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Chapter 1

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ACTG 2020
Ben Kelly

ACTG2020 Chapter 1 Jessica Gahtan Chapter 1: Managerial Accounting and the Business Environment Managerial Accounting is the form of accounting concerned with providing info to managers for use in planning and controlling operations and for decision making Financial accounting is the form of accounting concerned with providing info to shareholders, creditors, and others outside the org THE WORK OF MANAGERS AND THEIR NEED FOR MANAGERIAL ACCOUNTING INFORMATION Managers carry out three major activities: 1. Planning which means developing objectives and preparing budgets to achieve these objectives 2. Directing and Motivating, that is, mobilizing people to carry out plans and run routine operations 3. Controlling, that is, ensuring that the plan is actually carried out and is appropriately modified as circumstances change - It is now important that companies facing global competition have a good strategy Strategy is a ‘game plan’ that enables a company to attract and retain customers by distinguishing itself from competitors - A goods strategy is one whose focal point should be its target customers- needs to create reasons for them to choose the company over its competitors- that is, customer value propositions There are three broad categories of customer value propositions: 1. Customer intimacy- “ the reason that you should choose us is because we understand and respond to your individual needs better than our competitors” 2. Operational excellence- “the reason you should choose us is because we can deliver products and services faster, more conveniently, and at a lower cost than our competitors” 3. Product leadership- “the reason that you should choose us is because we offer higher quality products than our competitors PLANNING - Future-oriented - Identify the alternatives, and then select from among them, the one that best meets the org’s objectives - When making this another choices, management must balance the expansion opportunities against the demands made on the company’s resources - Among other data, top management looks at the sales volumes, profit margins, and costs of the company’s established outlets in similar markets. This info (which is supplied by the management accountant) is combined with projected sales volume data at the proposed new locations to estimate the profits that would be generated by the new outlets. - In general, virtually all important alternatives considered by management in the planning process have some effect on revenues or costs, and management accounting data are essential in estimating those effects Budget is a quantitative plan for the acquisition and use of financial and other resources over a specified future period of time (typically yearly) - Usually prepared under the direction of the controller (= the manager in charge of the accounting dept. in an org) DIRECTING AND MOTIVATING - Managers must oversee day-to-day activities and keep the org functioning smoothly- this requires assigning tasks to employees, arbitrating disputes, answering questions, solving on-the-spot problems, and making many small decisions that affect customers and employees - Deals with the ‘here’ and ‘now’ CONTROLLING Control is those steps taken by management that attempt to increase the likelihood that the objectives developed at the planning stage are attained and to ensure that all parts of the org function in a manner consistent with org policies; when managers seek to ensure that the plan is being followed 1 ACTG2020 Chapter 1 Jessica Gahtan Feedback is accounting and other reports that help managers monitor performance and focus on problems and/or opportunities that might otherwise go unnoticed- it signals whether operations are on track. It’s the key to effective control Performance report compares budgeted to actual data - They suggest areas where ops aren’t proceeding as planning, the parts of the org that might require extra attention THE RESULTS OF MANAGERS’ ACTIVITIES - A role of managerial accounting is to inform and facilitate management decisions throughout these processes so that managers’ efforts result in the efficient achievement of company goals THE PLANNING AND CONTROL CYCLE Planning and control cycle is the flow of management activities through planning, directing and motivating, and controlling, and then back to planning again. - Mgmt. accounting can serve the info needs of managers at all phases of the planning and control cycle - E.g. detailed reports that managers need to make day-to-day and long-term decisions, prepare budgets to help direct resources toward the org’s goals; later, actuals vs. projected figures can be compared, and reports created that inform mgmt. about significant variances from the budget Questions the management accounting can answer: - How much does it cost to provide a particular g/s? - How do costs behave when the company operates at diff. levels of activity? - How can a company reduce costs to help improve profitability? - How many units must be sold to break even? - What will the company’s budget look like at a different forecasted level of activity? - Should the company add or drop a product line? - Should the company outsource some of its ops? - How should mgmt. choose when selecting among competing investment proposals? - In what new projects should the company invest and what projects should be abandoned? THE BUSINESS PLAN - It is how new businesses often formalize their strategic planning - Consists of info about the company’s basic product or service, steps it will take to reach its potential market - The actual length of the business plan process varies with the nature and complexity of the venture, could span from a few weeks to more than several months - Though some steps clearly come before others, the process isn’t entirely linear - Development of the business plan is an interactive process - Today’s dynamic and complex business environment- it must be flexible enough to respond to market changes that require new estimates and forecasts - To be effective- it should encourage a shared vision w/ clear targets and well-defined performance measures - Knowledgeable person should write it COMPARISON OF FINANCIAL AND MANAGERIAL ACCOUNTING Financial Managerial - Reports to those outside the org (owners, - Reports to those inside the org (for planning, creditors, tax authorities, regulators) directing and motivating, controlling, - Emphasizes financial consequences of past performance evaluation) activities - Emphasizes decisions affecting the future - Emphasized objectivity and verifiability - Emphasizes relevance - Emphasizes precision - Emphasizes timeliness - Emphasizes summary data concerning the entire - Emphasizes detailed segment* reports about org departments, products, and customers - Must follow GAAP - Need not follow GAAP - Mandatory for external reports - Not mandatory 2 ACTG2020 Chapter 1 Jessica Gahtan *Segment- part of the company; any part of an org that can be evaluated independently of other parts and about which the manager seeks financial data ORGANIZATIONAL STRUCTURE DECENTRALIZATION Decentralization is the delegation of decision making throughout an organization by providing managers at various operating levels with the authority to make key decisions relating to their areas of responsibility - Companies differ in their degree of decentralization Organizational chart is a diagram of a firm’s organizational structure that depicts formal lines of reporting, communication, and responsibility between managers - Informal relationships and channels of communication often develop outside formal reporting relationships on the org chart as a result of personal contacts b/w managers- they don’t appear on the org chart but are vital for effective ops LINE AND STAFF RELATIONSHIPS Line position is a job position that is directly related to the achievement of the org’s basic objectives Staff position is a job position that is only indirectly related to the achievement of the org’s basic objectives. Such positions are supportive in nature in that they provide service or assistance to line positions or to other staff positions - Both line and staff managers have authority over the employees in their own departments THE CONTROLLER - Manager in charge of the accounting department - Reports to the CFO - CFO and controller both have staff positions - CFO is the member of top mgmt. team who is given the responsibility of providing relevant and timely data to support planning and control activities and of preparing financial statements for exte
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