, Chapter 1
How Management
Accounting
Information Supports
Decision Making
QUESTIONS
1-1 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.
1-2 A company’s operators, managers, and executives need information for their
operational control and improvement activities, as well as on the performance
of their individual processes, products, services, and customers. This
information is important to direct managers’ attention to areas where
improvement is needed, to provide feedback on activities, and to monitor and
evaluate the performance of operators, departments, divisions, and business
units and their managers. This information should be created and produced
based on the internal need for operational and strategic information.
Shareholders and external suppliers of capital are not involved in managing the
business or establishing and validating the company’s strategy. Therefore, they
do not need the timely and disaggregate information generated for internal
managerial uses. External capital suppliers will receive less timely (typically
quarterly for shareholders, monthly for creditors) and more aggregate
information. Also the form and accounting procedures used to prepare these
external reports are constrained by regulation—such as by the country’s
standard setting authorities and governmental regulatory agencies. This
–1–
,Atkinson, Solutions Manual t/a Management Accounting, 6E
information may also have to be audited by independent accountants, whereas
the data for internal uses do not have to be subjected to external auditing
review.
Another constraint on information supplied externally is the risk of competitors
seeing and acting upon a company’s disclosed information. Therefore, while
internal information should be highly relevant about the success of the
company’s strategy, such information disclosed externally could harm the
company.
1-3 Operators need direct measures on variables they can influence and control.
These generally are physical measures of outputs produced and input resources
used to produce the outputs (including productivity measures such as
percentage of good units produced). In addition, operators should be seeing
measures of the quality of their output (defects, scrap, and rework) and the time
required to produce the output. In this way, they can become problem solvers
and attempt to improve quality, productivity, and cycle times of their tasks and
activities. Financial measures are a summary of the effectiveness and efficiency
(or lack thereof) of operators’ actions, but by themselves do not direct attention
to the drivers of improved financial performance or the root causes of poor
financial performance. Operators need leading measures of performance, and
financial measures tend to be lagging measures of performance.
Middle managers, while generally seeing more financial information than
operators, will also need to see summary measures about outputs produced
(first-pass yields, productivity), quality (scrap, rework, defect rates) and cycle
times if they are going to motivate employees for continuous improvement of
yields, quality and production process times. The middle managers will also
want to see operating summaries of the performance of their operations from
their customers’ perspectives (including internal customers), such as measures
of on-time delivery, quoted and actual lead times for delivery, returns due to
defects or dissatisfaction, and customer satisfaction. They may also want
periodic summaries about their employees’ attitude, skills, number of
suggestions made, absenteeism, turnover, etc.
Even senior executives can benefit from seeing nonfinancial measures.
Measures such as market share, customer satisfaction, retention and acquisition
of customers, on-time delivery performance, employee morale, and summaries
of the quality, yield, productivity, safety, and timeliness of key business
processes can provide valuable information to senior executives about the
success of their strategic initiatives and the efficiency of internal operations.
–2–
, Chapter 1: How Management Accounting: Information Supports Decision Making
1-4 Financial measures are inadequate for guiding and evaluating organizations’
trajectories through today’s competitive environments. Financial measures are
lagging indicators that could fail to capture much of the value that has been
created or destroyed by managers’ actions in the most recent accounting period.
The financial measures tell some, but not all, of the story about past actions and
they fail to provide adequate guidance for the actions that have created or
destroyed future financial value.
The information-age environment for both manufacturing and service
organizations requires new capabilities for competitive success. The ability of a
company to mobilize and exploit its intangible or invisible assets has become
far more decisive than investing and managing physical, tangible assets.
Intangible assets enable an organization to:
• develop customer relationships that retain the loyalty of existing
customers and enable new customer segments and market areas to be
served effectively and efficiently;
• introduce innovative products and services desired by targeted customer
segments;
• produce customized high-quality products and services at low cost and
with short lead times;
• mobilize employee skills and motivation for continuous improvements in
process capabilities, product and service quality, and response times; and
• deploy information technology, data bases, and systems
Managers who are placed under pressure to deliver consistent and excellent
short-term financial performance may make trade-offs that limit the search for
investments in these growth opportunities. Even worse, the pressure for short-
term financial performance can cause companies to reduce spending on new
product development, process improvements, human resource development,
information technology, databases and systems, and customer and market
development. In the short run, the financial accounting model reports these
spending cutbacks as increases in reported income, even when the reductions
have cannibalized the company’s stock of assets and its capabilities for creating
future economic value. Alternatively, the company could maximize short-term
financial results by exploiting customers through high prices or lower service.
In the short-run, these actions enhance reported profitability, but the lack of
customer loyalty and customer satisfaction will leave the company highly
vulnerable to competitive inroads.
1-5 Innovations in management accounting practice have been driven by the
–3–
