Financial Accounting

1
Financial Accounting

• Defined as the preparation of financial
  statements and other data for parties external to
  the firm.
• External parties include shareholders, creditors,
  tax authorities, regulatory bodies, other
  stakeholders.
• Governed by generally accepted accounting
  principles (GAAP).
• Primarily concerned with reporting historical
  data.
• Information provided relates to the organization
  as a whole.

2
Management Accounting

• Defined as the collection and transformation of
  cost and related information for use by parties
  internal to the firm.
• Not governed by GAAP.
• A future rather than historical orientation.
• Provides both financial and non-financial
  information.
• Emphasis on subunits of the firm rather than on
  the firm as a whole.
• Integrates a number of business disciplines.

3
Objectives of Management Accounting

• Providing managers with information for decision
  making and planning.
• Assisting managers in directing and controlling
  operational activities.
• Motivating managers and other employees toward
  the organizations goals.
• Measuring the performance of subunits, managers,
  and other employees within the organization.

4
Cost Management

• Cost management 1) actions taken by managers to
  satisfy customers while continuously reducing and
  controlling costs. 2) encompasses both the cost
  accounting and the management accounting.
• Objectives
• To measure the cost of resources consumed in
  performing the organizations significant
  activities.
• To eliminate non-value-added activities.
• To determine the efficiency and effectiveness of
  all major activities performed in the
  organization.
• To identify and evaluate new activities that can
  improve the future performance of the
  organization.

5
Adding Value to the Organization

• Accountants must also add value to an
  organization or risk being replaced or
  eliminated.
• Does the information provided by management
  accountants improve managers decisions?
• If the use of cost information leads to the
  elimination of non-value-added activities,
  accountants have added value to the organization.
• If needed information is not received in a timely
  manner, no value has been added to the
  organization.

6
The Changing Business Environment

• New Tools for Managers
• Just-In-Time.
• Activity-Based Costing/Management.
• Total Quality Management.
• Process Reengineering.
• Theory of Constraints.
• Value Chain
• New tools for managers require new accounting
  systems to measure the appropriate variables.

7
Just-In-Time Production Systems

• In a JIT system, each component on a production
  line is produced immediately as needed by the
  next step in the production line.
• JIT systems are characterized by zero or
  near-zero inventories.
• The sale of a finished unit triggers the
  completion of a unit in work in process. This
  demand-pull continues all the way back to the
  purchase of raw materials.

8
Features of JIT Production Systems

• Simplified and improved production processes.
• Zero production defects.
• Flexible workforce.
• Global costs are minimized (no local minima).
• Vendors are certified suppliers
• Fewer, ultra-reliable suppliers.
• Defect-free supplier deliveries.
• Frequent deliveries of small quantities of
  inventory.

9
Benefits of JIT

• Lower inventory costs - lower investment in
  inventory, lower carrying/handling costs, lower
  investment in storage capacity, lower risk of
  obsolescence/spoilage.
• Lower labor costs.
• Lower scrap/rework costs.
• Reductions in paperwork.
• Lower overall material costs from improved
  quality of materials and potential price
  reductions by vendors negotiating long-term
  supply contracts.

10
Activity-Based Costing/Management

• Activity-Based Costing (ABC) - A costing method
  that is designed to provide managers with cost
  information for strategic and other decisions
  that potentially affect capacity.
• Activity-Based Management (ABM) - An approach to
  management that focuses on activities.
• ABC represents the state of the art in
  estimating the costs of products or services.
• ABC is increasingly being adopted by firms for
  decision making and cost management purposes.

11
Total Quality Management (TQM)

• TQM provides tools and techniques for continuous
  improvement.
• Two major characteristics of TQM
• A focus on serving customers.
• Systematic problem solving using teams made up of
  front line workers.
• Plan-Do-Check-Act cycle. Analogous to scientific
  method.
• Hypothesis.
• Experiment.
• Analyze data.
• Hypothesis refuted or supported.
• Widely used by thousands of organizations.

12
Process Reengineering

• A business process is diagrammed in detail.
• Every step in the business process must be
  justified.
• The process is redesigned to include only those
  steps that make the product more valuable.
• Automation CIM.
• Anticipated results
• Process is simplified.
• Process is completed in less time.
• Costs are reduced.
• Opportunities for errors are reduced.

13
Theory of Constraints

• Theory of Constraints - a sequential process of
  identifying and removing constraints in a system.
• Constraint - restrictions or barriers that impede
  progress toward an objective.
• Adopting firms tend to experience significant
  increases in throughput and profitability.

14
A System Approach

• A data-based, relationship accounting approach
• All information pertinent to a transaction is
  entered into the accounting database system
• Various users of information can extract what
  they need from the database and create custom
  accounting reports
• Need to understand different functions of the
  business inclusive manufacturing cost approach
• Functions are interrelated A decision affecting
  one affects the others

15
Questions

• Which one of the following is least likely to be
  an objective of a cost accounting system? (CMA,
  adapted)
• Product costing and inventory valuation
• Departmental efficiency
• Sales commission determination
• Income determination

16
Questions

• Companies that adopt just-in-time purchasing
  systems often experience (CMA, adapted)
• A reduction in the number of suppliers.
• Fewer deliveries from suppliers.
• A greater need for inspection of goods as the
  goods arrive.
• Less need for linkage with a vendors
  computerized order entry system.

17
Questions

• The primary reason for adopting total quality
  management is to achieve (CIA, adapted)
• Greater customer satisfaction.
• Reduced delivery time.
• Reduced delivery charges.
• Greater employee participation.