© 2012 Pearson Prentice Hall. All rights reserved. How Management Accounting Information Supports Decision Making Chapter 1

© 2012 Pearson Prentice Hall. All rights reserved.

How Management AccountingHow Management AccountingInformation Supports Information Supports

Decision Making Decision Making

Chapter 1


Management Accounting Management Accounting InformationInformation

The Institute of Management Accountants has defined management accounting as:

– A profession that involves partnering in management decision making, devising planning and performance systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy


Management Accounting Management Accounting InformationInformation

Management accounting provides relevant information to managers and employees– Both financial and nonfinancial information– Useful for making decisions, allocating resources,

and monitoring, evaluating, and rewarding performance

– Customized to serve multiple purposes


Management Accounting Management Accounting Information Information

Examples of management accounting information include:– The reported expense of an operating department– The cost of producing a product– The cost of delivering a service– The cost of performing an activity or business

process– The cost of serving a customer

Comparison of Financial and Comparison of Financial and Managerial AccountingManagerial Accounting


Changing FocusChanging Focus Early 19th century – systems to measure the cost of

producing individual products Middle of the 19th century

– Railroads first to develop and use financial statistics to assess and monitor performance

– Andrew Carnegie developed detailed cost systems that gave him a competitive advantage

Early 20th century – DuPont and General Motors expanded the focus to planning and control

1970’s – Japanese manufacturers developed new tools to report on quality, service, customer, and employee performance

StrategyStrategy Management accounting is a discipline that helps

an enterprise to develop and implement its strategy

Strategy is about an organization making choices about what it will do or not do

As a strategy gets executed, management accounting information provides feedback



Plan-Do-Check-Act Cycle Plan-Do-Check-Act Cycle or Deming Cycleor Deming Cycle

Developed by quality expert, W. Edwards Deming

A systematic and recursive way to develop, implement, monitor, evaluate, and change a course of action


PDCA StepsPDCA Steps Plan Step defines the organization’s purpose and

selects the focus and scope of its strategy Do Step involves the implementation of a chosen

course of action Check Step includes measuring and monitoring

performance and taking short-term actions based on measured performance

Action Step involves managers taking actions to lower costs, change resource allocations, and improve quality


Behavioral Implications Behavioral Implications As measurements are made on operations and

especially on individuals and groups their behavior changes– People react when they are being measured, and

they react to the measurements– They focus on the variables and behavior being

measured and spend less attention on those not measured

Two old sayings recognize these phenomena:– “What gets measured gets done.”– “If you don’t measure it, you can’t manage and

improve it.”


Behavioral Implications Behavioral Implications Employees familiar with the current system may

resist as managers attempt to introduce or redesign cost and performance measurement systems

Employees have acquired expertise in the use of the old system

Employees also may feel committed to the decisions based on the information the old system produced


Behavioral ImplicationsBehavioral Implications Management accountants must understand and

anticipate the reactions of individuals to information and measurements

When the measurements are used not only for information, planning, and decision-making, but also for control, evaluation, and reward, employees and managers place great pressure on the measurements themselves


Behavioral ImplicationsBehavioral Implications Managers and employees may take unexpected

and undesirable actions to influence their score on the performance measure

Managers seeking to improve current bonuses based on reported profits may skip discretionary expenditures that may improve performance in future periods


The Balanced ScorecardThe Balanced Scorecardand Strategy Mapand Strategy Map

Chapter 2


Performance Measurement Performance Measurement SystemsSystems

Measurement must support the company’s strategy and operation

Must be designed so companies get better at managing and improving the value created from their intangible assets

Need to move from reliance on financial measures to a mix of financial and nonfinancial measures


Balanced ScorecardBalanced Scorecard The Balanced Scorecard (BSC) provides a system

for measuring and managing all aspects of a company’s performance

The scorecard balances traditional financial measures of success, such as profits and return on capital, with nonfinancial measures of the drivers of future financial performance

The Balanced Scorecard measures organizational performance across different perspectives

The Four Perspectives of theThe Four Perspectives of theBalanced ScorecardBalanced Scorecard

Customer Adding value for customers.

Customer Adding value for customers.

Financial Creating organizational value

for owners/shareholders.

Financial Creating organizational value

for owners/shareholders.

ProcessEnsuring efficiency and

quality in the value chain.

Learning and GrowthInvesting in organizational

infrastructure.

Learning and GrowthInvesting in organizational

infrastructure.

Mission,Vision,

Strategy

Four different but linked perspectives are derived from the organization’s mission, vision and strategy:


Balanced MeasurementsBalanced Measurements The BSC enables companies to:

– Track financial results– Monitor how they are building the capabilities for

future growth and profitability With customers With their internal processes With their employees and systems


StrategyStrategy A strategy accomplishes two principal functions:

– Creating a competitive advantage by positioning the company in its external environment with resources to support customers better than its competitors

– Having a clear strategy provides clear guidance for how internal resources should be allocated to gain a competitive advantage in the marketplace

Enter the Strategy MapEnter the Strategy Map The strategy map is a picture that illustrates the

causal relationships among the balanced scorecard perspectives

The strategy map is a guide to action that relates the management actions needed to achieve an organization objective with the measures designed to assess performance on those actions

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The Overall Picture – The Overall Picture – SummarySummary

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Financial Perspective Financial Perspective 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


Financial PerspectiveFinancial Perspective 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

Financial Measure Financial Measure AlternativesAlternatives

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The Customer PerspectiveThe Customer Perspective The customer perspective reflects what the

organization promises its target customers. This promise is called the value proposition The value proposition’s components are

– Price– Quality– Time– Function– Service

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Value Proposition AlternativesValue Proposition Alternatives A taxonomy originally developed by Michael Porter a

well-known strategist– Cost Effectiveness

You sell a commodity where prices are set by the market – your key control lever is cost

– Product Leadership You compete by constantly bringing new products into

the market place – your key control lever is innovation– Customer Intimacy

You compete by meeting the unique requirements of each customer – you key control lever is understanding customer requirements

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Customer Objectives and Customer Objectives and MeasuresMeasures

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Process Perspective Process Perspective 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 Process Objectives and MeasuresMeasures

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Learning and Growth Learning and Growth PerspectivePerspective

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 Perspective Perspective

Identifies objectives that drive improvement in the process objectives– Human Resources– Information Technology– Organization Culture and Alignment

Learning and Growth Objectives Learning and Growth Objectives and Measuresand Measures

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BSC in Nonprofit and BSC in Nonprofit and Government OrganizationsGovernment Organizations

The BSC is especially well-suited for nonprofit and government organizations (NPGOs)

Their success has to be measured by their effectiveness in providing benefits to constituents

Because nonfinancial measures can assess performance with constituents, the BSC provides the natural performance management system for NPGOs


NPGOs and StrategyNPGOs and Strategy Many NPGOs encountered difficulties in

developing their initial BSC, finding that they didn’t have a clear strategy

Many NPGOs place their mission objective at the top of their scorecard and strategy map– Cannot use the standard BSC architecture where

financial objectives are the ultimate, high-level outcomes to be achieved


Managing with the BSCManaging with the BSC The benefits from BSC are realized as the

organization integrates its new measurement system into management processes that:– Communicate the strategy to all employees and

organizational units– Align employees’ individual objectives and

incentives to successful strategy implementation– Integrate the strategy with ongoing management

processes

Barriers to Effective UseBarriers to Effective Use Senior management is not committed

Scorecard responsibilities do not filter down

The solution is overdesigned, or the scorecard is a one-time event

The scorecard is treated as a systems or consulting project


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© 2012 Pearson Prentice Hall. All rights reserved. How Management Accounting Information Supports Decision Making Chapter 1