A. Managerial vs. Financial Accounting. Financial accounting
is concerned with reports to owners, creditors, and others outside
of the firm. Managerial accounting is concerned with reports prepared
for the internal use of management. Since these are internal reports,
there is no requirement that management accounting reports conform
to GAAP. Indeed, it is desirable to depart from GAAP in some instances.
B. Organizations. Some organizations you may be familiar with
include: sole proprietorships, partnerships, corporations, churches,
cities, military units, social clubs, foundations, and families. With
the various types of organizations listed, focus on two points.
1. An organization consists of people who are brought together
for some common purpose. It is a group of people working together
that is the essence of any organization, not the particular assets
used by these people.
2. People work together in an organization in order to attain some
goals. The objectives or goals may be clearly stated, but often
they are not. The financial objectives for most organizations, even
if not articulated, are fairly straightforward. In commercial enterprises,
the primary goal is ordinarily to maximize profits or to at least
earn a "satisfactory profit." In nonprofit organizations,
avoiding losses is more of a constraint than a goal. Nevertheless,
managers need virtually the same informa-tion to avoid losses that
they need to maximize profits. While we usually talk about profit-making
firms in the course, almost everything we say applies as well to
nonprofit organizations.
C. The Work of Management and the Planning and Control Cycle.
While it is clearly a simplification, the work of managers can be
usefully classified into three major categories: planning, directing
and motivating, and controlling. All of these activities involve making
decisions.
1. Planning consists of strategic planning and developing more
detailed short-term plans. Most of what we refer to below is with
reference to the more detailed short-term plans.
2. Directing and motivating involves mobilizing people to implement
the plan.
3. Control is concerned with ensuring that the plan is followed.
Emphasize that the accounting function plays a major role in the
control phase. Accountants maintain the databases and prepare the
reports that provide feedback to managers. The feedback can be used
to reward particularly successful em-ployees, but more importantly
the feedback can be used to identify potential problems and opportuni-ties
that were not anticipated in the plan. Based on feedback, it may
be desirable to modify the plan. The feedback can be also used to
identify parts of the organization that need help and those parts
that can provide advice and assistance to others.
4. Decision-making is an integral part of the other three management
activities.
These management activities are summarized below:
| Planning |
Controlling |
Decision Making |
|
- Monitoring a plan's implementation
|
Choosing among competing alternatives |
- Identifying ways to achieve the objectives
|
- Feedback is information
used to evaluate or correct implementation of a plan.
|
Example: deciding the selling price of
products |
|
- Based on feedback, a manager might:
– continue the implementation as originally planned
– take corrective action if needed, or
– modify the plan.
|
|
| |
- Example: performance reports, which are
accounting reports that provide feedback by comparing actual
results with plans
|
|
Most of you already use (consciously or unconsciously) the steps
of the planning and control cycle. Many of you have established long-term
educational goals (e.g., academic major, graduation, and future employment).
Short-term planning involves deciding which courses to take the next
term or perhaps over the next few terms. You implement your plan by
enrolling in classes and (hopefully) studying diligently. Performance
is measured by grades. At the end of each term, you evaluate your
performance to decide on the appropriate courses for the next term,
or perhaps even reevaluate your long-term objectives (e.g., major).
D. Need for Information. Accurate and timely accounting information
helps management plan effectively and to focus attention on deviations
from plans. In the planning stage, managers make decisions concerning
which alternatives should be selected. Financial information is often
a vital component of this decision-making. Once the alternatives have
been selected, detailed planning is possible. These detailed plans
are usually stated in the form of budgets. The control function of
management is aided by perform-ance reports that compare actual performance
to the budget. This feedback mechanism directs attention to activities
where managerial attention is needed.
E. Comparison of Financial and Managerial Accounting. Financial
and managerial accounting both rely on the same basic accounting database,
although managerial accountants often accumulate and use additional
data. However, important differences exist between the two disciplines:
1. Financial Accounting.
o Is concerned with reports made to those outside the organization.
o Summarizes the financial consequences of past activities.
o Emphasizes precision and verifiability.
o Summarizes data for the entire organization.
o Must follow GAAP since the reports are made to outsiders and
are audited.
o Is required for publicly-held companies and by lenders.
2. Managerial Accounting.
o Is concerned with information for the internal use of management.
o Emphasizes the future.
o Emphasizes relevance and flexibility of data.
o Places more emphasis on non-monetary data and timeliness and
less emphasis on precision.
o Emphasizes the segments of an organization rather than the organization
as a whole.
o Is not governed by GAAP.
o Is not required by external regulatory bodies or by lenders.
F. Expanding Role of Managerial Accounting. An understanding
of the history of managerial accounting is important for several reasons.
First, it helps to understand later in the course why some
prevailing management accounting practices are less than optimal (e.g.,
allocating overhead on the basis of direct labor). Second, you should be aware that management accounting is evolving in response
to changes in the business environment. There is not a single right
way to do things or a single formula that will always provide the
best answer. This often comes as a surprise if you expect
management accounting to be a subject like physics with immutable
laws.
G. Organizational Structure. Organizational structure refers
to the way in which responsibilities and authority are distributed
within an organization.
1. Centralization vs. decentralization. At one extreme is a totally
centralized organization in which the "boss" makes all
decisions. The opposite extreme is a totally decentralized organization
where deci-sions are made at the lowest possible level in the organization.
Centralization tends to be favored in situations where information
is centralized and control is important. Decentralization tends
to be fa-vored in situations where information is dispersed and
centralized control is less important.
2. Organization charts. Informal communication links are particularly
important.
3. Line and staff relationships. A line manager is directly engaged
in attaining the organization's objectives. People in staff positions
pro-vide support to the line positions. Especially important to
note here is that the accounting function is a staff position.
4. The Chief Financial Officer. The controller is the manager in
charge of the accounting department and he/she reports to the Chief
Financial Officer (CFO). The CFO is usually a member of the top-management
team and should be an active participant in the planning, control,
and decision-making processes at the very highest levels in the
organization.
H. The Changing Business Environment. Over the last two decades,
competition in many industries has become global and the pace of innovation
in products and services has accelerated. While this has generally
been good news for consumers, it has resulted in wrenching changes
in business, including the advent of the internet. Many companies
now realize that they must continuously improve in order to remain
competitive.
1. Improvement programs come and go and have almost as many names
as there are consulting firms engaged in marketing continuous improvement
programs. The boundaries between the various ap-proaches are blurry.
2. Historically, Just-In-Time (JIT) was developed first. While
JIT has its roots in the Rouge River automotive plant built by Henry
Ford in the 1920s, it was most fully developed by Toyota in Japan.
We use the term JIT narrowly to refer to minimum inventory production
systems. The use of the term JIT to refer to continuous improvement
programs in general has fallen out of use.
3. The major characteristics of three other general approaches to continuous improvement are also touched upon —Total Quality Management (TQM), Process Reengineering, and the Theory of Constraints (TOC). These approaches are not mutually exclusive. They can be used together in concert. Indeed, TQM and Process Reengineering may be most effective when they are combined with TOC.
4. A key concept in continual improvement is that improvement never
ends. After every improvement, a new opportunity for improvement
is sought out.
5. While not emphasized in the text, sometimes these various improvement
programs are not always successful. Advocates of the various programs
will invariably claim that failures are due to poor implementation
or to lack of support by top management. While these two factors
undoubtedly account for many of the failures, we suspect that the
improvement programs are not as universally appropriate as their
proponents claim. For example, a TQM program that is focused on
improving non-constraint workstations will have difficulty translating
operational improvements into additional profits.
I. Just-In-Time. The term JIT means that materials are received
just in time to be used in production, manufactured parts are completed
just in time to be assembled into products, and products are completed
just in time to be shipped to customers. As a result, inventories
are virtually eliminated in a JIT system.
1. JIT uses a "pull" approach to production control.
a. At the final assembly stage, a signal is sent to the preceding
workstation as to the exact amount of parts and materials needed
for the next few hours. Similar signals are sent back through
each preceding workstation. All workstations respond to the pull
exerted by the final assembly stage, which in turn responds to
customer demands.
b. In contrast, in a conventional production control system each
workstation completes its process-ing and "pushes" its
partially completed components forward to the next workstation.
This is done regardless of whether the next workstation is ready
to receive the components or whether anyone actually wants to
buy the finished product. The result is that work in process tends
to build up in front of the workstations that are inherently slower
than the others. The overriding concern in many conventionally
run facilities is to keep all the workstations busy all of the
time. Since the capacities at workstations differ, this necessarily
results in piles of work in process in-ventories in front of the
workstations with lower capacities.
c. The pull approach used in JIT reduces inventories since workstations
do not produce anything unless it has already been requested by
a downstream workstation and ultimately by customers.
2. The causes of excessive inventory.
a. Some inventories are usually maintained to guard against stock-outs.
These inventories can be cut if the time required to make a product
is reduced to the point that current customer demands can be met
with current production.
b. Poor coordination among workstations can lead to excessive
inventories.
c. Large batch sizes lead to excessive inventories.
d. The desire to "keep everyone busy" often leads to
inventory buildups. The market may not be able to absorb everything
the plant can make. Moreover, differing capacities at workstations
will inevitably lead to buildups of work in process inventories
in front of the workstations with lower capacities. (See the discussion
above.)
J. JIT Purchasing. JIT purchasing can be used by any organization
that has inventories-retail, wholesale, service, or manufacturing.
Key features of JIT purchasing are:
1. The company relies on a few ultra-reliable suppliers. All purchases
are concentrated in a few, highly dependable suppliers who can meet
stringent delivery schedules.
2. Suppliers make frequent deliveries in small lots just before
the goods are needed. Since a com-pany that has adopted JIT wants
goods only when they are really needed, suppliers must make fre-quent
deliveries in small lots. Dependability is essential since there
are little or no buffer inventories to protect the purchaser from
disruptions in supply.
3. Suppliers must deliver defect-free goods. Suppliers certify
that goods are defect-free. This elimi-nates the need for incoming
inspections and ensures that production will not be disrupted or
customers disappointed by defective goods.
K. Key Elements of JIT. In addition to JIT purchasing, successful
JIT production control systems usually have the following four key
characteristics:
1. Improved plant layout. The layout of the plant should be improved
to reduce distances work in process must travel. In conventional
plant layouts, all of the machines of a similar class are grouped
together in one location. For example, all of the milling machines
are usually in one location and all of the drilling machines in
another. Consequently, work in process must often move long distances
between operations. There are a number of problems with this. First,
moving components around the plant results in unnecessary costs.
Second, moving introduces delay. The components sit around waiting
to be moved and then it takes time to actually move them. Third,
it is difficult to keep track of individual items when the inventory
is scattered all over the factory floor.
SUGGESTION: An interesting analogy can drive home the importance
of a good plant layout. If McDonald's or Burger King were organized
like a conventional factory, all of their grills would be lo-cated
in one store, all of their deep fat fryers in another store, and
all of their beverage dispensers in another. A customer who wanted
a hamburger with fries and a beverage would have to drive from one
store to the other. In reality, each fast food outlet is a work
cell that combines all of the equipment required to make the final
product-the complete meal ordered by the customer.
2. Reduced setup time. Reduced setup time provides the capability
to respond quickly to customer or-ders and reduces the need for
safety stocks.
3. Low defect rates. A company should constantly strive to reduce
the defects. Large numbers of de-fects require that excess work
in process be put into production to ensure that there will be sufficient
defect-free output to meet customer orders. Therefore, defects should
be eliminated as much as pos-sible in a JIT program.
4. Flexible workforce. Workers should be multi-skilled in a JIT
environment, which is often organized into small "cells"
that contain all of the equipment required to carry out many steps
in the production process. Workers need to be able to use all of
the various pieces of equipment in the work cell. Also, workers
are typically expected to perform maintenance tasks on their own
equipment and to do their own quality inspections.
L. Benefits of JIT. Among the benefits resulting of using
JIT are the following:
1. Inventories are reduced. In addition to releasing funds tied
up in financing inventories (see below), smaller inventories reduce
the risk of potential losses due to obsolescence.
2. Space is freed up. Areas that were previously devoted to storing
inventories are made available for more productive uses.
3. Throughput time is reduced. This makes it easier to respond
to customer demands and can be a very significant competitive advantage.
4. Defect rates are reduced. Operating without large work in process
inventories makes it much easier to quickly identify and correct
production problems. This latter point cannot be overemphasized.
Ex-cessive work in process inventories make it very difficult to
detect and diagnose problems. When a facility operates without significant
inventories, it is running "naked." Problems become quickly
apparent and can be dealt with in a timely manner.
M. Total Quality Management (TQM). Total Quality Management
means different things to dif-ferent people. Nevertheless, most TQM
programs seem to share at least two common elements a focus on the
customer and systematic problem-solving using teams made up largely
of front-line workers.
1. TQM tools. TQM tools include Pareto analysis, fishbone charts,
storyboards, statistical process control, benchmarking, and the
plan-do-check-act cycle. To avoid getting into too many details,
we mention only two of these tools in the text-benchmarking and
the plan-do-check-act cycle.
2. Benchmarking involves studying the best practices of other organizations
to learn how to do things better and as a means of setting goals.
For example, a large bakery might study the distribution system
of a successful florist to improve its own distribution system.
3. The Plan-Do-Check-Act Cycle (PDCA) is a systematic, fact-based
approach to continuous improvement. It resembles the scientific
method in that hypotheses are formulated and then tested.
4. TQM empowers employees. TQM empowers those who are closest to
problems and it focuses attention on fact-based problem solving
rather than on finger pointing.
N. Process Reengineering. The boundaries between Process Reengineering
on the one hand and JIT and TQM on the other hand are fuzzy. A successful
JIT implementation almost always involves some Process Reengineering-although
it may not be called by that name. And some TQM advocates would no
doubt claim that Process Reengineering is just a special case of TQM.
To prevent confusion, we have at-tempted in the text to draw the sharpest
distinction we can between Process Reengineering and the other two
methods.
1. Process Reengineering involves completely redesigning a business
process from the ground up. In this respect, it can be differentiated
from TQM, which tends to emphasize small, incremental im-provements.
2. Process Reengineering begins by flowcharting whatever business
process is under examination. Quite often, the flowchart reveals
a Rube Goldberg-like process that has been thrown together over
time in responseto various problems.
3. Non-value-added activities in the flowchart are identified.
These are activities that take time or con-sume resources but that
do not add any value that the customer is willing to pay for.
4. The process is redesigned with a focus on simplification and
elimination of non-value-added activities.
5. Unfortunately, Process Reengineering often fails because of
behavioral problems.
a. By simplifying and eliminating non-value-added activities,
it should be possible to design a process that gets the job done
with fewer resources than before. This often means that fewer
workers will be required. If management lays off the surplus workers
or transfers them to less desirable jobs, morale suffers and further
process reengineering efforts will very likely be resisted by
employees. Management should develop plans for redeploying surplus
resources-including people-even before the Process Reengineering
is begun and these plans should be communicated to employees.
b. Reengineering is often guided by consultants or staff specialists
who recommend dramatic changes in how jobs are performed. Consequently,
reengineering is likely to be resisted by front-line workers.
Management must work hard to ensure that workers do not feel threatened
by reen-gineering and that their legitimate concerns are taken
into account.
O. Theory of Constraints (TOC). As with JIT, TQM, and Process
Reengineering, the text barely scratches the surface of the Theory
of Constraints in the text. For additional background, you might want
to read THE GOAL: Second Revised Edition, by Goldratt and Cox.
1. Every organization has at least one constraint. It is easiest
to think about this in the context of a factory whose production
cannot keep up with demand. In that case, the constraint is inside
the factory. Ordinarily, the constraint will be the workstation
with the lowest rate of output (and smallest capacity).
2. The output of the entire system (in this case, the factory)
is determinedby the rate of output (i.e., the capacity) of the constraint.
The non-constraints have excess capacity.
3. To increase the output of the system, it is necessary to increase
the average rate of output through the constraint. The constraint
should never be starved for work and improvement efforts should
be fo-cused on the constraint.
4. If improvement efforts are focused on a non-constraint, the
end result will be to increase the amount of excess capacity. This
will be beneficial only if the excess capacity can be transferred
in some way to the constraint or costs can be reduced by eliminating
excess capacity. However, as noted above, eliminating excess capacity
can have a negative impact on morale if it involves layoffs.
5. If improvement efforts are focused on the constraint (as they
usually should be), its rate of output may improve to the point
that it is no longer the constraint. The constraint would then shift
elsewhere. At that point, improvement efforts should shift to the
new constraint.
6. The goal in the Theory of Constraints is not to
eliminate all constraints; the system always has a constraint of
some sort if the goal is to make more money. Nevertheless, constraints
determine the performance of the entire system, so they should
be intelligently managed.
P. Professional Ethics. Some students tend to equate legal
and ethical behavior. That is, if an action is legal, they consider
it to be ethical. We believe it is important to dispel this notion.
1. In the text we use a utilitarian approach in arguing for the
importance of maintaining ethical stan-dards. We argue that ethical
standards are necessary for the smooth functioning of an advanced
market economy. Basically, if you could not trust anyone, you would
be unwilling to transact in the mar-ketplace without ironclad guarantees.
Such guarantees are expensive to write and enforce even when they
are feasible.
2. One advantage of approaching ethical issues in the managerial
accounting course is that the code of ethics promulgated by the
Institute of Management Accountants can be used as a framework.
This code of ethics is more specific than most codes of ethics,
which tend to be general platitudes with little substantive content.
By contrast, the IMA code of ethics is refreshingly specific and
strongly worded in some key areas. It is also general enough that
it can be used by managers as well as by management accountants.
Cable TV companies are granted exclusive franchises (i.e.,
monopolies) by local governments. Cable TV companies regularly mail
special offers to non-subscribers. One such recent mailing stated
in bold letters that the installation charge had been cut to 99¢
and that the monthly charge for a popular movie channel had been cut
to $6.95 per month for the first three months. In the fine print at
the bottom of the flier it was stated that in addition there would
be the usual monthly charge for basic cable TV service. Nowhere in
the flier did it mention what the usual monthly charge would be nor
did it mention how much the movie channel would cost after the first
three months. Is this marketing technique
is ethical? We believe this marketing technique is not ethical. The
flier did not fully disclose all relevant information that could reasonably
be expected to influence the reader's understanding of the nature
of the contract. (This is a restatement of the last standard from
the IMA code of ethics.) Some of you might respond "So what?"
Our response is that attempting to mislead customers in this way is
likely to be bad business and will almost certainly undermine the
functioning of our economy if such practices became widespread. It
is bad business because households that sign up for the service under
the impres-sion that it will only cost $6.95 per month are likely
to be disgruntled. They may cancel the service after the cable company
had incurred the expenses of making a hookup. Moreover, a cable TV
company that engages in such marketing ploys is likely to acquire
a richly deserved reputation as a sleazy operator and its exclusive
franchise may be revoked or transferred to some other operator. From
the standpoint of the whole economic system, if companies generally
try to mislead and fool customers, no one would have any trust in
claims made by sellers. Without trust, whole industries would collapse.
For example, people who buy insurance usually do so without reading
the fine print. What would happen to the insurance industry if unscrupulous
operators sold insurance policies with fine print that allowed them
to weasel their way out of paying claims?
