The activities that make an enterprise successful today may no longer be sufficient next year.
A crucial role of managerial accounting is to continually assess how an organization stacks up against the competition, with an eye toward continuously improving. Among the ques- tions asked in assessing an organization’s competitive position are the following:
ģ How well is the organization doing in its internal operations and business processes?
ģ How well is the organization doing in the eyes of its customers? Are their needs being served as well as possible?
ģ How well is the organization doing from the standpoint of innovation, learning, and continuously improving operations? Is the organization a trendsetter that embraces new products, new services, and new technology? Or is it falling behind?
ģ How well is the organization doing financially? Is the enterprise viable as a con- tinuing entity?
ģ Disney’s management team must be concerned with the quality of the company’s business processes as well as its entertainment services.
ģ Management must continually monitor the needs of its customers and assess their level of satisfaction with the services provided.
ģ The company’s overall financial strength also must be prominent in manage- ment’s thinking.
ģ Management must ask if the company possesses the skills it needs to continually adapt as the entertainment industry changes.
The balanced scorecard is an important managerial accounting concept. We will pro- vide an extensive discussion of the balanced scorecard in Chapter 12.
Managerial Accounting in Different Types of Organizations
Organizations need information the way humans need food: without this basic fuel, they cannot sustain the activities that make them vital. This is true whether they are profit-seeking or nonprofit enterprises and regardless of the activities they pursue. As a result, managerial accounting information is vital in all types of organizations. Ford (manufacturing), J.Crew (retail), GoDaddy.com (Internet), American Airlines (transpor- tation), Marriott Hotels (tourism), Goldman Sachs (financial services), The University of Texas (education), The American Red Cross (nonprofit), M. D. Anderson Cancer Center (health care), and the U.S. Department of Defense (government) all have manage- rial accountants who provide information to management. Moreover, the five basic pur- poses of managerial accounting activity are relevant in each of these organizations, and all managers in those companies and industries are using managerial accounting tools.
Managerial versus Financial Accounting
Take another look at the major objectives of managerial accounting activity. Notice that the focus in each of these objectives is on managers. Thus, the focus of managerial accounting is on the needs of managers within the organization, rather than interested parties outside the organization.
Financial accounting, by contrast, is the use of accounting information for report- ing to parties outside the organization. The annual report distributed by McDonald’s Corporation or Facebook to its stockholders is an example of the output from a financial accounting system. Users of financial accounting information include current and pro- spective stockholders, lenders, investment analysts, unions, consumer groups, and gov- ernment agencies.
There are many similarities between managerial accounting information and financial accounting information because they both draw upon data from an organiza- tion’s core accounting system. This is the system of procedures, personnel, and com- puters used to accumulate and store financial data in the organization. One part of the overall accounting system is the cost accounting system, which accumulates data about the costs of producing the company’s outputs (goods and services). These data are used in both managerial and financial accounting. For example, production cost data typically are used in helping managers evaluate the pricing of different products or services, which is a managerial accounting use. However, production cost data also are used to value inventory on a manufacturer’s balance sheet, which is a financial accounting use.
Exhibit 1–2 depicts the relationships among an organization’s core accounting sys- tem, its cost accounting system, and uses of the data for managerial accounting and financial accounting purposes. Although similarities do exist between managerial and financial accounting, the differences are even greater. Exhibit 1–3 lists the most important differences.
Managerial Accounting in Different Types of Organizations
Managerial versus Financial Accounting
“[A CFO should] be a strategic partner to the chief executive officer and the business. . . . For CFOs of high-growth tech companies, the key is managing growth and balancing growth and profitability.” (1f)
Trulia Inc.
Learning Objective 1-4 Explain the major differences between managerial and financial accounting.
Exhibit 1–3 Differences between Managerial and Financial Accounting
Managerial Accounting Financial Accounting Users of Information Managers, within the organization.
Regulation Not required and unregulated, since it is intended only for management.
Source of Data Almost exclusively drawn from the organi-
zation’s core accounting system, which accu- mulates financial information.
Nature of Reports and Procedures
Required and must conform to generally accepted accounting principles. Regulators include the International Accounting Standards Board, the Financial Accounting Standards Board (U.S.), and the U.S. Securities and Exchange Commission.
The organization’s core accounting system, plus various other sources, provide financial data as well as nonfinancial data such as product defect rates, quantities of material and labor used in production, occupancy rates in hotels, and average take-off delays in airlines.
Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines.
Based on a combination of historical data, estimates, and projections of future events.
Interested parties, outside the organization.
Published reports focus on the enterprise in its entirety. Generally consolidated from the reports of geographic or business segment divisions, and based almost exclusively on historical transaction data.
Exhibit 1–2 Managerial Accounting, Financial Accounting, and Cost Accounting
Managerial Accounting Information for decision making, planning, directing, and controlling an organization’s operations, and assessing its competitive position
Financial Accounting
Published financial statements and other financial reports
External Users of Information Stockholders, financial analysts, lenders, unions, consumer groups, and governmental agencies Internal Users of Information
Managers at all levels in the organization
Accounting System
(one part of the organization’s management information system) Accumulates data for use in both financial and managerial accounting
Cost Accounting System
(one part of the organization’s overall accounting system) Accumulates cost information
©Fredo de Luna/Purestock/Superstock ©Alfredo Garcia Saz/Shutterstock
Where Do We Find Managerial Accountants in an Organization?
As we discussed earlier, every manager must have an understanding of basic mana- gerial accounting concepts and tools. However, complex decisions, such as the one to open Disney’s Star Wars: Galaxy’s Edge and Star Wars Hotel, always receive the sup- port of expert managerial accountants from an organization’s accounting and finance organization.
Although most business schools have separate departments dedicated to teaching the skills of accounting and finance, in companies accounting and finance personnel are usu- ally part of the same organizational unit. Take a look at Exhibit 1–4, which portrays the organization of the accounting and finance organization, which includes managerial accountants, in The Walt Disney Company.10
Notice that the company is led by its board of directors, which represents the interests of the company’s stockholders. The company’s leading executive is its chief executive officer (CEO). The CEO is generally a member of the Board of Directors and sometimes, as is currently the case at Disney, also serves as the chairman of the Board of Directors.
Other times, a board member who is not part of company management will hold the posi- tion of chairman.
Line and Staff Positions Reporting to the CEO in large companies are two types of executive positions: line positions and staff positions. Managers in line positions are directly involved in the provision of goods or services. For example, Disney’s line posi- tions include the chairman of Disney Parks, Experiences, and Consumer Products (oper- ating the theme parks and producing and selling products based on the Disney brand and characters), the president of the ESPN sports cable channel, and the chairman of Disney Studios (producing and distributing Disney’s films and other media content). Further down the organizational chart, also in line positions, would be the thousands of manag- ers in the various operating units of the divisions. For example, the general manager of Disney’s Star Wars Hotel in the Walt Disney World Resort, the executive producer of SportsCenter on ESPN, and the manager of the Times Square Disney Store in New York, would all be in line positions.
Managers in staff positions supervise activities that support Disney’s overall mis- sion, but they are only indirectly involved in operational activities. Disney’s staff positions include the general counsel, the chief communications officer, and the chief financial officer (CFO), among others.
CFO or Controller In most organizations, the designation given to the executive responsible for all accounting and finance functions is the chief financial officer (CFO).
Sometimes called the controller in smaller companies or the comptroller in nonprofit or governmental organizations, the CFO is the organization’s top managerial and finan- cial accountant. The CFO has responsibility for supervising the accounting and finance specialists throughout the company and for preparing the information and reports used in both managerial and financial accounting. As the organization’s chief managerial accountant, the CFO and her team provide analyses that support the decisions of line managers. The CFO participates as an integral member of the management team, and most CFOs and controllers are involved in planning and decision making at all levels and across all functional areas of the enterprise. This broad role has enabled many manage- rial accountants to rise to the top of their organizations. Former CFOs have gone on to become CEOs in such companies as General Electric, Korn Ferry, PepsiCo, Bayer, and many others.
Where Do We Find Managerial Accountants in an Organization?
10The information for the Disney organization chart is adapted from data at www.thewaltdisneycompany.com/about, accessed September 12, 2018.
Learning Objective 1-5 Describe the accounting and finance structure in an organization.
“Analytical people who are strong communicators can explain why a particular decision is good for the business and how it will affect people, helping colleagues embrace change instead of fearing it.” (1g)
EY (Big 4 accounting firm)
Learning Objective 1-6 Describe the roles of an organization’s chief financial officer (CFO) or controller, treasurer, and internal auditor.
Exhibit 1–4 Managerial Accountants in The Walt Disney Company Senior Executive VP Chief Financial Officer Senior accounting and finance staff from Operating Units report both within the Operating Unit and to the CFO or the Executive VP for Controllership, Financial Planning, and Tax
Senior VP Global Security
Executive VP Controllership, Financial Planning, and Tax
Senior Executive VP Chief Communications Officer
Senior Executive VP General Counsel
Senior Executive VP Chief Human Resources Officer ESPN, Inc. President
TOP MANAGEMENT STAFF POSITIONS LINE POSITIONS
W
altD
isney Company Operating UnitsDisney/ABC Television Group President Operating Units
Board of Directors Chairman of the Board and Chief Executive Officer Disney Media Networks Chairman Operating UnitsOperating Units
The Walt Disney Studios Chairman Parks, Experiences, and Consumer Products Chairman
Direct-to-Consumer and International Chairman Operating Units
In addition to the CFO or controller for the entire corporation, most companies, including The Walt Disney Company, have divisional CFOs/controllers in their major operating subunits. Thus, Disney’s detailed organization chart would show a CFO or con- troller for Disney/ABC Television Group, Disneyland Paris, The Walt Disney Studios, and so forth.
In recent years, an increasing awareness of the importance of planning, budgeting, and analysis of performance has caused some larger organizations to adopt a variation on the model just described. In this alternate structure, a subset of the managerial accounting functions relating to financial planning and analysis are overseen by a chief performance analyst. Sometimes the chief performance analyst reports to the CFO. But often, as in the case of Disney’s Executive VP for Controllership, Financial Planning, and Tax, the unit is separate from the CFO (see the Disney organization chart).
Treasurer The treasurer typically is responsible for raising capital and safeguarding the organization’s assets. In addition, the treasurer is responsible for management of the organization’s cash and investments, its credit policy, and its insurance coverage. At Dis- ney, the treasurer is part of the CFO’s organization.
Internal Auditor Most large corporations and governmental agencies have an internal auditor. An organization’s internal auditor, who in larger organizations is the director of an internal audit department, is responsible for reviewing the accounting procedures, records, and reports in both the managerial and financial accounting areas of responsi- bility. The auditor then expresses an opinion to top management and the organization’s board of directors regarding the effectiveness of the organization’s accounting system and its system of internal controls. In some organizations, the internal auditor’s role is much more extensive than this and can include detailed assessments of specific company oper- ations. At Disney, internal audit is part of the controllership function. Note that, in this structure, the internal audit function is independent of the CFO and can hold it account- able for proper financial operations.