<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0072996501/lo4.gif','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>     Explain the importance of accounting information for internal parties—primarily management—in terms of the objectives and the characteristics of that information.

Internal decision makers employed by the enterprise, often referred to as management, create and use internal accounting information not only for exclusive use inside the organization but also to share with external decision makers. For example, in order to meet a production schedule, a producer may design an accounting information system for suppliers detailing its production plans. The producer shares this information with its supplier companies so that they can help the producer meet its objectives. Thus, although the creator and distributor of the accounting information is an internal decision maker, the recipient of the information is, in this case, an external decision maker. Other types of accounting information, however, are not made available to external decision makers. Long-range plans, research and development results, capital budget details, and competitive strategies typically are closely guarded corporate secrets.

USERS OF INTERNAL ACCOUNTING INFORMATION

Every employee of the enterprise uses internal accounting information. From basic labor categories to the chief executive officer (CEO), all employees are paid, and their paychecks are generated by the accounting information system. However, the amount of use and, in particular, the involvement in the design of accounting information systems vary considerably. Examples of internal usersIndividuals who use accounting information from within an organization (for example, board of directors, chief financial officer, plant managers, store managers). of accounting information systems are as follows:

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Employees have different specific goals and objectives that are designed to help the enterprise achieve its overall strategies and mission. Looking at the typical, simple organization chart in Exhibit 1–5 you can see that the information created and used by various employees will differ widely. All enterprises follow rules about the design of their accounting information systems to ensure the integrity of accounting information and to protect the enterprise’s assets. There are no rules, however, about the type of internal reports or the kind of accounting information that can be generated. A snapshot look inside a firm will demonstrate the diversity of accounting information generated and used in the decision-making processes of employees.

Exhibit 1–5	TYPICAL SIMPLE ORGANIZATION CHART
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Many enterprises use a database warehousing approach for the creation of accounting information systems. This approach, coupled with user-friendly software, allows management and other designated employees access to information to create a variety of accounting reports, including required external financial reports. For example, detailed cost information about a production process is used by the production line supervisor to help control production costs. A process design engineer, when considering the best configuration of equipment and employees, uses the same information to reduce costs or to increase efficiency. Finally, production-related cost information appears in the external financial statements used by investors and creditors.

OBJECTIVES OF MANAGEMENT ACCOUNTING INFORMATION

Each enterprise has implicit and explicit goals and objectives. Many enterprises have a mission statement that describes their goals. These goals can vary widely among enterprises ranging from nonprofit organizations, where goals are aimed at serving specified constituents, to forprofit organizations, where goals are directed toward maximizing the owners’ objectives. For example, the American Cancer Society, a nonprofit organization, has the following mission:

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The American Cancer Society is the nationwide community-based voluntary health organization dedicated to eliminating cancer as a major health problem by preventing cancer, saving lives, and diminishing suffering from cancer, through research, education, advocacy, and service.³

Procter & Gamble, a for-profit, global producer of consumer products, has the following purpose:

We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers.⁴

Procter & Gamble’s annual report to shareholders provides more detail on how the company will achieve its mission. The following growth strategies were identified in P&G’s 2005 annual letter to its shareholders: Build existing core businesses into stronger global leaders. Grow leading brands, big countries, winning customers. Develop faster-growing, higher-margin, more asset-efficient businesses with global leadership potential. Regain growth momentum and leadership in Western Europe. Drive growth among lower-income consumers in developing markets.5 The constituents of these organizations receive external financial information that helps them assess the progress being made in achieving these goals and objectives. In the case of Procter & Gamble, quarterly and annual information is provided to shareholders. The American Cancer Society is required to report its activities and financial condition to regulators. Providing constituents evaluative information is only one objective of accounting systems.

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Enterprises design and use their internal accounting information systems to help them achieve their stated goals and missions. Multiple reports, some as part of the normal reporting process and some that are specially constructed and designed, are produced and distributed regularly. To motivate managers to achieve organizational goals, the internal accounting system is also used to evaluate and reward decision-making performance. When the accounting system compares the plan or budget to the actual outcomes for a period, it creates a signal about the performance of the employee responsible for that part of the budget. In many enterprises management creates a reward system linked to performance as measured by the accounting system.

Thus the objectives of accounting systems begin at the most general level with the objectives and mission of the enterprise. These general organizational goals create a need for information. The enterprise gathers historical and future information from both inside the enterprise and external sources. This information is used by the decision makers who have authority over the firm’s resources and who will be evaluated and rewarded based on their decision outcomes.

CHARACTERISTICS OF MANAGEMENT ACCOUNTING INFORMATION

The accounting information created and used by management is intended primarily for planning and control decisions. Because the goal of creating and using management accounting information differs from the reasons for producing externally reported financial information, its characteristics are different.

Both the processes used to create financial accounting reports and the structure of those reports significantly impact management strategy. For example, because external financial reporting standards require companies to include pension-related obligations on their financial statements, management monitors those obligations closely. These pension-related obligations impact labor negotiations and labor-related corporate strategies.

Another example is that the processes necessary to create required external financial reports have historically determined the type of accounting information available inside of companies for internal decision making. Most plants within companies are organized as profit centers where plant-related financial statements mirror those necessary for external reporting purposes.

As you read the chapters of this book, we will remind you about how financial reporting has an impact on and is impacted by management strategies. The following paragraphs identify internal accounting information characteristics.

Importance of Timeliness   In order to plan for and control ongoing business processes, accounting information needs to be timely. The competitive environment faced by many enterprises demands immediate access to information. Enterprises are responding to this demand by creating computerized databases that link to external forecasts of industry associations, to their suppliers and buyers, and to their constituents. Time lines for the development and launch of new products and services are becoming shorter and shorter, making quick access to information a priority.

In addition to needing timely information for planning purposes, enterprises are constantly monitoring and controlling ongoing activities. If a process or activity goes out of control, the enterprise can incur significant costs. For example, recalls of products can be very expensive for a company. If the company can monitor processes and prevent low-quality or defective products from reaching its customers, it can experience significant savings.

Identity of Decision Maker   Information that is produced to monitor and control processes needs to be provided to those who have decision-making authority to correct problems. Reporting scrap and rework information to line workers without providing them the responsibility for fixing the process is counterproductive. However, a self-directed work team that has been assigned decision-making responsibility over equipment and work-related activities can have a significant impact on rework and scrap if team members control the process causing the problems.

Oriented toward the Future   Although some accounting information, like financial accounting information, is historical in nature, the purpose in creating and generating it is to affect the future. The objective is to motivate management to make future decisions that are in the best interest of the enterprise, consistent with its goals, objectives, and mission.

Measures of Efficiency and Effectiveness   Accounting information measures the efficiency and effectiveness of resource usage. By comparing the enterprise’s resource inputs and outputs with measures of competitors’ effectiveness and efficiency, an assessment can be made of how effective management is in achieving the organization’s mission. The accounting system uses money as a common unit to achieve these types of comparisons.

Management Accounting Information—A Means   As with financial accounting information, management accounting information is a means to an end, not an end in and of itself. The ultimate objective is to design and use an accounting system that helps management achieve the goals and objectives of the enterprise.

Exercise  1.2, 1.9, 1.10