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 u Vincent Daniels, manager of the new retail outlet of Ikon Printing, wonders what financial and operating information he needs to manage the store. u 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 u What information does Vincent need to improve processes? u Should he receive information about the quality and defects associated with each line of business? u 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 u What is management accounting information? u 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 and Financial Data Processing Actions

1- 10  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Management Accounting Information u 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 u 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 u Financial accounting provides information to external constituencies on past performance. Historically Oriented Rules Driven Objective and Aggregate Financial Measures

1- 14  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Management Accounting u Management accounting systems provide information to managers and employees within the organization. u 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 u Management accounting provides information to internal constituencies. Current and Future Oriented No Regulations Subjective and Disaggregate 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 u 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 u At the operational level many repetitive activities are performed. u 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 u How much detail should be presented? – Disaggregate details u How frequent should information be provided? u 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 u What are the information needs of middle and upper management? u 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 u 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 u How much detail should be presented? u More aggregate than at the operational level. u How frequent should information be provided? u 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 u What are the information needs of senior executives? u 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 u 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 u How much detail should be presented? u More aggregate than at the managerial level. u How frequent should information be provided? u 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 u 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 u What is operational control? u It provides feedback to employees and their managers about the efficiency of activities being performed. u What is product costing? u 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 u What is customer costing? u It is assigning marketing, selling, distribution, and administrative costs to individual customers so that the cost of serving each customer can be calculated. u What is management control? u 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 u Many innovations in management accounting systems occurred in the early decades of the 20th century. u Senior executives at DuPont Corporation devised techniques to develop operating budgets and capital budgets. u 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 u The return on investment calculation gave DuPont executives a single number to evaluate the performance of their operating divisions. u Profitability Measure u Return on Sale = Operating Income ÷ Sales u Asset or Capital Utilization Measure u Sales ÷ Investment

1- 32  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Origins of Management Control u Return on Investment u ROI = Operating Income ÷ Investment u 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 u Around 1920, Brown left DuPont to become CFO for General Motors under its chief executive officer, Alfred Sloan. u 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 u Corporate managers received periodic financial information about divisional operations and profitability. u 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 u Sloan’s and Brown’s initiative played a critical role during the 1920 to 1970 time period. u 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 u 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 u 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 contact with customers No inventory, per se Quality 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 u 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 u During the last quarter of the 20th century, the competitive environment for both manufacturing and service companies has become more challenging. u 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 u Starting in the mid 1970s, manufacturing companies encountered severe competition from foreign companies that offered higher- quality products at lower prices. u 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 u Companies will need both financial and nonfinancial information to succeed. u The deregulation movement since the 1970’s also changed the ground rules under which many service companies operated. u 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 u Government and non-profit organizations are feeling the pressures for improved performance. u In 1990, the U.S. Congress passed the Chief Financial Officers Act. u 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 u It also requires the systematic measurement of performance. u 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. u 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 u In 1995, the FASB issued a document of “Managerial Cost Accounting and Standards for the Federal Government”. u 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 control 2 Performance measurement 3 Determining reimbursements and setting fees and prices 4 Program evaluations 5 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 u Demand for cost information in government will be essentially identical to those in for- profit manufacturing and service companies. u 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 u The measurement of activities will be the key organizing principle for studying management accounting information. u 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 u Activities describe how organizational resources and employees accomplish work. u What is activity-based costing? u 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 u What are business processes? u They represent collections of activities for accomplishing organizational objectives. u 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 u Traditionally, management accounting information has been collected and reported for individual departments. u 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 u Management accounting information can help organizations clarify, communicate, and implement business strategy. u 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 u Dell Computers, CostCo, and McDonald’s follow a strategy of operational excellence. u They emphasize cost leadership and consistent quality. u Intel, Sony, and Merck follow a strategy of product leadership. u 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 u Home Depot and Mobil follow a strategy that emphasizes customer services. u They provide customers with a great buying experience. u 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 u The act of measuring and informing affects the individuals involved. u People react to measurements. u They focus on the variables and behavior being measured and spend less attention on those not measured. u People also resist change.

1- 60  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Behavioral Implications u A new management system can lead to embarrassment and threat, a trigger for reactions against change. u 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 u Management accountants may find themselves in complex situations, fraught with conflict. u 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 u 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 u What is a beliefs system? u 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 u What is a boundary system? u It is the system that identifies forbidden actions. u 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 u Management accountants also operate with an additional boundary system, the code of behavior promulgated by their industry and professional associations. u 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 u 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

1- 68  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young End of Chapter 1