CHAPTER Introduction to Cost and Management Accounting in a Global Business Environment 1 L E A R N I N G O B J E C T I V E S After completing this chapter, you should be able to answer the following questions: 1 How do financial and management accounting relate to each other? 2 How does cost accounting relate to financial and management accounting? 3 What is the role of a code of ethics in guiding the behaviors of an organization’s global workforce? 4 What factors have influenced the globalization of businesses and why have these factors been significant? 5 What are the primary factors and constraints that influence an organization’s strategy and why are these factors important? 6 How does an organization’s competitive environment impact its strategy and how might an organization respond to competition? 7 How does the accounting function impact an organization’s ability to successfully achieve its strategic goals and objectives? 8 Why is a company segment’s mission affected by product life cycle? 9 What is the value chain and why is it important in managing a business? ABN AMRO INTRODUCING Bank http://www.com T he Netherlands-based bank, ABN AMRO, was formed in 1990 when Algemene Bank Nederland merged with Amsterdam-Rotterdam Bank. Following the ABN AMRO formulated an identity statement in 1992 to reflect its corporate aspirations: “ABN AMRO Bank is a long-established, solid, multi-faceted bank of international merger, ABN AMRO has established itself as a global bank reputation and standing. We will strive to fulfill the bank’s with operations in 76 countries and territories including ambition in being a frontrunner in value-added banking, the United States, where the bank has a 16% share of the both on a local and worldwide level.” The corporate Midwest market. ABN AMRO’s global expansion was driven values statement was formalized in 1997, although the initially by mergers but more recently by innovative web- values have been important priorities since the bank was based delivery of products and services.
established in the 1800s. The four values forming the basis By traditional measures (such as its $505 billion in as- of the bank’s activities are integrity, teamwork, respect, sets and its capital position), ABN AMRO is the largest and professionalism. Bank managers believe that the values bank in Holland, the fourth largest in Europe, and the need to be formalized even though they are and should eighth largest in the world. ABN AMRO’s core lending be self-evident.
The formalization provides external parties business is solid. Over half of ABN AMRO’s revenues criteria by which the bank can be assessed. ABN AMRO come from Dutch clients—a very stable source of business perceives its corporate identity and values as the underlying that includes such companies as Royal Dutch Shell, Philips tenets of the organization. Electronics, and Unilever.com/profile; Chris Costanzo, “ABN AMRO Says Web Will Anchor Its Expansion,” American Banker (December 9, 1999), p.
ABN AMRO is successfully pursuing a corporate identity as a “bank of international reputation and standing.” ABN AMRO was ranked as the fifth largest commercial and savings bank and the seventy-third largest corporation in the 1999 Fortune Global 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 five continents. 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 funds for Web site development to market its products and services around the world. Organizations operating globally face three primary challenges.
First, managers must 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 with its plans and goals. This chapter introduces cost accounting and describes the global environment of business, international market structures, trade agreements, e-commerce, and legal and ethical considerations.
It addresses the importance of strategic planning and links strategy creation and implementation to the accounting information system. The chapter discussion applies equally well to large and small profit-seeking businesses, and most discussion is appropriate for not-for-profit and governmental entities. INTRODUCTION TO COST ACCOUNTING To manage a diverse, international banking organization, ABN AMRO’s leaders need monetary and nonmonetary information that helps them to analyze and solve 3 4 Part 1 Overview problems by reducing uncertainty. Accounting, often referred to as the language of business, provides much of that necessary information.
Accounting language has two primary “variations”: financial accounting and management accounting. Cost accounting 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 produced and services provided by the organization; and (3) providing information useful to internal 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 provide product 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 essential to 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 and Exchange 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 the business rather than the whole organization, management accounting information commonly 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 EXHIBIT 1–1 Financial Accounting Management Accounting Financial and Management Primary users External Internal Accounting Differences Primary organizational focus Whole (aggregated) Parts (segmented) Information characteristics Must be May be • Historical • Current or forecasted • Quantitative • Quantitative or qualitative • Monetary • Monetary or nonmonetary • Verifiable • Timely and, at a minimum, reasonably estimated Overriding criteria Generally accepted Situational relevance accounting principles (usefulness) Consistency Benefits in excess of costs Verifiability Flexibility Recordkeeping Formal Combination of formal and informal Chapter 1 Introduction to Cost and Management Accounting in a Global Business Environment 5 and to be useful to managers’ functions.
A related criterion is that information should be developed and provided only if the cost of producing that information is less than the benefit of having it. This is known as cost-benefit analysis. These two criteria, though, must be combined with the financial accounting information criteria of verifiability, uniformity, and consistency, because all accounting docu- ments and information (whether internal or external) must be grounded in reality rather than whim. The objectives and nature of financial and management accounting differ, but 1 all accounting information tends to rely on the same basic data system and set of How do financial and accounts.
The accounting system provides management with a means by which management accounting relate costs are accumulated from input of materials through the production process un- to each other? til completion and, ultimately, to cost of goods sold. Although technology has im- proved to the point that a company can have different accounting systems de- signed for different purposes, some companies still rely on a single system to supply the basic accounting information. The single system typically focuses on providing information for financial accounting purposes, but its informational output can be adapted to meet most internal management requirements. Relationship of Financial and Management Accounting 2 to Cost Accounting How does cost accounting relate to financial and management Cost accounting is defined as “a technique or method for determining the cost accounting? of a project, process, or thing.
This cost is determined by direct measurement, arbitrary assignment, or systematic and rational allocation.”1 The appropriate method cost accounting of determining cost depends on the circumstances that generate the need for in- formation. Various costing methods are illustrated throughout the text. Central to a cost accounting system is the process for tracing various input costs to an organization’s outputs (products or services). This process uses the traditional accounting form of recordkeeping—general and subsidiary ledger accounts.
Accounts containing cost and management accounting information include those dealing with sales, procurement (materials and plant assets), production and inventory, person- nel, payroll, delivery, financing, and funds management.2 Not all cost information is This manufacturer of televisions must use cost accounting tech- niques to determine financial statement valuations for product inventory and cost of goods sold. 1 Institute of Management Accountants (formerly National Association of Accountants), Statements on Management Accounting Number 2: Management Accounting Terminology (Montvale, N. 2 With reference to accounts, this text will focus primarily on the set of accounts that depicts the internal flow of costs. 6 Part 1 Overview reproduced on the financial statements, however.
Correspondingly, not all financial accounting information is useful to managers in performing their daily functions. Cost accounting creates an overlap between financial accounting and man- agement accounting. Cost accounting integrates with financial accounting by pro- viding product costing information for financial statements and with management accounting by providing some of the quantitative, cost-based information managers need to perform their tasks. Exhibit 1–2 depicts the relationship of cost account- ing to the larger systems of financial and management accounting.
None of the three areas should be viewed as a separate and exclusive “type” of accounting. The boundaries of each are not clearly and definitively drawn and, because of EXHIBIT 1–2 changing technology and information needs, are becoming increasingly blurred. Accounting Information System Components and Relationships External parties, including shareholders 1 2 3 4 1 2 3 Internal accountants 4 5 6 7 8 gather data for 9 10 11 12 13 14 15 16 17 18 19 20 Flows into 21 22 23 24 For use by 25 26 27 28 29 Internal accountants Cost 30 31 32 33 provides information for inventory and cost of goods sold or Financial Accounting cost of services rendered for the provides information for financial statements periodic financial statements Management ⴙ Management ⴙ ⴙ ⴝ Accounting provides information AIS output to be combined with other external for internal management Monetary Nonmonetary Analysis information by information information managers to use in Planning Controlling Decision Evaluating making performance Chapter 1 Introduction to Cost and Management Accounting in a Global Business Environment 7 The cost accounting overlap causes the financial and management accounting systems to articulate or be joined together to form an informational network. Be- cause these two systems articulate, accountants must understand how cost ac- counting provides costs for financial statements and supports management infor- mation needs.
Organizations that do not manufacture products may not require elaborate cost accounting systems. However, even service companies need to un- derstand how much their services cost so that they can determine whether it is cost-effective to be engaged in particular business activities. Management and Cost Accounting Standards Management accountants can use different costs and different information for dif- ferent purposes, because their discipline is not required to adhere to generally ac- cepted accounting principles when providing information for managers’ internal use.