the American Institute of Certified Public Accountants (AICPA)

chief executive officer (CEO)

executive within a company with the highest ranking title who has the overall responsibility for the management of a company; reports to the board of directors

chief financial officer (CFO)

corporation officer who reports to the CEO and oversees all of the accounting and finance concerns of a company

collaboration

working in cross-functional teams and earning the trust and respect of colleagues in order to complete a task

commercial awareness

knowing how a business is run and how it is influenced by the external environment, and knowing and understanding the overall industry within which the business is operating

continuous improvement

ongoing effort to improve processes, products, services, and practices

controller

financial officer of a corporation reporting to the CFO who is responsible for an organization's accounting records, financial statements, tax returns, and internal reporting

controlling

monitoring of the planning objectives that were put into place

corporate social responsibility (CSR)

actions that firms take to assume responsibility for their impact on the environment and social well-being

cost accountant

employee who amasses large sums of data, checking for accuracy and then formulating the cost of raw materials, work in process, finished goods, labor, overhead, and other associated manufacturing costs

effective communication

conveying information in both written and oral forms in a way that the intended audience can understand

Enrolled Agent (EA)

credential focusing on a career in taxation; created by the IRS to signify significant knowledge of the US tax code and the ability to apply the concepts of that code

enterprise resource planning (ERP)

system that helps a company streamline its operations and helps management respond quickly to change

evaluating

comparing actual results against the planned results

external user

someone who relies on the financial statements and annual reports to access information about a company in order to make more informed decisions (e.g., creditor, tax authority and regulator, investor, customer, competitor, and others)

Financial Accounting Standards Board (FASB)

independent, nonprofit organization that sets financial accounting and reporting standards for both public and private sector businesses in the United States that use Generally Accepted Accounting Principles (GAAP)

financial analyst

someone who assists in preparing budgets and tracking actual costs, and performs other tasks that support other management personnel in organizing forecasts and projections

Foreign Corrupt Practices Act (FCPA)

law that specifically prohibits payments to foreign government officials to aid in obtaining or retaining business and requires a company to have good internal controls so a slush fund to pay bribes cannot be created and maintained

generally accepted accounting principles (GAAP)

common set of rules, standards, and procedures that publicly traded companies must follow when composing their financial statements

globalization

development of business through international influence, or extending social and cultural aspects around the world

goal

what a company expects to accomplish over time

government agency

found at all levels of government: federal, state, county, city, and so on; includes military, law enforcement, airports, and school systems

Institute of Management Accountants (IMA)

professional organization for management accountants that provides research, education, a means of knowledge sharing, and practice development to its members

intangible good

good with financial value but no physical presence; examples include copyrights, patents, goodwill, and trademarks

internal auditor

employee of an organization whose job is to provide an independent and objective evaluation of the company's accounting and operational activities

internal user

someone inside the company or organization who is responsible for managing the company's business interests and executing decisions (e.g., all levels of management, owner, and other employees)

just-in-time (JIT) manufacturing

inventory system that companies use to increase efficiency and decrease waste by receiving goods only as they are needed within the production process, thereby reducing warehousing costs

kaizen

another process that is often linked to Six Sigma and is designed for continuous improvement by eliminating waste and increasing efficiencies; a Japanese word meaning change for the better

lean business model

one in which a company strives to eliminate waste in its products, services, and processes, while still fulfilling the company's mission

Lean Six Sigma (LSS)

quality control program that depends on a combined effort of many team members to enhance performance by analytically removing waste and diminishing variations between products

managerial accounting

process that allows decision makers to set and evaluate business goals by determining what information they need to make a particular decision and how to analyze and communicate this information

mission statement

short statement of a company's purpose and focus

monetary accounting information

relating to money or currency

non-monetary accounting information

not relating to money or currency, such as the quantity of materials, number of employees, number of hours worked, and so forth

nonprofit (not-for-profit) organization

tax-exempt organization that serves its community in a variety of areas

objective

target that needs to be met in order to meet company goals

outsourcing

act of using another company to provide goods or services that your company requires

planning

process of setting goals and objectives

radio-frequency identification (RFID)

technology that uses electromagnetic fields to routinely identify and trace inventory tags that have been attached to objects

Sarbanes-Oxley Act (SOX)

federal law that regulates business practices; intended to protect investors by enhancing the accuracy and reliability of corporate financial statements and disclosures through governance guidelines including sanctions for criminal conduct

strategic planning

setting priorities and determining how to allocate corporate resources to help an organization accomplish short-term and long-term goals

sustainability

meeting the needs of the present generation without compromising the ability of future generations to meet their own needs by being aware of current economic, social, and environmental impacts

tangible good

physical good that customers can handle and see

theory of constraints (TOC)

process of recognizing and removing bottlenecks within the value chain that may be limiting an organization's profitability

total quality management (TQM)

process in which management and employees look to reveal waste and errors, streamline the supply chain, improve customer relations, and confirm that employees are informed and properly trained

treasurer

financial officer of a corporation reporting to the CFO who is in control of the finance side of the business (cash position, corporation funds)

whistleblower

someone who provides evidence of fraud 

1.7. Summary

1.1 Define Managerial Accounting and Identify the Three Primary Responsibilities of Management

• The purpose of managerial accounting is to supply financial and nonfinancial information to the organization's management and other internal decision makers.
• Most of the job responsibilities of a manager fit into one of three categories: planning, controlling, and evaluating.
• Planning involves setting goals and forming the plans to achieve those goals.
• Controlling involves the day-to-day activities. Its purpose is to help in planning functions and to facilitate coordination within the organization.
• Evaluation determines whether plans are being followed and whether progress is being made as planned toward the fulfillment of organizational goals and objectives. It also involves taking corrective measures in case of deviations identified in the course of action.

1.2 Distinguish between Financial and Managerial Accounting

• Managerial accounting provides information to managers and other users within the company. It has a specific focus, and the information is detailed and timely.
• Financial accounting follows the guidelines of the GAAP, set in place by the FASB and, in many cases, by the SEC. Managerial accounting is much more flexible and does not have to follow specific rules or guidelines.
• There are seven key differences between managerial accounting and financial accounting: users, types of reports produced, frequency of producing the reports, purpose of the information produced, focus of the reporting information, nature of the original information used to produce the reports, and verification of the data used to create the reports.

1.3 Explain the Primary Roles and Skills Required of Managerial Accountants

• Essential skills for managerial accountants include commercial awareness, collaboration, effective communication skills, strong technology talents, extensive analytical abilities, and elevated ethical values.
• Management accountants work with individuals at all levels of an organization from the CEO to the shop floor workers.
• There are many different career paths management accountants can take to work in corporations, government entities, service firms, or nonprofit organizations.
• There are numerous certifications that accountants can earn to improve their careers and set themselves apart from their peers.

1.4 Describe the Role of the Institute of Management Accountants and the Use of Ethical Standards

• Many professional organizations share resources, such as education, research, and practice development, with their members. They also enforce a code of ethics for their members.
• All employees within a company are expected to act ethically within their business actions. This can sometimes be difficult when the company almost promotes the idea of unethical actions.
• In response to several corporate scandals, the United States Congress passed the Sarbanes-Oxley Act of 2002 (SOX).
• Ethical codes can be helpful guidelines, but the rationale to act ethically must originate from within oneself, from personal morals and values. There are steps that provide an outline for examining ethical issues.One of the issues with ethics is that what one person, community, or even country considers unethical or wrong, another person, community, or country may have no problem with and see it as just a way of doing business.
• The Foreign Corrupt Practices Act of 1977 specifically prohibits payments to foreign government officials to aid in obtaining or retaining business. This provision applies to all US persons and foreign firms acting within the United States.

1.5 Describe Trends in Today's Business Environment and Analyze Their Impact on Accounting

• Business regulations are always being altered, global competition continues to increase, and technology provides continual disruption. Management accounting must keep up with the changes in the business environment.
• The fundamental difference between manufacturing organizations and service-based firms is whether the organizations produce a tangible product.
• Business entities have been in the lead for using technology, but they must continue to adjust quickly with the ever-advancing business technology.
• ERP systems help companies streamline their operations and help management respond quickly to change.
• Lean manufacturing, which was started in Japan by automakers, is now a widely used practice that attempts to increase productivity and eliminate waste.
• The philosophy of continuous improvement has led organizations to adopt practices such as TQM, JIT manufacturing, and LSS.
• The balanced scorecard approach uses both financial and nonfinancial measures in evaluating all attributes of the organization's procedures.
• Globalization has expanded competitive borders, giving customers and companies more alternatives.
• Many companies have started to assess their corporation not only on financial profits, but also on their corporate social responsibility.