1- 1 2001 prentice hall business publishing management accounting, 3rd ed., atkinson, banker,...

1- 1 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young

Management Accounting:Information that Creates Value

Chapter 1


Introduction

Vincent Daniels, manager of the new retail outlet of Ikon Printing, wonders what financial and operating information he needs to manage the store.

The store lines of business are:– Printing– Computing– Document preparation


Introduction

– Fax services– Sales of office supplies What information does Vincent need to

improve processes? Should he receive information about the

quality and defects associated with each line of business?

This chapter will help you to…


Learning Objectives

1 Appreciate the important role that management accounting information plays in both manufacturing, service, non-profit, and governmental organizations.

2 Discuss the significant differences between management accounting and financial accounting.


Learning Objectives

3 Understand how different people in the organization have different demands for management accounting information.

4 Appreciate how management accounting creates value for organizations and how it relates to operations, marketing, and strategy.


Learning Objectives

5 Explain why management accounting information must include both financial and nonfinancial information.

6 Understand why activities should be the primary focus for measuring and managing performance in organizations.

7 Appreciate the behavioral and ethical issues faced by management accountants.


Learning Objective 1

Appreciate the important role that management accounting

information plays in both manufacturing, service, non-

profit, and governmental organizations.


Management Accounting Information

What is management accounting information?

It is a value adding process of planning, designing, measuring, and operating nonfinancial and financial information systems that guides management action.



Operational andFinancial Data

Processing

Actions



What are some examples of management accounting information?

– reported expenses of an operating department

– calculated costs of producing a product– measurements of economic performance



Discuss the significant differences between

management accounting and financial accounting.


Financial Accounting

Financial accounting is constrained by mandated reporting requirements:

– Financial Accounting Standards Board– Securities and Exchange Commission– International Accounting Standards

Committee


Financial Accounting

Financial accounting provides information to external constituencies on past performance.

Historically Oriented

RulesDriven

Objective andAggregate

FinancialMeasures


Management Accounting

Management accounting systems provide information to managers and employees within the organization.

Companies have discretion to design systems that provide information in order to make decisions about the organization’s financial, physical, and human resources.


Management Accounting

Management accounting provides information to internal constituencies.

Current and Future Oriented

No Regulations

Subjective andDisaggregate

Financial,Operational, and

Physical Measures



Understand how different people in the organization have different demands for

management accounting information.


Diversity of Management Accounting Information

How does the demand for managerial accounting information vary among employees at different levels of the organization?

– Operational level– Middle and upper management– Senior executives



At the operational level many repetitive activities are performed.

Management accountants develop information about the standards for labor time, machine time, and materials usage for repetitive tasks.



How much detail should be presented?– Disaggregate details How frequent should information be

provided? Operational level information should be

provided very frequently (usually daily).



What are the information needs of middle and upper management?

Middle and upper management need information to plan, supervise, and make decisions about financial and physical resources, products, services, and customers.



What type of information is used at the managerial level?

– Resource utilization– Efficiency and quality of performance– Profitability



How much detail should be presented? More aggregate than at the operational

level. How frequent should information be

provided? Managerial level information should be

provided frequently (usually monthly).



What are the information needs of senior executives?

Senior executives need strategic information to assess overall performance, to monitor operating departments, and for benchmarking.



What type of information is used at the senior executives level?

– Profitability– Customer loyalty and satisfaction– Market opportunities and threats– Technological innovations



How much detail should be presented? More aggregate than at the managerial

level. How frequent should information be

provided? Executive level information should be

provided less frequently than at the managerial level (annually or semi-annually).



Appreciate how management accounting creates value for

organizations and how it relates to operations,

marketing, and strategy.


Functions of Management Accounting

What are the functions of management accounting information?

– Operational control– Product costing – Customer costing – Management control



What is operational control? It provides feedback to employees and their

managers about the efficiency of activities being performed.

What is product costing? It measures and assigns the costs of the

activities performed to design and produce individual products and/or services.



What is customer costing? It is assigning marketing, selling,

distribution, and administrative costs to individual customers so that the cost of serving each customer can be calculated.

What is management control? It is providing information about the

performance of managers.


Origins of Management Control

Many innovations in management accounting systems occurred in the early decades of the 20th century.

Senior executives at DuPont Corporation devised techniques to develop operating budgets and capital budgets.

Donaldson Brown, the CFO of DuPont, developed the return on investment performance measure.



The return on investment calculation gave DuPont executives a single number to evaluate the performance of their operating divisions.

Profitability Measure Return on Sale = Operating Income ÷ Sales Asset or Capital Utilization Measure Sales ÷ Investment



Return on Investment ROI = Operating Income ÷ Investment The senior managers at DuPont used the

ROI measure to help them decide which of their divisions should receive additional capital to expand capacity.



Around 1920, Brown left DuPont to become CFO for General Motors under its chief executive officer, Alfred Sloan.

General Motors introduced many management accounting initiatives to accomplish the company’s operating philosophy of “centralized control with decentralized responsibility”.



Corporate managers received periodic financial information about divisional operations and profitability.

The General Motor’s management accounting system enabled the organization to plan, coordinate, control, and evaluate the operations of multiple operating divisions.



Sloan’s and Brown’s initiative played a critical role during the 1920 to 1970 time period.

However, during the past few decades, demands by external constituents led many organizations to place more emphasis on external reporting.



Management accounting information stagnated and proved inadequate for the changing and challenging competitive, technological, and market conditions of the late 20th century.



Explain why management accounting information must

include both financial and nonfinancial information.


Management Accounting in Service organizations

The major changes in the demand for management accounting information experienced by manufacturing companies in recent years have also occurred in service organizations.



Characteristics of Service Organizations

Provide a service,no product

More direct contactwith customers

No inventory, per seQuality hard to control

in advance



Management accounting systems in most service organizations allowed managers to budget expenses by operating department and to measure and monitor actual spending against these functional departmental budgets.


Changing Competitive Environment

During the last quarter of the 20th century, the competitive environment for both manufacturing and service companies has become more challenging.

Today’s companies demand different and better management accounting information.



Starting in the mid 1970s, manufacturing companies encountered severe competition from foreign companies that offered higher-quality products at lower prices.

A company could prosper only if its cost, quality, and product capabilities were as good as those of the best companies in the world.



Companies will need both financial and nonfinancial information to succeed.

The deregulation movement since the 1970’s also changed the ground rules under which many service companies operated.

Managers of service companies now require accurate, timely information to improve the quality, timeliness, and efficiency of the activities they perform.


Government and Non-Profit Organizations

Government and non-profit organizations are feeling the pressures for improved performance.

In 1990, the U.S. Congress passed the Chief Financial Officers Act.

This act requires each major federal agency to have a CFO responsible for developing and reporting cost information.



It also requires the systematic measurement of performance.

The Government Performance and Results Act of 1993 (GPRA) requires that each federal agency:

– establish top-level agency goals and objectives and annual program goals.

– define how it intends to achieve those goals.



– demonstrate how it will measure agency and program performance in achieving those goals.

Also, in 1993, Vice President Al Gore recommended an action to require the Federal Accounting Standards Advisory Board (FASAB) to issue a set of cost accounting standards for all federal activities.



In 1995, the FASB issued a document of “Managerial Cost Accounting and Standards for the Federal Government”.

This document specified that in managing federal programs cost information is essential in five areas:



1 Budgeting and cost control2 Performance measurement3 Determining reimbursements and setting

fees and prices4 Program evaluations5 Making economic choice decisions



Demand for cost information in government will be essentially identical to those in for-profit manufacturing and service companies.

Managers of non-profit organizations of all types are looking to adapt management accounting procedures in order to satisfy the demands on them for accountability and performance measurement.



Understand why activities should be the primary focus for measuring and managing performance in organizations.


Measuring and Managing Activities and Business Processes

The measurement of activities will be the key organizing principle for studying management accounting information.

What are some examples of organizational activities?

– assembling products processing customer orders

– receiving and storing materials



Activities describe how organizational resources and employees accomplish work.

What is activity-based costing? It is a cost system based on activities that

links organizational spending on resources to the products and services produced and delivered to customers.



What are business processes? They represent collections of activities for

accomplishing organizational objectives. What are some examples?– procurement– order fulfillment– customer administration



Traditionally, management accounting information has been collected and reported for individual departments.

In today’s environment, cost and non-financial performance must also be measured for activities and business processes.


Management Accounting and Strategy

Management accounting information can help organizations clarify, communicate, and implement business strategy.

What are some examples of business strategy?

– operational excellence– product leadership– customer service



Dell Computers, CostCo, and McDonald’s follow a strategy of operational excellence.

They emphasize cost leadership and consistent quality.

Intel, Sony, and Merck follow a strategy of product leadership.

They develop products that deliver superior performance.



Home Depot and Mobil follow a strategy that emphasizes customer services.

They provide customers with a great buying experience.

These companies need management accounting information that will provide feedback on ease and speed of purchase plus friendly and helpful employees.



Appreciate the behavioral and ethical issues faced by management accountants.


Behavioral Implications

The act of measuring and informing affects the individuals involved.

People react to measurements. They focus on the variables and behavior

being measured and spend less attention on those not measured.

People also resist change.


Behavioral Implications

A new management system can lead to embarrassment and threat, a trigger for reactions against change.

The design and introduction of new measurements and systems must be accompanied by an analysis of the behavioral and organizational reactions to the measurements.


Ethics and the Management Accountant

Management accountants may find themselves in complex situations, fraught with conflict.

Who may put pressure on accountants?– Department managers– Senior executives



What types of controls can companies use to foster high ethical standards among their employees?

– Beliefs systems – Boundary systems



What is a beliefs system? It is the explicit set of statements,

communicated to employees, of the basic values, purpose, and direction of the organization.



What is a boundary system? It is the system that identifies forbidden

actions. Boundary systems include clear

communication of the laws under which the company operates.



Management accountants also operate with an additional boundary system, the code of behavior promulgated by their industry and professional associations.

The Institute of Management Accountants (IMA) is the professional association for management accountants in the United States.


Conclusion

What must the management accounting system provide to Vincent Daniels, the manager of Ikon Printing?

– feedback about the efficiency, cost, and profitability of the various machines

– product defects, rework, customer returns, and defective merchandise


Conclusion

– response time to customer requests– activity-based information about product

cost and profitability– market share and satisfaction for targeted

customers– time, quality, and cost of internal processes– new products and services to offer


End of Chapter 1

1- 1 2001 prentice hall business publishing management accounting, 3rd ed., atkinson, banker,...

Documents

financial accounting

management action

management accountants

nonfinancial information

operating information

financial information

line of business

young learning objectives