How Management Accounting

Information Supports
Decision Making
Chapter 1

2012 Pearson Prentice Hall. All rights reserved.

Management Accounting
Information

The Institute of Management Accountants has

defined management accounting as:
A profession that involves partnering in

management decision making, devising planning

and performance systems, and providing expertise
in financial reporting and control to assist
management in the formulation and
implementation of an organizations strategy

2012 Pearson Prentice Hall. All rights reserved.

Management Accounting
Information

Management accounting provides relevant

information to managers and employees
Both financial and nonfinancial information
Useful for making decisions, allocating resources,

and monitoring, evaluating, and rewarding

performance
Customized to serve multiple purposes

2012 Pearson Prentice Hall. All rights reserved.

Management Accounting
Information

Examples of management accounting information

include:
The reported expense of an operating department
The cost of producing a product
The cost of delivering a service
The cost of performing an activity or business

process
The cost of serving a customer

2012 Pearson Prentice Hall. All rights reserved.

Comparison of Financial and

Managerial Accounting

Changing Focus

Early 19th century systems to measure the cost of

producing individual products
Middle of the 19th century
Railroads first to develop and use financial

statistics to assess and monitor performance

Andrew Carnegie developed detailed cost systems
that gave him a competitive advantage

Early 20th century DuPont and General Motors

expanded the focus to planning and control
1970s Japanese manufacturers developed new
tools to report on quality, service, customer, and
employee performance
2012 Pearson Prentice Hall. All rights reserved.

Strategy

Management accounting is a discipline that helps

an enterprise to develop and implement its
strategy
Strategy is about an organization making choices
about what it will do or not do
As a strategy gets executed, management
accounting information provides feedback

2012 Pearson Prentice Hall. All rights reserved.

Plan-Do-Check-Act Cycle
or Deming Cycle

Developed by quality expert, W. Edwards Deming

A systematic and recursive way to develop,

implement, monitor, evaluate, and change a course
of action

2012 Pearson Prentice Hall. All rights reserved.

PDCA Steps

Plan Step defines the organizations purpose and

selects the focus and scope of its strategy
Do Step involves the implementation of a chosen
course of action
Check Step includes measuring and monitoring
performance and taking short-term actions based
on measured performance
Action Step involves managers taking actions to
lower costs, change resource allocations, and
improve quality
2012 Pearson Prentice Hall. All rights reserved.

Behavioral Implications

As measurements are made on operations and

especially on individuals and groups their behavior
changes
People react when they are being measured, and they

react to the measurements

They focus on the variables and behavior being
measured and spend less attention on those not
measured

Two old sayings recognize these phenomena:

What gets measured gets done.
If you dont measure it, you cant manage and

improve it.

2012 Pearson Prentice Hall. All rights reserved.

Behavioral Implications

Employees familiar with the current system may

resist as managers attempt to introduce or redesign
cost and performance measurement systems

Employees have acquired expertise in the use of

the old system

Employees also may feel committed to the

decisions based on the information the old system
produced

2012 Pearson Prentice Hall. All rights reserved.

Behavioral Implications

Management accountants must understand and

anticipate the reactions of individuals to
information and measurements

When the measurements are used not only for

information, planning, and decision-making, but
also for control, evaluation, and reward,
employees and managers place great pressure on
the measurements themselves

2012 Pearson Prentice Hall. All rights reserved.

Behavioral Implications

Managers and employees may take unexpected

and undesirable actions to influence their score on
the performance measure

Managers seeking to improve current bonuses

based on reported profits may skip discretionary
expenditures that may improve performance in
future periods

2012 Pearson Prentice Hall. All rights reserved.

The Balanced Scorecard

and Strategy Map
Chapter 2

2012 Pearson Prentice Hall. All rights reserved.

Performance Measurement
Systems

Measurement must support the companys strategy

and operation

Must be designed so companies get better at

managing and improving the value created from
their intangible assets

Need to move from reliance on financial measures

to a mix of financial and nonfinancial measures

2012 Pearson Prentice Hall. All rights reserved.

Balanced Scorecard

The Balanced Scorecard (BSC) provides a system

for measuring and managing all aspects of a
companys performance
The scorecard balances traditional financial
measures of success, such as profits and return on
capital, with nonfinancial measures of the drivers
of future financial performance
The Balanced Scorecard measures organizational
performance across different perspectives

2012 Pearson Prentice Hall. All rights reserved.

The Four Perspectives of the

Balanced Scorecard

Four different but linked perspectives are derived from the organizations
mission, vision and strategy:
Financial
Financial
Creating
Creating organizational
organizational value
value
for
for owners/shareholders.
owners/shareholders.

Customer
Customer
Adding
Adding value
value for
for customers.
customers.

Mission,
Vision,
Strategy

Process
Ensuring efficiency and
quality in the value chain.

Learning
Learning and
and Growth
Growth
Investing
Investing in
in organizational
organizational
infrastructure.
infrastructure.

Balanced Measurements

The BSC enables companies to:

Track financial results
Monitor how they are building the capabilities for

future growth and profitability

With customers
With their internal processes
With their employees and systems

2012 Pearson Prentice Hall. All rights reserved.

Strategy

A strategy accomplishes two principal functions:

Creating a competitive advantage by positioning

the company in its external environment with

resources to support customers better than its
competitors
Having a clear strategy provides clear guidance for

how internal resources should be allocated to gain

a competitive advantage in the marketplace

2012 Pearson Prentice Hall. All rights reserved.

Enter the Strategy Map

The strategy map is a picture that illustrates the

causal relationships among the balanced scorecard
perspectives
The strategy map is a guide to action that relates
the management actions needed to achieve an
organization objective with the measures designed
to assess performance on those actions

20

The Overall Picture

Summary

21

Financial Perspective

The ultimate objective for profit-seeking

companies
Financial performance measures indicate whether
the companys strategy, implementation, and
execution are contributing to bottom-line
improvement
A companys financial performance can be
improved in two ways: productivity improvements
and revenue growth

2012 Pearson Prentice Hall. All rights reserved.

Financial Perspective

Increased productivity occurs by:

Lowering direct and indirect expenses
Utilizing their financial and physical assets more

efficiently

Companies generate revenue growth by:

Selling additional products or services to existing

customers
Selling new products, selling to new customers,
and expanding into new markets

2012 Pearson Prentice Hall. All rights reserved.

Financial Measure
Alternatives

24

The Customer Perspective

The customer perspective reflects what the

organization promises its target customers.
This promise is called the value proposition
The value propositions components are
Price
Quality
Time
Function
Service
25

Value Proposition Alternatives

A taxonomy originally developed by Michael Porter a

well-known strategist
Cost Effectiveness

You sell a commodity where prices are set by the market

your key control lever is cost
Product Leadership

You compete by constantly bringing new products into

the market place your key control lever is innovation
Customer Intimacy

You compete by meeting the unique requirements of each

customer you key control lever is understanding
customer requirements
26

Customer Objectives and

Measures

27

Process Perspective

The process perspective reflects how the

organization plans to deliver its value proposition
Useful to think in terms of process type
Operations management processes
Customer management processes
Innovation processes
Regulatory and social processes

The customer value proposition will determine the

relative importance of each process type
28

Process Objectives and

Measures

29

Learning and Growth

Perspective

Reflects the development of intellectual capital

(organization know-how) needed to develop and
improve objectives in the process perspective

30

Learning and Growth

Perspective

Identifies objectives that drive improvement in the

process objectives
Human Resources
Information Technology
Organization Culture and Alignment

2012 Pearson Prentice Hall. All rights reserved.

Learning and Growth Objectives

and Measures

32

BSC in Nonprofit and

Government Organizations

The BSC is especially well-suited for nonprofit

and government organizations (NPGOs)
Their success has to be measured by their
effectiveness in providing benefits to constituents
Because nonfinancial measures can assess
performance with constituents, the BSC provides
the natural performance management system for
NPGOs

2012 Pearson Prentice Hall. All rights reserved.

NPGOs and Strategy

Many NPGOs encountered difficulties in

developing their initial BSC, finding that they
didnt have a clear strategy
Many NPGOs place their mission objective at the
top of their scorecard and strategy map
Cannot use the standard BSC architecture where

financial objectives are the ultimate, high-level

outcomes to be achieved

2012 Pearson Prentice Hall. All rights reserved.

Managing with the BSC

The benefits from BSC are realized as the

organization integrates its new measurement
system into management processes that:
Communicate the strategy to all employees and

organizational units
Align employees individual objectives and
incentives to successful strategy implementation
Integrate the strategy with ongoing management
processes

2012 Pearson Prentice Hall. All rights reserved.

Barriers to Effective Use

Senior management is not committed

Scorecard responsibilities do not filter down

The solution is overdesigned, or the scorecard is a

one-time event

The scorecard is treated as a systems or consulting

project

2012 Pearson Prentice Hall. All rights reserved.