• • The Knowledge Transfer Alliance is an initiative to help Maine communities and businesses overcome and prevent hardships caused by the economic recession and natural disasters. KTA is a full collaboration between the University of Maine’s School of Economics, College of Business, Public Policy and Health, College of Engineering, Cooperative Extension, The University of Maine System, community and economic development districts, Maine’s business assistance agencies, municipal and community leaders, and an array of highly qualified private sector advisory firms and individuals. Our goal is to connect Maine businesses and communities to the tools they need to recover from economic and natural disasters, develop solutions to prevent future hardships, and to create sustainable frameworks so these enterprises may thrive in the future. We hope that businesses and communities that benefits from our services will join our network and help give back to other struggling Maine enterprises. The ultimate goal of KTA is to evolve from a relief and recovery program to a community and business development partner that will help create a more sustainable Maine economy for the future.

Financial Accounting Communicates economic information to individuals and organizations that are external to the direct operations of the company Stresses the form in which it is communicated Is based on historical information Provides information to managers and employees within the organization Allows great discretion to design systems that provide information for helping employees and managers make decisions Forward looking

operational (operating) and control (performance evaluation) management decision making In short. such as the assembly department of an automobile plant or an electronics company  The costs of producing a product  The cost of delivering a service  The cost of performing an activity or business process – such as creating a customer invoice  The costs of serving a customer • • .MANAGEMENT ACCOUNTING • Be aware that this definition identifies:  Management accounting as providing both financial information and nonfinancial information  The role of management information as supporting strategic (planning). management accounting information is pervasive and purposeful  It is intended to meet specific decision-making needs at all levels in the organization Examples of management accounting information include:  The reported expense of an operating department.

MANAGEMENT ACCOUNTING • Management accounting also produces measures of the economic performance of decentralized operating units. improvement. such as:  Business units  Divisions  Departments These measures help senior managers assess the performance of the company’s decentralized units Management accounting information is a key source of information for decision making. and control in organizations Effective management accounting systems can create considerable value to today’s organizations by providing timely and accurate information about the activities required for their success • • • .

given the product features and competitors’ prices 2. Quality – the degree of conformance between what the customer is promised and what the customer receives  For example a defect free automobile that performs as promised by the salesperson • • 1-6 .BUSINESS LEVEL STRATEGY AND THE VALUE PROPOSITION (1 OF 2) • A key element of any organization’s strategy is identifying its target customers and delivering what those target customers want What the organization tries to deliver to customers is called its value proposition Value propositions have four elements: 1. Cost – the price paid by the customer.

for an automobile service might include: how the customer is treated as the automobile is purchased and the degree and form of after sales service Dell Computer’s value proposition is building to customer requirements. for example a meal in a restaurant that provides the diner with the level of satisfaction expected for the price paid 4. quickly. and at a low price • 1-7 .BUSINESS LEVEL STRATEGY AND THE VALUE PROPOSITION (2 OF 2) • Value propositions have four elements (cont.): 3. Functionality and features – the performance of the product. Service – all the other elements of the product relevant to the customer  For example.

DELIVERING THE VALUE PROPOSITION • Organizations use processes that they design and manage to deliver the value proposition • Dell delivers its value proposition by providing customers easy and accessible access to ordering and insisting that suppliers locate close to its assembly facilities • These steps enable Dell to minimize its inventories and avoid the costs of holding inventory and of obsolete inventory in a rapidly changing industry 1-8 .

an organization can use financial and nonfinancial information to monitor the organization’s ability to deliver its chosen value proposition At a higher level. however.FINANCIAL CONTROL As previously stated. organizations use broad measures of financial performance to assess the overall success of the organization’s chosen strategies This approach to evaluating aggregate performance is called financial control 1-9 .

it had to:  Acquire raw materials from many different suppliers  Process these materials through many production stages in several different types of plants  Produce a diversified mix of chemical products that were bought by companies in many different industries 1-10 .g. DuPont and General Motors • As the DuPont Company expanded..ORIGINS IN 20TH-CENTURY ENTERPRISES • Many innovations in financial control systems occurred in the early decades of the twentieth century to support the growth of multiple-division diversified corporations  E.

including monthly forecasts of sales. production. and operating expenses  A capital budget  The document that authorizes spending for resources with multiyear useful lives (capital assets)  The vital return on investment (ROI) performance measure developed by Donaldson Brown.FINANCIAL CONTROL AT DUPONT • The senior executives of the diversified DuPont Company devised techniques to coordinate operating activities in their different divisions:  An operating budget  The document that forecasts revenues and expenses during the next operating period. the chief financial officer (CFO) of DuPont 1-11 .

ROI: THE DUPONT FORMULA • The ROI calculation gave DuPont executives a single number to evaluate the performance of their operating divisions and decide which of their divisions should receive additional capital to expand capacity • The ROI measure combined a profitability measure with a capital intensity measure to produce return on investment or ROI  Profitability Measure: = Operating income/Sales  Asset or Capital Utilization Measure: = Sales/Investment ROI = operating income sales X sales investment 1-12 .

acquisition of materials.FINANCIAL CONTROL AT GM (1 OF 4) • Around 1920. product mix. customer relationships. product design. General Motors introduced many management accounting initiatives to accomplish the company’s guiding operating philosophy of “centralized control with decentralized responsibility” • Decentralized responsibility refers to the authority that localdivision managers had in order to make their own decisions without having to seek higher approval on pricing. Alfred Sloan • Under Sloan’s and Brown’s leadership. and appropriate operating processes 1-13 . Brown left DuPont to become CFO for General Motors under its new chief executive officer.

FINANCIAL CONTROL AT GM (2 OF 4) • Decentralization allowed managers to use their superior access to information about local opportunities and operating conditions to make better and more timely decisions • Centralized control of decentralized operations was accomplished by having corporate managers receive periodic financial information about divisional operations and profitability • This summary financial information helped assure the senior managers that their division managers were making decisions and taking actions contributing to overall corporate goals 1-14 .

and transmissions 1-15 . coordinate. assembly divisions producing Chevrolet. and evaluate the operations of multiple.. fuel pumps.g..FINANCIAL CONTROL AT GM (3 OF 4) • The management accounting system at General Motors. somewhat independent operating divisions  E. control. engines. enabled such a complex organization to plan. batteries. Pontiac. and Buick automobiles • And component divisions producing parts  E. radiators.g.

design. operating.FINANCIAL CONTROL AT GM (4 OF 4) • The management accounting system enabled the managers of these divisions to pursue their individual financial. and marketing objectives aggressively while contributing in a coherent fashion to the overall wealth of the corporation • Sloan’s and Brown’s initiatives played a critical role in creating an enormously successful enterprise from 1920 to 1970 1-16 .

MANAGEMENT ACCOUNTING AND CONTROL IN SERVICE ORGANIZATIONS • The major changes in the demand for management accounting and control information experienced by manufacturing companies in recent years have also occurred in virtually all types of service organizations • Service companies have existed for hundreds of years • Their importance in modern economies has increased substantially during the twentieth century 1-17 .

SERVICE COMPANIES (1 OF 2) • Service companies differ from manufacturing companies in several ways  Obvious difference: service companies do not produce a tangible product  Less obvious: many employees in service companies have direct contact with customers • Service companies must be especially sensitive to the timeliness and quality of the service that their employees provide to customers 1-18 .

SERVICE COMPANIES (2 OF 2) • Customers of service companies immediately notice defects and delays in service delivery  The consequences from such defects can be severe  Dissatisfied customers usually choose alternative suppliers after an unhappy experience  They also usually tell others about their bad experience 1-19 .

and telecommunications companies  Others. postal services. such as local retailers. competition 1-20 . were subject only to local.. not national or global. airlines.Service Companies’ Use of Management Accounting Information • Managers in service companies have historically used management accounting information far less intensively than managers in manufacturing companies • Such a lack of accurate information about the cost of operations probably occurred because many service organizations operated in noncompetitive markets  Either highly regulated or government owned  E. national railroads.g.

NONPROFIT ORGANIZATIONS (1 OF 2) • Nonprofit organizations are also feeling the pressure for cost and performance measurement • There has been explosive growth in nongovernmental organizations dealing with:  Economic development  The environment  Poverty  Illiteracy  Hunger and malnutrition  Public and private health  Social services and the arts 1-21 .

developed in the private sector.NONPROFIT ORGANIZATIONS (2 OF 2) • These organizations compete for funds from governments. to meet the demands placed on them for accountability and cost and performance measurement 1-22 . including measures of effectiveness  Are the organizations achieving their intended purpose and measures of efficiency?  Are they using their resources productively? • Managers of all types of nonprofit organizations are looking to adapt management accounting procedures. foundations. and private individuals • Increasingly the public and private donors are demanding accountability from the organizations they fund.

FINANCIAL & NONFINANCIAL INFORMATION IN GOVERNMENT AND NOT FOR PROFIT ORGANIZATIONS (1 OF 2) • The objectives of customers should be the objectives of the organization • In innovative government and not-for-profit organizations. managers use nonfinancial and financial performance measures to evaluate how well and how efficiently these organizations use their funds to provide services to their customers 1-23 .

FINANCIAL & NONFINANCIAL INFORMATION IN GOVERNMENT AND NOT FOR PROFIT ORGANIZATIONS (2 OF 2) • Governments and not-for-profits need to look at the processes they use to deliver services to their customers to verify that these processes meet customer requirements at the lowest possible cost  For example. what is the best way to approach training for an individual who is chronically unemployed so that the person’s needs are met at the lowest cost to society? 1-24 .

directly impacting your bottom line and related fundraising decisions. or directly allocable costs) across functional areas. . It generally works well to “dump” all shared costs into cost center and then allocate them out across those functional areas on a periodic basis. management and fundraising that will appear on your Form 990 and other reports – numbers that potential donors use to judge your organization’s worthiness for their contributions. it can provide a realistic picture of what different programs and other activities cost. It is also used in cost recovery for reimbursable expenses. Your allocation method also determines the percentages of program. done accurately and consistently. Cost Centers are temporary holding tanks for functional areas Cost allocation is important because. usually monthly or yearly.COST ALLOCATION (1 OF 4) • • • • • Cost allocation is a method for apportioning shared expenses or shared costs (also called common costs.

year-end or whenever you allocate costs. you will want to divide out that $500 between the specific functional areas that actually used the office supplies.COST ALLOCATION (2 OF 4) • Example: You get a bill from your office supply store for $500. • $50 of that bill being allocated to management • $75 to fundraising • $375 proportionately across various programs • Your allocation method is your way of deciding what percentage of that bill to apportion to each functional area. • At month-end. . you would initially expense it to “Supplies” and code it to a cost center.

35 percent of their aggregated time on Program B. utilities and other occupancy-related costs. 15 percent on Administration and 10 percent on Fundraising. Program B occupies 20 percent.Allocations are based on the proportionate space occupied by each functional area in your office or worksite.Allocations are based on the previous year’s percentage breakdowns for each functional area. and several of the most common are: 1) Payroll . Administration 5 percent and Fundraising 15 percent. four employees’ time sheet data shows that they spent 15 percent of their aggregated time during the last payroll period on Program A. Program C 50 percent. 3) Square footage . For example. . Program A occupies 10 percent of your office space. For example. This method is useful for allocating rent. 25 percent on program C. 2) Cost-to-cost or direct cost .Allocations are based on a percentage of the total actual time worked or the total payroll dollars charged by all employees in each functional area.COST ALLOCATION (3 OF 4) There are a number of cost allocation methods out there.

you should use it consistently. Whatever method(s) you decide to use. You might have to pick and choose which method or methods work best for your organization in terms of both your available time and the accuracy of the data produced. • • . put it in writing. or more than one method of cost allocation Example using payroll for personnel-related expenses and square footage for office-related expenses.COST ALLOCATION (4 OF 4) • • Your organization might require a method not included above. some consolidation might be in order. if you have many different allocation methods. BOD and be able to back it up if questioned about it. That said. have it approved by the executive director.

BEHAVIORAL IMPLICATIONS (1 OF 4) • As measurements are made on operations and especially on individuals and groups.” 1-29 . and they react to the measurements  They focus on the variables and behavior being measured and spend less attention on those not measured • Two old sayings recognize these phenomena:  “What gets measured gets managed”  “If I can’t measure it. their behavior changes  People react when they are being measured. I can’t manage it.

perhaps.BEHAVIORAL IMPLICATIONS (2 OF 4) • People familiar with the current system may resist as managers attempt to introduce or redesign cost and performance measurement systems • They have acquired expertise in the use (and. misuse) of the old system and wonder whether their experience and expertise will apply to the new system • People also may feel committed to the decisions based on the information the old system produced  Actions taken may no longer seem valid based on the information produced by a newly installed management accounting system  A new management system can be a threat or lead to embarrassment and may lead to a resistance to change 1-30 .

and reward. employees and managers place great pressure on the measurements themselves 1-31 .BEHAVIORAL IMPLICATIONS (3 OF 4) • Management accountants must understand and anticipate the reactions of individuals to information and measurements • An analysis of the behavioral and organizational reactions to the measurements must accompany the design and introduction of new measurements and systems • More importantly. planning. when the measurements are used not only for information. evaluation. and decision-making but also for control.

managers seeking to improve current bonuses based on reported profits may skip discretionary expenditures that may improve performance in future periods  Preventive maintenance  Research and development  Advertising 1-32 .BEHAVIORAL IMPLICATIONS (4 OF 4) • Managers and employees may take unexpected and undesirable actions to influence their score on the performance measure • For example.

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