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Chapter 1

Main point: Accounting reports are used for multiple purposes. ... Supplement historical cost accounting data with other knowledge ...

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Chapter 1

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  1. Accounting for Decision Making and Control, Second Edition Jerold L. Zimmerman Alumni Distinguished Professor William E. Simon Graduate School of Business Administration University of Rochester Published by Richard D. Irwin, Inc. 1997 Slide 1-01 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  2. Outline of Chapter 1 Introduction Purposes of Managerial Accounting (pp. 4-6) • Decision Making • Control Design of Accounting Systems (pp. 7-16) • Design and Use of Systems • Evolution • Firm’s Organizational Structure Example of Decision Making (pp. 17-20) Outline of Text (pp. 20-21) Slide 1-02 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  3. Decision Making - Product Management Examples • Add new product • Terminate an existing product line • Accept or reject special order Related Topics • Operations management • Budgeting - capital and operating • Just-in-time (JIT) Slide 1-03 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  4. Decision Making - Pricing Examples • Set selling price to achieve desired profits • Set selling price to achieve positive cash flow Related Topics • Marketing • Microeconomics - Price Theory • Corporate Finance Slide 1-04 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  5. Decision Making - Cost Control Examples • Adding new equipment • Changing production process • Make internally versus buy externally (outsource) Related Topics • Process engineering • Management information systems • Activity-based costing (ABC) Slide 1-05 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  6. Control - Incentives (p. 5) Assumptions • Individuals maximize their own self-interest • Owners of firm want to maximize firm value • Maximizing firm profits maximizes firm value Incentives • Design performance incentives based on internal accounting measures to motivate employees to take actions that will maximize firm value Slide 1-06 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  7. Control - Performance Evaluation Examples • Performance bonuses depend on accounting results • Benchmarking: comparisons to industry leaders Related Topics • Organizational behavior • Human resources management Slide 1-07 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  8. Design - Multiple Role of Accounting Study Figure 1-1 at page 8. Main point: Accounting reports are used for multiple purposes. Slide 1-08 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  9. Design - External Reports (p. 9) Users of external reports • Shareholders, bondholders, and analysts (SEC, FASB) • Taxing authorities (IRS, states, etc.) • Regulatory authorities (GASB, etc.) • Board of directors Objectives in external reporting • Comparability between firms • Historical accounting • Auditors can verify reports Slide 1-09 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  10. Design - Internal Reports (pp. 9-10) Users of internal reports • Managers at all levels Objectives of internal reporting • Useful for decision making about future activities • Measure performance that is relevant to the firm • Focus on projects or processes within a firm Slide 1-10 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  11. Design - Conflicting Goals (pp. 9-12) Control • Incentives to motivate behavior changes • Tendency to ignore information not specifically included in incentive system • Report “good” numbers to satisfy top management Decision making • Want to avoid distorted information • Estimates useful to plan future activities Slide 1-11 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  12. Design - Evolution (pp. 12-13) Economic Darwinism: Over the long term systems survive in competitive markets when the benefits exceed or equal the costs of maintaining those systems. Survival does not imply optimality. Better systems may exist, but have not yet been discovered. Slide 1-12 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  13. Design - Figure 1-2 (p. 14) Study Figure 1-2 at page 14. Main Point: In a typical corporation, the corporate controller is responsible for all internal and external accounting reports. There are also controllers in the operating divisions. Slide 1-13 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  14. Design - Organizational Structure (pp. 14-16) Controller • Reports to chief financial officer (CFO) • Administers internal and external accounting • Budget planning • Controls financial data collection and reporting Balance providing information to other managers for decision making against providing monitoring information used to control behavior of lower-level managers. Slide 1-14 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  15. Example - Vortec Special Order (pp. 17-18) Current With Order Incremental Units produced and sold 100,000 105,000 5,000 Total Revenue and Costs Sales ($5.00 regular, $4.00 special) $ 500,000 $520,000 $20,000 Direct labor and materials -300,000 -315,000 -15,000 Other factory costs -150,000 -153,300 -3,300 Administrative expenses - 26,000- 26,000 0 Net profit before taxes $ 24,000 $25,700 $ 1,700 Average Costs Per Unit Sales $ 5.00 $ 4.952 $ 4.00 Factory (labor, materials, other) - 4.50 -4.460 - 3.66 Administrative - 0.26 -0.248 - 0.00 Incremental profit per unit $ 0.24 $ 0.244 $ 0.34 Slide 1-15 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  16. Example - Beware of average costs (p. 19) Average cost per unit at current production volume is usually not an accurate estimate of the cost per unit at other levels of production. Production costs include: • fixed costs that do not change with volume • variable costs that do change with volume Costs may increase when production volume is near or above normal operating capacity. Slide 1-16 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  17. Example - Consider opportunity costs (p. 20) • Opportunity costs measure what the firm forgoes when it chooses a specific action • Consider what a firm forgoes by accepting a special order Slide 1-17 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  18. Example - Supplement accounting data (p. 20) • Supplement historical cost accounting data with other knowledge • Such as expected customer demands, competitors’ plans, future technology, and government regulation Slide 1-18 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  19. Example - Accounting data for evaluation (p. 20) When managers have incentives to maximize performance on one particular accounting measure, firm profits are not necessarily maximized. • Reducing average manufacturing costs per unit does not always maximize profit • Maximizing total revenue does not always maximize profit Slide 1-19 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

  20. Outline of Text (pp. 20-21) See Overview Figure at page vii in the preface. ChaptersTheme 2-5 Use of accounting for decision making and control 6-8 Budgeting and cost allocations 9-13 Absorption costing and alternative costing methods 14 Integrative framework Slide 1-20 AFDMC 2/e The McGraw-Hill Companies, Inc. 1997

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