This chapter discusses the evolution of internal accounting systems in response to changing business needs and environments. It covers innovations like ABC accounting, total quality management, just-in-time production, six sigma, and the balanced scorecard. The balanced scorecard framework links strategic objectives to performance indicators across financial and non-financial perspectives. The chapter concludes that management accounting systems must continually adapt to remain relevant as firms and their contexts change over time.

1. Instructor: Mary Haines, MBA, CPA

2. Management
Accounting in a
Changing
Environment
Chapter Fourteen
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

3.  Chapter 14 summarizes the concepts
developed in the previous chapters and applies
them to recent internal accounting system
innovations.
 Every chapter mentions the trade-offs between
decision management (decision making) and
decision control.
 Internal accounting systems continue to evolve
in response to changing needs and
environments.
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4.  As firms evolve, internal accounting systems evolve.
 Early 1800s: Textile mills develop absorption costing.
 1850 - 1910: Multi-location firms create cost controls.
 1915 - 1925: Large corporations decentralize
 1925 - 1975: External reporting dictates design.
Behavioral Accounting (1970s) then HR Accounting.
 ABC Accounting (1970-1980s) – multiple cost drivers
 Recent: Automation induces redesign of costing.
 Recent: TQM (more non-financial measures)
 Recent: JIT (non-value-added activities)
 Recent: The Balanced Scorecard links strategy to key
performance indicators
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5. 14-5

6.  Total Quality Management (TQM) – to improve customer
satisfaction. (p.617 Saia)
 Just in Time Production (JIT) – production doesn’t start till
order is placed. RM & supplies delivered JIT! (p.623 Harley)
 Six Sigma – Like TQM, but focus is on reducing defects to
improve quality. (p.624 – Caterpillar)
 Lean Production – Like JIT, but eliminates all non-value
activities from value chain (R&D, design & engineering,
distribution, customer service)
 Balanced Scorecard – Strategy based (operational
excellence, customer intimacy, product leadership)– links
it to performance drivers. (p.628 Philips & p.630)
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7.  A firmwide process
◦ communicate up, down, and laterally
 Quality is defined by customer
◦ specialized knowledge of customer needs
 Requires organizational changes
◦ push decision rights down to operating and
marketing
 Designed into the product
◦ Reduce defects by redesigning production
14-7

8.  Issued by International Standards Organization,
a European community body that sets quality
standards.
 Requires written policies, procedures, and
quality methods.
 Certifies that policies exist that allow quality
products to be manufactured.
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9.  Just-in-time (JIT) production:
 Production does not start until order is received.
 JIT aims to minimize throughput time.
 Throughput time = Processing time + Non-value-
added time
 Non-value-added time = Waiting + Transit +
Inspection
 Manufacturing cycle efficiency (MCE) (not mentioned
in textbook)
 MCE = (Processing time) = (Throughput time)
14-9

10.  Increase quality of material and processes
 Reduce setup times
 Balance flow rates across manufacturing cells
 Coordinate deliveries from suppliers
 Improve factory layout to reduce transit time
 Change performance measurement and reward
system to focus on reducing throughput time
of entire production process rather than
individual departments
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11.  Advantages:
◦ Simpler because no work-in-process accounting
◦ Focus attention on throughput time
 Disadvantages:
◦ Become dependent on suppliers for on-time
delivery
◦ Still need periodic physical count of materials
inventory
◦ Reorganizing production can be expensive.
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12.  Translates the strategy into a plan of action
 Identifies specific objectives and performance
drivers (key performance indicators)
 Helps determine if the organization is
moving in the right direction
 Attempts to achieve a balance between:
◦ short and long-term objectives
◦ outcome and performance measures for cause
and effect objectives
◦ financial and non-financial performance
measures
◦ all of the stakeholders of the organization
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13.  For each objective there are:
◦ Driver performance indicators
 Measure input activities to achieve the objective
◦ Outcome performance indicators
 Measure if the objective has been realized
◦ Driver and outcome performance indicators reflect
the cause and effect nature of the balanced
scorecard.
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14. Innovation and Learning
Perspective
Customer
Perspective
STRATEGY
Financial
Perspective
Internal Business
Processes
Perspective
14-14

15.  Example 1: Philips Electronics (a success)
 Example 2: The U. S. retail banking operations of a
leading international financial services provider
(a failure)
 Summarize what is needed to achieve success and
avoid failure.
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16.  Continual evolution (Economic Darwinism)
◦ No single ideal management accounting system
◦ Respond to changes in technology and markets
 Trade-offs
◦ Decision making vs. Decision control
◦ Opportunity cost vs. Historical cost
◦ Simplicity vs. Comprehensiveness
◦ Internal users vs. External users
◦ Financial measures vs. Nonfinancial measures
14-16