management accounting: information that creates value chapter 1
Post on 19-Dec-2015
222 views
TRANSCRIPT
![Page 1: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/1.jpg)
Management Accounting:Information That Creates Value
Chapter 1
![Page 2: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/2.jpg)
Management Accounting Information• The institute of Management Accountants has
defined management accounting as:– A value-adding continuous improvement process
of planning, designing, measuring and operating both nonfinancial information systems and financial information systems that guides management action, motivates behavior, and supports and creates the cultural values necessary to achieve an organization’s strategic, tactical and operating objectives
![Page 3: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/3.jpg)
Management Accounting Information– Management accounting provides both
financial information and nonfinancial information
– The role of management information supports strategic (planning), operational (operating) and control (performance evaluation) management decision making
• In short, management accounting information is pervasive and purposeful
![Page 4: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/4.jpg)
• Examples of management accounting information include:– The reported expense of an operating department, such
as the assembly department of an automobile plant or an 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
Management Accounting Information
![Page 5: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/5.jpg)
Management Accounting Information
• Management accounting also produces measures of the economic performance of decentralized operating units, such as:– Business units– Divisions– Departments
• These measures help senior managers assess the performance of the company’s decentralized units
![Page 6: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/6.jpg)
Management Accounting Information• Management accounting information is a key
source of information for decision making, improvement, and control in organizations
• Effective management accounting systems can create considerable value to today’s organizations by providing timely and accurate information about the activities required for their success
![Page 7: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/7.jpg)
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
![Page 8: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/8.jpg)
Financial v. Management Accounting Financial Accounting• Communicates economic
information to individuals and organizations that are external to the direct operations of the company
• Stresses the form in which it is communicated
• Is based on historical information
Management Accounting• Provides information to
managers and employees within the organization
• Allows great discretion to design systems that provide information for helping employees and managers make decisions
• Forward looking
![Page 9: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/9.jpg)
A Brief History
• The earliest management accountants were scribes whose job was to record the receipt and disbursements of cash and to provide an accounting of the current stock of wealth including valuable ores and foods
• The treasury role for management accountants was virtually the same until medieval England
![Page 10: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/10.jpg)
A Brief History
• In medieval England, producers (the Guilds) kept detailed records of raw materials and labor costs as evidence of product quality
• From 1400-1600, the rudiments of basic modern management accounting practice emerged
![Page 11: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/11.jpg)
A Brief History• In 19th century America, textile mill owners kept
detailed records of costs to direct efficiency improvement activities and to provide a basis for product pricing– But there was little or no standardized management
accounting practice
• Then, in 1885, Henry Metcalf published Cost of Manufacturers
![Page 12: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/12.jpg)
A Brief History• In the late 19th century, railroad managers
implemented large and complex costing systems• The railroads were the first modern industry to
develop and use broad financial statistics to assess organization performance
• About the same time, Andrew Carnegie was developing detailed records of the cost of materials and labor used to make the steel produced in his steel mills
![Page 13: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/13.jpg)
A Brief History
• The emergence of large and integrated companies at the start of the 20th century created a demand for measuring the performance of different organizational units
• Managers developed ways to measure the return on investment and the performance of their units (more on this later)
![Page 14: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/14.jpg)
A Brief History• After the late 1920s management accounting
development stalled• It was only in the 1970s that interest returned to
developing more effective management accounting systems
• During the latter part of the 20th century there were innovations in costing and performance measurement systems – the focus of this text
![Page 15: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/15.jpg)
A Brief History• The history of management accounting
comprises two characteristics:1. Management accounting was driven by the
evolution of organizations and their strategic imperatives– When cost control was the goal, costing systems
became more accurate– When the ability of organizations to adapt and change to
environmental changes became important, management accounting systems that supported adaptability were developed
![Page 16: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/16.jpg)
A Brief History2. Management accounting innovations have
usually been developed by managers to address their own decision-making needs– Management accounting needs to be both pragmatic
and add value to the organization
![Page 17: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/17.jpg)
Role of Financial Information• Financial information pervades our economy
– It is the primary means of communication between profit seeking organizations and their stakeholders
– For this reason organizations use financial measures internally as a broad indicator of performance
• This financial information provides a signal that something is wrong, but not what is wrong
• Financial information summarizes underlying activities
![Page 18: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/18.jpg)
Business Level Strategy andthe Value Proposition
• What the organization tries to deliver to customers is called its value proposition
• Value propositions have four elements:
1. Cost – the price paid by the customer, given the product features and competitors’ prices
2. Quality – the degree of conformance between what the customer is promised and what the customer receives• For example a defect free automobile that
performs as promised by the salesperson
![Page 19: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/19.jpg)
Business Level Strategy andthe Value Proposition
3. Functionality and features – the performance of the product, for example a meal in a restaurant that provides the diner with the level of satisfaction expected for the price paid
4. Service – all the other elements of the product relevant to the customer• For example, for an automobile service might include: how the
customer is treated as the automobile is purchased and the degree and form of after sales service
• Dell Computer’s value proposition is building to customer requirements, quickly, and at a low price
![Page 20: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/20.jpg)
Delivering the Value Proposition• Organizations use processes that they design
and manage to deliver the value proposition• Dell delivers its value proposition by providing
customers easy and accessible access to ordering and insisting that suppliers locate close to its assembly facilities
• These steps enable Dell to minimize its inventories and avoid the costs of holding inventory and of obsolete inventory in a rapidly changing industry
![Page 21: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/21.jpg)
Management Accounting and Controlin Service Organizations
• The major changes in the demand for management accounting and control information experienced by manufacturing companies in recent years have also occurred in virtually all types of service organizations
• Service companies have existed for hundreds of years
• Their importance in modern economies has increased substantially during the twentieth century
![Page 22: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/22.jpg)
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 service
companies have direct contact with customers• Service companies must be especially sensitive to
the timeliness and quality of the service that their employees provide to customers
![Page 23: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/23.jpg)
Service Companies
• Customers of service companies immediately notice defects and delays in service delivery– The consequences from such defects can be severe
• Dissatisfied customers usually choose alternative suppliers after an unhappy experience
• They also usually tell others about their bad experience
![Page 24: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/24.jpg)
Service Companies’ Use of Management Accounting Information
• Managers in service companies have historically used management accounting information far less intensively than managers in manufacturing companies
• Such a lack of accurate information about the cost of operations probably occurred because many service organizations operated in noncompetitive markets– Either highly regulated or government owned– Others, such as local retailers, were subject only to
local, not national or global, competition
![Page 25: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/25.jpg)
Lack of Competition• In a noncompetitive environments, managers of service
companies were not under great pressure to:– Lower costs– Improve the quality and efficiency of operations– Introduce new products that made profits– Eliminate products and services that were incurring losses
• Management accounting systems in most service organizations were simple, designed to allow managers to:– Budget expenses by operating department – Measure and monitor actual spending against these functional
departmental budgets
![Page 26: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/26.jpg)
Competitive Environment• The competitive environment has now become
far more challenging and demanding for both manufacturing and service companies
• Starting in the mid-1970s, manufacturing companies in North America and Europe encountered severe competition from Asian companies that offered higher-quality products at lower prices
• A company could survive and prosper only if its costs, quality, and product capabilities were as good as those of the best companies in the world
![Page 27: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/27.jpg)
Competitive Environment (2 of 2)
• The ground rules under which many service companies operate have completely changed– The deregulation movement in North America and
Europe since the 1970s– The switch from centrally controlled socialist
economies to free market economies in much of the world
• Managers of service companies now require accurate, timely information:– To improve the quality, timeliness, and efficiency of
the activities they perform– To make decisions about their individual products,
services, and customers
![Page 28: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/28.jpg)
Government Agencies• Government and nonprofit organizations as well
as profit-seeking enterprises are feeling the pressures for improved performance
• Citizens are demanding more responsive and more efficient performance from their local, regional, and national governments
• The U.S. Congress passed– The Chief Financial Officers (CFO) Act of 1990– The Government Performance and Results Act
(GPRA) of 1993
![Page 29: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/29.jpg)
CFO Act• The U.S. Congress, in 1990, passed the Chief
Financial Officers Act– Requires each major federal agency to have a
chief financial officer who is responsible for:• The development and reporting of cost information• The systematic measurement of performance
![Page 30: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/30.jpg)
GPRA• The Government Performance and Results Act of 1993
requires that each U.S. federal agency: – Establish top-level agency goals and objectives, as well as
annual program goals– Define how it intends to achieve those goals– Demonstrate how it will measure agency and program
performance in achieving those goals
• In signing GPRA, President Clinton announced that the act would:– Chart a course for every endeavor paid for by taxpayers’ money – See how well we are progressing– Tell the public how we are doing– Stop the things that don’t work– Never stop improving the things that are worth investing in
![Page 31: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/31.jpg)
Implementing CFO Act and GPRA• In response to the CFO and GPRA acts, the Financial
Accounting Standards Board issued a document of “Managerial Cost Accounting and Standards for the Federal Government”
• This document stated, “In managing federal government programs, cost information is essential in the following five areas: – Budgeting and cost control, – Performance measurement, – Determining reimbursements and setting fees and prices, – Program evaluations, and – Making economic choice decisions.”
• The demands for cost information in government will be identical to those in for-profit manufacturing and service companies
![Page 32: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/32.jpg)
Nonprofit Organizations (1 of 2)
• Nonprofit organizations are also feeling the pressure for cost and performance measurement
• There has been explosive growth in nongovernmental organizations dealing with:– Economic development– The environment– Poverty– Illiteracy– Hunger and malnutrition– Public and private health– Social services and the arts
![Page 33: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/33.jpg)
Nonprofit Organizations (2 of 2)
• These organizations compete for funds from governments, foundations, and private individuals
• Increasingly the public and private donors are demanding accountability from the organizations they fund, including measures of effectiveness
• Managers of all types of nonprofit organizations are looking to adapt management accounting procedures, developed in the private sector, to meet the demands placed on them for accountability and cost and performance measurement
![Page 34: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/34.jpg)
Financial & Nonfinancial Informationin Government and Not for Profit
Organizations
• The objectives of customers should be the objectives of the organization
• In innovative government and not-for-profit organizations, managers use nonfinancial and financial performance measures to evaluate how well and how efficiently these organizations use their funds to provide services to their customers
![Page 35: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/35.jpg)
Financial & Nonfinancial Informationin Government and Not for Profit
Organizations• Governments and not-for-profits need to look at
the processes they use to deliver services to their customers to verify that these processes meet customer requirements at the lowest possible cost
![Page 36: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/36.jpg)
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 managed”– “If I can’t measure it, I can’t manage it.”
![Page 37: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/37.jpg)
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
![Page 38: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/38.jpg)
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
![Page 39: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/39.jpg)
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
![Page 40: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/40.jpg)
Ethics & the Management Accountant
• When management accounting information is used for control, management accountants may find themselves in complex situations
• Pressure may be exerted to influence the numbers to make a favored product, customer, or line of business appear more profitable than it actually is
• Department managers may distort information so that unfavorable factors are not revealed in a management accounting report
![Page 41: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/41.jpg)
Ethics
• Senior executives whose incentive compensation is based on the reported financial numbers may put pressure on accountants to manage earnings
• Organizational leadership plays a critical role in fostering a culture of high ethical standards
![Page 42: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/42.jpg)
Ethics• The way an individual responds to pressure
derives from inner values and beliefs, but individuals are strongly influenced by their view of organizational standards
• If individuals see unethical or illegal behavior practiced by the organization’s leaders and superiors or coworkers, they may feel that such behavior is accepted and sanctioned
• An individual without a strong set of personal beliefs and values may find it difficult to withstand the pressure to “go along with the flow” and participate in this behavior when a difficult or conflicting situation arises
![Page 43: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/43.jpg)
Ethics
• Beyond the example set by senior executives, companies may use two types of control systems to foster high ethical standards among their employees– Beliefs systems– Boundary systems
• A beliefs system is the explicit set of statements, communicated to employees, of the basic values, purpose, and direction of the organization
![Page 44: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/44.jpg)
Ethics (5 of 9)
• The statements in a beliefs system are intended to inspire and promote commitment to the organization’s core values and its purpose for being in business
• Articulate and actionable beliefs systems may inspire people to higher values and aim at higher missions but they may not communicate clearly what behavior and actions are unacceptable
![Page 45: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/45.jpg)
Ethics
• Boundary systems are stated in negative terms, or in minimal standards of behavior– Intended to constrain the range of acceptable
behavior
• Boundary systems also include clear communication of the laws under which the company operates
![Page 46: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/46.jpg)
Ethics
• Management accountants, like all employees, must be aware of and be deeply committed to act in ways that do not violate their organization’s code of conduct and societal laws governing organizational behavior and actions
• They have an additional obligation to ensure that such boundary systems exist in their organization, and that the boundary systems are clearly communicated throughout the organization
• They should also monitor that senior executives act quickly and decisively when behavior in violation of these standards is detected
![Page 47: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/47.jpg)
Ethics• Management accountants, as members of a profession,
also operate with an additional boundary system: the code of behavior promoted or advocated by their industry and professional association– In the United States, the Institute of Management
Accountants (IMA)– In the United Kingdom and elsewhere, the Chartered
Institute of Management Accountants (CIMA)
![Page 48: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/48.jpg)
Ethics
• Professional organizations usually establish ethical norms and codes of professional conduct for their members
• The professional association can monitor and police its norms and codes through peer reviews
• Many of the guidelines are phrased in terms of what management accountants should not do, consistent with how boundary systems operate
![Page 49: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/49.jpg)
Meeting the Challenge• Management accounting has become an
exciting discipline that is undergoing major changes to reflect the challenging new environment that organizations worldwide now face
• Need to develop financial and nonfinancial information that will:1. Focus on aggregate, usually financial, measures of
performance in for-profit organizations that provide an overall summary of performance, and the ability of the organization to meet its financial objectives
![Page 50: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/50.jpg)
Meeting the Challenge (2 of 3)
2. Focus on the organization’s success in meeting its customers’ requirements in for-profit organizations so that the organization can react promptly to failures in delivering the value proposition
3. Enable all organizations to identify process improvements needed to improve the organization’s ability to deliver its value proposition
![Page 51: Management Accounting: Information That Creates Value Chapter 1](https://reader036.vdocument.in/reader036/viewer/2022062421/56649d2a5503460f949fec7e/html5/thumbnails/51.jpg)
Meeting the Challenge (3 of 3)
4. Enable all organizations to identify the potential of the organization’s members to manage and improve process performance
5. Enable the for profit organization to assess the profitability and desirability of continued investment in various entities such as products, product lines, departments, and organization units
6. Enable the organization to motivate, monitor, and detect noncompliance with inappropriate organization behavior