978-0137024971 Chapter 1 Part 1

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Chapter 1

How Management

Accounting

Information Supports

Decision Making

QUESTIONS

1-1 Management accounting is a discipline that designs planning and performance

measurement systems, using financial and nonfinancial information, to help an

cycle includes prospective data on costs, profits, efficiency, and quality

associated with alternative ways to produce or provide goods or services.

1-2 A company’s operators, managers, and executives need information for their

operational control and improvement activities, as well as on the performance

units and their managers. This information should be created and produced

based on the internal need for operational and strategic information.

quarterly for shareholders, monthly for creditors) and more aggregate

information. Also the form and accounting procedures used to prepare these

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the data for internal uses do not have to be subjected to external auditing

review.

company.

1-3 Operators need direct measures on variables they can influence and control.

These generally are physical measures of outputs produced and input resources

used to produce the outputs (including productivity measures such as

percentage of good units produced). In addition, operators should be seeing

financial performance. Operators need leading measures of performance, and

financial measures tend to be lagging measures of performance.

Middle managers, while generally seeing more financial information than

of on-time delivery, quoted and actual lead times for delivery, returns due to

defects or dissatisfaction, and customer satisfaction. They may also want

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1-4 Financial measures are inadequate for guiding and evaluating organizations’

trajectories through today’s competitive environments. Financial measures are

lagging indicators that could fail to capture much of the value that has been

created or destroyed by managers’ actions in the most recent accounting period.

destroyed future financial value.

The information-age environment for both manufacturing and service

organizations requires new capabilities for competitive success. The ability of a

company to mobilize and exploit its intangible or invisible assets has become

Intangible assets enable an organization to:

• develop customer relationships that retain the loyalty of existing

customers and enable new customer segments and market areas to be

served effectively and efficiently;

segments;

• produce customized high-quality products and services at low cost and

with short lead times;

• mobilize employee skills and motivation for continuous improvements in

• deploy information technology, data bases, and systems

development. In the short run, the financial accounting model reports these

spending cutbacks as increases in reported income, even when the reductions

have cannibalized the company’s stock of assets and its capabilities for creating

future economic value. Alternatively, the company could maximize short-term

vulnerable to competitive inroads.

1-5 Innovations in management accounting practice have been driven by the

Atkinson, Solutions Manual t/a Management Accounting, 6E

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information needs of new strategies as companies became more complex,

introduced new technologies, and encountered new competitors.

 When controlling and reducing costs were important, innovations in costing

systems occurred. For example, by the middle of the 19th century, railroad

managers had developed complex costing systems to compute the costs of

carrying different types of freight along multiple routes. Later in the

 When organizations gained advantage from scale and diversification,

disaggregations of return on investment.

 When competitive advantage shifted to how well a company deployed and

managed its intangible assets—customer relationships, process quality,

satisfaction, and employee performance.

Furthermore, many companies formerly produced a fairly narrow product

line. The companies produced standard products in high volumes so that

product distortions did not arise from variation in batch sizes,

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 Though not covered in the chapter, commentary on service organizations is

provided here: For many service organizations, the regulated environment

understand the underlying cost drivers of their business. In addition to better

cost and profit information, service companies have to concentrate on

 Finally, organizations today derive competitive advantage from their

intangible assets: innovative products and services, high quality and

responsive processes, skilled and motivated employees, excellent

technology and information systems, and reputation and image among

1-6 Given a selected strategy, the organization needs management accounting

information provides feedback about where it is working and where it is not, and

1-7 The plan step of the PDCA cycle defines the organization’s purpose, selects

The check step includes two components: measuring and monitoring ongoing

performance and taking short-term actions based on the measured performance.

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new products. They reward (and occasionally punish) employees based on

trip around its PDCA cycle.

1-8 Individuals react to measurements. They focus on the variables and behavior

being measured and spend less attention on those not measured. In designing

making but also for control, evaluation, and reward, employees and managers

may take unexpected and undesirable actions to influence their score on the

performance measure.

system. People may also have concerns that decisions and actions based on

information the old system produced, may no longer seem valid given

the change.

EXERCISES

1-9 These questions are designed to generate discussion about the broad scope of

contemporary management accounting information, cross-functional

Effective management accounting systems can create considerable value to

organizations by providing timely and accurate information about the activities

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performance.

To develop effective management accounting information systems, the system

designers must understand the different decision and feedback information

processes, the organization’s strategy and competitive environment (including

customers and noncustomers), and the behavioral implications of performance

measurements. In response to the challenging and continually changing

environment facing organizations all over the world, management accounting

technical and behavioral aspects of change.

1-10 The plan step of the PDCA cycle defines the organization’s purpose and selects

the focus and scope of its strategy. Many organizations start the planning stage

by reaffirming or updating their mission statement. The enterprise’s planners

then accumulate information about the organization’s external environment

achieve the organization’s objectives.

Critical management accounting information in the plan step includes cost,

revenue, and profit projections. This information relies on an accurate

understanding of how costs change as various plans are implemented. The

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disposing of products. End–of-cycle salvage and reclamation costs can be

enormous, and information about these future costs for any project are now

considered part of any new product development process.

The check step includes two components: measuring and monitoring ongoing

performance and taking short-term actions based on the measured performance.

Management accounting information in this step includes costs of products and

product lines, costs of serving customers, customer profitability, and business

process quality, and employee capabilities and motivation.

In the act step, managers use management accounting information acquired in

some or all of the previous steps to take actions to lower costs, change resource

allocations, improve the quality, cycle time, and flexibility of processes, modify

strategic plan. This launches the enterprise on another trip around its PDCA

cycle.

1-11 Obviously, there is no single “correct” answer to this question, but the

instructor should be able to generate an interesting discussion with the class to

brainstorm on the financial and nonfinancial measures used by managers at the

different levels of a fast food organization. The answers below are meant to be

helpful in performing their jobs.

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(a) The manager of the local fast food outlet will want information on the

deterioration in performance.

(b) The regional manager will want to see operating summaries, perhaps

weekly, of all the outlets in his or her region. These summaries will

Periodically, surveys will be distributed randomly to customers asking

for their opinion on the food and service.

(c) The Vice President of Operations will want summary statistics, probably

The Vice President of Marketing will want monthly summaries of all

customer surveys, the number of customers visiting each establishment,

1-12 As in the previous question, there is no single “correct” answer. The instructor

should try to generate an interesting discussion with the class to brainstorm on

Atkinson, Solutions Manual t/a Management Accounting, 6E

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(a) (1) The manager of a patient unit will want to track the number of

patients each day in the unit, and their predicted demands for

meals, housekeeping, medication, and other nursing services that

incorrect medications provided, inappropriate meals delivered, and

excessive delays in responding to patients’ needs and requests—so

that the root causes of these problems can be identified and efforts

made to eliminate these causes. Most of this information will be

provided daily, and will be non-financial. Perhaps a daily report of

(2) On a weekly basis, the manager of the radiology department would

procedures. The manager should monitor any excess supply of

personnel. Quality measures would include the number and

percentage of procedures that had to be redone, stockouts of

critical supplies, and the quality of images created (perhaps the