Accounting Philosophy

Intro
d - 1

Peter Drucker made the

following comments:

The most exciting and innovative work

in management today is found in
accounting theory, with new concepts,
new methodology--even what might be
called new economic philosophy-rapidly taking shape. And while there
is enormous controversy over specifics,
the lineaments of the new
manufacturing accounting are
becoming clearer every day.

Drucker, Peter E., The Emerging Theory of Manufacturing, Harvard Business Review,
Man-June 1990, pp. 94-102.

Intro
d - 2

Peter Drucker made the

following comments:

Accounting has become the most

intellectually challenging area in the field
of management, and the most turbulent
one.
Accounting is the primary discipline
attempting to answer questions
few executives yet know how to
ask: What information do I need to
do my job? When do I need it? And
from whom should I be getting it?

Drucker, Peter E., Be Data LiterateKnow What to Know, The Wall Street Journal,
December 1, 1992, p. A16.
Intro
d - 3

MANAGEMENT DECISIONS
Should I
make this
product?
How can I
improve market
share?

Is there
a better way
to provide this
Service?
What will
this change
cost me?

Intro
d - 4

MANAGEMENT vs. FINANCIAL

ACCOUNTING

Management
Internal focus
Decision driven
Emphasis on
future
Detailed
Segment
evaluation
Subjective (if
relevant)

Financial
External focus
G.A.A.P. driven
Historical
orientation
Aggregate
Entity-wide
evaluation
Objective

Intro
d - 5

Strategic
Strategic Cost
Cost Management
Management
Strategic
Strategicposition
position
analysis--an
analysis--an
organizations
organizationsbasic
basicway
wayValue
Valuechain
chainanalysis-analysis-of
the
ofcompeting
competingto
tosell
sell
thestudy
studyof
ofvaluevalueproducts
productsor
orservices.
services. producing
producingactivities,
activities,
stretching
stretchingfrom
frombasic
basic
raw
materials
to
the
raw
materials
to
the
Cost
driver
analysis-Cost driver analysis-- final
consumer
of
aa
final
consumer
of
the
thestudy
studyof
offactors
factorsthat
that product
or
service.
product
or
service.
cause
or
influence
costs.
cause or influence costs.
Intro
d - 6

STRATEGIC MANAGEMENT
ACCOUNTING
Accounting exists within an business primarily to

facilitate the development and implementation of

business strategy...

Three important generalizations emerge from this way of

viewing management accounting:

Accounting is not an end in itself, but only a means to

help achieve business success

Specific accounting techniques or systems must be

considered in terms of the role they are intended to play

In evaluating the overall accounting system... the key

question is whether the overall fit with strategy is
appropriate.

Shank, John K. and Vijay Govindarajan, Strategic Cost

Management, The Free Press, Macmillan, Inc., 1993, pp. 6-7.

Intro
d - 7

EMERGING THEMES OF
BUSINESS AND MANAGEMENT
Highly Competitive Environment
Advanced Technologies
Continuous Change
Process Orientation
De-regulation
Intro
d - 8

Competition
Competition
Price/cost

Time

Competition
Competition
takes
takes place
place on
on
these
these dimensions.
dimensions.

Service

Quality

Diversity
Intr
od
- 9

Missions,
Missions, Goals,
Goals, and
and Strategies
Strategies
Mission
Mission -- the
the basic
basic
purpose
purpose toward
toward which
which
activities
activities are
are directed.
directed.

Intr
od
10

Missions,
Missions, Goals,
Goals, and
and Strategies
Strategies
Goal
Goal -- aa definable
definable
measurable
measurable target
target or
or
objective
objective based
based on
on the
the
organizations
organizations mission.
mission.

Intr
od
- 11

Missions,
Missions, Goals,
Goals, and
and Strategies
Strategies
Strategy
Strategy -- aa course
course of
of
action
action that
that will
will assist
assist
in
in achieving
achieving one
one or
or
more
more goals.
goals.

Intr
od
12

Porters
Porters Strategic
Strategic Positions
Positions
Cost leadership
Product or service

differentiation
Focus on market

niche
Intr
od
13

MANAGEMENT
DECISION - MAKING
CYCLE
Revision of plans

Establishment of goals

Planning

Organizing

Control

Action

Review of results

Developing means to
achieve goals
Intr
od
14

An
An Activity
Activity (A
(A Unit
Unit of
of Work)
Work)
Waiter or Waitress Activity
Seat customer and offer menu
Take customer order
Bring order to kitchen
Bring food to customer
Replenish beverages
Determine and bring bill to customer
Collect money and give change
Clear table
Intr
od
15

Structural
Structural Cost
Cost Drivers
Drivers
Structural cost drivers are fundamental
choices about the size and scope of
operations and technology employed in
delivering products or services to customers.

Intr
od
16

Structural
Structural Cost
Cost Drivers
Drivers
For a chain of discount stores-Determine
Determine the
the
type
type of
of
construction
construction

Determine
Determine
the
the location
location

Determine
Determine the
the
kind
kind of
of
technology
technology
employed
employed in
in
the
the store
store

Determine
Determine the
the
size
size of
of the
the stores
stores

Intr
od
17

Organizational
Organizational Cost
Cost Drivers
Drivers
Organizational cost drivers are choices concerning
the organization of activities and choices concerning
the involvement of persons inside and outside the
organization in decision making.

Intr
od
18

Organizational
Organizational Cost
Cost Drivers
Drivers
Deciding to work closely with

a limited number of suppliers.

Providing employees with cost
information and authorizing
them to make decisions.
Deciding to reorganize the
existing equipment in the
plant so that sequential
operations are closer.

Intr
od
19

Organizational
Organizational Cost
Cost Drivers
Drivers
Designing components of a

product so they can only fit

together in the correct manner.
Deciding to manufacture a low
volume product on low-speed,
general-purpose equipment
rather than high-speed,
special-purpose equipment.
Intr
od
20

Activity
Activity Cost
Cost Drivers
Drivers
Activity cost drivers
are specific units of
work (activities)
performed to serve
customer needs that
consume costly
resources.

Intr
od
21

Activity
Activity Cost
Cost Drivers
Drivers
Customers
Served by
activities
Activities
Activities consume
resources
Resources

Costs
Resources
cost money
Intr
od
22