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CHAPTER 1
Management accounting: Information for creating
value and managing resources
ANSWERS TO SELECTED REVIEW QUESTIONS
1.2 The explosion in e-commerce will affect management accounting in significant ways. One effect will be a drastic
reduction in paperwork. Millions of transactions between businesses will be conducted electronically with no hard-
copy documentation. Along with this method of communicating for business transactions comes the very
significant issue of information security. Businesses need to find ways to protect confidential information in their
own computers, while at the same time sharing the information necessary to complete transactions. Another effect
of e-commerce is the dramatically increased speed with which business transactions can be conducted. In addition
to these business-to-business transactional issues, there will be dramatic changes in the way management
accounting procedures are carried out, one example being e-budgeting, the enterprise-wide electronic completion
of a company’s budgeting process.
1.3 Management accounting information prepared on a regular basis includes product costs, profitability reports, and
also individual resource costs such as materials purchased and used, labour costs and the costs incurred in
providing and managing facilities. On an ad hoc basis, management accounting reports may be prepared to
estimate future cash flows relating to the impact of purchasing and operating a new piece of equipment and the
expected outcome from changing the product mix.
1.4 Management accounting is defined as ‘processes and techniques that are focused on the effective and efficient use
of organisational resources to support managers in their task of enhancing both customer value and shareholder
value’. Value creation is a central focus for contemporary managers. Customer value refers to the value that a
customer places on particular features of a good or service (and which is what leads to them purchase the product).
Shareholder value is the value that shareholders, or owners, place on a business, usually expressed in the form of
increased profitability, increased share prices or increased dividends.
1.5 The important differences between management accounting and financial accounting are listed below.
(a) Management accounting information is provided to managers and employees within the organisation,
whereas financial accounting information is provided to interested parties outside the organisation.
(b) Management accounting reports are unregulated, whereas financial accounting reports are legally required
and must conform to Australian accounting standards and corporations law.
(c) The primary source of data for management accounting information is the organisation’s basic accounting
system, plus data from many other sources. These sources will yield data such as rates of defective products
manufactured, physical quantities of material and labour used in production, occupancy rates in hotels and
hospitals and average take-off delays in airlines. The primary source of data for financial accounting
information is almost exclusively the organisation’s basic accounting system, which accumulates financial
information.
(d) Management accounting reports often focus on sub-units within the organisation, such as departments,
divisions, geographical regions or product lines. These reports are based on a combination of historical data,
estimates and projections of future costs. The data may be subjective and there is a strong emphasis on
reporting information that is relevant and timely. Financial accounting reports tend to focus on the enterprise
in its entirety. These reports are based almost exclusively on verifiable transaction data. The focus is often
on reliability rather than relevance and the reports are not timely.
1.7 The ‘Real life’ report of Australian organisations in the twenty-first century demonstrates issues such as increasing
competition and pressure to reduce costs. This pressure makes it imperative to have a clear idea of a business’
costs. Management accountants’ role then has become essential to the continuing success of organisations, in
terms of providing information that allows management to plan and control their organisations in response to
today’s rapidly changing business environment.
1.8 With the development of management accounting techniques that better assist decision making, management
accountants gradually took their place in decision-making teams. It is possible for management accountants to
have a presence on the factory floor and in the corporate offices. Very often each plant will have at least one
Full download please contact or qidiantiku.com
1
, Full download please contact or qidiantiku.com
management accountant. The chief management accountant is then likely to be located in head office where he or
she has regular contact with other senior managers and is regularly involved in meetings with these other senior
personnel.
1.9 A CFO needs to possess:
leadership skills that can be applied to the accounting/finance function, senior management and the
organisation as a whole
managerial skills that support the need to balance responsibilities of stewardship with those of strategy
development and implementation, thus requiring the effective and efficient acquirement of and use of
resources while safeguarding assets through internal controls and risk management
the ability to build effective, collaborative relationships with internal and external stakeholders
understanding of the organisation and its environment, such as its competitors, markets, technologies and new
developments
professional qualities as they pertain to professional accountants, including integrity, objectivity and
competence.
While the CEO may be the first pilot, the CFO can be an indispensable flight engineer.
1.10 Student answers will vary depending on the organisation chosen, but major processes that management accounting
systems use to create value and manage resources include:
product costing systems that estimate the cost of resources consumed in producing goods and services
processes that compile information that is required in planning and control, the preparation of budgets
(financial plans) and the monitoring of progress in comparison to planned progress (control)
performance measurement and evaluation processes relating to individuals, discrete parts of the organisation
and the organisation as a whole.
1.13 A management accountant might provide the following types of information to assist management in a business
that considered product quality to be of key strategic importance:
number of defects
quality costs (i.e. the costs incurred in training, maintaining and improving equipment, scrapping or correcting
defective work)
warranty costs
returns
analysis of customer needs, inquiries and complaints
number of new customers
customer retention rate
customer satisfaction with products
customer profitability analysis
market share.
1.18 The implications of contingency theory for management accounting system design are that the design may be
influenced by (that is, be contingent upon) a range of factors that reflect the context within which the organisation
operates, including the external environment; technology; organisational structure; organisation size; strategy;
and organisational and national culture (Chenhall, 2003). This means that in designing the system, the
management accountant will need to take account of the size and complexity of the organisation, the types of
markets the organisation operates in, the existing management style within the organisation and so on.
1.19 During the 1980s and 1990s, management accounting started to shift towards the broader techniques of resource
management and focused on the creation of customer value and shareholder wealth. Management accountants
became more valuable in the formation and evaluation of strategies. Accordingly, by the early 2000s, management
accountants were seen as part of the management team, with a clear view of the ‘big picture’, a full understanding
of the business as a whole and as providers of information to managers that could help them to maintain a
competitive advantage in order to achieve corporate objectives. The focus of management accounting in the first
decades of the 21st century has broadened from the drivers of customer value, shareholder value and
organisational innovation to include the drivers of stakeholder value, risk management and sustainability reporting.
Students will find that the broader focus on all stakeholders (not just customers and shareholders) is explored in
more detail in Chapter 17.
Full download please contact or qidiantiku.com
2
CHAPTER 1
Management accounting: Information for creating
value and managing resources
ANSWERS TO SELECTED REVIEW QUESTIONS
1.2 The explosion in e-commerce will affect management accounting in significant ways. One effect will be a drastic
reduction in paperwork. Millions of transactions between businesses will be conducted electronically with no hard-
copy documentation. Along with this method of communicating for business transactions comes the very
significant issue of information security. Businesses need to find ways to protect confidential information in their
own computers, while at the same time sharing the information necessary to complete transactions. Another effect
of e-commerce is the dramatically increased speed with which business transactions can be conducted. In addition
to these business-to-business transactional issues, there will be dramatic changes in the way management
accounting procedures are carried out, one example being e-budgeting, the enterprise-wide electronic completion
of a company’s budgeting process.
1.3 Management accounting information prepared on a regular basis includes product costs, profitability reports, and
also individual resource costs such as materials purchased and used, labour costs and the costs incurred in
providing and managing facilities. On an ad hoc basis, management accounting reports may be prepared to
estimate future cash flows relating to the impact of purchasing and operating a new piece of equipment and the
expected outcome from changing the product mix.
1.4 Management accounting is defined as ‘processes and techniques that are focused on the effective and efficient use
of organisational resources to support managers in their task of enhancing both customer value and shareholder
value’. Value creation is a central focus for contemporary managers. Customer value refers to the value that a
customer places on particular features of a good or service (and which is what leads to them purchase the product).
Shareholder value is the value that shareholders, or owners, place on a business, usually expressed in the form of
increased profitability, increased share prices or increased dividends.
1.5 The important differences between management accounting and financial accounting are listed below.
(a) Management accounting information is provided to managers and employees within the organisation,
whereas financial accounting information is provided to interested parties outside the organisation.
(b) Management accounting reports are unregulated, whereas financial accounting reports are legally required
and must conform to Australian accounting standards and corporations law.
(c) The primary source of data for management accounting information is the organisation’s basic accounting
system, plus data from many other sources. These sources will yield data such as rates of defective products
manufactured, physical quantities of material and labour used in production, occupancy rates in hotels and
hospitals and average take-off delays in airlines. The primary source of data for financial accounting
information is almost exclusively the organisation’s basic accounting system, which accumulates financial
information.
(d) Management accounting reports often focus on sub-units within the organisation, such as departments,
divisions, geographical regions or product lines. These reports are based on a combination of historical data,
estimates and projections of future costs. The data may be subjective and there is a strong emphasis on
reporting information that is relevant and timely. Financial accounting reports tend to focus on the enterprise
in its entirety. These reports are based almost exclusively on verifiable transaction data. The focus is often
on reliability rather than relevance and the reports are not timely.
1.7 The ‘Real life’ report of Australian organisations in the twenty-first century demonstrates issues such as increasing
competition and pressure to reduce costs. This pressure makes it imperative to have a clear idea of a business’
costs. Management accountants’ role then has become essential to the continuing success of organisations, in
terms of providing information that allows management to plan and control their organisations in response to
today’s rapidly changing business environment.
1.8 With the development of management accounting techniques that better assist decision making, management
accountants gradually took their place in decision-making teams. It is possible for management accountants to
have a presence on the factory floor and in the corporate offices. Very often each plant will have at least one
Full download please contact or qidiantiku.com
1
, Full download please contact or qidiantiku.com
management accountant. The chief management accountant is then likely to be located in head office where he or
she has regular contact with other senior managers and is regularly involved in meetings with these other senior
personnel.
1.9 A CFO needs to possess:
leadership skills that can be applied to the accounting/finance function, senior management and the
organisation as a whole
managerial skills that support the need to balance responsibilities of stewardship with those of strategy
development and implementation, thus requiring the effective and efficient acquirement of and use of
resources while safeguarding assets through internal controls and risk management
the ability to build effective, collaborative relationships with internal and external stakeholders
understanding of the organisation and its environment, such as its competitors, markets, technologies and new
developments
professional qualities as they pertain to professional accountants, including integrity, objectivity and
competence.
While the CEO may be the first pilot, the CFO can be an indispensable flight engineer.
1.10 Student answers will vary depending on the organisation chosen, but major processes that management accounting
systems use to create value and manage resources include:
product costing systems that estimate the cost of resources consumed in producing goods and services
processes that compile information that is required in planning and control, the preparation of budgets
(financial plans) and the monitoring of progress in comparison to planned progress (control)
performance measurement and evaluation processes relating to individuals, discrete parts of the organisation
and the organisation as a whole.
1.13 A management accountant might provide the following types of information to assist management in a business
that considered product quality to be of key strategic importance:
number of defects
quality costs (i.e. the costs incurred in training, maintaining and improving equipment, scrapping or correcting
defective work)
warranty costs
returns
analysis of customer needs, inquiries and complaints
number of new customers
customer retention rate
customer satisfaction with products
customer profitability analysis
market share.
1.18 The implications of contingency theory for management accounting system design are that the design may be
influenced by (that is, be contingent upon) a range of factors that reflect the context within which the organisation
operates, including the external environment; technology; organisational structure; organisation size; strategy;
and organisational and national culture (Chenhall, 2003). This means that in designing the system, the
management accountant will need to take account of the size and complexity of the organisation, the types of
markets the organisation operates in, the existing management style within the organisation and so on.
1.19 During the 1980s and 1990s, management accounting started to shift towards the broader techniques of resource
management and focused on the creation of customer value and shareholder wealth. Management accountants
became more valuable in the formation and evaluation of strategies. Accordingly, by the early 2000s, management
accountants were seen as part of the management team, with a clear view of the ‘big picture’, a full understanding
of the business as a whole and as providers of information to managers that could help them to maintain a
competitive advantage in order to achieve corporate objectives. The focus of management accounting in the first
decades of the 21st century has broadened from the drivers of customer value, shareholder value and
organisational innovation to include the drivers of stakeholder value, risk management and sustainability reporting.
Students will find that the broader focus on all stakeholders (not just customers and shareholders) is explored in
more detail in Chapter 17.
Full download please contact or qidiantiku.com
2
