Managerial Accounting:Conceptual Framework

Chapter 1

Managerial AccountingConcepts and Empirical Evidence

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Managerial Accounting

DECISION MAKING (planning and control)INFORMATION

MANAGERIAL ACCOUNTING:Design and use of information systems for

managerial planning and control

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Setting Organizational Objectives

Planning and Control Framework

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Planning and Control FrameworkSetting Organizational

Objectives

Identifying Opportunitiesand/or Problems

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Planning and Control FrameworkSetting Organizational

Objectives

Identifying Opportunitiesand/or Problems

Selecting Course ofAction and Allocating

Resources

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Setting Organizational Objectives

Evaluating Accomplishmentsof Organizational

Objectives

Identifying Opportunitiesand/or Problems

Selecting Course ofAction and Allocating

Resources

Planning and Control Framework

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Three-Way Classification Scheme of Information

Nonfinancial

Ex post

Internal

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Three-Way Classification Scheme of Information

ExternalNonfinancial

Ex postInternal

Financial

Ex ante

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Data for Example

• MaLa Toy Corporation - Introduction of New Toy

• Estimate of revenues = $2,000,000• Estimates of costs of new toy = $1,000,000 or

$2,500,000, with equal probabilities• Cost of developing specialized information system

to help predict toy costs = $40,000• Cost prediction is 80% accurate with specialized

information system

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Mala Toy CorporationInformation Economics

Prediction withoutSpecialized Information

System

Revenues = $ 2,000,000Costs = $ 1,000,000

Probability (p) = 0.5

Low Costs

High Costs

Revenues = $ 2,000,000 Costs = $ 2,500,000 p = 0.5

EV = ($ 2,000,000 - $ 1,000,000)*.5 + ($ 2,000,000 - $ 2,500,000)*.5 = $ 250,000

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Mala Toy CorporationInformation Economics

Prediction withSpecialized Information

System

Low-Cost Signal, p = 0.8

High-Cost Signal, p = 0.2

High-Cost Signal, p = 0.8

Low-Cost Signal, p = 0.2

Prediction withoutSpecialized Information

System

Revenues = $ 2,000,000Costs = $ 1,000,000

Probability (p) = 0.5

Low Costs

High Costs

Revenues = $ 2,000,000 Costs = $ 2,500,000 p = 0.5

EV = ($ 2,000,000 - $ 1,000,000)*.5 + ($ 2,000,000 - $ 2,500,000)*.5 = $ 250,000

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Mala Toy CorporationInformation Economics

Prediction withSpecialized Information

System

Low-Cost Signal, p = 0.8

High-Cost Signal, p = 0.2

High-Cost Signal, p = 0.8

Low-Cost Signal, p = 0.2

Expected payoff

Do not Produce

Do not Produce

= (.5)*(.8)*($ 2,000,000 - $ 1,000,000) = $ 400,000

= (.5)*(.2)*($ 2,000,000 - $ 2,500,000) = $ -50,000

Expected Value (EV) = $ 350,000Less: Cost of Specialized Information System - 40,000

Net EV $ 310,000 Since $ 310,000 > $ 250,000 (by $60,000),

install Specialized Information System

Prediction withoutSpecialized Information

System

Revenues = $ 2,000,000Costs = $ 1,000,000

Probability (p) = 0.5

Low Costs

High Costs

Revenues = $ 2,000,000 Costs = $ 2,500,000 p = 0.5

EV = ($ 2,000,000 - $ 1,000,000)*.5 + ($ 2,000,000 - $ 2,500,000)*.5 = $ 250,000

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Decision Support Systems Overview

• Computer-based information systems designed to support managerial planning and control

User

User

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Decision Support Systems Overview

• Computer-based information systems designed to support managerial planning and control

Data Base

Data base Management System

User

User

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Decision Support Systems Overview

• Computer-based information systems designed to support managerial planning and control

Model Base

Model base Management System

Data Base

Data base Management System

User

User