The Changing Business Environment: A Manager’s Perspective18

The Role of Management Accounting

OBJECTIVE 1: Distinguish management accounting from financial accounting and explain how management accounting supports the management process.

Table 1: Comparison of Management and Financial Accounting

Figure 1: Overview of the Planning Framework

Figure 2: The Supply Chain

Exhibit 1: A Management Accounting Report

The Role of Management Accounting

• Like financial accounting, management accounting assists decision makers by providing pertinent information and communicating the information through reports.

The Role of Management Accounting

• Management accounting differs from financial accounting in many respects:– Primary users

• Management accounting information: managers, employees, supply chain partners

• Financial accounting information: owners or stockholders, lenders, customers, government agencies

The Role of Management Accounting

• Management accounting differs from financial accounting in many respects: (cont.)– Report format

• Management accounting: flexible format, driven by user’s needs

• Financial accounting: based on generally accepted accounting principles

The Role of Management Accounting

• Management accounting differs from financial accounting in many respects: (cont.)– Purpose of reports

• Management accounting: to provide information for planning, control, performance measurement, and decision making

• Financial accounting: to report on past performance

The Role of Management Accounting

• Management accounting differs from financial accounting in many respects: (cont.)– Nature of information

• Management accounting: objective and verifiable for decision making; more subjective for planning (relies on estimates)

• Financial accounting: historical, objective, and verifiable

The Role of Management Accounting

• Management accounting differs from financial accounting in many respects: (cont.)– Units of measure

• Management accounting: dollars at historical, current market, or projected values; physical measures of time or number of objects

• Financial accounting: dollars at historical and current market values

The Role of Management Accounting

• Management accounting differs from financial accounting in many respects: (cont.)– Frequency of reports

• Management accounting: prepared as needed; may or may not be on a periodic basis

• Financial accounting: prepared on a periodic basis (minimum of once a year)

The Role of Management Accounting

• Management accounting provides relevant information at each stage of the management process.– Planning stage: Management accounting

provides information for the planning process, which involves a mission statement, the development of strategic, tactical, and operating objectives, and the formulation of a business plan.

The Role of Management Accounting

• Management accounting provides relevant information at each stage of the management process.– Performing stage: Managers implement the

business plan, using management accounting information to manage the supply chain and make optimal use of resources.

The Role of Management Accounting

• Management accounting provides relevant information at each stage of the management process.– Evaluating stage: Management accounting

complements the efforts of managers at this stage to compare actual performance with the performance goals they established in the planning stage, analyze any significant differences, and correct the problems.

The Role of Management Accounting

• Management accounting provides relevant information at each stage of the management process.– Communicating stage: Management

accounting reports communicate the results of managers’ efforts in the planning, performing, and evaluating stages.

The Role of Management Accounting

• The key to producing accounting reports that clearly communicate accurate information is to apply the four w’s: why, who, what, and when.

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Value Chain Analysis

OBJECTIVE 2: Describe the value chain and its usefulness in analyzing a business.

Figure 3: The Value Chain

Exhibit 2: Value Chain Analysis

Value Chain Analysis

• The value chain conceives of each step in the manufacture of a product or the delivery of a service as a link in a chain that adds value to the product or service.

Value Chain Analysis

• The primary processes that add value to a product or service include research and development, design, supply, production, marketing, distribution, and customer service.

Value Chain Analysis

• The value chain also includes support services (such as human resources, legal services, information services, and management accounting); these services are necessary for promoting the effectiveness and efficiency of the primary processes, but they do not add value to the product or service.

Value Chain Analysis

• Value chain analysis enables a company to focus on its core competencies.

• Value chain analysis often results in a decision to outsource a product or service.

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Continuous Improvement

OBJECTIVE 3: Identify the management tools used for continuous improvement.

Figure 4: The Continuous Improvement Environment

Continuous Improvement

• The concept of continuous improvement, which evolved in response to an increase in global competition, has given rise to several important management tools, all of which rely on management accounting information:– Just-in-time (JIT) operating philosophy– Total quality management (TQM)

• Costs of quality

Continuous Improvement

• The concept of continuous improvement, which evolved in response to an increase in global competition, has given rise to several important management tools, all of which rely on management accounting information: (cont.)– Activity-based management (ABM)

• Value-adding activities• Nonvalue-adding activities• Activity-based costing (ABC)

Continuous Improvement

• The concept of continuous improvement, which evolved in response to an increase in global competition, has given rise to several important management tools, all of which rely on management accounting information: (cont.)– Theory of constraints (TOC)

Continuous Improvement

• All these tools are designed to– Reduce production or service costs and

delivery time– Improve product or service quality– Increase customer satisfaction

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Performance Measures: A Key to Achieving Organizational Objectives

OBJECTIVE 4: Explain the balanced scorecard and its relationship to performance measures.

Figure 5: The Balanced Scorecard for Good Foods Store

Performance Measures: A Key to Achieving Organizational Objectives

• Performance measures – Quantitative tools that gauge an organization’s

performance in relation to a specific process, activity, or task

– May be financial or nonfinancial

Performance Measures: A Key to Achieving Organizational Objectives

• Performance measures (cont.)– Financial performance measures include

• Return on investment

• Net income as a percentage of sales

• Costs of poor quality as a percentage of sales

Performance Measures: A Key to Achieving Organizational Objectives

• Performance measures (cont.)– Nonfinancial performance measures include

• Number of customer complaints

• Number of orders shipped the same day

• Hours of inspection

• Time to fill an order

Performance Measures: A Key to Achieving Organizational Objectives

• Performance measures (cont.)– Performance measures are useful in reducing

waste and inefficiencies in operating activities.

Performance Measures: A Key to Achieving Organizational Objectives

• Performance measures are used in all stages of the management process.– Planning stage: Managers establish

performance measures that will motivate employees to fulfill the company’s mission and achieve its objectives.

– Performing stage: Performance measures guide and motivate actual performance and assist in assigning costs.

Performance Measures: A Key to Achieving Organizational Objectives

• Performance measures are used in all stages of the management process. (cont.)– Evaluating stage: Managers use performance

measures to analyze significant differences between actual and planned performance.

– Communicating stage: Performance measurement information is used in communicating performance evaluations and developing new budgets.

Performance Measures: A Key to Achieving Organizational Objectives

• Balanced scorecard– Approach to performance measurement that

links the perspectives of an organization’s four stakeholder groups to the organization’s mission, objectives, resources and performance measures.

Performance Measures: A Key to Achieving Organizational Objectives

• Balanced scorecard (cont.)– Stakeholders have one of four perspectives:

• Financial perspective

• Learning and growth perspective

• The business’s internal procedures

• A customer perspective

Performance Measures: A Key to Achieving Organizational Objectives

• Balanced scorecard (cont.)– The balanced scorecard enables a company to

determine whether it is making continuous improvement in its operations.

Performance Measures: A Key to Achieving Organizational Objectives

• Benchmarking is a technique for determining a company’s competitive advantage by comparing its performance with that of its closest competitors in the same industry.– Benchmarks are measures of the best practices

in an industry.

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Standards of Ethical Conduct

OBJECTIVE 5: Identify the standards of ethical conduct for management accountants.

Exhibit 3: Statement of Ethical Professional Practice

Exhibit 3: Statement of Ethical Professional Practice

Standards of Ethical Conduct

• Management accountants must adhere to standards of ethical conduct.

Standards of Ethical Conduct

• Standards of ethical conduct for management accountants emphasize competence, confidentiality, integrity, and credibility.– Competence standards require management

accountants to• Develop their knowledge and skills on an ongoing

basis.

• Perform duties in accordance with relevant laws and technical standards.

Standards of Ethical Conduct

• Standards of ethical conduct for management accountants emphasize competence, confidentiality, integrity, and credibility.– Competence standards require management

accountants to (cont.)• Provide decision support and recommendations that

are accurate, clear, concise, and timely.• Recognize and communicate professional limitations

or other constraints that would preclude performance of responsibilities.

Standards of Ethical Conduct

• Standards of ethical conduct for management accountants emphasize competence, confidentiality, integrity, and credibility. (cont.)– Confidentiality standards require them to

• Refrain from disclosing confidential information except when authorized or legally required to disclose it.

• Inform all relevant parties regarding appropriate use of confidential information. Make sure that subordinates refrain from disclosing confidential information.

Standards of Ethical Conduct

• Standards of ethical conduct for management accountants emphasize competence, confidentiality, integrity, and credibility. (cont.)– Confidentiality standards require them to

• Refrain from using or appearing to use confidential information for unethical or illegal advantage.

Standards of Ethical Conduct

• Standards of ethical conduct for management accountants emphasize competence, confidentiality, integrity, and credibility. (cont.)– Integrity standards require them to

• Avoid conflicts of interest and mitigate any actual conflicts of interest.

• Refrain from activities that would prejudice their ability to carry out their duties ethically.

• Refrain from activities that would discredit the profession.

Standards of Ethical Conduct

• Standards of ethical conduct for management accountants emphasize competence, confidentiality, integrity, and credibility. (cont.)– Credibility standards require them to

• Communicate information fairly and objectively.• Fully disclose all relevant information that could

influence a user’s understanding of the material.• Disclose delays or deficiencies in information,

timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

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