Chapter 1

Managerial Accounting and the

Business Organization
LEARNING OBJECTIVES:
When your students have finished studying this chapter, they should be
able to:

1. Describe the major users of accounting information.

2. Explain the cost-benefit and behavioral issues involved in designing

an accounting system.

3. Explain the role of budgets and performance reports in planning

and control.

4. Discuss the accountants role in the companys value-chain

functions.

5. Contrast the functions of controllers and treasurers.

6. Identify current trends in management accounting.

7. Explain a management accountants ethical responsibilities.

8. Understand how managerial accounting is used in companies.

1
CHAPTER 1: OVERVIEW
This chapter provides an overview of the focus of management
accounting and its role in organizations.

Section One: Centers on the purposes of accounting including the

users of accounting information, the questions that an
accounting system must be able answer, and the effects of
government regulation on accounting systems (e.g.,
Foreign Corrupt Practices Act).

Section Two: Indicates that the management accounting concepts

applicable for manufacturing firms are also useful for
service organizations.

Section Three: Accounting systems must consider the cost-benefit test

and behavioral ramifications.

Section Four: Discusses the role of budgets and performance reports

in the management processes of planning and control. The
use of management by exception is also discussed.

Section Five: The role of accounting information at different stages of

a product's life cycle is discussed. The value chain is
described in relation to adding value to products or
services of an organization.

Section Six: Discusses the roles of the accountant and, especially, the
controller in organizations. Line and staff positions in
organizations are defined and the functions of the
controller are distinguished from those of the treasurer.

Section Seven:Presents information on career opportunities for

management accountants, including the CMA designation
and a possible future career as a top executive.

Section Eight: Current trends affecting management accounting are

discussed. These include the shift to a more service-based
economy, increased global competition, and the impacts of
advances in technology. The just-in-time (JIT) philosophy
and computer-integrated manufacturing (CIM) are also
discussed.

Section Nine: The ethical responsibilities of accountants are

presented.
2
CHAPTER 1: ASSIGNMENTS
COGNITIVE EXERCISES

27 Finance and Management Accounting

28 Marketing and Management Accounting
29 Production and Management Accounting

EXERCISES

30 Planning and Control, Management by Exception

31 Management Accounting and Financial Accounting
32 Line Versus Staff and Value Chain Responsibility
33 Organization Chart
34 Objectives of Management Accounting
35 Cost/Benefit of the Ethical Environment
36 Ethics Early Warning Signs

PROBLEMS

37 Management and Financial Accounting

38 Use of Accounting Information in Hospitals
39 Costs and Benefits
40 Importance of Accounting
41 Changes in Accounting Systems
42 Value Chain
43 Role of Controller
44 Ethical Issues

BUSINESS FIRST

45 The Accountant's Role in an Organization

CASES

46 Line and Staff Authority (CMA Adapted)

47 Ethics and Accounting Personnel
48 Professional Ethics and Toxic Waste

COLLABORATIVE EXERCISE

49 The Future Management Accountant

INTERNET EXERCISE

3
CHAPTER 1: OUTLINE

I. Accounting and Decision Making {L. O. 1}

A. Users of Accounting Information

In general, users of accounting information fall into three

main categories.

1. Internal managers who use information for short-term

planning and controlling routine operations,
2. Internal managers who use information for nonroutine
decisions, and
3. External parties (e.g., investors and government
authorities) that use the information for making decisions
about the company.

The internal managers make use of Management

Accounting information while the external parties make use
of Financial Accounting information. See EXHIBIT 1-1 for
the major distinctions between these two types of accounting
information.

Accounting System - a formal mechanism for gathering,

organizing, and communicating information about an
organization's activities. A good accounting system helps an
organization achieve its goals and objectives by helping to
answer three types of questions.

1. Scorecard Questions (Am I doing well or poorly?) -

accumulation and classification of data,
2. Attention-Directing Questions (Which problems should
I look into?) - focuses on operating problems and
opportunities, and
3. Problem-Solving Questions (Of the several ways of
doing the job, which one is best?) - quantifies the likely
results of possible courses of action for long-range
planning.

B. Accounting Systems

An accounting system is a formal mechanism for gathering,

organizing, and communicating information about an
organization's activities. Reports for external users are bound
4
by generally accepted accounting principles (GAAP) and legal
requirements.

Internal accounting reports are not restricted by GAAP. Costs

of developing and operating a system dictate an internal
accounting system's design. Many organizations have an
accounting system designed to meet external reporting
requirements. Managers are forced to use this information
that is not designed for their specific needs.

5
II. Effects of Government Regulation
Since government agencies have legal power to order into
evidence any internal document that they deem necessary,
internal accounting systems may be affected by government
regulation. An example is the manner in which universities
and defense contractors must allocate their costs to
government contracts.

Foreign Corrupt Practices Act - requires that accounting

records be maintained in reasonable detail and accuracy, and
that an appropriate system of internal accounting controls be
maintained. The internal accounting controls must be
documented by management rather than external auditors.

Management Audit - a review performed by internal

auditors of profit-seeking organizations and governmental
agencies (through the General Accounting Office) to
determine whether the policies and procedures specified by
top management have been implemented.

III. Management Accounting in Service and Nonprofit

Organizations
The basic ideas of management accounting were developed in
manufacturing organizations, but also apply to service
organizations. Service Organization - does not make or sell
tangible goods. There are both profit-seeking (e.g., accounting
firms, law firms, and hotels) and nonprofit (e.g., hospitals, schools,
libraries, and governmental agencies) service organizations.

Some common characteristics of service organizations are (1)

Labor is intensive, (2) Output is usually difficult to define, and (3)
Major inputs and outputs cannot be stored.

In designing accounting systems for service organizations,

simplicity is key. Complexity tends to generate costs of gathering
and interpreting data that often exceed benefits.

IIIV. Cost-Benefit and Behavioral Considerations {L. O.

2}
Cost-Benefit Balance - weighing estimated costs against
probable benefits. This is the primary consideration in choosing
among accounting systems and methods. The value of a system
6
must be seen as exceeding its cost.

Behavioral Implications - the accounting system's effects on the

behavior (decisions) of managers. A system that managers believe
in and trust will be used more in making decisions than one they
distrust.

7
IV. The Management Process and Accounting {L.
O. 3}
A. The Nature of Planning and Controlling

The management process is a series of activities in a cycle of

planning and control with Decision Making - the purposeful
choice from among a set of alternative courses of action
designed to achieve some objective, as the core. Planning -
the setting of objectives and outlining how they will be
attained. Controlling - the implementation of plans and
using feedback to attain objectives. Planning determines
action; action generates feedback, and feedback influences
further planning and possible corrective actions. See
EXHIBIT 1-2 for illustrations of these relationships.

B. Management by Exception

A budget is a quantitative expression of a plan of action.

Budgets are the chief devices for compelling and disciplining
management planning.

Performance Reports - provide feedback by comparing

results with plans and by highlighting Variances (i.e.,
deviations from plans). The accounting system records,
measures, and classifies actions in order to produce
performance reports. See EXHIBIT 1-3 for an example of a
performance report.

Management by Exception - concentrating on areas that

need attention and ignoring areas that appear to be running
smoothly. Managers use performance reports to investigate
exceptions (i.e., items for which actual amounts differ
significantly from budgeted amounts). Operations are then
brought into conformity with plans, or the plans are revised.

V I. Illustration of Budgets and Performance Reports

The text provides an example that illustrates the planning and

control cycle through the use of a budget and a performance
report for the Casaverde Company. See EXHIBIT 1-4 and
EXHIBIT 1-5 for an assembly departments budget and
performance report. The accountant's role is to provide
prompt measurements of actions and systematically pinpoint

8
trouble spots.

9
VII. Planning And Control For Product Life Cycles {L. O.
4}
And The Value Chain
Product Life Cycle - the various stages through which a product
passes, from conception and development through introduction into
the market through maturation and, finally, withdrawal from the
market. In the planning process, managers must determine
revenues and costs over the entire life cycle. Accounting also
needs to track actual costs and revenues throughout the life cycle.
Periodic comparisons between planned costs and revenues and
actual costs and revenues allow managers to assess the current
profitability of a product, determine its current life-cycle stage, and
make any needed changes in strategy. See EXHIBIT 1-6 for a
typical product life cycle.

The Value Chain - set of business functions that add value to the
products or services of an organization. These functions, not of
equal importance, include Research and Development, Design of
products or services, Production, Marketing, Distribution, and
Customer Service. See EXHIBIT 1-7 for a depiction of business
functions value chain.

TEACHING TIP: Internet Site see the following for the value
chain:
http://www.aicpa.org/cefm/ma/index.htm
(Advanced Management Practices and Processes Value Chain
Analysis)

VIII. Accounting's Position in the Organization

A. Line and Staff Authority

Line Authority - authority extended downward over

subordinates. Staff Authority - authority to advise but not
command. It may be exerted downward, laterally, or upward.
See EXHIBIT 1-8 for the types of authority depicted in an
organizational chart.

Controller (or Comptroller in a government organization) is

the top accounting officer in an organization. This executive,
like virtually everyone in an accounting function, fills a staff
role, whereas sales and production executives and their
subordinates fill line roles. Line Departments are those that

10
 are central to the mission of the organization, while Staff
Departments lend support and service to the line
department. See EXHIBIT 1-9 for an organization chart of a
controllers department.

B. The Controller

Although controllers have a staff role, they are generally

empowered by the firm's president to approve, install, and
oversee the organization's accounting system to assure
uniform accounting and reporting methods.

11
 C. Distinctions Between Controller and Treasurer {L.
O. 5}
Controllers are responsible for planning for control, reporting
and interpreting, evaluating and consulting, tax
administration, government reporting, protection of assets,
and economic appraisal. The duties of Treasurer include
provision of capital, investor relations, short-term financing,
banking and custody, credits and collections, investments,
and risk management (insurance).

IX. Career Opportunities in Management Accounting

A. Certified Management Accountant

While financial accounting has long provided auditing

positions that are typically staffed by Certified Public
Accountants (CPAs), accounting positions in corporations
are increasingly calling for Certified Management
Accountants (CMAs). The Institute of Management
Accountants, the largest U.S. professional organization of
accountants whose major interest is management accounting,
oversees the CMA program.

TEACHING TIP: IMAs Web Site -

http://www.rutgers.edu/Accounting/raw/ima/. The
students could be required to peruse the site in detail (in
particular the Students & Academics and Certification
sections).

TEACHING TIP: Articles see the following articles in the

suggested reading list on the future of the management
accounting profession and the CFM: Anastas, Benke, Boer,
Cooper, Foster, Horsch, and Kulesza.

B. Training for Top Management Positions.

In addition to preparing you for a position in an accounting

department, studying accounting-and working as a
management accountant-can prepare you for the very highest
levels of management, such as CEO.

X. Adaptation to Change
12
As decisions change, demands for information change.
Accountants must adapt their systems to the changes in
management practices and technology.
A. Current Trends {L. O. 6}
1. Shift from a manufacturing to a service-based economy,
2. Increased global competition, and
3. Advances in technology including e-commerce.

13
XI. Just-in-Time Philosophy and Computer-Integrated
Manufacturing.

The most important recent change leading to increased

efficiency in American factories has been the adoption of a
Just-In-Time (JIT) Philosophy - the elimination of waste by
(1) reducing the time that a product spends in the production
process and (2) eliminating the time that products spend on
activities that do not add value (e.g., inspection and waiting
time).

Companies can use computer-aided design (CAD) to design

products that can be manufactured efficiently and computer-
aided manufacturing to produce a smoother, more efficient
flow of production with fewer delays. The impact of both of
these is to reduce processing time. Computer-Integrated
Manufacturing (CIM) Systems - systems that use CAD and
CAM together with robots and computer-controlled machines.

B. Implications for the study of management accounting

To adapt to changes, the student must understand why

techniques are being used, not just how they are used.
Students should develop their understanding of underlying
concepts and principles, not just memorize rules and
techniques.

XII. Importance Of Ethical Conduct {L. O. 7}

A. Standards of ethical conduct

Standards of ethical conduct have been adopted by

professional accounting organizations because of the reliance
by so many parties on the product of accountants. See
EXHIBIT 1-10 for the Standards of Ethical Conduct for
Practitioners of Management Accounting and Financial
Management developed by the IMA. The standards are
shown as responsibilities regarding competence,
confidentiality, integrity and objectivity.

B. Ethical dilemmas

Competing obligations to shareholders, customers, suppliers,

fellow managers, society, and self and family create ethical
dilemmas for management accountants. Many companies
14
have formal codes of ethical conduct that must be signed by
employees. However, ethical standards are personal and
depend on the values of the individual.

15
CHAPTER 1: TRANSPARENCY MASTERS

The following exhibits are reproduced as transparency masters at the end

of this manual:

Exhibit 1-1 Distinctions Between Management Accounting and

Financial Accounting

Exhibit 1-2 The Chop House Restaurant - Accounting

Framework for Planning and Control

Exhibit 1-3 Performance Report

Exhibit 1-4 Casaverde Company Assembly Department Budget

for the Month Ended March 31, 200x

Exhibit 1-5 Casaverde Company Assembly Department

Performance Report for the Month Ended March 31, 200x

Exhibit 1-7 The Value Chain of Business Functions

Exhibit 1-8 Partial Organizational Chart of a Manufacturing

Company

Exhibit 1-9 Organization Chart of a Controller's Department

Exhibit 1-10 Standards of Ethical Conduct for Management

Accountants

16
CHAPTER 1: Quiz/Demonstration
Exercises
Learning Objective 1

1. The major users of accounting information are:

a. external parties for making decisions about the company

b. internal managers for planning and control purposes
c. internal managers for nonroutine decisions
d. all of the above

2. Good accounting information helps an organization by:

a. accumulating and classifying data.

b. determining who should be fired and when.
c. directing management's attention.
d. helping to solve problems.

Learning Objective 2

3. Which of the following should be considered in the selection of an

accounting system?

a. behavioral effects of the system on managers

b. costs of buying and operating the system
c. improved decision-making power resulting from the system
d. all of the above

4. The cost-benefit balance weighs _____ costs against _____ benefits:

a. actual; actual
b. actual; estimated
c. estimated; estimated
d. estimated; actual

17
Learning Objective 3

5. Which of the following is NOT and example of a special report?

a. cash flow report

b. customer survey
c. competitor analysis
d. advertising impact analysis

6. The process of setting goals is called:

a. controlling
b. managing
c. planning
d. none of the above

Learning Objective 4

7. The focus on customers occurs in which functions of the value chain:

a. research and development

b. production
c. marketing
d. distribution
e. all of the above

8. In the value-chain, accounting is in the _____ function:

a. research and development

b. design
c c. support
d d. customer service
e. distribution

Learning Objective 5

9. The functions of planning for control, evaluating and consulting, and

governmental reporting are typically assumed within organizations
by:

a. the company treasurer

b. the company controller
c. the company vice-president of marketing
d. external auditors

18
10. The treasurer function includes:

a. tax administration
b. evaluating and consulting
c. investor relations
d. economic appraisal

Learning Objective 6

11. Trends that are causing changes in management accounting today

include:

a advances in technology
b. increased global competition
c c. a shift from a manufacturing to a service-based economy
d. a., b.
e. a., b., c.

12. The most dominant influence on management accounting over the

past decade is:

a. increased global competition

b. a shift from a manufacturing to a service-based economy
c. advances in technology
d. none of the above

Learning Objective 7

13. Ethical obligations of management accountants are governed by the

Standards of Ethical Conduct for Management Accountants,
which outlines responsibilities regarding:

a. incompetence, full disclosure of all information, moral decay,

and partisanship
b. assisting in maximizing profits regardless of the means
necessary
c. competence, confidentiality, integrity, and objectivity
e. none of these

14. In the Standards of Ethical Conduct for Management

Accountants, which of the following is an example of Competence:

a. communicate unfavorable as well as favorable information

b. avoid actual or apparent conflicts of interest

19
c. refuse any gift that would appear to or actually influence
behavior
d. perform professional duties in accordance with relevant laws

20
CHAPTER 1: Solutions to
Quiz/Demonstration Exercises

1. [d] 2. [b] 3. [d] 4. [c] 5.

[a] 6. [c] 7. [e]

8. [c] 9. [b] 10. [c] 11. [e] 12. [c] 13.

[c] 14. [d]

21
CHAPTER 1: SUGGESTED READINGS

Anastas, M. The Changing World of Management Accounting and

Financial Management, Management Accounting, October 1997, 48-
51.

Atkinson, A. A. New Directions in Management Accounting Research,

Journal of Management Accounting Research, Vol. 9 1997, 79-108.

Axline, Larry L. "The Bottom Line on Ethics," Journal of Accountancy,

December 1990, 87-91.

Awasthi, V. N. and E. Staehelin, Ethics and Management Accounting:

Teaching Note for a Video Case, The Order: A Progressive Disclosure
Vignette, Journal of Accounting Education, Vol. 13 No. 1, 1995, 87-
98.

Baker, W. M. "Shedding the Bean Counter Image," Management

Accounting, October 1994, 29-31.

Bayou M. E. and B. L. Gerber. A 100-Year History of the Control Function at

Ford Motor Company, Journal of Cost Management, May/June 1997.

Benke Jr., R. L. 150-Hour Programs and the Preparation of Management

Accountants, Journal of Accounting Education, Vol. 14 No. 2, 1996,
187-192.

Bhide, A., and H. H. Stevenson. "Why Be Honest if Honesty Doesn't Pay,"

Harvard Business Review, Sept-Oct 1990, 121-129.

Bloomfield, B. P. and T. Vurdubakis. Visions of Organization and

Organizations of Vision: The Representational Practices of
Information Systems Development, Accounting, Organizations and
Society, 1996 No. 7, 639-668.

Boer, G. "Five Modern Management Accounting Myths," Management

Accounting, January 1994, 22-27.

Boer, G. Management Accounting Beyond the Year 2000, Journal of Cost

Management, Winter 1996, 46-49.

Boer, G. Management Accounting Education: Yesterday, Today, and

Tomorrow, Issues in Accounting Education, May 2000, Vol. 15, 313-
335.

22
Borthick, A. F. and H. P. Roth. Faster Access to More Information for Better
Decisions, Journal of Cost Management, Winter 1997, 25-30.

Burns, C. S. and S. K. Mills. Bringing the Factory to the Classroom,

Journal of Accountancy, January 1997, 56-62.

23
Cavinato, J. L. A Total Cost/Value Model for Supply Chain
Competitiveness, Journal of Business Logistics, May 1992, Vol. 13
No. 2, 285.

Cooper, J. To Boldly Go: Roles for Management Accountants, CMA

Management, Sept. 2000 Vol. 74, 41-48.

Cooper, R. Look Out, Management Accountants: Part 1, Management

Accounting, May 1996, 20-26.

Cooper, R. Look Out, Management Accountants: Part 2, Management

Accounting, June 1996, 35-41.

Epstein, M. J. "The Expanding Role of Accountants in Society,"

Management Accounting, April 1993, 22-26.

Evans III, J. H., Y. Hwang, and N. J. Nagarajan. Cost Reduction and Process
Reengineering in Hospitals, Journal of Cost Management, May/June
1997, 20-27.

Ferrara, W. L. Cost/Management Accounting The 21ST Century

Paradigm, Management Accounting, December 1995, 30-36.

Fifer, R. M. Cost Benchmarking Functions on the Value Chain, Planning

Review, May 1989, Vol. 17 No. 3, 18.

Flegm, E. H. The Future of Management and Financial Accounting,

Journal of Cost Management, Winter 1996, 44-45.

Frishkoff, P. A. and S. Thompson. "This Controller Wears Many Hats,"

Management Accounting, November 1994, 42-44.

Foster, G. Management Accounting in 2000, Journal of Cost

Management, Winter 1996, 36-39.

Foster, G. Frontiers of Management Accounting Research, Journal of

Management Accounting Research, Vol. 9 1997, 63-78.

Greenberg, P. S. Using a Systems Perspective in Cost/Management

Accounting to Teach Learning and Thinking Skills, Issues in
Accounting Education, Fall 1996, 297-313.

Harrison, S. "The Most Natural Thing to Do," Management Accounting,

March 1995, 22-26.

24
Hergert, M. and D. Morris. Accounting Data for Value Chain Analysis,
Strategic Management Journal, March 1989, Vol. 10 No. 2, 175.

25
Hertenstein, J. H. and M. B. Platt. Why Product Development Teams Need
Management Accountants, Management Accounting, April 1998, 50-
55.

Hill, J. W., M. B. Metzger, and D. R. Dalton. "How Ethical is Your Company?"

Management Accounting, July 1992, 59-61.

Howard, R. "Values Make the Company: An Interview with Robert Haas,"

Harvard Business Review, Sept-Oct 1990, 133-144.

Horsch, J. C. The Certified in Financial Management (CFM) Program,

Management Accounting, May 1997, 50-55.

Jablonsky, S.F. and P.J. Keating. "Financial Managers: Business Advocates

or Corporate Cops," Management Accounting, February 1995, 21-25.

Johnson, H. T. Management Accounting in the 21st Century, Journal of

Cost Management, Fall 1995, 15-19.

Kaplan, R. S. New Roles for Management Accountants, Journal of Cost

Management, Fall 1995, 6-13.

Keegan, D. P. and S. W. Portik. Accounting Will Survive the Coming

Century, Wont It? Management Accounting, December 1995, 24-
29.

Keenan, J. P. and C. A. Krueger. "Whistleblowing and the Professional,"

Management Accounting, August 1992, 21-24.

King, A. M. Three Significant Digits, Journal of Cost Management, Winter

1997, 31-37.

Kogan, A., E. F. Sudit and M. A. Vasarhelyi. Management Accounting in

the Era of Electronic Commerce, Management Accounting,
September 1997, 26-33.

Konstans, C., C. Kronke and M. C. Anderson. Wanted: Management

Accounting Skills, Strategic Finance, May 1999 Vol. 80, 88-90.

Koreto, R. J. Beresford Looks Forward, Journal of Accountancy, July 1997,

67-70.

Kulesza, C. S. and G. Siegel. Its Not Your Fathers Management

Accounting! Management Accounting, May 1997, 56-59.

26