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Managers need information for all of the managerial activities described in the preceding section. That information comes from a variety of sources, including economists, financial experts, marketing and production personnel, and the organization’s managerial accounting system. Objectives of Managerial Accounting Activity
Managerial accountants add value to an organization by pursuing five major objectives:
Nowadays managerial accounting analysis is considered so crucial in managing an enterprise that in most cases managerial accountants are integral members of the management team. Far from playing a passive role as information providers, managerial accountants take a proactive role in both the strategic and day-to-day decisions that confront an enterprise. Although much of the information provided by the managerial accounting system is financial, there is a strong trend toward the presentation of substantial nonfinancial data as well. Managerial accountants supply all kinds of information to management and act as strategic business partners in support of management’s role in decision making and managing the organization’s activities. As we will see in subsequent chapters, contemporary managerial accounting systems are focusing more and more on the activities that occur on all levels of the organization. Measuring, managing, and continuously improving operational activities are critical to an organization’s success. To illustrate the objectives of managerial accounting activity, let us continue with the example of Disney’s Animal Kingdom. Providing Information for Decision Making and Planning, and Proactively Participating as Part of the Management Team in the Decision-Making and Planning Processes For virtually all major decisions, Disney’s management team would rely largely on managerial accounting information. For example, the decision to establish the new theme park would be influenced heavily by estimates of the costs of building the Animal Kingdom and maintaining it throughout its life. The theme park’s managers also would rely on managerial accounting data in formulating plans for the park’s operations. Prominent in those plans would be a budget detailing the projected revenues and costs of providing entertainment. While Disney’s top management contemplated its decision about the theme park, the company’s managerial accountants could not simply gather information and then sit on the sidelines. The managerial accountants were key participants in the management team as decisions were made and plans formulated for the theme park’s operations. Assisting Managers in Directing and Controlling Operational Activities Directing and controlling day-to-day operations require a variety of data about the process of providing entertainment services. For example, in directing operational activities, the park’s management team would need data about customer food-service demand patterns in order to make sure appropriate staffing was provided in the theme park’s various food venues. In controlling operations, management would compare actual costs incurred with those specified in the budget.
Managerial accounting information often assists management through its attention-directing function.The function of managerial-accounting information in pointing out to managers issues that need their attention. Managerial accounting reports rarely solve a decision problem. However, managerial accounting information often directs managers’ attention to an issue that requires their skills. To illustrate, suppose Disney’s Animal Kingdom incurred electricity costs that significantly exceeded the budget. This fact does not explain why the budget was exceeded, nor does it tell management what action to take, but it does direct management’s attention to the situation. Suppose that upon further investigation, the accounting records reveal that the local electric rates have increased substantially. This information will help management in framing the decision problem. Should steps be taken to conserve electricity? Should the park’s hours be curtailed? Perhaps management should consider switching to a lower-cost method of air conditioning. Motivating Managers and Other Employees Toward the Organization’s Goals Organizations have goals. However, organizations comprise people who have goals of their own. The goals of individuals are diverse, and they do not always match those of the organization. A key purpose of managerial accounting is to motivate managers and other employees to direct their efforts toward achieving the organization’s goals. One means of achieving this purpose is through budgeting. In establishing a budget for Disney’s Animal Kingdom, top management indicates how resources are to be allocated and what activities are to be emphasized. When actual operations do not conform to the budget, the theme park’s managers will be asked to explain the reasons for the deviation. One way in which employees can be motivated toward the organization’s goals is through empowerment. Employee empowermentThe concept of encouraging and authorizing workers to take the initiative to improve operations, reduce costs, and improve product quality and customer service. is the concept of encouraging and authorizing workers to take the initiative to improve operations, reduce costs, and improve product quality and customer service. At The Walt Disney Company’s theme parks, for example, employees are routinely asked for suggestions about ways to improve service to the parks’ millions of visitors. Measuring the Performance of Activities, Subunits, Managers, and Other Employees Within the Organization One means of motivating people toward the organization’s goals is to measure their performance in achieving those goals. Such measurements then can be used as the basis for rewarding performance through positive feedback, promotions, and pay raises. For example, most large corporations compensate their executives, in part, on the basis of the profit achieved by the subunits they manage. In other companies, executives are rewarded on the basis of operational measures, such as product quality, sales, or on-time delivery. At Disney’s Animal Kingdom, for example, management could be rewarded, in part, on the basis of growth in attendance at the theme park. In addition to measuring the performance of people, the managerial accounting system measures the performance of an organization’s subunits, such as divisions, product lines, geographical territories, and departments. These measurements help the subunits’ managers obtain the highest possible performance level in their units. Such measurements also help top management decide whether a particular subunit is a viable economic investment. For example, it may turn out that a particular attraction at Disney’s Animal Kingdom is too costly an activity to continue, despite the efforts of a skilled management team.
Assessing the Organization’s Competitive Position, and Working with Other Managers to Ensure the Organization’s Long-Run Competitiveness in Its Industry Nowadays the business environment is changing very rapidly. These changes are reflected in global competition, rapidly advancing technology, and improved communication systems, such as the Internet. The activities that make an enterprise successful today may no longer be sufficient next year. A crucial role of managerial accounting is to continually assess how an organization stacks up against the competition, with an eye toward continuously improving. Among the questions asked in assessing an organization’s competitive position are the following:
The Balanced ScorecardThe questions listed in the preceding section are so important for any organization’s management to address that they have been organized into a management framework called the balanced scorecard, which is depicted in Exhibit 1–1 for The Walt Disney Company.4 The balanced scorecardA model of business performance evaluation that balances measures of financial performance, internal operations, innovation and learning, and customer satisfaction. is a model of business performance evaluation that balances measures of financial performance, internal operations, innovation and learning, and customer satisfaction.
If an organization is to remain viable in a changing and ever more competitive business environment, its managers need to continually ask the questions emphasized in the balanced scorecard. The Walt Disney Company is no exception. Disney’s management team must be concerned with the cost effectiveness of the company’s business processes as well as its entertainment services. Management must continually monitor the needs of its customers and assess their level of satisfaction with the services provided. The company’s overall financial strength also must be prominent in management’s thinking. Finally, are the company’s entertainment attractions “keeping up with the times” in terms of popular culture and technology? Are the company’s employees providing the innovation that is critical to the company’s future success?
We will hold off on an extensive discussion of the balanced scorecard until Chapter 10. However, let’s briefly consider the goals and measures that Disney’s top management might consider for the balanced scorecard depicted in Exhibit 1–1. According to the company’s Web site, The Walt Disney Company’s “primary financial goals are to maximize earnings and cash flow, and to allocate capital profitably toward growth initiatives that will drive long-term shareholder value.” So Disney’s financial perspective would include such measures as earnings, earnings per share, and cash flow. Now the question is, for Disney to achieve its financial goals in the future, what does the company need to be doing now in the balanced scorecard’s other three perspectives? For its customer perspective, Disney might use surveys to access customer satisfaction with its theme parks, movies, and products, as well as collect more objective data such as the number of visitors per day at its theme parks, attendance at its feature films, and customer traffic through the many Disney stores. For the learning and growth perspective, Disney could focus on new theme parks opened, new theme park attractions, new feature film releases, and new media outlets. For its internal operations perspective, Disney could focus on measures such as operating expense per theme park attendee, meals served per attendee, number of visitors at each attraction, rate of employee retention, and so forth. The key point of the balanced scorecard concept is that by focusing on measures of performance now in these three key perspectives, Disney can achieve its financial goals in the future. Included on the text Web site, Topic Tackler offers a helping hand in understanding the most challenging topics in the chapter. It provides help through video clips, PowerPoint slides, practice exercises, and self tests. These topics are indicated by this logo.
Among the well-known manufacturers making use of the balanced-scorecard concept are Apple Computer, Caterpillar, Caltex Petroleum, Cisco Systems, DaimlerChrysler, Eli Lilly, ExxonMobil, General Motors, Microsoft, Motorola, and Phillips Electronics. Finally, governmental units have benefited from a balanced scorecard, among them the City of Brisbane, Australia, NASA, the U.S. Department of Energy, and the U.S. Department of Transportation. We will come back to the balanced scorecard in Chapter 10. Managerial versus Financial Accounting
Take another look at the major objectives of managerial accounting activity. Notice that the focus in each of these objectives is on managers. Thus, the focus of managerial accounting is on the needs of managers within the organization, rather than interested parties outside the organization. Financial accountingThe use of accounting information for reporting to parties outside the organization. is the use of accounting information for reporting to parties outside the organization. The annual report distributed by McDonald’s Corporation or Mutual of Omaha to its stockholders is an example of the output from a financial accounting system. Users of financial accounting information include current and prospective stockholders, lenders, investment analysts, unions, consumer groups, and government agencies. There are many similarities between managerial accounting information and financial accounting information because they both draw upon data from an organization’s basic accounting system. This is the system of procedures, personnel, and computers used to accumulate and store financial data in the organization. One part of the overall accounting system is the cost accounting systemPart of the basic accounting system that accumulates cost for use in both managerial and financial accounting., which accumulates cost data for use in both managerial and financial accounting. For example, production cost data typically are used in helping managers set prices, which is a managerial accounting use. However, production cost data also are used to value inventory on a manufacturer’s balance sheet, which is a financial accounting use. Exhibit 1–2 depicts the relationships among an organization’s basic accounting system, cost accounting system, managerial accounting, and financial accounting. Although similarities do exist between managerial and financial accounting, the differences are even greater. Exhibit 1–3 lists the most important differences.
Managerial Accounting in Different Types of OrganizationsAll organizations need information, whether they are profit-seeking or nonprofit enterprises and regardless of the activities they pursue. As a result, managerial accounting information is vital in all organizations. Ford, Lands’ End, American Airlines, Marriott Hotels, Prudential Insurance, American Express, Cornell University, The United Way, Mayo Clinic, the City of Los Angeles, and the Department of Defense all have managerial accountants who provide information to management. Moreover, the five basic purposes of managerial accounting activity are relevant in each of these organizations.
Problem 1-32 Case 1-33 4The balanced scorecard concept was developed by Robert S. Kaplan and David D. Norton. See Robert S. Kaplan and David D. Norton, The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Boston: Harvard Business School Press, 2001). 5Thomas Wunder, “New Strategy Alignment in Multinational Corporations,” Strategic Finance 87, no. 5 (November 2005), pp. 35–41; and Andra Gumbus and Bridget Lyons, “The Balanced Scorecard at Philips Electronics,” Strategic Finance 84, no. 5 (November 2002), pp. 45–49. 6Robert S. Kaplan and David D. Norton, The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Boston: Harvard Business School Press, 2001). | |||||||||||||||||||||||||||
