Management Accounting

CHAPTER 1
Introduction: The Role, History, and

Direction of Management Accounting
Chapter 1 provides an overview of management accounting. This chapter also is an opportunity to discuss
ethical behavior.
LEARNING OBJECTIVES
After studying Chapter 1, students should be able to:
1. Explain the need for management accounting information.
2. Explain the differences between management accounting and financial accounting.
3. Provide a brief historical description of management accounting.
4. Identify the current focus of management accounting.
5. Describe the role of management accountants in an organization.
6. Explain the importance of ethical behavior for managers and management accountants.
7. Identify three forms of certification available to management accountants.
KEY TOPICS
The following major topics are covered in this chapter (related learning objectives are listed for each topic).
1. Management accounting information system (Learning Objective 1)
2. Management accounting and financial accounting (Learning Objective 2)
3. A brief historical perspective of management accounting (Learning Objective 3)
4. Current focus of management accounting (Learning Objective 4)
5. The role of the management accountant (Learning Objective 5)
6. Management accounting and ethical conduct (Learning Objective 6)
7. Certification (Learning Objective 7)
1
2 Chapter 1
1. MANAGEMENT ACCOUNTING INFORMATION SYSTEM

Opening Discussion Question: Why do managers need accounting information?
Suggested In-class Assignment: After having students read the opening scenario, ask students to discuss
accounting information’s usefulness and why managers need accounting information.
Information needs of managers include using accounting information to:

 identify problems
 identify solutions to problems
 evaluate the effectiveness of decisions, such as continuous improvement efforts
Discuss the three objectives of a management accounting information system:

 To provide information for costing services, products, and other objects of interest to
management.
 To provide information for planning, controlling, evaluation, and continuous improvement.
 To provide information for decision making.
The management process is summarized below:
Management Process
Planning Controlling Decision Making
 Setting objectives  Monitoring a plan’s  Choosing among competing

implementation alternatives
 Identifying ways to achieve  Feedback is information  Example: deciding the
the objectives used to evaluate or correct selling price of products
implementation of a plan.
 Example: budgets  Based on feedback, a
manager might:
– continue the
implementation as
originally planned
– take corrective action
if needed, or
– modify the plan.
 Example: performance
reports, which are
accounting reports that
provide feedback by
comparing actual results
with plans
Introduction: The Role, History, and Direction of Management Accounting 3
2. MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING

The accounting information system within an organization has two major subsystems:
 a management accounting system
 a financial accounting system
Accounting Information System
Management Accounting Financial Accounting

Information System Information System
Targeted user: internal users external users

managers stockholders and creditors
Restrictions: no mandatory rules for preparing must follow GAAP when preparing
reports financial statements
Types of information: financial and nonfinancial financial information
information
Time orientation: emphasizes the future (planning historical orientation (reports what
and decision making) has already occurred)
Aggregation: detailed information about product information about overall firm
line, departments, and so on performance
The accounting system should be flexible enough to supply different information for different users and
different purposes. Frequently the reports of both management accounting and financial accounting
are derived from the same database, which was originally established to support the reporting require-
ments of financial accounting. Many organizations need to redesign this database in order to satisfy more
fully the needs of internal users.
3. A BRIEF HISTORICAL PERSPECTIVE OF MANAGEMENT ACCOUNTING

The main point to discuss in this section deals with the changes in management accounting over the last
20 years. This section can be used to introduce the emerging themes.
4. CURRENT FOCUS OF MANAGEMENT ACCOUNTING

After discussing the historical perspective, the current focus of management accounting can be discussed.
Trends covered in the text include the following:
1. Activity-based management
2. Customer orientation
3. Cross-functional perspective
4 Chapter 1
4. Total quality management

5. Time as a competitive element
6. Efficiency
TEACHING HINT: The practice of management accounting is being reshaped. You may want to empha-
size the following quote from Peter Drucker1:
“The most exciting and innovative work in management today is found in accounting
theory, with new concepts, new methodology—even what might be called new
economic philosophy—rapidly taking shape. And while there is enormous contro-
versy over specifics, the lineaments of the new manufacturing accounting are
becoming clearer every day.”
5. THE ROLE OF THE MANAGEMENT ACCOUNTANT

The management accountant is responsible for collecting, processing, and reporting information that
will help managers in their planning, controlling, and decision-making activities. This is a good time to
discuss line positions and staff positions.
The controller is the chief accounting officer and has responsibility for both internal and external
accounting requirements. The controller may have direct responsibility for:
 internal auditing
 cost accounting
 financial accounting (including SEC reports and financial statements)
 systems accounting (including analysis, design, and internal controls)
 taxes
The treasurer raises capital and manages cash and investments.
6. MANAGEMENT ACCOUNTING AND ETHICAL CONDUCT

A. Teaching Ethics
Teaching values is considered by many to be an important part of the current educational process. In part,
this feeling stems from a number of unethical practices that have been highly publicized. Some examples
of moral lapses are reported in the chapter. You may want to cite some with which you are familiar or ask
students for examples with which they are familiar.
TEACHING HINT: After discussing the reasons why teaching value judgments is important, ask the
students to define ethical behavior. This usually provokes a lively discussion.
1
Peter E. Drucker, “The Emerging Theory of Manufacturing,” Harvard Business Review, May–June 1990, pp. 94–102.
Introduction: The Role, History, and Direction of Management Accounting 5
B. IMA Code of Ethics
One of the major goals of management accounting is to help managers increase the profitability of their
organization.
However, the objective of profit maximization should be constrained by the requirement that profits be
achieved through legal and ethical means.
The performance evaluation and reward system should be designed so that incentives to pursue undesir-
able behavior are minimized.
The role of professional codes of ethics should be discussed. Professional associations often provide a
well-defined set of ethical standards that helps to define acceptable and unacceptable behavior. In addi-
tion, there are problems and cases throughout the book that provide additional ethical dilemmas. Also,
there are several end-of-chapter exercises that focus on ethics.
7. CERTIFICATION
This section briefly discusses the three major certifications for management accountants. Most students
are aware of the CPA but are probably not as knowledgeable about the CMA or CIA. Explaining why
these two certifications are viable alternatives to the CPA should prove to be interesting for those who are
considering a career in accounting.
TEACHING HINT: Ask students why certification is needed. You may wish to point out that other pro-
fessions, such as engineering and data processing, also have certifications.
8. APPLICATIONS
Applications for the chapter include the following:
A. In-class Group Practice Tests. See the Study Guide that accompanies the Hansen and Mowen text
for Key Terms Test or Chapter Quiz that can be used for in-class, group tests. Each student takes the
quiz or test individually without looking at the answers provided in the study guide. Then ask the
students to break into teams of four or five to grade the test and discuss answers.
B. End-of-Chapter Exercises and Problems

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CHAPTER 1

Introduction: The Role, History, and

1. Explain the need for management accounting information.

2. Explain the differences between management accounting and financial accounting.

3. Provide a brief historical description of management accounting.

4. Identify the current focus of management accounting.

5. Describe the role of management accountants in an organization.

7. Identify three forms of certification available to management accountants.

1. Management accounting information system (Learning Objective 1)

2. Management accounting and financial accounting (Learning Objective 2)

3. A brief historical perspective of management accounting (Learning Objective 3)

4. Current focus of management accounting (Learning Objective 4)

5. The role of the management accountant (Learning Objective 5)

6. Management accounting and ethical conduct (Learning Objective 6)

7. Certification (Learning Objective 7)

1. MANAGEMENT ACCOUNTING INFORMATION SYSTEM

Information needs of managers include using accounting information to:

Discuss the three objectives of a management accounting information system:

The management process is summarized below:

Planning Controlling Decision Making

 Setting objectives  Monitoring a plan’s  Choosing among competing

2. MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING

Accounting Information System

Management Accounting Financial Accounting

Targeted user: internal users external users

3. A BRIEF HISTORICAL PERSPECTIVE OF MANAGEMENT ACCOUNTING

4. CURRENT FOCUS OF MANAGEMENT ACCOUNTING

4. Total quality management

5. THE ROLE OF THE MANAGEMENT ACCOUNTANT

The treasurer raises capital and manages cash and investments.

6. MANAGEMENT ACCOUNTING AND ETHICAL CONDUCT

B. IMA Code of Ethics

B. End-of-Chapter Exercises and Problems

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