The Crimson Press Curriculum Center

First Page and the Assignment Questions:
Management accounting is not a required activity. In this respect it is unlike financial accounting, which is required for almost all organizations. The only management accounting requirement is the computation of cost of goods sold in manufacturing and merchandising organizations. Thus, when senior management decides to undertake some management accounting activities, it does so because it believes the information provided will assist in decision-making, and therefore will be worth its cost. This is true for full cost accounting, where the information presumably will be used for pricing and profitability assessments. It is true for differential cost accounting, where senior management believes that a cost analysis will assist it to make a more financially beneficial alternative choice decision. And it is true for responsibility accounting, where senior management believes that the development of an appropriate network of responsibility centers and the creation of a management control process will assist it to achieve the organization’s strategy more effectively and efficiently than otherwise would be the case.

   In all three of these areas, but especially in the last, senior management must recognize that management accounting does not exist in a vacuum. Rather, it must be an integral part of a wide range of organizational activities that must be well managed if the organization is to be successful. The goal of this note is to discuss these other activities, and to place management accounting into its broader managerial context.

ORGANIZATION OF THE NOTE

   The note begins with a review of the idea that different costs are used for different purposes, and discusses the differences. It then summarizes the criteria for a good responsibility accounting system. Next, it illustrates the contingent nature of responsibility accounting systems by positioning them as one of several activities that interrelate and that must be well managed if the organization is to be successful. The note concludes with a “Managerial Checklist” concerning these interrelationships.

DIFFERENT COSTS FOR DIFFERENT PURPOSES

   Fundamental to an understanding of management accounting is the notion that different costs are used for different purposes. For example, differential costs rather than than full costs are appropriate for breakeven analyses and alternative-choice decisions. Full costs are inappropriate for these types of decisions. In the same vein, a still separate set of information—both costs and revenues—is appropriate for the responsibility accounting system. Specifically, for responsibility accounting purposes, we are concerned with the distinction between controllable and non-controllable items. These three different uses of cost information are shown in Exhibit 1.

   It is important to note that improving the full cost accounting system or assessing cost behavior ordinarily can be achieved by the accounting staff, with appropriate guidance from senior management to assure that the resulting information meets its needs. However, the responsibility accounting system will require continuing and active involvement from senior management if it is to be effective in assisting the organization to achieve its strategic goals.

CRITERIA FOR A GOOD RESPONSIBILITY ACCOUNTING SYSTEM

   To assure that is has a responsibility accounting system that meets its needs, senior management can focus on three categories: structure, process, and behavioral aspects.