Chapter 1: Introduction to Managerial Accounting.gdoc

Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary 1.1. Why is Managerial Accounting Important? Managerial accounting focuses on providing information for internal decision makers. ​ Includes both...

Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary 1.1. Why is Managerial Accounting Important? Managerial accounting focuses on providing information for internal decision makers. ​ Includes both financial and nonfinancial information for managers and other business users like supervisors and directors. Financial accounting focuses on providing information for external decision makers. ​ Used by managers to report monetary transactions and prepare financial statements. Managerial accounting helps managers make decisions that are needed for business success. Individuals in management roles rely on managerial accounting to: ​ Plan ​ Direct ​ Control ​ Make decisions about the business. ​ Key roles: department heads, division managers, chief executive officers, vice presidents. Manager’s Role in the Organization Managers occur in all different parts of a company’s structure. Most companies structure their organization along departments or divisions. A company’s organizational chart helps show:  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ​ The relationship between departments and divisions. ​ The managers responsible for each section. The decision to change Smart Touch Learning’s business model is made by the board of directors. The board of directors is: ​ Elected by the stockholders (the owners of the company). ​ Responsible for developing the strategic goals of the corporation. ​ Listed at the top of the organizational chart. The board of directors selects the president—chief executive officer (CEO). The CEO is responsible for: ​ Developing a plan to meet the company’s short-term and long-term strategies. ​ Overseeing the implementation of the plans. ​ Acting as the liaison between the board of directors and the company’s management. ​ Delegating the implementation of plans to the vice presidents. The vice presidents are each responsible for different areas, such as finance and operations. Positions in a company can be classified as: ​ Line positions: Directly involved in providing goods or services to customers. ○​ Examples for Smart Touch Learning: ​ Vice president—chief operating officer (COO) ​ Tablet computer division manager ​ Software development division manager ​ Production manager ​ Sales manager ​ Staff positions: Support the line positions. ○​ Examples for Smart Touch Learning: ​ Vice president—chief financial officer (CFO) ​ Controller ​ Treasurer ​ Payroll processing manager Managerial Accounting Business managers need information to help them: ​ Plan ​ Direct ​ Control operations. ​ Lead the business.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary This includes managing the company’s: ​ Plant ​ Equipment ​ Human resources. Managerial accountants can provide this information to the company’s management team. Management Positions Planning means: ​ Choosing goals and deciding how to achieve them. ​ Managers must look to the future and establish goals for the business. ​ Business goals can vary: ○​ A common goal is to increase operating income. ○​ Other goals could include developing a new product or expanding into new territories. Planning can be classified as: ​ Strategic planning: ○​ Involves developing long-term strategies to achieve company goals. ○​ Often spans 3 to 10 years. ​ Operational planning: ○​ Focuses on short-term actions for day-to-day operations. ○​ Typically lasts one year, but may also span a week, month, or quarter. Directing involves: ​ Running the day-to-day operations of a business. ​ Coordinating activities such as purchasing, manufacturing, and selling. ​ Managers must ensure the business has enough materials to meet customer demand. ​ Motivating employees and ensuring productivity. ​ Example: A marketing manager coordinates the marketing plan and trains sales reps on new products. Controlling is the process of: ​ Monitoring day-to-day operations and keeping the company on track. ​ Comparing actual results to expected results. ​ Example: Comparing actual costs to expected costs to evaluate performance. ○​ If actual costs are lower than expected, it’s usually good news.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ○​ If actual costs exceed expected costs, managers will evaluate the reasons and determine if modifications or changes are necessary. Managerial Accounting Certifications Businesses rely on managers to make decisions, and managerial accountants assist by providing financial and nonfinancial data needed for decision-making. Many managerial accountants pursue professional certifications, which have: ​ Education requirements ​ Experience requirements ​ Examination requirements Professional certifications represent that an accountant has the knowledge and skills to perform the job. Certified accountants usually earn more than noncertified accountants. Certified Management Accountant (CMA) certification: ​ Demonstrates specialized knowledge in: ○​ Budgeting and forecasting ○​ Planning and analysis ○​ Risk management and internal controls ○​ Performance management ​ CMAs earn 57% more in median total compensation compared to non-CMAs (according to the Institute of Management Accountants - IMA). ​ Learn more at the IMA Web site: http://www.imanet.org. Chartered Global Management Accountant (CGMA) certification: ​ Distinguishes accountants with advanced knowledge in: ○​ Finance ○​ Operations ○​ Strategy ○​ Management ​ Learn more at the CGMA Web site: https://www.cgma.org/aboutcgma.html. Decision making is part of all three functions: ​ Planning ​ Directing ​ Controlling ​ Good decision-making leads to a prosperous company. Accounting plays a critical role in a manager’s decision-making.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary The Pathways Vision Model (Exhibit M:1-3) shows the role of managerial accounting in decision-making: ​ Managers review information about economic activities. ​ They use critical thinking and accounting judgment to create useful information. ​ This information helps managers make good decisions, which impacts: ○​ Society ○​ Future economic activity ​ This creates a circular flow of cause and effect. Managerial Accounting Skills Managerial accountants are an important part of the company’s management team and need a unique set of both technical and nontechnical skills to provide insights that help other managers make good decisions. CMA exam covers numerous technical skills, including: ​ Financial planning ​ Performance analysis ​ Analytics ​ Strategic financial management ​ Exhibit M:1-4 identifies the variety of technical skills that CMAs must know.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary In addition to technical skills, managerial accountants also need nontechnical skills, such as: ​ Oral and written communication ​ Critical thinking ​ Collaboration ​ Business acumen ​ Professionalism ​ Leadership ​ Project management These interpersonal and behavioral skills, often called “soft” skills, are vital for being successful in the role of advisor to the management team. Ethical Standards of Managerial Accountants Managers often face ethical challenges. The Institute of Management Accountants (IMA) has developed standards for managerial accountants to uphold when facing ethical challenges. The IMA standards emphasize that society expects professional accountants to exhibit the highest level of ethical behavior. IMA’s Statement of Ethical Professional Practice (effective July 1, 2017) includes the following key standards: ​ Maintain professional competence. ​ Preserve the confidentiality of the information they handle. ​ Act with integrity and credibility. To resolve ethical dilemmas, the IMA suggests: 1.​ Following organizationally established policies. 2.​ If policies do not resolve the issue, discussing the situation with: ○​ An immediate supervisor.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ○​ An objective adviser. ○​ If necessary, an attorney. How are Costs Classified? Costs are classified based on the type of business a company engages in. Businesses are generally classified as: ​ Service companies ​ Merchandising companies ​ Manufacturing companies Service companies: ​ Sell their time, skills, and knowledge. ​ Examples: EY (accounting firms), Baker McKenzie (law offices). Merchandising companies: ​ Resell products they buy from suppliers. ​ Keep an inventory of products. ​ Managers are responsible for the purchase, storage, and sale of products.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ​ Examples: The Home Depot (NYSE: HD), Lowe’s Companies (NYSE: LOW). Manufacturing companies: ​ Use labor, equipment, supplies, and facilities to convert raw materials into finished products. ​ Managers must use these resources to create products that: ○​ Customers want. ○​ Are priced at a level customers are willing to pay. ​ Examples: Honda Motor Co. (NYSE: HMC), The Coca-Cola Company (NYSE: KO), The Boeing Company (NYSE: BA). Direct and Indirect Costs Companies classify costs in many ways. One classification is direct vs. indirect costs: ​ Direct cost: A cost that can be easily and cost-effectively traced to a cost object. ○​ A cost object is anything for which managers want a separate measurement of cost (e.g., a product, department, sales territory, or activity). ○​ Example: For Smart Touch Learning, the cost object could be the tablet it manufactures. ○​ A direct cost for the tablet would include the cost of materials used, such as the processor, screen, and case. ​ Indirect costs: Costs that cannot be easily or cost-effectively traced directly to a cost object. ○​ Example: For Smart Touch Learning, indirect costs might include the salary of the production supervisor. ○​ While the supervisor is involved in the factory, they are not directly responsible for producing the product, so the cost cannot be easily traced to a specific tablet. Don't confuse prices with costs: ​ Price (or sales price) is the amount the company charges the customer for the goods or services provided. ​ Cost is the amount the company incurs to acquire the goods or services. ​ Example: If a company purchases an item for $4 and sells it for $10, the cost is $4 and the price is $10.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Manufacturing Costs All companies need to determine the cost of the goods and services they sell to customers: ​ Service companies need to know the cost of the services they provide. ​ Merchandising companies need to know the cost of the goods they purchased for resale. ​ Manufacturing companies must determine the cost to manufacture their products by tracking manufacturing costs (also called production costs or product costs). Manufacturing companies use three kinds of inventory: 1.​ Raw Materials Inventory (RM): ○​ Includes materials used to make a product. ○​ Example: For Smart Touch Learning, raw materials include the processor, screen, tablet case, and glue. 2.​ Work-in-Process Inventory (WIP): ○​ Includes goods that are in the manufacturing process but are not yet complete. ○​ The product has undergone some transformation but is not yet ready for sale. ○​ Example: Smart Touch Learning’s WIP could include tablets with electronic components but not yet the screen. 3.​ Finished Goods Inventory (FG): ○​ Includes completed goods that have not yet been sold. ○​ Example: Smart Touch Learning’s finished tablets. Manufacturing costs in a company like Smart Touch Learning are classified into three categories: 1.​ Direct Materials (DM): ○​ The cost of raw materials that are converted into the finished product and are easily traced to the product. ○​ Example: For Smart Touch Learning, direct materials include the processor, screen, and tablet case. 2.​ Direct Labor (DL):  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ○​ The cost of wages and salaries of employees who convert the raw materials into the finished product. ○​ Example: For Smart Touch Learning, direct labor includes the wages of employees who assemble the tablets. 3.​ Manufacturing Overhead (MOH): ○​ Refers to indirect manufacturing costs that cannot be easily traced to specific products. ○​ Includes all manufacturing costs other than direct materials and direct labor. ○​ Examples include: ​ Costs of indirect materials (e.g., glue, cleaning supplies). ​ Manufacturing factory managers' salaries and other indirect labor (e.g., production supervisors, janitors). ​ Repair and maintenance costs. ​ Depreciation on manufacturing buildings and equipment. ​ Utilities, rent, insurance, and property taxes for the factory. Manufacturing overhead is also called factory overhead or indirect manufacturing costs. Indirect Materials: ​ Cost of raw materials that are difficult or not cost-effective to trace directly to the product. ​ Example: For Smart Touch Learning, the cost of glue used in assembling the tablets. Indirect Labor: ​ Cost of wages and salaries in the factory for persons not directly producing the product. ​ Examples include: ○​ Production supervisors. ○​ Factory janitors. ○​ Workers who repair factory equipment. ○​ Factory groundskeepers.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Prime and Conversion Costs The purpose of managerial accounting is to provide useful information to managers. To make cost information more useful, manufacturing costs are sometimes combined in different ways, depending on the managers' needs: 1.​ Prime Costs: ○​ Combine the direct costs: direct materials and direct labor. ○​ In a labor-intensive manufacturing process (where people do most of the work), direct costs are the primary costs. ○​ Labor-intensive means people, not machines, perform the work. ○​ In such an environment, managers may focus on prime costs to control these essential costs for profitability. 2.​ Conversion Costs: ○​ Combine direct labor with manufacturing overhead. ○​ These are the costs to convert direct materials into the finished product.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ○​ In a machine-intensive manufacturing process (where machines do most of the work), direct labor is minimal, and employees primarily set up and oversee machine production. ○​ Overhead costs can be substantial, including utilities and depreciation on machinery. ○​ In such an environment, managers may focus on the total conversion cost rather than tracking direct labor and manufacturing overhead separately. Product and Period Costs Costs can also be classified as product or period costs, which is required when preparing financial statements for external use. 1.​ Product Costs: ○​ Include the costs of purchasing or making a product. ○​ Product costs are recorded as assets in inventory accounts on the balance sheet when incurred. ○​ The cost does not become an expense until the company sells the inventory. ○​ At that time, the cost is reported as Cost of Goods Sold (COGS) on the income statement. ○​ Examples of product costs for a merchandising company: ​ Cost of purchasing merchandise for resale. ○​ Examples of product costs for a manufacturing company: ​ Direct materials ​ Direct labor ​ Manufacturing overhead 2.​ Period Costs: ○​ Non-manufacturing costs. ○​ Include selling and administrative expenses and other expenses like taxes and interest. ○​ Incurred by service, merchandising, and manufacturing companies. ○​ Period costs are matched with the revenue of a specific time period and are expensed in the same accounting period.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ○​ Examples of period costs: ​ Salaries and wages of the accounting staff. ​ Rent for the administrative building. ​ Sales commissions paid to sales representatives. ​ Utilities paid for the marketing office. Overhead costs can be confusing depending on the type of company and the nature of the cost. For a service or merchandising company: ​ The cost of rent is classified as a period cost and recorded as a selling and administrative expense. For a manufacturing company: ​ The classification of rent depends on the reason for the cost: ○​ If the rent is for the corporate office, it is classified as a period cost. ○​ If the rent is for the factory, it is classified as a product cost because it is a cost incurred in the manufacturing process. ○​ Since the rent is neither direct materials nor direct labor, it is classified as manufacturing overhead.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary How Do Manufacturing Companies Prepare Financial Statements? Balance Sheet Balance sheet classification differs based on the type of company: 1.​ Service companies: ○​ Sell their time, skills, and knowledge. ○​ Do not carry inventories on their balance sheet. 2.​ Merchandising companies: ○​ Resell products they buy from suppliers. ○​ Record the cost of inventory purchased as an asset called Merchandise Inventory on their balance sheet. 3.​ Manufacturing companies: ○​ Keep track of costs using three inventory accounts: ​ Raw Materials Inventory ​ Work-in-Process Inventory ​ Finished Goods Inventory ○​ These three inventory accounts are listed in the asset section of the balance sheet.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Income Statement Income statement classifications depend on the type of company: 1.​ Service companies: ○​ Do not have product costs. ○​ Only record period costs, such as: ​ Salaries expense ​ Rent expense 2.​ Merchandising companies: ○​ Income statements usually report Cost of Goods Sold (COGS) as the major expense. ○​ COGS represents the business' cost of the merchandise inventory sold. 3.​ Manufacturing companies: ○​ Like merchandising companies, COGS is usually the largest expense. 4.​ However, since a manufacturer makes the product it sells, the calculation of COGS is different from that of a merchandising company.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Flow of Product Costs in a Manufacturing Company Calculating cost of goods manufactured and cost of goods sold requires understanding how product costs flow through a manufacturing company: 1.​ Flow of Costs: ○​ Manufacturing companies convert raw materials into a finished product. ○​ The flow of costs starts with raw materials: ​ Raw materials purchased, along with beginning raw materials inventory, gives the company raw materials available for use. ​ These raw materials are either used in production or remain in raw materials inventory, which is reported on the balance sheet. 2.​ During production: ○​ The manufacturer uses direct labor and manufacturing overhead (including indirect labor and indirect materials) to convert direct materials into Work-in-Process Inventory. ○​ The cost of beginning work-in-process units is added to the cost of: ​ Direct materials ​ Direct labor ​ Manufacturing overhead incurred during the period. ○​ This results in the work-in-process inventory costs to account for. 3.​ Completion of production: ○​ When the manufacturing process is complete, the costs are transferred to Finished Goods Inventory. ○​ The cost of manufacturing the finished goods makes up the cost of goods manufactured. 4.​ If work-in-process units are incomplete: ○​ The costs remain in Work-in-Process Inventory and are reported on the balance sheet. 5.​ Cost of Goods Manufactured: ○​ This amount is used on the income statement to determine the Cost of Goods Sold (COGS). ○​ Only when finished goods are sold, the costs are transferred from the balance sheet to the income statement as Cost of Goods Sold.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Calculating the Cost of Goods Manufactured To calculate Cost of Goods Manufactured for Smart Touch Learning, follow these three steps: Step 1: Calculate Direct Materials Used ​ Beginning direct materials inventory = $70,000 ​ Direct materials purchased = $350,000 ​ Ending direct materials inventory = $65,000 Formula: ​ Direct Materials Used = Beginning direct materials + Purchases - Ending direct materials ​ Direct Materials Used = $70,000 + $350,000 - $65,000 = $355,000 Step 2: Calculate Total Manufacturing Costs Incurred ​ Direct Materials Used = $355,000 (from Step 1) ​ Direct Labor Used = $169,000 ​ Manufacturing Overhead: ○​ Indirect Materials = $17,000 ○​ Indirect Labor = $28,000 ○​ Depreciation on plant and equipment = $20,000 ○​ Plant utilities, insurance, and property taxes = $18,000 Total Manufacturing Overhead = $17,000 + $28,000 + $20,000 + $18,000 = $83,000  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Formula: ​ Total Manufacturing Costs = Direct Materials Used + Direct Labor Used + Manufacturing Overhead ​ Total Manufacturing Costs = $355,000 + $169,000 + $83,000 = $607,000 Step 3: Calculate Cost of Goods Manufactured ​ Beginning Work-in-Process Inventory = $80,000 ​ Ending Work-in-Process Inventory = $27,000 Formula: ​ Total Manufacturing Costs to Account For = Total Manufacturing Costs + Beginning Work-in-Process Inventory ​ Total Manufacturing Costs to Account For = $607,000 + $80,000 = $687,000 ​ Cost of Goods Manufactured = Total Manufacturing Costs to Account For - Ending Work-in-Process Inventory ​ Cost of Goods Manufactured = $687,000 - $27,000 = $660,000 Summary of Calculation: ​ Direct Materials Used = $355,000 ​ Total Manufacturing Costs = $607,000 ​ Cost of Goods Manufactured = $660,000 This schedule of Cost of Goods Manufactured helps companies track the costs of making their inventory, and it is a key part of determining Cost of Goods Sold. Step 1  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Step 2 Step 3  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Example of Schedule of Cost of Goods Manufactured–Smart Touch Learning Calculating Cost of Goods Sold To calculate Cost of Goods Sold (COGS) for Smart Touch Learning, follow these steps: Step 1: Calculate the Total Cost of Goods Available for Sale ​ Beginning Finished Goods Inventory = $0 (as given) ​ Cost of Goods Manufactured = $660,000 (from the previous calculation) Formula: ​ Total Cost of Goods Available for Sale = Beginning Finished Goods Inventory + Cost of Goods Manufactured ​ Total Cost of Goods Available for Sale = $0 + $660,000 = $660,000  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Step 2: Subtract the Ending Finished Goods Inventory ​ Ending Finished Goods Inventory = $60,000 (as given) Formula: ​ Cost of Goods Sold (COGS) = Total Cost of Goods Available for Sale - Ending Finished Goods Inventory ​ COGS = $660,000 - $60,000 = $600,000 Summary of Calculation: ​ Cost of Goods Sold (COGS) = $600,000 This represents the cost of the Finished Goods Inventory that has been sold by Smart Touch Learning during the period. To understand the completed income statement for Smart Touch Learning, here’s a breakdown of the process: 1.​ Gross Profit: ○​ Net Sales Revenue: The total revenue from sales of products. ○​ Cost of Goods Sold (COGS): The cost of the Finished Goods Inventory that has been sold. ○​ Gross Profit = Net Sales Revenue - Cost of Goods Sold. 2.​ Operating Income: ○​ Selling and Administrative Expenses (period costs): These are non-manufacturing costs, such as marketing and administrative expenses. ○​ Operating Income = Gross Profit - Selling and Administrative Expenses. 3.​ Net Income: ○​ Other Income and Expenses: Any additional income or expenses not related to the core operations, such as interest or gains/losses on investments. ○​ Income Tax Expense: The taxes that must be paid on the company’s income.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ○​ Net Income = Operating Income - Other Income and Expenses - Income Tax Expense. This is the general structure of how Smart Touch Learning’s income statement would be prepared, showing how the costs and revenues are allocated and ultimately leading to the calculation of net income. Flow of Product Costs Through the Inventory Accounts ​ Flow of product costs; the formula is the same for all three (raw materials inventory, work-in-process inventory, and finished goods inventory)  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ​ Formula: ○​ Beginning Balance + Additions - Ending Balance = Amount Used, manufactured, or sold ​ The final amount at each stage is added to the beginning of the next. Using the Schedule of Cost of Goods Manufactured to Calculate unit Product Cost Step 1: Calculate Unit Product Cost To calculate the unit product cost for Smart Touch Learning, use the Cost of Goods Manufactured from the previous steps: ​ Cost of Goods Manufactured = $660,000 (from the previous calculation). ​ Units produced = 2,200 tablets. Formula: ​ Unit Product Cost = Cost of Goods Manufactured ÷ Units produced ​ Unit Product Cost = $660,000 ÷ 2,200 tablets = $300 per tablet. So, the unit product cost for Smart Touch Learning is $300 per tablet. Step 2: Calculate Cost of Goods Sold (COGS) Now that we know the unit product cost, we can compute the Cost of Goods Sold (COGS): ​ Units sold = 2,000 tablets. ​ Unit Product Cost = $300 per tablet. Formula: ​ COGS = Units sold x Unit Product Cost  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ​ COGS = 2,000 tablets x $300 = $600,000. So, the Cost of Goods Sold for the 2,000 tablets sold is $600,000. Step 3: Consider Period Costs and Sales Price Knowing the unit product cost is just one part of determining the sales price for each product. Smart Touch Learning also needs to cover period costs (like selling and administrative expenses) on top of product costs. ​ The sales price must cover both product costs (e.g., unit product cost) and period costs (e.g., selling and administrative expenses) to ensure the company remains profitable. Summary: ​ Unit Product Cost = $300 per tablet. ​ COGS for 2,000 tablets sold = $600,000. ​ The sales price must cover both product costs and period costs to make a profit. What Business Trends Are Affecting Managerial Accounting? To be successful, managers of both large corporations and small, privately owned businesses must consider recent business trends and how managerial accounting can be used to help handle these future changes. Service-Based Economy U.S. Bureau of Labor Statistics (BLS) Report: ​ The goods-producing sector (including mining, construction, and manufacturing) provided only 13% of jobs in the United States in 2020. ​ The service sector provided 80% of jobs in the United States in 2020. Service companies: ​ Provide essential services such as health care, communication, banking, and other important benefits to society. Projected job growth (2020-2030): ​ The service-providing sectors are predicted to account for more than 95% of projected job growth from 2020 to 2030. ​ Key areas for growth include:  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ○​ Healthcare and social assistance ○​ Professional and business services ○​ Leisure and hospitality sectors. Importance of managerial accounting in the service industry: ​ Managers in the service industry need to understand managerial accounting to: ○​ Determine the cost of providing services. ○​ Plan for future customer needs and service demands. ○​ Support customer satisfaction and business growth. Globalization Global Operations and Competition: ​ Many companies are moving operations to other countries to be closer to new markets and reduce costs. ​ Some companies are partnering with foreign companies to meet local needs and help with supply chain distribution. Example: ​ Toyota Motor Corporation (NYSE: TM), a Japanese company, operates 14 manufacturing plants in North America. Role of Managerial Accounting: ​ Managerial accounting concepts help managers make informed decisions about: ○​ Outsourcing portions of the production process. ○​ Delivery of goods to customers in different geographic markets. ○​ Cost savings and planning when deciding to move operations. Competitive Advantage: ​ As competition increases globally, managerial accountants help companies: ○​ Manage resources efficiently. ○​ Make more informed decisions by providing useful accounting information. Time-Based Competition Competitive Advantage Through Time Utilization: ​ Companies are focusing on effective utilization of time in manufacturing and distribution to achieve a competitive advantage.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ​ Customers expect timely deliveries and do not want to wait weeks to receive products, especially when purchasing online. ​ Time has become the new competitive turf for world-class businesses. Time-Saving Responses Developed by Companies: 1.​ Advanced Information Systems: ○​ Many companies use Enterprise Resource Planning (ERP) systems to integrate worldwide functions, departments, and data. ○​ ERP systems help streamline operations and allow companies to respond quickly to changes in the marketplace. 2.​ E-commerce: ○​ The Internet enables companies to sell to customers globally, providing 24/7 access to company information and products. 3.​ Just-in-Time (JIT) Management: ○​ Inventory held too long may become obsolete, take up space, and incur additional costs for storage and security. ○​ The Just-in-Time philosophy helps companies cut costs by speeding up the transformation of raw materials into finished products. ○​ JIT Management system: ​ Produces products just in time to satisfy customer needs. ​ Suppliers deliver materials just in time for today's production in exactly the right quantities. ​ Finished units are completed and ready for delivery to customers as soon as needed. Emerging Technologies Advances in Technology for Competitive Advantage: ​ Recent technological advances provide businesses with a competitive advantage by allowing them to collect large amounts of data from multiple sources: ○​ Company websites ○​ ERP systems ○​ Social media Software Tools for Data Analysis: ​ Tools such as R Programming, Tableau, and Power BI allow accountants to collaborate with information technology teams to analyze large datasets. ​ The use of data analytics can lead to: ○​ Increased sales ○​ Improvements in operations ○​ Cost reductions  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Robotic Process Automation (RPA), Artificial Intelligence (AI), and Machine Learning (ML): ​ These technologies help improve operational efficiency and decrease costs: 1.​ Robotic Process Automation (RPA): ​ Involves machines performing tedious, repetitive work. ​ Frees up workers to focus on higher value tasks such as serving customers and developing new products. 2.​ Artificial Intelligence (AI): ​ Uses computer systems to perform tasks typically requiring human intelligence. ​ Examples include: ​ Reading email messages from customers. ​ Creating sales orders. 3.​ Machine Learning (ML): ​ A subset of AI, uses computer algorithms to analyze data. ​ Helps determine what has worked in the past, imitating human learning and gradually improving accuracy. Data Analytics in Accounting Today’s Accountants' Skill Set: ​ Accountants need more than just accounting knowledge; they must also understand how technology is used to process financial information. ​ Accounting and finance professionals collaborate with information technology teams to develop effective accounting systems. Data Analytics: ​ Data analytics is the process of examining data, identifying trends, and drawing conclusions. ​ Companies use data analytics to answer business questions and gain valuable insights. Data Visualizations: ​ Data visualizations present data, trends, and conclusions in a graphical format. ​ These visualizations often take the form of a dashboard, which is a visual display of data used to answer various questions. Ideal Business Employees: ​ The ideal business employee has knowledge in both accounting and technology. ​ Technology skills are in high demand as companies prioritize digital transformation.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Future Learning: ​ Future chapters will explore how data analytics is transforming the role of business employees. Cloud-Based Services Cloud-Based Services: ​ Cloud-based services are information technology resources provided over the Internet. ​ These services are accessible via the Internet, allowing employees to access them from any location. Importance of Cloud-Based Services: ​ As companies face staffing shortages and more employees work remotely, cloud-based services are crucial in maintaining a competitive advantage. Risks of Cloud-Based Services: ​ The increased use of cloud-based services has led to an uptick in cyberterrorism, cybercrime, and cyberfraud. Risk Management: ​ Companies must be aware of these risks and take appropriate steps to reduce the risk to their networks. Total Quality Management Total Quality Management (TQM): ​ TQM is a philosophy focused on the continuous improvement of products and processes. ​ The goal of continuous improvement is to reduce defects and increase customer satisfaction. ​ TQM emphasizes the importance of each person in the organization, creating a culture of cooperation across all business processes: ○​ Research and development ○​ Design ○​ Production ○​ Marketing and sales ○​ Distribution ○​ Customer support  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary The Value Chain: ​ The value chain includes all the steps that add value to the end product, both upstream and downstream. ​ Upstream activities occur before production, including: ○​ Research and development ○​ Product design ​ Downstream activities occur after production, including: ○​ Selling the product ○​ Delivering the product to customers ○​ Follow-up customer support Managerial Accounting in TQM: ​ Managerial accounting plays a crucial role in decision-making by assisting with: ○​ Planning and costing of each activity in the value chain. ○​ Helping to ensure that each step in the process contributes to the overall value of the final product. The Triple Bottom Line Triple Bottom Line: ​ Refers to profits, people, and the planet—the economic, social, and environmental impact of doing business. ​ It highlights the importance of balancing financial success with social responsibility and environmental sustainability. Corporate Social Responsibility (CSR): ​ Companies are recognizing their multiple responsibilities, not just to generate profits for owners and investors, but also to contribute positively to society. ​ CSR includes aspects such as: ○​ Labor practices ○​ Community service ○​ Sustainable environmental practices Customer and Stockholder Preferences:  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary ​ Customers and stockholders are increasingly choosing to support companies based on their labor practices, community involvement, and environmental sustainability. CSR Reports: ​ Companies often communicate their CSR efforts through a CSR report, which is often included in the annual financial report. Example: PepsiCo, Inc.’s 2021 Annual Report: ​ Diversity of workforce: 45% of all employees in the United States are racially/ethnically diverse. ​ Citizenship giving: $166 million given in charitable contributions. ​ Sustainability: 70% of global electricity needs met by renewable sources How is Managerial Accounting Used in Service and Merchandising Companies? The previous sections of this chapter focused on manufacturing companies, but managerial accounting is used in all types of businesses. Even though service and merchandising companies don’t manufacture a product, the managers are still interested in planning, directing, and controlling operations. We now know how to determine the cost of a manufactured product. Let’s see how managerial accounting can be used to help service and merchandising companies. Calculating Cost per Service Provided To calculate the cost per service provided, we use the following formula: Unit Cost per Service = Total Operating Costs ÷ Number of Services Provided Given: ​ Total Operating Costs = $3,900 ​ Number of Services Provided = 1,950 e-learning services Calculation: Unit Cost per Service = $3,900 ÷ 1,950 services​ Unit Cost per Service = $2.00 per service So, the cost per service provided by Smart Touch Learning is $2.00.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Calculating Cost per Item Sold To calculate the cost per item sold, we use the following formula: Average Unit Cost per Item = Total Cost of Items Sold ÷ Number of Items Sold Given: ​ Total Cost of Items Sold = $90,800 ​ Number of Items Sold = 260 tablets Calculation: Average Unit Cost per Item = $90,800 ÷ 260 tablets​ Average Unit Cost per Item = $349.23 per tablet This confirms that Smart Touch Learning was purchasing the tablets for $349.23 each. By manufacturing the tablets, the company was able to reduce the cost to $300 per tablet, resulting in a cost savings of $49.23 per tablet.  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Vocabulary Managerial accounting: the field of accounting that focuses on providing information for internal decision makers.| Financial accounting: the field of accounting that focuses on providing information for external decision makers.| Organizational chart: shows the relationship between departments and divisions and managers responsible for each section.| Board of directors: elected by the stockholders and responsible for developing the strategic goals of a corporation.| Chief executive officer, CEO: officer of a company that has ultimate responsibility for implementing the company’s short- and long-term plans.| Line positions: job that is directly involved in providing goods or services to customers.| Staff positions: job that provides support for line positions.| Service companies: a company that sells services–time, skills, and knowledge–instead of products| Merchandising companies: a company the resells products previously bought from suppliers| Manufacturing companies: a company the uses labor, equipment, supplies, and facilities to convert raw materials into finished products| Direct cost: cost that can be easily and cost-effectively traced to a cost object| Cost object: anything for which managers want a separate measurement of cost| Indirect costs: costs that cannot be easily or cost-effectively traced to a cost object| Raw materials inventory, RM: materials converted through the manufacturing process into a finished product| Work-in process inventory, WIP: goods that have been started in the manufacturing process but are not yet complete| Finished goods inventory, FG: completed goods that have not yet been sold| Direct materials, DM: the cost of raw materials that are converted into the finished product and are easily traced to the product| Direct labor, DL: the cost of wages and salaries of employees who convert raw materials into finished products| Manufacturing overhead, MOH: manufacturing costs that cannot be easily and cost-effectively traced to a cost object; includes all manufacturing costs except direct materials and direct labor| Indirect materials: the cost of raw materials that cannot be conveniently traced directly to specific finished products or are not large enough to justify tracing to the specific product| Indirect labor: the cost of wages and salaries in the factory for persons not directly producing the product and cannot be conveniently traced directly to specific finished products or are not large enough to justify tracing to the specific product| Prime costs: the direct costs of the manufacturing process; direct materials plus direct labor| Conversion costs: the cost to convert direct materials into finished goods; direct labor plus manufacturing overhead|  Managerial Accounting Chapter 1: Introduction to Managerial Accounting Outline and Vocabulary Product costs: the cost of purchasing or making a product; the cost is recorded first as an asset (inventory) and then expensed (Cost of Goods Sold) when the product is sold| Period costs: operating cost that is expensed in the accounting period in which it is incurred| Cost of goods manufactured: the manufacturing costs of the goods that finished the production process in a given accounting period| Enterprise Resource Planning, ERP: software system that can integrate all of a company’s functions, departments, and data into a single system| Just-in-Time Management, JIT: a cost management system in which a company produces products just in time to satisfy needs; suppliers deliver materials just in time to begin production, and finished units are completed just in time for delivery to the customer| Data analytics: the process of examining data, identifying trends, and drawing conclusions| Data visualizations: the presentation of data, trends, and conclusions in a graphical format| Total Quality Management, TQM: a philosophy designed to integrate all organizational areas in order to provide customers with superior products and services, while meeting organizational goals throughout the value chain| Value chain: includes all activities that add value to a company’s products and services| Upstream: refers to activities that occur before production; includes research and development and product design| Downstream: refers to activities that occur after production; selling the product, delivering the product, follow-up and customer support| Triple bottom line: evaluating a company’s performance by its economic (profits), social (people), and environmental (planet) impact|