Management Accounting: Information that Creates Value

Chapter 1

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

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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 Copying & Digital Imaging Computing Fax Services Document preparation _ binding document Sales of office supplies
2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young

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 Vincent

currently have the following informationFinancial & Operating Information Daily report of total sales(cash & credit) Vincent does not have information aboutExpenses for material, labor & equipment for each line of business separately Amount and type of capital required by each business

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

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Introduction
What
o o

information does Vincent need to improve processes? More revenue with same resource quality and defects associated with each line of business

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

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Management Accounting ?
Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.
It is a value adding process of planning, designing, measuring, and operating nonfinancial and financial information systems that guides management action.

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

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Management Accounting Information

What

is management accounting information? Financial and operating data about an organization's activities, processes, operating units, products, services and customers. For example: cost of a product, process, activity or department in recent time,
2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young

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Differences Between Financial and Managerial Accounting

Financial Accounting
1. Users 2. Time focus 3. Verifiability versus relevance 4. Precision versus timeliness 5. Subject 6. Requirements External persons who make financial decisions Historical perspective Emphasis on verifiability Emphasis on precision Primary focus is on the whole organization Must follow GAAP and prescribed formats

Managerial Accounting
Managers who plan for and control an organization Future emphasis Emphasis on relevance for planning and control Emphasis on timeliness Focuses on segments of an organization Need not follow GAAP or any prescribed format

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

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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

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

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Diversity of Management Accounting Information

At

the operational level Management accountants develop information about the -Total material usage -total time required and standard time allocated for the job -total time spent reworking defects standards for labor time, machine time, and materials usage
2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young

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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.

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

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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

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

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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.

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

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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

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

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Functions of Management Accounting

What

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

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

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Functions of Management Accounting

Operational control? It provides feedback to employees and their managers about the efficiency of activities being performed. product costing? It measures and assigns the costs of the activities performed to design and produce individual products and/or services.
2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young

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Functions of Management Accounting

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. management control? It is providing information about the performance of managers.
2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young

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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.

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

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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

Quality hard to control in advance

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

Management Accounting in Service organizations

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

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

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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.

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

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Changing Competitive Environment

Starting

in the mid 1970s, manufacturing companies encountered severe competition from foreign companies that offered higherquality 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.
2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young

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

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

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

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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.

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

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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:

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

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Government and Non-Profit Organizations

1
2 3

4 5

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

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

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Government and Non-Profit Organizations

Demand

for cost information in government will be essentially identical to those in forprofit 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.
2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young

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

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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.

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

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

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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 nonfinancial performance must also be measured for activities and business processes.

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

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

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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.

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

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

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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

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

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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

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

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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.

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

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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.

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

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

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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

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

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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

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

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