MANAGEMENT ACCOUNTING

1. MANAGEMENT ACCOUNTING Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse

2. 1-2 Management Accounting Organizations and accounting Chapter 1

3. 1-3 Objectives • 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. 1-4 Management Accounting in a Changing Environment Helps create organizational value through better decision making and management Accountingwithinorganizations Management Accounting Is linked to the organization’s characteristics No fixed set of rules to follow Provides information in a dynamic environment Continually evolves to meet organization needs

5. 1-6 Information Acquisition and Dissemination Computer-Integrated Manufacturing (CIM) An organization where all systems are linked by computer Computer Assisted Design (CAD) The use of three-dimensional plans to create new products Computer-Assisted Manufacturing (CAM) Allows organizations to make products using programmed machines

6. 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

7. 1-8 Globalization Total Quality Management Lower Costs The Increase In Global Competition Requires Just-In-Time Increased Efficiency

8. 1-9 Total Quality Management (TQM) Quality designed into product Customer defines quality Involves everyone in organization TQM Seeks to lower costs and improve quality Seeks continuous improvement

9. 1-10 Customer Service Distribution Production Design and Engineering Customers Value Chain Analysis Processes not on the value chain are considered non-value-added activities Research and Development

10. 1-11 Customer Service Distribution Production Design and Engineering Customers Value Chain Analysis Elimination of non-value-added activities saves resources and helps sell products at lower prices Research and Development

11. 1-12 Planning Decisions Product/Service Design Production and Delivery Customer Services Control Decisions Responsibilities Performance Measures Compensation Framework for Organizational Change Technological Change Customer Preferences Globalization Strategy for Customer Value Product/Service Innovation Quality, Low Cost Customer Value Organizational Value

12. 1-13 Strategy for Increasing Customer Value Must offer product or service at a price less than customer value Must develop strategies by looking at the opportunities and threats posed by technological change globalization and customer preferences Must recognize their own strengths and weaknesses given the existing and proposed characteristics of the organization Must provide the product or service at a cost less than the price

13. 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

14. 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

15. 1-16 Organizations and Decisions Stakeholders are parties that are affected by the organization Owners Society Stakeholders Customers Creditors Employees

16. 1-17 Organizational Structure Organization Assignment of Responsibilities Measurement of Performance Rewarding of Individuals

17. 1-18 Assigning Responsibilities An Organization Chart provides lines of authority to determine responsibility Staff Functions Line Functions

18. 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

19. 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

20. 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?

21. 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?

22. 1-23 The Role of Accounting Accounting plays an integral part in assisting an organization to achieve its goals

23. 1-24 The Role of Accounting In this section, we will focus on the Managerial Role of the Accounting System Accounting System

24. 1-25 Use of Accounting for Making Planning Decisions Political Environment Management Accounting System Managers’ Sources of Information Legal Environment Non-financial organizational Goals Competition Information on customer tastes

25. 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

26. 1-27 Emergence of Management Accounting The growth of large organizations and the need for accurate information 1825 - 1925 1925 - 1975 Financial Accounting took precedence over Managerial Accounting 1975 - Rapid technological change, globalization and customer needs caused major changes in management accounting

27. 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

28. 1-29 Trade-Offs in Using Accounting for Multiple Purposes Trade-Offs For Example: A computer specialist may select a more powerful computer than is necessary to perform a task For Example: Estimates of future costs are used in planning while historical cost is used for external reporting Planning Decision vs. External Reporting Planning Decision vs. Control Control vs. External Reporting For Example: Managers may cut maintenance costs to increase current profits at the expense of future profits

29. 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

30. 1-31 Organizations and Decisions Staff Functions Line Functions In larger organizations, The Controller is normally assigned the responsibilities of a Management Accountant

31. 1-32 Organizations and Decisions Staff Functions Line Functions The Internal Audit Department is also concerned with decision control

32. 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

33. 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 USalso administers programmes that qualify CertifiedManagement Accountants (CMA)examination, which covers topics relating to: • Management Accounting • Economics • Finance • Financial Accounting • Organizational behaviour • Decision Analysis

34. 1-35 Management Accounting Organizations and accounting End of Chapter 1