CHAPTER 1

INTRODUCTION TO MANAGEMENT
ACCOUNTING

LEARNING 08JECTIVES

After studying this chapter, you should be able to:

distinguish between management accounting and financial
accounting;
e
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 maximize future
profits;
explain the
important changes that have taken place in
environment that have influenced the business
management accounting practice
outline and describe the key success factors that
customer satisfaction; directly affect
identify and describe the
functions of a cost and
accounting system.
management

here are many definitions of

accounting, but the one that captures the
theme of this book is the definition formulated
by the American Accounting
Association. It describes
accounting as:
the process of identifying,
measuring and communicating economic
information to permit informed judgements and decisions users of the
by
information.
In other words,
accounting is concerned with providing both financial and non-
financial information that will help decision-makers to make
good decisions.
 MANAGEMENT ACCOUNTING
INTRODUCTION TO
CHAPTER 1
ne to know something
accounting, you
af about the
In order to
understand

and also to be aware arioususers

of the various users of accounting decision-
information
process,
making organizations in both the r

During the past

two decades many
business enviro
in their business environment.
acturing and serv
hasegulation and
dramatic changes
faced domestic
sectors have
from verseas companies domestic
overseas c o m p a n i e s in markets resulte
extensive competition es now operate in a highly comn
now Operate highly competitive global market
most companies
situation where signiticant reduction in prodtct!
duct life cycles At
the same time there
has been a
toO meet increasingly diserie arising from
technological
innovations and
the
need
competitive environment. con
nating customer
succeed in today's higniy anies have made
demands. To priority. They have also adopted new
an overiding manage
satisfaction
customer companies have changed their manufac
and manufacturing
appr These change nave had a significant influene
and invested
in new technologies. on
management accounting systems.

is to give you the background knowledge that willan

The aim ofthis first chapter
e you
insight into the Issues and problems of cost ancd
more meaningful
to achieve a in the book. ve begin by looking at the users of ent
accounting that are discusspd
ffomation and identitying their requirements. Ihis is followed by a description of th
decision-making, planning and control process aid u ianging Dusiness environment

of management accounting are described.

functions
Finally, the different

INFORMATION
THE USERS OF ACCOUNTING
communicates economic information to various
arties
Accounting is alanguage that
interest in the organization. Stakeholders fall into
(known as stakeholders) who have
an
shareholders and potential investors, employees, creditors
several groups (e.g. managers, has its own requirements for information:
of these groups
and the government) and each
that will assist them in their decision-making and
Managers require information
is needed on the estimated selling
control activities; for example, information
prices, costs, demand, competitive position and profitability of various products/
services that are provided by the organization.
the value of their investment and the income
.Shareholders require information on
that is derived from their shareholding.
the ability of the firm to meet wage demands
Employees require information on

andavoid redundancies.
information on firm's ability to
Creditors and the providers of loan capital require
a

meet its financial obligations.

collect accounting
Government agencies such as the Central Statistical Office
information and require such information as the details of sales activity, profits,
profits
investments, stocks (i.e. inventories), dividends paid, the proportionauthorities
of

absorbed by taxation and so on. In addition, government taxation

require information on the amount of profits that are subject to taxation. All this
information is important for determining policies to manage the economy.
The need to provide accounting information is not confined to business organizations.
Individuals sometimes have to provide information about their own financial situation
for example, if you want to obtain a mortgage or a personal loan, you may be asked for
detalils of your private financial affairs. Non-profit-making organizations such as religious
 CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING 3

and charitable organizations, clubs and government units such as local authorities, also
reguire accounting information for decision-making, and for reporting the results of their
activities. For example, a tennis club will require information on the cost of undertaking
its various activities so that a decision can be made as to the amount of the annual
subscription that it will charge to its members. Similarly, municipal authorities, such
as local government and public sector organizations, need information on the costs of
undertaking specific activities so that decisions can be made 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 for decision-making. The objective of accounting is to provide sufficient
information to meet the needs of the various users at the lowest possible cost. Obviously,
the benefit derived from using an information system for decision-making must be greater
than the cost of operating the system.

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

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 external users of accounting information. Management accounting is concerned
with the provision of information to people within the organization to help them make better
decisions and improve the efficiency and effectiveness of existing operations, whereas
financial accounting is concerned with the provision of information to external
parties
outside the organization. Thus, management accounting could be called internal
and financial accounting could be called external reporting. This book
reporting
concentrates on
management accounting.

DIFFERENCES BETWEEN MANAGEMENT ACCOUNTING

AND FINANCIAL ACCOUNTING
The major differences between these two branches of
accounting are:
Legal requirements. There is a statutory
requirement for public limited
companies to produce annual financial accounts,
not management regardless of whether or
regards this information as useful.
by contrast, is entirely optional and information Management accounting,
it is considered
should be produced only if
that the benefits it offers management exceed the cost of
collecting it.
Focus onindividual parts or segments of
describe the whole of the
the business. Financial accounting reports
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 to conform with the legal requirements and the
accepted accounting principles established by the regulatory bodiesgenerally
the Financial Accounting Standards Board
such as
(FASB) in the USA, the Financial
Reporting Council (FRC) in the UK and the International Accounting Standards
 ACCOUNTINGG
M A N A G E M E N T

I N T R O D U C T I O N
TO
1
CHAPTER
are
to ensure unlformity and
requlrements

Board(IASB).which make
These
i n t err
ccompany
and histori comparlson:
iable and objectlve. In cont rast,
osslble.
consistency, s h o u l d be
verifia
data
accounting require lred to adhere to generally accepted
Financial are not
managerlal Information for Intern
a c c o u n t a n t s

management
when providing
serving management's needs and
accounting
princlples
Instead, the
focus is
on
when they are carrylng out elr
providing
managers
purposes.
useful to
that is control functions.
information
and
planning
decision-making,
ounting reports what has happened in the past
accoun
Financial
dimension. management
accounting is concerned with
Time whereas
Decisions are concerned with futur
organization, information. Der
in an as past
infomation
as well requires,detailsails of expected future costs and
therefore,
management,
and
revenues.

on precision. A detailed set of financial counts

emphasis
Reportfrequency
andless detailed accounts are published semi-annually.
less
annually and ion more quickly than this if it is to act on it.
is published requires
infomation
usualy on various activities
Management
accounting repots pared
Consequently, management intervals.
or monthly
at daily, weekly

THE DECISION-MAKING, PLANNING

AND CONTROL PROCESS

accountants must be judged in the ight f

management
Information produced
by decisions. It is therefore important to ha an
outcome of
effect on the
its ultimate decision-making, planning
and Figure 1.1 presente control process.
of the control process. The first four stages
decision-making, planning and
understandin

a diagram of the
nal two stages represent the
process. The final
decision-making or planning
represe
the
of measuring and correcting actual
performane
which is the process
control process, and the plans for implementing them are carried
chosen
alternatives that are
to ensure the in more detail.
examine the stages
out. We will now

FIGURE 1.1
1. ldentüy objectives The decision-making,
planning and control
courses of action process
2. Search for altemative

Planning
process
3, Select appropriate courses of action

4. Implement the decislons

outcomes
5. Compare actual and planned
Control
process
6. Respond to divergencies from plan
 CHAPTER 1 INTRODUCTION TO MANAGEMENT ACcOUNTING

Identifying objectives
Bofore good declsions can be made there must be sorne guiding aim or direction that will
enable the decision-makers to assess the desirability of choosing one course of action
over another. Hence, the fIrst stage in the declsion-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 firms seek to maximize profits for the owners of the firm or, more precisely, the maximization
of shareholders' wealth, which is equivalent to the maximization of the present value of future
cash flows. Varlous arguments have been used to support the profit maximization objective.
There is the legal argument that the ordinary shareholders are the owners of the fim, which
therefore should be run for their benefit by trustee managers. Another argument supporting
the profit objective is that profit maximization leads to the maximization of overall economic
welfare. That is, by doing the best for yourself, you are unconsciously doing the best for
society. Moreover, it seems a reasonable belief that the interests of firms will bebetterserved
by a larger profit than by a smaller profit, so that maximization is at least a useful approximation,
Some writers (e.g. Simon, 1959) believe that many managers are content to find a plan that
provides satisfactory profits rather than to maximize profits.
Clearly it is too simplistic to say that the only objective of a business firm is to maximize
profits. Some managers seek to establish a power base and build an empire. Another
common goal is security, and the removal of uncertainty regarding the future may
override the pure profit motive. Organizations may also pursue more specific objectives,
such as producing high quality products or being the market leader within a
particular
market segment. Nevertheless, the view adopted in this book is that,
broadly,
to maximize future profits. There are two reasons for us to concentrate
firms seek
on this objective:
1 It is unlikely that any other objective is as widely applicable in measuring the ability
of the organization to survive in the future.
2 It is unlikely that maximizing future profits canbe realized in practice, but
establishing the principles necessary to achieve this by
to increase profits. objective you will learn how

The search for alternative courses of

action
The second stage in the
decision-making model is a search for a range of possible courses
of action (or strategies) that
might enable the objectives to be achieved. If the
of a company concentrates
entirely on its present product range and markets,management
and market
shares and profits are allowed to
decline, there is a danger that the
unable to survive in the future. If the business company will be
is to survive,
potential opportunities and threats in the current environment and management must identiDy
so that the
organization will not be taken by surprise by future take specificIn steps now
the company
should consider one or more of the following coursesdevelopments. particular,
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 future opportunities and environments; it is the most difficult and important
stage of the decision-making process.
 MANAGEMENT ACCOUNTING
INTRODUCTION TO
CHAPTER 1

alternative courses of action

Select appropriate
make an iniommea action, data ah
cholce of
managers to
In order formust
altematives be gathered. For example, managers might ask to see projected figudifferent
t h e ootential growth rates of the alternatve activities under consideratio
on; on:
to achieve;
the company is likely
t h e market share
each alternative activity.
projected profits for
to identity which course of ant:tion
The altenatives
should be evaluated best satisfies
The selection the most
the objectives of
an organization.
decision-making9 process and the provision of
advantageous
in alteernnative
is central to the whole
facilitates this choice is one of the major functions of management accounting. These

accounting are examined in Chapters 9 to 12

aspect of management
the decisions
Implementation of
Once the course of action has been selected, it should be implemented a .part
r the
process. Ihe budget is a financial plan for im
budgeting and long-term planning
the decisions that management
has made. The budgetsfor all variousof the dplementing
company takes are expressed in terms Or casn inmows and Outtlows, and sales reven
nues
and expenses. These budgets are initlany prepared at tne departmental/responsihilt
within an organization for whose performan
centre level (i.e. a unit or department
and merged togetner into a single unifying statement for
manager is held responsible)
that specifies the organization's expectations for f ture
organization as a whole
known as a master budget and consists of budoetod
periods. This statenment is profit
flow statements. The budgeting procesS communicates to evervone
and cash
the part that they are expected to play in implementing managemente
organization
decisions.
outcomes and responding
Comparing actual and planned
to divergencies from plan
1.1 nvolve comparing actual and planned
Thefinal stages in the process outlined in Figure The managerial function of controi
outcomes and respondingdivergencies
to plan.
from
and subsequent correction of performance in
consists of the measurement, reporting
an

and plans are achieved.

attempt to ensure that the firm's objectives
To monitor performance, the accountant produces performance reports and presents
them to the managers who are responsible for implementing the various decisions. These
costs and revenues) with planned outcomes
reports compare actual outcomes (actual
issued at regular intervals. Performance
(budgeted costs and revenues) and should be
should highlight those activities that do not
reports provide feedback information and
conform to plans, so that managers can devote their limited time to focusing mainly on
these items. This process represents the application of management by exception.
Effective control requires that corrective action is taken so that actual outcomes conform
to planned outcomes. Alternatively, the plans 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 actual outcomes do not conform to planned outcomes, is indicated by the arrowed lines
in Figure 1.1 linking stages 6 and 4 and 6 and 2. These arrowed lines represent 'feedback
 MANAGEMENT ACCOUNTING
CHAPTER 1 INTRODUCTION TO

REAL WORLD VIEWS 11

addition to strong accounting fundamentals,

Churtered Institute of Management
CIMA teaches strategic business and
Accountants (CIMA) -
activities
management skills:
and skills

What is management accounting? Analysis they analyze information and

Management accounting combines
accounting, finance and management with
the leading edge techniques needed to
drive successful businesses.
Chartered management accountants:
Advise managers about the financial
implications of projects.
Explain the financial consequences of
business decisions.
Formulate business strategy.
Monitor spending and financial control.
Conduct internal business audits.
Explain the impact of the competitive
landscape.
Bring a high level of professionalism
and integrity to business.
Management accounting skillset
Our members are qualified to work across
an organization, not just in finance. In
use it to make business decisions.
Strategy they formulate business
strategy to create wealth and
shareholder value.
Risk-they identify and manage risk.
Planningthey apply accounting
techniques to plan and budget.
Communication they determine what
information management needs and
explain the numbers to non-financial
managers.
Question
Provide more detailed ilustrations for
each of the first four items in the first
category of the above list of how the
management accountant can be of
assistance in an organization with which
you are familiar.

loops'. They signify that the process is dynamic and stress the interdependencies between
the various stages in the process. The feedback loop between stages 6 and 2 indicates that
the plans should be regularly reviewed, and if
they are no longer attainable then alternative
courses of action must be considered for
achieving the organization's objectives. The
second loop stresses the corrective action taken so that actual outcomes conform
to planned outcomes.

THE IMPACT OF THE CHANGING BUSINESS

ENVIRONMENT ON MANAGEMENT ACCOUNTING
During the last few decades, global competition, deregulation, declines in product life
cycles, advances in manufacturing and information technologies, environmental issues
and a competitive environment
requiring companies to become more customer driven,
 MANAGEMENT
ACCOUNTING
INTRODUCTION TO
CHAPTER 1
environment, These
hese
of the
business
changes have
have changed the
the ways
nature

in which
fims operate,
which in turn, have resulted in significantly
changes
altered
management accounting practices. In

Global competition
r e d u c t i o n s in tariffs
and duties o n
orts and
During the last few decades
transportation
and on exports, and
systems, have
tothis, many organizations resulted n
in
improvements
dramatic market. Pr
global
of communication and operated in
in a
fims operaling Barrie
many environment.

distance, and competitrve

a protected
sometimes protected markets, limited the ability of overerseas companie geographical
There was little
incentive for firms to to
domestic
markets. imize efficiency
compete in practices, or to imize
minim costs, as cost increa
ases
be passed
and on to customers.
improve
management
Dunng the 1990s, however, organizations hengan tocould ften
encounter
overseas ompetitors
competito who offered high-quality products
competition
from at lovw
severe can now establish global networks for
rices.
pr ic
Manufacturing companies
overseas, and service organizations can
acquiring
materials and
distributing goods
internet and digital techr
using inte
communicate
with overseas
offices instantaneously
access to domestic markets thre
blogies. These
competitors to gain
changes
have enabled
have to compete against the best
comnan ghout the
world.Nowadays, organizations increased the demand for costinfor e world.
environment has
competitive ng9
This anailysis by product lines and geographicall
new

tocost management and profitability

life cycles
Changing product
cycle is the period
of
tme rom
ntial
expenditure on research and
A Droduct's ife
customers to Intensive alohal.
is Withdrawn.
development to the time at which support combined with increasingly discriminating
innovation,
competition and technological
and sophisticated customer
demands, have
resuied
in a dramatic decline in product lita
must now speed up the rate at which they introdiuce
cycles. To be successful, companies new products and services Boi
to the market and constantly develop g
new products
can have a dramatic effect on product profitabilit
ility.
later to the market than the competitors
life cycle costs are determinr
fraction of a product's b
In many industries a large created a heed for management accountina
This has
decisions made early in its life cycle. intormation at the design stage because many
to place greater emphasis on providing at this time. Therefore, to compete successfult
locked in
of the costs are committed or
their costs effectively at the design stage, have the
companies must be able to manage customer requirements and reduce the
to adapt to new, different and changing
capability
modified products.
time to market of new and

Advances in manufacturing technologies

to compete in sophisticated
Excellence in manufacturing can provide a competitive weapon
companies must be capable of
worldwide markets. In order to compete effectively, also
at a low cost, and a first-
provide
cturing innovative products of high quality
must have the flexibility to cope with short
customer sevice. At the same time, they more discriminating customers
product life cycles, demands for greater product variety from have
and Increasing International competition. World-class manufacturing companies
with
responded to these competltive demands by replacing traditional production systems
leanmanufacturing systems that seek to reduce waste by implementing just-in-time (JI)
 CHAPTER1 INTROOJCTION TO MANAGEMENT ACCOUNTING

REAL WORLD VIEWS 1.2

y r

Changing product life cycies consumer the USA depending on the type of medical
medicul sriences device. During this timeframe, an iPod/iPad
has probably gone through at least two
Medical devices are normally associated
with use by hospitals and medical practices. generations, and smart devices are now
the norm. t may be that
Some devices are used by normal consumers medical devices
will never get as
and, according to an article on the Medical savvy as a consumer iPad
due to regulatory concerns and device
Device and Diagnostic Industry web-
site (www.mddionline.com), are proliferating. efficacy. However, increasing consumer-
driven requirements are
The market for devices such as insulin likely to shorten
the product life cycle over
pumps and blood pressure monitors has
as devices
coming years
move further towards
become more consumer-driven and is personal
putting pressure on manufacturers to design smart devices. As of April 2016, for
exam-
better products and get them to the market ple, a Financial Times article notes there are
more than 165 000 healith and
faster fitness apps
According to the article, 'patients want available at the Apple App Store. While
their medical devices to have the same kind Apple's devices are not medical
devices
of design and appeals as iPods'. This con- they do pose a competitive threat.
vergence of medical and mass consumer
electronics is creating many challenges for
medical device manufacturers. These chal-
uestions
lenges include widely divergent product 1 Do you think the costs of
the electronic
life cycles, varying scenarios of use and components in a smart device such as
safety, and efficacy concerns. The typical an iPod/iPad are more or less than those
life cycle of a consumer device is likely to in a medical device like a blood pressure
be measured more in months than years. monitor?
Compare this to the long approval cyclees 2 Would
of drug and medical device decreasing the product life cycle
regulatory of medical devices, or medical devices
authorities which, according to the article,
can be anything from 27 to 36 months
being like consumer electronics,
more
in pose any risks for manufacturers?

production systems, focusing on quality, simplifying processes and

manufacturing technologies (AMTs). investing in advanced

The impact of information technology

During thepast two decades the use of information
activities has increased dramatically and the technology (T) to support business
communication technologies known as e-business,development
of electronic business
e-commerce or internet
have had a major impact. For commerce
example, consumers are more discerning in their purchases
because they can access the internet to
compare the relative merits of different products
and services. Internet trading also allows
buyers and sellers to undertake transactions
from diverse locations in different of
parts the world. E-commerce (such as bar coding)
has allowed considerable cost
savings to be made by streamlining business processes
and has generated extra revenues from the adept use of online sales facilities (such as
 ACCOUNTING
M A N A G E M E N T

I N T R O D U C T I O N
TO
1
banking). The proficlen use of
CHAPTER

bookings
and
internet

advantage.
e-commerce has
airline Competitive
ticketless
a
nt Impact on
many
companies

a significant Iimpact the work of

given
in T
have
ormation gathering manager n t
had

g and Dro
and reduced

accountants for processl

developments

agement acr
substantially
The
Theyhave
nmanagement
accountants.

Instead of
anagers Informatlon,
Dersonal computers to derive the information
their person
ASKIng

of
infomation.
access
system
on
the systerm oanalvses. This has freed accountants to
adopt the
analyses.
they
they can and do
their own Managemer role
directly consultants
to
tne
duSiness.
ccountants have now
require
and internalinternal cons ting the
the information
information generated from the
of advises
become
more
involved
business
in interpreting

support for m a n a g e r s , accounting

system
and providing
sustainability
issues
Environmental
and
being given to makir companies accounta for social and
attention
isand
now
the need for organizations to be managed in a ustainable way.
Increasing
environmental issues and
nvironmental resources are limited and should h
that environ.
recognition
general
e is now a generations.

for future
preserved
ompanies simply comply with the l
ners are
no longer
satisfied if com
requirements
expect company managers to be more
their
activities. They proactive
and environmental issues. Environmental
responsibility, safety
undertaking
of
f their social is becoming increas portant in many organizations. There
ent accounting environmental costs can be large for some indus
for this. First,
everal reasons involving
requirements involving huge
fines for
for non-complia ha
Second, regulatory de. Therefore, selecting the least cost
decade
sectors. over the past hod
significantly Third, society is demanding that companies
increased
a major
objective.
has become
of ompliance more environmentally friendly. Companies
are finding that becomina a

responsible improves their image and

citizen and being environmentaly
ocial and services.
ability to sell their products
enhances their
created the need tor companies to develop svsteme oof
These developments have
environmenta costs, the consumption of scarce environmental
reporting
measuring and maternals used or pollutants emitted to the environment
of hazardous
resources and details the information that managers
Knowledge of environmental
costs, and tneir caUses,orprovides
scarce environmental resources
to minimize tne usage and
need to redesign processes also make more sensitive
environmental decisions.
and to
theeniission pollutants
standards of ethical behaviour
Pressures to adopt higher practices were
suggested that management accounting
Earlier in this chapter it to
was
maximize future profits. It was,
that assists managers
developed provide information
to assume that the only objective of a business
out that it is too simplistic to
however, pointed maximization objective should be constrained by
the
maximize profits. The profit
fim is to that their
to their social responsibilities and
ensure

need firms to also give high priority

for of ethical behaviour. A code of ethics has now become

employees adopt high standards

an essential part of corporate culture.
much attention in
ethical behaviour has attracted
ldentification of what is acceptable negative publicity for ethical
of attracting
recentyearswith numerous examples companies Volkswagen (VW) Europe's
failings and their impact reported profits.declineexample,
on For
in its reputation after the revelation
has suffered a dramatic
biggest car maker worldwide. VW
to cheat emission tests to 11 million
cars
thatit fitted software designed
 CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING 11
has set aside ¬18.4 billlon to cover the costs of
legal action,
Public dlstrust and protests agalnst corporate misdemeanours compensation and refits.
have resulted in calls for
Increased regulation and the need to focus on improving ethical behaviour.
Management accountants have critical part to play in the
a
performance and management of ethical
obligation to uphold ethical standards. Professional
an
accounting
organizations play an important role in promoting a high standard of ethical behaviour
their members. Both of the professional bodles representing by
the UK (Chartered Institute of
management accountants, in
Management Accountants), and in the
institute of Certifled Public Accountants), have issued codes of ethicalUSA (The American
members and established mechanisms for monitoring and guidelines for their
You can view each organization's ethical standards at enforcing professional ethics.
www.cimaglobal.com/ethics and
www.aicpa.org/research/standards/codesofconduct/pages/default.aspx
Deregulation and privatization
Before the 1990s many organizations, such as those
operating in the airlines, utilities and
financial service industries, were either government-owned
highly regulated, protected and non-competitive environment. monopolies or operated in a
These organizations were
not subject to any great pressure to improve the quality and
to improve profitability by eliminating services or
efficiency of their operations or
products that were making losses. Prices
were set to cover operating costs and provide a
predetermined return on capital. Hence
cost increases could often be absorbed by increasing the
prices of the products or services.
Little attention was therefore given to developing
management accounting systems that
accurately measured the costs and profitability of individual products or services.
Privatization of government-controlled companies and
elimination in pricing and competitive restrictions. deregulation has resulted in the
and an expanding product range create the need for Deregulation, intensive competition
these organizations to focus on
cost management and develop
management accounting information systems that enable
them to understand their cost base and determine the
sources of profitability for their
products, customers and markets.

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

FOCUS ON CUSTOMER SATISFACTION AND NEW

MANAGEMENT APPROACHES
The key success factors which
satisfaction
organizations must concentrate on to provide customer
are cost, quality,
reliability, delivery and the choice of innovative new
products. In addition, firms are attempting to increase customer satisfaction
by adopting
a
philosophy of continuous improvement to reduce costs and improve
and delivery quality, reliability
 MANAGEMENT ACCOUNTING
INTRODUCTION TO
CHAPTER 1
12

Cost efficiency
cost emcient provides an
ornani
low and being with a strong
Keeping costs
Increased competition
has also made decicins
Many companiesto poor
advantage.
competitive
potentialy
h a ~ a r d o u s to an organization
ation. AMa
infomation. more
cost
aware of the need to mprove
tneir cost systems so that th
can
produce have
mo
become determine the cost st of their products
and
infomation to services
accurate cost
oosts over time. pinpoint
loss-making activities and analie monitor
ofits by products,
trends in
customers and markets.
sales outlets.

Quality
customers are
low costs, demanding high quality nroed..
in
services. to demanding
additionMost companies are responding tO this by foCusing on total quality manS and
ent
where all business functions
TOM. TQM is a term
used to descnibe a situation
on delivering prod
a process of
continuous quality improvement that foCuses TOOuctsor
high quality in a timely fashion. The emphasis on
services of consistently
fresh dermands on the management accounting Tunction to
measure and evaliato the
services and the activities that produce them.
quality of products and

weapon
Time as a competitive
to increase Customer satisfaction by providing a s n a o
Organizations are also seeking
ensunng 100 per cent on-time delivery and reducina +h
response to customer requests, For these reasons managemend
new products to market.
time taken to develop and bring
en
accounting systems now place more emphasis on time-based measures, such as ccycle
time from start to completion of a product or service. t
time. This is the length of
time, mOve time, a i t time and inspection time, On
consists of the sum of processing
to the product, and the remaining activities are non-valiue
processing time adds value
that they can be reduced or eliminated without alterina
added activities in the sense
to the customer. organizations are therefore focusina on
the product's service potential such activiies. The management
minimizing cycle by
time reducing the time spent on
has an important
role to play in this prOcess by identifying and
accounting system non-value added activities, Cvcle
on the time devoted
to value added and
reporting for service organizations. For example.
time measures have also become important
loan applications by financial organizations can be
thetime taken to process mortgage non-value added waiting time. Reducing the time
considerable, involving substantial and creates the potential for
enhances customer satisfaction
to process applications
increasing sales revenue.

Innovation and continuous improvement

a steady stream of innovative new products
Tobe successful, companies must develop to changing customer requirements.
and services and have the capability to adapt
have begun to report performance
Management accounting information systems
measures relating to innovation. Examples
include:

the total launch time for new products/services;

relative to those of
an assessment of the key characteristics of new products
competitors;
 ACCOUNTING 13
TO MANAGEMENT
CHAPTER 1 INTRODUCTION

REAL WORLD VIEWS 13

Passion-We have genuine passion for
A look at a key feuture of easyJet's our customers, our people and the work
business we do.
in the low cost airline do
As one of the pioneers Integrity-We stand by ourword and
model includes
market, easyJet's business what we say.
some core values:
Simplicity-We cut out the things that
Safety-Our number one value, sitting don't matter to keep us lean and make
at the core of everything we do.
it easy.
Pioneering-We challenge to find
new ways to make travel easy and Question
affordable. 1. How can the management accounting
One team-Together we'll always find function provide intormation to support a
a way. low cost strategy?

feedback on customer satisfaction with the new features and characteristics of

newly introduced products and the number of new products launched.

Organizations are also attempting to enhance customer satisfaction by adopting a

philosophy of continuous improvement. Traditionally, organizations have sought to
study activities and establish standard operating procedures. Management accountants
developed systems and measurements that compared actual results with predetermined
standards. This process created a climate whereby the predetermined standards
represented a target to be achieved and maintained. In today's competitive environment,
companies must adopt a philosophy of continuous improvement, an ongoing process that
involves continuous search to reduce costs, eliminate waste and
a
improve the quality
and performance of activities that increase customer value or
satisfaction, Management
accounting supports continuous improvement by identifying
opportunities for change
and then reporting on the progress of the methods that have been
implemented.

GLOBALIZATION AND MANAGEMENT ACCOUNTING

INTERNATIONAL PRACTICES
Globalization has had significant impact on management accounting. The growth in
a
multinational companies has resulted in management accountants
overseeing the operation of management accounting being responsible for
Do management systems many different countries.
in
accounting practices differ across national borders?
Granlund and Lukka (1998) argue that there is a
strong current
convergence of management accounting practices within the tendency
towards global
world. They distinguish between industrialized parts of the
management
micro levels. The macro level relates to accounting practices at the macro and
concepts and techniques, in other words, it relates
 ACCOUNTING
INTRODUCTION
TO MANAGEMENT
CHAPTER1
14
In C o n t r a s t , t h e mnicro level is
cone.

of this b0OK. ith the

mainiy to the
content
managementaccounting information is
ahavioural patterns relating to hoWL u k k a SUggest that the convergenc
and
At the macro level, Granlund
practices in
different
countries h a s Occured becaed f agement
intensified glob
accounting in intormation
technology, the increa.
endency
global cone
developments
competition,
to
dardize
standardize practices,
t h e i r practices, the global
their consultancy indust.
transnational companies t e x t b o o k s and teaching. ry
of globally applied
and the u s e
S t a n d a r d i z e d software D a c k a r
the world are adopung sthat have
F i n s throughout reporting patterns of accountina infor
s t a n d a r d i z a t i o n of
resulted in the of a transnational ent
h e a d q u a r t e r s / p a r e n t company
common for the
accOunting practices to those of the
head e to forcce
similar
company.
foreign Globaltoconsultancy
divisions adopt companies ternd to promote the same standar parent
ons
s a m e textbooks
are used globally and university a
the
alobaly. Finally, tend to be similar
in different c o u n t r i e s .
accounting syllabuses
that differences in
Granlund and Lukka acknowledge
micro level, onal
Atthe management accounting informnation heain
culture c a n result in
and corporate to suggest that acco
example, t n e r e Is evidence
a c r o s s countries. For
different ways tO managerial performan
ting
rigorous/rigid manner evaluate
information is used in a more
and in a more flexible way in cultures evhi
certain national traits,
cultures exhibiting
different national traits.

AccOUNTING
FUNCTIONS OF MANAGEMENT
s h o u l d generate information to m e e t # .
and management accounting system e
A cost
should:
following requirements. It
and inventories for internal and external
cost of goods sold
1 allocate costs between
profit reporting: make better decisions;
information to help managers
2 provide relevant
control, performance measurement and
information for planning,
3 provide
continuous improvement.
match costs with revenues to calculate
Financial accounting rules require that we
finished goods inventories (or partly completed work
profit. Consequently, any unsold which is matched against
in the cost of goods sold,
in progress) will not be included that produces a wide range of
In an organization
sales revenue during a given period.
for inventory valuation purposes, to charge the
different products it will be necessary,
The total value of the inventories of completed products
costs to each individual product.
raw materials, forms the basis for determining
and work in progress, plus any unused
the inventory valuation to be deducted
from the current period's costs when calculating
the inventory valuation for inclusion in the
profit. This total is also the basis for determining
each individual job or product for financial
balance sheet. Costs are therefore traced to
costs incurred during a period between
accounting requirements, in order to allocate the
that the terms 'stocks' and "inventories' are used
cost of goods sold and inventories. (Note
for meeting external
synonymously throughout this book.) This information is required
financial accounting requirements, but most organizations also produce internal profit
reports at monthly intervals. Thus, product costs are also required for periodic internal
rofit reporting. Many service organizations, however, do not carry any inventories and
product costs are therefore not required by these organizations for valuing inventories.
 MANAGEMENT ACCOUNTING 15
CHAPTER 1 INTRODUCTION TO

is to
cost and management accounting system
The second requirement of a make better decisions.
Information to managers to help them
orovide relevant financial
of various segments of the business
information is required relating to the profitability in order to ensure that
customers and distribution channels,
such as products, services, undertaken. Information is also required for making resource
activities are
only profitable
and discontinuation decisions. In some situations
allocation and product/service mix
also plays a crucial role in determining
information extracted from the costing system
in markets where customized products and services that do not
particularly
selling prices,
have readily available market prices are provided.
information for planning, control,
Management accounting systems should also provide
continuous improvement. Planning involves translating
performance measurement and
resources that are required to achieve
goals and objectives into the specific activities and
them. Companies develop both long-term and short-term plans and the management
Short-term plans, in the form
accounting function plays a critical role in this process.
detail than the longer-term plans and
of the budgeting process, are prepared in
more
are one of the mechanisms used by managers as a basis for control and performance
evaluation. The control 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 with feedback information in the form of periodic
reports, suitably analyzed, to enable them to determine if operations for which they are
responsible are proceeding according to plan, and to identify those activities where
corective action is necessary. In particular, the management accounting function should
provide economic feedback to managers to assist them in controlling costs and improving
the efficiency and effectiveness 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 requirements of external reporting and internal profit measurement, whereas
management accounting relates to the provision 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 management accounting is not
clear cut and the two terms are often used synonymously. In this book no further
will be made to distinguish between them.
attempt
You should now be aware that a
management accounting system serves multiple
purposes. The emphasis throughout this book is that costs must be assembled in different
ways for different purpóses. Most organizations record cost information in a
database, with costs appropriately coded and classified, so that relevant informationsingle
can
be extracted to meet the requirements of different
users. We shall examine this
next chapter. topic the
in
 ACCOUNTING
MANAGEMENT
16 uHAPTER1 INTRODUCTION
TO

SUMMARY
objectives
listedat the beginning of the chapter
leaming
itemns relate to the and accounting.
financial
The following accounting
in several ways.
financial accounting
m.anagement

between
Distunguish differs
from of information
of information tot
Management ounting the provision
with
concerned and improve the efficiency nd
accounting is decisions decisions

Management etter
better
make oncerned with the provision
them is c o nc

internal users to help accounting

operations.
Financial
organization. Unnlike financial accounting
effectiveness of o u t s i d e the
a c c o u n tting
in to produce financi
e x t e r n a l parties management
information to for
requirement Furthermore, management
Furthe
tnere is no statutory imposed rules.
v imposed rts of the where
business whereas
the business
externally different parts of
statements or follow relating to
provides
information
the whole
ss. Management accounting
business Management acc

accounting focus on
are often
ublished on
published on aa daily
reports reports
oriented and
financial accounting
future semi-annually.
are published
also tends to be more accounting
reports
basis whereas
financial
involved in the decision-making, planning and
in the decision-making, planni
elements
d e s c r i b e the involved the decision-making.
identyfy and elements are
f
that will guide th business; (b)
The following the business; (6) search
search for
conirol
ontrol pproce
rocess.
the objectives
(a identify enable the objectives to be achieved;
and control process: (a)
control process: i o n that
action that might
enable
enable the objectives to be
c o u r s e s of
of possible of action that wll
a range
ge c o u r s e s

appropriate
alternative
of the planninga
and budgeting process;
(c) select
se decisions as part
implement the to divergencies from plan
divergencies plan
achieved; () outcomes;
and () respond
m to planned outcomes, or
planned outcomes, c
actual and planned o u t c o m e s conform
(e)
(e) compare
co so that
actual
are no longer attainable.
corrective action
indicate that the plans
by taking the comparisons
if o r g a n i z a t i o n s is to broadiy
modify the plans of commercial
objective
that a major maximizing future profits
Justily the view The reaspns tor identmying
future proíits. is aS widely applicable
scok to maximize tnat any otner ooecive
are: (a) t is unlkely the future; (b) although it is
as a major objective organization to survive in
of the it is still important to
in measuring the ability be realized in practice
future profits can
unlikely that maximizing achieve this objective.
necessary to
the principles
establish
in the business environment
changes that have taken place
Explain the irportant The factors influencing the
management accounting practice.
hat have irfiugnced of worid trade; (b) deregulation
environment are: (a) globalization
change in the competitive and
life cycles; (d) advances manufacturing
in
changing product
in various industries; (c) environmental issues and
ethical issues; and (f the
infomation technologies;(e) focus on
customer-driven.
need to become more
 CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCcOUNTING 17

Outline and describe the key success factors that directiy affect customer
satisfaction. The key success factors are: cost efficiency, quality, time and innovation
and continuous improvement. Keeping costs low and being cost efficient provides
an organization with a strong competitive advantage. Customers also demand
high
quality products and services and this has resulted in companies making quality a key
competitive variable. Organizations are also seeking to increase customer satisfaction
by providing a speedier response to customer requests, ensuring 100 per cent
on-time delivery and reducing the time taken to bring new products to the market. To
be successful, companies must be innovative and develop a steady stream of new
products and services and have the 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 infomation
to meet the following requirements: (a) allocate costs between cost of goods sold
and inventories for internal and external profit reporting and inventory valuation;
(b)
provide relevant information to help managers make better decisions; and (c) provide
information for planning, control and performance measurement.

KEY TERMS AND CONCEPTS

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

Budget a financial plan for implementing external reporting and internal

management decisions
Continuous improvement an ongoing search
to reduce costs, eliminate waste and
improve the quality and performance of
activities that increase customer value or
satisfaction.
Control a managerial function that consists
of the measurement,
reporting and
subsequent correction of performance
in order to achieve the
organization's
objectives.
Control process the process of
setting
targets or standards against whiçh
actual results are measured.
Cost accounting accounting concerned
with cost accumulation for
inventory
valuation to meet the requirements of
profit
measurement.
Cycle time the length of time from start to
completion of a product or service and
is the sum of processing time, move
time, wait time and inspection time.
e-business the use of information and
communication technologies to support
any business activities, including buying
and selling.
e-commerce the use of information and
communication technologies to support
the purchase, sale and exchange of
goods.
Ethical behaviour behaviour that is
consistent with the standards of honesty,
fairness and social responsibility that
have been adopted by the organization.
 ACCOUNTING
18 CHAPTER1 INTRODUCTION TO MANAGEMENT

Non-value added
activities activities thas
concerned

can be
reduced or eliminated withoid
Financial accounting accountin
With the provision of information to par altering the products service potential

tles that are external to the organization.

to the customer.

the buying and selling Performance reports regular reports o

internet commerce
internet.
the management that compare actual
of goods and services over
systems
that outcomes with planned outcomes.
Lean manufacturing systems
the period of time
Product's life cycle
manufacturing

seek to reduce waste in

Dy implementing just-in-time
prodUcto from initial expenditure
on research

simplitying and development to the withdrawal of

systems, focusing on quality, advanced
in support to customers.
processes and investing

technologies. c on-
n
Stakeholders various parties that.have an
accounting interest in an organization. Examples
Ma
Management accounting
of informa-
shareholders and
cerned with the provision include managers,
organization
TIon to people within the
the potential investors, employees, creditors
and improve and the government.
to aid decision-making
effectiveness
of existing
efficiency and courses of action designed to
Strategies
operations. where ensure that objectives
are achieved.
situation
by exception a a customer
Total quality management (TQM)
ianagement on
focused
attetion is
management continuous improve-
outcomes do not
meet
oriented process of
areas where on delivering products
ment that focuses
targets. or services
of consistent high quality in a
statement
Master budget a single unifying for
timely fashion.
expectations
of an organization's budgeted
future periods comprising
profit and cash flow statements.

KEY EXAMINATION POINTS

management accounting. It is
to the scope of
introduction
Chapter 1 has provided
an the content of an introductory
will be set that refer to
examination questions to outline how a costing
unlikely that set requiring you
are sometimes
chapter. However, questions of an organization.
Note that the examiner may
the management Cost account
system can assist and management accounting.
cost accounting
not distinguish between accounting. Your
discussion of a cost
also embrace management
ing is often used to therefore include a description
(with illustrations) of how the
should
accounting system and control. Make sure that
information for decision-making, planning
system provides whole of a first-year course
and not just this
you draw off your experience from the
introductory chapter.
ASSESSMENT MATERIAL

The review questions are short questions that enable you to assess your understanding of
the main topics 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.

REVIEW QUESTIONS

1.1 ldentify and describe the different users of accounting information. (pp. 2-3)
1.2 Describe the differences between management accounting and financial
accounting. (pp. 3-4)
1.3 Explain each of the elements of the decision-making, planning and control process.
(pp. 4-7)
1.4 Describe what is meant by management by exception. (p. 6) .
1.5 Explain how the business environment that businesses face has changed over the
past decades and discuss how this has had an impact on management accounting.
(pp, 7-11)
1.6 Describe each of the key success factors that companies should concentrate on to
achieve customer satisfaction. (pp. 11-13)
1.7 Explain why firms are beginning to concentrate on social responsibility and
corporate ethics. (p. 10-11)
1.8 Describe the different functions of management
accounting. (pp. 14-15)