The concepts covered in the course include the following: information is costly, resources are allocated by a central planner or through market mechanisms, different costs apply for different purposes, what is measured gets attention, goals and targets are precise plans, motivation is used to measure performance and allocate effort, marketing and customer service add value, research and development is important but often misunderstood, cost, expense, and cash flow are different concepts, and costs and decision making involve irrelevant costs, differential costs, opportunity costs, and controllable costs.
The course’s conceptual framework centers on the idea that information is costly, emphasizing the inherent costs and benefits of providing and utilizing information. Resource allocation, managed centrally or individually, is a key focus, with market mechanisms introduced in challenging situations. The instructor aims to equip students with practical intellectual skills, emphasizing writing and active participation. Management accounting, addressing internal decision-makers, involves allocating resources within a company. The course encourages a broader skill set, integrating business intelligence, data science, and communication skills. Topics include cost accounting, planning and control, and the importance of concrete goals in managerial accounting. Differences between managerial and financial accounting, the value chain, and terminology such as cost, expense, and cash flow are explored. Decision-making aspects cover irrelevant costs, opportunity costs, and incentives. The course concludes with a cautionary note on linear modeling assumptions in dynamic scenarios.
The course’s conceptual framework centers on the costliness of information and the allocation of resources, managed centrally or individually, with a focus on practical intellectual skills. Management accounting, addressing internal decision-makers, emphasizes concrete goals and a broad skill set integrating business intelligence and data science. The course covers topics such as the value chain, terminology like cost and cash flow, and decision-making aspects, concluding with a cautionary note on linear modeling assumptions in dynamic scenarios.
Course: Costly info, resource allocation. Management accounting: concrete goals, broad skills. Topics: value chain, cost terms, decision-making, caution on linear models in dynamic scenarios.
The course’s foundational concept revolves around the inherent costliness of information and the intricate dynamics of resource allocation, whether managed centrally or individually. Management accounting is explored with a keen focus on tangible goals and the integration of a comprehensive skill set encompassing business intelligence and data science. The course delves into diverse topics, including the value chain, nuanced cost terminology, and the complexities of decision-making, ultimately cautioning against the linear modeling assumptions in dynamically evolving scenarios.
The conceptual framework for the course revolves around the idea that information is costly. While it is undeniably valuable, there are inherent costs and benefits associated with both providing and utilizing information. Resources are allocated, whether by a central planner in the case of a company or by a manager in the context of organizations like Little Country, where a benevolent overlord oversees resource allocation. In cases where resource allocation becomes challenging, market mechanisms may be introduced within the company.
The allocation of resources can be driven by either a central plan or individuals, each with its associated costs. The importance of what is measured becomes evident, emphasizing the significance of the big picture concepts we will cover.
My focus is on equipping you with practical intellectual skills. As you progress in your careers, these skills will enable you to navigate data, answer questions, and communicate effectively. Expect a bit more emphasis on writing compared to traditional accounting classes, and active participation in discussions. I encourage you to be ready to contribute and engage, as this not only benefits your learning but also reflects positively when interacting with professionals in the field.
I have connections with friends working in investment banks, and I hope you can make me proud in front of them. I want you to be the kind of students who are prepared, capable, and valuable to your teams from day one in your jobs.
Let’s review management accounting. Now, regarding my wardrobe choice today, wearing a wool suit was a miscalculation, and I am feeling quite hot. Moving on…
Management accounting is the process of generating and utilizing information for internal decision-makers. It caters to managers, board members, and external decision-makers such as investors who decide whether to invest resources in the company. The focus is on allocating resources within the company.
I want to ensure that you gain not only accounting knowledge but also skills that are relevant to the evolving job market. Business intelligence and data science are expanding fields, and understanding their intersection with accounting is valuable. They encompass skills like hacking, math, statistics, and substantive expertise, reflecting a broader set of competencies required in the industry.
As accounting students, understanding these areas can enhance your flexibility and competitiveness in the job market. I encourage you to broaden your knowledge beyond traditional financial reporting, incorporating statistics, programming, and communication skills into your skill set. This approach ensures you remain adaptable and competitive throughout your career.
Topics in management accounting include cost accounting, planning and control, which involves setting goals, preparing budgets, and understanding variances. This course aims to equip you with the skills needed for real-world challenges in the dynamic field of management accounting.
I want to emphasize that in managerial accounting, goals and budgets are not merely aspirational; they are concrete plans. Unlike personal goals, managerial accounting goals have real consequences. If you overshoot your goal, you might fail, and that could be as detrimental as undershooting your goal. Think of these goals and targets as bullseyes, aiming for specific outcomes that other aspects depend on, rather than mere aspirations.
While it would be nice if certain outcomes were achieved, such as high cash flows or personal goals like weight loss, managerial accounting is not concerned with such niceties. In this field, goals and targets are precise plans. What adds complexity is that, while making concrete plans, we are simultaneously measuring performance to motivate employees and ourselves, fostering good decision-making and effort allocation.
Now, let’s explore the differences between managerial accounting and financial accounting. In managerial accounting, we estimate and predict the future, using the past as a guide. This forecasting aspect involves looking ahead, trying to be somewhat like wizards foreseeing the future. On the other hand, financial accounting looks back and tallies up what has actually occurred.
It’s important to note that external decision-makers, like financial accountants, process data for public reports, adhering to external rules. In contrast, managerial accountants have more freedom, as there are no external reports; they process their own data, making their job both interesting and potentially challenging.
Moving on to the concept of value chain, it encompasses various stages like research and development, product design, manufacturing, labor, material, machinery, distribution, marketing, customer service, and general administration. Each stage adds value, transforming raw materials into a more valuable end product or service.
Research and development, in particular, is a crucial but often underestimated aspect, responsible for groundbreaking innovations. However, the challenge lies in understanding its importance and societal impact, given that the costs associated with R&D often appear as expenses on a company’s books.
Now, let’s delve into some terminology. Differentiating between cost, expense, and cash flow is crucial. Cost represents the value used to produce a product, while expenses are accounting terms indicating the cost incurred. Cash flow, on the other hand, refers to the movement of money in and out of the firm.
We also touch upon direct and indirect costs, highlighting the challenge of tracing some costs effectively. Additionally, we explore the concepts of prime costs, conversion costs, and typical overheads like indirect materials, labor, depreciation, insurance, and property taxes.
Further, we introduce terms like cost object, cost driver, variable cost, fixed cost, and average cost, emphasizing their significance in managerial accounting. The key takeaway is that costs can be fixed or variable depending on the chosen driver, highlighting the need for a nuanced understanding within relevant ranges.
Lastly, we touch upon decision-making and costs, introducing concepts like irrelevant costs, differential costs, opportunity costs, and controllable costs. These distinctions aid in determining what costs are crucial for decision-making.
In the realm of incentives and performance measurement, we acknowledge that individuals make decisions based on their decision rights within organizations. The interplay between individual and collective incentives shapes both decisions and the information systems designed to influence behavior.
As we wrap up, a cautionary note is sounded regarding the assumption of linear relationships in cost modeling. While it may hold in predictable scenarios, venturing into uncharted territories, especially in the context of venture capital and rapidly scaling businesses, challenges the linearity assumption. Understanding the limitations of linear models becomes imperative in such dynamic situations.
Certainly! Here’s a summary of the transcript in ten Markdown slides:
Feel free to let me know if you’d like any modifications or additional details on specific slides!
Okay, welcome. It’s starting like 30 seconds early, but I’m very, very nervous. This is my very first time ever teaching students face -to -face.
I graduated with my PhD in 2018. I worked in Shanghai for a year, moved here in 2019, and they’ve assigned me to teach every spring semester. semester.
If you’ve been in school since 2019, you’ll remember spring semester. They just walked the professors in their offices and we all yelled at our walls like crazy people. So this is my first time actually teaching living human beings that are all staring at me with their eyes.
So, it’s exciting. So I’m Dr. Lawrence.
This is at Cowham County. degree, which must be some sort of pun, it’s like advanced again. Okay, so why are we here? Well, first I sent a, I posted a survey for all of you to answer a bunch of questions so that I can get a sense of what your plans are in the future, what you’re doing right now, what you’re experiencing, is.
And so once I have a chance to kind of analyze all your answers and think about that, I’ll have a better sense of why you’re here. Also, don’t hesitate to email me and let me know questions you have, things that you’re looking for. toward the end of your career, and so as students start getting your real career.
And so I would like feedback from you whenever you have thoughts about the sorts of things that would be useful for you. I try to adapt as much as I can. In fact, the first time I taught this particular course was last year, and I had these great ideas about what I thought the students wanted and they hated everything I did so this year I’ve changed everything so that hopefully you don’t hate it.
So continue, please let me know if you’re really critical feedback please give it to me earlier rather because then I can do something about it for you. As opposed to last year where all the students students didn’t say anything to me for the entire semester and then wrote novels about how terribly the class went for them at the end of the semester which I am now adapting to, but they won’t have the benefit because they waited to. So if you hate something that happened in class, tell me right away.
I hope you don’t hate the class. So let me tell you why I’m here. here.
Let me know if this gets too small. And maybe I’ll bring down the other thing. This is, again, the first time I’ve done this course this way in a room like this.
So let me know what’s working and not working. OK, so first, I really hope that I can do something meaningful in terms of maybe getting you to think about something so that– that later when you are working or just living your life, you’ll be able to kind of be happy that I exposed you to some knowledge. In my life, I took a financial, I was an econ undergrad, well, also Russian undergrad, so I can speak Russian, but that doesn’t really help us today.
(clears throat) But I, I got really good at using Stata, which is a statistics software, and really good at doing stuff in Excel. And then I went to work for some nonprofit, and it turned out that the most valuable thing I knew how to do was work in Excel and compute averages, because everybody else had studied English and didn’t know what they were talking about. And so it was like– these really fundamental skills made it so that in those awkward days when I was new, I could, even if I didn’t know what I was supposed to be doing, I could really quickly analyze some data and make myself useful in a proactive way.
So hopefully, you know, my financial economics class in undergrad will really help me in my first job. And I hope that maybe there’s going to be some little skill or some piece of knowledge that you’ll be able to take into your next job and there’ll be some day when you’re feeling awkward that you’re intimidating a new job and you notice something that you could analyze, a question you can answer because you had some practice or exposure. My main goal is for this class to do something like that for you.
I don’t really care that much about, like, I mean, mean I like getting good teaching evaluations, but I’d rather have this be a good, useful thing for you like 10 years in the future. I’m a tenure track professor so like, they really care about my research and don’t care that much about my teaching evaluations, but like I read them all and it’s like sad if you’re unhappy, so I want you to be happy. okay so I want yeah I like I said I want you to like to like me and I don’t know I’m the kind of crazy person that if like something is my job and I’m being paid to do it it becomes an obsession of mine to do it really well so I’ve had lots of jobs so I’ve briefly been good at all sorts of things and this actually goes back to the theory of all those sentiments by Adam Smith who talked about that man, women, everyone actually desires not only to be loved, but to be lovely and dreads to be hated and to be hateful.
So at some point during the semester, you think, oh, Professor Morris is just trying to make my life terrible. I’m not. Let me know if it’s bad.
And I will do everything I can to fix it. However, there are some things that can’t change. Things like, I have to put 50 % of the weight on the head.
final, not my choice, and I have to be a grade at the end, also not my choice. But because this is an upper division class, you’re already demonstratively brilliant, and so often students come to me and ask, am I going to fail? You will have to try to fail. If you actually do all of the exercises, show up to class most of the time, you will not fail.
If you have zeros for a lot of things, if you don’t take any of the exams, if you don’t do any of the homework, then it might be hard to pass if you don’t do anything. But zeros are the only thing that will keep you from failing. I expect you all to do very, you know, quite well and get out of the course when it’s ready.
Okay, that was way more than I planned to talk about for that first slide. Okay, so let’s look briefly at the course website. So here’s the entire syllabus.
Nick Wu is our, oh I guess I should go in order, so this is my email address, email is probably the best way to get in touch with me, welcome. Just make sure you put the section number, like the course number, the section number and your name and ID number so that I know who you are. Thank you.
students this semester, so that just helps me kind of address what’s actually going on. Nick is very responsive and he’s, but he’ll be available via email. You can ask him questions about grading and stuff, but yeah.
So then office hours, be a Zoom. I’ve got two slots on Wednesdays. If you, for some reason, can’t make any of those, we can come up with another.
We can add slots, whatever works. But this is sort of my proposal, beginning of the semester. So this is actually tomorrow.
And we’ll just do a short one from 10 to 10 .30 tomorrow. But, yeah. In general.
general, I’m available via email. I’ll be online for these two slots on Wednesday. And we can add more if we need them.
Class sessions, you obviously already know that since you’re here. And we’ll do our review sessions also via Zoom. It gets really hard to schedule with some people who maybe have like a– episode of doing the review sessions in the Zoom, it seems like a good way to meet everyone’s needs.
And then I can do the Zoom recording, apparently cameras in here and these microphones picking things up, but I have no idea what the quality is, so once I see what those videos are, look like, I’ll decide if they’re worth sharing with you. Also, I want to prioritize, since we’re, like, locked in this room together for this hour and a half or hour and 20 minutes, I want to prioritize, like, actually having somewhat of a live discussion. And I feel like if I’m being recorded and I know that the recording is going to be widely distributed, I want to be very polished, and I don’t want you to feel like you have to be polished when you answer questions.
So if we share these videos, there will only be in situations when students are, like, unable to come to class because of an emergency or something like that. I will not be, like, this stuff is not going to end up on YouTube in particular, and if it does, I will be enraged. So I want you to feel comfortable– well, enraged is overstate.
I don’t want that to happen. I want you to feel comfortable in our discussion that these discussions are for our class and our classmates. They’re not for broad consumption.
Objectives, you can read through this stuff on your own. I have a couple slides about it. The textbook is accounting for decision -making and control by Gerald Zimmerman.
You can use any format. They try to sell you some sort of learning management system along with it. You don’t need to pay for that.
The only reason that you might want to get the 10th edition is because that’s the particular questions I’ll be asking. But I don’t have a ton of questions from that text. And I’ll probably, like, put them into the Canvas so you wouldn’t actually need to have an updated version.
And you think that the readings that I’ll assign are pretty good readings. And so I’m going to highly recommend that you actually have your own copy of the text with e -text or a physical copy. But we’ll have some cases and class notes.
which I will distribute through Canvas. So mode of instruction is going to be in person, we’ll have lectures and case discussions. This is kind of all stuff that I already said.
The one thing I want to point out about Canvas, in Canvas, Canvas has like a syllabus tab, and that just tracks the assignments that are in Canvas. That’s not going to – this doesn’t include like all of the course expectations, which you’ll lay out here. It doesn’t include like creating breakdown and stuff like that.
Then, reading scheme, class participation, and then the class participation. going to get 16 percent, cases and problems will get 16 percent, the midterm will be 18 percent, and then buy requirements. It’s actually the Hong Kong Certified Management Accounting Association that requires this course of 50 percent of the weight -on final exam, which is I think a ridiculous, inhumane, inappropriate thing to do.
do. So, all of the things I grade are going to be preparing you for that final exam. Like, I’m on your side, and we are fighting against the CMA association.
So, I want you to be well on the final exam, and so everything’s going to be up to you. The cases of problems will be kind of really, really similar to the sorts of things I’ll ask you on the exam. In some ways, I’ll ask you to think a little more.
and a little more broadly use, you know, Excel or Python to answer some parts of that. I won’t ask you to do that on the exam. This exam will be kind of difficult.
I’ll simplify in some ways. But if you practice the problems and are very familiar with the problems, you will find that you are very familiar with what’s going on. on the exam.
And if you take the midterm exam, which I recommend, then your performance on that exam will be great preparation. If you don’t do well on something on the midterm, it’s probably going to be really similar on the final. So that’s the setup.
And the– OK. So class participation. especially me, has not been in situations where we’re interacting as a group.
I find that if I randomly call on you, then I end up accidentally, because humans are bad at generating randomness, I’ll accidentally call on the people in the front row all the time. I want to make sure everyone has a chance to participate. participate, though there’s no pressure to participate.
While you’re here, when I call your name, or actually when I have a little computer program you may call your name, you’ll get full credit and you can, you know, when I ask you the question you can also say that you don’t want to answer or you can ask me a question back or whatever you can ask about the health of my cats, which I have two cats. they’re very cute. So this is more like an interactive way to take attendance.
The cases and problems are all due the night before we do the lecture. On one hand, you’re going to be like, oh, well, I could have done it perfectly if you’d explained everything to me. But I want you to think it through on your own.
And basically, I’m assigning points to these. so that I’m like, paying you with points so that you’ll actually prepare for the class. And so if you, as long as you, like, kind of do the, do everything that I’m asking you, you’ll get most of the points.
If you do, like, an utterly perfect and just, like, amazing thing, then you might get, like, even more points. But, so there’s some incentive to, like, try to prepare for the hard on the lower. one.
But really, I just want you to think through everything and turn it in before class so that then we’ll work through it all together. And then you can use that to prepare for the exam. And life.
I think these things will be massively interesting and very important for the rest of the life. All the times and locations for the exams are still TBA because they assign them to you. them for us.
Grading scale is here. Basically, I’m going to take your performance over the course of the semester and try to get the highest grade I possibly can. If anybody complains, then I’ll just– But like, you worry about you.
I’m on your side. I want you to do well, but I also want you to learn. And I do have to– assign a grade at the end of class.
OK, we’re not going to run through the entire course schedule in that point now, but I want to show you kind of how this notation works. So I’ll put– there’ll be a topic, readings, a problem. If there’s a problem, readings and the problems or cases will all be found.
on Canvas. If you ever can’t find something, please let me know. If you see something that looks inconsistent, please let me know.
Yeah, so for, let’s say, for February 16th, I want you to work through three problems. It’s worth kind of taking a look at these things in advance so that you kind of have some expectation for what the questions are and how much time they might take to answer. Yeah.
Okay, so that is everything about the syllabus. Okay, so we have, I thought this, this screen, every time I’ve had a costume assigned to me, they had giant screens. screens.
So the conceptual framework for the course is going to be that information is costly. It’s also useful, but there’s always costs and benefits to giving information and using it. Resources are going to be allocated somehow, either by a central planner in a company’s case.
This is going to be a manager. We even think of companies like Little Country, that have like a benevolent overlord who is the manager that allocates resources. And sometimes it might be hard to allocate resources so we might bring in some sort of market mechanism within the company.
This is what I mean by resources that are either allocated by central plan or people. Different costs apply for different purposes and what is measured gets attention. These are kind of the big picture.
concepts we’ll cover. I want to focus like I mentioned before on giving you useful intellectual skills because in a year you’re going to be sitting in some cubicle somewhere and you might not know what to do next and I want to give you some skills so that you can be comfortable comfortable thinking with some structure about data and coming up with answers to questions and then communicating. So I’ll probably be asking you to write a few more things than most accounting classes do.
And I’ll be asking you to talk, because I want you to be the students that Also, I have, through random chance, a bunch of my friends work at investment banks, and at different friends at the firms that you’re going to. And I kind of want you to make me look good in front of my friends. So, I want you to be the students that you are.
up and I want my– and really are ready to go and really useful to your teams when you start your jobs, rather than the students that are kind of like not quite ready to be– another reason why I really want you to be ready to communicate and answer questions. I think I’ve covered everything on here already. OK, so let’s review management accounting.
I am wearing a wool suit, and I vastly misjudged the temperature. So I am now very, very hot. So basically– OK.
So what is management accounting? Oh, and this is going to be– Okay, so this is this is how we’re going to do the random So I just have a random Picker that picks from a spreadsheet of everyone that’s enrolled So Everyone that’s enrolled in the course your name is in a big bucket and I pull out a name and I ask you the question and no matter what you say you get full credit, and then your name stays out of the bucket until the bucket is empty, and then it really goes back to the bucket. So there’s a super low pressure. You can even avoid the question, you can say whatever you want, as long as it’s not terribly offensively.
Also, I have to really apologize. I speak Russian, English, a little bit of Ukrainian. Ukrainian.
I can kind of understand Polish in a terrible at Asian languages. So I’m really going to do a bad job of pronouncing everyone’s name. But so the first question, what is managerial accounting is for long -winged math.
Go ahead. OK, it’s the process of generating [INAUDIBLE] and then taking information to internal visitors. Excellent answer.
Excellent answer. Thank you. Oh, yeah, I have to– I got excited because my system was working really well.
and then it crashed. Again, if you think to yourself, “Man, it seems like this is Dr. Morris’ first time at everything.” Like I said, that’s true.
Okay, so I told Lee Reed. It’s, again, focused at internal decision makers. These are managers, board members.
External decision makers. external decision -makers are investors. These are people that kind of decide whether or not to put resources into the company.
And then management companies focus on people who decide how to allocate resources within the company. Oh, I should add that everything we’re talking about today is kind of accounting 220, just to kind of bubble up the things that you probably studied two or three years ago. ago.
So this is kind of, I’m going to tell you my version of stuff that you heard like a few years ago. So there shouldn’t be really much that’s new today. We’re going to make decisions like pricing products and services, the mix of products, production and financing decisions, measurement of investment and measurement of performance profitability.
profitability at the product department. I think that this last point is super fascinating. This is like what my dissertation was about.
Okay, now, but wait, what are business intelligence and data science? This is worth thinking about because these are exploding areas of, like, lots of people are getting hired for jobs with these names. So, what are these? And is this being a free to read? way you shot? Yeah, I like that way of putting it. It’s kind of– well– well, here’s a I had, I even practiced how to work this this system I made.
I practiced it last night because I was like, I’m gonna screw it up in front of everyone and I keep screwing it up so I have to manually note every single name. Sorry about that. OK, so here’s a version of exactly what you said.
Data science is kind of an intersection between hacking skills, math and statistics knowledge, and substantive or substantive expertise. This is– if you google the data science and diagram, you’ll find this is supposed to slide everywhere. So on one hand, you could sort of globally say that business intelligence and data science are just names for things you’re going to do with your accounting degree, or names of people who are going to be competing with you for the job that you want to have.
So why are these things– relevant, why might these things be relevant to you as students who are studying accounting? And I actually don’t have an idea that this is, I did all the previous questions. I had some idea of what I thought the answer should be and you all nailed it. This one I actually don’t have a preconception about the answers to.
Yeah, yeah, yeah. I couldn’t believe it because I’m kind of old and have bad hearing. But not that.
I just turned 40. That’s, like, old enough that you can start joking about it, but not so old that you’re actually old. old.
Yeah, I think exactly what you’re saying. I think that the – I’m going to do this right this time. So my system wants me to write “true” and enter “yes.” Okay, let’s ask one more person for their perspective.
So if I heard you correctly, you’re saying that accounting information kind of flows into this. the, okay, and let’s ask Katherine. Go ahead.
Another, another reason why business intelligence is this, I had to roll it. Yeah, yeah, excellent. Sorry, this is a little bit hard to see I’m that when I tested this in my test of this diagram in one of the big So this is a version of the data science Venn diagram with four parts.
Communication, statistics, programming, and business. And the communication bubble, pure communication is hot air. Pure statistics is like staff professors at the schools or maybe in the middle.
Pure programming is like a hacker. Pure business is the accountant. I want to argue that accountants, financial accountants, are this.
Pure business, right? Because you are taking business, you’re like measuring the business’s performance and creating a very particular set of numbers. I think that everything inside… this business loop where it overlaps with statistics and programming and communication, that is management accounting.
So there are data scientists, data science, the first data scientist is right here at the intersection of all of them. I think that this is a managerial accounting as well. Though you don’t have to be a hacka to be a good manager.
accountant. You don’t have to be a statistician. You don’t have to be a performer, writer, or any of those things.
But if you’re going to do a good job and remain competitive and flexible for your whole long career that’s coming, you really need all these things. And so, I’m really happy that here, here at other universities that worked at students who are not as well -prepared as you. I think you are well -prepared because you’ve been exposed to, I believe you’re required to take an intro to Python class, a small course, but just an intro.
You have strong mathematics backgrounds, statistics, communication, and so this is why my approach to the course is going to push you to take your business forward. knowledge as accountants and add statistics, programming, and communication. Because if all you know how to do is prepare financial reports, you’re way less flexible.
A lot of the things that are kind of simple, multiple choice answers, like formulas you can really memorize, that’s stuff that I can program a computer to do. do, and I’m not a great hacker, but I can probably hack a financial report into existence, and that means that I think being employable as experts in accounting, women need to be a little bit of statisticians, a little bit of programmers. Now, I don’t, what that means is really broad, but we’re gonna need these things in order to stay real.
And the reason I’m emphasizing that is, you guys have a long life ahead of you. You’re gonna have to fight for a long time to stay real. Okay, topics in management accounting, cost accounting, just figuring out how much stuff costs to make, planning and control, This is the, you know, setting goals, preparing budgets, pursuing them, and understanding why you missed or didn’t miss, like why you hit your targets or why you didn’t.
The one thing I really want to stress now and throughout the course is that in managerial accounting, goals and budgets are not aspirational. They’re concrete plans. Right? Like, this year I have a goal to be able to type faster than a hundred words per minute.
That’s a goal, right? That’s like an aspirational. It’s a goal, but it’s an aspiration. But I don’t have, like, there’s nothing that comes after it that’s going to fail if I come in at 90 words a minute or more.
In a managerial accounting, if you overshoot your goal, you’re going to fail. that might be just as bad as undershooting your goal. So I want you to– when you see goals and targets, think of them as like bullseyes we’re aiming for, that other things depend on, rather than just aspirations.
It would be nice if our cash flows were this high. Just like it would be nice if I lost some weight, or it would be nice if I lost some weight, if I could type faster. This is not the sort of thing we talk about in managerial accounting.
In managerial accounting, goals and targets are precise plans. And then motivation, this is kind of what makes the precise planning aspect of it a little bit tricky and interesting, is that at the same time as we’re making concrete plans, we are all measuring performance in order to motivate our employees and ourselves to allocate effort and make good decisions and that’s it. Okay, how do managerial accounting and financial accounting differ? Low wing key.
key. Okay, yeah, yeah, that’s a great… So there are a ton of good answers to this, and that was one of them.
So this is managerial accounting, we’re kind of estimating, whereas financial accounting… we’re looking back and sort of Telling everything up. So we’re like looking at things that actually happen now the cool the kind of cool thing is that When we’re estimating we’re trying to predict the future, but we use past the past to predict the future I mean there’s an aspect of this where we’re like trying to be wizards See into the future So this goes back to the first answer today Accounting is just systematic collection and processing of financial as well as financial data or financial as well as non -financial data for decision.
This is accounting in general I think when managers are making this decisions, the activity is managerial. And when external decision makers are making the decisions, it’s financial. Now, everything that Winkie just said is precisely correct, even though I stated these as though the activity is the same, and that’s because…
the external decision makers process the data, the financial accountants, but managerial accountants get to process their own data. What do I mean by process? I mean, if you prepare a financial report and file it with the SEC in the United States under a US GAAT, you’re done. And you make like a specific set of forward -looking statements, but those are like caveated heavily.
at their kind of boilerplate. What you really did, what you really prepared as an accountant was just a list of the things that happened and then you pass that off to our colleagues in finance who you know do whatever they do and make and place bets right. So they are the ones when it’s external to decision makers they’re the ones that process and estimate and try to see the future in its interest.
decision makers. It’s us. We get to try to see the future.
And this first point is slightly overstated. So financial accounting really only occurs when the firms are public. Really it only occurs technically when you’re asking someone outside to infuse capital into the firm.
This is the most common time for this. this to happen is when you’re a publicly traded firm. It’s required to report to external– to prepare public reports.
This is kind of a rehash. I want to emphasize the financial reporting because it is– for external parties. There are also external rules about it.
Managerial accounting has really no rules, or no rules in the sense that there’s no external party that’s going to be prepared, which is, on one hand, gives you a lot of freedom, but also on the other hand, it makes your job as and, a managerial accountant much more interesting and potentially difficult because you are responsible for your own interests rather than when external parties, they’re responsible for what they do with the information and you just follow the rules. In our case, we are responsible for what comes after us. Okay, types of costs in value chain.
Again, we’re kind of motoring through a bunch of different topics, but I just want to kind of toss them all out there so you can start remembering these things from when you saw the two years ago. So, value chain. I think I have a question prompt coming up.
So, what is… a value chain named [inaudible] Yeah, exactly. So, during you kind of whatever it is you’re making, you start with not that thing and turn it into the thing.
And it should be more valuable at the end. And everything that happens in the middle, all the costs you put into it, that’s the value change. So it goes from some sort of raw material, to what you sell, or a service that you do.
And then at the end, it has more value. And that whole thing is the value change. Okay, so in the value chain, we have things like research and development, product design, manufacturing, labor, material, machinery, these are all the things you just listed.
Distribution also adds value, right, because something far away is, you know, things are cheap in the place where they’re made and more expensive further away. away. Marketing, might add value, customer service, general administration.
I actually– something that is sort of a long -term curiosity of mine is I think that one of the least well -understood or one of the worst pockets of understanding in our kind of business economics world is research and development. I really don’t think, even at the highest level, people really understand both the importance of research and development and to society as a whole. For example, who uses Apple problems? Who uses Android from Apple? This is almost everyone in the room.
Both of these are based on Unix operating systems. Unix is a type of operating system that’s platform -independent. It was developed in the 1950s at AT &T.
You know, the famous computer company, AT &T. Oh, just kidding. kidding.
It’s not famous for that at all So the R &D department at AT &T in the 1950s realized that there were all kinds of different computers and they needed a way of thinking about developing operating systems for those computers that we just let them write programs for what they need to do which was Operate landline systems, right? So the phones worked correctly. They were just trying to build something and that would help them do something else. And what they did was they invented one of the most important personal computing technologies that has ever been invented.
And AT &T got almost no money for it because they didn’t realize it was important and they sold it off to a non -profit for less than a million US dollars. dollars in like the 70s. So one of the most important pieces of software in existence was developed in R &D in a company that captured none of the benefits.
Same thing is true with fertilizer. Same thing is true with the steam engine. All of the big, not maybe all, but most of the big huge developments that have really moved humanity forward came out of companies R &D departments.
And the companies didn’t give any money for it. it. So this is me thinking is sort of like a managerial accounting professor who’s also Economics and like cares about people in the world.
I think that we need to better understand aren’t Now are we gonna solve this problem in this class? No Did that story just waste a little bit of your time? I don’t know maybe But I think that this this idea is important R &D shows up as an expense on a company’s books, on the company that spends on it. Shows up as an expense, but everybody else benefits. OK, terminology.
And I skipped too fast. OK, so some terminology. So cost versus expense versus expense.
cash flow, what are these things? And I’ll ask that question a little bit more. Okay, so I’m going to ask three people, what’s it cost, what’s the expense, and what’s the cash flow? So contestant number one is Sun Yin Wang. Yeah, go ahead.
Value used to produce a product. That is a great way of saying that. Yes, value used to produce a product and What is an expense? Brian Lee Yeah, yeah, yeah.
In accounting, expense is purely a counting term, whereas cost is more of an economic term. Which, this is kind of, makes talking to normal people a little bit complicated? Because some will be like, “That’s expensive !” And then if you say, for example, my wife will be like, that’s expensive. And I’ll be like, darling, it’s costly.
Slap me. Okay, and then what is a cash flow? Oh, let me mark Brian is correct. Okay, shum potein.
So this is like money that was outside the firm, and it’s just a movement. Yeah, exactly value of resources sacrificed. I like for cost I like this notion of sacrificing the resources So like you no longer have those resources because it helps And yeah, cash flows, dollars received or paid at any point.
So this puts a good emphasis on the fact that not all costs generate cash flows. At some costs, you use up something that you already bought, no cash moving. And then expenses, exactly like Ryan said, cost charted on the income statement.
It’s an accounting warrior. The main difference between these things is timing. A cruel accounting rearranges cash flows so the revenues match the related expenses.
This is kind of an interesting terminology thing. I think in the Zimmerman book, he often will refer to things as accounting fictions. Lawyers often refer to things as legal fictions.
And I kind of dispute that. that. I think these things are all equally real.
Just depends on what you’re trying to understand. Because you might sacrifice value a long time away from when you produce them. And so the costs and benefit are really displaced from them.
So there’s a reality in which– you know, cost accounting captures the reality. And then some people might say, oh, cruel accounting is fictitious, right? We’re just making these things up. We’re actually trying to capture some sort of underlying economic reality.
So to me, that’s also very real as long as we know what it is we’re trying to understand. They’re both real. Okay, direct versus indirect.
costs Yes, what’s the difference direct? Yes, yes This one is always funny because it’s like really in the name But it’s not quite so simple as the name makes it sound. Excellent. Yeah, directly traced, but here’s the twist.
Directly traced in a cost -effective manner. Like we could, if we worked in a factory where you have these materials that are hard to trace, you could hire two people for every job and one person was the doer of the job and the other person was like just writing down a Like we do this in athletic events, right, in swim races? We actually, there’s one person in every lane watching every swimmer. We could do that for everything.
But would that be cost effective? Probably not. But if we were like working with some very, very expensive material, then maybe it would be. Indirect costs, same thing.
Direct costs that are too expensive to trace could be indirect. Oh, and on the last slide, these things change over time. Some costs that used to be very expensive to trace, as sensors get cheaper and more accurate, become easier to trace.
So you can imagine this. that like if you get hired at a very old legacy firm You might be able to help them save a lot by measuring things They didn’t use to measure because now it’s cheap to measure and used to be expensive Inventory this one Inventory a ball Versus period costs. What is the difference? How? yeah, excellent answer.
Yeah, so it’s really just about the way that we map them. And to be honest, this difference, we’re going to– to kind of move things back and forth depending on what suits our needs the best so some types of inventory will cost all the direct labor materials factory overheads that we can’t trace them precisely but we know about where they go. So we’ll inventory those.
Prime costs, these usually refer to direct materials plus direct labor costs. Conversion costs usually refers to direct labor plus factory overhead costs. Conversion costs actually kind of heartens back to the value chain discussion because conversion costs are really everything that you put in.
in to convert the raw materials into the finished prints. If you took my class, sometimes I have deja vu when I give this first lecture, because if you took my class like in 2019, I said that exact thing. So I have these moments where I’m like, “Oh, I already said that.” Okay, typical overheads, indirect materials, labor, labor, depreciation on factory buildings and equipment, insurance and property taxes.
We’ll talk more about cost objects, cost drivers, variable cost, fixed cost, average cost. But I want you to review these terms because these terms are going to be key to the stuff we’ll talk about in more detail in subsequent sessions. So cost object is an item for which we want to measure costs.
Cost driver is anything that causes value to be sacrificed. Variable cost is anything that varies in proportion to that driver. Now, it says in direct proportion.
And that language is– is very linear, and the last slide we’ll talk about how we often use language that describes relationships as though they are linear, even though in reality linear relationships, perfectly always and everywhere linear relationships are rare. Quick spots, just anything that’s not changing with the underlight driver. and average cost is just total cost, it’s just an average.
The important, the thing I don’t want you to forget here is that the cost are fixed and variable depending on the driver. So you may have a cost that is variable with respect to one driver and fixed with respect to another driver. driver.
That’s it. We’ll often talk about things like factory rent and things like that as always fixed, even though there might be times when that doesn’t hold. So these are all kind of, we’re going to make these assignments within relevant ranges within kind of, we’re going to save these things like the truth.
true, but they’re not true everywhere all the time, because cost functions are different at the time. And we’ll look forward to that next time. OK, costs and decision making– actually, just structured this slide a little bit because I put up the answer, so I’m not going to ask the question here.
So we have irrelevant costs, differential costs, opportunity costs, and controllable costs. I think the important – we never really list these names of costs in managerial accounting. accounting we’re going to decide if something is relevant or irrelevant whether it’s differential or not whether it’s sunk not whether it’s an opportunity cost or not whether it’s controllable or not the reason that we use these definitions is to give ourselves a framework for thinking about the things that our decisions actually affect so irrelevant costs this is really important because then we know what we we can ignore.
If we’re too aggressive about this, we can trick ourselves by throwing out, by treating costs as irrelevant when they are actually relevant. Differential costs are a way of expressing costs that are relevant. And again, if we treat something as relevant, it is irrelevant.
We may be assuming that we have more control over costs than we actually do. And then some costs, this is a particular type of irrelevant cost. This is a cost that’s already been– We’ll have the reading for chapter 2, I believe, as a bunch of really– nice examples of these.
I’m not too worried because everyone loves to talk about some cost opportunity costs in their glasses, so by this time you probably have like 18 lectures about some cost opportunity costs. So I won’t belabor the point, but it’s worth reviewing in the reading for chapter two. But really what we’re, the kind of the big takeaway here is we’re focused on figuring out what it is that we can control, what we’re actually deciding.
So the big questions here are who makes decisions and who makes information. Now, I want to tell you. you what I think about this.
This isn’t a question for you. So individuals make decisions. And individuals’ decision rights are the decisions that they are allowed or able to make.
I get to choose which textbook I use. I don’t get to choose how much weight to put on final exam. I have some decision rights, but I don’t have all these decisions, but I, as an individual, I make decisions within the university.
Individuals also build and manage the systems that collect and generate information. I just pronounced that, I said de -generate, generate. And this is key, because…
as they do that, individuals make their own decisions. Individuals are self -interested. This isn’t necessarily a bad thing.
And even when you have the best intentions, you can think of being self -interested as just we all look out kind of from our own eyes, and so we see everything from our own perspective. That’s another way of thinking about what it means to be. see in the world.
And individual and collective incentives not only shape decisions, but they also shape the information systems, which in turn shape effort. So, in addition to talking about about how we set incentives for behavior, we also need to think about, and we’ll think about this in different ways throughout the rest of the course, we also need to think about the ways in which incentives shape the information that we use to shape the decisions. And this happens in two ways, right? We make decisions based on signals that we receive.
We process those signals and then we choose the right course of action based on all of our influences and incentives. And those influences and incentives also include information about our performance. For example, as a professor, I’m a tenure track professor.
I haven’t done tenure yet. And so there’s one signal that matters, and that is how much I publish. And so I’m going to make all of my decisions based on how my publication record is measured, even decisions that you wouldn’t think are directly connected to it.
Like, for example, everything that I teach you in this class, I’m thinking about how, in addition to helping you, how it can make me see. and more effective as a researcher. Why do I think about that? I wouldn’t think about that if I weren’t a 10 -year track professor because I wouldn’t have to do research.
But since I have to do research, everything else I do is shaped by the thing that gets measured in my incentive structure. So the way that we measure performance shapes the way we make decisions. Even if the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance shapes the way we measure performance decisions are at first glance not at all related to the underlying metric.
Now, that’s not exactly how my incentive structure works because there’s two other things. One, if I do a bad job teaching, then I feel bad because I like all of you. But also, my managers will come and bother me.
I won’t get fired if I do a bad job. But they’ll come and talk to me, email me, and all sorts of things. And all of these things happened to me over the last year because I did bad teaching reviews.
And so I have so many emails, and I’m like, Dr. Morris, we just noticed. Oh, you just noticed.
It’s been this way for a year. That’s an aside. But this is very important.
and we’ll keep this in mind throughout the rest of the semester. Now, we are 10 minutes early, which has never happened to be on the Thursday of class, but this is the final slide I have for today. We often model things as linear relationships.
We often use language that implies linear relationships, but this is not always true. This is a strong assumption, but it’s not always true. should be treated with care.
The main thing– and we’ll talk about this more in coming lectures. The main thing is, because we so often refer to things as though they are linear, as though cost is a linear function of quantity, because we speak that way so commonly, we need to very carefully think. about the range in which this is true.
And so I brought a dry erase marker just for this purpose. Here it is. OK.
So we have cost, quantity, and we’re going to say this is our cost curve. this is how we assume it works but we can’t ever forget that it almost certainly works like this and so if we refer to it as linear we need to make sure that we’re here and anytime you extrapolate outside the area where this is true you blow things up cause huge problems problems. So this is– we’re always going to want to keep in mind that any time you extrapolate something to extremes, our cost estimates are going to get weird behavior.
Now, a time when this is particularly salient or particularly important is in a venture capital context, when the venture capital business model is we bet on a bunch of things, and because we help one another. them explodes But when something explodes in scale All of the things we know about the way cost works in the firm Are no longer true. This is why really really exciting companies like Tesla and Uber have really struggled to keep revenue revenue ahead of cost because they go to company here.
Their output exploded and so their costs also exploded and we’re going off into uncharted territory, right? Because we hit an inflection point and then the future is very, very uncertain. So this linearity assumption, it works really well, really predictable, in really predictable like business as usual scenarios and it starts to break. break down as we get out of business -as -usual.
And I bring this up again, because venture capital, which is a very, very important part of the economy, is all about living out here. And so, therefore, is a place where managerial accounting and all accounting becomes very, very challenging. Hopefully that was an interesting thing to end on.
But that is the end for today. And actually, I’ll see you in a minute. said, we’re 10 minutes early.
Way earlier than that. Usually, I tell stories. So thank you for coming today.
And I hope that we’ll have a great semester. Any questions, you can come up. But also, don’t hesitate to email.
When I post announcements, I’ll leave it quite on– Canvas. I’ll leave a question, like, question section there so you can reply also to Canvas if that’s in the email. Yeah? [inaudible] Oh, okay.
Yeah, yeah. So the assignment, um, just, uh, we have a very good question. So the assignment for tomorrow has been completed.
like the way that it shows up on campus might not be obvious what I’m asking. It is a – it’s just a table with quantities. So I have quantities down this side, and then across the top, total cost, right? Total cost, marginal cost, average cost.
incremental cost. And so all I’m asking you to do is, based on these two quantities, calculate these numbers. So this is like 100 comma 50, and above there’s a formula.
So you just, for total cost, you’re just plugging the quantities. quantities into the formula and filling out total cost. And then marginal cost, you have Q1, Q2, and so you calculate each of them.
Is that– yeah, I called you. Okay. » Were it grading at submitting or the correct rate? » Okay.
So the way that I’m going to grade this is– » Yeah. you answer everything and make like a real effort, like you actually, like it says, write a paragraph and you write a paragraph, then you will get almost all the points. If you get everything perfectly correct and your paragraph is perfect, then you will get 10 out of 10.
I’m imagining everyone that actually finishes everything will get like 10 out of 10. and a half to nine out of ten. And then if you, like, if every number is correct and if every single thing is correct, then you get the last of them.
So again, as long as you fill it all out, you’re going to get most of the bubbles out. Yes? If anyone is on the waiting list, email me. If you’re on the waiting list, you won’t be responsible for anything that happens while you’re on the waiting list.
I do recommend that you work through the assignment and come to class more quickly. And I’m going to get in as many people as I can. But I think we have you fit today.
So I know there are a few students that have internships and things, so we’ll need to check to make sure everything works. OK, any other questions? Otherwise, enjoy three, 10 minutes, 12 minutes, isn’t it?