Management Accounting: Information for Creating and Managing Value (PDF)
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Uploaded by Yugi
Curtin University
2021
Langfield-Smith, Kim, et al.
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This document is a textbook on management accounting and provides information for decision-making, with a focus on relevant costs and benefits in various managerial scenarios. It details decision-making processes, roles of management accountants, and considerations for tactical and strategic decisions within organizations. The focus is on how management accountants can provide information that will support better management decisions.
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Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 20...
Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. 872 PART 4 Information for creating value The management accountant’s role in decision making Management accountants play an important role in providing relevant information to managers to help them make decisions. Indeed, many management accountants are active members of cross-functional management teams. These managers and teams face a broad array of decisions, including production, marketing and financial decisions. Production managers make decisions about alternative production processes and schedules; marketing managers make pricing decisions; and specialists in finance are usually involved in decisions about the major acquisition of equipment. In a manufacturing company, production teams make decisions about day-to-day operations. In a service business, such as a consulting company, managers make decisions about which clients to service and which staff to assign to particular jobs. Thus, the management accountant must have a good understanding of the types of decisions facing managers throughout the organisation. The Real Life below discusses the role of the management accountant in today’s fast-paced business environment and the need for accountants to provide valuable insights to support managerial decision making. A model of the decision-making process The processes that managers undertake when making decisions are often described as a series of logical, sequential steps. To illustrate this approach we will use a decision that needs to be made by managers at Wallaby Airlines. LO 19.1 Wallaby Airlines is based in Sydney and flies routes from Australia to the US, Europe and several Asian cities. Wallaby Airlines is facing increasing competition in its overseas operations. In particular, it is having difficulty maintaining its cost competitiveness. Senior management is considering closing its hub operation in London. Airlines establish hubs at airports where many of their routes intersect. Hub operations include facilities for in-flight food preparation, aircraft maintenance and storage, and administrative offices. The seven steps involved in making the decision about whether to close the hub operation in London are as follows: 1. Clarify the problem. Sometimes the decision to be made, or the problem to be solved, is clear. For example, if a company is asked to supply a special order of its most popular product at a price below the usual market price, the decision is whether to accept or reject the order. In the case of Wallaby Airlines, the problem is whether to close the London hub or keep it open. But the decision is seldom so clear and unambiguous. Perhaps a company has unused capacity in its Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. manufacturing plant because demand for its product is declining. What exactly is causing this decreased demand? Increasing competition? Declining quality control? Has a competitor just introduced a similar product into the market? Before a decision can be made, the problem needs to be clarified and defined in more specific terms. Considerable management skill is required to define a problem in terms that can be addressed effectively. 2. Specify the decision criterion. Once a problem has been clarified, the manager should specify the criterion upon which the decision will be made. The criterion may be to achieve a certain objective, such as to maximise profit, increase market share, minimise cost, minimise waste, or improve outcomes for the community. Where there are two or more objectives, they may be in conflict. This may be the case for a problem where the production cost is to be minimised, but product quality must be maintained. In such cases, once the criterion—for example, cost minimisation—has been specified, the other criterion—for example, product quality—becomes the constraint. This might be expressed as the defect rate being no higher than one defective part in 1 000 manufactured units. In the case of Wallaby Airlines, the criterion to be used to make the decision about the London hub will be whether or not it increases profit. 3. Identify alternative courses of action. A decision involves selecting from two or more possible courses of action. If a machine breaks down, what are the possible courses of action? The machine can be repaired, a replacement machine could be purchased, or a replacement could be leased. In the case of Wallaby Airlines, the two possible alternatives are to close the London hub or to keep it open. 4. Collect information about relevant costs and benefits. Although management accountants are often involved in all seven decision-making steps, they are chiefly responsible for steps 4 and 5. Identifying Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. 898 PART 4 Information for creating value Incentives for decision makers In this chapter we have studied how managers make decisions by focusing on the relevant costs and benefits. However, in an earlier part of this chapter it was also stated that managers do not always follow rational processes or systematic methods when making decisions. Various incentives may be created within LO 19.10 organisations—intentionally or unintentionally—that may influence the ways in which managers make decisions. For example, there is an important link between decision making and managerial performance evaluation. Managers typically make decisions that maximise their reported performance and rewards. This is human nature. If we want managers to make decisions that are consistent with the organisation’s goals and strategies, then the performance measurement system and reward structure should be consistent with that perspective. This issue is investigated further in Chapter 13. The correct treatment of sunk costs in decision making illustrates this issue. Earlier in this chapter it was stated that sunk costs should be ignored, as they are irrelevant. For example, let’s assume that a manager is considering whether to buy in a product or continue producing it (using a machine that was purchased quite recently). The original cost of this machine is irrelevant when making this decision. Suppose that the manager correctly ignores that original cost of the machine and, as part of the buy alternative, this machine is disposed of. The unfortunate manager may be criticised by his superior for taking a loss on this machine and for disposing of a machine for which he had to fight so hard to get permission to purchase. What is our manager likely to do the next time he faces a similar decision? Our manager may favour the make alternative to retain the machine in order to justify the prior decision to purchase it (and avoid criticism). This may not be in the best interest of the firm! Costing systems may be designed explicitly to encourage biases in certain decisions. It has even been argued that less accurate costing systems can be designed to direct employees’ attention towards certain issues in order to help them learn and to motivate them (Merchant & Shields, 1993). An example of such a system occurred at the portable instruments division of Tektronix in the US (Cooper & Turney, 1988). The company implemented a just-in-time/total quality management system. Material support costs, such as for purchasing, receiving, inspection, storage and handling, constituted about 50 per cent of overheads. To cost products, the company chose a single overhead cost driver: the number of parts. This system was designed to encourage engineers to reduce the number of parts in newly developed products. Thus, the more parts involved in a new product, the more costly that product appeared. While employees knew that not all overhead costs were driven by the number of parts, the system focused attention on factors that Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. were considered by management to be critical to the company’s cost strategy. The new system encouraged designers to use fewer parts in new products, which, in turn, resulted in lower costs for receiving, storage, handling and manufacturing. Once the system had achieved its purpose, more cost drivers were identified and a more accurate product costing system was developed. The message here is that if we want managers and employees to make certain decisions, we must design systems with incentives that encourage that behaviour. These issues are considered further in other chapters of the book, including Chapter 13. Pitfalls to avoid when using accounting data for decisions Identification of the relevant costs and benefits is an important step in making any decision. Nonetheless, both managers and management accountants often overlook relevant costs or incorrectly include irrelevant data. In this section, we review four common mistakes that should be avoided in decision making: LO 19.11 1. Sunk costs. Sunk costs cannot be changed by any current or future course of action, so they are irrelevant in decision making. Nevertheless, a common behavioural tendency is to give importance to past costs. People may seek to justify their past decisions by refusing to delete a product or department, even when this is contrary to the formal analysis. The message: ignore sunk costs. 2. Unitised costs. For product costing purposes, fixed costs are often divided by a measure of production volume and assigned to individual units of product. Similarly, under activity-based costing, facility level costs, product level costs and batch level costs may also be expressed at a rate per unit of product. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21. Copyright © 2021. McGraw-Hill Education (Australia) Pty Limited. All rights reserved. Langfield-Smith, Kim, et al. Management Accounting : Information for Creating and Managing Value, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/curtin/detail.action?docID=6736469. Created from curtin on 2024-08-30 05:15:21.
