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    Chapter 1

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    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 maximize future profits; * explain the important changes that have taken place in the business environment that have influenced management accounting practice; * outline and describe the key success factors that directly affect customer satisfaction; e identify and describe the functions of a cost and management accounting system. 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 by users of the information. In other words, accounting is concerned with providing both financial and non- financial information that will help decision-makers to make good decisions. Eee ee DUCTION TO Pe ee | ry about the decision. _ now something jormation, rs of accounting inf anufacturing and service you need to K |n order ‘ inting, to understarid eocountings YOU nee use Making process, and also torbe aware ee i inbot : 1 Oe re ass environment. Deregulation and their busine mestic markets has TeSd fed in a anal ly competitive global market. At tt life cycles arising from discriminating customer During the past two decades man} sectors have faced dramatic changes in extensive competition from overseas companies situation where most companies now operate in @ TIC the same time there has been a significant reduction in P! sing] : technological innovations and the need to meet increas nol srmpanies have Made demands To succeed in today’s highly competitive envi adopted new management customer satisfaction an overriding priority. They have ag a turing systems approaches and manufacturing companies have change" icant influence on and invested in new technologies. These changes have management accounting systems. “The aim ofthis first chapter is to give you the backgro! toachieve a more meaningful insight into the issues and prob” accounting that are discussed in the book. We begin by looking information and identifying their requirements. This is followe decision-making, planning and control process and the changing * Finally, the different functions of management accounting are described. THE USERS OF ACCOUNTING INFORMATION (GAGEouRHIAG is @ language that communicates economic: information to-various parties (known as stakeholders) who have an interest in the organization <@teKetolsers fall into several groups (e.g. managers, shareholders and potential investors, employees, cr and the government) and each of thésé groups has its own requirements for informatio © 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, competitive position 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-derived from their shareholding. Employees require information on the ability of the firm to m and avoid redundancies. eet wage demands « Creditors/and thé providers of josn capital require i - fr meet is financial obligations. quire information on a firm's ability to @ Government agencies such as the Central Statisti i Govern st ist information and require such information as the au ee Fee occuring ivi rofits, .stments, stocks (2. inventories), dividends pai mute stoaien nw anean soa earn ean ure ' nforma !ount of profits that are subj uthorities' information is important for determining policies to mane cot xation. All this The need to’ provide accounting information is not anege.the economy. Individuals sometimes have to provide information Pils for example, if you want to obtain a mortgage of a neo details of your private financial affairs. Non-prttemaking " und knowledge that will enable you problems of cost and management at the users of accounting d by a description of the business environment. as business organizations: ai Bene financial situation: | organ ou May be asked for) ‘9anizations such as religious j CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING. and charitable organizations, require accounting information activities. For example, a ten its various activities so that clubs and government units such as local authorities, also n for decision-making, and for reporting the results of their inis club will require information pn the cost of undertaking ; © 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 és rent users of accounting information who require information for decision-making. The objective of accounting {s to. provide suficiont aa aatt ders ee ous Of the various users atthe lowest possible cost. Obvious, 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. Itis possible to distinguish between two branches of accounting, which reflect the internal and external users of accounting information. @SNaeeMIEnn MECOUNEADis concerned with the provision of information to people within the organization to help them make better decisions and ae the efficiency and effectiveness of existina operations, whereas is concerned with the provision of information to external parties outside the oraanization. Thus, management accounting could be called internal reporting and financial accounting could be called external reporting. This book 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, regardless of whether or not management regards this information as useful, Managementaccounting, by contrast, is entirely optional and information should be produced only if itis considered that the benefits it offers management exceed the cost of collecting it. © Focus on individual parts or segments of the business. Financial accounting reports describe the whole 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 to conform with the leaal requirements and the aenerally + * accepted accounting principles established by the requlatory bodies such as the Financial Accounting Standards Board (FASB) in the USA, the Financial Reporting Council (FRC) in the UK and the International Accounting Standards ., an (NAGE eg memnit PTER 1 INTRODUCTION 70 MAI ensure uniformity Oa tial to On mparisons POSsIn'e- essential 0 ements are 2 rorical C Be Pt Board (1ASB). These requ oan npae 2 consistency, which mal rable a apie Financial pluntine data should be veriti bie Mere 10 enerally. oe ts are tion for internal she i 7 s and providing ke intercompan management accoun' is fi ad ing principles whe! i met ‘i nunca instead a focus is on serving Te varying out thelr information that is useful tO managers ret ns. decision-making, planning and control ‘i ed in the ing reports : @ Time dimension. Financial accounting rep rm Time dimension ment accounting IS ature in. an organizati nage! i is So aneat emetion, Decisions plata ea events and management, therefore, requires details of @xP' | art ca i inancial accounts fepor : ish led set of financial 2 shasis on’precision. A detail f * pubes an and loss empnest accounts are published semi-annually. Management usualy requires i i wuickly than this if itis to od onit. on ‘ Consequently, management accounting reports on various activities may be prepared at daily, weekly or monthly intervals. THE DECISION-MAKING, PLANNING AND CONTROL PROCESS Information produced by management accountants must be judged in the light of its ultimate effect on the outcome of decisions. It is therefore important to have an understanding of the decision-making, planning and control process. Figure 1.1 presents a diagram of the decision-making, planning and control process. The first four stages represent the decision-making or planning process. The final two stages represent the which is the process of measuring and correcting actual performance to ensure the alternatives that are chosen and the plans for implementing them are carried ‘out. We will now examine the stages in more detail, FIGURE 4.1 The decision-making, planning and control process Planning process CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING Before;good decisions can be made there must be some 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 decision-making process should be to specify the company’s goals or organizational objectives. amt Thisis an area where there is considerable controversy. Economic theory normally assumes that fims seek to maximize profits forthe 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. Various arguments have been used to support the profit maximization objective. There is the legal argument that the ordinary shareholders are the owners of the firm, 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 be better served byalarger profit than by a smaller profit, so that maximization is at least a useful approximation. Some wrriters (¢.9. Simon, 1959) believe that many managers are content to find a plan that provides satisfactory profits rather than to maximize profits. Clearly itis 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, firms seek to maximize future profits. There are two reasons for us to concentrate on this objective: 7 Itis unlikely that any other objective is as widely applicable in measuring the ability of the organization to survive in the future. 2 Itis unlikely that maximizing future profits can be realized in practice, but by establishing the principles necessary to achieve this objective you will learn how to increase profits. ‘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 management of a company concentrates entirely on its present product range and markets, and market shares and profits are allowed to decline, thete Is a danger that the company will be Unable to survive in the future. If the business is to survive, management must identify Potential opportunities and threats in the current environment and take specific steps now so that the organization will not be taken by surprise by future developments, In particular, 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 future opportunities and environments; it is the most difficult and important stage of the decision-making process. 6 TING 1 CHAPTER 1 INTRODUCTION TO. WANAGEMENT ACCOUN _ xd ch i |n order for managers to make an it ee naga — alternatives must be gathered. rene aati cle RE SOON f the al i the at sae comoan kay cto . the com ivitv. satisfi ° fed profits for each alternative activ! ation best ies ich course of us alternative i uated to Identify dvantageo! . The alternatives should be eval jection of the most advan ation that the objectives of an organization. The s " n is central to the whole decision-making process agement accounting. These facilitates this choice is one of the major fi enter eto 12: aspect of management accounting are examine plemented as part of the . be im| i Once the course of action has been selected, it should be ImPAN erent budgeting and long-term planning process. Th pu Dor fall of the various decisions a ade. THe hows and outflows, and sales revenues ‘company takes are expressed iri terms of cash inflows and ouMOWe TT and expenses. These budgets are initially prepared at the depai he sitormancats centre level (.e. a unit or department within an organization for whose a co manager is held responsible) arid merged together into a single unifying stater ora le organization as a whole that specifies the organization's expectations for future periods. This statement is known as a master budget and consists of budgeted profit and cash flow statements.. The budgeting process communicates to everyone in the organization the part that they are expected to play in implementing management's decisions. The final stages in the process outlined in Figure 1.1 involve comparing actual and planned outcomes and responding to divergencies from plan. The managerial function ea consists of the measurement, reporting and subsequent correction of performance in an attempt to ensure that the firm's objectives and plans are achieved. To monitor performance, the accountant produces performance reports and presents them to the managers who are responsible for implementing the various decisions. Thes? reports compare actual outcomes (actual costs and revenues) with planned outcomes (budgeted costs and revenues) and should be issued at regular intervals, Performanc® reports provide feedback information and should highlight those activities that do not conform to plans, so that managers can devote their limited time to focusing nein on these items. This process represents the application of Management by : ceria Eifective control requires that corrective action is taken so that actual outcernae fom to planned outcomes. Alternatively, the plans may require modification fine ese indicate that the plans are no longer attainable, 1 Comparigo” The process of taking corrective action or modifyin that actual outcomes do not conform to planned oute: in Figure 1.1 linking stages 6 and 4 and 6 and 2. Th pie Plans it the comparisons indicat? el is: indicated by the arrowed lines rowed lines represent ‘feedback CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING Chartered Institute of Management addition to strong accounting fundamentals, Accountants (CIMA) ~ activities CIMA teaches strategic business and aad skills : managerient skills: Mans esmenaperiett esata? * Analysis ~ they analyze information and lanagement accounting combines use it to make business decisions. accounting, finance and management with * Strategy - they formulate business the leading _edae_techniaues needed to strategy to create wealth and drive successful businesses. shareholder value. Chartered management accountants: “Risk = they identify and manage risk. Planning - they apply accounting fechniques to plan and budget. -Communication ~ they determine what information management needs and (plain the numbers to non-financial Advise managers about the financial implications of projects. Explain the financial coheeduena se of business decisions. Formulate business strategy. - Monitor spending ahd financial contol Conduct internal business audits. Explain the impact of the a! landscape. : f Bring a high level of profes: and integrity to business. Honagement éccounting skiliset Our members are qualified to work across an organization, not just in finance. 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, . Ore “detailed illustrations for is o rst four items in the first TT es es have significantly 8 CHAPTER 4 INTRODUCTION TO MANAGEMENT tulted in changes in usiness environment. have changed the nature of fro businetfe, which in tu, altered the ways.in which management accounting practices. . These chang' have rest arts and exports, and ms, have resulted in , izations operated in nd geographical g companies to and duties on imps mmunication systet this, many organ! Global competition reductions in tariffs st few decades r Sa ngportation and cof dramatic improvements in tra d St arating in a gibal markt. Prot to Ws, Ty ee a a protected competitive environment. Barfers of or distance, and sometimes protected markets, limited th ie ea resize Stfiolericy Compete in domestic markets. There was litle Incentive tr fms to aximize mote) i it i sosts, as COS Pe pove management practices, or to minimize Costs, Oe peat onto sere: During the 4990s, however, Oa oe a ot i i fered high-quality caare competition from overseas competitors who of ts saree Manufacturing companies can now establish global networks for acquiing raw oeverials and distributing goods overseas, and service organizations can communicate ‘with overseas offices instantaneously using internet and digital technologies. These Changes have enabled competitors to gain access to domestic markets throughoyt the world, Nowadays, organizations have best companies in the world, to compete against the n “This new competitive environment has increased the demand for cost information relating tocost management and profitability analysis by product lines and geographical locations. Changing product life cycles A is the period of time from initial expenditure on research ‘and develor nt to the time at wt ich support to custo! is witl |. Intensive global competition and technological innovation, combined with increasingly discriminating and sophisticated customer demands, have resulted in a dramatic decline in product life cycles. To be successful, companies must now speed up the rate at which they introduce new products to the market and constantly develop new products and services. Being later to the market than the competitors can have a dramatic effect on product profitability. In many industries a large fraction of a product's life Ing a larg cycle costs are determined by © detisions made early in its life eycle. This has created a‘need for management qosobriting ® plece greater emphasis on providing information at the design stage because many fe costs are committed or locked in at this time. Therefore, to compete successfully, eee ie ie able to manage their costs effectively at the design stage, have the lapt to, new, different and changing custo ‘ time to market of new and modified products, Ban st ana Advances in manufacturing technologies Excellence in manufacturing can provide a competi ape fein pnp pare eaete mee aaa nen a manufacturing innovative products of high quality at a low cost, and also eis a class customer service. At the same time, they must have the flexibility to Deviae avai product life cycles, demands for greater product variety from more dlscriminat Cee and increasing international competition. World-class manufacturing ul oe responded to these competitive demands by replacing traditional production u nies have + ean manufacturing systems that seek to reduce waste by implementing just-in-time QT) CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING Changing product life cyctes ~ consumer medical sciences Medical devices are normally associated with use by hospitals and medical practices. ‘Some devices are used by normal consumers and, according to an article on the Medical Device and Diagnostic Industry web- site (www.mddionline.com), are proliferating. The market for devices such as insulin pumps and blood pressure monitors has become more consumer-driven and is putting pressure on manufacturers to design better products and get them to the market faster. According to the article, ‘patients want their medical devices to have the same kind of design and appeals as iPods’. This con- vergence of medical and mass consumer electronics is creating many challenges for medical device manufacturers. These chal- lenges include widely divergent product life cycles, varying scenarios of use ‘and safety, and efficacy concerns. The typical life cycle of a consumer device is.likely to be measured more in months than years. Compare this to the long approval cycles of drug and medical device regulatory authorities - which, according to the article, can be anything from 27 to 36 months in Production systems, focusing on quality, manufacturing technologies (AMTs). the USA depending on the type of medical device. During this timeframe, an iPod/iPad has probably gone through at least two generations, and°smart devices are now the norm. It may be that medical devices will never get as savvy as a consumer iPad due to regulatory concerns and device efficacy. However, increasing consumer- driven requirements are likely to shorten the product life cycle over coming years as. devices move further towards personal smart devices. As of April 3016, for exam- ple, a Financial Times article notes there are more than 165 000 health and fitness apps available at the Apple App Store. While - ’ Apple’s devices are not medical devices they do pose a competitive threat. Questions 4 Do you think the costs of the electronic components in a smart device such as an iPod/Pad are more or less than those "ina medical device like a blood pressure monitor? @ Would decreasing the product life cycle of medical. devices, or medical devices being more like consumer electronics, pose any risks for manufacturers? simplifying processes and investing in advanced The impact of information technology During the past two decades the use of information technology (IT) to support business activities has increased dramatically and the development of electronic business Communication technologies known as e-husi i siness, e- el 18 have had a major impact. For example, consumers are more discerning in their purchases bec. ‘ause 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 Parts of 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 1 INTIND GEMENT ACCOU! roe has | CHAPTER 1 INTRODUCTION TO MANA 4 ne proficient U se of e-comme! 4 t banking). Tl ticketless airine bookings and iNet tage. agement given many companies a comR® on the Work of man: 9! nificant Impact ing and processing for information, information they freed accountants to adopt the role ts have now ement accountan' \ sf ie generated from the accounting The developments in IT have i a accountants, They have substantially eg ima of information. Instead. of managers 4 ir com| they can access the system on tra a A jo their own . canoes Itants to the busines . of advisers and internal consu! ; ‘lon become more involved in ‘interpreting the nee system and providing business support for mat 9 issues ; companies accountable for social and anaged in a sustainable way. es are limited and should be Environmental and sustainability i being given to making need for organizations to be m: mental resourc' Increasing attention is now environmental issues and the There is now'a general recognition that environ preserved for future generations. Customersare nolongersatisfiedif companies simpply comply with r of undertaking their activities. They expect company managers to be paket in terms of their social responsibilty, safety and environmental issues. ENerennr T management accounting is becoming increasingly important in many organizations. | are several reasons for this. First, environmental costs can be large for some industrial gecters. Second, regulatory requirements involving huge fines for non-compliance have increased significantly over the past decade. Therefore, selecting the least costly method of compliance has become a major objective. Third, society is demanding that companies focus on being more environmentally friendly. Companies are finding that becoming @ good social citizen and being environmentally responsible improves their image and enhances their ability to sell their products and services. the legal requirements These developments have created the need for companies to devélop systems of” measuring and reporting environmental costs, the consumption of scarce environmental resources and details of hazardous materials used or pollutants emitted to the environment. Knowledge of environmental costs, and their causes, provides the information that managers need to redesign processes to minimize the usage of scarce environmental resources and the emission pollutants and to also make more sensitive environmental decisions. Earlier in this chapter it was suggested that management: accountini i developed to provide information that assists Pare to maximize Sue ee eh however, pointed out that it is too simplistic to assume that the only objective of a business firm Is to maximize profits. The profit maximization objective should be constrained by the need for firms to also give high priority to their social responsibilities and ensure that their employees adopt high standards of ethical behaviour. A an essential part of corporate culture. ee gerne erent 2 poles hat acceptable ethical behaviour has attracted much attention in perospepolitieg 's examples of companies attracting negative publicity for ethical biggest car mor Pos cue eported Profits, For example, Volkswagen (VW) Europe's Saosin uffered a dramatic decline in jts reputation after the revelati are designed to cheat emission tests to 11 milion cars worldwide, VW CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING has set aside €18.4 billion to cover the costs of legal action, compensation and refits. Public distrust and protests against corporate misdemeanours have resulted in calls for increased regulation and the need to focus on improving ethical behaviour. Management accountants have a critical part to play in the management of ethical erformance and an obligation to uphold ethical standards. Professional accounting organizations play an important role in promoting a high standard of ethical behaviour by their members. Both of the professional bodies representing management accountants, in the UK (Chartered Institute of Management Accountants), and in the USA (The American Institute of Certified Public Accountants), have issued codes of ethical guidelines for their members and established mechanisms for monitoring and enforcing professional ethics. You can view each organization's ethical standards at www.cimaglobal.corm/ethics and www.aicpa.org/research/standards/codesofconduct/pages/default.aspx Before the 1990s many 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. These organizations were not subject to any great pressure to improve the quality and efficiency of their operations or to improve profitability by eliminating services 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 deregulation has resulted in the elimination in pricing and competitive restrictions. Deregulation, intensive competition and an expanding product range create the need for 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 crucial to their future success. This has resulted in companies making customer satisfaction an overriding priority and to focus on identifying and achieving the key success factors that are necessary to be successful in today's competitive environment. These key success factors are discussed in the next section. FOCUS ON CUSTOMER SATISFACTION AND NEW MANAGEMENT APPROACHES The key success factors which organizations must concentrate on to provide customer satisfaction are cost, quality, reliability, delivery and the choice of innovative new Products. In addition, firms are attempting to increase customer satisfaction by adopting € philosophy of continuous improvement to reduce costs and improve quality reliability and delivery. " 12 ING CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNT Keeping costs low and competitive advantage. In Cost information, more potentially hazar become aware of the need to improve 1 i a stron being cost efficient provides 2 sue a ee tition has also ma‘ e crease ordous to an organization. Many companis have heir cost systems so that they can produes Tove the cost of their products and services, r ir tion to determine t rE orloes frente sant over tiny pinpoint loss-making activities and analyze profits by p sales outlets, customers and markets. Quality sae In addition to demanding low costs, customers are demanding high quality pro services. Most companies are responding to this by focusing o ntotal quality management used to describe a situati ir tions are involved 1). TQM i describe a situation where al/ business func! 0 akg Pant saul nt that focuses on delivering products or jon, The emphasis on TOM has created fresh demands on the management accounting function to measure and evaluate the quality of products and services and the activities that produce them. Time as a competitive weapon 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 develop and bring new products to market. For these reasons management accounting systems now place more emphasis on time-based measures, such as cycis time. This is the length of time from start to completion of a product or service. It consists of the sum of processing time, move time, wait time and inspection time. Only Processing time adds value to the product, and the remaining activities are non-vaiue added activities in the sense that they can be reduced or eliminated without altering the product's service potential to the customer. Organizations are therefore focusing on minimizing cycle time by reducing the time spent on such activities. Thi s by identifying and added and non-value added activities. Cycle portant for service organizations. For example, ir an applications by financial organizations can be ee: nae substantial non-value added waiting time, Reducing the time ‘SS applications enhances custom i i hnowasing idee rae ler satisfaction and creates the potential for feporting on the time devoted to value time measures have also become im the time taken to process mortgage lo: Innovation and continuous improvement Tob pop seacenst, companios must develop a steady stream of innovative new products ve the capability to adapt to changing customer requirements. Management i lag accounting infor lave begun to report Performance é mation syster Measures relating to innovatior Cine in. Examples include: ® the total launch time for new products/s: © an assessment of the key c} istic Berra ey characteristics of new products relative to those of ‘ervices; CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING REAL WORLD VIEWS 1,3 A look at @ kev feature of easyJet’s business As one of the pioneers in the low cost aitline market, easyJel’s business model includes some core values: ~ * Safety - Our number one value, sitting * Passion ~ We have genuine passion for our customers, our people and the work we do. Integrity - We stand by our word and do what we say. » Simplicity - We cut out the things that at the core of. hing we do, fu eo to keep us lean and make + Pioneering - We challenge to find ig new ways to make travel easy and Question Sftordahie.. 1 How can the management accounting i + One team ~ Together we'll aways find function provide information to support a away. 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 fepresented 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 a continuous search to reduce costs, eliminate waste and 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.a significant impact on management accounting. The growth in multinational companies has resulted in management accountants being responsible for verseeing the operation of management accounting systems in many different countries, Do management accounting practices differ across national borders? Granlund and Lukka (1998) argue that there is a strong current tendency towards global Convergence of management accounting practices within the industrialized parts of the World. They distinguish between management accounting practices at the macro. and micro levels, The macro level relates to concepts and techniques; in other words, it relates CHAPTER 1 INTRODUCTION TO MANAGEMENT eo ned with the tothe miorO con is actually. used, In contrast gunting informatic® management " book. mainly to the content of this cement a behavioural patter reatng!OPON TS goat ha he contigo of intensified global At the macro level, Graniund A trips has 000 re increasing tendency of ‘accounting practices in steer t ttancy industry competition, development i transnational companies to stan ee transnationa!Pajobaly applied textbooks and 2 ages that have re pac! tandardized software hal ha cit eo inting information. mae trough arization of reporting uae . Saori (erprise t pen nein \dquarters parent common forthe headauaters/PRrt rT ractces to those of he Ne te in [ end standard solutions foreign divisions to adopt sim ning ra he eae itancy companies ten ee global ya orte textbooks ree used globally and university anc P globally. Finally, Sccounting syllabuses tend to be similar in different countries. hel ledge that differenc Granlund and Lukka acknowl! 8 e / ad 5 oe Lceartee can result in management accounting information Sn anon s across countries. For example, there is evidence to suggest th ts ae 3 tefecration i used ina more rigorous/rigid manner to evaluate managerial pet formanc i suttures exhibiting certain national traits, and in a more flexible way in cultures ex! ig different national traits. FUNCTIONS OF MANAGEMENT ACCOUNTING ‘A-cost and management accounting system should generate information to meet the following requirements. It should: + allocate costs between cost of qoods sold and inventories for internal and external profit reporting; 2 provide relevant information to help managers make better. decisions; provide information for planning, control, performance measurement and Zantinuous improvement. 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 the cost of goods sold, which is matched against sales revenue during a given period, In an organization that produces a wide range of different products it will be necessary, for inventory valuation purposes, to charge the coisas each individual product. The total value of the inventories of completed products S . in progress, plus any unused raw materials, forms the basis for determining we ever oy aaution fo be deducted from the current period's costs when calculating Cw dae eo 1g peas for determining the inventory valuation for inclusion in the oo 'erefore traced to each individual job or product for financial Sie order to allocate the costs incurred during a period between Peete eaib ar lncus ecto. (Note that the terms ‘stocks’ and ‘inventories’ are used hare accouniee ested rae is rornarort feaied for meeting external reports at monthly intervals. Thus, Product costs mete | oa. proauce inter, pref oe Jeperting: Many sates Organizations, however, do pay be Pensa internal fore not required by these organizations for Valuing tvowiats Se i es. CHAPTER 1 INTRODUCTION TO MANAGEMENT ACCOUNTING The second requirement of a cost and management: accounting system is to provide relevant financial information'to managers to’helpthem make better decisions. Information is required relating to the profitability of various segments of the business sucti'as products, services, customers and distribution channels, in order to ensure that only profitable ‘activities are undertaken. Information is also required for making resource allocation and product/service mix and discontinuation decisions. In some situations information 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 market prices are provided. Management accounting systems should also provide information for planning, control, performance measurement and continuous improvement. Planning involves translating goals and objectives into the specific activities and resources that are required to achieve them. Companies develop both long-term and'short-term plans and the management accounting function plays a critical role in this process. Short-term plans, in the’ form of the budgeting process, are prepared in more detail than the longer-term plans and 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 corrective 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. Itis appropriate at this point to distinguish between cost accounting and management accounting

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