1. © Pearson Education Limited 2008 MANAGEMENT ACCOUNTING Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse

2. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-2 Management Accounting Organizations and accounting Chapter 1

3. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-3Objectives Explain how technological change, globalization and customer preferences can affect and organization and its management accounting system Identify strategies for achieving customer value Describe features of organizations that promote decisions to achieve organizational goals Explain the critical role played by management accounting in making planning decisions and controlling managers to create organizational value Identify the trade-offs that exist in using information for making planning decisions, control and external reporting Identify the roles of different types of management accountants Recognize the role of judgement and ethics in making management accounting choices

4. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-4 Management Accounting in a Changing Environment Management Accounting Accounting within organizations Continually evolves to meet organization needs No fixed set of rules to follow Helps create organizational value through better decision making and management Provides information in a dynamic environment Is linked to the organization’s characteristics

5. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-5 Technological Change Internet Personal Digital Assistants Mobile Telephones The information and communications technology industries have revolutionized the way that organizations operate Organization Suppliers Members Customers Suppliers Members Customers Suppliers Members Customers Communication

6. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-6 Information Acquisition and Dissemination Computer-Integrated Manufacturing (CIM) Computer-Integrated Manufacturing (CIM) An organization where all systems are linked by computer Computer-Assisted Manufacturing (CAM) Computer-Assisted Manufacturing (CAM) Allows organizations to make products using programmed machines Computer Assisted Design (CAD) Computer Assisted Design (CAD) The use of three- dimensional plans to create new products

7. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-7 E-business and the Internet Provides information to potential customers, service to customers following purchase, and is important in providing coordination with suppliers Rapidly becoming an integral part of normal business operations Allows Organizations to “outsource” different processes including manufacturing and billing

8. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-8Globalization The Increase In Global Competition Requires Lower Costs Just-In-Time Increased Efficiency Total Quality Management

9. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-9 TQM Customer defines quality Involves everyone in organization Seeks to lower costs and improve quality Seeks continuous improvement Quality designed into product Total Quality Management (TQM)

10. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-10 Design and Engineering Research and Development Production Distribution Customer Service Processes not on the value chain are considered non-value-added activities Customers Value Chain Analysis

11. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-11 Design and Engineering Research and Development Production Distribution Customer Service Elimination of non-value-added activities saves resources and helps sell products at lower prices Customers Value Chain Analysis

12. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-12 Framework for Organizational Change Customer Preferences Technological Change Globalization Strategy for Customer Value Product/Service Innovation Quality, Low Cost Control Decisions Responsibilities Performance Measures Compensation Planning Decisions Product/Service Design Production and Delivery Customer Services Organizational Value Customer Value

13. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-13 Strategy for Increasing Customer Value Must offer product or service at a price less than customer value Must provide the product or service at a cost less than the price Must recognize their own strengths and weaknesses given the existing and proposed characteristics of the organization Must develop strategies by looking at the opportunities and threats posed by technological change globalization and customer preferences

14. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-14 Strategy for Increasing Customer Value Common organizational strategies to create customer value: Innovative product/service design High-quality products and services Low-cost production Strategies require planning and implementation, both of which are supported by Management Accounting

15. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-15 Strategies and Management Accounting Strategies require planning and implementation, both of which are supported by management accounting Management accounting methods should differ depending on the strategy chosen Matching management accounting methods with a strategy is critical to the success of the organization

16. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-16 Organizations and Decisions Stakeholders are parties that are affected by the organization Stakeholders Owners Creditors Employees Customers Society

17. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-17 Organizational Structure Organization Measurement of Performance Measurement of Performance Assignment of Responsibilities Assignment of Responsibilities Rewarding of Individuals Rewarding of Individuals

18. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-18 Assigning Responsibilities An Organization Chart provides lines of authority to determine responsibility Line Functions Staff Functions

19. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-19 Decision Making Within an Organization – Planning Decisions Decisions about what tasks should be performed and how to complete those tasks Long-term decisions tend to be made by top-level managers Short-term decisions tend to be made by lower levels of management Revolve around activities in the value chain Choice and design of products/services Activities necessary to make/deliver products/services Customer service choices

20. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-20 Decision Making Within an Organization – Control Decisions Decisions relating to managing, motivating and monitoring individuals within the organization Proper organizational design and assignment of responsibilities help control decisions of members of the organization Control includes the choice of performance measures organizations control members through monitoring

21. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-21 Framework for Organizational Change – Strategic Level What are the Opportunities and Threats that exist in the business environment with respect to technological change, globalization, and customer preferences? What are the Strengths and Weaknesses of the organization in creating customer value through innovative products/services, high quality, and/or low cost?

22. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-22 Framework for Organizational Change – Implementation Level What activities should be implemented to achieve the strategy and create organizational value? How should the organization assign responsibilities, measure performance, and compensate employees to motivate employees to make decisions consistent with the strategy?

23. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-23 The Role of Accounting Accounting plays an integral part in assisting an organization to achieve its goals

24. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-24 The Role of Accounting In this section, we will focus on the Managerial Role of the Accounting System Accounting System

25. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-25 Use of Accounting for Making Planning Decisions Managers’ Sources of Information Management Accounting System Competition Non-financial organizational Goals Legal Environment Political Environment Information on customer tastes

26. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-26 Use of Accounting for Control Decisions Management Accounting Assists Control by Helping to align the interests of the members of the organization with the goals of the organization

27. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-27 Emergence of Management Accounting 1825 - 1925 The growth of large organizations and the need for accurate information 1975 - Rapid technological change, globalization and customer needs caused major changes in management accounting 1925 - 1975 Financial Accounting took precedence over Managerial Accounting

28. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-28 Trade-Offs in Using Accounting for Multiple Purposes Because a single accounting system will not provide appropriate information for all decisions, trade-offs must be made among the different roles for accounting

29. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-29 Trade-Offs Planning Decision vs. Control For Example: Estimates of future costs are used in planning while historical cost is used for external reporting Trade-Offs in Using Accounting for Multiple Purposes Planning Decision vs. External Reporting For Example: A computer specialist may select a more powerful computer than is necessary to perform a task For Example: Managers may cut maintenance costs to increase current profits at the expense of future profits Control vs. External Reporting

30. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-30 Types of Management Accountants Management accountants are responsible for the accounting system within the organization In small organizations the management accounting function is performed by a book- keeper In larger organizations someone is assigned the responsibilities of management accountant. That person is usually called the controller Management accountants are responsible for the accounting system within the organization In small organizations the management accounting function is performed by a book- keeper In larger organizations someone is assigned the responsibilities of management accountant. That person is usually called the controller

31. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-31 Board Of Directors President and CFO VP Operations Division Mgr Manufacture Sales Division Mgr VP Finance Controller Cost Financial Tax Internal Audit Treasurer Other VPs Organizations and Decisions In larger organizations, The Controller is normally assigned the responsibilities of a Management Accountant Line Functions Staff Functions

32. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-32 Board Of Directors President and CFO VP Operations Division Mgr Manufacture Sales Division Mgr VP Finance Controller Cost Financial Tax Internal Audit Treasurer Other VPs Organizations and Decisions The Internal Audit Department is also concerned with decision control Line Functions Staff Functions

33. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-33 Ethics and Management Accounting The Chartered Institute of Management Accountants (CIMA) has prescribed the following set of ethical standards: Integrity Objectivity Professional Competence and due care Confidentiality Professional behaviour

34. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-34 Ethics and Management Accounting The Chartered Institute of Management Accountants (CIMA), the Society of Management Accountants of Canada (SMAC) and the Institute of Management Accountants in the US also administers programmes that qualify Certified Management Accountants (CMA) examination, which covers topics relating to: Management Accounting Economics Finance Financial Accounting Organizational behaviour Decision Analysis

35. © Pearson Education Limited 2008 Management Accounting McWatters, Zimmerman, Morse 1-35 Management Accounting Organizations and accounting End of Chapter 1