COLIN DRURY

Licensed to:

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

This is an electronic version of the print textbook. Due to electronic rights restrictions,some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. Forvaluable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest.

Licensed to:

Management and Cost AccountingEighth EditionColin Drury

Publishing Director: Linden Harris

Publisher: Brendan George

Development Editor: Annabel Ainscow

Editorial Assistant: Lauren Darby

Production Editor: Lucy Arthy

Production Controller: Eyvett Davis

Marketing Manager: Amanda Cheung

Typesetter: Integra, India

Cover design: Design Deluxe

Text design: Design Deluxe

ª , Colin Drury

ALL RIGHTS RESERVED. No part of this work covered by the copyright hereinmay be reproduced, transmitted, stored or used in any form or by any meansgraphic, electronic, or mechanical, including but not limited to photocopying,recording, scanning, digitizing, taping, Web distribution, informationnetworks, or information storage and retrieval systems, except as permittedunder Section or of the United States Copyright Act, orapplicable copyright law of another jurisdiction, without the prior writtenpermission of the publisher.

While the publisher has taken all reasonable care in the preparation of thisbook, the publisher makes no representation, express or implied, with regardto the accuracy of the information contained in this book and cannot acceptany legal responsibility or liability for any errors or omissions from the bookor the consequences thereof.

Products and services that are referred to in this book may be eithertrademarks and/or registered trademarks of their respective owners. Thepublishers and author/s make no claim to these trademarks. The publisherdoes not endorse, and accepts no responsibility or liability for, incorrect ordefamatory content contained in hyperlinked material.

For product information and technology assistance,contact [email protected].

For permission to use material from this text or product,and for permission queries,

email [email protected].

British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British Library.

ISBN: - - - -

Cengage Learning EMEACheriton House, North Way, Andover, Hampshire, SP BE, United Kingdom

Cengage Learning products are represented in Canada by NelsonEducation Ltd.

For your lifelong learning solutions, visit www.cengage.co.uk

Purchase your next print book, e-book or e-chapter atwww.cengagebrain.com

Printed in China by RR Donnelley1 2 3 4 5 6 7 8 9 10 – 14 13 12



Licensed to:

PART ONEINTRODUCTIONTO MANAGEMENTAND COSTACCOUNTING



Licensed to:

1 Introduction to management accounting

2 An introduction to cost terms and concepts

T he objective of this section is to provide an introduction to management and cost accounting. In

Chapter 1 we define accounting and distinguish between financial, management and cost account-

ing. This is followed by an examination of the role of management accounting in providing information to

managers for decision-making, planning, control and performance measurement. We also consider the

important changes that are taking place in the business environment. As you progress through the book

you will learn how these changes are influencing management accounting systems. In Chapter 2 the

basic cost terms and concepts that are used in the cost and management accounting literature are

described.



Licensed to:

1INTRODUCTIONTO MANAGEMENTACCOUNTING

LEARNING OBJECTIVES After studying this chapter, you should be able to:

•distinguish between management accounting and financial accounting;

•identify and describe the elements involved in the decision-making, planning and control process;

•justify the view that a major objective of commercial organizations is to broadly seek to maximizefuture profits;

•explain the factors that have influenced the changes in the competitive environment;

•outline and describe the key success factors that directly affect customer satisfaction;

•identify and describe the functions of a cost and management accounting system;

•provide a brief historical description of management accounting.

There are many definitions of accounting, but the one that captures the theme of this book is thedefinition formulated by the American Accounting Association. It describes accounting as:

the process of identifying, measuring and communicating economic information to permit informed judgementsand decisions by users of the information.

In other words, accounting is concerned with providing both financial and non-financial information thatwill help decision-makers to make good decisions. In order to understand accounting, you need to knowsomething about the decision-making process, and also to be aware of the various users of accountinginformation.

During the past two decades many organizations in both the manufacturing and service sectors havefaced dramatic changes in their business environment. Deregulation and extensive competition fromoverseas companies in domestic markets has resulted in a situation where most companies now operate ina highly competitive global market. At the same time there has been a significant reduction in product lifecycles arising from technological innovations and the need to meet increasingly discriminating customerdemands. To succeed in today’s highly competitive environment, companies have made customersatisfaction an overriding priority. They have also adopted new management approaches and manufac-turing companies have changed their manufacturing systems and invested in new technologies. Thesechanges have had a significant influence on management accounting systems.

The aim of this first chapter is to give you the background knowledge that will enable you to achieve amore meaningful insight into the issues and problems of cost and management accounting that are

4



Licensed to:

discussed in the book. We begin by looking at the users of accounting information and identifying theirrequirements. This is followed by a description of the decision-making process and the changing businessenvironment. Finally, the different functions of management accounting are described.

THE USERS OF ACCOUNTING INFORMATION

Accounting is a language that communicates economic information to people who have an interest in anorganization. These people (known as stakeholders) fall into several groups (e.g. managers, shareholdersand potential investors, employees, creditors and the government) and each of these groups has its ownrequirements for information:

• Managers require information that will assist them in their decision-making and control activities;for example, information is needed on the estimated selling prices, costs, demand, competitiveposition and profitability of various products/services that are provided by the organization.

• Shareholders require information on the value of their investment and the income that is derivedfrom their shareholding.

• Employees require information on the ability of the firm to meet wage demands and avoidredundancies.

• Creditors and the providers of loan capital require information on a firm’s ability to meet itsfinancial obligations.

• Government agencies such as the Central Statistical Office collect accounting information andrequire such information as the details of sales activity, profits, investments, stocks (i.e. inventories),dividends paid, the proportion of profits absorbed by taxation and so on. In addition, governmenttaxation authorities require information on the amount of profits that are subject to taxation. Allthis information is important for determining policies to manage the economy.

REAL WORLDVIEWS 1.1

Accounting information for humanresource professionalsPeople Management, the journal of the CharteredInstitute of Personnel and Development (CIPD), pro-vides an example of the importance of accountinginformation to human resources (HR) professionals.The article touts the oft-cited expression ‘people areour greatest asset’, but questions how many HRprofessionals appreciate the full costs of people inan organization.

According to Vanessa Robinson of the CIPD, HRprofessions shouldn’t merely say ‘people are our great-est asset’, but look at the income statement and seewhat they cost! The problem is that many HR profes-sionals may not have sufficient basic accounting knowl-edge to understand basic accounting principles. Theyneed to be familiar with the basic financial statements –the income statement, statement of financial position

and the statement of cash flows –aswell as understandbasic cost concepts. What this article tells us is some-thing weas accountants already know – that accountingis a communication medium, a language indeed, thatnot everyone understands. Having said that, while HRprofessionals may not think they require fluency inaccounting, they do need to make business decisionswhich are underpinned by sound financial information,e.g. recruit and retain staff. Having an understanding ofaccounting information (rather than just accepting itfrom the accountants) will benefit HR and other profes-sionals in an organization.

Questions

1 What kind of accounting information would youcommunicate to HR professionals?

2 What format would you use?

References‘You do the match’, People Management, 30/7/2009,available at http://www.peoplemanagement.co.uk/pm/articles/2009/07/you-do-the-math.htm

THE USERS OF ACCOUNTING INFORMATION 5



Licensed to:

The need to provide accounting information is not confined to business organizations. Individualssometimes have to provide information about their own financial situation; for example, if you want toobtain a mortgage or a personal loan, you may be asked for details of your private financial affairs. Non-profit-making organizations such as churches, charitable organizations, clubs and government units suchas local authorities, also require accounting information for decision-making, and for reporting the resultsof their activities. For example, a tennis club will require information on the cost of undertaking itsvarious activities so that a decision can be made as to the amount of the annual subscription that it willcharge to its members. Similarly, municipal authorities, such as local government and public sectororganizations, need information on the costs of undertaking specific activities so that decisions can bemade as to which activities will be undertaken and the resources that must be raised to finance them.

As you can see, there are many different users of accounting information who require information fordecision-making. The objective of accounting is to provide sufficient information to meet the needs of thevarious users at the lowest possible cost. Obviously, the benefit derived from using an information systemfor decision-making must be greater than the cost of operating the system.

The users of accounting information can be divided into two categories:

1 internal users within the organization;

2 external users such as shareholders, creditors and regulatory agencies, outside the organization.

It is possible to distinguish between two branches of accounting, which reflect the internal and externalusers of accounting information. Management accounting is concerned with the provision of informa-tion to people within the organization to help them make better decisions and improve the efficiency andeffectiveness of existing operations, whereas financial accounting is concerned with the provision ofinformation to external parties outside the organization. Thus, management accounting could be calledinternal reporting and financial accounting could be called external reporting. This book concentrates onmanagement accounting.

DIFFERENCES BETWEEN MANAGEMENT ACCOUNTINGAND FINANCIAL ACCOUNTING

The major differences between these two branches of accounting are:

• Legal requirements. There is a statutory requirement for public limited companies to produceannual financial accounts, regardless of whether or not management regards this information asuseful. Management accounting, by contrast, is entirely optional and information should beproduced only if it is considered that the benefits it offers management exceed the cost ofcollecting it.

• Focus on individual parts or segments of the business. Financial accounting reports describe thewhole of the business, whereas management accounting focuses on small parts of the organization;for example, the cost and profitability of products, services, departments, customers and activities.

• Generally accepted accounting principles. Financial accounting statements must be prepared toconform with the legal requirements and the generally accepted accounting principles establishedby the regulatory bodies such as the Financial Accounting Standards Board (FASB) in the USA, theAccounting Standards Board (ASB) in the UK and the International Accounting Standards Board.These requirements are essential to ensure uniformity and consistency, which make intercompanyand historical comparisons possible. Financial accounting data should be verifiable and objective. Incontrast, management accountants are not required to adhere to generally accepted accountingprinciples when providing managerial information for internal purposes. Instead, the focus is on theserving management’s needs and providing information that is useful to managers when they arecarrying out their decision-making, planning and control functions.

• Time dimension. Financial accounting reports what has happened in the past in an organization,whereas management accounting is concerned with future information as well as past information.

6 CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING



Licensed to:

Decisions are concerned with future events and management, therefore, requires details of expectedfuture costs and revenues.

• Report frequency. A detailed set of financial accounts is published annually and less detailedaccounts are published semi-annually. Management usually requires information more quicklythan this if it is to act on it. Consequently, management accounting reports on various activitiesmay be prepared at daily, weekly or monthly intervals.

THE DECISION-MAKING PROCESS

Information produced by management accountants must be judged in the light of its ultimate effect on theoutcome of decisions. It is therefore important to have an understanding of the decision-making process.Figure 1.1 presents a diagram of the decision-making, planning and control process. The first four stagesrepresent the decision-making or planning process. The final two stages represent the control process, whichis the process of measuring and correcting actual performance to ensure the alternatives that are chosen andthe plans for implementing them are carried out. We will now examine the stages in more detail.

Identifying objectivesBefore good decisions can be made there must be some guiding aim or direction that will enable thedecision-makers to assess the desirability of choosing one course of action over another. Hence, the firststage in the decision-making process should be to specify the company’s goals or organizational objectives.

This is an area where there is considerable controversy. Economic theory normally assumes that firmsseek to maximize profits for the owners of the firm or, more precisely, the maximization of shareholders’wealth, which we shall see in Chapter 13 is equivalent to the maximization of the present value of futurecash flows. Various arguments have been used to support the profit maximization objective. There is thelegal argument that the ordinary shareholders are the owners of the firm, which therefore should be runfor their benefit by trustee managers. Another argument supporting the profit objective is that profitmaximization leads to the maximization of overall economic welfare. That is, by doing the best foryourself, you are unconsciously doing the best for society. Moreover, it seems a reasonable belief that theinterests of firms will be better served by a larger profit than by a smaller profit, so that maximization is atleast a useful approximation. Some writers (e.g. Simon, 1959) believe that many managers are content tofind a plan that provides satisfactory profits rather than to maximize profits.

Cyert and March (1969) have argued that the firm is a coalition of various different groups –shareholders, employees, customers, suppliers and the government – each of whom must be paid aminimum to participate in the coalition. Any excess benefits after meeting these minimum constraints are

1. Identify objectives

2. Search for alternative courses of action

3. Select appropriate courses of action

4. Implement the decisions

5. Compare actual and planned outcomes

6. Respond to divergences from plan

Planningprocess

Controlprocess

FIGURE 1.1The decision-making, planningand controlprocess

THE DECISION-MAKING PROCESS 7



Licensed to:

seen as being the object of bargaining between the various groups. In addition, a firm is subject toconstraints of a societal nature. Maintaining a clean environment, employing disabled workers andproviding social and recreation facilities are all examples of social goals that a firm may pursue.

Clearly it is too simplistic to say that the only objective of a business firm is to maximize profits. Somemanagers seek to establish a power base and build an empire. Another common goal is security, and theremoval of uncertainty regarding the future may override the pure profit motive. Organizations may alsopursue more specific objectives, such as producing high quality products or being the market leaderwithin a particular market segment. Nevertheless, the view adopted in this book is that, broadly, firmsseek to maximize future profits. There are three reasons for us to concentrate on this objective:

1 It is unlikely that any other objective is as widely applicable in measuring the ability of theorganization to survive in the future.

2 It is unlikely that maximizing future profits can be realized in practise, but by establishing theprinciples necessary to achieve this objective you will learn how to increase profits.

3 It enables shareholders as a group in the bargaining coalition to know how much the pursuit ofother goals is costing them by indicating the amount of cash distributed among the membersof the coalition.

The search for alternative courses of actionThe second stage in the decision-making model is a search for a range of possible courses of action (orstrategies) that might enable the objectives to be achieved. If the management of a company concen-trates entirely on its present product range and markets, and market shares and profits are allowed todecline, there is a danger that the company will be unable to survive in the future. If the business is tosurvive, management must identify potential opportunities and threats in the current environment andtake specific steps now so that the organization will not be taken by surprise by future developments. Inparticular, the company should consider one or more of the following courses of action:

1 developing new products for sale in existing markets;

2 developing new products for new markets;

3 developing new markets for existing products.

The search for alternative courses of action involves the acquisition of information concerning futureopportunities and environments; it is the most difficult and important stage of the decision-makingprocess. We shall examine this search process in more detail in Chapter 15.

Select appropriate alternative courses of actionIn order for managers to make an informed choice of action, data about the different alternatives must begathered. For example, managers might ask to see projected figures on:

• the potential growth rates of the alternative activities under consideration;

• the market share the company is likely to achieve;

• projected profits for each alternative activity.

The alternatives should be evaluated to identify which course of action best satisfies the objectives of anorganization. The selection of the most advantageous alternative is central to the whole decision-makingprocess and the provision of information that facilitates this choice is one of the major functions ofmanagement accounting. We shall return to this subject in Chapters 8 to 14.

Implementation of the decisionsOnce the course of action has been selected, it should be implemented as part of the budgeting and long-term planning process. The budget is a financial plan for implementing the decisions that managementhas made. The budgets for all of the various decisions a company takes are expressed in terms of cash




Licensed to:

inflows and outflows, and sales revenues and expenses. These budgets are merged together into a singleunifying statement of the organization’s expectations for future periods. This statement is known as amaster budget and consists of budgeted profit and cash flow statements. The budgeting processcommunicates to everyone in the organization the part that they are expected to play in implementingmanagement’s decisions. We shall examine the budgeting process in Chapter 15.

Comparing actual and planned outcomes and respondingto divergencies from planThe final stages in the process outlined in Figure 1.1 involve comparing actual and planned outcomes andresponding to divergencies from plan. The managerial function of control consists of the measurement,reporting and subsequent correction of performance in an attempt to ensure that the firm’s objectives andplans are achieved.

To monitor performance, the accountant produces performance reports and presents them to themanagers who are responsible for implementing the various decisions. These reports compare actualoutcomes (actual costs and revenues) with planned outcomes (budgeted costs and revenues) and shouldbe issued at regular intervals. Performance reports provide feedback information and should highlight thoseactivities that do not conform to plans, so that managers can devote their limited time to focusing mainly onthese items. This process represents the application ofmanagement by exception. Effective control requiresthat corrective action is taken so that actual outcomes conform to planned outcomes. Alternatively, theplans may require modification if the comparisons indicate that the plans are no longer attainable.

The process of taking corrective action or modifying the plans if the comparisons indicate that actualoutcomes do not conform to planned outcomes, is indicated by the arrowed lines in Figure 1.1 linkingstages 6 and 4 and 6 and 2. These arrowed lines represent ‘feedback loops’. They signify that the process isdynamic and stress the interdependencies between the various stages in the process. The feedback loopbetween stages 6 and 2 indicates that the plans should be regularly reviewed, and if they are no longerattainable then alternative courses of action must be considered for achieving the organization’s objec-tives. The second loop stresses the corrective action taken so that actual outcomes conform to plannedoutcomes. Chapters 15 to 18 focus on the planning and control process.

THE IMPACT OF THE CHANGING BUSINESS ENVIRONMENTON MANAGEMENT ACCOUNTING

During the last few decades global competition, deregulation, growth in the service industries, declines inproduct life cycles, advances in manufacturing and information technologies, environmental issues and acompetitive environment requiring companies to become more customer driven, have changed the natureof the business environment. These changes have significantly altered the ways in which firms operate,which in turn, have resulted in changes in management accounting practices.

Global competitionDuring the last few decades reductions in tariffs and duties on imports and exports, and dramaticimprovements in transportation and communication systems, have resulted in many firms operating ina global market. Prior to this, many organizations operated in a protected competitive environment.Barriers of communication and geographical distance, and sometimes protected markets, limited theability of overseas companies to compete in domestic markets. There was little incentive for firms tomaximize efficiency and improve management practices, or to minimize costs, as cost increases couldoften be passed on to customers. During the 1990s, however, organizations began to encounter severecompetition from overseas competitors that offered high-quality products at low prices. Manufacturingcompanies can now establish global networks for acquiring raw materials and distributing goodsoverseas, and service organizations can communicate with overseas offices instantaneously using videoconferencing technologies. These changes have enabled competitors to gain access to domestic markets

THE IMPACT OF THE CHANGING BUSINESS ENVIRONMENT ON MANAGEMENT ACCOUNTING 9



Licensed to:

throughout the world. Nowadays, organizations have to compete against the best companies in theworld. This new competitive environment has increased the demand for cost information relating tocost management and profitability analysis by product lines and geographical locations.

Growth in the service industryIn many countries the service sector exceeds 50 per cent of GDP. For example, in 2010 the service sectorin the UK and USA was approximately 75 per cent of GDP. Before the 1990s many service organizations,such as those operating in the airlines, utilities and financial service industries, were either government-owned monopolies or operated in a highly regulated, protected and non-competitive environment. Theseorganizations were not subject to any great pressure to improve the quality and efficiency of theiroperations or to improve profitability by eliminating services or products that were making losses. Priceswere set to cover operating costs and provide a predetermined return on capital. Hence cost increasescould often be absorbed by increasing the prices of the services. Little attention was therefore given todeveloping cost systems that accurately measured the costs and profitability of individual services.

Privatization of government-controlled companies and deregulation have completely changed thecompetitive environment in which service companies operate. Pricing and competitive restrictions havebeen virtually eliminated. Deregulation, intensive competition and an expanding product range create theneed for service organizations to focus on cost management and develop management accounting

REAL WORLDVIEWS 1.2

Changing competitive environment – e-booksIn recent years, books have become increasinglyavailable in electronic format. Amazon.com offerse-books on its Kindle e-readers, and Apple Inc. offere-books through their iBooks App, which covers sev-eral devices. Hundreds of thousands of books arenow available as e-books. How has this changedthe competitive environment of publishing? Arguably,several costs may have disappeared from e-books asopposed to traditional printed books – publishing anddistribution costs in the main. But some other costshave increased, notably the costs imposed on pub-lishers by companies like Amazon and Apple. Forexample, Apple typically takes 30 per cent of reven-ues, quite a substantial cost. E-books have not fullyreplaced printed books, but publishers are seeing anincrease in e-book sales annually. At the retail end,some book stores are beginning to stock less paperbooks, opting instead for a print-on-demand servicein store. In this case, books are stored electronically,either on- or offsite.

The factors just mentioned present a new com-petitive model for the publishing sector. Arguably ane-book is a different product, with differing economicdrivers. The competitive concerns revolve around

maximizing revenues of those books that are suitablefor distribution through digital means. While the costsof an e-book are readily determinable, the revenuesare not. Some books may be given away for free inthe hope that customers will ‘buy-in’ to a particularstore with future paid sales. Another model is ‘pay-per-view’, which generates less revenue that a down-loaded e-book. In addition, although Amazon andApple are the main players now, it is difficult to pre-vent new entrants or new business models in thelonger term.

Questions

1 How might e-booksellers generaterevenues if publishersand authors over timereduce the cut takenfrom revenue?

2 What are the barriers toentry for firms trying toenter the e-bookmarket?

Referenceshttp://www.apple.com/ipad/features/ibooks.htmlhttp://www.dailyfinance.com/story/company-news/amazons-e-book-market-share-may-plummet-great-news-for-amazon/19361847/

©AlexSlobodkin,iStock.com




Licensed to:

information systems that enable them to understand their cost base and determine the sources ofprofitability for their products, customers and markets. One of the major features of the businessenvironment in recent decades has been the growth in the service sector and the growth of managementaccounting within service organizations.

Changing product life cyclesA product’s life cycle is the period of time from initial expenditure on research and development to thetime at which support to customers is withdrawn. Intensive global competition and technologicalinnovation, combined with increasingly discriminating and sophisticated customer demands, haveresulted in a dramatic decline in product life cycles. To be successful companies must now speed upthe rate at which they introduce new products to the market. Being later to the market than thecompetitors can have a dramatic effect on product profitability.

In many industries a large fraction of a product’s life cycle costs are determined by decisions madeearly in its life cycle. This has created a need for management accounting to place greater emphasis onproviding information at the design stage because many of the costs are committed or locked in at thistime. Therefore, to compete successfully, companies must be able to manage their costs effectively at thedesign stage, have the capability to adapt to new, different and changing customer requirements andreduce the time to market of new and modified products.

REAL WORLDVIEWS 1.3

Changing product life cycles – consumermedical devicesMedical devices are normally associated with use byhospitals and medical practices. Some devices areused by normal consumers, and according to anarticle on the Medical Device and Diagnostic Industrywebsite (www.mddionline.com), are proliferatingamongst the general public. The market for medicaldevices such as insulin pumps and blood pressuremonitors has become more consumer-driven and isputting pressures on manufacturers to design bet-ter products and get them to the market faster.

According to the article, ‘patients want their med-ical devices to have the same kind of design andappeals as iPods’. This convergence of medical andmass consumer electronics is creating many chal-lenges for medical device manufacturers. Thesechallenges include widely divergent product lifecycles, varying scenarios of use and safety andefficacy concerns. The typical life cycle of a consu-mer device is likely to be measured more in monthsthan years. Compare this to the long approvalcycles of drug and medical device regulatory autho-rities – which according to the article can be any-thing from 27 to 36 months in the US depending on

the type of medical device. During this timeframe,an iPod has probably gone through at least twogenerations. It may be that medical devices willnever get as savvy as an iPod due to regulatoryconcerns and the efficacy of the device itself. How-ever, increasing consumer-driven requirements arelikely to shorten the product life cycle over comingyears as devices move further towards savvy elec-tronics like iPods/iPads.

Questions

1 Do you think the costsof the electroniccomponents in an iPod/iPad are more or lessthan those in a medicaldevice like a bloodpressure monitor?

2 Would decreasing theproduct life cycle ofmedical devices, or medical devices being morelike consumer electronics, pose any risks formanufacturers?

ReferencesDeveloping medical devices in a consumer-driven mar-ket, available at http://www.mddionline.com/article/developing-medical-devices-consumer-driven-market

©San

tje09

,Shutterstock

Imag

es

THE IMPACT OF THE CHANGING BUSINESS ENVIRONMENT ON MANAGEMENT ACCOUNTING 11



Licensed to:

Advances in manufacturing technologiesExcellence in manufacturing can provide a competitive weapon to compete in sophisticated worldwidemarkets. In order to compete effectively, companies must be capable of manufacturing innovativeproducts of high quality at a low cost, and also provide a first-class customer service. At the same time,they must have the flexibility to cope with short product life cycles, demands for greater product varietyfrom more discriminating customers and increasing international competition. World-class manufactur-ing companies have responded to these competitive demands by replacing traditional production systemswith lean manufacturing systems that seek to reduce waste by implementing just-in-time (JIT) produc-tion systems, focusing on quality, simplifying processes and investing in advanced manufacturingtechnologies (AMTs). The major features of these new systems and their implications for managementaccounting will be described throughout the book.

The impact of information technologyDuring the past two decades the use of information technology (IT) to support business activities hasincreased dramatically and the development of electronic business communication technologies known ase-business, e-commerce or internet commerce have had a major impact. For example, consumers aremore discerning in their purchases because they can access the internet to compare the relative merits ofdifferent products. Internet trading also allows buyers and sellers to undertake transactions from diverselocations in different parts of the world. E-commerce (such as bar coding) has allowed considerable costsavings to be made by streamlining business processes and has generated extra revenues from the adeptuse of online sales facilities (such as ticketless airline bookings and internet banking). The proficient useof e-commerce has given many companies a competitive advantage.

One advanced IT application that has had a considerable impact on business information systems isenterprise resource planning systems (ERPS). An ERPS comprises a set of integrated software applica-tions modules that aim to control all information flows within a company. Users can use their personalcomputers (PCs) to access the organization’s database and follow developments almost as they happen.Using real time data enables managers to analyze information quickly and thus continually improve theefficiencies of processes. A major feature of ERPS systems is that all data are entered only once, typicallywhere they originate. There are a number of ERPS packages on the market provided by companies suchas SAP, Baan, Oracle and J.D. Edwards. SAP is the market leader with more than 7500 users in 90countries (Scapens, Jazayeri and Scapens, 1998).

The introduction of ERPS has the potential to have a significant impact on the work of managementaccountants. In particular, it substantially reduces routine information gathering and the processing ofinformation. Instead of managers asking management accountants for information, they can access thesystem to derive the information they require directly and do their own analyzes. This has freedaccountants to adopt the role of advisers and internal consultants to the business. Management accoun-tants have now become more involved in interpreting the information generated from the ERPS andproviding business support for managers.

Environmental issuesCustomers are no longer satisfied if companies simply comply with the legal requirements of under-taking their activities. They expect company managers to be more proactive in terms of their socialresponsibility, safety and environmental issues. Environmental management accounting is becomingincreasingly important in many organizations. There are several reasons for this. First, environmentalcosts can be large for some industrial sectors. Second, regulatory requirements involving huge fines fornon-compliance have increased significantly over the past decade. Therefore, selecting the least costlymethod of compliance has become a major objective. Third, society is demanding that companies focuson being more environmentally friendly. Companies are finding that becoming a good social citizen andbeing environmentally responsible improves their image and enhances their ability to sell their productsand services.




Licensed to:

These developments have created the need for companies to develop systems of measuring and reportingenvironmental costs, the consumption of scarce environmental resources and details of hazardous materialsused or pollutants emitted to the environment. Knowledge of environmental costs, and their causes, providesthe information that managers need to redesign processes to minimize the usage of scarce environmentalresources and the emission pollutants and to also make more sensitive environmental decisions.

Customer orientationIn order to survive in today’s competitive environment companies have had to become more customer-driven and to recognize that customers are crucial to their future success. This has resulted in companiesmaking customer satisfaction an overriding priority and to focus on identifying and achieving the keysuccess factors that are necessary to be successful in today’s competitive environment. These key successfactors are discussed in the next section.

FOCUS ON CUSTOMER SATISFACTION AND NEWMANAGEMENT APPROACHES

The key success factors which organizations must concentrate on to provide customer satisfaction arecost, quality, reliability, delivery and the choice of innovative new products. In addition, firms areattempting to increase customer satisfaction by adopting a philosophy of continuous improvement toreduce costs and improve quality, reliability and delivery.

Cost efficiencyKeeping costs low and being cost efficient provides an organization with a strong competitive advantage.Increased competition has also made decision errors, due to poor cost information, more potentiallyhazardous to an organization. Many companies have become aware of the need to improve their costsystems so that they can produce more accurate cost information to determine the cost of their productsand services, monitor trends in costs over time, pinpoint loss-making activities and analyze profits byproducts, sales outlets, customers and markets.

QualityIn addition to demanding low costs, customers are demanding high quality products and services. Mostcompanies are responding to this by focusing on total quality management (TQM). TQM is a term usedto describe a situation where all business functions are involved in a process of continuous qualityimprovement that focuses on delivering products or services of consistently high quality in a timelyfashion. The emphasis on TQM has created fresh demands on the management accounting function tomeasure and evaluate the quality of products and services and the activities that produce them.

Time as a competitive weaponOrganizations are also seeking to increase customer satisfaction by providing a speedier response tocustomer requests, ensuring 100 per cent on-time delivery and reducing the time taken to develop andbring new products to market. For these reasons management accounting systems now place moreemphasis on time-based measures, such as cycle time. This is the length of time from start to completionof a product or service. It consists of the sum of processing time, move time, wait time and inspectiontime. Only processing time adds value to the product, and the remaining activities are non-value addedactivities in the sense that they can be reduced or eliminated without altering the product’s servicepotential to the customer. Organizations are therefore focusing on minimizing cycle time by reducing thetime spent on such activities. The management accounting system has an important role to play in thisprocess by identifying and reporting on the time devoted to value added and non-value added activities.Cycle time measures have also become important for service organizations. For example, the time taken

FOCUS ON CUSTOMER SATISFACTION AND NEW MANAGEMENT APPROACHES 13



Licensed to:

to process mortgage loan applications by financial organizations can be considerable, involving substan-tial non-value added waiting time. Reducing the time to process applications enhances customersatisfaction and creates the potential for increasing sales revenue.

Innovation and continuous improvementTo be successful companies must develop a steady stream of innovative new products and services andhave the capability to adapt to changing customer requirements. Management accounting informationsystems have begun to report performance measures relating to innovation. Examples include:

• the total launch time for new products/services;

• an assessment of the key characteristics of new products relative to those of competitors;

• feedback on customer satisfaction with the new features and characteristics of newly introducedproducts and the number of new products launched.

Organizations are also attempting to enhance customer satisfaction by adopting a philosophy ofcontinuous improvement. Traditionally, organizations have sought to study activities and establishstandard operating procedures. Management accountants developed systems and measurements thatcompared actual results with predetermined standards. This process created a climate whereby thepredetermined standards represented a target to be achieved and maintained. In today’s competitiveenvironment, companies must adopt a philosophy of continuous improvement, an ongoing process thatinvolves a continuous search to reduce costs, eliminate waste and improve the quality and performance ofactivities that increase customer value or satisfaction. Management accounting supports continuousimprovement by identifying opportunities for change and then reporting on the progress of the methodsthat have been implemented.

Benchmarking is a technique that is increasingly being adopted as a mechanism for achievingcontinuous improvement. It is a continuous process of measuring a firm’s products, services or activitiesagainst the other best performing organizations, either internal or external to the firm. The objective is toascertain how the processes and activities can be improved. Ideally, benchmarking should involve anexternal focus on the latest developments, best practice and model examples that can be incorporatedwithin various operations of business organizations. It therefore represents the ideal way of movingforward and achieving high competitive standards.

In their quest for the continuous improvement of organizational activities, managers have found thatthey need to rely more on the people closest to the operating processes and customers, to develop newapproaches to performing activities. This has led to employees being provided with relevant informationto enable them to make continuous improvements to the output of processes. Allowing employees to takesuch actions without the authorization by superiors has come to be known as employee empowerment.It is argued that by empowering employees and giving them relevant information they will be able torespond faster to customers, increase process flexibility, reduce cycle time and improve morale. Manage-ment accounting is therefore moving from its traditional emphasis on providing information to managersto monitor the activities of employees, to providing information to employees to empower them to focuson the continuous improvement of activities.

MANAGEMENT ACCOUNTING AND ETHICAL BEHAVIOUR

Earlier in this chapter it was suggested that management accounting practices were developed to provideinformation that assists managers to maximize future profits. It was, however, pointed out that it is toosimplistic to assume that the only objective of a business firm is to maximize profits. The profit maximizationobjective should be constrained by the need for firms to also give high priority to their socialresponsibilities and ensure that their employees adopt high standards of ethical behaviour. A code ofethics has now become an essential part of corporate culture.

Identification of what is acceptable ethical behaviour has attracted much attention in recent years.Performance measurement systems are widely used to financially reward managers on the basis of their




Licensed to:

performance in reducing costs or increasing sales or profits. This has resulted in many managers in thefinancial services sector taking actions to increase sales or profits when such actions have resulted inproviding high risk loans that caused the financial crises in the banking sector. Many would argue thatthey were motivated by personal greed to increase the reported sales revenues and profits and thus theirbonus, without considering the adverse long-term implications of their actions. It could be argued,however, that they were engaging in organizationally desirable behaviour by seeking to maximize profitsbecause the reward system strongly encouraged them to increase sales or profits. An alternative view isthat they were engaging in unethical actions. So where should the blame be assigned? Is the reward systemat fault or the unethical behaviour? Or both?

Professional accounting organizations also play an important role in promoting a high standard ofethical behaviour by their members. Both of the professional bodies representing management accoun-tants, in the UK (Chartered Institute of Management Accountants), and in the USA (Institute ofManagement Accountants), have issued a code of ethical guidelines for their members and establishedmechanisms for monitoring and enforcing professional ethics. The guidelines are concerned with ensur-ing that accountants follow fundamental principles relating to:

• integrity (being honest and not being a party to any falsification);

• objectivity (not being biased or prejudiced);

• confidentiality and professional competence and due care (maintaining the skills required to ensurea competent professional service);

• compliance with relevant laws and regulations.

You can view the Chartered Institute of Management Accountants code of ethics at www.cimaglobal.com/standards and ethics.

INTERNATIONAL CONVERGENCE OF MANAGEMENTACCOUNTING PRACTICES

This book has become an established text in many different countries. Its widespread use supports thepremise that management accounting practices generally do not differ across national borders. Granlundand Lukka (1998) argue that there is a strong current tendency towards global homogenization ofmanagement accounting practices within the industrialized parts of the world.

Granlund and Lukka distinguish between management accounting practices at the macro and microlevels. The macro level relates to concepts and techniques; in other words, it relates mainly to the content of

REAL WORLDVIEWS 1.4

A look at a key feature of easyJet’s businessAs one of the pioneers in the low cost airline market,easyJet bases its business on a number of principles:

•Minimize distribution costs by using the internet totake bookings. About 90 per cent of all easyJettickets are sold via the Web. This makes thecompany one of Europe’s largest internet retailers.

•Maximize efficient use of assets, by increasingturnaround time at airports.

•A ‘simple-service model’ means the end of freeon-board catering.

•Ticketless travel, where passengers receive ane-mail confirming their booking, cuts the cost ofissuing, distributing and processing tickets.

•Intensive use of IT in administration andmanagement, aiming to run a paperless office.

Question

1 How can the management accounting functionprovide information to support a low-cost strategy?

Referenceswww.easyjet.com

INTERNATIONAL CONVERGENCE OF MANAGEMENT ACCOUNTING PRACTICES 15



Licensed to:

this book. In contrast, the micro level is concerned with the behavioural patterns relating to how manage-ment accounting information is actually used. At the macro level, Granlund and Lukka suggest that theconvergence of management accounting practices in different countries has occurred because of intensifiedglobal competition, developments in information technology, the increasing tendency of transnationalcompanies to standardize their practices, the global consultancy industry and the use of globally appliedtextbooks and teaching.

Firms throughout the world are adopting similar integrated enterprise resource planning systems orstandardized software packages that have resulted in the standardization of data collection formats andreporting patterns of accounting information. In multinational companies this process has resulted in thestandardization of the global flow of information, but it has also limited the ability to generate locally relevantinformation. Besides the impact of integrated IT systems, it is common for the headquarters/parent companyof a transnational enterprise to force foreign divisions to adopt similar accounting practices to those ofthe headquarters/parent company. A large global consultancy industry has recently emerged that tends topromote the same standard solutions globally. The consultancy industry also enthusiastically supportsmimetic processes. Granlund and Lukka describe mimetic processes as processes by which companies,under conditions of uncertainty, copy publicly known and appreciated models of operation from each other,especially from successful companies that have a good reputation. Finally, the same textbooks are usedglobally and university and professional accounting syllabuses tend to be similar in different countries.

At the micro level, Granlund and Lukka acknowledge that differences in national and corporateculture can result in management accounting information being used in different ways across countries.For example, there is evidence to suggest that accounting information is used in a more rigorous/rigidmanner to evaluate managerial performance in cultures exhibiting certain national traits, and in a moreflexible way in cultures exhibiting different national traits. At the macro level Granlund and Lukka arguethat the impact of national culture is diminishing because of the increasing emerging pressures to follownational trends to secure national competitiveness.

FUNCTIONS OF MANAGEMENT ACCOUNTING

A cost and management accounting system should generate information to meet the following require-ments. It should:

1 allocate costs between cost of goods sold and inventories for internal and external profit reporting;

2 provide relevant information to help managers make better decisions;

3 provide information for planning, control, performance measurement and continuousimprovement.

Financial accounting rules require that we match costs with revenues to calculate profit. Consequently,any unsold finished goods inventories (or partly completed work in progress) will not be included in thecost of goods sold, which is matched against sales revenue during a given period. In an organization thatproduces a wide range of different products it will be necessary, for inventory valuation purposes, tocharge the costs to each individual product. The total value of the inventories of completed products andwork in progress, plus any unused raw materials, forms the basis for determining the inventory valuationto be deducted from the current period’s costs when calculating profit. This total is also the basis fordetermining the inventory valuation for inclusion in the balance sheet. Costs are therefore traced to eachindividual job or product for financial accounting requirements, in order to allocate the costs incurredduring a period between cost of goods sold and inventories. (Note that the terms ‘stocks’ and ‘inventories’are used synonymously throughout this book.) This information is required for meeting external financialaccounting requirements, but most organizations also produce internal profit reports at monthly inter-vals. Thus, product costs are also required for periodic internal profit reporting. Many service organiza-tions, however, do not carry any inventories and product costs are therefore not required by theseorganizations for valuing inventories.

The second requirement of a cost and management accounting system is to provide relevant financialinformation to managers to help them make better decisions. Information is required relating to the




Licensed to:

profitability of various segments of the business such as products, services, customers and distributionchannels, in order to ensure that only profitable activities are undertaken. Information is also required formaking resource allocation and product/service mix and discontinuation decisions. In some situationsinformation extracted from the costing system also plays a crucial role in determining selling prices,particularly in markets where customized products and services that do not have readily available marketprices are provided.

Management accounting systems should also provide information for planning, control, performancemeasurement and continuous improvement. Planning involves translating goals and objectives into thespecific activities and resources that are required to achieve them. Companies develop both long-term andshort-term plans and the management accounting function plays a critical role in this process. Short-termplans, in the form of the budgeting process, are prepared in more detail than the longer-term plans andare one of the mechanisms used by managers as a basis for control and performance evaluation. Thecontrol process involves the setting of targets or standards (often derived from the budgeting process)against which actual results are measured. The management accountant’s role is to provide managers withfeedback information in the form of periodic reports, suitably analyzed, to enable them to determine ifoperations for which they are responsible are proceeding according to plan, and to identify those activitieswhere corrective action is necessary. In particular, the management accounting function should provideeconomic feedback to managers to assist them in controlling costs and improving the efficiency andeffectiveness of operations.

It is appropriate at this point to distinguish between cost accounting and management accounting.Cost accounting is concerned with cost accumulation for inventory valuation to meet the requirementsof external reporting and internal profit measurement, whereas management accounting relates to theprovision of appropriate information for decision-making, planning, control and performance evaluation.However, a study of the literature reveals that the distinction between cost accounting and managementaccounting is not clear cut and the two terms are often used synonymously. In this book no furtherattempt will be made to distinguish between them.

You should now be aware that a management accounting system serves multiple purposes. Theemphasis throughout this book is that costs must be assembled in different ways for different purposes.Most organizations record cost information in a single database, with costs appropriately coded andclassified, so that relevant information can be extracted to meet the requirements of different users. Weshall examine this topic in the next chapter.

A BRIEF HISTORICAL REVIEW OF MANAGEMENTACCOUNTING

The origins of today’s management accounting can be traced back to the Industrial Revolution of thenineteenth century. According to Johnson and Kaplan (1987), most of the management accountingpractices that were in use in the mid-1980s had been developed by 1925, and for the next 60 years therewas a slow-down, or even a halt, in management accounting innovation. They argue that this stagnationcan be attributed mainly to the demand for product cost information for external financial accountingreports. The separation of the ownership and management of organizations created a need for the ownersof a business to monitor the effective stewardship of their investment. This need led to the development offinancial accounting, which generated a published report for investors and creditors summarizing thefinancial position of the company. Statutory obligations were established requiring companies to publishaudited annual financial statements. In addition, there was a requirement for these published statementsto conform to a set of rules known as Generally Accepted Accounting Principles (GAAP), which weredeveloped by regulators.

The preparation of published external financial accounting statements required that costs be allocatedbetween cost of goods sold and inventories. Cost accounting emerged to meet this requirement. Simpleprocedures were established to allocate costs to products that were objective and verifiable for financialaccounting purposes. Such costs, however, were not sufficiently accurate for decision-making pur-poses and for distinguishing between profitable and unprofitable products and services. Johnson and

A BRIEF HISTORICAL REVIEW OF MANAGEMENT ACCOUNTING 17



Licensed to:

Kaplan argue that the product costs derived for financial accounting purposes were also being usedfor management accounting purposes. They conclude that managers did not have to yield the designof management accounting systems to financial accountants and auditors. Separate systems couldhave been maintained for managerial and financial accounting purposes, but the high cost ofinformation collection meant that the costs of maintaining two systems exceeded the additionalbenefits. Thus, companies relied primarily on the same information as that used for external financialreporting to manage their internal operations.

Johnson and Kaplan claim that, over the years, organizations had become fixated on the cost systemsof the 1920s. Furthermore, when the information systems were automated in the 1960s, the systemdesigners merely automated the manual systems that were developed in the 1920s. Johnson and Kaplanconclude that the lack of management accounting innovation over the decades, and the failure to respondto its changing environment, resulted in a situation in the mid-1980s where firms were using manage-ment accounting systems that were obsolete and no longer relevant to the changing competitive andmanufacturing environment.

During the late 1980s, criticisms of current management accounting practices were widely publicizedin the professional and academic accounting literature. In 1987 Johnson and Kaplan’s book entitledRelevance Lost: The Rise and Fall of Management Accounting, was published. An enormous amount ofpublicity was generated by this book as a result of the authors’ criticisms of management accounting.Many other commentators also concluded that management accounting was in crisis and that funda-mental changes in practice were required.

Since the mid-1980s management accounting practitioners and academics have sought to modify andimplement new techniques that are relevant to today’s environment which will ensure that managementaccounting regains its relevance. By the mid-1990s Kaplan (1994a) stated that:

The past 10 years have seen a revolution in management accounting theory and practice. The seeds of therevolution can be seen in publications in the early to mid-1980s that identified the failings and obsolescence ofexisting cost and performance measurement systems. Since that time we have seen remarkable innovations inmanagement accounting; even more remarkable has been the speed with which the new concepts have becomewidely known, accepted and implemented in practice and integrated into a large number of educationalprogrammes.

SUMMARY OF THE CONTENTS OF THIS BOOK

This book is divided into six parts. Part One contains two chapters and provides an introduction tomanagement and cost accounting and a framework for studying the remaining chapters. Part Twoconsists of five chapters and is entitled ‘Cost Accumulation for Inventory Valuation and Profit Measure-ment’. This section focuses mainly on cost accounting. It is concerned with assigning costs to products toseparate costs incurred during a period between costs of goods sold and the closing inventory valuation.The extent to which product costs accumulated for inventory valuation and profit measurement shouldbe adjusted for meeting decision-making, cost control and performance measurement requirements, isalso briefly considered. Part Three is made up of seven chapters and is entitled ‘Information for Decision-making’. Here the focus is on measuring and identifying those costs which are relevant for different typesof decisions.

The title of Part Four is ‘Information for Planning, Control and Performance Measurement’. It consistsof six chapters and concentrates on the process of translating goals and objectives into specific activitiesand the resources that are required, via the short-term (budgeting) and long-term planning processes, toachieve the goals and objectives. In addition, the management control systems that organizations use aredescribed and the role that management accounting control systems play within the overall controlprocess is examined. The emphasis here is on the accounting process as a means of providing informationto help managers control the activities for which they are responsible. Performance measurement andevaluation within different segments of the organization is also examined.

Part Five contains two chapters and is entitled ‘Strategic Cost Management and Strategic Manage-ment Accounting’. The first chapter focuses on strategic cost management and the second on strategic




Licensed to:

management accounting. The sixth part consists of three chapters and is entitled ‘The Application ofQuantitative Methods to Management Accounting’.

GUIDELINES FOR USING THIS BOOK

If you are pursuing a course of management accounting, without cost accumulation for inventoryvaluation and profit measurement, Chapters 4 to 7 in Part Two can be omitted, since the rest of thisbook does not rely heavily on these chapters. Alternatively, you could delay your reading of Chapters 4 to 7in Part Two until you have studied Parts Three and Four. If you wish to gain an insight into costaccumulation for inventory valuation and profit measurement but do not wish to study it in depth, youmay prefer to read only Chapters 3 and 7 of Part Two. It is important that you read Chapter 3, whichfocuses on traditional methods of tracing overheads to cost objects, prior to reading Chapter 11 onactivity-based costing.

The chapters on the application of quantitative techniques to management accounting have beendelayed until Part Six. An alternative approach would be to read Chapter 23 immediately after readingChapter 8 on cost–volume–profit analysis. Chapter 24 is self-contained and may be assigned to follow anyof the chapters in Part Four. Chapter 25 should be read only after you have studied Chapter 9.

A comprehensive treatment of all of the topics that are contained in this book will not be essential forall readers. To meet different requirements, the more advanced material that is not essential for thosereaders not requiring an in-depth knowledge of a particular topic, has been highlighted. The start of eachadvanced reading section has a clearly identifiable heading and a vertical green line is used to highlightthe full section. The advanced reading sections are more appropriate for an advanced course and maynormally be omitted if you are pursuing an introductory course.

SUMMARY

The following items relate to the learning objectives listed at the beginning of the chapter.

• Distinguish between management accounting and financial accounting.

Management accounting differs from financial accounting in several ways. Management accounting isconcerned with the provision of information to internal users to help them make better decisions andimprove the efficiency and effectiveness of operations. Financial accounting is concerned with theprovision of information to external parties outside the organization. Unlike financial accounting thereis no statutory requirement for management accounting to produce financial statements or followexternally imposed rules. Furthermore, management accounting provides information relating todifferent parts of the business whereas financial accounting reports focus on the whole business.Management accounting also tends to be more future oriented and reports are often published on adaily basis whereas financial accounting reports are published semi-annually.

• Identify and describe the elements involved in the decision-making, planningand control process.

The following elements are involved in the decision-making, planning and control process: (a) identifythe objectives that will guide the business; (b) search for a range of possible courses of action thatmight enable the objectives to be achieved; (c) select appropriate alternative courses of action thatwill enable the objectives to be achieved; (d) implement the decisions as part of the planning andbudgeting process; (e) compare actual and planned outcomes; and (f) respond to divergencies fromplan by taking corrective action so that actual outcomes conform to planned outcomes, or modify theplans if the comparisons indicate that the plans are no longer attainable.

GUIDELINES FOR USING THIS BOOK 19



Licensed to:

• Justify the view that a major objective of commercial organizations is to broadly seek tomaximize future profits.

The reasons for identifying maximizing future profits as a major objective are: (a) it is unlikely that anyother objective is as widely applicable in measuring the ability of the organization to survive in thefuture; (b) although it is unlikely that maximizing future profits can be realized in practice it is stillimportant to establish the principles necessary to achieve this objective; and (c) it enables share-holders as a group in the bargaining coalition to know how much the pursuit of other goals is costingthem by indicating the amount of cash distributed among the members of the coalition.

• Explain the factors that have influenced the changes in the competitive environment.

The factors influencing the change in the competitive environment are: (a) globalization of world trade;(b) deregulation in various industries; (c) growth of the service sector; (d) changing product life cycles;(e) advances in manufacturing and information technologies; (f) focus on environmental issues; and(g) the need to become more customer-driven.

• Outline and describe the key success factors that directly affect customer satisfaction.

The key success factors are: cost efficiency, quality, time and innovation and continuous improve-ment. Keeping costs low and being cost efficient provides an organization with a strong competitiveadvantage. Customers also demand high quality products and services and this has resulted incompanies making quality a key competitive variable. Organizations are also seeking to increasecustomer satisfaction by providing a speedier response to customer requests, ensuring 100 per centon-time delivery and reducing the time taken to bring new products to the market. To be successfulcompanies must be innovative and develop a steady stream of new products and services and havethe capability to rapidly adapt to changing customer requirements.

• Identify and describe the functions of a cost and management accounting system.

A cost and management accounting system should generate information to meet the followingrequirements: (a) allocate costs between cost of goods sold and inventories for internal and externalprofit reporting and inventory valuation; (b) provide relevant information to help managers make betterdecisions; and (c) provide information for planning, control and performance measurement.

• Provide a brief historical description of management accounting.

Most of the management accounting practices that were in use in the mid-1980s had been developedby 1925, and for the next 60 years there was virtually a halt in management accounting innovation. Bythe mid-1980s firms were using management accounting systems that were obsolete and no longerrelevant to the changing competitive and manufacturing environment. During the late 1980s, criti-cisms of current management accounting practices were widely publicized in the professional andacademic accounting literature. In response to the criticisms, considerable progress has been madein modifying and implementing new techniques that are relevant to today’s environment and that willensure that management accounting regains its relevance.

KEY TERMS AND CONCEPTS

Each chapter includes a section like this. You should make sure that you understand each of the terms listed belowbefore you proceed to the next chapter.

Benchmarking A mechanism for achieving continuousimprovement by measuring products, services oractivities against those of other best performingorganizations.

Budget A financial plan for implementing managementdecisions.

Continuous improvement An ongoing search to reducecosts, eliminate waste and improve the quality and




Licensed to:

performance of activities that increase customer value orsatisfaction.

Control A managerial function that consists of themeasurement, reporting and subsequent correction ofperformance in order to achieve the organization’sobjectives.

Control process The process of setting targets or standardsagainst which actual results are measured.

Cost accounting Accounting concerned with costaccumulation for inventory valuation to meet therequirements of external reporting and internal profitmeasurement.

Cycle time The length of time from start to completion of aproduct or service and is the sum of processing time,move time, wait time and inspection time.

E-business The use of information and communicationtechnologies to support any business activities, includingbuying and selling.

E-commerce The use of information and communicationtechnologies to support the purchase, sale andexchange of goods.

Employee empowerment Providing employees with relevantinformation to allow them to make continuousimprovements to the output of processes without theauthorization by superiors.

Enterprise resource planning system (ERPS) A set ofintegrated software application modules that aim tocontrol all information flows within a company.

Ethical behaviour Behaviour that is consistent with thestandards of honesty, fairness and social responsibilitythat have been adopted by the organization.

Financial accounting Accounting concerned with theprovision of information to parties that are external to theorganization.

Internet commerce The buying and selling of goods andservices over the internet.

Lean manufacturing systems Systems that seek toreduce waste in manufacturing by implementingjust-in-time production systems, focusing on quality,simplifying processes and investing in advancedtechnologies.

Management accounting Accounting concerned with theprovision of information to people within theorganization to aid decision-making and improvethe efficiency and effectiveness of existingoperations.

Management by exception A situation where managementattention is focused on areas where outcomes do notmeet targets.

Master budget A single unifying statement of anorganization’s expectations for future periodscomprising budgeted profit and cash flowstatements.

Non-value added activities Activities that can be reduced oreliminated without altering the product’s servicepotential to the customer.

Performance reports Regular reports to managementthat compare actual outcomes with plannedoutcomes.

Product’s life cycle The period of time from initialexpenditure on research and development to thewithdrawal of support to customers.

Strategies Courses of action designed to ensure thatobjectives are achieved.

Total quality management (TQM) A customer-orientedprocess of continuous improvement that focuses ondelivering products or services of consistent high qualityin a timely fashion.

KEY EXAMINATION POINTS

Chapter 1 has provided an introduction to the scope ofmanagement accounting. It is unlikely that examinationquestions will be set that refer to the content of an intro-ductory chapter. However, questions are sometimes setrequiring you to outline how a costing system can assistthe management of an organization. Note that the exam-iner may not distinguish between cost accounting and

management accounting. Cost accounting is often usedto also embrace management accounting. Your discussionof a cost accounting system should therefore include adescription (with illustrations) of how the system providesinformation for decision-making, planning and control.Make sure that you draw off your experience from the wholeof a first-year course and not just this introductory chapter.

ASSESSMENT MATERIAL

T he review questions are short questions that enable you to assess your understanding of the maintopics included in the chapter. The numbers in parentheses provide you with the page numbers to

refer to if you cannot answer a specific question.The remaining chapters also contain review problems. These are more complex and require you to

relate and apply the chapter content to various business problems. Fully worked solutions to the reviewproblems are provided in a separate section at the end of the book.

ASSESSMENT MATERIAL 21



Licensed to:

The digital support resources also include over 30 case study problems. The Electronic Boards case is acase study that is relevant to the introductory stages of a management accounting course.

REVIEW QUESTIONS

1.1 Identify and describe the different users of accountinginformation. (pp. 5–6)

1.2 Describe the differences between management accountingand financial accounting. (pp. 6–7)

1.3 Explain each of the elements of the decision-making,planning and control process. (pp. 7–9)

1.4 Describe what is meant by management by exception.(p. 9)

1.5 Explain how the business environment that businesses facehas changed over the past decades and discuss how thishas had an impact on management accounting. (pp. 9–13)

1.6 Describe each of the key success factors that companiesshould concentrate on to achieve customer satisfaction.(pp. 13–14)

1.7 Explain why firms are beginning to concentrate on socialresponsibility and corporate ethics. (pp. 14–15)

1.8 Describe the different functions of management accounting.(pp. 16–17)

1.9 Describe enterprise resource planning systems and theirimpact on management accountants. (p. 12)

1.10 Explain why management accounting practices tend not todiffer across countries. (pp. 15–16)




COLIN DRURY

Documents

Transcript of COLIN DRURY