Management Accounting:

Information That Creates Value

Chapter 1
1-1
Management Accounting Definition
The Institute of Management Accountants has
defined management accounting as:
A value-adding continuous improvement process
of planning, designing, measuring and operating
both nonfinancial information systems and
financial information systems that guides
management action, motivates behavior, and
supports and creates the cultural values
necessary to achieve an organizations strategic,
tactical and operating objectives
1-2
Management Accounting Definition
The American Accounting Association has
defined management accounting as:
Management Accounting is the
application of appropriate techniques and
concepts in processing historical and
projected economic data of an entity to
assist management in establishing plans
for reasonable economic objectives and
in the making of rational decisions with a
view towards achieving these objectives.
1-3
Management Accounting Information
Management accounting provides both
financial information and nonfinancial
information.
The role of management information supports
strategic (planning), operational (operating)
and control (performance evaluation)
functions and management decision making.

In short, management accounting information is
pervasive and purposeful.
1-4
Examples of management accounting information
include:
The reported expense of an operating department, such
as the assembly department of an automobile plant or
an electronics company
The costs of producing a product
The cost of delivering a service
The cost of performing an activity or business process
such as creating a customer invoice
The costs of serving a customer
Management Accounting Information
1-5
Management Accounting Information
Management accounting also produces
measures of the economic performance of
decentralized operating units, such as:
Business units
Divisions
Departments
These measures help senior managers assess
the performance of the companys decentralized
units
1-6
Management Accounting Information
Management accounting information is a key
source of information for decision making,
improvement, and control in organizations
Effective management accounting systems can
create considerable value to todays
organizations by providing timely and accurate
information about the activities required for their
success
1-7
Changing Focus
Traditionally, management accounting information has
been financial information
Denominated in a currency such as $ (dollars),
(pound sterling), (yen), or (euro)
Management accounting information has now expanded
to encompass information that is operational or physical
(nonfinancial) information:
Quality and process times
More subjective measurements, such as:
Customer satisfaction
Employee capabilities
New product performance
1-8
Financial and Management Accounting
Differences (Exhibit 1-3)
Financial
Unified Structure
Made as per GAAP

Statutory obligation
Format prescribed
Historical
Business as a whole
Purpose External
Reporting
Financial Measurements
only
Management
Specific to Business
More flexibility in
preparation
Optional
Mgts discretion
Future oriented
Focuses on parts
Aid to Managerial
Decision making
Financial plus
Operational, Physical
measurements
1-9
Role of Financial Information
Financial information pervades our economy
It is the primary means of communication between
profit seeking organizations and their stakeholders
For this reason organizations use financial measures
internally as a broad indicator of performance
This financial information provides a signal that
something is wrong, but not what is wrong
Management Accounting helps in ascertaining
what is wrong
1-10
Business Level Strategy and
the Value Proposition
What the organization tries to deliver to customers is
called its value proposition
Value propositions have four elements:
1. Cost the price paid by the customer, given the
product features and competitors prices
2. Quality the degree of conformance between what
the customer is promised and what the customer
receives
For example a defect free automobile that
performs as promised by the salesperson
1-11
Business Level Strategy and
the Value Proposition
3. Functionality and features the performance of the
product, for example a meal in a restaurant that
provides the diner with the level of satisfaction
expected for the price paid
4. Service all the other elements of the product relevant
to the customer
For example, for an automobile service might include: how the
customer is treated as the automobile is purchased and the
degree and form of after sales service
Dell Computers value proposition is building Computers
to customer requirements, quickly, and at a low price
1-12
Dell - Delivering the Value
Proposition
Dell delivers its value proposition by providing
customers easy access to ordering and
delivering customized product.

It also insists that suppliers locate close to its
assembly facilities

These steps enable Dell to minimize its
inventories and avoid the costs of holding
inventory and of obsolete inventory in a rapidly
changing industry
1-13
Service Companies
Service companies differ from manufacturing
companies in several ways
Obvious difference: service companies do
not produce a tangible product
Less obvious: many employees in service
companies have direct contact with
customers
Service companies must be especially sensitive to
the timeliness and quality of the service that their
employees provide to customers
1-14
Service Companies
Customers of service companies
immediately notice defects and delays in
service delivery

The consequences from such defects can
be severe
Dissatisfied customers usually choose
alternative suppliers after an unhappy
experience
They also usually tell others about their bad
experience
1-15
Service Companies Use of
Management Accounting Information
Managers in service companies have historically used
management accounting information far less intensively
than managers in manufacturing companies

Such a lack of accurate information about the cost of
operations probably occurred because many service
organizations operated in noncompetitive markets
Either highly regulated or government owned
Others, such as local retailers, were subject only to
local, not national or global, competition
1-16
Cost Accounting
Cost Accounting Definition
Accounting information system which records,
measures, and reports information about costs.
Purpose Cost ascertainment and its use in
decision making and performance evaluation.
Provides data for both financial accounting and
management accounting.
Basis of inventory valuation and COGS.
Useful in performance appraisal, planning and
control.


Cost Accounting and Management
Accounting
Cost Accounting
It deals primarily with
Cost data
It has a narrower scope
Cost accounting, Cost
control, Cost reduction,
Cost audit
Both complement each
other
Management Accounting
It involves consideration of
both cost and revenue
It has a wider scope -
based mainly on Cost
Accounting & Financial
Accounting
Should not be much
concerned about
boundaries of the two



Assignment
Questions: 1-1 to 1- 9
Exercises: 1-13 to 1-19
1-19