Atkinson, Solutions Manual t/a Management Accounting, 6th Edition Chapter 07: Management Accounting and Control Systems: Assessing Performance Over the Value Chain
Chapter 1
How Management
Accounting
Information Supports
Decision Making
QUESTIONS
Management accounting is a discipline that designs planning and performance
measurement systems, using financial and nonfinancial information, to help an
organization develop and implement its strategy. The information must be
relevant and helpful, and customized to serve multiple purposes, such as making
decisions, allocating resources, and monitoring, evaluating, and rewarding
performance. Information for the ―plan‖ and ―do‖ steps of the PDCA cycle
includes prospective data on costs, profits, efficiency, and quality associated with
alternative ways to produce or provide goods or services. Information for the
―check‖ and ―act‖ steps includes assessments of how well the organization is
achieving its objectives. Common information requirements include measures of
cost, quality, profitability, and timeliness.
Two examples of financial management accounting information are the cost of
producing a product and the cost of delivering a service. Measures related to
customer satisfaction and loyalty and innovation are two examples of non-
financial management accounting information.
Both the disciplines of financial accounting and management accounting are
based on quantitative information about an entity’s operations. However, these
two disciplines can be differentiated as follows:
• Financial accounting is retrospective in nature while management
accounting is both retrospective and prospective in nature.
• Financial accounting is primarily oriented towards external stake-holders
such as investors, creditors, and regulators. On the other hand, the
discipline of management accounting is oriented towards meeting the
decision making needs of the parties who are internal to the organization,
namely managers and employees.
• Financial accounting has to be consistent with the rules framed by the
standard setters and the regulatory authorities. Management accounting is
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,Atkinson, Solutions Manual t/a Management Accounting, 6E
not guided by any rigid rules or form; it depends on the managers’
judgements and decisions.
Strategic planning refers to the process of choosing a strategy that provides the best
fit between the organization’s environment and its internal resources in order to
achieve the organization’s objectives. Selecting a strategy forces managers to
make choices about what markets the organization should target and how the
organization will compete in those markets.
The relevant management accounting tools are
(a) Cost-volume-profit analysis
(b) Budget
(c) Relevant cost analysis
Given a selected strategy, the organization needs management accounting
information to help implement the strategy, allocate resources for the strategy,
communicate the strategy, and link employees and operational processes to
achieve the strategy. As the strategy gets executed, management accounting
information provides feedback about where it is working and where it is not, and
guides actions to improve the performance from the strategy.
The plan step of the PDCA cycle defines the organization’s purpose, selects the
focus and scope of its strategy, and determines actions to achieve the
organization’s objectives.
The do step involves implementing a chosen course of action.
The check step includes two components: measuring and monitoring ongoing
performance and taking short-term actions based on the measured performance.
In the act step, managers take actions to lower costs, change resource
allocations, improve the quality, cycle time, and flexibility of processes, modify
the product mix, change customer relationships, and redesign and introduce new
products. They reward (and occasionally punish) employees based on
performance. As these new actions get implemented, the management team will
eventually return to the planning step to assess whether its previous plan is still
valid and worth continuing, or whether it has become time to adapt the plan or
perhaps introduce a new strategic plan. This launches the enterprise on another
trip around its PDCA cycle.
Individuals react to measurements. They focus on the variables and behavior being
measured and spend less attention on those not measured. In designing
feedback mechanisms, measurements and goals, management accountants and
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, Chapter 1: How Management Accounting: Information Supports Decision Making
the management team must understand and anticipate the reactions of individuals
to feedback information, measurements, and goals. When the measurements are
not only used for information, planning, and decision-making but also for control,
evaluation, and reward, employees and managers may take unexpected and
undesirable actions to influence their score on the performance measure.
As management accounting systems change in order to introduce or redesign cost
and performance measurement systems, people familiar with the previous
systems may resist. People who have acquired expertise in the old system may
fear that their experience and expertise will not be transferable to the new
system. People may also have concerns that decisions and actions based on
information the old system produced, may no longer seem valid given
information produced by a new management accounting system. Thus, people
may feel threatened by a new management accounting system and react against
the change.
EXERCISES
These questions are designed to generate discussion about the broad scope of
contemporary management accounting information, cross-functional interaction
in designing management accounting information systems, and the range of
needed skills and knowledge in today’s business environment.
―Accounting‖ conveys a notion of recording and reporting for stewardship, or
accountability for use of assets or incurrence of expenses. Accurate, timely, and
relevant information about the economics and performance of organizations is
crucial to organizational success or good stewardship over entrusted assets.
Management accounting information is one of the primary informational sources
for decision making, improvement, and control in organizations. Effective
management accounting systems can create considerable value to organizations
by providing timely and accurate information about the activities required for
their success. Traditionally, management accounting information that helped
support decision making and efficient use of resources was primarily financial. In
recent times, management accounting information has expanded to encompass
operational or physical (nonfinancial) information, such as quality and process
times, as well as more subjective measurements, such as customer satisfaction,
employee capabilities, and new product performance.
To develop effective management accounting information systems, the system
designers must understand the different decision and feedback information needs
of the organization’s operators/employees, middle managers, and senior
executives. The different needs include operational control, product and customer
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