What Is Management
Accounting?

Management accounting is the process of
measuring and providing operational and
financial information that guides managerial
action, motivates behaviors, and supports the
cultural values necessary to achieve an
organization's strategic objectives.
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Key Ideas About
Management
Accounting
It is a measurement process.
 Includes both financial information and
operational information.
 Purpose is to help an organization reach its key
strategic objectives.
 A good system has three attributes:

– technical -- provide decision relevant information and
enhance our understanding of the underlying causes
and processes
– behavioral -- encourages actions that are consistent
with strategic objectives
– cultural -- represents cultural values and beliefs
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Link To Strategy

Strategy is the way in which a firm positions and
distinguishes itself from its competitors. Today it
means competing simultaneously on quality, cost, and
time -- the “strategic triangle.”
– Quality = physical characteristics of the product, its features,
and its functions, reliability in use, and after-sale support.
– Cost for customer = total “cost of ownership” -- from purchase
to disposition. Cost for producer = all “value chain” costs from
design to recycling or disposition.
– Time = products available when needed; speed of introduction
of new features or technologies; and production start to finish
cycle time.

Management accounting must help position and meet
QCT goals of an organization.
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Nature of Strategic
Management Accounting

Strategic objectives of quality, cost, and time can
be fulfilled only if management accounting:
– Links the daily actions of managers to the larger
strategic objectives of an organization.
– Enables managers to effectively involve the entire
extended enterprise of customers, suppliers, dealers,
and recyclers in achieving the strategic objectives.
– Encourages a long-term view of organizational
strategies and actions.
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Technical Attributes of
Management Accounting
Provides data that improves decisions.
 Improves process understanding by shifting
attention from responsibility accounting to
process management.

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Process-Oriented Accounting Measures
Process v. Responsibility
Focus
CUSTOMERS
AND PRODUCTS
Cross-functional teams (Engineering, Procurement, Accounting, Sales ...)
Small Cars
Cross-functional teams (Engineering, Procurement, Accounting, Sales ...)
Large Cars
Cross-functional teams (Engineering, Procurement, Accounting, Sales ...)
Minivans
Cross-functional teams (Engineering, Procurement, Accounting, Sales ...)
Trucks
Cross-functional teams (Engineering, Procurement, Accounting, Sales ...)
Jeeps
Responsibility Accounting
Measures
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Behavioral Impact of
Management
Accounting
SOCIAL-PSYCHOLOGICAL
VARIABLES IMPACTED
OUTCOMES
Cognitions/Visibility
Perceptions
Motivation
Management
Accounting
Measures
Attitudes
Aspiration Levels
Attributions
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Behavioral
Changes
Cultural Impact of
Management
Accounting
CULTURAL VARIABLES
IMPACTED
Beliefs and ethics
Sustained
Basis for
Political values and interests
Action
Organizational values/symbols
Collective mindset
Management
Accounting
Measures
OUTCOMES
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Evaluating Technical Attribute
(Sample Questions)

Decision Relevance:
– Are cost calculations relevant for assessing product
profitability?
– Are measures relevant for assessing why we have unused
capacity or how to better utilize capacity?

Process Understanding:
– Do measures of quality help us understand and eliminate
sources of defects?
– Does budgeting help us understand what decisions, actions or
tasks caused variances?
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Evaluating Behavioral
Impact (Sample Questions)





Do methods for measuring cost of quality help to focus
attention on quality?
Does rewarding employees for purchasing at the lowest
cost motivate them to purchase poor quality materials?
How does budget achievement impact aspiration levels?
How will the use of activity based costing impact the
attitudes of employees being measured?
Do accounting measures and processes encourage
managers to involve the entire extended enterprise of
customers, suppliers, dealers, and recyclers in
achieving the strategic objective?
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Evaluating Cultural Impact
(Sample Questions)
Are cost allocations using "ability to pay" fair?
 Does the term "nonvalue added activity" used in activitybased costing violate the beliefs of workers?
 Are methods that create pressure to meet budgets
ethical?
 How would the use of life cycle cost impact the interests
of industries that produce toxic waste?
 Should a measurement method be changed to support or
rationalize a decision made by a manager?
 Are new measures, like activity based management or
capacity measurement, adopted to instill total quality
management (TQM) and continuous improvement in the
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© Houghton Mifflin Company. culture?
All rights reserved.
organization’s

Some Examples of
Organizational Culture



“Disney, for example, has almost religiously preserved a central ideology
of wholesomeness and bringing happiness to people, yet it has
continually changed its product strategy-- from cartoons to feature films,
to the Mickey Mouse Club, to Disneyland, to videos.”
“Boeing resolutely held tight its core philosophy of product integrity and
leading edge aviation, yet turned its business strategy upside down in the
1950s by betting the company on commercial jets at a time when 80% of
its business came from military bombers.”
“At IBM, service to the customer above everything else was a core value;
dominating the mainframe computer market was business strategy, and
compulsory white shirts an operating practice. IBM stumbled badly in the
late 1980’s because it drifted from its core values (which it should never
have abandoned) while remaining too rigid in its strategies and operating
practices (which it should have changed far more vigorously.)” p. 141
(Collins, James C. “Change is Good-But First, Know What Should Never
Change,” Fortune, May 29, 1995.)
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Building A World Class
Organization

Customer Oriented
– gets voice of customer throughout the organization. Makes each
employee realize how their job affects customer satisfaction.

Quality Oriented
– customers’ requirements for features and functions of product are
understood and designed into products. Produces quality into
product, rather than inspecting it in.

Cost Conscious
– designs new products which can be sold for what customers are
willing to pay and yield an adequate profit. Works with all value chain
members to design costs out.

Time Conscious
– innovates new products as customers desire change; reengineers
and continually improves production and delivery times (reduces
cycle time).
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Building A World Class
Organization cont.

Continuous improvement
– of quality, cost and time.

Team Oriented
– breaks down functional barriers between departments and between
organization and value chain members. Designs products and
processes together, shares information across departments.

Builds trust and long run relationships
– does not squeeze profitability away from value-chain members; their
long run health is vital. Employees are encouraged to be flexible and
train to do a variety of jobs over lifetime.

Lower inventories
– rearrangement and coordination of production processes and
information sharing with suppliers reduces the need for large
inventories. Each area said to work on a “pull” system where a
customer order drives production to start and suppliers to furnish
goods.
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Management Accounting In
A World Class Organization











Provides information to teams and management to support and
evaluate strategic decisions
Motivates employees
Support or helps to create desired organizational culture
Is less functionally orientation and more activity and process oriented
More cost modeling for design purposes
Greater use of visual factory graphics showing goal accomplishment
Use of computerized data bases for information sharing across the
extended enterprise
More emphasis on understanding what causes or drives costs; less
use of volume based models for decision making
More reports using nonfinancial data
New costing techniques for items such as environment and quality
which reflect changed cultural values
New measures for continuous improvement efforts
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