Zimmerman

Chapter 1: Introduction

Managerial accounting: decision making and control

The internal accounting system, an important component of a firm's information system, includes

budgets, data on the costs of each product and current inventory and periodic financial reports.

Internal accounting systems serve two purposes:

v Provide some of the knowledge necessary for planning and decision making;

v Help motivate and monitor people in organizations (control). The most basic control use of

accounting is to prevent fraud and embezzlement.

Design and use of cost systems

An internal accounting system should have the following characteristics:

v Provide the information necessary to identify the most profitable products and the pricing and

marketing strategies to achieve the desired volume levels;

v Provide information to detect production inefficiencies to ensure that the proposed products and

volumes are produced at minimum costs;

v When combined with the performance evaluation and reward systems, create incentives for

managers to maximize firm value;

v Support the financial accounting and tax accounting reporting functions;

v Contribute more to firm value than it costs.

Economic Darwinism (strong organizations will survive)

Two caveats must be raised concerning too strict an application of economic Darwinism:

v Some surviving operating procedures can be neutral mutations. Just because a system survives

does not mean that its benefits exceed its costs. Benefits less costs might be close to zero.

v Just because a given system survives does not mean it is optimal. A better system might exist but

has not yet been discovered.

Management accountant's role in the organization

We cannot stress the importance of the internal control system too much. The most basic conflicts of

interest between employees and owners is theft. To reduce the likelihood of embezzlement, firms

install internal control systems, which are an integral part of the firm's control system. Fraud and theft

are prevented not just by having security guards and door locks but also by having procedures that

require checks above a certain amount to be authorized by two people. Internal control systems

include internal procedures, codes of conduct and policies that prohibit corruption, bribery and

kickbacks. Finally internal control systems should prevent intentional (or accidental) financial

misrepresentation by managers.

Chapter 2: The nature of costs

Accounting systems measure cost, which managers use for external reports, decision making and

controlling the behavior of people in the organization.

Opportunity costs

Opportunity costs, a powerful tool for understanding the myriad cost terms and for structuring

managerial decisions. In addition, opportunity costs provides a benchmark against which accounting

based cost numbers can be compared and evaluated.

Opportunity costs = "The costs of doing anything consists of the receipts that could have been

obtained if that particular decision had not been taken." = The benefit forgone as a result of choosing

one course of action rather than another.

Cost is a sacrifice of resources. Using a resource for one purpose prevents its use elsewhere. The

return forgone of its use elsewhere is the opportunity cost of its current use. Opportunity cost of a

particular decision depends on the other alternatives available. The alternatives are compromised in

the opportunity set. It is important to remember that opportunity costs can be determined only within

the context of a specific decision and only after specifying all the alternative actions.

Characteristics of opportunity costs

Opportunity costs are not necessarily the same as payments. Remember, the opportunity costs of

obtaining some goods or service is what must be surrendered or forgone in order to get it. Opportunity

costs are forward looking. They are estimated foregone benefits from actions that could, but will not,

be undertaken. Opportunity costs is based on anticipations; it is necessarily a forward-looking concept.

Opportunity costs is the sacrifice of the best alternative for a given action.

Examples of decisions based on opportunity costs

v Opportunity costs are negative when the firm incurs costs for storing the product and if disposal is

costly.

v If materials will be used in another order, using them now requires us to replace them in the future.

Hence, the opportunity cost is the cost of replacement.

v Opportunity costs can also contain the interest forgone on the additional inventory of the firm as

part of the normal operations of manufacturing and selling a product.

v Sunk costs are expenditures incurred in the past that cannot be recovered. Remember