CHAPTER 1
THE ACCOUNTANT’S ROLE IN THE ORGANIZATION
LEARNING OBJECTIVES
1.
Describe how cost accounting supports management accounting and financial accounting
2. Understand how management accountants affect strategic decisions
3.
Distinguish between the planning and control decisions of managers
4. Distinguish among the problem-solving, scorekeeping, and attention-directing roles of management
accountants
5. Identify four themes managers need to consider for attaining success
6. Describe the set of business functions in the value chain
7.
Describe three ways management accountants support managers
8. Understand how management accounting fits into an organization’s structure
9. Understand what professional ethics mean to management accountants
CHAPTER OVERVIEW
Chapter 1 is an important foundation chapter. The theme of the text, Cost Accounting: A Managerial
Emphasis, 11/E, is the major role that accounting plays in management decision making. Accounting
provides information managers need when making decisions. Financial accounting provides information to
external managers while modern cost accounting yields insights into what managers and accountants do
within an organization. Management accountants provide financial and nonfinancial information to help
managers decide how best to deal with challenges and opportunities.
Management accounting is successful when it provides information that improves managers’ strategic,
planning, and control decisions. The use of accounting in the planning and control process is introduced
and highlighted in the text example.
A framework for understanding management accounting systems in providing managers information is
developed in the chapter. The goals, roles, activities, and guidelines of management accounting systems are
described through understanding what managers do.
An introduction and discussion of professional ethics including standards of ethical conduct for
management accountants is presented.
CHAPTER OUTLINE
Learning Objective 1:
Describe how cost accounting supports management accounting and financial accounting
I.
Accounting systems: processing information from economic events into useful information for
managers and others
A. Purpose of cost accounting: to provide information
1. Identifying and measuring financial and other information related to the acquisition or
consumption of an organization’s resources
2. Providing users of economic information (managers) useful reports and access to needed
information
B. Cost accounting: provides information relating to cost of acquiring and utilizing resources for both
management and financial accounting
1. Management accounting: focus on internal reporting for decision making of managers in
fulfilling organization’s goals
a. Emphasis on the organization—the future and influencing behavior of managers and
employees
b. Concern with development and implementation of strategies and policies
2. Financial accounting: focus on external reporting for decision making of those outside the
organization
a. Emphasis on financial statements
b. Strict adherence to GAAP
3. Cost management
a. Approaches and activities of managers in planning and control
b. Integral part of general management strategies and their implementation
Do multiple choice 1.
Assign Exercise 1-16.
Learning Objective 2:
Understand how management accountants affect strategic decisions
II. Strategic decisions and management accounting: key to a company’s success in creating value for
customers while differentiating itself from its competitors
2 Chapter 1
A. Providing information about the sources of competitive advantage
1. Strategy: how an organization uses what it has to get what it wants within the marketplace
2. Two broad strategies used
a. Providing a quality product or service at a lower price than competitors
b. Providing a unique product or service at a higher price than competitors
3. Role of management accountant: provide managers information in helping formulate strategy
B. Identifying and building resources and capabilities
1. Strategic analysis: matching knowledge of marketplace opportunities and threats with
company’s resources and capabilities
2. Balance sheet information about assets
a. Current resources
i.
Cash adequacy
ii. Inventory management
b. Long-term productive assets: important strategic decisions for the right investments
i.
Analyze trends and measure efficiencies
ii. Develop network of relationships with customers and suppliers
iii. Identify financial and nonfinancial costs and benefits associated with alternative
choices
c. Intangible assets
Do multiple choice 2.
Assign Exercise 1-16 (if not previously assigned).
Learning Objective 3:
Distinguish between the planning and control decisions of managers
III. Management accountant’s role in implementing strategy [Exhibits 1 and 2]
A. Implementing strategy: managers taking action by using planning and control systems to help the
collective decisions of an organization
1. Planning
a. Thinking process
The Accountant’s Role in the Organization
3
i.
Selecting organization goals
ii. Predicting results under various alternatives of achieving those goals
iii. Deciding how to attain desired goals
b. Communicating goals and how to attain them to entire organization
2. Control
a. Taking actions to implement the planning decisions
b. Deciding on performance evaluation
3. Feedback: linking planning and control to help future decision making
TEACHING TIP: The decision-making process is akin to the thinking process. Individuals as well as
groups of all types and sizes employ common elements in making decisions. The key for the use of
accounting in the process is usually in “determining relevant information” but may be used in each stage.
Chapter 11 expands upon this process. An interesting reading on group decision making is from Fortune,
October 5, 1992, “How Public Opinion Really Works,” pages 102–108, written by Daniel Yankelovich.
Feedback is an interesting aspect to explore as it highlights the ongoing nature of decision making. One can
give numerous examples to prove the adage that in solving one problem, several more problems are created.
Do multiple choice 3.
Assign Problem 1-25.
Learning Objective 4:
Distinguish among the problem-solving, scorekeeping, and attention-directing roles of management
accountants
B. Supporting managers by providing information to improve strategic, planning, and control
decisions
1. Three roles of management accountants for success
a. Problem solving: comparative analysis for decision making
b. Scorekeeping: accumulating data and reporting reliable results
c. Attention directing: helping managers properly focus their attention
2. Goals to assist managers in making better decisions [Survey of Company Practice]
a. Different decisions emphasize roles differently
i.
Strategy and planning emphasize problem solving
ii. Control emphasizes scorekeeping and attention directing
b. Interaction among types of decisions means activity/roles done simultaneously
4 Chapter 1
c. Information must be relevant and timely to be useful
Do multiple choice 4 and 5.
Assign Problems 1-26 and Exercise 1-17 or 1-18.
Learning Objective 5:
Identify four themes managers need to consider for attaining success
C. Enhancing the value of management accounting systems by guiding managers to focus on
challenges [Concepts in Action]
1. Customer focus [Exhibit 1-3]
Learning Objective 6:
Describe the set of business functions in the value chain
2. Value-chain and supply-chain analysis [Exhibits 1-4 and 1-5]
a. Companies add value through—
i.
Research and development
ii. Design of products, services, or processes
iii. Production
iv. Marketing
v. Distribution
vi. Customer service
b. Managers in all business functions are customers of management accounting information
3. Key success factors
a. Cost and efficiency
b. Quality
c. Time
d. Innovation
4. Continuous improvement and benchmarking
Do multiple choice 6 and 7.
Assign Exercises 1-19 or 1-20 and 1-22.
The Accountant’s Role in the Organization
5
Learning Objective 7:
Describe three ways management accountants support managers
D. Providing the most value through three key management accounting guidelines
1. Employ cost-benefit approach
2. Recognize behavioral and technical considerations
3. Identify different costs for different purposes
Do multiple choice 8.
Assign Problem 1-24.
Learning Objective 8:
Understand how management accounting fits into an organization’s structure
E. Working within the organization
1. Line and staff relationships [Exhibit 1-6]
2. The chief financial officer and the controller
Do multiple choice 9.
Assign Problem 1-27.
Learning Objective 9:
Understand what professional ethics mean to management accountants
IV. Professional ethics
A. Guidelines
1. IMA certification programs
2. IMA Standards of Ethical Conduct for Management Accountants [Exhibit 1-7]
a. Competence
b. Confidentiality
c. Integrity
d. Objectivity
B. Typical challenges: Guidance as to “Resolution of Ethical Conduct” [Exhibit 1-8]
Do multiple choice 10.
6 Chapter 1
Assign Exercise 1-23 and Problems 1-28 and 1-29.
CHAPTER QUIZ SOLUTIONS: 1. b
2. c 3. d 4. c 5. a 6. b 7. d 8. d 9. c 10. a
The Accountant’s Role in the Organization
7
CHAPTER QUIZ
1. Why do most companies adhere to GAAP for their basic internal financial statements?
a.
b.
c.
d.
2.
GAAP is required by law for publicly held companies.
To use GAAP and another system of reporting would be too costly for most companies.
Accountants are required by their code of ethics to use GAAP accounting.
Accrual accounting provides a uniform way to measure an organization’s financial performance.
The key to a company’s success is creating value for customers while
a.
b.
c.
d.
increasing the market value of its stock.
reducing costs to the least amount necessary.
differentiating itself from its competitors.
employing the best managers and cost accountants available.
3. A quantitative expression of a plan of action is called a(n)
a. strategic analysis report.
b. performance report.
c. financial statement.
d. budget.
4. The primary users of information provided by a management accountant are
a.
b.
c.
d.
downstream components to the total value chain.
upstream components to the total value chain.
managers within the organization.
customers of the organization.
5. A managerial emphasis for cost accounting means
a. accountants are focused on decision support.
b. accountants are the watchdogs that make sure managers adhere strictly to strategic plans.
c. managers use cost accounting for providing financial information but look elsewhere for
nonfinancial information.
d. managers must take courses in cost accounting.
6. The design of a management accounting system should be guided by the
a.
b.
c.
d.
requirements for financial reporting.
challenges facing managers.
standards developed for cost accounting by the Cost Accounting Standards Board.
preferences of the organization’s financial officer.
7. Four themes are common to many managers. The critical theme for all of these is
a.
b.
c.
d.
developing relationships with suppliers.
benchmarking and continuous improvement.
reducing costs and improving efficiencies.
improving customer focus and customer satisfaction.
8 Chapter 1
8. Which of the following is not a key guideline used by management accountants?
a.
b.
c.
d.
Different costs for different purposes
Cost-benefit approach
Behavioral consideration
Technical supremacy
9. ________ management exists to provide advice and assistance to those responsible for attaining the
objectives of the organization.
a.
b.
c.
d.
Line
Functional
Staff
Risk
10. Which of the following is not one of the ethical responsibilities of a management accountant?
a.
b.
c.
d.
Compliance
Confidentiality
Integrity
Objectivity
The Accountant’s Role in the Organization
9
WRITING/DISCUSSION EXERCISES
1. Describe how cost accounting supports management accounting and financial accounting
What are some basic characteristics of accounting that all accountants use whether in
financial or managerial accounting? The Financial Accounting Standards Board (FASB)
describes a hierarchy of accounting qualities in its second Statement of Financial Accounting Concepts.
The characteristics deemed important for financial accounting are the same as those described throughout
the text as those of managerial accounting. The Concepts describe the users of accounting information as
“decision makers” with the constraints of cost/benefit and materiality. The qualities of accounting
information are given as “understandability, decision usefulness, relevance, and reliability.” Relevance
is further described by the terms “predictive value, feedback value, and timeliness.” Reliability is
characterized by “verifiability, neutrality, and representational faithfulness.” The additional quality of
comparability, including consistency, belongs to the descriptors of decision usefulness. These qualities
apply to all accounting information, financial or managerial, in processing any economic transaction that
have occurred into information useful for making decisions.
The definition given for accounting by the 1941 Committee on Terminology of the American Institute of
Accountants is “. . . the art of recording, classifying, and summarizing in a significant manner and in
terms of money, transactions, and events which are in part, at least, of a financial character, and
interpreting the results thereof.” This definition was before the study of cost accounting as an academic
subject, but note the statement from the current text about accounting systems—“Processing any
economic transactions entails collecting, categorizing, summarizing, and analyzing.” Some basic
characteristics define accounting.
From FASB Statement of Financial Accounting Concepts No. 2 (Stamford, CT: FASB, 1980)
2. Understand how management accountants affect strategic decisions
Explain how routine reports to managers not only provide information but also influence
behavior regarding the planning and controlling of operations. Throughout the text, the
behavior or performance of people is noted in response to goals set, structure of bonus calculations,
choice of financial reporting (absorption versus variable costing and the build up of inventory),
designation as cost center versus profit or investment center, etc. The information provided will be acted
upon based upon the user’s understanding and individual goals. Goal congruence as a concept is
introduced at a later point but has pertinence here. People will work to achieve their own goals within
the company’s structure. They will look to the measurement being used to further their own goals.
Managers must be careful in designing measures of performance to insure the measures work to attain the
company’s strategic goals.
3. Distinguish between the planning and control decisions of managers
Describe the steps in a decision-making or thinking process. Exhibit 1-1 can be used as an
example. Students may be given a situation or asked to use a recent decision they have made. Any goalsetting situation can be an example. Perhaps the student selects the goal of making good grades for the
semester to gain a “good student discount” for car insurance purposes. Knowing what is expected for the
discount and for earning specific grades in each class assists in predicting results under various
alternative ways of achieving the goal. Keeping a log of how time was spent would measure action
taken. Comparing the log of how the time was spent to the planned usage of time comprises control.
Evaluating the results of time spent and grades earned are an example of feedback.
10 Chapter 1
4. Distinguish among the problem-solving, scorekeeping, and attention-directing roles of
management accountants
Describe the steps in making a decision in terms of the roles of management
accountants. Using the example given in Learning Objective 3 above, the keeping of a study log
would be an example of scorekeeping. Comparing the log of how the time was actually spent to the
planned usage of time spent would be an example of attention directing. Evaluating or analyzing the
results of time spent and grades earned is an example of problem solving because of the characteristic of
relevance in providing feedback and predictive value as to how time should be spent and for what it
should be spent doing.
Students could provide other examples of the use of problem solving, scorekeeping, and attention
directing, especially in the area of sports.
5. Identify four themes managers need to consider for attaining success
List some activities a management accountant could do to keep up to date with or ahead
of changes in the field of management. Active membership in professional organizations is one
way to keep current. One of the points made in the IMA Standards of Ethical Conduct for Management
Accountants is to “maintain an appropriate level of professional competence by ongoing development of
their knowledge and skills.” (Competence section) Keeping up on the news by reading current
periodicals, listening to programs on current business practices, or attending seminars sponsored by
professional organizations are all helpful.
6. Describe the set of business functions in the value chain
Describe how managers in all areas of the value chain are customers of accounting
information. Include a definition of “value” as it applies to the “value” chain along with
the meaning of “success” for management accounting. The section in the text describing the
value chain notes that usefulness added to the products or services of a company result in value to the
customer. Throughout the section, “Enhancing the Value of Management Accounting Systems,” runs
the theme of integration of functions and information for improved decision making by managers, a
definition of success for management accounting. This is a focus of modern cost accounting–decision
support.
7. Describe three ways management accountants support managers
Explain the cost-benefit approach guideline (a) when considered within the confines of
an individual company and (b) when considered as interplay between society and the
individual company. The explanation given in the section of the text “Cost-Benefit Approach” is
useful for using within the company situation. The interplay between society and company can have a
different meaning of cost-benefit: the company must bear the cost of additional processing or information
for the benefit of society to have a cleaner environment, for example, or to make better decisions about
investing or lending, a typical financial accounting function.
Explain why “bean counters” would have “behavioral considerations” as a key guideline
in performing their management accounting functions. As pointed out in the “Behavioral
Consideration” section in the text, “management control is primarily a human activity that should focus
on how to help individuals do their jobs better.” The role that management accounting systems play in
The Accountant’s Role in the Organization
11
helping managers make better decisions demands that accountants understand the importance of people
in each step of the decision-making process and operations of the company.
8. Understand how management accounting fits into an organization’s structure
Describe the knowledge, skills, and abilities required of a management accountant
following the different costs for different purposes theme. The section in the text, “Surveys of
Company Practices—A Day in the Life,” can be helpful for this exercise. The IMA has also published
the results of a survey on the KSAs (knowledge, skills, abilities) needed for management accounting.
Check the Web site of IMA (http://www.imanet.org) for additional information.
The American Institute of Certified Public Accountants (AICPA) in its “Vision Project” has identified
characteristics of leaders or persons who stand out among their peers. The term “pathfinders” has been
applied to those who display the traits necessary. The characteristics can be obtained through the AICPA
Web site (http://www.cpavision.org ).
9. Understand what professional ethics mean to management accountants
From the perspective of (a) a stockholder, (b) a company manager, (c) an employee other
than a manager, and (d) a customer, explain why a code of ethics is important for the
accountants within a company. Consider the functions performed, the measures
employed, and the concept of professional status. The section in the text, “Surveys of
Company Practice—Common Ethical Dilemmas,” can be helpful in addressing this exercise as well as
the section on professional ethics. Accountants consider themselves to be professionals. A code of
ethics is usually regarded as a necessary aspect of a professional class. In the explanation of management
accounting functions, the function of scorekeeping receives particular attention as one in which
accountants are responsible for the reliability of the reported information and act as watchdogs for top
management.
12 Chapter 1
SUGGESTED READINGS
Bhide, A. & Stevenson, H., “Why Be Honest if Honesty Doesn’t Pay?” Harvard Business Review
(September-October 1990) p.121 [9p].
Brooks, L., Business and Professional Ethics for Accountants (2000) South-Western College Publishing,
Cincinnati OH.
Cisco, S. & Strong, K., “The Value Added Information Chain,” Information Management Journal
(January 1999) p.4 [9p].
Frost, P., “Why Compassion Counts!” Journal of Management Inquiry (June 1999) p.127 [7p].
Guilding, C., Cravens, K. & Tayles, M., “An International Comparison of Strategic Management
Accounting Practices,” Management Accounting Research (March 2000) p.113 [23p].
Halal, W., “Corporate Community: A Theory of the Firm Uniting Profitability and Responsibility,”
Strategy and Leadership (January 2000) p. 10 [7p].
Howard, R., “Values Make the Company: An Interview with Robert Haas,” Harvard Business Review
(September-October 1990) p.134 [11p].
Litman, J., “Genuine Assets: Building Blocks of Strategy and Sustainable Competitive Advantage,”
Strategic Finance (November 2000) p.37 [6p].
Martinson, O. and Ziegenfuss, D., “Looking at What Influences Ethical Perception and Judgment,”
Management Accounting Quarterly (Fall 2000) p.41 [7p].
Michlitsch, J., “High-Performing, Loyal Employees: The Real Way to Implement Strategy,” Strategy and
Leadership (January 2000) p.28 [6p].
Moriarity, S., “Trends in Ethical Sanctions within the Accounting Profession,” Accounting Horizons
(December 2000) p.427 [13p].
Moye, J. and Upton, D., “Data Warehousing 101,” Strategic Finance (February 2001) p.34 [5p].
Thorne, L., “The Development of Two Measures to Assess Accountants’ Prescriptive and Deliberate
Moral Reasoning,” Behavioral Research in Accounting (Vol. 12—2000) p.139 [31p].
Weber, J. & Wasieleski, D., “Investigating Influences on Managers’ Moral Reasoning,” Business and
Society (March 2001) p.79 [33p].
West III, G.P. & DeCastro, J., “The Achilles Heel of Firm Strategy: Resource Weaknesses and
Distinctive Inadequacies,” Journal of Management Studies (May 2001).
The Accountant’s Role in the Organization
13