Professional Documents
Culture Documents
Changing Focus
Traditionally, management accounting information has
been financial information
Denominated in a currency such as $ (dollars),
(pound sterling), (yen), or (euro)
Management accounting information has now expanded
to encompass information that is operational or physical
(nonfinancial) information:
Quality and process times
More subjective measurements, such as:
Customer satisfaction
Employee capabilities
New product performance
Management Accounting
Provides information to
managers and employees
within the organization
Allows great discretion to
design systems that
provide information for
helping employees and
managers make
decisions
Forward looking
A Brief History
The earliest management accountants were
scribes whose job was to record the receipt and
disbursements of cash and to provide an
accounting of the current stock of wealth including
valuable ores and foods
The treasury role for management accountants
was virtually the same until medieval England
A Brief History
In medieval England, producers (the Guilds)
kept detailed records of raw materials and labor
costs as evidence of product quality
From 1400-1600, the rudiments of basic modern
management accounting practice emerged
A Brief History
In 19th century America, textile mill owners kept
detailed records of costs to direct efficiency
improvement activities and to provide a basis for
product pricing
But there was little or no standardized management
accounting practice
A Brief History
In the late 19th century, railroad managers
implemented large and complex costing systems
The railroads were the first modern industry to
develop and use broad financial statistics to
assess organization performance
About the same time, Andrew Carnegie was
developing detailed records of the cost of
materials and labor used to make the steel
produced in his steel mills
A Brief History
The emergence of large and integrated
companies at the start of the 20th century
created a demand for measuring the
performance of different organizational units
Managers developed ways to measure the
return on investment and the performance of
their units (more on this later)
A Brief History
After the late 1920s management accounting
development stalled
It was only in the 1970s that interest returned to
developing more effective management
accounting systems
During the latter part of the 20th century there
were innovations in costing and performance
measurement systems the focus of this text
A Brief History
The history of management accounting
comprises two characteristics:
1. Management accounting was driven by the
evolution of organizations and their strategic
imperatives
When cost control was the goal, costing systems
became more accurate
When the ability of organizations to adapt and change to
environmental changes became important, management
accounting systems that supported adaptability were
developed
A Brief History
2. Management accounting innovations have
usually been developed by managers to
address their own decision-making needs
Management accounting needs to be both pragmatic
and add value to the organization
Service Companies
Service companies differ from manufacturing
companies in several ways
Obvious difference: service companies do not
produce a tangible product
Less obvious: many employees in service
companies have direct contact with customers
Service companies must be especially sensitive to
the timeliness and quality of the service that their
employees provide to customers
Service Companies
Customers of service companies immediately
notice defects and delays in service delivery
The consequences from such defects can be severe
Dissatisfied customers usually choose alternative
suppliers after an unhappy experience
They also usually tell others about their bad
experience
Lack of Competition
In a noncompetitive environments, managers of service
companies were not under great pressure to:
Lower costs
Improve the quality and efficiency of operations
Introduce new products that made profits
Eliminate products and services that were incurring losses
Competitive Environment
The competitive environment has now become
far more challenging and demanding for both
manufacturing and service companies
Starting in the mid-1970s, manufacturing
companies in North America and Europe
encountered severe competition from Asian
companies that offered higher-quality products
at lower prices
A company could survive and prosper only if its
costs, quality, and product capabilities were as
good as those of the best companies in the
world
Competitive Environment (2 of 2)
The ground rules under which many service companies
operate have completely changed
The deregulation movement in North America and
Europe since the 1970s
The switch from centrally controlled socialist
economies to free market economies in much of the
world
Managers of service companies now require accurate,
timely information:
To improve the quality, timeliness, and efficiency of
the activities they perform
To make decisions about their individual products,
services, and customers
Government Agencies
Government and nonprofit organizations as well
as profit-seeking enterprises are feeling the
pressures for improved performance
Citizens are demanding more responsive and
more efficient performance from their local,
regional, and national governments
The U.S. Congress passed
The Chief Financial Officers (CFO) Act of 1990
The Government Performance and Results Act
(GPRA) of 1993
CFO Act
The U.S. Congress, in 1990, passed the Chief
Financial Officers Act
Requires each major federal agency to have a
chief financial officer who is responsible for:
The development and reporting of cost information
The systematic measurement of performance
GPRA
The Government Performance and Results Act of 1993
requires that each U.S. federal agency:
Establish top-level agency goals and objectives, as well as
annual program goals
Define how it intends to achieve those goals
Demonstrate how it will measure agency and program
performance in achieving those goals
In the Philippines:
The Financial Reporting Standards Council (FRSC) was
established by the Board of Accountancy (BOA or the Board)
in 2006 under the Implementing Rules and Regulations of
the Philippine Accountancy of Act of 2004 to assist the Board
in carrying out its power and function to promulgate
accounting standards in the Philippines. The FRSCs main
function is to establish generally accepted accounting
principles in the Philippines.
The FRSC is the successor of the Accounting Standards
Council (ASC). The ASC was created in November 1981 by
the Philippine Institute of Certified Public Accountants
(PICPA) to establish generally accepted accounting
principles in the Philippines. The FRSC carries on the
decision made by the ASC to converge Philippine
accounting standards with international accounting
standards issued by the International Accounting Standards
Board (IASB).
Nonprofit Organizations (1 of 2)
Nonprofit organizations are also feeling the
pressure for cost and performance
measurement
There has been explosive growth in
nongovernmental organizations dealing with:
Economic development
The environment
Poverty
Illiteracy
Hunger and malnutrition
Public and private health
Social services and the arts
Nonprofit Organizations (2 of 2)
These organizations compete for funds from
governments, foundations, and private
individuals
Increasingly the public and private donors are
demanding accountability from the organizations
they fund, including measures of effectiveness
Managers of all types of nonprofit organizations
are looking to adapt management accounting
procedures, developed in the private sector, to
meet the demands placed on them for
accountability and cost and performance
measurement
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
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
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
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
Ethics
Senior executives whose incentive compensation
is based on the reported financial numbers may
put pressure on accountants to manage earnings
Organizational leadership plays a critical role in
fostering a culture of high ethical standards
Ethics
The way an individual responds to pressure
derives from inner values and beliefs, but
individuals are strongly influenced by their view of
organizational standards
If individuals see unethical or illegal behavior
practiced by the organizations leaders and
superiors or coworkers, they may feel that such
behavior is accepted and sanctioned
An individual without a strong set of personal
beliefs and values may find it difficult to withstand
the pressure to go along with the flow and
participate in this behavior when a difficult or
conflicting situation arises
Ethics
Beyond the example set by senior executives,
companies may use two types of control systems
to foster high ethical standards among their
employees
Beliefs systems
Boundary systems
A beliefs system is the explicit set of statements,
communicated to employees, of the basic values,
purpose, and direction of the organization
Ethics (5 of 9)
The statements in a beliefs system are intended
to inspire and promote commitment to the
organizations core values and its purpose for
being in business
Articulate and actionable beliefs systems may
inspire people to higher values and aim at higher
missions but they may not communicate clearly
what behavior and actions are unacceptable
Ethics
Boundary systems are stated in negative terms,
or in minimal standards of behavior
Intended to constrain the range of acceptable
behavior
Boundary systems also include clear
communication of the laws under which the
company operates
Ethics
Management accountants, like all employees,
must be aware of and be deeply committed to act
in ways that do not violate their organizations
code of conduct and societal laws governing
organizational behavior and actions
They have an additional obligation to ensure that
such boundary systems exist in their organization,
and that the boundary systems are clearly
communicated throughout the organization
They should also monitor that senior executives
act quickly and decisively when behavior in
violation of these standards is detected
Ethics
Management accountants, as members of a profession,
also operate with an additional boundary system: the
code of behavior promoted or advocated by their industry
and professional association
In the United States, the Institute of Management
Accountants (IMA)
In the United Kingdom and elsewhere, the Chartered
Institute of Management Accountants (CIMA)
Ethics
Professional organizations usually establish ethical
norms and codes of professional conduct for their
members
The professional association can monitor and police its
norms and codes through peer reviews
Many of the guidelines are phrased in terms of what
management accountants should not do, consistent with
how boundary systems operate