In the Prologue, we established the business context within which management accounting operates. We discussed topics such as strategy, Lean Production, and corporate governance that influence how managers perform their jobs. In addition, we introduced Good Vibrations, an international retailer of music CDs, and learned about its organizational structure.

After describing the three major activities of managers in the context of Good Vibrations, this chapter compares and contrasts financial and managerial accounting. We define many of the terms that are used to classify costs in business. Because these terms will be used throughout the text, you should be sure that you are familiar with each of them.

Chapters 2, 3, and 4 describe costing systems that are used to compute product costs. Chapter 2 describes job-order costing. Chapter 3 describes activity-based costing, an elaboration of job-order costing. Chapter 4 covers process costing.

The Work of Management and the Need for Managerial Accounting Information

• Planning
• Directing and Motivating
• Controlling
• The End Results of Managers’ Activities
• The Planning and Control Cycle

Comparison of Financial and Managerial Accounting

• Emphasis on the Future
• Relevance of Data
• Less Emphasis on Precision
• Segments of an Organization
• Generally Accepted Accounting Principles (GAAP)
• Managerial Accounting—Not Mandatory

General Cost Classifications

• Manufacturing Costs
• Nonmanufacturing Costs

Product Costs versus Period Costs

• Product Costs
• Period Costs
• Prime Cost and Conversion Cost

Cost Classifications on Financial Statements

• The Balance Sheet
• The Income Statement
• Schedule of Cost of Goods Manufactured

Product Cost Flows

• Inventoriable Costs
• An Example of Cost Flows

Cost Classifications for Predicting Cost Behavior

• Variable Cost
• Fixed Cost

Cost Classifications for Assigning Costs to Cost Objects

• Direct Cost
• Indirect Cost

Cost Classifications for Decision Making

• Differential Cost and Revenue
• Opportunity Cost
• Sunk Cost

The Role of Management Accounting

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It is estimated that 95% of all finance professionals work inside corporations, governments, and other organizations integrating accounting with operations and reporting to the outside world. While some of the effort expended by these people relates to financial accounting, the profession needs to further stress the role management accountants play within organizations supporting decision making, planning, and control. In short, the emphasis in business and the role of accounting should be more about doing business rather than tabulating and reporting historical financial results.

Management accounting is undergoing a renaissance in response to technological changes, globalization, and growing risk management concerns. In these challenging times, management accountants help “steady the ship” by acting as their organization’s interpreters, sage advisors, and ethical “keepers of the numbers.” Managers understand that good business results come from dynamic processes, procedures, and practices that are well designed and properly implemented and managed. Certified Management Accountants are qualified to help their fellow managers achieve good business results because they have earned an advanced certification that addresses all important aspects of accounting inside organizations.

Source: Conversation with Paul Sharman, CEO of the Institute of Management Accountants.