atkinson5e_ch01mac imt new final

8/10/2019 Atkinson5e_ch01MAC IMT New Final

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Management Accounting:

Information That Creates ValueChapter 1

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Management Accounting Definition

The Institute of Management Accountants hasdefined management accounting as:

A value-adding con t inuou s improvement process

of p lanning, designing, measur ing and operat ing

bo th non f inancial information systems and

f inancial informat ion sys tems that guides

management act ion, motivates behavior, and

supports and c reates the cu ltural values

necessary to achieve an organizations strategic,

tact ical and operat ing object ives

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Management Accounting Definition

The American Accounting Association hasdefined management accounting as:

Management Account ing is the

appl icat ion of app rop r iate techniques and

concepts in processing histor ica l andpro jected econom ic data of an ent i ty to

assis t management in establ ish ing plans

for reasonable econom ic object ives and

in the making of rational decis ions w i th a

view tow ards ach ieving these object ives.

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Management Accounting Information

Management accounting provides bothfinancial information and nonfinancialinformation.

The role of management information supports

strategic (planning), operational (operating)and control (performance evaluation)functions and management decision making.

In short, management accounting information ispervasive and purposeful.

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Examples of management accounting informationinclude:

The reported expense of an operating department, suchas the assembly department of an automobile plant oran electronics company

The costs of producing a product

The cost of delivering a service

The cost of performing an activity or business process

such as creating a customer invoice The costs of serving a customer


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Management Accounting Information Management accounting also produces

measures of the economic performance ofdecentralized operating units, such as:

Business units

Divisions

Departments

These measures help senior managers assessthe performance of the companys decentralized

units

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Management accounting information is a keysource of information for decision making,improvement, and control in organizations

Effective management accounting systems can

create considerable value to todaysorganizations by providing timely and accurateinformation about the activities required for theirsuccess

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Changing Focus Traditionally, management accounting information has

been financial information Denominated in a currency such as $ (dollars),

(pound sterling), (yen), or(euro)

Management accounting information has now expanded

to encompass information that is operational or physical(nonfinancial) information:

Quality and process times

More subjective measurements, such as:

Customer satisfaction Employee capabilities

New product performance

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Financial and Management AccountingDifferences (Exhibit 1-3)

Financial

Unified Structure

Made as per GAAP

Statutory obligation

Format prescribed

Historical

Business as a whole

PurposeExternal

Reporting Financial Measurements

only

Management

Specific to Business

More flexibility inpreparation

Optional

Mgts discretion Future oriented

Focuses on parts

Aid to Managerial

Decision making Financial plus

Operational, Physicalmeasurements

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Role of Financial Information Financial information pervades our economy

It is the primary means of communication betweenprofit seeking organizations and their stakeholders

For this reason organizations use financial measuresinternally as a broad indicator of performance

This financial information provides a signal thatsometh ingis wrong, but not whatis wrong

Management Accounting helps in ascertaining

what is wrong

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Business Level Strategy andthe Value Proposition

What the organization tries to deliver to customers iscalled its value proposi t ion

Value propositions have four elements:

1. Costthe price paid by the customer, given the

product features and competitors prices2. Qualitythe degree of conformance between what

the customer is promised and what the customerreceives

For example a defect free automobile thatperforms as promised by the salesperson

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Business Level Strategy andthe Value Proposition

3. Functionality and featuresthe performance of theproduct, for example a meal in a restaurant thatprovides the diner with the level of satisfactionexpected for the price paid

4. Serviceall the other elements of the product relevantto the customer For example, for an automobile service might include: how the

customer is treated as the automobile is purchased and thedegree and form of after sales service

Dell Computers value proposition is building Computers

to customer requirements, quickly, and at a low price

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Dell - Delivering the ValueProposition

Dell delivers its value proposition by providingcustomers easy access to ordering anddelivering customized product.

It also insists that suppliers locate close to itsassembly facilities

These steps enable Dell to minimize itsinventories and avoid the costs of holdinginventory and of obsolete inventory in a rapidly

changing industry 1-13


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Service Companies

Service companies differ from manufacturing

companies in several ways

Obvious difference: service companies do

not produce a tangible product

Less obvious: many employees in servicecompanies have direct contact with

customers

Service companies must be especially sensitive tothe timeliness and quality of the service that theiremployees provide to customers

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Service Companies

Customers of service companies

immediately notice defects and delays in

service delivery

The consequences from such defects canbe severe

Dissatisfied customers usually choose

alternative suppliers after an unhappyexperience

They also usually tell others about their badexperience

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Service Companies Use of


Managers in service companies have historically usedmanagement accounting information far less intensivelythan managers in manufacturing companies

Such a lack of accurate information about the cost ofoperations probably occurred because many serviceorganizations operated in noncompetitive markets

Either highly regulated or government owned

Others, such as local retailers, were subject only tolocal, not national or global, competition

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Cost Accounting

Cost AccountingDefinition Accounting information system which records,

measures, and reports information about costs.

PurposeCost ascertainment and its use indecision making and performance evaluation.

Provides data for both financial accounting andmanagement accounting.

Basis of inventory valuation and COGS.

Useful in performance appraisal, planning andcontrol.


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Cost Accounting and ManagementAccounting

Cost Accounting

It deals primarily with

Cost data It has a narrower scope

Cost accounting, Costcontrol, Cost reduction,Cost audit

Both complement eachother

Management Accounting

It involves consideration of

both cost and revenue It has a wider scope -

based mainly on CostAccounting & FinancialAccounting

Should not be muchconcerned aboutboundaries of the two


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Assignment

Questions: 1-1 to 1- 9

Exercises: 1-13 to 1-19

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atkinson5e_ch01mac imt new final

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