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Managerial accounting is concerned with providing information to managers—that is, people inside an organization who direct and control its operations. In contrast, financial accountingThe phase of accounting concerned with providing information to stockholders, creditors, and others outside the organization. is concerned with providing information to stockholders, creditors, and others who are outside an organization. Managerial accounting provides the essential data that are needed to run organizations. Financial accounting provides the essential data that are used by outsiders to judge a company’s past financial performance. Managerial accountants prepare a variety of reports. Some reports focus on how well managers or business units have performed—comparing actual results to plans and to benchmarks. Some reports provide timely, frequent updates on key indicators such as orders received, order backlog, capacity utilization, and sales. Other analytical reports are prepared as needed to investigate specific problems such as a decline in the profitability of a product line. And yet other reports analyze a developing business situation or opportunity. In contrast, financial accounting is oriented toward producing a limited set of specific prescribed annual and quarterly financial statements in accordance with generally accepted accounting principles (GAAP). Because it is manager oriented, any study of managerial accounting must be preceded by some understanding of what managers do, the information managers need, and the general business environment. Accordingly, the purpose of this chapter is to briefly examine these subjects. The Work of Management and the Need for Managerial Accounting InformationEvery organization—large and small—has managers. Someone must be responsible for making plans, organizing resources, directing personnel, and controlling operations. This is true of the Bank of America, the Peace Corps, the University of Illinois, the Red Cross, and the Coca-Cola Corporation, as well as the local 7-Eleven convenience store. In this chapter, we will use a particular organization—Good Vibrations, Inc.—to illustrate the work of management. What we have to say about the management of Good Vibrations, however, is very general and can be applied to virtually any organization. Good Vibrations runs a chain of retail outlets that sells a full range of music CDs. The chain’s stores are concentrated in Pacific Rim cities such as Sydney, Singapore, Hong Kong, Beijing, Tokyo, and Vancouver. The company has found that the best way to generate sales, and profits, is to create an exciting shopping environment. Consequently, the company puts a great deal of effort into planning the layout and decor of its stores—which are often quite large and extend over several floors in key downtown locations. Management knows that different types of clientele are attracted to different kinds of music. The international rock section is generally decorated with bold, brightly colored graphics, and the aisles are purposely narrow to create a crowded feeling much like one would experience at a popular nightclub on Friday night. In contrast, the classical music section is wood-paneled and fully sound insulated, with the rich, spacious feeling of a country club meeting room.
PlanningThe first step in planning is to identify alternatives and then to select from among the alternatives the one that does the best job of furthering the organization’s objectives. The basic objective of Good Vibrations is to earn profits for the owners of the company by providing superior service at competitive prices in as many markets as possible. To further this objective, every year top management carefully considers a range of options, or alternatives, for expanding into new geographic markets. This year management is considering opening new stores in Shanghai, Los Angeles, and Auckland. When making this and other choices, management must balance the opportunities against the demands made on the company’s resources. Management knows from bitter experience that opening a store in a major new market is a big step that cannot be taken lightly. It requires enormous amounts of time and energy from the company’s most experienced, talented, and busy professionals. When the company attempted to open stores in both Beijing and Vancouver in the same year, resources were stretched too thinly. The result was that neither store opened on schedule, and operations in the rest of the company suffered. Therefore, entering new markets is planned very, very carefully. Among other data, top management looks at the sales volumes, profit margins, and costs of the company’s established stores in similar markets. These data, supplied by the management accountant, are combined with projected sales volume data at the proposed new locations to estimate the profits that would be generated by the new stores. 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. After considering all of the alternatives, Good Vibrations’ top management decided to open a store in the booming Shanghai market in the third quarter of the year, but to defer opening any other new stores to another year. As soon as this decision was made, detailed plans were drawn up for all parts of the company that would be involved in the Shanghai opening. For example, the Personnel Department’s travel budget was increased, since it would be providing extensive on-site training to the new personnel hired in Shanghai. As in the Personnel Department example, the plans of management are often expressed formally in budgetsA detailed plan for the future, usually expressed in formal quantitative terms., and the term budgeting is applied to generally describe this part of the planning process. Budgets are usually prepared under the direction of the controllerThe manager in charge of the accounting department in an organization., who is the manager in charge of the Accounting Department. Typically, budgets are prepared annually and represent management’s plans in specific, quantitative terms. In addition to a travel budget, the Personnel Department will be given goals in terms of new hires, courses taught, and detailed breakdowns of expected expenses. Similarly, the manager of each store will be given a target for sales volume, profit, expenses, pilferage losses, and employee training. These data will be collected, analyzed, and summarized for management use in the form of budgets prepared by management accountants. Directing and MotivatingIn addition to planning for the future, managers must oversee day-to-day activities and keep the organization functioning smoothly. This requires the ability to motivate and effectively direct people. Managers assign tasks to employees, arbitrate disputes, answer questions, solve on-the-spot problems, and make many small decisions that affect customers and employees. In effect, directing is that part of the managers’ work that deals with the routine and the here and now. Managerial accounting data, such as daily sales reports, are often used in this type of day-to-day decision making. ControllingIn carrying out the controlThe process of instituting procedures and then obtaining feedback to ensure that all parts of the organization are functioning effectively and moving toward overall company goals. function, managers seek to ensure that the plan is being followed. FeedbackAccounting and other reports that help managers monitor performance and focus on problems and/or opportunities that might otherwise go unnoticed., which signals whether operations are on track, is the key to effective control. In sophisticated organizations, this feedback is provided by detailed reports of various types. One of these reports, which compares budgeted to actual results, is called a performance reportA detailed report comparing budgeted data to actual data.. Performance reports suggest where operations are not proceeding as planned and where some parts of the organization may require additional attention. For example, before opening the new Shanghai store in the third quarter of the year, the store’s manager will be given sales volume, profit, and expense targets for the fourth quarter of the year. As the fourth quarter progresses, periodic reports will be made in which the actual sales volume, profit, and expenses are compared to the targets. If the actual results fall below the targets, top management will be alerted that the Shanghai store requires more attention. Experienced personnel can be flown in to help the new manager, or top management may conclude that its plans need to be revised. As we shall see in following chapters, providing this kind of feedback to managers is one of the central purposes of managerial accounting. The End Results of Managers’ ActivitiesAs a customer enters one of the Good Vibrations stores, the results of management’s planning, directing and motivating, and controlling activities will be evident in the many details that make the difference between a pleasant and an irritating shopping experience. The store will be clean, fashionably decorated, and logically laid out. Featured artists’ videos will be displayed on TV monitors throughout the store, and the background rock music will be loud enough to send older patrons scurrying for the classical music section. Popular CDs will be in stock, and the latest hits will be available for private listening on earphones. Specific titles will be easy to find. Regional music, such as CantoPop in Hong Kong, will be prominently featured. Checkout clerks will be alert, friendly, and efficient. In short, what the customer experiences doesn’t simply happen; it is the result of the efforts of managers who must visualize and then fit together the processes that are needed to get the job done. The Planning and Control CycleThe work of management can be summarized in a model such as the one shown in Exhibit 1–1. The model, which depicts the planning and control cycle The flow of management activities through planning, directing and motivating, and controlling, and then back to planning again., illustrates the smooth flow of management activities from planning through directing and motivating, controlling, and then back to planning again. All of these activities involve decision making, so it is depicted as the hub around which the other activities revolve. |
