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1- 1 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Management Accounting:Information that Creates Value
Chapter 1
1- 2 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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
1- 3 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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…
1- 4 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 5 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 6 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 7 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Learning Objective 1
Appreciate the important role that management accounting
information plays in both manufacturing, service, non-
profit, and governmental organizations.
1- 8 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 9 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Management Accounting Information
Operational andFinancial Data
Processing
Actions
1- 10 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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
1- 11 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Learning Objective 2
Discuss the significant differences between
management accounting and financial accounting.
1- 12 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Financial Accounting
Financial accounting is constrained by mandated reporting requirements:
– Financial Accounting Standards Board– Securities and Exchange Commission– International Accounting Standards
Committee
1- 13 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Financial Accounting
Financial accounting provides information to external constituencies on past performance.
Historically Oriented
RulesDriven
Objective andAggregate
FinancialMeasures
1- 14 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 15 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Management Accounting
Management accounting provides information to internal constituencies.
Current and Future Oriented
No Regulations
Subjective andDisaggregate
Financial,Operational, and
Physical Measures
1- 16 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Learning Objective 3
Understand how different people in the organization have different demands for
management accounting information.
1- 17 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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
1- 18 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 19 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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).
1- 20 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 21 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Diversity of Management Accounting Information
What type of information is used at the managerial level?
– Resource utilization– Efficiency and quality of performance– Profitability
1- 22 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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).
1- 23 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 24 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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
1- 25 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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).
1- 26 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Learning Objective 4
Appreciate how management accounting creates value for
organizations and how it relates to operations,
marketing, and strategy.
1- 27 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Functions of Management Accounting
What are the functions of management accounting information?
– Operational control– Product costing – Customer costing – Management control
1- 28 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 29 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 30 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 31 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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
1- 32 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 33 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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 company’s operating philosophy of “centralized control with decentralized responsibility”.
1- 34 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Origins of Management Control
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.
1- 35 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Origins of Management Control
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.
1- 36 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 37 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Learning Objective 5
Explain why management accounting information must
include both financial and nonfinancial information.
1- 38 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 39 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Management Accounting 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
1- 40 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 41 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 42 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 43 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Changing Competitive Environment
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.
1- 44 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 45 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 46 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 47 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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:
1- 48 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Government and Non-Profit Organizations
1 Budgeting and cost control2 Performance measurement3 Determining reimbursements and setting
fees and prices4 Program evaluations5 Making economic choice decisions
1- 49 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 50 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Learning Objective 6
Understand why activities should be the primary focus for measuring and managing performance in organizations.
1- 51 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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
1- 52 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 53 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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
1- 54 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Measuring and Managing Activities and Business Processes
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.
1- 55 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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
1- 56 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Management Accounting and Strategy
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.
1- 57 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 58 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Learning Objective 7
Appreciate the behavioral and ethical issues faced by management accountants.
1- 59 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 60 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 61 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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
1- 62 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
Ethics and the Management Accountant
What types of controls can companies use to foster high ethical standards among their employees?
– Beliefs systems – Boundary systems
1- 63 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 64 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 65 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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.
1- 66 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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
1- 67 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young
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