(See related pages)
|
|
|
Several major themes influence virtually all aspects of managerial accounting. We will briefly introduce these themes now, and they will be apparent throughout the text. Information and IncentivesThe need for information is the driving force behind managerial accounting. However, managerial accounting information often serves two functions: a decision-facilitating function and a decision-influencing function. Information usually is supplied to a decision maker to assist that manager in choosing an alternative. Often, that information is also intended to influence the manager’s decision.
Managerial accounting information is vital in all types of organizations. Managerial accountants act as strategic business partners in support of management’s roles in decision making and directing operational activities. Pictured here are a manufacturer, a service-industry firm, a retailer, and a nonprofit emergency medical service. How would managerial accounting be important in each of these organizations? To illustrate, let us consider The Walt Disney Company’s annual budget. Although the budget is prepared under the direction of the CFO, it must be approved by the chairman of the board and CEO and, ultimately, by the board of directors. As part of the budget approval process, the CEO and the board of directors will make important decisions that determine how the company’s resources will be allocated. Throughout the year, the decisions of management will be facilitated by the information contained in the budget. Management decisions also will be influenced by the budget, since at year-end actual expenditures will be compared with the budgeted amounts. Explanations will then be requested for any significant deviations. Behavioral IssuesThe reactions of both individuals and groups to managerial accounting information will significantly affect the course of events in an organization. How will the general manager of Disney’s Animal Kingdom react to a budget? How will data regarding the cost of providing entertainment services affect the way the theme park’s management prices those services? How much detail should be included in the quarterly accounting reports to the general manager? If too much detail is provided, will the manager be overloaded with information and distracted from the main points? All of these questions involve the behavioral tendencies of people and their cognitive limitations in using information. The better a managerial accountant’s understanding of human behavior is, the more effective he or she will be as a provider of information. Costs and BenefitsInformation is a commodity, much like wheat or corn. Like other goods, information can be produced, purchased, and consumed. It can be of high or low quality, timely or late, appropriate for its intended use or utterly irrelevant. As is true of all goods and services, information entails both costs and benefits. The costs of providing managerial accounting information to the managers in Disney’s Animal Kingdom include the cost of compensation for the theme park’s controller and Accounting Department personnel, the cost of purchasing and operating computers, and the cost of the time spent by the information users to read, understand, and utilize the information. The benefits include improved decisions, more effective planning, greater efficiency of operations at lower costs, and better direction and control of operations. Thus, there are both costs and benefits associated with managerial accounting information. The desirability of any particular managerial accounting technique or information must be determined in light of its costs and benefits. We will reinforce this cost-benefit trade-off throughout the text by pointing out areas where managerial accounting information could be improved, but only at too great a cost. Evolution and Adaptation in Managerial Accounting
Compared to financial accounting, managerial accounting is a young discipline. As a result, managerial accounting concepts and tools are still evolving as new ways are found to provide information that assists management. Moreover, the business environment is changing rapidly. For managerial accounting to be as useful a tool in the future as it has been in the recent past, managerial accounting information must be adapted to reflect those changes. Several changes in the business environment that are especially pertinent to managerial accounting are discussed briefly here. The effect of these changes on various topics in managerial accounting will be explored in subsequent chapters. E-Business E-commerce, e-business, e-tailing! Our ever-expanding e-vocabulary is testimony to the rapid electronic transformation of the business environment. Most of us have gone online to order a book from Amazon.com, an airline reservation from expedia.com, or possibly a computer from dellcomputer.com. We are all aware of the many dot-com companies that populate the electronic-retailing landscape. We’re also aware that these companies appear and often disappear at an alarming pace. Nevertheless, the electronic revolution in the marketplace is here to stay. Perhaps what we’re less aware of, though, is the depth of the e-commerce impact throughout the spectrum of the business environment. Just as we can order books, CDs, or clothing online in consumer-to-business e-commerce channels, businesses can order raw materials and supplies using business-to-business networks. Supply-chain management, which encompasses the coordination of order generation, order taking, order fulfillment, and distribution of products and services, is increasingly an electronic, online process.8E-commerce may be defined as buying and selling over digital media.9 E-business is a broader concept. In addition to encompassing e-commerce, e-business includes the business processes that form the engine for modern business. How does the e-business phenomenon affect the practice of managerial accounting? This is an evolving story, but just as managerial accountants participate as business partners in decisions about a company’s product mix or its investment in robotic equipment, they also are active participants in decisions to go online with a company’s business processes. The cost management opportunities presented by e-business are sometimes astounding in magnitude. Michael Dell built Dell Computer Corporation into a computer giant with the simple philosophy of managing the supply chain to minimize inventory and fill customer orders in record time. Moreover, managerial accountants are not only quantifying the cost-management benefits of e-business, they are rapidly moving toward e-accounting themselves. Managerial accountants are harnessing the power of online communications to streamline the procedures of managerial accounting. For example, e-budgeting is now used by hundreds of companies to quickly and effectively transmit the information needed to construct a budget from far-flung business units around the globe. E-business is here to stay, and it will affect our lives and our jobs in ways we can’t even imagine today. Service versus Manufacturing Firms The service sector occupies a growing role in the U. S. economy. Moreover, several key service industries have been deregulated by the government. The telecommunications, financial services, and airline industries are among them. As more and more companies provide financial, medical, communication, transportation, consulting, and hospitality services, managerial accounting techniques must be adapted to meet the needs of managers in those industries. The key difference between service and manufacturing firms is that most services are consumed as they are produced. Most services cannot be inventoried like manufactured goods. Service organizations also tend to be more labor-intensive than manufacturing firms. Many of the techniques developed for measuring costs and performance in manufacturing companies have been adapted successfully to service industry firms. Throughout the text, you will notice that roughly two-thirds of the illustrations of managerial accounting techniques involve service industry firms and nonprofit organizations. Emergence of New Industries Scientific discoveries are opening up whole new industries that were not even contemplated a short time ago. Such discoveries as hybrid automobiles, genetic engineering, and superconductivity have spawned business activities in which managers face new challenges. Managerial accountants also face new challenges as they seek to provide relevant information in these new high-tech industries. Global Competition “It’s a small world!” Although this cliché has been around a long time, it concisely sums up today’s business environment. Nowadays the marketplace is truly a global one. A firm is just as likely to be in competition with a company from Japan, Germany, or Korea as from across town. Intense international competition is forcing companies to strive for excellence in product quality and service more than ever before. Moreover, new economic arrangements and potential trade agreements are constantly in the news, as national economies become more and more intertwined. Organizations such as the European Union (EU) and the World Trade Organization (WTO), as well as international agreements like the North American Free Trade Agreement (NAFTA), all have the potential to dramatically change international commerce. A multinational company is an organization that has operational subunits, such as manufacturing plants or sales facilities, in two or more countries. Multinational firms face several challenges that do not confront domestic companies. Political systems, accounting rules for external reporting, legal systems, and cultural norms vary widely among countries. Managers of multinationals must be aware of these differences to successfully carry out operations across international boundaries. Income tax systems differ among countries also. In planning international operations, managers of multinationals must take into account the different tax laws and rates in the countries where they do business. Monetary systems also differ among countries, and multinationals must continually monitor the fluctuating values of foreign currencies. The price at which one country’s currency can be converted into that of another country is called an exchange rate. For example, on the day this paragraph is being written, it takes $.74 in U.S. dollars to buy one Australian dollar. Yesterday, however, the U.S.-Australia exchange rate was $.72. Thus, the exchange rate can fluctuate daily as various forces shape the world economy. An American planning a vacation in Australia would be sensible to time the trip to take advantage of a favorable U.S.-Australia exchange rate. Managers of multinationals face the same kinds of challenges on a much larger scale as they sign contracts, buy and sell goods, and conduct business operations in many countries. Focus on the Customer “The customer is always right,” a traditional saying in the retail industry, has never been more pertinent. To succeed in this era, businesses of all types must continually focus on their customers. Managers are increasingly aware of their product’s value to the customer, which is the customer’s perceived difference between the benefits the customer receives and the sacrifice the customer incurs to receive the product. The value of a product or service to the customer is affected by such diverse attributes as product price, quality, functionality, user-friendliness, customer service, warranty, and maintenance costs. In response to this heightened customer focus, managerial accounting systems now often measure various attributes of customer value. Cross-Functional Teams In years past, managers tended to stick to their own turf. Production managers focused on how best to manufacture a product or produce a service. Marketing managers concentrated on selling the product or service. Design engineers often emphasized engineering elegance rather than designing a product for manufacturability. Managerial accountants provided information for decision making, planning, control, and performance evaluation. Today a cross-functional approach has replaced this narrow managerial perspective. Cross-functional managerial teams bring together production and operations managers, marketing managers, purchasing and material-handling specialists, design engineers, quality management personnel, and managerial accountants to focus their varied expertise and experience on virtually all management issues. If products are to be designed and manufactured with the customers’ needs in mind, a cross-functional approach is crucial. Marketing managers have the best feel for customer needs, and production managers are up on the latest in manufacturing technology. Design engineers know how to build the functionality into a product that customers demand, and purchasing managers can acquire the materials, parts, and services necessary to get the job done. Managerial accounting information is the glue that holds the cross-functional team together. The managerial accountant designs an information system and provides data ranging across all aspects of the organization’s internal operations and external environment. Then the managerial accountant works as an integral ember of the crossfunctional team, interpreting information and analyzing the implications of decision alternatives. Working together, the cross-functional team creates value for the organization by meeting the customer’s needs in the most effective manner possible. Computer-Integrated Manufacturing Over a long period of time, manufacturing processes have evolved from labor-intensive methods to more automated processes, in which most of the work is accomplished by machines. This trend continues today, as computer-integrated-manufacturing (or CIM) systems become more common. A CIM process is fully automated, with computers controlling the entire production process. In CIM systems, the types of costs incurred by the manufacturer are quite different from those in traditional manufacturing environments. Product Life Cycles and Diversity One impact of highly automated manufacturing systems has been to enable manufacturers to produce an ever-more diverse set of products. Moreover, the rate at which technology is changing means that the life cycles of most products are becoming shorter. In the computer industry, for example, product models are used only a few years before they are replaced by more powerful versions. To be competitive, manufacturers must keep up with the rapidly changing marketplace. Managers must have timely information about production costs and other product characteristics in order to respond quickly and effectively to the competition. Time-Based Competition Response time, lead time, on time, and downtime are among the many time-based phrases that dot the conversations of today’s managers. Why are managers so concerned with time? In the global competitive environment, time has become a crucial element in many companies’ strategies for success. By reducing the time it takes to develop a new product and getting the product on the market more quickly, a company can gain an important advantage over its competitors. Thus, the time to market becomes a critical objective for many companies. Reducing the time elapsed from the new product concept stage to having the product in Wal-Mart requires careful time management at each stage of a product’s development. The product must be designed with the customer’s needs in mind and with a view toward manufacturability. Delays between product development stages must be reduced or eliminated. The production process must be efficient and product quality must be high. A cross-functional approach to management is crucial in managing the time to market. Once again, managerial accounting information is critical for the cross-functional management team. Information about the trade-offs between time and cost in all phases of a product’s development is particularly important. For example, how much more would it cost to get a new product to market six months earlier? Can these cost increases be reflected in the product’s price? How much higher would sales be if our company beats the competition by six more months? The answers to these and similar questions are increasingly important to managers as they are ever more likely to find themselves competing against time.
Information and Communication Technology We are all confronted with the breakneck pace of technological change. Just as we learn how to get the most out of our personal computers or to set up our cell phones, they are replaced by new and better models. It would be hard to overestimate the impact of technological innovation on the business environment. Although large mainframe computers still perform certain kinds of tasks, businesses now make heavy use of personal computers. In most offices, virtually every employee has a personal computer for such tasks as word processing, data analysis, report generation, presentation preparation, and communication. These PCs are usually linked together in a network that enables employees to electronically transfer files and reports, share data, and communicate via e-mail. Often called an intranet, these networked PCs are invaluable tools in the era of crossfunctional management teams. Moreover, these intranets are not confined to the walls of a building, as the World Wide Web or Internet allows computer-to-computer interface anywhere in the world.
Managerial accounting analyses that in years past would have to be scheduled on a mainframe computer are now done on PCs using a variety of software products. Spreadsheet programs, such as EXCEL® or LOTUS® 1-2-3®, are in wide use for data analysis.12 Software packages specifically designed for accounting applications are also widely available. Many businesses are adopting integrated business software packages that handle a broad range of computing needs, such as customer and supplier databases, personnel and payroll functions, production scheduling and management, inventory records, and financial and managerial accounting functions. Among the integrated software packages in wide use are SAP, which stands for Systems Applications and Products in Data Processing, and PeopleSoft. Managerial accountants often play significant roles in selecting software for their organizations or designing in-house software to meet the organization’s unique needs. Other innovations also have served to speed communications and link business parties around the world. Global cellular phone technology now enables voice and e-mail communications from the most remote locations. The global positioning satellite system (GPS) now enables trucking, railroad, shipping, and rental car companies to more easily track vehicles. This virtual explosion in data availability has enabled managerial accounting systems to provide information that would have been impossible to supply only a few years ago. Just-in-Time Inventory Management In traditional manufacturing settings, inventories of raw materials and parts, partially completed components, and finished goods were kept as a buffer against the possibility of running out of a needed item. However, large buffer inventories consume valuable resources and generate hidden costs. Consequently, many companies have completely changed their approach to production and inventory management. These manufacturers have adopted a strategy for controlling the flow of manufacturing in a multistage production process. In a just-in-time (JIT) production systemA comprehensive inventory and manufacturing control system in which no materials are purchased and no products are manufactured until they are needed., raw materials and parts are purchased or produced just in time to be used at each stage of the production process. This approach to inventory and production management brings considerable cost savings from reduced inventory levels. The key to the JIT system is the “pull” approach to controlling manufacturing. To visualize this approach, look at Exhibit 1–5, which displays a simple diagram of a multistage production process. The flow of manufacturing activity is depicted by the solid arrows running across the page from one stage of production to the next. However, the signal that triggers more production activity in each stage comes from the next stage of production. These signals, depicted by the dashed-line arrows, run from right to left. We begin with sales at the right-hand side of the exhibit. When sales activity warrants more production of finished goods, the goods are “pulled” from production stage III by sending a signal that more goods are needed. Similarly, when production employees in stage III need more inputs, they send a signal back to stage II. This triggers production activity in stage II. Working our way back to the beginning of the process, purchases of raw materials and parts are triggered by a signal that they are needed in stage I. This pull system of production management, which characterizes the JIT approach, results in a smooth flow of production and significantly reduced inventory levels. The result is considerable cost savings for the manufacturer.
Further details of the JIT production system and other changes in the manufacturing environment will be covered in subsequent chapters. The impact of these changes will be a recurrent theme throughout the book. Total Quality Management One implication of a just-in-time inventory philosophy is the need to emphasize product quality. If a component is to be produced just in time for the next production stage, it must be “just right” for its intended purpose. One flawed component can shut down the entire production line, entailing considerable cost. Therefore, managerial accountants have become involved increasingly in monitoring product quality and measuring the costs of maintaining quality. This information helps companies maintain programs of total quality managementThe broad set of management and control processes designed to focus an entire organization and all of its employees on providing products or services that do the best possible job of satisfying the customer., or TQMThe broad set of management and control processes designed to focus an entire organization and all of its employees on providing products or services that do the best possible job of satisfying the customer.. This refers to the broad set of management and control processes designed to focus the entire organization and all of its employees on providing products or services that do the best possible job of satisfying the customer. Continuous Improvement Global competition is forcing companies to continuously improve their operations. Continuous improvementThe constant effort to eliminate waste, reduce response time, simplify the design of both products and processes, and improve quality and customer service. is the constant effort to eliminate waste, reduce response time, simplify the design of both products and processes, and improve quality and customer service. Managerial accountants are contributing to the continuous improvement programs of many organizations through the development of cost management systems, which are discussed next. Cost Management SystemsThe explosion in technology we are experiencing, coupled with increasing worldwide competition, is forcing managers to produce high-quality goods and services, provide outstanding customer service, and do so at the lowest possible cost. These demands are placing ever-greater requirements on the information provided by managerial accounting systems. Many companies have moved away from a historical cost accounting perspective and toward a proactive cost management perspective. A cost management systemA management planning and controlling system that measures the cost of significant activities, identifies non-value-added costs, and identifies activities that will improve organizational performance. is a management planning and control system with the following objectives.
Notice the emphasis of a cost management system on the organization’s activities. This emphasis, sometimes called activity accountingThe collection of financial or operational performance information about significant activities in an enterprise., is crucial to the goal of producing quality goods and services at the lowest possible cost. In keeping with the focus on activities, managerial accountants have developed a system for determining the cost of producing goods or services called activity-based costing (ABC)A two-stage procedure used to assign overhead costs to products or services produced. In the first stage, significant activities are identified, and overhead costs are assigned to activity cost pools in accordance with the way resources are consumed by the activities. In the second stage, the overhead costs are allocated from each activity cost pool to each product line in proportion to the amount of the cost driver consumed by the product line.. In an ABC system, the costs of the organization’s significant activities are accumulated and then assigned to goods or services in accordance with how the activities are used in the production of those goods and services. An ABC system helps management to understand the causal linkages between activities and costs. Using an activity-based costing system to improve the operations of an organization is called activity-based managementUsing an activity-based costing system to improve the operations of an organization. or ABMUsing an activity-based costing system to improve the operations of an organization..We will have considerably more to say about activity-based costing, activity-based management, and the role of cost management systems throughout the text. 8Ravi Kalakota and Andrew B. Whinston, Electronic Commerce: A Manager’s Guide (Reading, MA: Addison-Wesley, 1997), p. 287. 9Ravi Kalakota and Marcia Robinson, e-Business: Road Map for Success (Reading, MA: Addison-Wesley, 1999), p. 4. 10The information and quotations for Bank of America and Harrah’s Casino in this inset are from David Rocks, “The Net as a Lifeline,” BusinessWeek, October 29, 2001. See also Kevin J. Delaney, “Industry Giants Embrace Internet Advertising,” The Wall Street Journal, April 17, 2006, p. A1. 11The information and quotations for Continental Airlines and MoMA are from “Websmart 50—Pacesetters: Customer Service,” BusinessWeek, November 21, 2005, p. 85. 12EXCEL® is a registered trademark of Microsoft Corporation; LOTUS® 1-2-3® is a registered trademark of Lotus Development Corporation. | |||||||||||||||
