CHAPTER 1
How management accounting information supports decision making
Management accounting: The process of supplying the managers and employees in an
organization with relevant information, both financial and nonfinancial, for making decisions,
allocating resources, and monitoring, evaluating, and rewarding performance.
Management accounting information has the following attributes:
o It is a retrospective and prospective and uses both financial and nonfinancial measures. It
also provides feedback about past operations.
o A source of competitive advantage for a company.
o No prescribed form or standard setter, the management decides what is best.
Financial management accounting: Cost of producing a product, the cost of delivering service.
(Nonfinancial) management accounting information: Reports on the critical drivers of long-
term financial performance: customers, processes, innovation, employees, systems and culture.
Example: Measures related to customer satisfaction and loyalty, process quality and timeliness,
and employee motivation.
Financial accounting has the following attributes:
o Retrospective, results of past decisions;
o Oriented to external stakeholders (investors/creditors/regulators);
o Consistent with rules formulated by a format who specify the content of the reports, the
rules for how it gets developed and how the content will be presented (FASB/IASF/SEC).
Early 19th century: Accounting on costs of an individual product.
Middle 19th century: Implemented large, complex costing systems that allowed them to
compute the costs of carrying different types of freight.
Later 19th century: Andrew Carnegie developed detailed systems to record the cost of
materials and labour used.
Early 20th century: DuPont and General Motors expanded the focus of management
accounting beyond cost accounting to management planning and
control.
The reason that performance management started is because of organizations who sought to
improve efficiency and therefore profitability by internalizing what were previously open market
transactions and eliminating the costs of transacting with external agents.
In the 1930’s the development slowed down because the senior management interest focused on
developing and preparing external financial statements. In the 1970’s the interest revived in
developing new management accounting tools (quality/service/customer and employee
performance). Also major advances were made in measuring the cost of products and services of
indirect and support costs.
Strategy: About an organization making choices about what it will do and about what it will not.
o The best fit, what markets, how to compete.
Once a strategy has been selected, 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.
1
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