Management Accounting:

Information That Creates Value

Chapter 1
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
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
Management Accounting Information
• 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
• 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
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
 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
 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
 Financial v. Management Accounting
Financial Accounting Management Accounting
• Communicates economic • Provides information to
information to individuals managers and employees
and organizations that within the organization
are external to the direct • Allows great discretion to
operations of the design systems that
company provide information for
• Stresses the form in helping employees and
which it is communicated managers make
• Is based on historical decisions
information • Forward looking
Management Accounting
Information
 Users of
Accounting Information

Internal managers…

use information for day-to-day

operating decisions...

and for long-range

strategic decisions.
 Users of
Accounting Information

External parties:

use information for

Investors making decisions
about the company.

Government authorities

Let’s review Problem 1-A1

 What kinds of Accounting
Information do Managers Need?

Good accounting information

helps an organization achieve
its goals and objectives.
 Uses of
Accounting Information

Am I doing well or poorly?

This is the accumulating and

classification of data.
 Uses of
Accounting Information

Which problems should I look into?

Attention directing means reporting and

interpreting information that helps
managers to focus on operating problems.
 Uses of
Accounting Information

This role asks: Of the several alternatives

available, which is the best?

This often involves special studies.

 1-A1
• 1. Problem solving. Helps a manager assess the impact of a
decision.
• 2. Scorekeeping. Reports on the results of an operation.
• 3. Attention directing and problem solving. Budgeting
involves making decisions about planned activities -- hence,
aiding problem solving. Budgets also direct attention to areas
of opportunity or concern --hence, directing attention.
Reporting against the budget also has a scorekeeping
dimension.
• 4. Attention directing. Focuses attention on areas that need
attention.
• 5. Attention directing. Helps managers learn about the
information contained in a performance report.
 1-A1
• 6. Scorekeeping. The statement merely reports what has
happened.
• 7. Problem solving. The cost comparison is apparently useful
because the manager wishes to decide between two
alternatives. Thus, it aids problem solving.
• 8. Attention directing. Variances point out areas where
results differ from expectations. Interpreting them directs
attention to possible causes of the differences.
• 9. Problem solving. Aids a decision about where the parts
should be made.
• 10. Scorekeeping. Determining a depreciation schedule is
simply an exercise in preparing financial statements to report
the results of activities.
 Learning Objective 2
• Describe the cost-benefit and behavioral issues
involved in designing an accounting system.
Influences on Accounting Systems

An accounting system is a formal mechanism

for gathering, organizing, and communicating
information about an organization’s activities.
Influences on Accounting Systems

Generally accepted accounting principles (GAAP)

Foreign Corrupt Practices Act

Internal control Management audits

 LO 5

SARBANES-OXLEY

• Enhanced the role of the management

accountant by
– Tightening regulation of corporate governance
– Establishing controls over management
– Raising importance of management’s assessment
of internal controls

22
Influences on Accounting Systems

In 2002 the Sarbanes-Oxley Act required

chief executive officers to sign a
statement verifying the accuracy of
the company’s financial statements.
 LO 4

Do you know what the

current focus for
managerial accounting
is?

24
 LO 4

CURRENT FOCUS
• Need for innovation and relevant produces:
– Activity based management
• ABC Improves accuracy of assigning costs
– Customer orientation
• Strategic positioning to maintain competitive advantage
• Value chain framework to focus on customer value
– Cross functional perspective
• Understand importance of value chain from manufacturing to
marketing to distribution to customer service

Continued
25
 LO 4

CURRENT FOCUS

• Need for innovation and relevant produces (cont.)

– Total quality management emphasized continuous
improvement
– Time becomes a competitive advantage for the firm
who an compress the value chain
– Improving efficiency for profit performance
– E-business for cost reduction

26
 LO 6
MANAGEMENT ACCOUNTING:
Designed for Profit Maximization

“The objective of profit

maximization should be
constrained by the requirement
that profits be achieved through
legal and ethical means.”1

1Hansen & Mowen, 2007, p. 17

27
 Management Accounting and Control
in 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
 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
Management Accounting in Service
and Nonprofit Organizations

Service Nonprofit
organizations organizations

Accounting firms Hospitals

Law firms Schools
Real estate firms Libraries
Banks Museums
Hotels Government agencies
 Service Organizations

Labor is intensive.

Output is usually difficult to define.

Major inputs and outputs cannot be stored.

 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
 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
 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
 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
 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
 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
 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
 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
 Financial & Nonfinancial Information
in 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
 Financial & Nonfinancial Information
in 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
Cost-Benefit and Behavioral
Considerations

1. Cost-benefit balance

2. Behavioral implications
Cost-Benefit Balance

The primary consideration in choosing

among accounting systems and
methods is weighing estimated
costs against probable benefits.
Behavioral Implications

The system must provide accurate,

timely budgets and performance
reports in a form useful to managers.

If managers do not use accounting

reports, the reports create no benefits.
 Learning Objective 3
• Explain the role of budgets and performance
reports in planning and control.
The Nature of Planning and
Controlling

What is decision making?

It is the purposeful choice from among

a set of alternative courses of action
designed to achieve some objective.

This is the core of the management process.

 The Nature of Planning and
Controlling
The management process internal accounting system:

Planning Budgets, Customer

Corrections and revisions

– Improve Special surveys

of plans and actions

profitability reports Competitor

analysis
Accounting Advertising
system impact
New items
Controlling report
– Actions Performance
– Evaluations reports
Role of Budgets

A budget is a quantitative
expression of a plan of action.

The Starbucks store would express

its plan for product growth and
improved marketing through
revenue and advertising budgets.
Performance Reports

What are performance reports?

These are reports that compare actual

results with budgeted amounts.
Performance Reports

Performance reports formalize controls and

provide feedback by comparing results with
plans and by highlighting variances.

Variances are deviations from the plan.

 Performance Reports

Starbucks Mayfair Store, March 31, 2004

Budget Actual Variance

Sales $50,000 $50,000 0
Less:
Ingredients 22,000 24,500 $2,500 U
Store labor 12,000 11,600 400 F
Other labor 6,000 6,050 50 U
Utilities, etc. 4,500 4,500 0
Total expenses $44,500 $46,650 $2,150 U
Operating income $ 5,500 $ 3,350 $2,150 U
 Objective 4
• Discuss the role of accountants play in the
company’s value chain functions.
Planning and Control for Product
Life Cycles and the Value Chain

Product life cycle refers to the various

stages through which a product passes.
 LO 4

What does a value chain

look like?
How does it work?

54
 LO 4

INDUSTRIAL VALUE CHAIN

A value chain
combines the output
of several firms
sequentially to meet
customer needs.

55
 LO 4

Industrial value chain is critical

for strategic cost management. It
links value-creating activities
from raw materials to disposal of
final product by end-use
customers.

56
Planning and Control for Product
Life Cycles and the Value Chain

Product Introduction
development to market

Mature Product
market phase-out
 The Value Chain

R&D Design Production

Support functions

Marketing Distribution Service

Value Chain Functions

Research and development…

is the generation of, and experimentation

with, ideas related to new products,
services, or processes.
Value Chain Functions

Design…

is the detail and engineering of products.

Value Chain Functions

Production…

is the coordination and assembly

of resources to produce a
product or deliver a service.
Value Chain Functions

Marketing…

is the manner by which individuals or

groups learn about the value and
features of products or services.
Value Chain Functions

Distribution…

is the mechanism by which products or

services are delivered to the customer.
Value Chain Functions

Customer service…

is the support activities

provided to the customer.
1.2a

The changing business environment

1. Organizations have faced dramatic changes in their business

environment.

 Move from protected markets to highly competitive global markets

 Deregulation

 Declining product life-cycles

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1.2b

2. To compete successfully in today’s environment

companies are:

 Making customer satisfaction an overriding priority.

 Adopting new management approaches.

 Changing their manufacturing systems.

 Investing in AMT ’s.

3. Above changes are having a significant impact on the MAS.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
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 Business Level Strategy and
the 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 seller is promised and what the
customer receives
• For example a defect free automobile that
performs as promised by the salesperson

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
 Business Level Strategy and
the 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
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2004 Colin Drury
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
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2004 Colin Drury
1.3

Focus on Customer Satisfaction

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
1.4a

Focus on customer satisfaction and new management

approaches

1. Key success factors

 Cost efficiency –increased emphasis on accurate product costs and

cost management.

 Quality –TQM, quality measures.

 Time – reduced cycle times, focus on non-value-added activities.

 Innovation – responsiveness in meeting customer requirements.

Product comparisons.
Feedback on customer satisfaction.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
1.4b
2. Continuous improvement
 Static historical standards no longer appropriate.
Benchmarking.

3. Employee empowerment
 Delegate more responsibility to people closest to operating processes
and customers.

4. Value chain analysis

 Suppliers,R &D,design,production,marketing, distribution,customer
service,customers.
Internal customer perspective.

5. Social responsibility and corporate ethics

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000Thomson Learning
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1.5a

International convergence of management accounting

1. Management accounting practices can be observed at the

macro or micro levels:

 Macro refers to concepts and techniques

 Micro refers to the behavioural patterns of use.

2. Tendency towards globalization at the macro level

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000Thomson Learning
© 2004 Colin Drury
1.5b

3. Drivers of convergence include:

 Global competition

 Information technology (e.g. ERP systems)

 Standardization by transnational companies

 Global consultancy

 Use of global textbooks

4. At the micro level accounting information may be used in

different ways due to influence of different national and local
cultures

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000Thomson Learning
© 2004 Colin Drury
 Enterprise resource
planning (ERP) is a
process by which a
company (often a
manufacturer)
manages and
integrates the
important parts of its
business.
An ERP management
information system in
-tegrates areas such
as planning,
purchasing, inventory,
sales, marketing,
finance and human
resources

e.g. SAP system

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
 Learning Objective 7

• Identify current trends in management

accounting.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
Current Trends

Shift from a manufacturing-based

to a service-based economy

Increased global competition

Advances in technology

Changes in business processes

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
Current Trends

Just-in-time (JIT) philosophy

Computer-aided design

Computer-aided manufacturing

Computer-integrated manufacturing

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
 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.”
 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
 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
 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
 Learning Objective 8

• Appreciate the importance of ethical

conduct to professional accountants.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
Importance of Ethics

No regulation can be as effective in

ensuring reliability as high ethical
standards of accountants.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
Standards of Ethical Conduct

The Institute of Management Accountants (IMA)

is the largest association of management
accountants in the United States.

The IMA has issued a Standards of Ethical

Conduct for Practitioners of Management
Accounting and Financial Management.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
Pressures for Unethical
Behavior
Emphasis on short-term results

Ignoring the small stuff

Economic cycles

Accounting rules

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
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
 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
 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
 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
 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
 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
 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
 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)
 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
 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
 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
 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
The End