Chapter 7: Managerial Accounting

1. Introduction to Managerial Accounting

• Definition: Managerial accounting provides economic and financial information for
managers and internal users to support decision-making, planning, and control within an
organization.
• Also known as management accounting.
• Purpose: Helps managers make informed decisions by analyzing costs, preparing budgets,
evaluating performance, and supporting strategic goals.
• Example: A restaurant manager uses managerial accounting to determine the cost of
producing a new menu item and set its selling price.

2. Distinguishing Features of Managerial Accounting

• Applicability:
• Applies to all business types: service, merchandising, manufacturing, not-for-profit, and
profit-oriented.
• Covers all business forms: proprietorships, partnerships, and corporations.
• Strategic Focus: Emphasizes strategic cost management, involving cross-functional teams
(e.g., production, marketing, engineering) to optimize costs and add value.
• Decision-Oriented: Provides data for critical decisions, such as pricing, product
discontinuation, or capital investments.
• Example: A manufacturing firm uses managerial accounting to decide whether to automate
a production line, involving engineers and accountants to assess costs and benefits.

Comparison with Financial Accounting

• Similarities:
• Both deal with economic events of a business.
• Both quantify and communicate financial data using the organization’s accounting system.
• Differences:
• Financial Accounting vs. Managerial Accounting Comparison
•
Feature Financial Accounting Managerial Accounting
Primary External (shareholders, creditors, Internal (managers, officers)
Users regulators)
Report Financial statements (quarterly, Internal reports (as needed)
Types annually)
 Purpose General-purpose reporting Special-purpose for specific
decisions
Content Aggregated, follows Detailed, subunit-focused, includes
GAAP/IFRS/ASPE, limited to double- non-accounting data, relevance-
entry accounting driven
Verification Audited by CPAs No independent audits
Time Focus Past-oriented Present and future-oriented
• Example: Financial accounting produces an annual report for investors, while managerial
accounting provides a weekly cost report for a factory manager to adjust production.

3. Management Functions
Managers perform three broad functions, supported by managerial accounting:

1. 1. Planning:

• Definition: Future-oriented process of setting objectives to add value to the business (e.g.,
increasing profits, market share, or sustainability).
• Activities: Establishing goals like maximizing profits, committing to environmental
protection, or supporting social programs.
• Value Measurement: Reflected in the company’s share price or potential selling price.
• Example: A retail chain plans to open 10 new stores to increase market share, using cost
projections from managerial accounting.

2. 2. Directing:

• Definition: Coordinating activities and resources to implement planned objectives.

• Activities: Motivating employees, hiring/training staff, and managing operations.
• Example: A hotel manager directs staff schedules and training to improve customer service,
using labor cost data from managerial accounting.

3. 3. Controlling:

• Definition: Ensuring activities align with goals through evaluation and corrective actions.
• Activities: Comparing actual results with budgets, assessing goal achievement, and making
adjustments.
• Example: A factory manager compares actual production costs to budgeted costs,
identifying overspending and adjusting processes.
• Outcome: Good decision-making results from effective planning, directing, and controlling,
supported by accurate managerial accounting data.
4. Role of Management Accountants in Organizational Structure
• Organizational Chart: Shows the interrelationships of activities, authority, and
responsibility.
• Line Positions: Directly involved in revenue-generating activities (e.g., production managers,
sales staff).
• Staff Positions: Support line activities (e.g., accountants, HR).
• Key Roles:

4. 1. Chief Executive Officer (CEO):

• Highest position, responsible for strategic decisions, overall operations, and communication
with the board/shareholders.
• Often the public face of the company.
• Example: A CEO decides to acquire a competitor, relying on managerial accounting for cost-
benefit analysis.

5. 2. Chief Financial Officer (CFO):

• Oversees all accounting and finance functions.

• Supported by:
• Controller: Maintains accounting records, ensures internal controls, and prepares financial
reports.
• Treasurer: Manages cash flows, maintains cash position, and handles short-term
investments.
• Example: The CFO uses managerial accounting to evaluate the profitability of a new product
line, with the controller preparing cost reports and the treasurer managing cash for
investment.
• Example: In a tech company, the CFO collaborates with the controller to analyze R&D costs,
ensuring funds are allocated efficiently for innovation.

5. Importance of Business Ethics

• Context: Corporate scandals (e.g., mismanagement, unethical accounting) have highlighted
the need for ethical behavior.
• Causes include greedy executives, poor oversight, aggressive accounting, and lack of
scrutiny by auditors/analysts.
• Ethical Challenges:
• Overly ambitious budgets may push managers to act unethically (e.g., falsifying reports to
meet targets).
• Unrealistic controls may reduce product quality as employees cut corners.
• Solutions:
• Code of Ethical Standards:
• Financial accounting follows strict standards (e.g., IFRS, ASPE, Sarbanes-Oxley Act of 2002).
• Managerial accounting adheres to internal ethical guidelines, such as the CPA Canada Code
of Conduct.
• Ethical conduct reflects personal character, going beyond mere compliance.
• Creating Proper Incentives: Align performance metrics with ethical behavior to avoid
pressure for unethical actions.
• Benefits: Ethical practices enhance a company’s reputation, attract investors, and add long-
term value.
• Example: A manager avoids inflating sales figures to meet a budget, maintaining trust with
stakeholders and ensuring accurate decision-making.

Corporate Social Responsibility (CSR)

• Definition: Balancing profitability with sustainable practices for employees and the
environment.
• Triple Bottom Line:

6. 1. People: Fair treatment of employees, customers, and communities.

7. 2. Planet: Environmental sustainability (e.g., reducing emissions).
8. 3. Profit: Financial performance.

• Example: A clothing company adopts eco-friendly materials (planet), offers fair wages
(people), and maintains profitability, enhancing its brand image.

6. Changes and Trends in Managerial Accounting

Managerial accounting evolves to meet modern business needs, particularly in service industries
and advanced manufacturing.

Service Industry Trends

• Shift to Services: North American economies increasingly focus on service industries (e.g.,
healthcare, hospitality).
• Adaptation: Techniques from manufacturing (e.g., cost allocation) are applied to services to
improve quality and efficiency.
• Example: A hospital uses managerial accounting to track the cost of patient care, optimizing
resource allocation.
Value Chain
• Definition: All activities adding value to a product/service, from design to delivery.
• Example: A car manufacturer’s value chain includes R&D, raw material sourcing, production,
marketing, and after-sales service. Managerial accounting tracks costs at each stage to
maximize value.

Technological Change
• Enterprise Resource Planning (ERP):
• Software integrating the value chain, replacing multiple systems for efficiency.
• Example: A retailer uses ERP to manage inventory, sales, and accounting in one system,
reducing errors.
• Computer-Integrated Manufacturing (CIM):
• Automated production with minimal human intervention.
• Example: A factory uses robots to assemble electronics, with managerial accounting tracking
automation costs.
• Business-to-Business (B2B) E-Commerce:
• Online transactions between businesses, streamlining supply chains.
• Example: A supplier sells parts to a manufacturer via an online platform, reducing
procurement costs.

Just-In-Time (JIT) Inventory

• Definition: Producing or purchasing goods only when needed, minimizing inventory costs.
• Requirements: Strong supplier relationships for timely, high-quality deliveries.
• Example: A phone manufacturer orders components just before assembly, reducing
warehouse costs, with managerial accounting monitoring supplier performance.

Total Quality Management (TQM)

• Definition: A philosophy aiming for zero defects, involving all employees in quality
management.
• Metrics: Tracks defective units, rework costs, warranty costs, and non-financial data (e.g.,
customer satisfaction).
• Outcome: Leads to product/process redesign to eliminate defects.
• Example: A toy company uses TQM to reduce defective products, with managerial
accounting reporting rework costs to guide improvements.
Activity-Based Costing (ABC)
• Definition: Allocates overhead based on activities (e.g., number of orders, machine setups)
rather than labour/machine hours.
• Purpose: Provides accurate product costing in complex production environments.
• Example: A furniture maker uses ABC to allocate overhead based on setup time for custom
orders, ensuring precise pricing.

Theory of Constraints (TOC)

• Definition: Identifies and manages bottlenecks limiting production/profitability.
• Process: Pinpoints constraints and optimizes processes to improve throughput.
• Example: A bakery identifies a slow oven as a bottleneck and upgrades it, with managerial
accounting assessing the investment’s impact on profits.

Lean Manufacturing
• Definition: Eliminates waste and focuses on customer needs in response to automation and
demand for customized products.
• Five Principles:

9. 1. Define Value: Determine what customers value (e.g., quality, speed).

10. 2. Identify the Value Stream: Map all activities, eliminating non-value-adding steps.
11. 3. Make the Value Stream Flow: Ensure smooth, continuous processes.
12. 4. Implement a Pull System: Produce only what customers demand.
13. 5. Strive for Perfection: Continuously improve processes.

• Example: A car manufacturer reduces excess inventory (waste) by producing only ordered
vehicles, using managerial accounting to track cost savings.

Balanced Scorecard
• Definition: A performance measurement tool integrating financial and non-financial metrics.
• Metrics:

14. 1. Financial: Revenue, profit margins.

15. 2. Customer: Satisfaction, retention.
16. 3. Internal Business Process: Efficiency, quality.
17. 4. Learning and Growth: Employee training, innovation.

• Purpose: Links performance to company objectives for a holistic evaluation.

• Example: A retailer uses the balanced scorecard to track sales (financial), customer reviews
(customer), delivery times (process), and staff training (learning), aligning with growth goals.
Key Takeaways
• Managerial Accounting: Provides internal data for planning, directing, and controlling,
unlike financial accounting’s external focus.
• Management Functions: Planning sets goals, directing implements them, and controlling
ensures alignment, all supported by managerial accounting.
• Management Accountants: CFOs, controllers, and treasurers use managerial accounting to
manage finances and support strategic decisions.
• Ethics: Ethical standards (e.g., CPA Code of Conduct) and CSR (triple bottom line: people,
planet, profit) enhance trust and value.
• Trends: Service industry growth, value chain management, technologies (ERP, CIM, B2B),
JIT, TQM, ABC, TOC, lean manufacturing, and balanced scorecards reflect modern
managerial accounting’s role in efficiency and customer focus.
• Examples: A hospital optimizing patient care costs (service trend), a manufacturer using ABC
for accurate pricing, or a retailer applying lean principles to reduce waste illustrate practical
applications.