Chapter 1: Managerial accounting, the business organization,
and professional ethics
Important!!
• Part of economics
• Main concept of business economics: Unlimited needs vs limited resources
o It involves making choices
• Main objective: maximum output with minimum use of resources
• This principle applied within business organisations
1. Main principle of business economics
!!!!!!!
Limited resources Maximum profit
• Resources are anything you use within your company, such as raw materials, personnel,
fixed assets (machines, buildings), time etc.
• Which decisions do we need to make?
• If we USE resources, we get COSTS
• The cost = the translation of the usage of a resource (not the purchase!)
2. Accounting Information System
= process of gathering, organizing, and communicating financial information
• Every company has this, small or big
• Can be very extensive, but can also be a small software containing the key elements
1
,2.1 Users of accounting information
+ page 22, understand the differences between management accounting and financial
accounting
Management Accounting
• Process of identifying, measuring, accumulating, analyzing, preparing, interpreting, and
communicating information used by: managers
• For example: are we going to launch a new product? Are we going to open a new store?
Should we accept a special order? (e.g. I sell my cars for 20.000 euro/unit, but a
customer wants it for 15.000 → accept or not?)
• Very detailed, can be about everything (e.g. we printed 20.000 pages, next year we want
to go for 10.000 pages)
Financial accounting
• Develops information for external decision makers: stockholders, suppliers, banks,
government authorities
• Not used for decision-making, only to compare and analyze
2
,• For example: you can compare the financial data from Apple to the financial data of Coca
Cola
• Pretty high-level, strict (annual report is defined in law, follow the accounting rules)
A lot of mistakes happen: you hear things in the press like ‘they really have to stop delivering
this type of service because they are making loss making’, you can’t say this because they
based themselves on financial accounting. They took a look at the annual report and they
made the decision. → not correct
2.2 Roles of Accounting Information
• Scorekeeping: evaluate organizational performance
o Less detailed level, just making an overview
• Attention directing: compare actual results to expected
o Bit more detailed, overview + comparing
o E.g. making overview of results from 2020 and compare to overview of results
from 2019
• Problem solving: assess possible courses of action
o The best level of information
o Alternatives
o E.g. What is the best option, should we buy a BMW, Mercedes or Toyota.
Make sure you provide an overview of all the costs of each type of car →
problem solving because the manager has a possible course of action
In the past: mostly scorekeeping → this shifted more and more to attention directing and
problem solving→ nowadays the management accountant is really involved in decision-
making
2.3 Why accounting is essential for decision makers and managers
Accounting information is used in decision making for planning and control.
• Planning describes how the organization will achieve its objectives
• Control is the process of implementing plans and evaluating if objectives are achieved
→ A manager is someone who is planning and controlling.
• Planning: provides the answer to two questions
o What objectives does the organization want to achieve?
o When and how will the organization achieve these objectives.?
• Control: refers to implementing plans and using feedback to evaluate the attainment of
objectives
→ feedback is crucial to the cycle of planning and control
Planning determines action, action generates feedback, and the control phase uses this
feedback to influence further planning and actions. Timely, systematic reports provided by
the accounting system are a primary source of useful feedback
3
, Plan: set an objective to reach it
Control: test, evaluate
→ adjust the plan or the action
You need management information for this
3. Budget and performance reports
Budget: quantitative expression of a plan of action and an aid to coordinating and
implementing plans
E.g. in 2021 I expect to sell 10.000 cars and I will sell them at the price of 20.000 euro/car =
plan of action, expectation of the year
Performance reports:
Used by organizations to judge managers’ decisions and the productivity of organizational
units
• Compare actual results with budgeted amounts
• Provide feedback by comparing results with plans
• Highlight variances
E.g. we only sold 8.000 → variance
Variances: deviation from plans
Performance report: report that compares the budget to the actual → attention directing
4
and professional ethics
Important!!
• Part of economics
• Main concept of business economics: Unlimited needs vs limited resources
o It involves making choices
• Main objective: maximum output with minimum use of resources
• This principle applied within business organisations
1. Main principle of business economics
!!!!!!!
Limited resources Maximum profit
• Resources are anything you use within your company, such as raw materials, personnel,
fixed assets (machines, buildings), time etc.
• Which decisions do we need to make?
• If we USE resources, we get COSTS
• The cost = the translation of the usage of a resource (not the purchase!)
2. Accounting Information System
= process of gathering, organizing, and communicating financial information
• Every company has this, small or big
• Can be very extensive, but can also be a small software containing the key elements
1
,2.1 Users of accounting information
+ page 22, understand the differences between management accounting and financial
accounting
Management Accounting
• Process of identifying, measuring, accumulating, analyzing, preparing, interpreting, and
communicating information used by: managers
• For example: are we going to launch a new product? Are we going to open a new store?
Should we accept a special order? (e.g. I sell my cars for 20.000 euro/unit, but a
customer wants it for 15.000 → accept or not?)
• Very detailed, can be about everything (e.g. we printed 20.000 pages, next year we want
to go for 10.000 pages)
Financial accounting
• Develops information for external decision makers: stockholders, suppliers, banks,
government authorities
• Not used for decision-making, only to compare and analyze
2
,• For example: you can compare the financial data from Apple to the financial data of Coca
Cola
• Pretty high-level, strict (annual report is defined in law, follow the accounting rules)
A lot of mistakes happen: you hear things in the press like ‘they really have to stop delivering
this type of service because they are making loss making’, you can’t say this because they
based themselves on financial accounting. They took a look at the annual report and they
made the decision. → not correct
2.2 Roles of Accounting Information
• Scorekeeping: evaluate organizational performance
o Less detailed level, just making an overview
• Attention directing: compare actual results to expected
o Bit more detailed, overview + comparing
o E.g. making overview of results from 2020 and compare to overview of results
from 2019
• Problem solving: assess possible courses of action
o The best level of information
o Alternatives
o E.g. What is the best option, should we buy a BMW, Mercedes or Toyota.
Make sure you provide an overview of all the costs of each type of car →
problem solving because the manager has a possible course of action
In the past: mostly scorekeeping → this shifted more and more to attention directing and
problem solving→ nowadays the management accountant is really involved in decision-
making
2.3 Why accounting is essential for decision makers and managers
Accounting information is used in decision making for planning and control.
• Planning describes how the organization will achieve its objectives
• Control is the process of implementing plans and evaluating if objectives are achieved
→ A manager is someone who is planning and controlling.
• Planning: provides the answer to two questions
o What objectives does the organization want to achieve?
o When and how will the organization achieve these objectives.?
• Control: refers to implementing plans and using feedback to evaluate the attainment of
objectives
→ feedback is crucial to the cycle of planning and control
Planning determines action, action generates feedback, and the control phase uses this
feedback to influence further planning and actions. Timely, systematic reports provided by
the accounting system are a primary source of useful feedback
3
, Plan: set an objective to reach it
Control: test, evaluate
→ adjust the plan or the action
You need management information for this
3. Budget and performance reports
Budget: quantitative expression of a plan of action and an aid to coordinating and
implementing plans
E.g. in 2021 I expect to sell 10.000 cars and I will sell them at the price of 20.000 euro/car =
plan of action, expectation of the year
Performance reports:
Used by organizations to judge managers’ decisions and the productivity of organizational
units
• Compare actual results with budgeted amounts
• Provide feedback by comparing results with plans
• Highlight variances
E.g. we only sold 8.000 → variance
Variances: deviation from plans
Performance report: report that compares the budget to the actual → attention directing
4
