Fluent Essays

Read through your colleagues’ posts, and respond to two or more of your colleagues in one of the following ways: Prepare the following: Provide insights or contrasting observations regarding financial and managerial accounting that you gained from reading their posts.Offer other examples, based on your experience or research, of when such accounting data was effectively used or when decisions were made without it and explain the results.Describe trends you observe from the posts of your colleagues and why those are important. References: Zimmerman, J. L. (2017). Accounting for decision making and control (7th ed.). New York, NY: McGraw-Hill. U.S. Securities and Exchange Commission. (2007). Beginners’ guide to financial statements. Retrieved from https://www.sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguidehtm.html U.S. Securities and Exchange Commission. (2011). How to read a 10-K. Retrieved from https://www.sec.gov/fast-answers/answersreada10khtm.html michelle_lutostanski_discussion_1.docx roderick_gaines__discussion_1.docx accounting_for_decision_making_and_control.pdf Unformatted Attachment Preview Michelle Lutostanski Financial Accounting 1. Stocks/Investments: When reviewing financial statements investors are looking to see how their investments are doing. Depending on the available information, investors could either keep or liquidate their investments in said company. Example: An organization looking to analyze how much money they are keeping in the company’s stock, to determine if they should sell and buy a stronger performance stock. 2. Corporate Governance: Another decision they could make is to consider the performance factor when they are electing a company’s officers during their annual meeting. If leadership isn’t steering the company’s profits in the right direction, as stockholders or stakeholders they can decide to use their vote towards a management change. Example: Using financial accounting to see whom the organization can elect for a company officer due to a decrease in performance How decisions are improved: Investors use this information to make present, and future decisions. These financial statements much of the time are what they base their final resolution on. Their decisions improve when they analyze a company’s financial health, and efficiency through their reports (West, 2019). Risks: The risks of not gathering financial information when making such decisions include miscalculated profits, assets, liabilities, and most importantly financial performance. Managerial Accounting Profit & Loss: Managers use these reports to attempt to make the right decision that could likely change the way a business operates overall. When seeing it from a P&L perspective, they could use the provided financial data to fine-tune changes within the organization to try and maximize profits. These reports are intended to be used by internal company management and not to be distributed outside of the company (Lohse, 2019). Example: Reviewing a profit and loss statement for a Rent-A-Car company who was trying to lower their variable expenses because they were bleeding into their fixed costs. The company saw that they were loosing more and more money in their variable gas expense that it was impacting their bottom line. After much research and investigation, they found that the root cause of this was due to human error and a lack of oversight in the car check-in process and customers not being educated on the company’s gas policy. The company reviewed the car check out and check-in process and found it to be more profitable to include a half tank of gas, instead of full, with every rental. Which lead to the company having to charge a premium rate for gas in those cars that returned with less than half a tank. The company saw their gas expense go from $9 a car less than $2. How decisions are improved: If the information is used accurately managerial accounting can motivate and control behaviors in organizations (Zimmerman, 2017). Managerial accounting focuses on evaluating operations, and performance inside an enterprise. Decisions improve due to managerial accounting because it defines budgets, assists with planning, and analyzes costs to reach both short and long term goals. Risks: Not using managerial accounting when making such decisions can affect an organizations budget, sales, inventory, manufacturing process, and service. References Lohse, Jess (2019). Use Your P&L Statement to Make Better Decisions | SBC Magazine. Sbcmag.Info. https://www.sbcmag.info/news/2019/aug/use-your-pl-statement-make-betterdecisions West, J. (2019, June 19). How Does Financial Accounting Help Decision Making? | The Unmistakable CEO. Unmistakableceo.Com. http://unmistakableceo.com/how-does-financialaccounting-help-decision-making/ Zimmerman, J. L. (2017). Accounting for decision making and control (9th ed.). New York, NY: McGraw-Hill. Roderick Gaines Financial accounting and managerial accounting are two of the four largest branches of the accounting discipline. Despite many similarities in approach and usage, there are significant difference between the two. These differences center around compliance, accounting standards and target audiences. The main objective of managerial accounting is to produce useful information for a companys internal use. Business managers collect information that encourages strategic planning, helps them set realistic goals, and encourages an efficient directing of company resources. Financial accounting allows a business to keep track of all its financial transactions. It is the process in which the company records and reports all the financial data that go in and out of its business operations. The accounting recorded on a series of financial statements including the balance sheet, income statement and cash flow. An income statement is a report that shows how much revenue a company earned over a specific time period ( There are three main areas where financial accounting helps decision making. It provides investors with a baseline of analysis for and comparison between the financial health of securities-issuing corporations, it helps creditors assess the solvency, it helps make decisions about to allocate scarce resources. When information is used accurately involving financial accounting is can help lenders and stakeholders make better lending decisions. Financial statements outline all its assets as well as the short and long term, lenders get a better sense of a companys creditworthiness. Not having the information could mislead lenders and provide inaccurate data regarding financial transaction. A company with an example of inaccurate reporting is Waste Management. Waste Management allegedly falsely increased the depreciation time length for their property, plant and equipment on the balance. At my current company wwithout having the correct financial information, we couldnt close out out financial statement for external stakeholders. Managerial accounting often involves several aspects of the company;s financial results, including revenue, sales, operating expenses and cost controls. Managerial accounting can be used for planning, forecasting, budgeting, project management decisions and performance tracking. When managerial accounting is accurate you can have the full picture of the company overall. Not having the the correct informations could lead to poor or inaccurate decision making by managers. At my current company we have to forecast sales and track performance of parts. Due to inaccurate information our sale numbers were skewed and performance of parts data lead to inaccurate pricing. Reference U.S. Securities and Exchange Commission. (2007). Beginners guide to financial statements. Retrieved from https://ww.sec.gov/reportspubs/investorpublications/investorpubbegfinstmtguidehtm.html. Zimmerman, J. L. (2017). Accounting for decision making and control (9th ed.) New York, NY: McGraw-Hill. zim36725_fm_i-xvi.qxd 12/15/09 2:31 PM Page i Seventh Edition Accounting for Decision Making and Control Jerold L. Zimmerman University of Rochester To: Conner, Easton, and Jillian ACCOUNTING FOR DECISION MAKING AND CONTROL, SEVENTH EDITION Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Previous editions © 2009, 2006, and 2003. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 1 0 ISBN MHID 978-0-07-813672-6 0-07-813672-5 Vice President & Editor-in-Chief: Brent Gordon Vice President of EDP: Sesha Bolisetty Editorial Director: Stewart Mattson Sponsoring Editor: Dick Hercher Marketing Manager: Sankha Basu Editorial Coordinator: Rebecca Mann Project Manager: Erin Melloy Design Coordinator: Brenda A. Rolwes Cover Designer: Studio Montage, St. Louis, Missouri Production Supervisor: Sue Culbertson Media Project Manager: Balaji Sundararaman Compositor: MPS Limited, A Macmillan Company Typeface: 10/12 Times New Roman Printer: R. R. Donnelley-Willard All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Zimmerman, Jerold L., 1947Accounting for decision making and control / Jerold L. Zimmerman.—7th ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-0-07-813672-6 (acid-free paper) ISBN-10: 0-07-813672-5 (acid-free paper) 1. Managerial accounting. I. Title. HF5657.4.Z55 2010 658.1511—dc22 2009049120 www.mhhe.com zim36725_fm_i-xvi.qxd 12/15/09 2:31 PM Page iii About the Author Jerold L. Zimmerman Jerold Zimmerman is Ronald L. Bittner Professor at the William E. Simon Graduate School of Business, University of Rochester. He holds an undergraduate degree from the University of Colorado, Boulder, and a doctorate from the University of California, Berkeley. While at Rochester, Dr. Zimmerman has taught a variety of courses spanning accounting, finance, and economics. Accounting courses include nonprofit accounting, intermediate accounting, accounting theory, and managerial accounting. A deeper appreciation of the challenges of managing a complex organization was acquired by spending four years as Deputy Dean of the Simon School. Professor Zimmerman publishes widely in accounting on topics as diverse as cost allocations, Sarbanes-Oxley Act, disclosure, financial accounting theory, capital markets, and executive compensation. His paper “The Costs and Benefits of Cost Allocations” won the American Accounting Association’s Competitive Manuscript Contest. He is recognized for developing Positive Accounting Theory. This work, co-authored with colleague Ross Watts, at the Massachusetts Institute of Technology, received the American Institute of Certified Public Accountants’ Notable Contribution to the Accounting Literature Award for “Towards a Positive Theory of the Determination of Accounting Standards” and “The Demand for and Supply of Accounting Theories: The Market for Excuses.” Both papers appeared in the Accounting Review. Professors Watts and Zimmerman are also co-authors of the highly cited textbook Positive Accounting Theory (Prentice Hall, 1986). More recently, Professors Watts and Zimmerman received the 2004 American Accounting Association Seminal Contribution to the Literature award. Professor Zimmerman’s textbooks also include: Managerial Economics and Organizational Architecture with Clifford Smith and James Brickley, 5th ed. (McGraw-Hill/Irwin, 2009); and Management Accounting: Analysis and Interpretation with Cheryl McWatters and Dale Morse (Pearson Education Limited UK, 2008). He is a founding editor of the Journal of Accounting and Economics, published by North-Holland. This scientific journal is one of the most highly referenced accounting publications. He and his wife Dodie have two daughters, Daneille and Amy. Jerry has been known to occasionally engage friends and colleagues in an amicable diversion on the links. iii zim36725_fm_i-xvi.qxd 12/15/09 2:31 PM Page iv Preface During their professional careers, managers in all organizations, profit and nonprofit, interact with their accounting systems. Sometimes managers use the accounting system to acquire information for decision making. At other times, the accounting system measures performance and thereby influences their behavior. The accounting system is both a source of information for decision making and part of the organization’s control mechanisms— thus, the title of the book, Accounting for Decision Making and Control. The purpose of this book is to provide students and managers with an understanding and appreciation of the strengths and limitations of an organization’s accounting system, thereby allowing them to be more intelligent users of these systems. This book provides a framework for thinking about accounting systems and a basis for analyzing proposed changes to these systems. The text demonstrates that managerial accounting is an integral part of the firm’s organizational architecture, not just an isolated set of computational topics. Distinguishing Features Conceptual Framework This book differs from other managerial accounting texts in several ways. The most important difference is that it offers a conceptual framework for the study of managerial accounting. This book relies on opportunity cost and organizational architecture as the underlying framework to organize the analysis. Opportunity cost is the conceptual foundation underlying decision making. While accounting-based costs are not opportunity costs, in some circumstances accounting costs provide a starting point to estimate opportunity costs. Organizational architecture provides the conceptual foundation to understand how accounting is employed as part of the organization’s control mechanism. These two concepts, opportunity costs and organizational architecture, provide the framework and illustrate the trade-offs created when accounting systems serve both functions: decision making and control. Trade-Offs This text emphasizes that there is no “free lunch”; improving an accounting system’s decision-making ability often reduces its effectiveness as a control device. Likewise, using an accounting system as a control mechanism usually comes at the expense of using the system for decision making. Most texts discuss the importance of deriving different estimates of costs for different purposes. Existing books do a good job illustrating how accounting costs developed for one purpose, such as inventory valuation, cannot be used without adjustment for other purposes, such as a make-or-buy decision. However, these books often leave the impression that one accounting system can be used for multiple purposes as long as the users make the appropriate adjustments in the data. What existing texts do not emphasize is the trade-off between designing the accounting system for decision making and designing it for control. For example, activity-based costing presumably improves the accounting system’s ability for decision making (pricing and product design), but existing texts do not address what activity-based costing gives up in terms of control. Accounting for Decision Making and Control emphasizes the trade-offs managers confront in an organization’s accounting system. iv zim36725_fm_i-xvi.qxd 12/15/09 2:31 PM Page v Preface v Economic Darwinism A central theme throughout this book is economic Darwinism, which simply implies that accounting systems that survive in competitive industries must be yielding benefits that are at least as large as their costs. While newer accounting innovations such as the balanced scorecard are described, the text also indicates through a series of company histories that many elements of today’s modern costing systems can be traced back to much earlier times. It is useful to understand that today’s managers are struggling with the same accounting issues as their predecessors, because today’s students will also be struggling with the same problems. These problems continue to exist because they involve making trade-offs, usually between systems for decision making (e.g., product pricing and make-or-buy decisions) versus control (e.g., performance evaluation). Accounting systems differ across firms and change as firms’ circumstances change. Today’s students will be making these trade-offs in the future. The current rage in managerial accounting texts is to present the latest, most up-to-date accounting system innovations. While recent innovations are important to discuss, they should be placed in their proper perspective. Traditional absorption costing systems have survived the test of time for hundreds of years. Accounting system innovations are new, not necessarily better. We certainly do not know if they will survive. Logical Sequence Another meaningful distinction between this text and other books in the field is that the chapters in this text build on one another. The first four chapters develop the opportunity cost and organization theory foundation for the course. The remaining chapters apply the foundation to analyzing specific topics such as budgets and standard costs. Most of the controversy in product costing involves apportioning overhead. Before absorption, variable, and activity-based costing are described, an earlier chapter provides a general analysis of cost allocation. This analysis is applied in later chapters as the analytic framework for choosing among the various product costing schemes. Other books emphasize a modular, flexible approach that allows instructors to devise their own sequence to the material, with the result that these courses often appear as a series of unrelated, disjointed topics without any underlying cohesive framework. This book has 14 chapters, compared with the usual 18–25. Instead of dividing a topic such as cost allocation into three small chapters, most topics are covered in one or at most two unified chapters. End-of-Chapter Material The end-of-chapter problem material is an integral part of any text, and especially important in Accounting for Decision Making and Control. The problems and cases are drawn from actual company applications described by former students based on their work experience. Many problems require students to develop critical thinking skills and to write short essays after preparing their numerical analyses. Good problems get students excited about the material and generate lively class discussions. Some problems do not have a single correct answer. Rather, they contain multiple dimensions demanding a broad managerial perspective. Marketing, finance, and human resource aspects of the situation are frequently posed. Few problems focus exclusively on computations. Changes in the Seventh Edition Based on extensive feedback from instructors using the six editions and from my own teaching experience, the seventh edition focuses on improving the book’s readability and accessibility. In particular, the following changes have been made: • Each chapter has been updated and streamlined based on student and instructor feedback. More intuitive, easier-to-understand numerical examples have been added. zim36725_fm_i-xvi.qxd vi 12/15/09 2:31 PM Page vi Preface • Additional actual company practices have been integrated into the text. • Sixteen new problems and cases supplement the existing problems. Users were uniform in their praise of the problem material. They found it challenged their students to critically analyze multidimensional issues while still requiring numerical problemsolving skills. Further problems and cases to complement this selection have been added. Overview of Content Chapter 1 presents the book’s conceptual framework by using a simple decision context regarding accepting an incremental order from a current customer. The chapter describes why firms use a single accounting system and the concept of economic Darwinism, among other important topics. This chapter is an integral part of the text. Chapters 2, 4, and 5 present the underlying conceptual framework. The importance of opportunity costs in decision making, cost–volume–profit analysis, and the difference between accounting costs and opportunity costs are discussed in Chapter 2. Chapter 4 summarizes recent advances in the theory of organizations and Chapter 5 describes the crucial role of accounting as part of the firm’s organizational arc ... Purchase answer to see full attachment