Management Accounting: Information that Creates Value

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Management AccountingInformation that Creates
Value

• Chapter 1

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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

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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

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Learning Objectives

• Appreciate the important role that management
  accounting information plays in both
  manufacturing, service, non-profit, and
  governmental organizations.
• Discuss the significant differences between
  management accounting and financial accounting.

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Learning Objectives

• Understand how different people in the
  organization have different demands for
  management accounting information.
• Appreciate how management accounting creates
  value for organizations and how it relates to
  operations, marketing, and strategy.

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Learning Objectives

• Explain why management accounting information
  must include both financial and nonfinancial
  information.
• Understand why activities should be the primary
  focus for measuring and managing performance in
  organizations.
• Appreciate the behavioral and ethical issues
  faced by management accountants.

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Learning Objective 1

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

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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.

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Management Accounting Information
Operational and Financial Data
Processing
Actions
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Management Accounting Information

• What are some examples of management accounting
  information?
• reported expenses of an operating department
• calculated costs of producing a product
• measurements of economic performance

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Learning Objective 2

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

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Financial Accounting

• Financial accounting is constrained by mandated
  reporting requirements
• Financial Accounting Standards Board
• Securities and Exchange Commission
• International Accounting Standards Committee

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Financial Accounting

• Financial accounting provides information to
  external constituencies on past performance.

Historically Oriented
Rules Driven
Objective and Aggregate
Financial Measures
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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 organizations financial, physical, and
  human resources.

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Management Accounting

• Management accounting provides information to
  internal constituencies.

Current and Future Oriented
No Regulations
Subjective and Disaggregate
Financial, Operational, and Physical Measures
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Learning Objective 3

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

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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

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Diversity of Management Accounting Information

• 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.

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Diversity of Management Accounting Information

• How much detail should be presented?
• Disaggregate details
• How frequent should information be provided?
• Operational level information should be provided
  very frequently (usually daily).

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Diversity of Management Accounting Information

• 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.

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Diversity of Management Accounting Information

• What type of information is used at the
  managerial level?
• Resource utilization
• Efficiency and quality of performance
• Profitability

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Diversity of Management Accounting Information

• 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).

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Diversity of Management Accounting Information

• What are the information needs of senior
  executives?
• Senior executives need strategic information to
  assess overall performance, to monitor operating
  departments, and for benchmarking.

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Diversity of Management Accounting Information

• What type of information is used at the senior
  executives level?
• Profitability
• Customer loyalty and satisfaction
• Market opportunities and threats
• Technological innovations

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Diversity of Management Accounting Information

• 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).

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Learning Objective 4

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

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Functions of Management Accounting

• What are the functions of management accounting
  information?
• Operational control
• Product costing
• Customer costing
• Management control

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Functions of Management Accounting

• 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.

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Functions of Management Accounting

• 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.

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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.

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Origins of Management Control

• 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

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Origins of Management Control

• 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.

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Origins of Management Control

• 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
  companys operating philosophy of centralized
  control with decentralized responsibility.

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Origins of Management Control

• Corporate managers received periodic financial
  information about divisional operations and
  profitability.
• The General Motors management accounting system
  enabled the organization to plan, coordinate,
  control, and evaluate the operations of multiple
  operating divisions.

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Origins of Management Control

• Sloans and Browns 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.

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Origins of Management Control

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

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Learning Objective 5

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

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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.

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Management Accounting in Service organizations
Characteristics of Service Organizations
Provide a service, no product
More direct contact with customers
No inventory, per se
Quality hard to control in advance
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Management Accounting in Service organizations

• 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.

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Changing Competitive Environment

• During the last quarter of the 20th century, the
  competitive environment for both manufacturing
  and service companies has become more
  challenging.
• Todays companies demand different and better
  management accounting information.

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Changing Competitive Environment

• 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.

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Changing Competitive Environment

• Companies will need both financial and
  nonfinancial information to succeed.
• The deregulation movement since the 1970s 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.

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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.

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Government and Non-Profit Organizations

• 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.

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Government and Non-Profit Organizations

• 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.

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Government and Non-Profit Organizations

• 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

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Government and Non-Profit Organizations

• Budgeting and cost control
• Performance measurement
• Determining reimbursements and setting fees and
  prices
• Program evaluations
• Making economic choice decisions

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Government and Non-Profit Organizations

• 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.

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Learning Objective 6

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

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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

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Measuring and Managing Activities and Business
Processes

• 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.

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Measuring and Managing Activities and Business
Processes

• What are business processes?
• They represent collections of activities for
  accomplishing organizational objectives.
• What are some examples?
• procurement
• order fulfillment
• customer administration

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Measuring and Managing Activities and Business
Processes

• Traditionally, management accounting information
  has been collected and reported for individual
  departments.
• In todays environment, cost and non-financial
  performance must also be measured for activities
  and business processes.

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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

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Management Accounting and Strategy

• Dell Computers, CostCo, and McDonalds 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.

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Management Accounting and Strategy

• 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.

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Learning Objective 7

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

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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.

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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.

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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

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Ethics and the Management Accountant

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

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Ethics and the Management Accountant

• 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.

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Ethics and the Management Accountant

• 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.

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Ethics and the Management Accountant

• 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.

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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

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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

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End of Chapter 1