ACCT 3210 Advanced Managerial Accounting

Dr. Morris

What are we going to do?

Course Syllabus Website for ACCT 3210

Conceptual Framework for this Course

• Information is costly
• Resources are either allocated by central planners (managers) or markets
• Different costs apply for different purposes
• What gets measured gets attention

Skills Focus

I want you to:

• be comfortable processing data to make reccomendations and answer questions, and
• be excellent communicators in writing and in person.

So I am going to ask you to do these things often. But always in a friendly environment :)

Let's review management accounting!

What is Management Accounting?

• The process of generating information to guide internal decision makers
  • Internal decision makers are managers and board members
  • External decision makers are investors
• Types of decisions based on management accounting information
  • Pricing of products and services
  • Product mix choices
  • Production and financing choices
  • Capital investment
  • Measurement of performance, profitability, and productivity at the product, department, and employee level

Wait! But what are "Business Intelligence" and "Data Science"?

The Data Science Venn Diagram

Answer: Names for what you will do with your degree, or names of people who will get the job you want.

Why are "Business Intelligence" and "Data Science" relevant to you?

Is data science worth pursuing without knowledge of a topic?

Answer: Because they overlap with what you are going to do.

Topics in Management Accounting:

Cost Accounting	Determining the cost of providing a service or product, of running a department, etc. This aspect of management accounting has the most overlap with financial accounting, providing the numbers for Inventory on the balance sheet and the Cost of Goods Sold on the income statement.
Planning and Control	Setting goals and quantifying them with budgets and standards. Comparing actual results to budgeted results and taking actions on the basis of this feedback. Remember that in Managerial Accounting "goals" and "budgets" are concrete plans not aspirations.
Motivation	Measuring and rewarding effort and innovation. Compensation and promotion often are contingent on performance as measured by management accounting procedures.

How do Managerial and Financial Accounting differ?

• Accounting is a systematic collection and processing of financial, as well as non-financial, data for decision-making.
• When firm managers are making the decisions this activity is Managerial Accounting
• When external investors making the decisions this activity is Financial Accounting
  • Financial Accounting only occurs when firms are public (or are going public) and required to provide audited financial statements to the public.¹
  • Everything else is internal and therefore managerial.
  • Much of the information is dual use (see Cost Accounting above).

^{1: This is slightly overstated for effect. Private companies often provide financial information to important stakeholders like, lenders, investors (VC, PE), tax authorities, and regulators.}

Financial Accounting	Management Accounting
FASB & GAAP	no authoritative rule-making body
mandatory for public companies	mostly optional
almost exclusively \$	many non-financial elements
historical cost basis	future cost basis
bias for verifiability and objectivity over relevance	bias for relevance
outputs are financial statements	outputs are decisions
overall summary of business activity	disaggregated analysis of business segments
general purpose statements	specific purpose reports
external users	internal users
retrospective	prospective

Types of Costs in the "Value Chain":

• Research and Development²
• Product Design
• Manufacturing
  • Labor
  • Material
  • Machinery
• Distribution
• Marketing
• Customer Service
• General Administration

^{2: R\&D might be the most important and least well understood modern economic activity. For example AT&T developed UNIX as a system to support early software development. UNIX became MacOX, Linux, and Android. Now AT&T pays to use it!}

Accounting Terminology and Conventions

Cost vs. Expense vs. Cash Flow

Cost	the value of the resources sacrificed to achieve a specific objective
Expense	the cost charged to the income statement in a particular accounting period
Cash Flow	the dollars received or paid at a point in time

The main difference is timing. Accrual accounting re-arranges cash flows so that revenues match the related expenses. Cost measures cash and non-cash resources sacrificed currently and in the future to achieve an objective.

Direct vs. Indirect Costs

Direct Cost:	a cost that can be directly traced (in a cost-effective manner) to a given object
Indirect Cost:	a cost that cannot be directly traced (in a cost-effective manner) to a given object

A cost may be direct for some objects (e.g., a department), but indirect for other objects (e.g., a unit of production).

Inventoriable vs. Period Costs

For financial accounting purposes it is helpful to keep the following cost categories in mind:

Inventoriable Cost	a cost that is directly associated with purchasing merchandise or manufacturing products that will later be sold. These costs are assigned to inventory as the units are being produced (or purchased) and awaiting sale. They enter the income statement (through the cost of goods sold) only when the units are sold. In this way, the cost of producing the units is matched directly against the revenue that is obtained from the sale of the units. Inventoriable costs are often called product costs.
Period Costs	a cost that is not directly associated with a product. They are generally viewed as costs of being in business for the period or costs that are too hard to match to the future revenues that they may help to produce. Period costs are expensed in the period with which they are associated.

Types of Inventoriable Costs for a Manufacturing Firm

Direct Material :	All material costs that can be traced to a specific cost objective in a cost- effective manner.
Direct Labor:	All labor costs that can be traced to a specific cost objective in a cost- effective manner.
Factory (Manufacturing) Overhead :	All costs associated with manufacturing that cannot be traced to a specific objective in a cost-effective manner.
Prime Cost :	usually refers to direct materials plus direct labor costs
Conversion Cost :	usually refers to direct labor plus factory overhead costs

Typical Overheads:

• Indirect Material
• Indirect Labor
• Depreciation on the Factory Buildings and Equipment
• Insurance and Property Taxes

Flow of Costs through the Manufacturing Process

Cost Object:	an activity or item for which a measurement of costs is desired
Cost Driver:	any factor whose change leads to a change in costs
Variable Cost:	a cost that varies in direct proportion to changes in an underlying cost driver
Fixed Cost:	a cost that is not affected by changes in an underlying cost driver
Average Cost:	total cost divided by some measure of activity of a cost driver

The most common measure of activity is units of production. In this case, average cost is also called unit cost.

Costs and Decision Making

What are: Irrelevant Costs, Differential Costs, Opportunity Costs, Controllable Costs?

Irrelevant Cost:	A cost that is constant across, or unaffected by, the selection of a decision alternative.
Differential Costs :	Costs that change in response to a particular course of action.
Sunk Cost :	A cost item that has already been incurred and which is irreversible. For example, the purchase price of specialized machinery without an alternative use or material disposal value is a sunk cost.
Opportunity Cost:	The value of an asset in its best alternative use. If you use an asset to fulfill one objective, you forgo the opportunity to use the asset to fulfill other objectives. The opportunity cost is the value of the best of these forgone alternative uses.
Controllable Cost:	This term is often used in the context of performance evaluation. The idea is that a manager should be evaluated on, among other things, the costs that the manager can control or influence.

Who makes decisions? Who makes information?

• Individuals make decisions. An individual's decision rights are the decisions that they are allowed or able to make
• Individuals build and manage the systems that collect data and generate information
• Individuals are self interested
• Individual and collective incentives influence the generation and use of information, as well as decisions and effort

Linearity Assumption

Accountants often model the cost of producing $q$ units of output, $C(q)$ with the linear approximation:

$$ C(q) \approx \alpha + \beta q. $$

The approximation is regarded as sufficiently accurate in $q_1 \leq q \leq q_2$ for some $q_1$ and $q_2$. The interval defined by $q_1$ and $q_2$ is often referred to as the relevant range. The term $\alpha$ is the intercept of this approximation and $\beta$ is its slope. If the approximation is exact, then $\alpha$ is the fixed cost and $\beta$ is the per-unit variable cost (i.e., the marginal cost).

This assumption is powerful, and should be treated with care.