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Management CHAPTER Accountants:
Their Vital Role in Strategic and
Operating Decisions
Learning Objectives
After studying this chapter, a student should be able to:
1.
Describe how cost accounting supports financial, management, and strategic
decisions;
2.
Explain how the value-chain concept relates to the dimensions of performance
customers expect;
3.
Identify differences between the planning and control decisions of managers, and
the different roles of relevant accounting information;
4.
Describe three guidelines management accountants follow in supporting managers,
and describe the professions role in an organization;
5.
Explain how professional accounting codes of ethics relate to corporate governance.
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Chapter 1
CHAPTER OVERVIEW
Chapter 1 is an important foundation chapter. Exhibit 1-1 delineates the differences
between the roles of management accounting and financial accounting. This
differentiation explains why the management accountants role is uniquely different from
the financial accountants. The introduction of a strategic management focus becomes
the reason for developing the subsequent chapters of the text book. As stated in this
chapter, the best-designed strategies and the best-developed capabilities are useless,
however, unless they are effectively executed. Management accounting facilitates
management in achieving its strategic goals.
Exhibit 1-2 introduces the value chain -- an important management concept. The major
purposes of management accounting systems are discussed. Financial and management
accounting are compared. The role of the management accountant in developing strategy
and building resources and capabilities is examined. Emphasis is on the integral role
accounting systems have in managerial decision making and the manager as the
consumer of the management accountants analyses.
Elements of management control are introduced. Planning and control are defined and
illustrated. The budget is the most important planning tool for both short-term and longterm decision making. The concept of feedback and its central role in a management
control system is discussed and illustrated in Exhibit 1-4. Tracking performance of key
success factors relative to the performance of competitors is an important focus of
feedback.
A framework for management accounting systems is outlined, with the cost-benefit
approach introduced as a pervasive criterion for choosing among alternative accounting
systems. Behavioural and technical considerations and the concept of different costs for
different purposes are also introduced as key guidelines for the management accountant.
The duties of the management accountant are outlined, and a distinction is made between
staff and line management. The roles of chief financial officer (CFO), and subordinate
responsibilities of controller, treasury, taxes, and internal audit are presented. The
scorekeeping, attention-directing, and problem-solving functions of management
accountants are discussed.
An introduction and discussion of professional ethics including standards of ethical
conduct for management accountants is emphasized as it relates to corporate governance
and the voluntary integration by companies of corporate social responsibility. Corporate
governance is more important today in light of recent corporate scandals.
TEACHING TIP: Begin the session on chapter with an overview of the chapter. Make
the major points in a three to five minute opening statement. Use the forgoing to guide
your comments. At the end of the session, close with a reiteration of the same points.
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Chapter 1
TEACHING TIP: Hand out the quiz questions (quiz fits two sided 8.5 by 11 sheet) at the
beginning of the lecture so that students can write their answer and or make a correction
as necessary. The quiz paper gives the opportunity to make a note about the correct
answer as explained during feedback session. The quiz could be used as part of a
personal response systems, or "clicker" technology.
CHAPTER OUTLINE
Learning Objective 1:
Describe how cost accounting supports management accounting
and financial accounting.
I.
Cost Accounting, Financial Accounting, and Management Accounting
[refer to Exhibit 1-1 on page 3]
A. Management accounting measures and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of the
organization
B. Financial accounting focuses on reporting to external parties it provides
financial statements that are based on GAAP
C. Cost accounting provides information for management accounting and
financial accounting. It measures and reports financial and nonfinancial
information related to the cost of acquiring or utilizing resources in an
organization.
Do Chapter Quiz multiple choice questions 1 and 2.
D. Management strategy is a way of thinking that relies on hypothesis generation
and testing. Management accountants are in the best position to facilitate
management by answering the what if questions.
1. The management accountant provides input that aids in:
Developing a strategy. Strategy specifies how an organization matches its
own capabilities with the opportunities in the marketplace to accomplish
its objectives. Management accountants work closely with managers in
formulating strategy by providing information about the sources of
competitive advantage.
a. Strategic cost management is a term used to describe how
management accounting provides answers to questions such as:
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b. Who are our most important customers?
c. How sensitive are their purchases to price, quality, and service?
d. Who are our most important suppliers?
e. What substitute products exist in the marketplace, and how do they
differ from our product in terms of price and quality?
f. What is our most critical resourcetechnology, production, or
marketing?
g. Will adequate cash be available to fund the strategy?
Do Chapter Quiz multiple choice question 3.
In-class exercise Mastery Questions Learning Objective 1: Question 2
TEACHING TIP: The Strategic Cost management process should be illustrated by a
simple example from everyday life (such as the examples given in the text readings, the
concepts in action, and others from current business news).
Learning Objective 2:
Explain how the value-chain concept relates to the dimension of
performance customers expect
II.
Value chain is the sequence of functions in which customer usefulness
is added to the products or services
TEACHING TIP: Emphasize the concept of value what is the customer willing to pay
for. Quality is job number one because customers recognize quality so anything you can
do to enhance quality you can demand a higher price for it. On-time delivery, a customer
will be willing to pay where the service is differentiated from other services.
A. Value chain, beginning to end [refer to Exhibit 1-2 on page 6]
1. Begins in research and development - what does the customer need and want
2. Next design what is the best design for the customers needs and wants
3. Production what is the most efficient and effective process includes the
supply chain
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4. Marketing what is the most cost effective means of communicating the value
5. Distribution what is the most efficient and effective way of getting the
product or service into the hands of the customer
6. Customer services what is necessary to meet the customers expectations
B. The efficiency and effectiveness of managers in each of the business functions is
enhanced when there is team collaborating in decision making.
C. Supply chain external sources and internal sources of supplies and services
1. External -- materials and services are brought together in the production
function initially, but are necessary through to the end of the customer service
function. The need to manage the costs at every stage is critical to the success
of the organization. [refer to Exhibit 1-3 on page 6]
2. Internal coordination of the flow of products and services is measured by a
number of measures, financial as well as nonfinancial, throughput contribution
and on-time delivery are two respective examples.
II. Do Chapter Quiz multiple choice question 4.
A. Key success factors are performance measures within the value chain and supply
chain. Customer focus is strategic to any organization. Is the company going to
provide the customer with good quality at a reasonable price or will the company
produce a higher than industry standards and charge a high price.
In either case the customer has expectations and those expectations need to be
met. If the customers expectations are met, the company will expect to realize
their performance goals. These become the key success factors to superior
performance. The key success factors can be categorized as follows:
1. Cost and efficiency continuous improvement is the goal for any
organization and it can happen in small increments. Employees and their
managers are charged to make positive changes across all value-chain
functions and over the entire life cycle of the product or service. Eliminate
waste and rework, serve the customer more efficiently and effectively.
2. Quality materials and services in the supply chain are important to the
overall quality of the products and services. Total Quality Management
(TQM) is critical and has caused organizations to adhere to the international
standards set by the International Standards Organization (ISO). Customer
receives the quality they deserve and expect.
3. Time the amount of time to accomplish at task is measurable and therefore
manageable. Every function has a time component. Customer response time
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is one that we are most familiar with when communicating by telephone.
4. Innovation ongoing company success is dependent on new and relevant
products and services for their customers.
Do Chapter Quiz multiple choice question 5.
In-class exercise Mastery Questions Learning Objective 2: Question 2
Assign Exercise 1-19.
Learning Objective 3:
Identify differences between the planning and control decisions of
managers, and the different roles of relevant accounting
information
III.
Planning and Control systems
A. Planning and control [refer to Exhibit 1-4 on page 10]
1. Planning is choosing goals, predicting results, and deciding how to attain
desired goals.
2. Control is both the action implementing the plan and performance evaluation
of the personnel and operations.
B. Management accountants contribute to strategy, planning, and control by:
1. Problem solving identifying the best available alternatives to achieve the
companys goals.
2. Scorekeeping accumulating and reporting reliable results to all management
levels.
3. Attention directing clarifying and sorting out situations that require
management attention from those that do not.
TEACHING TIP: Emphasize the use of verbs to differentiate among the roles.
Words such as analyze and predict are primarily used for problem solving.
Words such as accumulate, tally, and preparing are primarily used for scorekeeping.
Words such as interpret and compare are primarily used for attention directing.
Note these verbs cannot be absolute and sometimes can indicate something else.
Do Chapter Quiz multiple choice question 6.
In-class exercise Mastery Questions Learning Objective 3: Question 2
Assign Problem 1-22
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Learning Objective 4:
Describe three guidelines management accountants follow in
supporting managers, and describe the professions role in an
organization
IV.
Management Accounting: Key Guidelines and Role
C. Key Guidelines In order to provide the most value in reporting to management,
management accountants should focus on:
1. Cost-Benefit Approach the primary criterion for choosing among
alternative accounting systems is how well they help achieve organizational
goals in relation to the systems cost.
2. Behavioural and Technical Considerations the management accounting
systems two simultaneous missions are to (a) help managers make wise
economic decisions and (b) to help motivate managers and other employees
to aim and strive for goals of the organization.
3. Different Costs for Different Purposes a cost concept used for external
reporting may not be the appropriate concept for internal reporting to
managers. Management accountants must ensure that the cost concept used
meets the needs of the decision maker(s).
Do Chapter Quiz multiple choice question 7.
In-class exercise Mastery Questions Learning Objective 4: Question 1
D. Organizational structure Line and Staff Relationships
1. Line management is directly responsible for attaining the objectives of the
organization.
2. Staff management exist to provide advice and assistance to line
management, for example a management accountant is in a staff role.
3. Teams consist of both line and staff management to achieve greater results
4. Distinctions between the chief financial officer [CFO] and the corporate
controller [refer to Exhibit 1-6 on page 16]
a. Chief financial officer (CFO) - the senior officer empowered with the
oversight of the finance operations of an organization. Includes
responsibilities over the following four areas:
i. Controllership oversee internal and external accounting reporting
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ii. Treasury cash management: investing, banking, and transactions
iii. foreign
exchange Taxes domestic, including income and PST, GST, HST, and
international tax planning
iv. Investor relations respond to and interact with shareholders
II. Do Chapter Quiz multiple choice questions 8 and 9.
Learning Objective 5:
Explain how professional accounting codes of ethics relate to
corporate governance.
V.
Professional Ethics, Corporate Social Responsibility, and Corporate
Governance
A. The importance that the accounting profession attaches to ethical standards is
sharper today than at anytime in the past. Corporate Scandals at Enron,
WorldCom, Bre-X, Livent, and YBM have had an enormous impact on
corporations. Now accountants more than anytime before are held to a high
expectation of ethical standards
TEACHING TIP: Bring the students up to date on the various outcomes of the trials
related to some of the high profile companies. The Sarbanes-Oxley Act has affected the
way companies do business in the United States, but this has ramifications in Canada for
any company with shares listed on the US exchanges. This Act impacts the
communication of financial information within organizations as well as externally and
therefore has important implications on role of management accountant.
B. The Society of Management Accountants of Canada (SMAC) has issued a Code
of Professional Ethics [refer to Exhibit 1-7 on pages 18 and 19].
1. Professional accounting organizations certify that their members have
demonstrated the competency of technical knowledge and skills required to
act in the best interests of the public, then in the interests of the profession,
clients, and employers.
Do Chapter Quiz multiple choice question 10.
In-class exercise Mastery Questions Learning Objective 5: Question 2
Assign Problem 1-33
contains an online version of the textbook. Students can
click the ebook link, and are immediately taken right to
the section of the textbook related to the problem they are
working to solve. Students can even take notes and highlight key passages in the ebook.
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Chapter 1
CHAPTER 1 QUIZ
1.
______________ provides information for both management and financial
accounting.
a.
b.
c.
d.
2.
______________ provides financial and non-financial information in a customized
format that is most useful for making decisions.
a.
b.
c.
3.
quantifies a long range plan
outlines how a certain problem will be solved
specifies how an organization accomplishes its objectives
coordinates managers in their control over employees
Value chain analysis is conducted preferably by:
a.
b.
c.
d.
5.
Strategic accounting
Financial accounting
Management accounting
A strategy :
a.
b.
c.
d.
4.
Cost accounting
Value chain analysis
Financial accounting
Management accounting
the chief financial officer
the chief operating officer
the auditor
a team of managers from different business functions
Key success factors are what define performance measures and focus on:
a.
b.
c.
d.
managers bonus payments
industry standards
improving customer related activities
employee satisfaction
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Chapter 1
Chapter 1 Quiz continued
6.
Making visible opportunities or problems that managers need to direct their focus
toward refers to the ________________ role of the management accountant.
a.
b.
c.
d.
7.
Management accountants are not guided by the following:
a.
b.
c.
d.
8.
Delegated
Line
Staff
Functional
Which of the following lists the areas of responsibilities of the chief financial
officer (CFO)?
a.
b.
c.
d.
10.
cost-benefit approach
maximization of personal compensation
behavioural considerations
relevant cost concept
____________ management exists to provide advice and assistance to managers to
attain the objectives of the organization.
a.
b.
c.
d.
9.
scorekeeping
attention-directing
problem-solving
eye doctor
Controllership; Treasury; Tax; and external audit
Controllership; Treasury; Tax; and Investor relations
Controllership; Treasury; Tax; and Government relations
None of the above
Which of the following is not one of the ethical responsibilities of a management
accountant?
a.
b.
c.
d.
Compliance
Confidentiality
Integrity
Objectivity
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CHAPTER 1 QUIZ SOLUTIONS:
1. [a]
2. [c]
3. [c]
4. [d]
5. [c]
6. [b]
7. [b]
8. [c]
9. [b]
10. [a]
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Chapter 1
WRITING/DISCUSSION EXERCISES
1.
Describe how cost accounting supports financial, management, and strategic
decisions;
Compare/contrast management accounting with financial accounting.
The points should come from the definitions of each and Exhibit 1-1 on page 3.
Alternatively:
Describe the role management accounts take in developing strategies and building
resources and capabilities
Management accountants provide support to the formulation and the
implementation of strategy. Management accountants support the planning and
control functions of the organization to ensure the overall attainment of
organizational goals through the collective decision making of managers.
2.
Explain how the value-chain concept relates to the dimensions of performance
customers expect;
Describe how each of the six business function enhances customer relationships.
Research and development is essential to creating products and services that are
relevant to customers needs. Products can be launched, but customers do not
perceive value in them.
Design incorporates the needs of the customer into the products and services.
Products succeed or fail on how well the customer receives the way the product is
designed. Ease of use would be one example.
Production impacts customers perception of value in the materials used, the
quality of workmanship, and time required to complete production.
Marketing introduces the products and services to potential customers and existing
customers. Customer relationship management (CRM) integrates people and
technology in all the business functions.
Distribution unites the products and the services with the customers. Various
means are used from retail outlets to courier services.
Customer service is the after-sale support to the customer. This is an important
part of the customer relationship. The internet has proven to be one of the most
significant tools in building customer relations, both pre-sale and after-sale
support.
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Alternatively:
What support do management accounts provide to customer relations?
Management accountants provide support to managers in tracking performance.
The content of the information provided through regular reporting of performance
in relation to the key success factors for instance. Key performance factors are
related to how well the company is performing compared to predetermined goals
and just as importantly, competitors. Customers make distinctions among the
companies so why not give managers the same perspective in reporting by
providing benchmarks as a standard to compare internal performance.
Two examples are given in the text; WestJet and Simpatico.
Cost of serving customers is just as important as on-time-delivery and management
accountants role in providing the customer perspective is critical to the overall
attainment of the organizations goal.
3.
Identify differences between the planning and control decisions of managers,
and the different roles of relevant accounting information
What is the connection between planning and control?
Managers are charged with the responsibility to plan and control. These
responsibilities are performed in a continuum. Planning would seem to precede
control but without some prior experience in controlling planning future events will
be less effective.
Planning is consists of choosing goals, predicting results and deciding various
action plans to achieve the goals. Control covers implementing the action plan and
subsequent evaluation of how well the action plan was executed. To provide an
objective benchmark to measure against a budget is created. The budget is the
quantitative expression of those action plans.
Feedback links planning and control and is used to help managers respond to the
feedback they receive. Changing goals, changing how the company operates,
changing the reward system, and changing the responsibilities of personnel are
some of the responses resulting from feedback received.
Alternatively:
Using the exercises and problems in the text, list verbs (action words) that clarify
the activities of problem solving, scorekeeping, and attention directing.
Words such as analyze and predict are primarily used for problem solving.
Words such as accumulate, tally, and report are primarily used for scorekeeping.
Words such as report and compare are primarily used for attention directing.
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4.
Describe three guidelines management accountants follow in supporting
managers, and describe the professions role in an organization
What three important guidelines help management accountants provide the most
value to the planning and control process?
Management accountants provide the most value by supporting managers in
focusing on three perspectives. Managers are responsible for efficiency in
operations. Efficiency is measured by how much it costs per unit of output and how
much input was used to produce a given output. Cost of input can be improved by a
perspective known as cost-benefit approach. The cost benefit approach should be
used in all decisions so that the collective set of decisions will better attain the
organizations goals. Simply stated cost-benefit seeks the greatest benefit for the
cost of an alternative action chosen.
Efficiency is enhanced when the amount of input used to achieve an outcome is
minimized. That is why collaborative planning is so important because it addresses
the perspective of behavioural and technical considerations. The human element is
a critical component to successful execution. The question should be asked are
the employees ready and do they have the resources necessary to carryout the
action plan? Without consensus about how and when an action plan is executed
time and resources will be wasted. Ineffective management is when goals are not
achieved in accordance with the predetermined performance standard.
The third perspective that guides management accountants is the cost concept used
for internal reporting of events before and after they occur. The example used is
the cost of advertising and expense in the context of financial reporting but a lifecycle cost in the context of management accounting. The financial reporting view
is the matching principle while the management accounting view is total life-cycle
cost of a product (includes all costs throughout the business functions).
Alternatively:
What is the position of the controller in an organization?
Controllers are financial executives responsible for both management accounting
and financial accounting. So they provide guidance to the planning and controlling
responsibilities of managers throughout the organization. This distinguishes the
difference between the relationship of line authority and staff authority. Managers
are under the line authority of higher level executives who exercise the
responsibility to plan and direct lower levels of management. Management teams
exist throughout the organization and the management accountant plays a
significant and necessary role in these teams.
Controllers exercise staff authority in regards to other executives and managers by
providing input to managers decisions. This input is to be taken seriously and as
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such exerts a force or influence to achieve better-informed collective decisions for
the good of the organization as a whole.
The president would heed the advice of the controller on matters pertaining to
financial impact of a decision on the organization as a whole.
5.
Explain how professional accounting codes of ethics relate to corporate
governance.
From the perspective of (a) a stockholder, (b) a company manager, (c) an
employee other than a manager, and (d) a customer, explain why a code of ethics
is important for the accountants within a company. Consider the functions
performed, the measures employed, and the concept of professional status.
The section in the text on professional ethics can be helpful in addressing this
exercise. Accountants consider themselves to be professionals. A code of ethics is
usually regarded as a necessary aspect of a professional class. In the explanation
of management accounting functions, the function of scorekeeping receives
particular attention as one in which accountants are responsible for the reliability
of the reported information and act as watchdogs for top management.
Discussion on the Focus on Values and Behaviours article in the text, page 16
will help the student to see clearly the role of the management accountant and the
conduct in relation to professional ethics.
Alternatively:
What constitutes unprofessional conduct?
From the Regulated Accounting Profession Act, Alberta, also page 20 of the
textbook: Unprofessional conduct includes:
a. conduct that is detrimental to the best interest of the public or harms the
integrity of the accounting profession;
b. conduct that contravenes the Act, regulations, or bylaws;
c. conduct that contravenes the rules of professional conduct or practice
standards;
d. conduct that displays a lack of competence.
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