Chapter 1:The Accountant's Role in the Organization

If you have not already read the Introduction, do so now. It describes the purposes and contents of the Student Guide and recommends a five-step approach for using the Student Guide with the textbook Chapter Overview Welcome to the study of cost accounting. This introductory chapter emphasizes the intertwining roles of managers and accountants in planning and controlling the operations of organizations. Unlike the remainder of the textbook, this chapter has no "number crunching". Its main purpose is to provide a framework for understanding cost accounting. Chapter Highlights 1. Accounting systems provide information for five major purposes: (a) formulating overall strategies and long-range plans, (b) resource allocation such as product and customer emphasis and pricing, (c) cost planning and cost control of operations and activities, (d) performance measurement and evaluation of people, and (e) meeting external regulatory and legal reporting requirements. Purposes (a) through (d) are management accounting. Purpose (e) is financial accounting.
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Management accounting measures and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. Management accounting (a) emphasizes the future, (b) aims to influence the behaviour of managers and other employees, and (c) is not particularly constrained by generally accepted accounting principles (GAAP). Financial accounting measures and records business transactions and provides financial statements the balance sheet, income statement, and statement of cash flows that are based on GAAP.

2. Cost accounting provides information for both management accounting and financial accounting. Cost accounting measures and reports financial and nonfinancial information related to the acquisition and consumption of resources by an organization. Cost accounting includes those parts of management accounting and financial accounting where cost information is collected or analyzed. 3. Cost management involves the activities of managers in short-run and long-run planning and control of costs. For example, rearranging the production floor layout might reduce manufacturing costs, or additional product design costs might be incurred in an effort to increase revenues and profits. 4. The value chain is the sequence of six business functions in which usefulness (value to the customer) is added to the products or services of an organization. These business functions are research and development (R&D); design of products, services, or processes; production;

marketing; distribution; and customer service. Managers in each of these parts of the value chain are customers of management accounting information. Rather than proceeding sequentially through the value chain, though, organizations can realize important gains when various parts of the value chain work together. For example, additional spending on R&D and product design might be more than offset by lower costs of production and customer service. 5. Management accounting facilitates planning and control. Planning is deciding on organization goals, predicting results under various alternative ways of achieving those goals, and then deciding how to attain the designated goals. Control includes both actions that implement the planning decisions and performance evaluation of the related personnel and operations. Control in one accounting period is linked to planning for the next period by means of feedback. Managers use feedback to examine past performance and systematically explore alternative ways of making better informed decisions in the future. 6. A well-conceived plan includes enough flexibility so that managers can seize opportunities unforeseen at the time the plan is formulated. In no case should control mean that managers cling to a preexisting plan when unfolding events indicate that action not encompassed by the original plan offers better results for the organization. 7. Budgeting is essential for planning and control. A budget is the quantitative expression of a proposed plan of action and is an aid to coordination and implementation of the plan. A key input used in developing budgets is the financial and nonfinancial information that has been routinely recorded in the management accounting system. 8. Three important guidelines help management accountants provide the most value in performing their problem solving, scorekeeping, and attention-directing roles: a. Employ the cost-benefit approach. This approach helps managers choose among alternative accounting systems. As an example, consider budgeting systems as economic goods. The expected costs of a proposed budgeting system (such as personnel, software, and training) should be compared with its expected benefits, which are the collective decisions of managers that will better attain the organization's goals. In particular, measurement of the expected benefits is seldom easy. b. Give full recognition to technical and behavioural considerations. A management accounting system should have two simultaneous missions for providing information: (i) to help managers make wise economic decisions (the technical mission) and (ii) to help motivate managers and other employees to strive for the organization's goals (the behavioural mission). Managers and accountants need to understand that planning and control are primarily human activities; the emphasis needs to be on how to help individuals do their jobs better. c. Use different costs for different purposes. To illustrate this guideline, consider the question of how much cost a manufacturing company will assign to each finished unit of one of its products. For the purpose of preparing financial statements under GAAP, only the manufacturing costs are assigned to the product. For the

purpose of determining a long-run selling price, however, costs from all parts of the value chain (not just production) are assigned to the product. 9. Most organizations distinguish between line management and staff management. Line management is directly responsible for attaining the goals of the organization. Staff management provides advice and assistance to line management. When organizations rely on teams for attaining their goals, the traditional distinction between line and staff management becomes less clear-cut. 10. The chief financial officer (CFO), a staff management function, is responsible for overseeing the financial operations of the organization, which typically include controllership, treasury, risk management, taxes, and internal audit. The controller, also a staff management function, is the financial executive primarily responsible for both management accounting and financial accounting. In performing the problem-solving and attention-directing roles, the controller "controls" by exerting an influence that helps managers make better informed decisions. 11. Management accountants perform three important roles: problem solving, scorekeeping, and attention directing. Problem solving uses comparative analysis to identify the best alternatives in relation to the organization's goals. Scorekeeping entails accumulating data and reporting reliable results to all levels of management. Attention directing helps managers focus on opportunities that can add value to the organization. 12. Accountants consistently rank high in public opinion surveys on the ethics exhibited by members of different professions. Professional accounting organizations such as the Society of Management Accountants of Canada (SMAC), the largest association of management accountants in Canada, play an important role in promoting high ethical standards. For example, the SMAC has issued a Code of Professional Ethics. EXHIBIT 1-5, text p. 12, gives the SMAC's guidance on ethical issues. 13. The design and operation of management accounting systems are shaped by five evolving management themes: customer satisfaction is priority one, key success factors (cost, quality, time, innovation), total value-chain analysis, continuous improvement, and dual external/internal focus. Collectively, these five themes (and new ones that may evolve in the future) direct the organization toward attracting and retaining profitable customers who are satisfied.
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