MANAGEMENT ACCOUNTING Analysis and Interpretation

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MANAGEMENT ACCOUNTINGAnalysis and
Interpretation

• Cheryl S. McWatters
• Dale C. Morse
• Jerold L. Zimmerman

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Management Accounting in an Organizational
Context

• Chapter 1

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Management Accounting in a Changing Environment
Accounting within organizations
Management Accounting
No fixed set of rules to follow
Continually evolves to meet organization needs
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Technological Change
Innovations have revolutionized the way
organizations operate.
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Computers
Computer-Integrated Manufacturing (CIM) describes
an organization where all systems are linked by
computer.
Computer-Assisted Design (CAD) is the use of
three-dimensional plans to create new products.
Computer-Assisted Manufacturing (CAM) allows
organizations to make products using programmed
machines.
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Information Acquisition and Dissemination
Telecommunications and computer industries have
revolutionized the way organizations operate.
The Internet provides information to potential
customers, service to customers following
purchase, and is important in providing
coordination with suppliers.
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Internet
The Internet is rapidly becoming an integral part
of normal business operations.
Organizations can outsource different processes
including manufacturing and billing.
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Globalization
The increase in global competition requires. . .
Lower costs
Increased efficiency
Just-in-time(JIT)
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Customers TQM, Value Chain Analysis
Involves everyone in organization
Customer defines quality
Total Quality Management (TQM)
Seeks continuous improvement
Seeks to lower costs and improve quality
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Customer TQM, Value Chain Analysis
Processes not on the value chain are considered
non-value-added activities.
Research and Development
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Customer TQM, Value Chain Analysis
Elimination of non-value-added activities saves
resources and helps sell products at lower prices.
Research and Development
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Adapting to a Changing Environment
Strategy for Customer Value Product/Service
Innovation Quality Low Cost
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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.
Threats
Opportunities
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Strategy for Increasing Customer Value
Common organizational strategies

• Innovative Product/Service Design

• High-Quality Products and Services

• Low-Cost Production

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Strategy for Increasing Customer Value
Common organizational strategies

• 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.
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Organizations and Decisions
Stakeholders are parties that are affected by the
organization.
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Organizational Structure
Measurement of Performance
Assignment of Responsibilities
Rewarding of Individuals
Processes in an Organization
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Board Of Directors
President and CFO
Line Functions
Staff Functions
VP Operations
VP Finance
Other VPs
Division Mgr.
Division Mgr.
Controller
Treasurer
Internal Audit
Manufacture
Sales
Cost
Financial
Tax
An organization chart provides lines of authority
to determine responsibility.
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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 at lower
  levels of management.

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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.

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Framework for Organizational Change
Technological Change
Customer Need
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
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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
  needs?
• What are the strengths and weaknesses of the
  organization in creating customer value through
  innovative products/services, quality, and/or low
  cost?

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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?

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The Role of Accounting
In this course, we will focus on the managerial
role of the accounting system.
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Use of Accounting for Making Planning Decisions
Management Accounting System
Political Environment
Managers Sources of Information
Legal Environment
Non-financial Organizational Goals
Competition
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Use of Accounting for Control Decisions

• Management accounting assists in control by
• Developing a reward system based on accounting
  numbers.

My performance evaluation is based on the
accounting profits of my division.
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Use of Accounting for Control Decisions

• Management accounting assists in control by
• Limiting employees actions based on accounting
  numbers.

If a return is for 50 or more, I must get a
managers approval.
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Emergence of Management Accounting
1825 to 1925 The growth of large organizations
and the need for accurate information. 1925-1975
Financial accounting took precedence over
managerial accounting. 1975 Rapid technological
change, globalization and customer needs caused
major changes in management accounting.
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TradeOffs 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.
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TradeOffs in Using Accounting for Multiple
Purposes
Planning Decisions vs. Control
For example, a computer specialist may select a
more powerful computer than necessary to perform
a task.
TradeOffs
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TradeOffs in Using Accounting for Multiple
Purposes
Planning Decisions vs. Control
Planning Decisions vs. External Reporting
TradeOffs
For example, estimates of future costs are used
in planning while historical cost is used for
external reporting.
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TradeOffs in Using Accounting for Multiple
Purposes
Planning Decisions vs. Control
Planning Decisions vs. External Reporting
TradeOffs
For example, managers may cut maintenance costs
to increase current profits at the expense of
future profits.
Control vs. External Reporting
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Multiple Accounting Systems
The use of multiple accounting systems solves the
trade-off problems but creates confusion when
different systems report different numbers.
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Types of Management Accountants
The accounting system should be designed to
assist in planning decisions, control, and
financial and tax reporting.
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Board Of Directors
President and CFO
Line Functions
Staff Functions
VP Operations
VP Finance
Other VPs
Division Mgr.
Division Mgr.
Controller
Treasurer
Internal Audit
Manufacture
Sales
Cost
Financial
Tax
In larger organizations, the controller is
normally assigned the responsibilities of a
management accountant.
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Ethics and Management Accounting

• The Institute of Management Accountants (IMA)
  has prescribed the following set of ethical
  standards
• Competence
• Confidentiality
• Integrity
• Objectivity

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Ethics and Management Accounting

• The IMA also administers the Certified
  Management Accountants (CMA) examination, which
  covers topics related to
• Economics
• Finance
• Financial Accounting
• Organizational Behavior
• Decision Analysis

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End of Chapter 1