Key Management Accounting Guidelines
Three guidelines help management accountants provide the most value to their companies in strategic and operational decision making: Employ a cost-benefit approach, give full recognition to behavioral and technical considerations, and use different costs for different purposes.
Cost-Benefit Approach
Managers continually face resource-allocation decisions, such as whether to purchase a new software package or hire a new employee. They use a cost-benefit approach when making these decisions: Resources should be spent if the expected benefits to thecompany exceed the expected costs. Managers rely on management accounting information to quantify expected benefits and expected costs although all benefits and costs are not easy to quantify. Nevertheless, the cost-benefit approach is a useful guide for making resource-allocation decisions.
Consider the installation of a company’s first budgeting system. Previously, the company used historical recordkeeping and little formal planning. A major benefit of installing a budgeting system is that it compels managers to plan ahead, compare actual to budgeted information, learn, and take corrective action. These actions lead to different decisions that improve performance relative to decisions that would have been made using the historical system, but the benefits are not easy to measure. On the cost side, some costs, such as investments in software and training are easier to quantify. Others, such as the time spent by managers on the budgeting process, are harder to quantify. Regardless, senior managers compare expected benefits and expected costs, exercise judgment, and reach a decision, in this case to install the budgeting system.
Behavioral and Technical Considerations
The cost-benefit approach is the criterion that assists managers in deciding whether, say, to install a proposed budgeting system instead of continuing to use an existing historical system. In making this decision senior managers consider two simultaneous missions: one technical and one behavioral. The technical considerations help managers make wise economic decisions by providing them with the desired information (for example, costs in various valuechain categories) in an appropriate format (such as actual results versus budgeted amounts) and at the preferred frequency. Now consider the human (the behavioral) side of why budgeting is used. Budgets induce a different set of decisions within an organization because of better collaboration, planning, and motivation. The behavioral considerations encourage managers and other employees to strive for achieving the goals of the organization.
Both managers and management accountants should always remember that management is not confined exclusively to technical matters. Management is primarily a human activity that should focus on how to help individuals do their jobs better for example, by helping them to understand which of their activities adds value and whic does not. Moreover, when workers underperform, behavioral considerations suggestthat management systems and processes should cause managers to personally discuss with workers ways to improve performance rather than just sending them a report highlighting their underperformance.
Three guidelines help management accountants provide the most value to their companies in strategic and operational decision making: Employ a cost-benefit approach, give full recognition to behavioral and technical considerations, and use different costs for different purposes.
Cost-Benefit Approach
Managers continually face resource-allocation decisions, such as whether to purchase a new software package or hire a new employee. They use a cost-benefit approach when making these decisions: Resources should be spent if the expected benefits to thecompany exceed the expected costs. Managers rely on management accounting information to quantify expected benefits and expected costs although all benefits and costs are not easy to quantify. Nevertheless, the cost-benefit approach is a useful guide for making resource-allocation decisions.
Consider the installation of a company’s first budgeting system. Previously, the company used historical recordkeeping and little formal planning. A major benefit of installing a budgeting system is that it compels managers to plan ahead, compare actual to budgeted information, learn, and take corrective action. These actions lead to different decisions that improve performance relative to decisions that would have been made using the historical system, but the benefits are not easy to measure. On the cost side, some costs, such as investments in software and training are easier to quantify. Others, such as the time spent by managers on the budgeting process, are harder to quantify. Regardless, senior managers compare expected benefits and expected costs, exercise judgment, and reach a decision, in this case to install the budgeting system.
Behavioral and Technical Considerations
The cost-benefit approach is the criterion that assists managers in deciding whether, say, to install a proposed budgeting system instead of continuing to use an existing historical system. In making this decision senior managers consider two simultaneous missions: one technical and one behavioral. The technical considerations help managers make wise economic decisions by providing them with the desired information (for example, costs in various valuechain categories) in an appropriate format (such as actual results versus budgeted amounts) and at the preferred frequency. Now consider the human (the behavioral) side of why budgeting is used. Budgets induce a different set of decisions within an organization because of better collaboration, planning, and motivation. The behavioral considerations encourage managers and other employees to strive for achieving the goals of the organization.
Both managers and management accountants should always remember that management is not confined exclusively to technical matters. Management is primarily a human activity that should focus on how to help individuals do their jobs better for example, by helping them to understand which of their activities adds value and whic does not. Moreover, when workers underperform, behavioral considerations suggestthat management systems and processes should cause managers to personally discuss with workers ways to improve performance rather than just sending them a report highlighting their underperformance.
Different Costs for Different Purposes
Consider the advertising costs associated with Microsoft Corporation’s launch of a major product with a useful life of several years. For external reporting to shareholders, television advertising costs for this product are fully expensed in the income statement in the year they are incurred. GAAP requires this immediate expensing for external reporting. For internal purposes of evaluating management performance, however, the television advertising costs could be capitalized and then amortized or written off as expenses over several years. Microsoft could capitalize these advertising costs if it believes doing so results in a more accurate and fairer measure of the performance of the managers that launched the new product. We now discuss the relationships and reporting responsibilities among managers and management accountants within a company’s organization structure.
Consider the advertising costs associated with Microsoft Corporation’s launch of a major product with a useful life of several years. For external reporting to shareholders, television advertising costs for this product are fully expensed in the income statement in the year they are incurred. GAAP requires this immediate expensing for external reporting. For internal purposes of evaluating management performance, however, the television advertising costs could be capitalized and then amortized or written off as expenses over several years. Microsoft could capitalize these advertising costs if it believes doing so results in a more accurate and fairer measure of the performance of the managers that launched the new product. We now discuss the relationships and reporting responsibilities among managers and management accountants within a company’s organization structure.
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