Learning Outcomes
- Define managerial accounting
A manager’s responsibilities in a business include making decisions related to planning (identifying goals and strategies for accomplishing them), directing (guiding daily operations and carrying out plans), and controlling (comparing expected and actual results and taking action for improvement). Since human, financial, and time resources are limited, managers must select from among many alternatives, foregoing other options. Managers try to optimize the collective outcome of their choices. Managerial accounting provides the timely and relevant information needed for effective decision making.
Let’s look at a typical organizational chart for a manufacturing company:
Large companies are usually incorporated. The Chief Executive Officer runs the company on behalf of the board of directors, who are appointed by the shareholders (owners). The CEO may also be the president, and the company may have several vice-presidents in charge of various aspects of the company like manufacturing, sales, and human resources. That level of the organization provides leadership and delegates day-to-day operation of the company to managers.
Here is a closer look at a typical manufacturing company organizational chart from the plant manager on down. Each column in the chart is a department with divisions, and each of those divisions could consist of dozens, hundreds, or even thousands of employees.
The manager is responsible for three basic functions:
- Planning — strategic v. operational
- Directing
- Controlling
A successful business relies on good decisions. Those decisions occur across a spectrum of planning, directing, and controlling activities, and quality decision making relies on accurate, timely, and reliable information.
Planning
Planning includes both strategic (long-term, high-level) and operational (short-term, day-to-day) planning.
Strategic planning leads the company and usually includes mission, vision, and values statements, along with some guidance that links the day-to-day activities with the larger picture.
HARLEY-DAVIDSON
Harley-Davidson describes who they are and what they do on the About Us page of their website like this:
Our Company
In 1903, out of a small shed in Milwaukee, Wisconsin, four young men lit a cultural wildfire that would grow and spread across geographies and generations. Their innovation and imagination for what was possible on two wheels sparked a transportation revolution and lifestyle that would make Harley-Davidson the most desirable motorcycle brand in the world. Today, we continue to define motorcycle culture and lifestyle, evoking soul-stirring emotion reflected in every product and experience we deliver – like we have for well over a century and will for generations to come.
Our Mission
More than building machines, we stand for the timeless pursuit of adventure. Freedom for the soul.
Our Vision
Building our legend and leading our industry through innovation, evolution and emotion.
Our Strategic Plan
The Hardwire is Harley-Davidson’s 2021-2025 strategic plan guided by our mission and vision. Our plan is targeting long-term profitable growth through focused efforts that extend and strengthen our brand and drive value for all stakeholders. The Hardwire is designed to enhance the desirability of Harley-Davidson and fuel our unique lifestyle brand. Our efforts will unlock the potential of the most important products, segments and geographies. This includes growth in our complementary businesses and selective expansion into segments where we have a path to leadership. [1]
Mission, then, is a statement about the soul of the company. Vision is a guiding statement. If vision was the destination, mission would be the mode of transportation—how the company gets to the vision.
Notice that all of this strategic planning is very high-level. This is the kind of guidance that the CEO, president, and vice-presidents hand down to managers, who are then accountable for achieving the high-level goals. They do that by creating operational plans.
Directing
Managerial accountants create and report on budgets, pricing, and competition. They monitor production and inventory levels. They design and implement tracking and reporting systems.
In addition, they provide information on costs, volume, and profits, and attempt to capture the cost of quality, or perhaps better said, the cost of a lack of quality. Finished goods that do not function as promised cause substantial warranty costs, including rework, shipping, and scrap. There is also an extreme long-run cost associated with a lack of customer satisfaction.
Managerial accountants also find ways to allocate and assign costs to departments and divisions, so managers can make rational decisions and be held accountable for their cost reductions and cost overruns—and not be held responsible for something over which they have no control.
Controlling
Most large organizations have a person designated as the controller (sometimes termed “comptroller”). The corporate control function is sufficiently complex that a controller may have hundreds of support personnel to assist with all phases of the management accounting process. As this person’s title suggests, the controller is primarily responsible for the control task: providing leadership for the entire cost and managerial accounting functions. In contrast, the chief financial officer (CFO) is usually responsible for external reporting, the treasury function, and general cash flow and financing management. In some organizations, one person may serve a dual role as both CFO and controller.
To assist in monitoring productive efficiency and cost control, managerial accountants develop standard costs systems, flexible budgets, and balanced scorecards. These standards represent benchmarks against which actual productive activity is compared. Standards can be developed for labor costs and efficiency, materials cost and utilization, and more general assessments of the overall deployment of facilities and equipment (the overhead).
Managerial accountants also implement larger strategic initiatives, such as total quality management (TQM) and enterprise resource planning (ERP).
You’ll be exposed to all of these techniques and concepts throughout this course.
Now, check your initial understanding of managerial accounting:
