Professional Ethics

Learning Objective 7: Understand what professional ethics mean to management accountants

After really big ethical fuck ups by the likes of big companies like Enron, Lehman Brothers, Toshiba, and many more, ethical conduct in accounting is more important than ever. When ethics fail, entire markets can fail.

Institutional Support

Because accountants are accountable both in and out of the company for financials, they have special obligations. The Sarbanes-Oxley Act exists as a means of putting these obligations into law. They impose tough standards and criminal punishments for anyone who doesn't meet those standards. It also opens a door for whistleblowers.

Under the Sarbanes-Oxley Act, CEOs and CFOs must prove their financial statements as legitimate, usually through outside auditing. For this reason, the Act empowers the audit committee of any company's board to hire, compensate, and fire public accounting firms to audit the company. As a counterbalance to this, the Act also limits the services an public accounting firm can give to a company they are auditing to reduce dependency. These audits and auditors are in turn audited by the Public Company Accounting Oversight Board. What this means is that companies are easily audited by independent public accounting firms while these same accounting firms are diversified and held under strict scrutiny to avoid any funny business.

Accountants also find institutional support from Professional Accounting Organizations, who represent management accountants. These organizations certify that these accountants have the technical knowhow and expertise, as well as advocate high ethical standards. In the United States, these are instead actual ethical guidelines. The Institute of Management Accountants (IMA) provides guidance on this front, and even has an ethics hotline for Accountants to walk through any ethical dilemma.

Statement of Ethical Professional Practice

https://quizlet.com/464550048/statement-of-ethical-professional-practice-flash-cards/

Resolution of Ethical Conduct

When faced with ethical issues, follow established policies to resolve the problem. If they don't work, then:

1. Discuss with immediate supervisor, unless they are involved already (in which case, keep going up levels). If you get to the CEO or equivalent, you can go to a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contacting above superiors should be done with superior's knowledge (if she is not involved with the initial problem). Communicating outside the organization is not appropriate, unless there is a violation of law.
2. Talk confidentially with an IMA Ethics Counselor or impartial advisor to clarify ethical issues.
3. Consult attorney regarding legalities

What are the ethical responsibilities of management accountants?

Management Accountants are responsible to many both in and out of the organization. For this reason, it is important for them to emphasize high standards in Competence, Integrity, Confidentiality, and Credibility. Laws like the Sarbanes-Oxley Act, as well as many outside ethical advisory groups and organization exist to help support Accountants in deriving solutions to ethical problems

Hybrid Costing Systems

Learning Objective 6: Understand the need for hybrid-costing systems such as operation costing

Overview of Operation-Costing Systems

ARE 140 Farm Management February 6 Lecture: Obtaining and Using Credit

Credit: What and Why?

Credit is the ability to borrow money. Creditors are particularly interested in your ability to pay it back.

Leverage - Jumpstarts starting point for business. Eat credit interest for higher return from business.

Credit: How and When?

Provide proof you can pay it back, this being in past records and plans to make more money with the loan.

Single parent or lump sum

Lines of credit - Provide big money account. Charge interest whenever you withdraw money, often reward putting money back in

Amortized loans - Kill over time

Balloon payment loans - Pay interest for first few years, pay whole thing at the end

Common costs of borrowing

Interest: Simple or compound

Points: Fee for getting loan

Appraisal fees 

Administrative fees

Rates may be fixed or variable

How to compare offers of credit?

Translate payments into PV.

Other means of sourcing capitol

• Leasing - Temporary possession of property
• Outside equity from investors
• Contracts

Equity Investors:

Entrepreneur provides idea and likely management services, and the equity investor proves the money capital.

Investor is likely to have the upper hand in valuing ownership.

Contracts:

Forward contracts: Pay now for service later (lock in price of grain for next year)

Crowdsourcing

Slow Money

Borrowing places demands on the borrower

The assumption made is that the borrower will make more money than the interest of the money they borrowed. 

Transferred-In Costs in Process Costing

Learning Objective 5: Apply process-costing methods to situations with transferred-in costs

They're basically the same as Direct Materials and Conversion Costs, but their own category.

Case 3: Process Costing with Some Beginning and Some Ending Work-in-Process Inventory

Learning Objective 4: Use the weighted-average method and the first-in, first-out (FIFO) method of process costing

Weighted-Average Method

Combine the beginning inventory with work started this period.

1. Physical Units: Add up Beginning WIP with Work Started this Period. It should match Units completed and transferred out + Ending WIP (225+175=400+100)
2. Equivalent Units: Convert WIP accounts to Equivalent Units and add to their respective start and completed Units, these should equal each other. (For expediency, you only need to calculate Completed+Ending WIP)
3. Total Costs: Add up Beginning WIP Costs and Costs added during period
4. Cost/Equivalent Unit: It's just math
5. Allocate Costs: Where'd it go between completed and ending WIP

First-In, First-Out Method

I, look I know what FIFO is.

1. Physical Units: Beginning WIP -> Completed and Transferred first. The difference must be units started during this period that are Completed and Transferred. Any units started this period that aren't Completed and Transferred should end up in Ending WIP.
2. Equivalent Units: Note, Equivalent Units of work done this period. This means if Beginning WIP inventory is [100% | 30%], the Equivalent Units of work done this period is [0% | 70%]. Ending WIP is more of the same.
3. Total Costs: Duh
4. Cost/Equivalent Unit: Also Duh
5. Allocate Costs: Allocate to Work Done this period to your Beginning Inventory, then Work Started and Completed, then Ending Inventory.

Two Things to note: 

FIFO should look mostly the same as Weighted Average except that it shifts the Cost of Goods Completed and Transferred Out with the Ending WIP. This is because Costs from the Beginning WIP first go through Completed and Transferred Out before Ending WIP (if they even get there). Compare this to Weighted Average, which distributes that cost proportionally between Transferred out and Ending WIP.

FIFO mostly applies only to items being transferred out. While it is possible to apply FIFO to units coming in as well, matching both up is cumbersome and is generally avoided.

Comparing the Weighted-Average and FIFO Methods

It should be noted that Weighted-Average and FIFO only really differentiate if the cost of inputs fluctuate by a significant amount, or if the Ending WIP to Products Completed and Transferred ratio is particularly high.

If Inputs drop, this causes FIFO to carry these higher costs into what eventually will be CoGS. If Inputs increase, Weighted-Average will do this. The higher CoGS will make the income of the company look smaller (even though the actual money they make is the same either way). This helps avoid taxes. On the other hand, going the opposite route for a lower CoGS may make a manager look better in the short term, though it does end up getting taxed more.

What are the Weighted-Average and FIFO methods of process costing? Under what conditions will they yield different levels of Operating Income?

Weighted Average and FIFO are different ways of allocating Process Costs onto the products created. Weighted Average simply distributes leftover costs from the previous month into the next, while FIFO gets those previous costs out of the door first.

They're mostly the same until Costs fluctuate and if Ending Inventory is significantly large, at which point FIFO makes costs look bigger if costs are falling and vice versa.

Try It! 17-3

Consider Stanton Processing Company Again. With the same information for 2017 as provided in Try It! 17-2, redo the problem assuming Stanton uses FIFO costing instead.

March 1   (3000 Units) [40%|10%]
March 31 (2000 Units) [80%|40%]

The company completed 30,000 units during March. Manufacturing costs incurred during March were direct materials costs of $176,320 and conversion costs of $312,625. Inventory at March 1 was carried at a cost of $16,155 (direct materials, $5,380 and conversion costs, $10,775).

Physical Units:
The 3,000 Units in the Beginning WIP Inventory are Completed and Transferred Out
27,000 Units Started this month are Completed and Transferred Out
2,000 Units Started this month end up incomplete and in the WIP Inventory

Equivalent Units:
From the Beginning WIP Inventory, the Equivalent Units of work that needs to be done is:
3,000 Units [60%|90%]
[1,800 | 2,700]
Units Started and Completed this month:
27,000 Units [100%|100%]
[27,000 | 27,000]
Units Started and end up in Ending WIP:
2,000 Units [80%|40%]
[1,600 | 800]
Total:
[30,400 | 30,500]

Total Costs:
Started: [$176,000 | $312,625]
WIP:     [    $5,380 |   $10,775]
Total:    [$181,380 | $323,400]

Cost/Equivalent Units:
[$5.97 | $10.60]

Allocate Costs
Finish WIP: [$10,746 | $28,620]
Started and Completed: [$161,190 | $286,200]
Started and WIP: [$9,552 | $8,480]

Try It! 17-2

The Stanton Processing COmpany had work in process at the beginning and end of March 2017 in its Painting Department as follows:

March 1   (3000 Units) [40%|10%]
March 31 (2000 Units) [80%|40%]

The company completed 30,000 units during March. Manufacturing costs incurred during March were direct materials costs of $176,320 and conversion costs of $312,625. Inventory at March 1 was carried at a cost of $16,155 (direct materials, $5,380 and conversion costs, $10,775).

Assuming Stanton uses weighted-average costing, determine the equivalent units of work done in March, and calculate the cost of units completed and the cost of units in ending inventory.

Physical Units:
3,000 Beginning
X Started
30,000 Completed
2,000 Ending

X=29,000 Started

Equivalent Units:

30,000 [100%|100%]
  2,000 [80%  |  40%]
[31,600 | 30,800]

Total Costs:
Started: [$176,000 | $312,625]
WIP:     [    $5,380 |   $10,775]
Total:    [$181,380 | $323,400]

Total Cost/Equivalent Units:
[$181,380 | $323,400] / [31,600 | 30,800]
[$5.74 | $10.50]

Allocate Costs:
30,000 [30,000 | 30,000]
  2,000 [  1,600 |      800]
30,000 [$172,200 | $315,000]
  2,000 [    $9,184 |     $8,400] (minor rounding error in allocated WIP Direct Materials)

17-1 Try It

Big Band Corporation produces a semiconductor chip used in communications. The direct materials are added at the start of the production process, while conversion costs are added uniformly throughout the production process. Big Band had no inventory at the start of June. During the month, it incurred direct materials costs of $935,750 and conversion costs of $4,554,000. Big Band started 475,000 chips and completed 425,000 of them in June. Ending inventory was 50% complete as to conversion costs.

Compute (a) the equivalent units of work done in June, and (b) the total manufacturing cost per chip. Allocate the total costs between the completed chips and those in ending inventory

(a)

475,000 physical units
425,000 completed
50,000 [100% | 50%] incomplete [(Direct Materials) | (Conversion Costs)]
50,000 Equivalent Units in Direct Materials (incompleted)
25,000 Equivalent Units in Conversion Costs (incompleted)
475,000 Equivalent Units in Direct Materials (total)
450,000 Equivalent Units in Conversion Costs (total)

(b)

$935,750 Direct Materials Cost / 475,000 Equivalent Units
$4,554,000 Conversion Costs / 450,000 Equivalent Units
$1.97 / Equivalent Unit (Direct Materials)
$10.12 / Equivalent Unit (Conversion Costs)

Completed:
(1.97+10.12)*425,000=$5,138,250
Incomplete:
50,000*1.97+25,000*10.12=$351,500

Double Check:
$5,135,250+$351,500=$5,489,750
$935,750+$4,554,000=$5,489,750

Case 2: Process Costing with Zero Beginning Inventory and Some Ending Work-In-Process Inventory

Learning Objective 3: Describe the five steps in process costing and calculate equivalent units

It should be noted that the estimation for % conversion for units is simply that, an estimation. Different businesses estimate differently based on the care and accuracy of the estimators/managers and the physical limitations of the business.

This % however, no matter how estimated, grants us a concept of equivalent units. These can be used to help measure the costs of our completed and incomplete units for a period. Process Costing for this type of problem follows its own process:

1. Summarize the flow of physical units of output
2. Compute output in terms of equivalent units
3. Summarize the total costs to account for
4. Compute the cost per equivalent unit
5. Assign the total costs to the units completed and to the units in ending work-in-process inventory

Summarizing the Physical Units and Equivalent Units (Steps 1 and 2)

Step 1: Summarize the flow of physical units of output

Physical units are the number of units, be it complete or incomplete. The flow is the measurement of what goes into the system and where it goes out. For example, consider a batch of 400 Simple Meals. We would record 400 simple meals started this period. However, let's say only 175 got completed, the other 225 only being partially completed. The flow then considers the 175 transferred out, and the 225 goes into Work-In-Progress.

Step 2: Compute Output in terms of equivalent units

Let's say the 225 units that are only partially completed are measured to have 100% of their materials, but only 60% converted. This would mean we have 225 physical units in our WIP, but what would this mean in Equivalent Units?

To calculate equivalent units, you multiply the amount of physical units there are by the percentage of completion. In this case, you have 225 equivalent units in Direct Materials, but only 135 equivalent units in Conversion Costs.

Note: Equivalent Units are calculated separately per input (in this case, Direct Materials and Conversion Costs)

For now, focus on quantities of units, not dollar amounts

Calculating Product Costs (Steps 3, 4, and 5)

Step 3: Summarize the Total Costs to Account For

In this case, the only costs we summarize are the ones added this period. Let's say it costs $32,000 in Direct Materials and $18,600 in Conversion Costs

Step 4: Compute the Cost Per Equivalent Unit
This is why you calculate equivalent units separately for input, by the way.

Divide the Material Cost by Equivalent Units in Direct Materials, and Conversion Costs to their Equivalent Units, to get the Cost Per Equivalent Unit.

Step 5: Assign the Total Costs to the Units Completed and to the Units in Ending WIP 

You now have the number of Equivalent Units Completed and in Progress (Steps 1 and 2), as well as the Cost Per Equivalent Units (Steps 3 and 4). Simply multiply them together to get your total costs within each inventory (Transferred out and WIP). These numbers should add up and match your recorded Total Production Costs

Journal Entries

In Process Costing, there are WIP Entries for each Process.


Why Accuracy in Conversion % is important

Inaccurate Conversion % would ultimately mean inaccurate costs being recorded, affecting the perceived performance of the manager/company.

If Conversion % is too high, this raises the apparent CoGS for the period. This is improves the performance indicators for some people in the company, meaning there's an unethical incentive to lie. The reverse is also true, where Supervisors could estimate low to help smooth over unnatural high points in productivity, which can then be used to cover up any future low points or spike future high points. Top Management should always emphasize obtaining the correct answer, regardless of how it affects reported performance.

What are the five steps in a process costing system, and how are equivalent units calculated?

1. Physical Units
2. Equivalent Units
3. Total Costs
4. Total Costs/Equivalent Units
5. Allocate Costs

Equivalent Units are calculated by measuring the amount of incomplete units in terms of both Direct Materials and Conversion Costs. So, at the end of the period if there's a WIP of 100 Units, 100% of Direct Materials are in there, but the Units are only 50% converted, that means you have 100 Equivalent Units in Direct Materials and 50 Equivalent Units in Conversion Costs. These Equivalent Units are then added to the Completed Units for the Time Period (which are treated (and defined) as 100% | 100% completed).

Case 1: Process Costing with No Beginning or Ending Work-in-Process Inventory

Learning Objective 2: Understand the basic concepts of process costing and compute average unit costs

How are average unit costs computed when no inventories are present?

When no inventories are present, this means that 100% of conversion was completed in this period for 100% of units produced in this period. In other words, average unit costs is a simple average of Direct+Indirect Costs of production (Direct Materials+Conversion Costs) and the # of units made.

Illustrating Process Costing

Learning Objective: Identify the situations in which process-costing systems are appropriate

Difference Between Job-costing and Process-costing systems

Process-Costing: Assigns cost by dividing total costs by the number of units, creating $/Unit. This is because in a mass manufacturing process, each unit receives the same or similar treatment (costs).

This process of treating each unit of production the same or similarly is actually the main difference between Job-costing and Process-costing. In a Job-costing system, each product produced does not receive the same or similar amount of products or work. Thus if you try to take an average of all the products and assign them to each job like Process-costing does, the measurement for each individual job is going to be inaccurate.

Some jobs mix both homogenous processes and unique jobs. These will be covered under "hybrid" costing systems in a later Learning Objective.

Direct-Cost vs Indirect-Costs (Direct Materials+Conversion Costs)

Although the chapter isn't actually clear what differentiates Direct-Costs and Indirect-Costs, the examples given are Direct Materials and Conversion Costs. A quick look online clarifies that Direct-Costs tend to be the variable costs in a system, where as Indirect-Costs tend to be fixed or period costs.

For example, let's say I have a Simple Meal plant where the main expenses are Corn which I buy from a nearby farm, a team of colonists who live on the plant, and the upkeep of the plant itself. The Corn I buy would be my Direct-Costs, the Direct Materials to produce Simple Meals, whereas the Colonists and the Plant would be Indirect-Costs, in this case the required Conversion to turn Corn into Simple Meals. It should be noted that if demand for Simple Meals changes, my demand for Corn changes as well (making Corn a variable cost), but the costs of the Colonists and Plant are Period and Fixed costs respectively, meeting the earlier clarification.

Process-costing systems separate costs into cost categories according to when costs are introduced into the process

Typically, Direct-Costs are applied right at the start of the process while Indirect-Costs are applied throughout the process based on completion.

Let's say we have an order for 100 Simple Meals. I order 1000 Corn for $1000, and let's say it will cost another $1000 to convert all of the Corn into 100 Simple Meals. The moment I receive my order for 1000 corn, the process records the costs of all "Simple Meals" in production at this point as costing $1000, applying the Direct-Cost upfront. Let's then say over the course of two days, I produce 50 Simple Meals. At this point of time, I'm only 50% done with Conversion (Indirect Costs). If I were to record the value of my "100" Simple Meals at this point, it would be the $1000 in Corn + half of the Conversion Costs for the order, in this case $500, for a total of $1,500 of Simple Meals at this point of time.

More complicated processes will have multiple different Direct and Indirect Costs throughout the process, however the rules still generally follow if you break these more complicated processes into steps. At the beginning of each step, if Direct Materials are added into the system, those costs are always recorded right away. Through the completion of the product, Indirect Costs for that step of Conversion or Completion are only added as a percentage of completion.

Under what conditions is a process-costing system used?

Process-costing systems are best used when dealing with large amounts of homogeneous products produced mostly or entirely the same throughout their production process. Process-costing will then record the cost of these products based on a function of Direct and Indirect Costs.

Chapter 17: Process Costing

Let's say we develop a process for creating Simple Meals in Rimworld. Now, Simple Meals are easy to mass produce, it's far better to consider their production a perpetual process than a core project; if you want to measure and keep track of them, you should use Process Costing.

There are three questions that Process Costing wants to solve. First, how many Simple Meals do you have at the end of the month/season/year? Second, how far along are the meals in progress? Third, how much exactly does a Simple Meal cost over the course of the process?

In particular for that last problem, there are many ways to value inventory, and depending on the method used, it would affect the measurable wealth of your economy (if Rimworld required you to write your own wealth reports), which in turn could affect enemy spawns and Pawn happiness. This is especially relevant if the cost of any particular ingredient during the process suddenly fluctuates.

The example given by the book is a story of if prices drop. Of the methods mentioned, FIFO, LIFO, and Weighted-Average, let's assume that our colony reports in FIFO. Simple Meals are for the most part mass produced through Corn, limited largely through a low-skill Grower. Let's assume we recruit a high-skill, high-passion Grower, and the "cost" of producing Corn drops. Even though the "Cost" of producing Simple Meals now has effectively dropped, FIFO requires us to maintain the costs of all of our old inventory before the newest Grower was hired. If this was a competitive Market, and all of the other Factions had their own influx of High-Skilled Growers, our own Colony's Simple Meals would look extremely expensive since we must carry through the costs of our old Grower's more expensive Corn, even though the Simple Meals we are producing are cheaper than ever.

Learning Objectives:

1. Identify the situations in which process-costing systems are appropriate
2. Understand the basic concepts of process costing and compute average unit costs
3. Describe the five steps in process costing and calculate equivalent units
4. Use the weighted-average method and the FIFO method of process costing
5. Apply process-costing methods to situations with transferred-in costs
6. Understand the need for hybrid-costing systems such as operation costing

Management Accounting Lecture January 27

Chapter 17 Process Costing

Process Costing -> Cost per Unit

Why do you want to know the cost per unit?

• Price of product
• Profit
• Control the cost
• How efficient production is
• Helps calculate CoGS
• Ending Inventory on Balance Sheet

Cost Accumulation

• Job Order
• Easily identifiable products
• Custom units, expensive yachts
• Often require contracts before going into production
• Process Costing
• Mass production 
• Toilet paper, toothpaste

Learning Objectives:

1. Identify the situations in which process-costing systems are appropriate
2. Understand the basic concepts  of process costing and compute  average unit costs
3. Describe the five steps in process  costing and calculate equivalent  units
4. Use the weighted-average method  and the first-in, first-out (FIFO)  method of process costing
5. Apply process-costing methods to  situations with transferred-in costs
6. Understand the need for hybridcosting systems such as operation  costing

Process Costing

Calculating unit costs by assigning total costs over identical/similar units of output.

ex. $1,000,000 operating cost over 100,000 identical untis = $10 Unit cost

Process-Costing Cost Categories

Process-Costing systems separate costs into 2 cost categories

1. Direct Materials - Often accumulated at the beginning of production/work station
1. The raw materials that will eventually become the final product
2. Conversion costs - Often accumulated throughout process
1. The work required to turn raw materials into a final product
2. For simplicity, these are added evenly throughout the process

Process-Costing: Three Cases

1. No beginning or ending work-in-process inventories
2. No beginning WIP and some ending WIP
3. Both beginning and ending WIP inventories

Case #1: No beginning or ending WIP inventories

Five-Step Process-Costing Allocation

1. Summarize the flow of physical units of output
2. Compute output in terms of equivalent units
3. Sumarize total costs to account for
4. Compute cost per equivalent unit
5. Assign total costs to units completed and to units in ending work-in-process

Equivalent Units

For now, focus on the equivalent number of units (for example, 100 units 80% complete ~ 80 equivalent units).

In case 1, in order to calculate cost per unit, you simply need to divide the total costs by the number of units.

Case #2: No beginning WIP, but some ending WIP

Because Direct Materials are counted 100% at the beginning of the process, their value is recorded entirely. However, conversion costs are calculated based on completion of the unit. If the units are 60% done, 60% of the conversion costs are recorded. This % of conversion costs are used to calculate unit costs for the time period.

Weighted-Average Process-Costing Method

Weighted Average method or the FIFO method

Calculates cost per equivalent unit of all work done to date (regardless of accounting period in which it was done)

FIFO focuses on current costs and matching revenues and expenses to time periods

Case #3: Both Beginning and ending WIP inventory

Costs from last period (in the beginning Inventory) are carried forward and mixed in with current period's costs. These total costs are divided by the total units completed and in process this period (adding the beginning inventory and work done there).

First-In, First-Out (FIFO Process-Costing Method

Assigns cost of the beginning inventory (from last period) units to the equivalent number of units completed in this period.

Work done in different periods have their costs separated.

Organization Structure and the Management Accountant

Learning Objective 6: Understand how management accounting fits into an organization's structure

Line and Staff Relationships
Line Management - Managing all the functions of the business that actually facilitate the business
Staff Management - Managing the support functions of the business that take care of people


The Chief Financial Officer and the Controller

CFO is in charge of:
Controllership
Tax
Treasury
Risk Management
Investor Relations
Strategic Planning

The Controller is in charge of Accounting

CFO oversees company as a whole, while Controller tends to answer directly to CFO

Management Accounting beyond the Numbers

Management Accountants need to work with more than just numbers. They also work in cross functional teams, be fact based and tough minded, lead and motivate others, communicate clearly and candidly, and they must have high integrity.

Where does Management Accounting fit into an organization's structure?

Management Accountants function as part of Staff Management, in service to the people that allow the business to run. Their roles can go as high as the CFO and Controller. Because Management Accountants need to work intimately with managers and other teams, it's important that they can fit in, be objective, inspiring, and have strong integrity.

Key Management Accounting Guidelines

Learning Objective 5: Describe three guidelines management accountants follow in supporting  managers.

(1) employ a cost–benefit approach,
(2) give  full recognition to behavioral and technical considerations, and
(3) use different costs for different purposes.

Cost Benefit Approach
In short, decisions should benefit the company more than they cost. Accounting is particularly useful in this endeavor, as their job revolves almost entirely in recording and analyzing value and cost.

Behavioral and Technical Considerations
Technical considerations include providing the right information in an easy to read format.
Because management deals with people, it's also important to use information to spur action and positive motivation in people, rather than just underlining people's underperformance.

Different Costs for Different Purposes
GAAP vs internal Accounting

What guidelines do management accountants use?

Well first of all they make sure that any decision they recommend brings more value or benefit to the company than it costs. They relay this information in a concise and easy to read way, usually with the aim of motivating its readers. Different formats are also necessary, depending on GAAP or whatever part of the organization the information is traveling to internally.

Decision Making, Planning, and Control: The Five-Step Decision-Making Process

Learning Objective 4: Explain the five-step decision-making process and its role in management accounting

For the most part, I'm gonna use this chapter to talk about Rimworld. For those who have no clue what that game is, tough luck.

Steps 1-4

1. Identify the problem and uncertainties
1. Especially when first starting out, Rimworld is a survival game. Thus, you need to know if you need to prioritize a food source, sleep, or regulating temperature for your first few nights.
2. There are very few uncertainties regarding sleep outside of where you should put your starting hut, but food and temperature can be far more variable depending on the difficulty of the game.
2. Obtain information
1. The Rimworld wikipedia is chock full of information, from articles of the individual elements of the game to start up guides to help players walk through the process of managing their starting terrain.
3. Make predictions about the future
1. Once you know what problems you are attempting to solve, as well as have information about your problems and options to solve them, you can reasonably estimate what would happen based on the possible paths you can take to solve your problems.
1. For example, you start the game with plenty of food to survive for about a week, meaning you don't need to rush food sources right away. On the other hand, your stranded colonists will need to sleep by the end of the day, and in more extreme maps they will freeze/get heatstroke within a couple of hours. If it took, let's say, half a day to approach each problem, with the previous two steps you will be able to recognize the consequences of each path you can take.
2. Predictions require judgment, and are subject to her own biases and irrationalities. It's important at this stage to test and retest her knowledge, as well as know where facts end and personal opinions begin, in order to outline these possible paths accurately and conclusively.
4. Make decisions by choosing among alternatives
1. When presented with multiple options with seemingly equally viable prospects, it's at this point that strategy and leadership can provide a strong sense of direction for the company and decision making in process. 
1. For example, once the midgame in Rimworld rolls around, the game becomes more about generating wealth and defending yourself from the outside world. If you already entered the game with a strategy in mind, even though there are a menagerie of equally viable options to generate wealth in the game, it's your strategy that gives you a clear path to maneuver through these options.

Steps 1-4 in the Decision-Making Process are collectively known as Planning. This is the stage of the game where you decide your goals and strategies, explore different paths and their outcomes to achieve your goals, and bring people together in order to achieve your goals. Management Accountants are key partners in the planning stage since they often understand the key success factors and what brings value to the company.

You should know what a budget is. Super important in the planning and execution of a Decision. 

     5. Implement the decision, evaluate performance, and learn

1. Once you have decided which path you want to take, implement it and watch what happens. In particular, compare what actually happens to the predictions you made planning the decision out.
1. Your predecision information could include the safety and reliability of starting the game in the house; the speculation required to make a decision. Your Control, or post decision information is all the details of what actually happens. In this case, it's a log of how you built your house, how Randy dropped a meteor on your house, and how you now need to build a second house in the middle of the night.

Analyzing control brings about learning. It's important to review what actually did happen, and proposing new solutions, plans, and possibilities based on control factors to make better informed decisions in the future.

So, how do managers make decisions to implement strategy? They follow a five step process, of
1. Outlining problems
2. Gathering information
3. Exploring possibilities
4. Choosing strategies
5. Execution and learning

Key Success Factors

Learning Objective 3: Identify the dimensions of performance that customers are expecting of companies

Fuck me this part of the chapter is nothing but bullet points.

• Cost and Efficiency
• Consumers are cheap fucks and better price points win them over. 
• Quality
• Unfortunately you can't sell them dogshit dog shit. They want high quality dog shit.
• Total Quality Management (TQM): An integrative philosophy of management for continuously improving the quality of products and processes. In short, everyone in the value chain is responsible for delivering quality dog shit. Some of the goals include: Meeting customer needs and wants, making zero (or very few) defects and waste products, and to minimize inventory.
• Time
• Time has many dimensions, but the two most important are new product development time and customer response time.
• New Product Development time means that consumers always want the latest and greatest thing, and people are wanting the latest and greatest dog shit faster and faster especially in modern times.
• Customer Response Time is how fast the organization responds to customer requests. If the consumer wants dog shit, how fast can the company deliver?
• Innovation
• More than just product development, it also includes reworking the business from the ground up to keep the company as a whole on the leading edge of dog shit.
• Sustainability
• Organic dog shit. Produced efficiently to provide no waste. Oh and it's recyclable.
• Sustainability is becoming a particularly important factor in this picture. Investors, employees, consumers, and society at large are all continuously placing more and more emphasis on it.
• Investors want companies that can sustainably operate, in a financial, social, and environmental sense.
• Employees tend to work for and are inspired by sustainable companies
• Customers prefer sustainable products
• Many countries and laws nowadays often take action against particularly egregious companies in terms of sustainability and harm to the environment. 

One of the jobs of Management Accountants is to help managers track the key success factors of both their company and their competitors. The information they gather helps set a competitive bar for them to achieve, as well as outline the information needed to continuously improve the company as a whole.

So, what are the dimensions of performance that customers are expecting of companies? They are as follows: Cost, Quality, Time, Innovation, and Sustainability. Customers want cheap, high quality products. They constantly want the latest and greatest thing, and businesses need to respond quickly to their market demands. In order to do achieve this, businesses should always aim to innovate and reinvent themselves to be on the leading edge, as well as maintain sustainability both to keep their company alive in the long term and to please everyone else in the room.

Value-Chain and Supply-Chain Analysis

Learning Objective 3a: Describe the set of business functions in the value chain.

Gonna be breaking that in half because this part of the chapter goes on for forever.

There are 7 business functions in the value chain

1. Research and Development
2. Design of Products and processes
3. Production
4. Marketing
5. Distribution
6. Customer Service
7. Administration

Because the example in the book is boring, I will be using Michael Reeve's Tazer Tag video

Research and development is sitting down and thinking to yourself "my god how in the world am I going to inflict pain on people who think I am their friend today?"

Design of Products and Processes would be figuring out how to make his first taser vest. 

Production is the process of making the other 5 vests.

Marketing is using lies and deceit to convince the other 5 idiots to put on the bomber vests.

Distribution was as he was passing it out to Offline TV.

Customer service would getting executed by firing squad to keep Offline TV happy.

Administration isn't exactly part of the six primary business functions in a value chain. Instead, it acts all throughout the entire system to support the other six primary business functions. In real life, it would include accounting and finance, HR, and IT.

The book then goes on another tangent to another three letter tool used in business known as CRM. Customer Relationship Management is simply a means to integrate people and technology into customer service. Whether or not this is on the test who knows, just know if you're a customer and there's any information being coordinated, may have to do with CRM.

It should be noted that different companies create value in different ways. For example, Michael Reeves creates value through the entertainment his sick twisted mind provides to viewers, and Apple creates it by brainwashing their consumers. As a result, every business function may be more critical, or more valuable, than the others depending on the business at hand.

With that in mind however, it's important not to look at the business functions as individual entities that you approach separately one by one by one. Yes a lot of value in Michael Reeves is his particularly messed up ideas which you may argue means that R&D is his most valuable business function, however he still needs to design his torture devices (he makes everything himself), he actively engages with viewers and/or at least proves himself to be as entertaining as possible for marketing purposes, and he goes back and makes sure his victims actually enjoy the experience even after putting them through tasers (customer service). It's a value chain, and managing the whole chain altogether makes the system flow.

Managers and Managerial Accountants can take information they gather throughout the Value Chain to make smarter decisions, especially in regards to Cost Management. With proper accounting, it is relatively easy to find the areas in which the value generated in any particular part of the chain outstrips that business function's operating cost. It's also easier to identify areas that need to be made more efficient, or areas that can afford greater costs to generate even more value.

To end the chapter off there's one more chain you need to know about, the Supply Chain. By definition, the supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in one organization or in multiple organizations. To give an example, let's take the store bought bacon in your fridge. Obviously, we start with farms and pigs. We could go back further but shut up. These pigs go to your butcher/bacon factory, which are then moved to packaging. These prepared and packaged strips of bacon are then brought to a bacon supplier, a distribution company that sells large stocks of bacon to retailers (supermarkets). The supermarkets then leave the packaged bacon out for you, the consumer, to buy and fatten yourself up. To review, the chain goes from

Raw Ingredients
Manufacturing
Packaging/Non-Concentrate Materials/Services
Distribution
Retail
Consumer

It can be slightly different depending on the product but this is the general work flow. Just remember, pig factory package distribution supermarket consumer.

And with this we cut the chapter in half. How do companies add value? They add value by following a sequence of operations, business functions, to bring you products and services that previously didn't exist. The business functions are as follows: R&D, Design, Production, Marketing, Distribution, and Customer Service. This can be followed by remembering the taser tag video. On top of all of these functions is administration, which doesn't really add value to the product but keeps the whole chain running. Different companies add values in different ways. While this also means they value different parts of the chain more than others, it's always important to remember that it's a whole chain. Understanding the chain, particularly from an accounting standpoint for the purposes of this book, will help you figure out the financial and economic advantages of working through the chain.

Strategic Decisions and the Management Accountant

Learning Objective 2: Understand how management accountants help firms make strategic decisions

Okay, you should know what management accounting is so let's instead jump right into what the hell this book means by 'strategic decisions'.

Okay so let's imagine on one hand you have all your baking supplies, flour, sugar, eggs, whipped cream, etc. etc., as well as a working oven and whatever trays you need. We'll call that point A. Now on the other hand, you have a bunch of screaming demon children and you desperately want them to shut up. Let's call that point B. Strategy then is how you get from point A to point B.

Now one strategy could be to just feed the kids raw ingredients, however you question the healthiness of feeding children raw eggs or the sanity of giving children cups of sugar. And no, no you can not use just the oven to solve the problem of having children. However, you do remember your mom's recipe for chocolate cake, and you do remember it making you feel better and brightening your mood back when you were a little demon child. So, you bust out your baking skills and craft the perfect chocolate cake, et voila, the demon children shut up and are eagerly chowing down on cake. The process that you plan on taking to get from your start point to your end point is your strategy, and through let's say, accounting for all of your starting resources, skills, and knowledge, it's one of the ways managers can help firms make strategic decisions.

While this is enough to answer the learning objective, the book does go into more detail about strategic decisions companies tend to make. Specifically, there are two main strategies: Cost Leadership, and Product Differentiation.

Cost Leadership starts with a good quality standard of a product and beating the competition for that quality of a product with a lower price point. Imagine three drug dealers standing side by side on the same street corner, and you have a problem. I mean you recognize that all of their products are generally of the same quality. However, drug dealer number 3 is selling his ketamine for only half the price of the other two. He will most likely win your patronage, having used a strategy of Cost Leadership to beat his rivals.

Product Differentiation on the other hand utilizes clever marketing and/or truly unique products to stand out amongst the crowd. The best real life example of this is Apple, which has somehow managed to hypnotize and brainwash its consumers into a strange brand-loyal state that causes all of these people to only be able to buy Apple products. Because of this odd brand loyalty, Apple and other companies that successfully utilize Product Differentiation are able to charge more for their products.

Management Accountants can help provide a lot of critical and numerical analysis on deciding what strategy to execute and how. The two examples given are the company's cost, productivity, or efficiency advantage relative to competitors, and the premium prices a company can charge over its costs from distinctive product or service features. This emphasis of strategic issues can also be called Strategic Cost Management.

The chapter ends on a bullet point point list of important questions to ask in formulating a strategy. They are:

• Who are our most important customers, and what critical capability do we have to be competitive and deliver value or our customers?
• This is the point a to point b example, analyzing what you have and the people you want to make happy (or shut up) and executing on the most effective strategy you have based on these constraints.
• What is the bargaining power of our customers?
• Demon children will eat anything sweet.
• What is the bargaining power of our suppliers?
• There are a lot of bakeries and baking supplies in town, so baking goods are actually rather cheap around here as everyone is climbing over each other.
• What substitute products exist in the marketplace, and how do they differ from our product in terms of features, price, cost, and quality?
• As mentioned there are a lot of bakeries around town. Their professional cakes are probably way better than mine, but they're also way pricier. 
• Will adequate cash be available to fund the strategy, or will additional funds need to be raised?
• Luckily I already had the ingredients lying around, so I will not need cash for the cake. I will need funds for the ketamine addiction though.

Anyway to wrap this up, how do management accountants support strategic decisions?

Primarily, management accountants keep inventory of the resources and assets on hand that you can use to achieve your goals and determine your strategic decisions. After deciding if you want to go with Cost Leadership or Product Differentiation, the accountant can walk you through the numbers behind your strategic decision from costs to premium prices. They should also be able to help you answer problems like bargaining power of both customers and suppliers, any substitutes and competition, as well as whether you have the capital to even begin your venture.

Financial Accounting, Management Accounting, and Cost Accounting

Learning Objective 1 wants you to be able to distinguish between Financial Accounting and Cost Accounting.

Real quick, what is accounting? Well in simple terms, accounting is just recording economic transactions and turning that into useful information. Every time you ring something up on a cash register? That transaction goes right to a computer where a manager will review what it is people are buying. Or a more extreme example, imagine the next time you walk into a Whole Foods that there's this balding middle aged guy following you around everywhere as you walk around the store. As you get ready to leave, he writes down in his notepad all the items in your shopping cart, hands you a bill, and puts his copy of your shopping list into a manila envelope with all of your personal information he's been recording about you for the last 3 years. What he will do with all of your personal information you don't know, but again this follows the simple process of recording the transaction and turning it into information to be used at a later date.

A minor tangent the chapter takes and one that shows up in many of my classes; a quick explanation of ERP systems. Enterprise Resource Planning systems are large single databases that collects data from multiple facets of an organization and puts all of it in one place. Parts of this data can then be fed into different applications to support the company's business based on whatever the manager in question needs at that time. These systems are incredibly useful to accountants, since nobody understands what accountants are talking about anyway and generally will need a computer to dumb down whatever transactional data the accountant is trying to explain to them. Whether or not this will be on the test, who knows.

Back to accounting. If accounting is just recording transaction data and turning it into useful information, two probably really good questions to ask are how is data being recorded, and who is going to use that information? In fact, in answering these questions, we will be able to achieve Learning Objective 1.

Financial Accounting is perhaps the easier to define of the two. Financial Accounting needs to follow a strict set of rules based on Generally Accepted Accounting Principles (GAAP). What exactly GAAP is is a long story but just know that if you don't follow them, a lot of people are going to be mad at you. Who are these people? Well, the public, the banks, investors, the federal government, basically the point of Financial Accounting is to accurately present your Financials to people outside of the company, hence the strict emphasis on the rules to keep information clear and legible for anybody on the outside looking in.

Managerial Accounting on the other hand is far less easy to define than its financial counterpart. The goal of Managerial Accounting is to provide useful financial (and non financial) information to managers to help fulfill the goal of the organization (usually this just means make money). Because of this, there aren't nearly as many rules to Managerial Accounting; if the managers can understand the information you give them and the information helps managers make money, it flies.

There's another key difference that can be inferred from these different goals. Financial Accounting wants to report accurately of what the company is, and thus tends to be past oriented (often reporting last year's performance up to today), while managerial accounting is a tool for where the company is going, and is future orientated. While long term plans do exist in managerial accounting, it's far more common for managerial accounting to plan up to the next year or so.

There's also the unloved step-child in the room that is Cost Accounting. Its role is to measure and analyze costs that the company incurs and use that data to make smart decisions with the company's limited resources. However, most accountants simply consider this as part of the job of Managerial Accounting, and just like unloved step-children, people tend not to even register its even there.

Before wrapping up, there is one last concept called Cost Management. There is no exact definition for this term, however the general idea is the analyzation of costs in a way that maximizes value to customers and/or achieves the company's goals. This does not strictly mean cost reduction; it also means analyzing when it's smart to take on additional costs to add to the product or service, hopefully manifesting in greater revenues and profits down the line. One thing to note is that cost management is a different idea from accounting in that "Information from accounting systems helps managers to manage costs, but the information and the accounting systems themselves are not cost management." (Page 3).

Anyway to summarize, or more specifically to answer Learning Objective 1, how is financial accounting different from managerial accounting? While both systems seek to record transactional data into usable information, how they record this data and who they present the information to are their key differences. Namely, Financial Accounting seeks to provide a clear and accurate picture of the company to outsiders, whereas Managerial Accounting is a tool to help managers plan out and strategize their next moves. This leaves the former past orientated and the latter future orientated. Cost Accounting has also been absorbed into Managerial Accounting for the most part. Nobody will miss it though.


Datar, Srikant M.. Horngren's Cost Accounting (ch. 1). Pearson Education. Kindle Edition

The Manager and Management Accounting

This study guide is based on Chapter 1 of Horngren's Cost Accounting

Imagine selling less of a product and making more money

Let's sit in Coca-Cola's shoes for a second. It's relatively close to the current year, consumers are becoming more health conscious, and people are actively deciding to drink less soda. As a soda company, this might at first seem to be a straight loss for Coca-Cola. Total sales in soda, at least by volume, are going to go down. However, because Coca-Cola was a leader in the sale of smaller sizes of soda, this change in the market place instead resulted in not just more revenue for the company, but higher profits as a whole.

This was achieved because of a variety of factors involved in marketing smaller can sizes. The smaller cans better fit consumers' health conscious tastes, and due to a menagerie of production and supply problems outside of the scope of this chapter, these smaller coke cans were able to charge a much higher price point per oz. than their liter sized comparisons. Furthermore, perhaps due to clever marketing strategies and consumer negligence, sales of soda have actually gone up. In other words, Coca-Cola was riding a wave; utilizing a strategy that let them generate more revenue and profit while selling less soda per unit.

Learning Objectives

1. Distinguish Financial Accounting from Management Accounting
2. Understand how management accountants help firms make strategic decisions
3. Describe the set of business functions in the value chain and identify the dimensions of performance that customers are expecting of companies
4. Explain the five-step decision-making process and its role in management accounting
5. Describe three guidelines management accountants follow in supporting managers
6. Understand how management accounting fits into an organization's structure
7. Understand what professional ethics mean to management accountants

Datar, Srikant M.. Horngren's Cost Accounting (ch. 1). Pearson Education. Kindle Edition