© 2012 Pearson Prentice Hall. All rights reserved. How Management Accounting Information Supports Decision Making Chapter 1

© 2012 Pearson Prentice Hall. All rights reserved. Management Accounting Information The Institute of Management Accountants has defined management accounting as: – A profession that involves partnering in management decision making, devising planning and performance systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy

© 2012 Pearson Prentice Hall. All rights reserved. Management Accounting Information Management accounting provides relevant information to managers and employees – Both financial and nonfinancial information – Useful for making decisions, allocating resources, and monitoring, evaluating, and rewarding performance – Customized to serve multiple purposes

© 2012 Pearson Prentice Hall. All rights reserved. Management Accounting Information Examples of management accounting information include: – The reported expense of an operating department – The cost of producing a product – The cost of delivering a service – The cost of performing an activity or business process – The cost of serving a customer

Comparison of Financial and Managerial Accounting

© 2012 Pearson Prentice Hall. All rights reserved. Changing Focus Early 19 th century – systems to measure the cost of producing individual products Middle of the 19 th century – Railroads first to develop and use financial statistics to assess and monitor performance – Andrew Carnegie developed detailed cost systems that gave him a competitive advantage Early 20 th century – DuPont and General Motors expanded the focus to planning and control 1970’s – Japanese manufacturers developed new tools to report on quality, service, customer, and employee performance

Strategy Management accounting is a discipline that helps an enterprise to develop and implement its strategy Strategy is about an organization making choices about what it will do or not do As a strategy gets executed, management accounting information provides feedback © 2012 Pearson Prentice Hall. All rights reserved.

Plan-Do-Check-Act Cycle or Deming Cycle Developed by quality expert, W. Edwards Deming A systematic and recursive way to develop, implement, monitor, evaluate, and change a course of action

© 2012 Pearson Prentice Hall. All rights reserved. PDCA Steps Plan Step defines the organization’s purpose and selects the focus and scope of its strategy Do Step involves the implementation of a chosen course of action Check Step includes measuring and monitoring performance and taking short-term actions based on measured performance Action Step involves managers taking actions to lower costs, change resource allocations, and improve quality

© 2012 Pearson Prentice Hall. All rights reserved. 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 Two old sayings recognize these phenomena: – “What gets measured gets done.” – “If you don’t measure it, you can’t manage and improve it.”

© 2012 Pearson Prentice Hall. All rights reserved. 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

© 2012 Pearson Prentice Hall. All rights reserved. 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

© 2012 Pearson Prentice Hall. All rights reserved. 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

© 2012 Pearson Prentice Hall. All rights reserved. The Balanced Scorecard and Strategy Map Chapter 2

© 2012 Pearson Prentice Hall. All rights reserved. Performance Measurement Systems Measurement must support the company’s strategy and operation Must be designed so companies get better at managing and improving the value created from their intangible assets Need to move from reliance on financial measures to a mix of financial and nonfinancial measures

© 2012 Pearson Prentice Hall. All rights reserved. Balanced Scorecard The Balanced Scorecard (BSC) provides a system for measuring and managing all aspects of a company’s performance The scorecard balances traditional financial measures of success, such as profits and return on capital, with nonfinancial measures of the drivers of future financial performance The Balanced Scorecard measures organizational performance across different perspectives

The Four Perspectives of the Balanced Scorecard Customer Adding value for customers. Financial Creating organizational value for owners/shareholders. Process Ensuring efficiency and quality in the value chain. Learning and Growth Investing in organizational infrastructure. Mission, Vision, Strategy Four different but linked perspectives are derived from the organization’s mission, vision and strategy:

© 2012 Pearson Prentice Hall. All rights reserved. Balanced Measurements The BSC enables companies to: – Track financial results – Monitor how they are building the capabilities for future growth and profitability With customers With their internal processes With their employees and systems

© 2012 Pearson Prentice Hall. All rights reserved. Strategy A strategy accomplishes two principal functions: – Creating a competitive advantage by positioning the company in its external environment with resources to support customers better than its competitors – Having a clear strategy provides clear guidance for how internal resources should be allocated to gain a competitive advantage in the marketplace

Enter the Strategy Map The strategy map is a picture that illustrates the causal relationships among the balanced scorecard perspectives The strategy map is a guide to action that relates the management actions needed to achieve an organization objective with the measures designed to assess performance on those actions 20

The Overall Picture – Summary 21

© 2012 Pearson Prentice Hall. All rights reserved. Financial Perspective The ultimate objective for profit-seeking companies Financial performance measures indicate whether the company’s strategy, implementation, and execution are contributing to bottom-line improvement A company’s financial performance can be improved in two ways: productivity improvements and revenue growth

© 2012 Pearson Prentice Hall. All rights reserved. Financial Perspective Increased productivity occurs by: – Lowering direct and indirect expenses – Utilizing their financial and physical assets more efficiently Companies generate revenue growth by: – Selling additional products or services to existing customers – Selling new products, selling to new customers, and expanding into new markets

Financial Measure Alternatives 24

The Customer Perspective The customer perspective reflects what the organization promises its target customers. This promise is called the value proposition The value proposition’s components are – Price – Quality – Time – Function – Service 25

Value Proposition Alternatives A taxonomy originally developed by Michael Porter a well-known strategist – Cost Effectiveness You sell a commodity where prices are set by the market – your key control lever is cost – Product Leadership You compete by constantly bringing new products into the market place – your key control lever is innovation – Customer Intimacy You compete by meeting the unique requirements of each customer – you key control lever is understanding customer requirements 26

Customer Objectives and Measures 27

Process Perspective The process perspective reflects how the organization plans to deliver its value proposition Useful to think in terms of process type – Operations management processes – Customer management processes – Innovation processes – Regulatory and social processes The customer value proposition will determine the relative importance of each process type 28

Process Objectives and Measures 29

Learning and Growth Perspective Reflects the development of intellectual capital (organization know-how) needed to develop and improve objectives in the process perspective 30

© 2012 Pearson Prentice Hall. All rights reserved. Learning and Growth Perspective Identifies objectives that drive improvement in the process objectives – Human Resources – Information Technology – Organization Culture and Alignment

Learning and Growth Objectives and Measures 32

© 2012 Pearson Prentice Hall. All rights reserved. BSC in Nonprofit and Government Organizations The BSC is especially well-suited for nonprofit and government organizations (NPGOs) Their success has to be measured by their effectiveness in providing benefits to constituents Because nonfinancial measures can assess performance with constituents, the BSC provides the natural performance management system for NPGOs

© 2012 Pearson Prentice Hall. All rights reserved. NPGOs and Strategy Many NPGOs encountered difficulties in developing their initial BSC, finding that they didn’t have a clear strategy Many NPGOs place their mission objective at the top of their scorecard and strategy map – Cannot use the standard BSC architecture where financial objectives are the ultimate, high-level outcomes to be achieved

© 2012 Pearson Prentice Hall. All rights reserved. Managing with the BSC The benefits from BSC are realized as the organization integrates its new measurement system into management processes that: – Communicate the strategy to all employees and organizational units – Align employees’ individual objectives and incentives to successful strategy implementation – Integrate the strategy with ongoing management processes

Barriers to Effective Use Senior management is not committed Scorecard responsibilities do not filter down The solution is overdesigned, or the scorecard is a one-time event The scorecard is treated as a systems or consulting project © 2012 Pearson Prentice Hall. All rights reserved.