How Management Accounting

Information Supports
Decision Making

Chapter 1

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 Management Accounting
Information
⚫ 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

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 Management Accounting
Information
⚫ 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

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 Management Accounting
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

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 Comparison of Financial and
Managerial Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization

Retrospective and
2. Time focus Retrospective Prospective
3. Emphasis Objectivity and Relevance for
verifiability planning and control
4. Importance Precision of Timeliness of
information information

5. Subject focus Summarized data for Detailed segment reports

the whole organization of an organization
6. GAAP Must follow GAAP/IFRS Need not follow GAAP/IFRS
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
 Changing 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
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 Strategy
⚫ 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

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 Plan-Do-Check-Act Cycle
or 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

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 PDCA 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
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 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.”
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 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

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 Behavioral 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

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 Behavioral 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

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The Balanced Scorecard
and Strategy Map

Chapter 2

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 Performance Measurement
Systems
⚫ 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

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 Balanced 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

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 The Four Perspectives of the
Balanced Scorecard
Four different but linked perspectives are derived from the organization’s
mission, vision and strategy:
Financial
Creating organizational value
for owners/shareholders.

Mission, Process
Customer
Vision, Ensuring efficiency and
Adding value for customers.
Strategy quality in the value chain.

Learning and Growth

Investing in organizational
infrastructure.
 Balanced 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

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 Strategy
⚫ 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

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 Enter 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

20
The Overall Picture –
Summary

21
 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

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 Financial 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

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Financial Measure
Alternatives

24
 The 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

25
Value 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

26
Customer Objectives and
Measures

27
 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

28
Process Objectives and
Measures

29
 Learning and Growth
Perspective
⚫ Reflects the development of intellectual capital
(organization know-how) needed to develop and
improve objectives in the process perspective

30
 Learning and Growth
Perspective
⚫ Identifies objectives that drive improvement in the
process objectives
– Human Resources
– Information Technology
– Organization Culture and Alignment

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Learning and Growth Objectives
and Measures

32
 BSC in Nonprofit and
Government 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

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 NPGOs 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

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 Managing 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

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 Barriers 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

© 2012 Pearson Prentice Hall. All rights reserved.