CHAPTER FOURTEENManagement Accounting in a Changing Environment

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Outline of Chapter 14Management Accounting in a

Changing Environment Integrative Framework

Organizational Innovations and Management Accounting

When Should the Internal Accounting System be Changed?

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Connection to Other ChaptersChapter 14 summarizes the concepts developed in

the previous chapters and applies them to recent internal accounting system innovations.

Every chapter mentions the trade-offs between decision management (decision making) and decision control.

Internal accounting systems continue to evolve in response to changing needs and environments.

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History of Management Accounting

As firms evolve, internal accounting systems evolve. Early 1800s: Multi-process textile mills develop absorption costing. 1850 - 1910: Multi-location firms create cost controls. 1915 - 1925: Large corporations decentralize in operating divisions. 1925 - 1975: External reporting dictates internal accounting design. Recent: Automation induces redesign of product costing. Recent: TQM requires more non-financial measures Recent: JIT producers want to identify non-value-adding

activities. Recent: The Balanced Scorecard links strategy to key performance

indicators to help determine if the organization is moving in the right direction.

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Organizational ArchitectureSee Figure 14-1. Decision rights partitioning

– Separating decision management and control Performance evaluation system

– Management accounting system– Nonfinancial measures

Performance reward and punishment system

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Business Strategy Asset structure influences performance measurement.

– Some firms can use historical financial accounting.– Publicly-traded firms may use stock market value.

Customer base influences distribution of specialized knowledge.– May decentralize into many responsibility centers

Knowledge creation influences partitioning of decision rights.– If knowledge is easy to acquire, more centralization is

possible.

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Environmental and Competitive Forces

Technological change– Changes relative value of investment projects– Changes performance measures and controls

Global market conditions change– Production sources dispersed internationally– Competitors from other countries

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Quality’s Multiple MeaningsDifferent meanings of quality can conflict. High mean Low variance Larger number of options Meeting customer expectations

Partitioning decision rights Who determines quality goals? Who measures quality?

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TQM Program Elements A firmwide process

– communicate up, down, and laterally Quality is defined by customer

– specialized knowledge of customer needs Requires organizational changes

– push decision rights down to operating and marketing

Designed into the product– Reduce defects by redesigning production

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ISO 9000Issued by International Standards Organization, a

European community body that sets quality standards.

Requires written policies, procedures, and quality methods.

Certifies that policies exist that allow quality products to be manufactured.

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TQM Quality CostsBenefits Reduce internal failures (before sold) Reduce external failures (after sold)

Costs Prevention (reengineering and training) Appraisal (inspection and testing before delivery)

Find optimal balance between benefits and costs.

See Self-Study Problem 1.

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JIT GoalsJust-in-time (JIT) production: Production does not start until order is received. JIT aims to minimize throughput time.

Throughput time = Processing time + Non-value-added time

Non-value-added time = Waiting + Transit + Inspection

Manufacturing cycle efficiency (MCE) (not mentioned in textbook)

MCE = (Processing time) (Throughput time)

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JIT Techniques Increase quality of material and processes Reduce setup times Balance flow rates across manufacturing cells Coordinate deliveries from suppliers Improve factory layout to reduce transit time Change performance measurement and reward

system to focus on reducing throughput time of entire production process rather than individual departments

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JIT Cost FlowsSee Figure 14-3. Compare to Figure 9-1.

Raw and In-Process (RIP) combines raw materials and work-in-process.

Conversion Cost combines direct labor and all manufacturing overhead.

Backflushing: As work completed, transfer costs to finished goods

from RIP using standard rates or specific identification from conversion costs using throughput time or other

allocation base

See Self-Study Problem 2.

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JIT LimitationsAdvantages: Simpler because no work-in-process accounting Focus attention on throughput time

Disadvantages: Become dependent on suppliers for on-time

delivery Still need periodic physical count of materials

inventory Reorganizing production can be expensive.

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Balanced Scorecard Translates the strategy into a plan of

action Identifies specific objectives and

performance drivers (key performance indicators)

Helps determine if the organization is moving in the right direction

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Balanced Scorecard Attempts to achieve a balance

between:– short and long-term objectives– outcome and performance measures for

cause and effect objectives– financial and non-financial performance

measures– all of the stakeholders of the organization

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Balanced Scorecard For each objective there are

– Driver performance indicators measure input activities to achieve the

objective

– Outcome performance indicators Measure if the objective has been realized

– Driver and outcome performance indicators reflect the cause and effect nature of the balanced scorecard.

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The Balanced Scorecard’s Four Perspectives

Innovation and Learning Perspective

Customer Perspective STRATEGY

FinancialPerspective

Internal Business Processes

Perspective

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Example Objectives, Performance Indicators, and

Targets Review Table 14-1. Pay particular attention to the

specificity of the definition of each element, particularly the targets.

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When Should the Internal Accounting System be Changed?

Continual evolution (economic Darwinism) No ideal management accounting system Respond to changes in technology and markets

Trade-offs Decision making vs. Decision control Opportunity cost vs. Historical cost Simplicity vs. Comprehensiveness Internal users vs. External users Financial measures vs. Nonfinancial measures