01: What is Management Accounting?

Minjae Koo
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ACCT 2121

Instructor: Professor Minjae Koo

• Office Hour: Monday, 10:00 am – 12:00 pm, or by appointment
• Email: [email protected]

Teaching Assistant: Yuyao Wu

• Email: [email protected]

3
Textbook

4
Grading
Homework and Participation
Exams
Exams
What Will be Covered in Exam
How to Get Good Grades?
o Preferably, preview the textbook chapters before class or, at least, read the corresponding chapters in the textbook right after class (2-
3 times before the exam).

o After understanding the context, revisit the lecture slides.

o If you find something puzzling, try to find explanations in the textbook or ask me or the TA for clarification.

o After a conceptual review, work on practice questions in the textbook and the problems in the slides.

o You can ask the TA for solutions, but you should show proof that you've done your work.

o Solutions don't help unless you practice by yourself.

o After you solve a problem, make sure to compare your answers with the solutions.

o You usually make mistakes in the same spot. If you notice these frequent mistakes, revisit the problem and work on similar problems
in the textbook.

o If I were you, I would practice the entire set of exercise questions in the textbook and in-class problem sets at least 2-3 times before
exams.
Roadmap
Introduction Cost terms How costs behave

Ch.1 Ch.2 Ch.10

ACCT
2121

Job costing

Ch.6 Ch.5 Ch.4 Ch.3

Master Activity-based Cost-Volume-Profit

budgets costing Analysis
Midterm Exam
(16 Oct 2024)
Overhead cost Decision making

Ch.7 Ch.8 Ch.9 Ch.12

Final Exam
(Time TBD)

Direct-cost Inventory
variances
 Table of Contents

• What is Management Accounting?

• What is Difference between Financial vs

Management Accounting?

• What is Difference between Cost vs Management

Accounting?

• Preview of Chapter 2
What is Management Accounting?
■ Strategic Decisions and Value Chain Analysis
□ Strategy: Matching capabilities with market opportunities
o Examples
˗ Cost leadership (e.g., IKEA)
˗ Product differentiation (e.g., Apple)
“Apple uses a MAP (minimum advertised price) retail strategy. MAP policies prohibit resellers or dealers from advertising a
manufacturer’s products below a certain minimum price.
According to Macworld, Apple maintains its high-priced products’ popularity by only offering retailers such as Walmart or
Best Buy a marginal wholesale discount.” (Market Realist, 2020/11/20)
□ Value Chain: Flow of products from initial sources to delivery place.
Administration

Design Production Distributio Customer

R&D Marketing
n Service

□ Companies create different values for different strategies (HKTV mall, Gucci, Pfizer).
Distribution of Cost Accounting Practitioners by Department

Production Administration

Production Field R&D & Accounting Planning & Sales CEO Other Total
management Operations design Cost
Accounting

% 31.2 5.8 6.9 13.3 8.7 7.5 20.8 5.8 100

Shin et al. (1995) from Korean Accounting Journal

The ‘IKEA Effect:’ Behind the Company’s Unique Business Model
What is Management Accounting?
■ Cost and Management Accounting
□ In making strategic decisions and maximizing value in value chains, managers
need to estimate and record necessary resources.
□ Cost: The amount of resources used in monetary terms.
o Examples
– Salaries and employee training cost for new hirings
– Outsourcing costs
– Marketing expenses
□ Management Accounting: A process of how managers collect cost and other
accounting information related to use of resources for various alternatives and use
that information to make strategic decisions.
Use of Management Accounting Information

Cost-volume-profit analysis
PLAN Budgeting- Master budget

3
Variance analysis
Balance scorecard, ROI
Responsibility accounting
SEE 2

Decision-making using relevant cost

DO
Cost allocation
CFOs See Monetary Policy — Not Labor — As Biggest Risk: Duke
CFO Survey

“It’s not how much you make, but how much you save.”
- Forbes Top 100 Money Quotes
CFO Magazine Survey
What Are the Most Important Skills for Accountants?
Probability of Automation by Finance Functional Roles
Professional Ethics for Accounting Professionals
□ Institute of Management Accounting (IMA): Standards of Ethical Conduct for
Practitioners of Management Accounting and Financial Management
o Four standards
– Competence: having the skills to do the job
– Confidentiality: keeping the firm’s secrets.
– Integrity: acting honestly and fairly.
– Credibility: providing reliable information.
□ Enron scandal: Large US energy company manipulate accounting numbers to mask its
losses
o Investors lost a lot of money.
□ Regulator’s response?
o The US congress enacted The Sarbanes-Oxley Act (2002) imposed harsh penalties for
destroying, altering, or fabricating financial records
o Focused on improving internal controls, corporate governance, and disclosure
practices of public companies.
Accountant's Diary - Episode 01 - ENRON SCANDAL
What is Difference between Financial vs Management Accounting?
□ Financial vs Management Accounting
Management accounting Financial accounting

Who do they report Internal users External users

to? (managers and other employees) (investors, bankers, and regulators)

Time period Future-oriented Past-oriented (e.g., financial performance in

emphasized (e.g., budget for next year) the past year)

Mandatory reporting Cost-benefit analysis Follow mandatory rules

rules (i.e., no reporting rule) (e.g., IFRS and GAAP)

Varies from hourly information to future Quarterly, semi-annually, and annually

Time span
years (20 years) reports

Disaggregated financial and

Aggregated financial information
Type of reports nonfinancial information
(e.g., assets, sales, earnings)
(e.g., products, strategies)
AICPA, CIMA Joint Venture Would Offer New Management Accounting
Designation
The AICPA and the London-based Chartered Institute of Management Accountants (CIMA) are proposing forming a joint
venture to develop and promote a new global management accounting designation. The joint venture is designed to give
management accounting a higher profile in the United States, advance the science of management accounting worldwide, and
promote the U.S. CPA designation as a worldwide standard of professional excellence in accounting, according to a press
release from the organizations.
The proposed joint venture would combine the strength of the AICPA in North America with CIMA’s footprint in Europe, the
Middle East, Africa, Asia and elsewhere. Together, the organizations represent more than 550,000 members and students.
Under the terms of the proposed agreement, CIMA and the AICPA would create a nonprofit joint venture called the Association
of International Certified Professional Accountants. The AICPA would own 60% of the entity; CIMA would own 40%; and the
board of directors would be split evenly between the organizations, with CIMA and the AICPA rotating in the role of chairman.
“In analyzing how and whether to pursue a new management accounting designation, AICPA focused on how best to achieve
three objectives: expanding recognition of the U.S. CPA as one of the premier professional accounting designations around the
world, responding to the need expressed by our members in business for an AICPA-issued management accounting designation
that had global recognition, and raising the AICPA’s contributions to management accountants by working with a proven
international leader in this field,” said Arleen Thomas, AICPA senior vice president–Member Competency & Development.
“Working with the National Accreditation Commission’s credentialing model, we determined that the best way to achieve these
goals was through a joint venture. CIMA emerged as the best organization to work with in pursuing these goals. The
organization shares our vision for enhancing the science and practice of management accounting worldwide as well as
promoting the CPA credential as a worldwide standard of professional excellence in accounting.”

(Journal of Accountancy, 2011/05/01)

What is Difference between Cost vs Management Accounting?
□ Broad Definition of Cost Accounting: Calculation and Usage of Cost
o No difference between cost and management accounting.

□ Narrow Definition of Cost Accounting: Measurement and Calculation of Cost

o Cost Accounting: Various cost calculation methods, cost allocation, and cost
estimation techniques
o Management Accounting: Focus on techniques used for decision-making using
calculated costs.
Chapter Summary
□ Management accounting is a field that provides accounting information, such as costs, to managers and assists
them in decision-making in order to efficiently and effectively operate a company or organization. It is
accounting for internal users, specifically managers.

□ Management accounting supports significant decision-making by managers at each stage of planning,

execution, and control.

□ Cost management accountants primarily work in the internal production departments of companies and
organizations. CEOs require a strong understanding of cost and management accounting knowledge.

□ Financial accounting aims to communicate information related to a company's financial position and
performance to stakeholders such as shareholders and creditors. On the other hand, management accounting
provides various information and supports decision-making to assist managers in their decision-making
process.

□ (Narrow definition of) Cost accounting, through various cost calculation techniques, generates and provides
accurate cost information, while management accounting utilizes this information to improve the quality of
decision-making.
Preview of Chapter 2
■ Product Costing Methods
□ (1) Scope of Production (Chapter 4)
o Job Costing
o Process Costing
□ (2) Timing of Cost Measurement
o Actual Costing (Chapter 4)
o Normal Costing (Chapter 4)
o Standard Costing (Chapter 7)
□ (3) Type of Resources
o Direct Material (Chapter 2)
o Direct Labor (Chapter 2)
o Manufacturing Overhead (Chapter 2)
Preview of Chapter 2
□ Direct Material Cost: Material costs that can be directly and easily traced to a cost
object. E.g., car engine
Preview of Chapter 2
□ Direct Labor Cost: Labor costs that can be directly and easily traced to a cost
object. E.g., worker’s wage
Preview of Chapter 2
□ Manufacturing Overhead
o Indirect material cost: Material costs that are not directly or easily traceable
to a cost object.
o Indirect labor cost: Labor costs that are not directly or easily traceable to a
cost object. E.g., supervisor’s salary
o All other expenses other than labor and material costs. E.g., repair costs,
depreciation cost

□ Prime cost = Direct Material Cost + Direct Labor Cost

□ Conversion cost = Direct Labor Cost + Manufacturing Overhead