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.
Monday, January 27, 2020
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.
(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
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
- Identify the problem and uncertainties
- 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.
- 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.
- Obtain information
- 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.
- Make predictions about the future
- 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.
- 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.
- 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.
- Make decisions by choosing among alternatives
- 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.
- 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
- 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.
- 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
1. Outlining problems
2. Gathering information
3. Exploring possibilities
4. Choosing strategies
5. Execution and learning
Saturday, January 25, 2020
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.
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
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
- Research and Development
- Design of Products and processes
- Production
- Marketing
- Distribution
- Customer Service
- 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.
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.
Friday, January 24, 2020
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:
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
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
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
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