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CHAPTER 15
The Changing Business Environment: A
Manager’s Perspective
REVIEWING THE CHAPTER
Objective 1: Distinguish management accounting from financial accounting and explain
how management accounting supports the management process.
1.
Management accounting is the process of identifying, measuring, accumulating,
analyzing, preparing, interpreting, and communicating information that management uses to
plan, evaluate, and control an organization and to ensure that its resources are used and
accounted for appropriately. The information that management accounting provides should
be timely and accurate and support management decisions about pricing, planning,
operations, and many other matters. The need for management accounting information
exists regardless of the type of organization or its size.
2.
Although both management accounting and financial accounting provide information
essential to decision making, they differ in a number of ways. The primary users of
management accounting information are people inside the organization—managers, as well
as employees, who depend on the information to make informed decisions, to perform their
jobs effectively, and to achieve their organization’s goals. Financial accounting, on the other
hand, uses the actual results of management decisions to prepare financial reports primarily
for use by parties outside the organization—owners or stockholders, lenders, customers, and
governmental agencies. Whereas the format of management accounting reports is flexible,
driven by the users’ needs, financial accounting reports must conform to GAAP. The nature
of the information in the reports also differs (historical or future-oriented in management
accounting reports; historical and verifiable in financial accounting reports), as do the units
of measure used and the frequency of the reports.
3.
Although management actions differ from organization to organization, they generally
follow a four-stage process. The four stages of the management process are to (1) plan, (2)
perform, (3) evaluate, and (4) communicate. Management accounting provides an ongoing
stream of relevant information that supports management decisions in each stage of this
process.
a.
In the planning stage, managers use management accounting information to establish
strategic, tactical, and operating objectives. Strategic objectives are long-term goals,
tactical objectives are interim goals, and operating objectives are short-term goals that
support the company’s mission statement, the fundamental way in which the
company will increase stakeholders’ value. Managers formulate a comprehensive
business plan for achieving those objectives. The business plan is usually expressed
in financial terms in the form of budgets.
b.
For successful performance, managers must implement the company’s business plan
in ways that make optimal use of available resources. The information that
management accounting provides about such matters as deliveries and sales is
extremely useful in managing the supply chain—the path that leads from the supplier
of the materials from which a product is made to the final consumer.
c.
When managers evaluate operating results they compare actual performance with
planned performance and take steps to correct any problems.
d.
The final step in the management process is communicating the results of the efforts
undertaken in the previous three stages. Accounting reports, whether prepared for
internal or external use, should present accurate information that is clear and useful to
the reader. The key to preparing such a report is to apply the four w’s: why, who,
what, and when.
Objective 2: Describe the value chain and its usefulness in analyzing a business.
4.
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. These value-adding
steps—research and development, design, supply, production, marketing, distribution, and
customer service—are called primary processes. The value chain also includes support
services—human resources, legal services, information services, and management
accounting. Support services facilitate the primary processes but do not add value to the
final product. Value chain analysis enables a company to focus on its core competency, the
thing that a company does best and that gives it an advantage over its competitors. Analysis
of the value chain frequently results in the outsourcing of parts of the value chain that are
not among a company’s core competencies.
Objective 3: Identify the management tools used for continuous improvement.
5.
Several management tools have been developed to help firms compete in an expanding
global market. They include the just-in-time (JIT) operating philosophy, total quality
management (TQM), activity-based management (ABM), and the theory of constraints
(TOC). All of these methods are based on the concept of continuous improvement—that
is, that management should never be satisfied with the status quo but should continue to
seek better methods, better products or services, better processes, and better resources.
a.
The just-in-time (JIT) operating philosophy requires that all resources—materials,
personnel, and facilities—be acquired and used only as needed. Its objectives are to
improve productivity and eliminate waste. Management accounting responds to a JIT
environment by providing an information system that is sensitive to changes in
production processes.
b.
Total quality management (TQM) requires that all parts of a business work together
to build quality into the firm’s products or services. The costs of quality include both
the costs of achieving quality and the costs of poor quality. Managers share accounting
information about the magnitude and classification of costs of quality with their
employees to stimulate improvement.
c.
Activity-based management (ABM) identifies all major operating activities or tasks,
determines the resources consumed by each of those activities and the cause of the
resource usage, and categorizes the activities as value-adding or nonvalue-adding.
Value-adding activities add value to a product or service, as perceived by the
customer. Nonvalue-adding activities add cost to a product or service but do not
increase its market value. ABM seeks to eliminate or reduce the cost of nonvalueadding activities. In assigning costs, ABM relies on activity-based costing (ABC), a
management accounting practice that identifies all of an organization’s major
operating activities (both production and nonproduction), traces costs to those
activities or cost pools, and then assigns costs to the products or services that use the
resources supplied by those activities.
d.
According to the theory of constraints (TOC), limiting factors, or bottlenecks, occur
during the production of any product or service, but by using management accounting
information to identify such constraints, managers can focus attention and resources
on them and achieve significant improvements. TOC thus helps managers set priorities
on how they spend their time and other resources.
Objective 4: Explain the balanced scorecard and its relationship to performance measures.
6.
Performance measures are quantitative tools that gauge an organization’s performance in
relation to a specific goal or an expected outcome. Performance measures may be either
financial or nonfinancial.
a.
Financial performance measures use monetary data to assess the performance of an
organization or its segments. Examples of these measures include return on
investment, net income as a percentage of sales, and the costs of poor quality as a
percentage of sales.
b.
Nonfinancial performance measures include the number of times an activity occurs or
the time taken to perform a task. Examples are number of customer complaints, the
time it takes to fill an order, number of orders shipped the same day, and the hours of
inspection. Such performance measures are useful in reducing or eliminating waste
and inefficiencies in operating activities.
7.
Managers use performance measures in each stage of the management process. In the
planning stage, they establish performance measures that will support the organization’s
mission and the objectives of its business plan. As managers perform their duties,
performance measures guide and motivate the performance of employees and assist in
assigning costs. When managers evaluate performance, they use the information that
performance measures have provided to analyze significant differences between actual and
planned performance and to improvise ways of improving performance. When managers
communicate, performance measurement information is useful in reporting performance
evaluations and developing new budgets.
8.
The balanced scorecard helps an organization measure and evaluate itself from a variety of
viewpoints. It links the perspectives of an organization’s four stakeholder groups—financial
(owners, investors, and creditors), learning and growth (employees), internal business
processes, and customers—with the organization’s mission, objectives, resources, and
performance measures. The balanced scorecard uses both financial and nonfinancial
performance measures to assess whether the objectives of the four perspectives are being
met.
9.
To ensure its success, a company must compare its performance with that of similar
companies in the same industry. Benchmarking is a technique for determining a company’s
competitive advantage by comparing its performance with that of its closest competitors.
Benchmarks are measures of the best practices in an industry.
Objective 5: Prepare an analysis of nonfinancial data.
10. Using management tools like TQM and ABM and comprehensive frameworks like the
balanced scorecard requires analysis of both financial and nonfinancial data. In analyzing
nonfinancial data, it is important to compare performance measures with the objectives that
are to be achieved.
Objective 6: Identify the standards of ethical conduct for management accountants.
11. Conflicts between external parties (e.g., owners, creditors, governmental agencies, and the
local community) can create ethical dilemmas for management and for management
accountants, who have a responsibility to help management balance the interests of external
parties. Throughout their careers, management accountants have an obligation to the public,
their profession, the organizations they serve, and themselves to maintain the highest
standards of ethical conduct. To provide guidance, the Institute of Management Accountants
has issued standards of ethical conduct for practitioners of management accounting and
financial management. These standards emphasize practitioners’ responsibility in the areas
of competence, confidentiality, integrity, and objectivity.