Chapter 1
Lecture Notes
Chapter theme: This chapter explains why managerial accounting is important to the future
careers of all business students. It answers two questions: (1) what is managerial
accounting? and (2) why does managerial accounting matter to your career? It also
discusses six topics that define the business context for applying the quantitative aspects of
managerial accounting.
I. What is managerial accounting?
A. Financial and managerial accounting: seven key differences
i. Users
1. Financial accounting reports are prepared for external parties. Managerial accounting
reports are prepared for internal users.
ii. Emphasis on the future
1. Financial accounting summarizes past activities. Managerial accounting has a strong
future orientation.
iii. Relevance of data
1. Financial accounting data should be objective and verifiable. Managerial accountants
focus on providing relevant data even if these data are not completely objective or
verifiable.
iv. Less emphasis on precision
2. Financial accounting focuses on precision when reporting to external parties.
Managerial accounting aids decision makers by providing good estimates as soon as
possible rather than waiting for precise data later.
v. Segments of an organization
3. Financial accounting is concerned with companywide reports. Managerial accounting
focuses on segment reports. Examples of segments include:
a. Product lines, sales territories, divisions, departments, etc.
vi. Managerial accounting – no externally imposed rules
4. Financial accounting conforms to GAAP and IFRS. Managerial accounting is not
bound by GAAP and IFRS.
vii. Managerial accounting – not mandatory
5. Financial accounting is mandatory because various outside parties require periodic
financial statements. Managerial accounting is not mandatory.
B. Managerial accounting helps managers carry out three main activities—planning,
controlling, and decision making.
i. Planning
1. Planning involves establishing goals and specifying how to achieve them.
2. Plans are often accompanied by a budget.
a. A budget is a detailed plan for the future that is usually expressed in formal
quantitative terms.
ii. Controlling
1. Controlling involves gathering feedback to ensure that the plan is being properly
executed or modified as circumstances change.
2. Part of the control process includes preparing performance reports.
a. A performance report compares budgeted to actual results to improve future
performance.
iii. Decision making
1. Decision making involves selecting a course of action from competing alternatives.
2. Many managerial decisions revolve around answering three questions:
a. What should we be selling?
b. Who should we be serving?
c. How should we execute?
II. Why does managerial accounting matter to your career?
A. Business majors
i. Marketing majors
1. Planning
a. How much should we budget for TV, print, and internet advertising?
b. How many salespeople should we plan to hire to serve a new territory?
2. Controlling
a. Is the budgeted price cut increasing unit sales as expected?
