Management Accounting

How Management Accounting Information

Information Supports  The Institute of Management Accountants has
defined management accounting as:
Decision Making
– A profession that involves partnering in
management decision making, devising planning
Chapter 1 and performance systems, and providing expertise
in financial reporting and control to assist
management in the formulation and
implementation of an organization’s strategy

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Management Accounting Management Accounting

Information Information
 Management accounting provides relevant  Examples of management accounting information
information to managers and employees include:
– Both financial and nonfinancial information – The reported expense of an operating department
– Useful for making decisions, allocating resources, – The cost of producing a product
and monitoring, evaluating, and rewarding – The cost of delivering a service
performance – The cost of performing an activity or business
– Customized to serve multiple purposes process
– The cost of serving a customer

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 Comparison of Financial and
Managerial Accounting Changing Focus
Financial Accounting Managerial Accounting  Early 19th century – systems to measure the cost of
1. Users External persons who Managers who plan for producing individual products
make financial decisions and control an organization
 Middle of the 19th century
Retrospective and
2. Time focus Retrospective Prospective – Railroads first to develop and use financial
3. Emphasis Objectivity and Relevance for
statistics to assess and monitor performance
verifiability planning and control – Andrew Carnegie developed detailed cost systems
4. Importance Precision of Timeliness of that gave him a competitive advantage
information information
 Early 20th century – DuPont and General Motors
5. Subject focus Summarized data for Detailed segment reports expanded the focus to planning and control
the whole organization of an organization
6. GAAP Must follow GAAP/IFRS Need not follow GAAP/IFRS
 1970’s – Japanese manufacturers developed new
and prescribed formats or any prescribed format tools to report on quality, service, customer, and
7. Requirement Mandatory for Not employee performance
external reports Mandatory © 2012 Pearson Prentice Hall. All rights reserved.

Plan-Do-Check-Act Cycle
Strategy
or Deming Cycle
 Management accounting is a discipline that helps
an enterprise to develop and implement its  Developed by quality expert, W. Edwards Deming
strategy
 A systematic and recursive way to develop,
 Strategy is about an organization making choices
implement, monitor, evaluate, and change a course
about what it will do or not do
of action
 As a strategy gets executed, management
accounting information provides feedback

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 PDCA Steps Behavioral Implications
 Plan Step defines the organization’s purpose and  As measurements are made on operations and
selects the focus and scope of its strategy especially on individuals and groups their
behavior changes
 Do Step involves the implementation of a chosen
– People react when they are being measured, and
course of action they react to the measurements
 Check Step includes measuring and monitoring – They focus on the variables and behavior being
performance and taking short-term actions based measured and spend less attention on those not
on measured performance measured
 Action Step involves managers taking actions to  Two old sayings recognize these phenomena:
lower costs, change resource allocations, and – “What gets measured gets done.”
improve quality – “If you don’t measure it, you can’t manage and
improve it.”
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Behavioral Implications Behavioral Implications

 Employees familiar with the current system may  Management accountants must understand and
resist as managers attempt to introduce or redesign anticipate the reactions of individuals to
cost and performance measurement systems information and measurements
 Employees have acquired expertise in the use of  When the measurements are used not only for
the old system information, planning, and decision-making, but
also for control, evaluation, and reward,
 Employees also may feel committed to the employees and managers place great pressure on
decisions based on the information the old system the measurements themselves
produced

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 Behavioral Implications
 Managers and employees may take unexpected The Balanced Scorecard
and undesirable actions to influence their score on
the performance measure and Strategy Map
 Managers seeking to improve current bonuses
based on reported profits may skip discretionary Chapter 2
expenditures that may improve performance in
future periods

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Performance Measurement
Balanced Scorecard
Systems
 Measurement must support the company’s  The Balanced Scorecard (BSC) provides a system
strategy and operation for measuring and managing all aspects of a
company’s performance
 Must be designed so companies get better at  The scorecard balances traditional financial
managing and improving the value created from measures of success, such as profits and return on
their intangible assets capital, with nonfinancial measures of the drivers
of future financial performance
 Need to move from reliance on financial measures
 The Balanced Scorecard measures organizational
to a mix of financial and nonfinancial measures
performance across different perspectives

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 The Four Perspectives of the
Balanced Measurements
Balanced Scorecard
Four different but linked perspectives are derived from the organization’s  The BSC enables companies to:
mission, vision and strategy:
Financial – Track financial results
Creating organizational value
for owners/shareholders. – Monitor how they are building the capabilities for
future growth and profitability
 With customers
Mission, Process
Customer With their internal processes
Vision, Ensuring efficiency and 

Adding value for customers.

Strategy quality in the value chain.  With their employees and systems

Learning and Growth

Investing in organizational
infrastructure.
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Strategy Enter the Strategy Map

 A strategy accomplishes two principal functions:  The strategy map is a picture that illustrates the
causal relationships among the balanced scorecard
– Creating a competitive advantage by positioning
perspectives
the company in its external environment with
resources to support customers better than its  The strategy map is a guide to action that relates
competitors the management actions needed to achieve an
organization objective with the measures designed
– Having a clear strategy provides clear guidance for to assess performance on those actions
how internal resources should be allocated to gain a
competitive advantage in the marketplace

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 The Overall Picture –
Financial Perspective
Summary
 The ultimate objective for profit-seeking
companies
 Financial performance measures indicate whether
the company’s strategy, implementation, and
execution are contributing to bottom-line
improvement
 A company’s financial performance can be
improved in two ways: productivity improvements
and revenue growth

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Financial Measure
Financial Perspective
Alternatives
 Increased productivity occurs by:
– Lowering direct and indirect expenses
– Utilizing their financial and physical assets more
efficiently
 Companies generate revenue growth by:
– Selling additional products or services to existing
customers
– Selling new products, selling to new customers,
and expanding into new markets

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 The Customer Perspective Value Proposition Alternatives
 The customer perspective reflects what the  A taxonomy originally developed by Michael Porter a
organization promises its target customers. well-known strategist
– Cost Effectiveness
 This promise is called the value proposition  You sell a commodity where prices are set by the market

 The value proposition’s components are – your key control lever is cost
– Product Leadership
– Price
 You compete by constantly bringing new products into

– Quality the market place – your key control lever is innovation

– Time – Customer Intimacy
 You compete by meeting the unique requirements of
– Function
each customer – you key control lever is understanding
– Service customer requirements

25 26

Customer Objectives and

Process Perspective
Measures
 The process perspective reflects how the
organization plans to deliver its value proposition
 Useful to think in terms of process type
– Operations management processes
– Customer management processes
– Innovation processes
– Regulatory and social processes
 The customer value proposition will determine the
relative importance of each process type

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 Process Objectives and Learning and Growth
Measures Perspective
 Reflects the development of intellectual capital
(organization know-how) needed to develop and
improve objectives in the process perspective

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Learning and Growth Learning and Growth Objectives

Perspective and Measures

 Identifies objectives that drive improvement in the

process objectives
– Human Resources
– Information Technology
– Organization Culture and Alignment

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 BSC in Nonprofit and
NPGOs and Strategy
Government Organizations
 Many NPGOs encountered difficulties in
 The BSC is especially well-suited for nonprofit
developing their initial BSC, finding that they
and government organizations (NPGOs)
didn’t have a clear strategy
 Their success has to be measured by their
 Many NPGOs place their mission objective at the
effectiveness in providing benefits to constituents
top of their scorecard and strategy map
 Because nonfinancial measures can assess – Cannot use the standard BSC architecture where
performance with constituents, the BSC provides financial objectives are the ultimate, high-level
the natural performance management system for outcomes to be achieved
NPGOs

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Managing with the BSC Barriers to Effective Use

 The benefits from BSC are realized as the  Senior management is not committed
organization integrates its new measurement
system into management processes that:  Scorecard responsibilities do not filter down
– Communicate the strategy to all employees and
organizational units  The solution is overdesigned, or the scorecard is a
– Align employees’ individual objectives and one-time event
incentives to successful strategy implementation
– Integrate the strategy with ongoing management  The scorecard is treated as a systems or consulting
processes project

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