lOM oA RcPSD 266 833 4

lOM oA RcPSD |266 833 4 1 / 2

lOM oA RcPSD |266 833 4

C HAPTER 1

How management accounting information supports decision making Management accounting: The process of supplying the managers and employees in an organization with relevant information, both financial and nonfinancial, for making decisions, allocating resources, and monitoring, evaluating, and rewarding performance.

Management accounting information has the following attributes:

oIt is a retrospective and prospective and uses both financial and nonfinancial measures. It also provides feedback about past operations.oA source of competitive advantage for a company.oNo prescribed form or standard setter, the management decides what is best.Financial management accounting: Cost of producing a product, the cost of delivering service.(Nonfinancial) management accounting information: Reports on the critical drivers of long- term financial performance: customers, processes, innovation, employees, systems and culture.Example: Measures related to customer satisfaction and loyalty, process quality and timeliness, and employee motivation.

Financial accounting has the following attributes:

oRetrospective, results of past decisions; oOriented to external stakeholders (investors/creditors/regulators); oConsistent with rules formulated by a format who specify the content of the reports, the rules for how it gets developed and how the content will be presented (FASB/IASF/SEC).Early 19 th

century: Accounting on costs of an individual product.

Middle 19 th

century: Implemented large, complex costing systems that allowed them to

compute the costs of carrying different types of freight.Later 19 th

century: Andrew Carnegie developed detailed systems to record the cost of

materials and labour used.Early 20 th

century: DuPont and General Motors expanded the focus of management

accounting beyond cost accounting to management planning and control.The reason that performance management started is because of organizations who sought to improve efficiency and therefore profitability by internalizing what were previously open market transactions and eliminating the costs of transacting with external agents.In the 1930’s the development slowed down because the senior management interest focused on developing and preparing external financial statements. In the 1970’s the interest revived in developing new management accounting tools (quality/service/customer and employee performance). Also major advances were made in measuring the cost of products and services of indirect and support costs.Strategy: About an organization making choices about what it will do and about what it will not.oThe best fit, what markets, how to compete.Once a strategy has been selected, the organization needs management accounting information to help implement the strategy, allocate resources for the strategy, communicate the strategy, and link employees and operational processes to achieve the strategy.

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