Atkinson CH 1 Lecture

1- 1 2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young

Management Accounting:Information that Creates Value

Chapter 1


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 – Copying & Digital Imaging– Computing – Fax Services– Document preparation _ binding document– Sales of office supplies


Vincent currently have the following information-• Financial & Operating Information• Daily report of total sales(cash & credit) Vincent does not have information about- Expenses for material, labor & equipment for each

line of business separately Amount and type of capital required by each

business


Introduction

What information does Vincent need to improve processes?

o More revenue with same resourceo quality and defects associated with each line of

business


Management Accounting ?

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.

It is a value adding process of planning, designing, measuring, and operating nonfinancial and financial information systems that guides management action.


Management Accounting Information

What is management accounting information?

Financial and operating data about an organization's activities, processes, operating units, products, services and customers.

For example: cost of a product, process, activity or department in recent time,


Differences Between Financial and Managerial Accounting

Financial Accounting Managerial Accounting

1. Users External persons who Managers who plan formake financial decisions and control an organization

2. Time focus Historical perspective Future emphasis

3. Verifiability Emphasis on Emphasis on relevance versus relevance verifiability for planning and control

4. Precision versus Emphasis on Emphasis on timeliness precision timeliness

5. Subject Primary focus is on Focuses on segments the whole organization of an organization

6. Requirements Must follow GAAP Need not follow GAAPand prescribed formats or any prescribed format


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



At the operational level- Management accountants develop

information about the

-Total material usage

-total time required and standard time allocated for the job

-total time spent reworking defects standards for labor time, machine time, and materials usage



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.



What type of information is used at the managerial level?

– Resource utilization– Efficiency and quality of performance– Profitability



What are the information needs of senior executives?

Senior executives need strategic information to assess overall performance, to monitor operating departments, and for benchmarking.



What type of information is used at the senior executives level?

– Profitability– Customer loyalty and satisfaction– Market opportunities and threats– Technological innovations


Functions of Management Accounting

What are the functions of management accounting information?

– Operational control– Product costing – Customer costing – Management control



Operational control?

It provides feedback to employees and their managers about the efficiency of activities being performed.

product costing?

It measures and assigns the costs of the activities performed to design and produce individual products and/or services.



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.

management control?

It is providing information about the performance of managers.


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.



Characteristics of Service Organizations

Provide a service,no product

More direct contactwith customers

No inventoryQuality hard to control

in advance



Management accounting systems in service organizations allowed managers to

-budget expenses by operating department

–to measure and monitor actual spending against these functional departmental budgets.


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.



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.



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.


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.



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.



– 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.



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 Budgeting and cost control2 Performance measurement3 Determining reimbursements and setting

fees and prices4 Program evaluations5 Making economic choice decisions



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.


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



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.



What are business processes? They represent collections of activities for

accomplishing organizational objectives. What are some examples?– procurement– order fulfillment– customer administration



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.


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


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.


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.


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



What types of controls can companies use to foster high ethical standards among their employees?

– Beliefs systems – Boundary systems



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.



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.



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.


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


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