Management Accounting: Information That Creates Value

Management Accounting: Information That Creates Value
Chapter 1  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Management Accounting Information (1 of 5)
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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Be aware that this definition identifies: Management accounting as providing both financial information and nonfinancial information The role of management information as supporting strategic (planning), operational (operating) and control (performance evaluation) management decision making In short, management accounting information is pervasive and purposeful It is intended to meet specific decision-making needs at all levels in the organization  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

A Brief History (1 of 8) 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 Considerable evidence of scribes in early Babylon, Greece, and during the era of the Roman Empire In Egypt, during the time of the Pharaohs, the treasurer, who was the head scribe, occupied the most senior administrative position in the empire, responsible for managing all aspects of the Pharaohs’ wealth This treasury role for management accountants was virtually the same until medieval England  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

A Brief History (2 of 8) In medieval England, producers (the Guilds) kept detailed records of raw materials and labor costs as evidence of product quality Change of focus from measuring wealth to providing a basis for quality assurance Still, the role was primarily recording the assets From , the rudiments of basic modern management accounting practice emerged They included notions of standards for materials use, employee productivity, job costing forms, and budgets Management accounting became more decision oriented and supported decisions relating to building or retiring fixed assets, managing costs, and product pricing  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

A Brief History (3 of 8) Cost of Manufacturers
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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

A Brief History (4 of 8) In the late 19th century, railroad managers implemented large and complex costing systems Allowed them to compute the costs of the different types of freight that they carried Supported efficiency improvements and pricing in the railroads 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

A Brief History (5 of 8) Carnegie was highly effective in reducing costs and unsentimental in closing mills that he felt were irretrievably inefficient 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 DuPont and General Motors are examples Managers developed ways to measure the return on investment and the performance of their units (more on this later)  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

A Brief History (6 of 8) After the late 1920s management accounting development stalled Accounting interest focused on preparing financial statements to meet new regulatory requirements It was only in the 1970s that interest returned to developing more effective management accounting systems American and European companies were under intense pressure from Japanese automobile manufacturers During the latter part of the 20th century there were innovations in costing and performance measurement systems – the focus of this text  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

A Brief History (7 of 8) The history of management accounting comprises two characteristics: 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

A Brief History (8 of 8) 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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 But to explain financial results, managers need to dig deeper Detailed information provides additional insight into what is happening to profits  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Business Level Strategy and the Value Proposition (1 of 2)
A key element of any organization’s strategy is identifying its target customers and delivering what those target customers want What the organization tries to deliver to customers is called its value proposition Value propositions have four elements: Cost – the price paid by the customer, given the product features and competitors’ prices 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Business Level Strategy and the Value Proposition (2 of 2)
Value propositions have four elements (cont.): 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 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Financial Control As previously stated, an organization can use financial and nonfinancial information to monitor the organization’s ability to deliver its chosen value proposition At a higher level, however, organizations use broad measures of financial performance to assess the overall success of the organization’s chosen strategies This approach to evaluating aggregate performance is called financial control  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Origins in 20th-Century Enterprises
Many innovations in financial control systems occurred in the early decades of the twentieth century to support the growth of multiple-division diversified corporations E.g., DuPont and General Motors As the DuPont Company expanded, it had to: Acquire raw materials from many different suppliers Process these materials through many production stages in several different types of plants Produce a diversified mix of chemical products that were bought by companies in many different industries  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Financial Control at DuPont
The senior executives of the diversified DuPont Company devised techniques to coordinate operating activities in their different divisions: An operating budget The document that forecasts revenues and expenses during the next operating period, including monthly forecasts of sales, production, and operating expenses A capital budget The document that authorizes spending for resources with multiyear useful lives (capital assets) The vital return on investment (ROI) performance measure developed by Donaldson Brown, the chief financial officer (CFO) of DuPont  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

ROI: The DuPont Formula
The ROI calculation gave DuPont executives a single number to evaluate the performance of their operating divisions and decide which of their divisions should receive additional capital to expand capacity The ROI measure combined a profitability measure with a capital intensity measure to produce return on investment or ROI Profitability Measure: = Operating income/Sales Asset or Capital Utilization Measure: = Sales/Investment  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Financial Control at GM (1 of 4)
Around 1920, Brown left DuPont to become CFO for General Motors under its new chief executive officer, Alfred Sloan Under Sloan’s and Brown’s leadership, General Motors introduced many management accounting initiatives to accomplish the company’s guiding operating philosophy of “centralized control with decentralized responsibility” Decentralized responsibility refers to the authority that local-division managers had in order to make their own decisions without having to seek higher approval on pricing, product mix, customer relationships, product design, acquisition of materials, and appropriate operating processes  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Decentralization allowed managers to use their superior access to information about local opportunities and operating conditions to make better and more timely decisions Centralized control of decentralized operations was accomplished by having corporate managers receive periodic financial information about divisional operations and profitability This summary financial information helped assure the senior managers that their division managers were making decisions and taking actions contributing to overall corporate goals  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

The management accounting system at General Motors, enabled such a complex organization to plan, coordinate, control, and evaluate the operations of multiple, somewhat independent operating divisions E.g., assembly divisions producing Chevrolet, Pontiac, and Buick automobiles And component divisions producing parts E.g., radiators, batteries, fuel pumps, engines, and transmissions  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

The management accounting system enabled the managers of these divisions to pursue their individual financial, operating, design, and marketing objectives aggressively while contributing in a coherent fashion to the overall wealth of the corporation Sloan’s and Brown’s initiatives played a critical role in creating an enormously successful enterprise from 1920 to 1970  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Organization Control and the Management Accountant
Organization control comprises the systems that organizations use to ensure that managers and employees behave in a way that is consistent with the organization’s ethics and best interests Although internal control systems protect the organization’s assets from fraud or theft, little interest or attention was paid to evaluating the appropriateness of management’s governance and strategic choices Massive corporate governance failures in 2002 caused intense interest in organization control  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Changes in Organization Control (1 of 2)
After massive corporate governance failures organizations call on management accountants to develop structures to motivate and monitor compliance with behavior that is consistent with the organization’s best interests Failures in organizations like Tyco International, Sunbeam, Waste Management, Cendant, WorldCom and Adelphia  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Changes in Organization Control (2 of 2)
Innovations will likely include developing: Information that independent Boards of Directors can use to evaluate the organization’s strategy Monitoring employee attitudes toward the organization’s success, environment, and decisions to ensure behavior consistent with the organization’s objectives Developing information systems to assess whether the organization’s ethical standards are actually being practiced  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Service Companies (1 of 2)
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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Service Companies (2 of 2)
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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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 E.g., national railroads, airlines, postal services, and telecommunications companies Others, such as local retailers, were subject only to local, not national or global, competition  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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 Accordingly, there was little demand from them for information to help them make decisions on those issues 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Competitive Environment (1 of 2)
The competitive environment has now become far more challenging and demanding for both manufacturing and service companies Accordingly, companies now demand better management accounting information 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 Before long it was not sufficient for a company to have cost and quality parity against its domestic competitors 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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 Are the organizations achieving their intended purpose and measures of efficiency? Are they using their resources productively? 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Financial & Nonfinancial Information in Government and Not for Profit Organizations (1 of 2)
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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Financial & Nonfinancial Information in Government and Not for Profit Organizations (2 of 2)
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 For example, what is the best way to approach training for an individual who is chronically unemployed so that the person’s needs are met at the lowest cost to society?  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Behavioral Implications (1 of 4)
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.”  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

People familiar with the current system may resist as managers attempt to introduce or redesign cost and performance measurement systems They have acquired expertise in the use (and, perhaps, misuse) of the old system and wonder whether their experience and expertise will apply to the new system People also may feel committed to the decisions based on the information the old system produced Actions taken may no longer seem valid based on the information produced by a newly installed management accounting system A new management system can be a threat or lead to embarrassment and may lead to a resistance to change  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Management accountants must understand and anticipate the reactions of individuals to information and measurements An analysis of the behavioral and organizational reactions to the measurements must accompany the design and introduction of new measurements and systems More importantly, 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Managers and employees may take unexpected and undesirable actions to influence their score on the performance measure For example, managers seeking to improve current bonuses based on reported profits may skip discretionary expenditures that may improve performance in future periods Preventive maintenance Research and development Advertising  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Ethics & the Management Accountant (1 of 9)
When management accounting information is used for control, management accountants may find themselves in complex situations, fraught with conflict Especially when it is used for performance evaluation 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 The cost of inefficient processes The existence of substantial amounts of excess capacity  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Ethics (2 of 9) Senior executives whose incentive compensation is based on the reported financial numbers may put pressure on accountants To recognize revenue from a customer early To defer until subsequent periods the recognition of an expense In some circumstances, to recognize certain expenses early so that much higher earnings may be reported in future periods All of these behaviors were evident in the frauds dominating the financial news in recent years Organizational leadership plays a critical role in fostering a culture of high ethical standards  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Ethics (3 of 9) 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 Such as being asked to misrepresent an organization unit’s performance potential when the unit is being offered for sale  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Ethics (4 of 9) 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: Credos Mission statements Vision statements Statements of purpose or values  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

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 When conflicting situations arise, however, the lofty rhetoric in the statements will only have true meaning and serve as guides to actions if employees observe senior managers acting according to the statements In this way, employees learn that the company’s stated beliefs represent deeply rooted and actionable values 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Ethics (6 of 9) Companies also need boundary systems that communicate what actions must never be taken Boundary systems are stated in negative terms, or in minimal standards of behavior Intended to constrain the range of acceptable behavior For example, the organization might tell employees in the Purchasing Department that accepting any gifts under any circumstances from suppliers will result in immediate termination Boundary systems also include clear communication of the laws under which the company operates Examples include antitrust laws; zero tolerance for sexual, racial, and gender discrimination and harassment; environmental, health, and safety laws; and foreign corrupt practices regulations  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Ethics (7 of 9) 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 As designers and custodians of the organization’s reporting and control systems, 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Ethics (8 of 9) If violations are detected but not acted upon, management accountants can communicate with the audit committee of the board of directors, who are the shareholders and society’s representatives in the organization 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)  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Ethics (9 of 9) 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 They have procedures for disciplinary action when violations are detected Many of the guidelines are phrased in terms of what management accountants should not do, consistent with how boundary systems operate  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Meeting the Challenge (1 of 3)
Management accounting has become an exciting discipline that is undergoing major changes to reflect the challenging new environment that organizations worldwide now face This chapter has introduced the need for organizations to develop and use appropriate financial and nonfinancial information that will: 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  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

In government and not-for-profit organizations the focus will be on the organization’s performance in meeting the needs of their citizens or clients 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 In public sector and not-for-profit organizations focus on the cost to deliver services to customers and to monitor and improve process efficiency Enable all organizations to identify process improvements needed to improve the organization’s ability to deliver its value proposition  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Enable all organizations to identify the potential of the organization’s members to manage and improve process performance 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 Enable the organization to motivate, monitor, and detect noncompliance with inappropriate organization behavior  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

If you have any comments or suggestions concerning this PowerPoint presentation, please contact: Terry M. Lease Sonoma State University  2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University

Management Accounting: Information That Creates Value

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Management Accounting: Information That Creates Value

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