Introduction to Cost and Management Accounting in a Global Business Environment

CHAPTER

LEARNING OBJECTIVES

After completing this chapter, you should be able to answer the following questions:

How do financial and management accounting relate to each other?

How does cost accounting relate to financial and management accounting?

What is the role of a code of ethics in guiding the behaviors of an organization’s global workforce?

What factors have influenced the globalization of businesses and why have these factors been significant?

What are the primary factors and constraints that influence anorganization’s strategy and why are these factors important?

How does an organization’s competitive environment impact itsstrategy and how might an organization respond to competition?

How does the accounting function impact an organization’s abilityto successfully achieve its strategic goals and objectives?

Why is a company segment’s mission affected by product life cycle?

What is the value chain and why is it important in managing a business?

ABN AMROBank

INTRODUCING

he Netherlands-based bank, ABN AMRO, wasformed in 1990 when Algemene Bank Nederlandmerged with Amsterdam-Rotterdam Bank. Following themerger, ABN AMRO has established itself as a global bankwith operations in 76 countries and territories includingthe United States, where the bank has a 16% share of theMidwest market. ABN AMRO’s global expansion was driveninitially by mergers but more recently by innovative web-based delivery of products and services.By traditional measures (such as its $505 billion in as-sets and its capital position), ABN AMRO is the largestbank in Holland, the fourth largest in Europe, and theeighth largest in the world. ABN AMRO’s core lendingbusiness is solid. Over half of ABN AMRO’s revenuescome from Dutch clients—a very stable source of businessthat includes such companies as Royal Dutch Shell, PhilipsElectronics, and Unilever.ABN AMRO formulated an identity statement in 1992to reflect its corporate aspirations: “ABN AMRO Bank is along-established, solid, multi-faceted bank of internationalreputation and standing. We will strive to fulfill the bank’sambition in being a frontrunner in value-added banking,both on a local and worldwide level....” The corporatevalues statement was formalized in 1997, although thevalues have been important priorities since the bank wasestablished in the 1800s. The four values forming the basisof the bank’s activities are integrity, teamwork, respect,and professionalism. Bank managers believe that the valuesneed to be formalized even though they are and shouldbe self-evident. The formalization provides external partiescriteria by which the bank can be assessed. ABN AMROperceives its corporate identity and values as the underlyingtenets of the organization.

ABN AMRO is successfully pursuing a corporate identity as a “bank of internationalreputation and standing.” ABN AMRO was ranked as the fifth largest commercialand savings bank and the seventy-third largest corporation in the 1999 FortuneGlobal 500. The corporation (with its foreign subsidiaries and affiliates) is com-prised of over 3,500 branches and offices in 76 countries and territories across fivecontinents. Although international trade was once confined to extremely large cor-porations such as ABN AMRO, the explosion of World Wide Web usage has en-abled any business with the right infrastructure capabilities and the necessary fundsfor Web site development to market its products and services around the world.Organizations operating globally face three primary challenges. First, managersmust understand factors influencing international business markets so they can iden-tify locations in which the company has the strengths and desire to compete. Sec-ond, managers must devise a long-term plan to achieve organizational goals. Third,the company must devise information systems that keep operations consistent withits plans and goals.This chapter introduces cost accounting and describes the global environment of business, international market structures, trade agreements, e-commerce, and legal andethical considerations. It addresses the importance of strategic planning and linksstrategy creation and implementation to the accounting information system. Thechapter discussion applies equally well to large and small profit-seeking businesses,and most discussion is appropriate for not-for-profit and governmental entities.

SOURCE

www.abnamro.com/profile

; Chris Costanzo, “ABN AMRO Says Web Will Anchor Its Expansion,”

American Banker

(December 9, 1999), p. 16.

http://

www.abnamro.com

INTRODUCTION TO COST ACCOUNTING

To manage a diverse, international banking organization, ABN AMRO’s leadersneed monetary and nonmonetary information that helps them to analyze and solve

problems by reducing uncertainty. Accounting, often referred to as the languageof business, provides much of that necessary information. Accounting language hastwo primary “variations”: financial accounting and management accounting. Costaccounting is a bridge between financial and management accounting. Accounting information addresses three different functions: (1) providing infor-mation to external parties (stockholders, creditors, and various regulatory bodies)for investment and credit decisions; (2) estimating the cost of products producedand services provided by the organization; and (3) providing information useful tointernal managers who are responsible for planning, controlling, decision making,and evaluating performance. Financial accounting is designed to meet external in-formation needs and to comply with generally accepted accounting principles. Man-agement accounting attempts to satisfy internal information needs and to provideproduct costing information for external financial statements. The primary differ-ences between these two accounting disciplines are given in Exhibit 1–1.Financial accounting must comply with the generally accepted accounting prin-ciples (currently established by the Financial Accounting Standards Board [FASB],a private-sector body). The information used in financial accounting is typically historical, quantifiable, monetary, and verifiable. These characteristics are essentialto the uniformity and consistency needed for external financial statements. Finan-cial accounting information is usually quite aggregated and related to the organi-zation as a whole. In some cases, a regulatory agency such as the Securities andExchange Commission (SEC) or an industry commission (such as banking or in-surance) may mandate financial accounting practices. In other cases, financial ac-counting information is required for obtaining loans, preparing tax returns, and un-derstanding how well or poorly the business is performing.By comparison, management accounting provides information for internal users.Because managers are often concerned with individual parts or segments of thebusiness rather than the whole organization, management accounting informationcommonly addresses such individualized concerns rather than the “big picture” of financial accounting. Management accounting is not required to adhere to gener-ally accepted accounting principles in providing information for managers’ inter-nal purposes. It is, however, expected to be flexible in serving management’s needs

Part 1

Overview

Financial AccountingManagement Accounting

Primary usersExternalInternalPrimary organizationalfocusWhole (aggregated)Parts (segmented)InformationcharacteristicsMust beMay be

•

Historical

•

Current orforecasted

•

Quantitative

•

Quantitative orqualitative

•

Monetary

•

Monetary ornonmonetary

•

Verifiable

•

Timely and, at a minimum,reasonably estimatedOverriding criteriaGenerally acceptedSituational relevanceaccounting principles(usefulness)ConsistencyBenefits in excess of costsVerifiabilityFlexibilityRecordkeepingFormalCombination of formal andinformal

EXHIBIT 1–1

Financial and Management Accounting Differences