Explain how management accounting is a competitive tool.
Understand the essential differences between management accounting and financial accounting.
Recognize and understand the common terms and concepts used in management accounting.
Discuss the need for ethics in management accounting and describe the ethical principles that apply to this profession.
In 1802, Eleuthére Irénée du Pont de Nemours established DuPont to produce black blasting powder. Three of his greatgrandsons, Alfred, Coleman, and Pierre, bought the firm's assets in 1902 and decided to make the company even bigger by purchasing many of the company's suppliers of raw materials (such as charcoal, sodium nitrate, and crude glycerin). In addition, instead of wholesaling the products through traditional retailers, the DuPonts created their own network of branch sales offices scattered across the United States.
Alfred, Coleman, and Pierre knew how to run a manufacturing business, but now they were in the mining, shipping, and sales business as well. How were they going to be able to effectively plan schedules, control operations, and evaluate the profitability of each of their diverse business segments? Essentially, Alfred, Coleman, and Pierre had an accounting problem.
Enter the management accountant, Donaldson Brown (DuPont's chief financial officer or CFO). Mr. Brown, along with other executives at DuPont, realized that every division required an investment in assets in order to be in business. The overall goal of every business should be to effectively use its assets to make a profit. For example, an explosives plant using assets worth $10 million and earning $500,000 in profit is not performing as well as a major sales division that creates a $500,000 profit but only requires $5 million in assets. The sales division is earning a 10% return ($500,000 ÷ $5,000,000) on the DuPont investment in inventory, equipment, and buildings. The explosives plant is earning only a 5% ($500,000 ÷ $10,000,000) return on investment, or ROI. The ROI tool allowed the DuPont cousins to be hugely successful in managing the country's first integrated company by combining cost management with asset management and raising it to an art form. Few management accounting techniques have had as great an impact on business management as the DuPont ROI formula.1
This topic introduces management accounting and distinguishes it from financial accounting. The key purpose of management accounting is fulfilling the competitive needs of the company. A company's management accounting system is used to support the management processes of planning, controlling, and evaluating.
Business professionals use management accounting data in order to make informed decisions that benefit the organization, its owners and employees, the community, and the public at large. As a result, it is critical that these decision makers understand the ethics of good business and are committed to perform ethically.