1. Management Accounting in a Changing Environment
CHAPTER FOURTEEN
Management Accounting in a Changing Environment

2. Outline of Chapter 14 Management Accounting in a Changing Environment
Integrative Framework
Organizational Innovations and Management Accounting
When Should the Internal Accounting System be Changed?

3. Connection to Other Chapters
Chapter 14 summarizes the concepts developed in the previous chapters and applies them to recent internal accounting system innovations.
Every chapter mentions the trade-offs between decision management (decision making) and decision control.
Internal accounting systems continue to evolve in response to changing needs and environments.

4. History of Management Accounting
As firms evolve, internal accounting systems evolve.
Early 1800s: Multi-process textile mills develop absorption costing.
: Multi-location firms create cost controls.
: Large corporations decentralize in operating divisions.
: External reporting dictates internal accounting design.
Recent: Automation induces redesign of product costing.
Recent: TQM requires more non-financial measures
Recent: JIT producers want to identify non-value-adding activities.
Recent: The Balanced Scorecard links strategy to key performance indicators to help determine if the organization is moving in the right direction.

5. Organizational Architecture
See Figure 14-1.
Decision rights partitioning
Separating decision management and control
Performance evaluation system
Management accounting system
Nonfinancial measures
Performance reward and punishment system

6. Business Strategy Asset structure influences performance measurement.
Some firms can use historical financial accounting.
Publicly-traded firms may use stock market value.
Customer base influences distribution of specialized knowledge.
May decentralize into many responsibility centers
Knowledge creation influences partitioning of decision rights.
If knowledge is easy to acquire, more centralization is possible.

7. Environmental and Competitive Forces
Technological change
Changes relative value of investment projects
Changes performance measures and controls
Global market conditions change
Production sources dispersed internationally
Competitors from other countries

8. Quality’s Multiple Meanings
Different meanings of quality can conflict.
High mean
Low variance
Larger number of options
Meeting customer expectations
Partitioning decision rights
Who determines quality goals?
Who measures quality?

9. TQM Program Elements A firmwide process
communicate up, down, and laterally
Quality is defined by customer
specialized knowledge of customer needs
Requires organizational changes
push decision rights down to operating and marketing
Designed into the product
Reduce defects by redesigning production

10. ISO 9000
Issued by International Standards Organization, a European community body that sets quality standards.
Requires written policies, procedures, and quality methods.
Certifies that policies exist that allow quality products to be manufactured.

11. TQM Quality Costs Benefits Reduce internal failures (before sold)
Reduce external failures (after sold)
Costs
Prevention (reengineering and training)
Appraisal (inspection and testing before delivery)
Find optimal balance between benefits and costs.
See Self-Study Problem 1.

12. JIT Goals Just-in-time (JIT) production:
Production does not start until order is received.
JIT aims to minimize throughput time.
Throughput time = Processing time + Non-value-added time
Non-value-added time = Waiting + Transit + Inspection
Manufacturing cycle efficiency (MCE) (not mentioned in textbook)
MCE = (Processing time)  (Throughput time)

13. JIT Techniques Increase quality of material and processes
Reduce setup times
Balance flow rates across manufacturing cells
Coordinate deliveries from suppliers
Improve factory layout to reduce transit time
Change performance measurement and reward system to focus on reducing throughput time of entire production process rather than individual departments

14. JIT Cost Flows See Figure 14-3. Compare to Figure 9-1.
Raw and In-Process (RIP) combines raw materials and work-in-process.
Conversion Cost combines direct labor and all manufacturing overhead.
Backflushing: As work completed, transfer costs to finished goods
from RIP using standard rates or specific identification
from conversion costs using throughput time or other allocation base
See Self-Study Problem 2.

15. JIT Limitations Advantages:
Simpler because no work-in-process accounting
Focus attention on throughput time
Disadvantages:
Become dependent on suppliers for on-time delivery
Still need periodic physical count of materials inventory
Reorganizing production can be expensive.

16. Balanced Scorecard Translates the strategy into a plan of action
Identifies specific objectives and performance drivers (key performance indicators)
Helps determine if the organization is moving in the right direction

17. Balanced Scorecard Attempts to achieve a balance between:
short and long-term objectives
outcome and performance measures for cause and effect objectives
financial and non-financial performance measures
all of the stakeholders of the organization

18. Balanced Scorecard For each objective there are
Driver performance indicators
measure input activities to achieve the objective
Outcome performance indicators
Measure if the objective has been realized
Driver and outcome performance indicators reflect the cause and effect nature of the balanced scorecard.

19. The Balanced Scorecard’s Four Perspectives
Innovation and Learning
Perspective
Customer
Perspective
Financial
Perspective
STRATEGY
Internal Business
Processes
Perspective

20. Example Objectives, Performance Indicators, and Targets
Review Table 14-1.
Pay particular attention to the specificity of the definition of each element, particularly the targets.

21. When Should the Internal Accounting System be Changed?
Continual evolution (economic Darwinism)
No ideal management accounting system
Respond to changes in technology and markets
Trade-offs
Decision making vs. Decision control
Opportunity cost vs. Historical cost
Simplicity vs. Comprehensiveness
Internal users vs. External users
Financial measures vs. Nonfinancial measures