Creating accounting information systems that can satisfy the demands of both external users (shareholders, creditors, IRS, SEC) and internal users (plant managers, marketing managers, human resource personnel, CFO, CEO) is very challenging. Exhibit 16–2 outlines the demands placed on accounting information systems. Users want accounting information for different, sometimes conflicting, reasons. Information necessary for planning and decision making is likely to be future oriented, and information for monitoring is likely to be histori- cal. Shareholders, creditors, and the IRS do not expect information that is as timely, or at the same level of detail, as the information needed by a plant manager. Yet, the same accounting information system usually serves multiple sets of users. Employees use it across a multitude
Performance evaluation: Past Budget plans:
Future
Actual results:
Current Top Management
Assign decision making Support decision making Evaluate decision making
Exhibit 16–1
MANAGEMENT
ACCOUNTING SYSTEM FRAMEWORK
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of organizational levels and job responsibilities, and it spreads over numerous geographic areas with different cultures, languages, currencies, and economic environments. Companies such as Coca-Cola Company are much better than they were 15 years ago at designing cost- efficient accounting information systems to serve multiple users. One of the primary rea- sons for better accounting information systems is the advance in these systems’ technological capabilities.
Due to rapidly evolving changes in technology and information needs, business managers study management accounting throughout their professional careers. In fact, many companies require employees to complete training in a variety of accounting techniques. Professional cer- tification is available to individuals who plan to make their career in management accounting.
The Institute of Certified Management Accountants sponsors two certification exams, the Certified Management Accountant (CMA) exam and the Certified Financial Manager (CFM) exam. To become either a CMA or a CFM, an individual must meet educational and experi- ence requirements as well as pass a rigorous examination.
Exhibit 16–2
DEMAND FOR ACCOUNTING INFORMATION
THE ACCOUNTING SYSTEM
Financial Accounting Management Accounting
Purpose Purpose
To provide investors, creditors, and other To provide managers with information useful external parties with useful information for planning, evaluating and rewarding about the financial position, financial performance, and sharing with other outside performance, and cash flow prospects of an parties. To apportion decision-making
enterprise. authority over firm resources.
Types of Reports Types of Reports
Primarily financial statements (statement Many different types of reports, depending of financial position or balance sheet, income on the nature of the business and the specific statement, statement of cash flows) and information needs of management.
related notes and supplemental disclosures Examples include budgets, financial that provide investors, creditors, and other projections, benchmark studies, activity- users information to support external based cost reports, and cost-of-quality decision-making processes. assessment.
Standards for Presentation Standards for Presentation
Generally accepted accounting principles, Rules are set within each organization to including those formally established in the produce information most relevant to the authoritative accounting literature and needs of management. Management needs standard industry practice. include reporting to both external
constituents and internal users.
Reporting Entity Reporting Entity
Usually the company viewed as a whole. A component of the company’s value chain, such as a business segment, supplier, customer, product line, department, or product.
Time Periods Covered Time Periods Covered
Usually a year, quarter, or month. Most Any period—year, quarter, month, week, reports focus on completed periods. day, even a work shift. Some reports are Emphasis is placed on the current (latest) historical in nature; others focus on period, with prior periods often shown for estimates of results expected in future comparison. periods.
Users of Information Outsiders as well as managers. For financial statements, these outsiders include stockholders, creditors, prospective investors, regulatory authorities, and the general public.
Users of Information Management (different reports to different managers), customers, auditors, suppliers, and others involved in an organization’s value chain.
Confirming Pages
Accounting for Manufacturing Operations 725
As you progress through the remaining chapters, keep in mind the three principles of management accounting systems: assigning decision-making authority, making and support- ing decisions, and evaluating and rewarding performance. The procedures and techniques dis- cussed in the remaining chapters are aimed at one or more of these principles. In addition, you will encounter many familiar terms and concepts because of the overlap of management and financial accounting. After all, a single accounting system serves both sets of users. It is com- mon for managers to use information about revenue, expenses, and assets in their daily deci- sion making. Managers receive customized accounting information (for example, by product line or customer) as needed to make decisions.
Accounting for Manufacturing Operations
A merchandising company buys its inventory in a ready-to-sell condition. Therefore, its cost of goods is mostly composed of the purchase price of the products it sells. A manufacturing company, however, produces the goods that it sells. As a consequence, its cost of goods sold consists of various manufacturing costs, including the cost of materials, wages earned by production workers, and a variety of other costs relating to the operation of a production facility. 3
Manufacturing operations are an excellent example of how managerial and financial accounting overlap because manufacturing costs are of vital importance to both financial and managerial accountants. Financial accountants use manufacturing costs to determine the cost of goods sold and inventory values reported in financial statements. Management accountants also rely on prompt and reliable information about manufacturing costs to help answer such questions as:
2 “Dell’s Do-Over,” BusinessWeek, Iss. 4152, October 26, 2009, p. 36.
3 Manufacturing costs are the cost of producing inventory, which is an asset. Therefore, these expenditures are termed costs rather than expenses. Unexpired costs are assets; expired costs are expenses.
As the tech industry shifted from the PC to the Internet, the company Michael Dell started in his college dorm to efficiently build and sell personal computers fell on hard times. For example, in 2005 Dell was valued at $100 billion, but by 2009 its value fell to $30 billion.2 It seems clear that Dell had stayed with its old playbook of cranking out PCs as efficiently
as possible for too long.
Michael Dell returned to the chief execu- tive roll in 2007 with the objective of remak- ing the company. However, lack of structure at the massive company including a lack of management accounting processes, tools, and culture didn’t support a new way of doing business. To get executives to seize new business opportunities and take more risks, Dell needed to change the com- pany’s management structure and culture.
He arranged for leaders of each division to be responsible for meeting financial targets and have broad authority to figure out how to reach them. Dell thought that by focusing outward and giving top managers more responsibility and more flexibility, the company would be more responsive to clients. Results are supporting his claims. By late 2009, Dell was beginning to show improvement in its financial results.
C A S E I N P O I N T
a
t i a m a d n r
© Keith Eng 2007/DAL
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• What sales price must we charge for our products to earn a reasonable profit?
• Is it possible to lower the cost of producing a particular product line in order to be more price competitive?
• Is it less expensive to buy certain parts used in our products or to manufacture these parts ourselves?
• Should we automate our production process with a robotic assembly line?