Management Accounting in a Dynamic Environment

Cheryl S. McWatters, Jerold L. Zimmerman

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781135039387
• Edition: 1
• Topic: Business
• Subtopic: Managerial Accounting
• Index: Business

Whether students pursue a professional career in accounting or in other areas of management, they will interact with accounting systems. In all organizations, managers rely on management accounting systems to provide information to deal with changes in their operating environment. This book provides students and managers with an understanding and appreciation of the strengths and limitations of an organization's accounting system, and enables them to be intelligent and critical users of the system.

The text highlights the role of management accounting as an integral part of the organization's strategy and not merely a set of individual concepts and computations. An analytical framework for organizational change is used throughout the book to underscore how organizations must adapt to create customer and organizational value. This framework provides a way to examine and analyze the organization's accounting system, and as a basis for evaluating proposed changes to the system.

With international examples that bring the current business environment to the forefront, problems and cases to promote critical thinking, and online support for students and instructors, Management Accounting in a Dynamic Environment is no mere introductory textbook. It prepares readers to use accounting systems intelligently to achieve organizational success.

The authors have identified several cases to accompany each chapter in the textbook. These are available through Ivey Publishing:

https://www.iveycases.com/CaseMateBookDetail.aspx?id=434

CHAPTER 1

WHY ACCOUNTING IS IMPORTANT IN ORGANIZATIONS

LEARNING OBJECTIVES

1. Explain how technological change, competition and globalization, and customer preferences can affect an organization and its management accounting system.

2. Identify strategies for achieving customer value.

3. Describe features of organizations that promote decisions to achieve organizational goals.

4. Explain the critical role played by management accounting in making planning decisions and controlling managers to create organizational value.

5. Identify the trade-offs that exist in using information for making planning decisions, control, and external reporting.

6. Identify the roles of different types of management accountants.

7. Recognize the role of judgment and ethics in making management accounting choices.

COLLEGE ART

Three years ago Kathy Johnson approached Nadja Joshi about investing in a college art store that sells jewelry, paintings, and pottery crafted by local college artists to the college community. Nadja, being a local accomplished artist, was intrigued but skeptical. Nonetheless, Kathy persisted. Kathy’s initial business strategy was to support local artists by displaying and selling inexpensive, locally produced art to college students to decorate their apartments and dorm rooms. She explained to her friend that they would not have to pay the artists until their art was sold. Any unsold art after three months would be returned to the artist. Therefore, no initial investment would be required for inventory and no risk of unsold inventory exists.

Kathy eventually convinced Nadja to invest $50,000 along with her own $50,000 to form a partnership. Kathy would receive an annual salary of $40,000 for managing the store and the remaining profits would be shared equally. Nadja would not be involved in management. They were also able to borrow $150,000 from a bank and leased space close to campus for College Art. After sales exceeded expectations, they opened two more stores near other local colleges. Kathy and Nadja also hired managers to operate the two new stores.

With the growth of the business, problems have begun to arise. Sales have not been as high as expected at one of the regional stores and the other store appears to suffer from considerable shoplifting. Competition in the retail home accessories and crafts business has increased with IKEA and Michaels opening stores near one of the regional stores. In addition, the Internet is an important factor. Not only do Ikea (www.ikea.com) and Michaels (www.michaels.com) offer Internet competition through their websites and stores, but online arts and crafts such as GalleryDirect (www.GalleryDirect.com) could also be having an adverse impact on College Arts sales.

Kathy and Nadja must make some decisions to revise their strategy and operations and adapt to the increased competition. They realize that their stores must be much more sensitive to their customers. Kathy and her managers spend a lot of time not only selecting pieces by local artists but also tracking the pieces sold each week to the artists who produced them so they can pay the artist. Kathy realizes the stores must operate more efficiently, but they aren’t sure exactly what to do.

MANAGEMENT ACCOUNTING IN A DYNAMIC ENVIRONMENT

Management accounting helps create organizational value – the benefits received by various stakeholders from their investment in the firm – through better decision making and management of the members of the organization. For example, managers use information on costs to make decisions on products and services. Also, management accounting information is used to evaluate the performance of a manager. Management accountants bring an integrating perspective to the organization’s strategic and financial decisions.

Management accounting includes the design and use of information within organizations. Previously, management accounting focused on financial information, such as the cost of a product or the revenues generated by a unit of the organization. But selecting and analyzing non-financial information, such as the time required to make a product, the percentage of defective products, or the number of on-time deliveries, has become an important part of management accounting. Non-financial information supplements financial information by providing a broader understanding of the organization, which can lead to better decisions.

Management accounting is not composed of a fixed set of rules. Organizations have different goals and are composed of different members; therefore, no universal rules exist. Management accounting must adapt to each organization.

It is not a static process. Management accounting adapts to organizational change. Three major forces cause organizations to evolve: changes in technology, increased competition and globalization, and customer preferences. Organizations that fail to adapt to these forces will not be able to survive in the long run. Organizations must meet the needs of other stakeholder groups beyond those of their customers. For example, the goals of shareholders and employees must be satisfied to maintain the organization’s viability. Government and regulatory bodies also affect how organizations operate in the pursuit of their goals.

Organizations depend on management accounting to provide information in a dynamic environment. If the evolution of the management accounting system lags behind the evolution of the organization, the system will act as an anchor preventing the organization from successfully dealing with a changing environment. Organizations must adapt to dynamic environments and management accounting must adapt to a changing organization. New environments require managers to have different information, including accounting numbers. Therefore, the study of management accounting is a study of a process, not a study of a set of procedures. The process of management accounting is linked to organizational characteristics, which are constantly changing. To understand management accounting, you must understand organizations and the forces that affect them.

The following sections describe the three major forces that affect organizations: technological change, competition and globalization, and changing customer mix and preferences. Organizations have chosen to adapt to these forces in different ways. Some of these adaptations, such as total quality management (TQM) and just-in-time (JIT), have become commonplace. These adaptations and others are described in the following sections. In identifying and understanding these changes in organizations, we can appreciate the role and process of management accounting.

Technological Change: Information and Communication Technologies

Technology has dramatically changed the way we live. Information technologies, transportation systems, food technology, and medical and scientific discoveries affect the way we work, eat, and recreate. Organizations have been similarly influenced by technological change and continually influenced by technological breakthroughs. For example, consider how the Internet, Facebook, Twitter, and the mobile universe have changed our lives.

Today people take information and communication technologies for granted. Many devices that we use daily rely on microchips and software to operate correctly. Today’s electronic treadmills take your pulse as you run, adjust the pace to your heart rate, and inform you of speed, distance, calories, and carbohydrates burned. Global positioning systems (GPS) route you quickly to your destination and measure the distance you jog or cycle. Upon arrival, you can take photographs that can be published instantly on the Internet or transmitted over mobile phones.

Information Acquisition and Dissemination

The information and communication technology industries have revolutionized the way organizations operate. Organizations can communicate with their members, suppliers, and customers through devices such as the Internet, smart phones, and tablets. Information on changing demand for products and demographics is easily accessible, and computers can manipulate information and simulate different scenarios to allow organizations to make better predictions of the future. Restaurants use electronic pagers to inform customers that their table is ready and iPads instead of paper menus and wine lists. Airlines use instant messaging to update passenger flight itineraries.

Information and communication technologies accomplish many of the tasks traditionally performed by human beings. For example, eBay prepares shipping labels, packing slips, and invoices. The eBay Listing Analytics service tracks sales performance and provides performance metrics. As a result, eBay sellers do not have to hire personnel to do the administrative tasks. Instead, they can focus on what they do best: selling. Air travellers today do work traditionally performed by airline personnel. Airline companies rely on the customer for booking flights, choosing seats, as well as for checking in. Google tracks individuals’ web surfing and tailors ads to the particular user.

Advanced technologies allow organizations to make better quality products more efficiently through automation and precise operations. Manufacturing firms use computer-aided design (CAD) and computer-aided manufacturing (CAM). CAD allows engineers and designers to create and analyze new product ideas using three-dimensional plans. Car manufacturers such as BMW and airplane manufacturers such as Airbus and Boeing rely heavily on CAD. CAM allows organizations to make products through programmed machines; for example, programmable machines perform welding in the manufacture of cars and insert components in a circuit board in the electronics industry. Electronic medical records reduce the errors of manual records and allow health-care professionals to instantly access the patient’s entire medical history.

All of these technologies make a firm’s products and services more reliable and safer. The production processes are more efficient as well; fewer mistakes are made in producing goods and providing services, which lowers production costs significantly. Advanced technologies also enable firms to deliver their products and services timely and reliably. This integration of the supply chain creates value for customers – they get higher-quality products sooner at lower prices. Being able to download a new tune now, instead of having to go into town and search for the CD or DVD, makes a big difference to the customer who prefers novelty to sound quality.

Information and communication technology systems are often highly integrated. The sale of a book, an insurance policy, or a flight via the Internet will update the relevant company databases instantly. Managers can use this up-to-date information for planning purposes, and for monitoring the execution of their company’s strategy. This creates organizational value.

BCM Kosmetik, part of Alliance Boots, is the largest health and beauty contract manufacturer in Europe, including production of about one-third of Boots products. Its production facility in Ditezenbach, Germany, for example, uses such an integrated approach to the manufacturing of its cosmetics. Employing computer-integrated manufacturing (CIM), BCM Kosmetik ties its reporting system to the marketing and scheduling systems to provide current production and inventory information. The systems feed data into a database that many users can access simultaneously. Using real-time information, employees can continually monitor quality, and react quickly to design changes and market demand. The system is also linked to the firm’s regulatory obligations, as cosmetics are subject to government regulation.¹

Successful organizations must recognize the advantages of greater access to information. A survey of investment managers reported that their firms’ accounting systems were outdated and not adapting to new technologies. Of the investment managers surveyed, the majority indicated that their legacy systems contributed to human error and reduced competitiveness. Firms needed to react to customer demands, risk management, and, particularly, regulatory requirements to adopt state-of-the-art systems.² For example, retail banking firms, such as Commonwealth Bank of Australia and Royal Bank of Canada, have installed complex software systems to improve customer service, including mobile applications, while improving internal information related to client profiles and preferences.³

E-Business and the Internet

Firms that existed before the Internet era often had trouble in transforming their businesses to operate online. A newer airline company, such as easyJet, had an advantage over its older rivals, such as KLM-Air France and British Airways. The newer firm adopted the Internet almost from its inception, operating an integrated system. This strategy enabled easyJet to adjust prices quickly to the dynamics of supply and demand, plan flights more efficiently, and grow quickly. Traditional airlines interacted with their clients mainly through travel agents. Adopting the Internet was initially a challenge for them, as they had to add Internet sales to existing retail channels. This change meant opening up their reservations systems to the public, and integrating and co-ordinating web-based sales with sales from agents. These changes impeded their ability to compete. Online services and mobile apps are now the rule and not the exception with most airlines.

Other so-called bricks-and-mortar shops, such as US-based bookshop Borders (now absorbed into Barnes and Noble) and UK-based HMV outsourced their Internet sales to their main rival Amazon. However, in 2006, HMV admitted to having underestimated the growth of Internet sales, and decided to reverse the deal with Amazon.⁴ The growth of digital download and Internet...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Preface
• How to Use This Book
• 1 Why Accounting is Important in Organizations
• 2 Cost Behavior and Activity Costs
• 3 Measuring and Analyzing Product Costs
• 4 Managing Activities
• 5 Managing Organizations
• 6 Decentralized Organizations
• 7 Budgeting
• 8 Cost Allocations
• 9 Absorption Costing Systems
• 10 Variable Costing and Capacity Costs
• 11 Standard Costs and Variance Analysis
• 12 Short-Term Decisions and Constraints
• 13 Investment Decisions
• 14 Management Accounting in Agile Organizations
• Answers to Organizational Analyses
• Answers to Concept Review Questions
• Index