Description
Managerial accounting facilitates planning and control decisions. Planning decisions relate to choices about acquiring and using resources to deliver products and services to customers (e.g., which products and services to offer, their prices, and the resources needed, such as materials, labor, and equipment). Control decisions concern how much to delegate, as well as how to motivate, measure, evaluate, and reward performance.
Current managerial accounting textbooks generally group product costing, cost management (ABC/ABM), short-term decisions, and performance evaluation practices into four separate modules. This grouping allows students to gain a working knowledge of current managerial accounting practices. However, while each book may provide solid coverage on one or more important dimensions, none offers a satisfactory, overarching theme. The average student walks away with a collection of concepts and techniques but with little idea of why things work the way they do. Armed with only the “what” and the “how” but not the “why,” students have no framework that lets them see the principles that drive practice or helps them adapt to novel or changing circumstances.
We provide instructors and students with a unifying, problem-solving framework. We believe that the framework itself must be the key takeaway from any introductory managerial accounting course. By virtue of its logic and internal consistency, the framework allows students to:
• Understand the big picture.
• Examine new ideas and concepts and their relation to existing practice.
• See how accounting information helps manage a complex entity.
At the core of our framework is the one feature common to all decisions—every decision involves a cost-benefit trade-off. The decision could be personal (should I eat out or make dinner?) or organizational (should we continue using traditional performance measures or switch to the balanced scorecard?). The decision could relate to planning (how should we price this product?) or control (where should we set the sales quota?). The theme of systematically measuring costs and benefits to make effective decisions runs throughout our text.
The first outgrowth of this theme, indicated by the titles of the modules, is our emphasis on a decision’s horizon. Time influences whether a cost or benefit is relevant for decision. The costs of the production plant and equipment are not relevant to many short-term decisions. Thus, there is no need to allocate these fixed costs to make effective short-term decisions. In the long term, however, a firm can manage capacity costs by shrinking or expanding its investment in plant and equipment. Thus, to make effective long-term decisions, a firm needs to identify variations in resource consumption patterns and create allocation mechanisms that capture the cost impact of these variations. Ultimately, when confronted with a decision problem, the successful manager knows what costs and benefits to include in the decision, and how to measure these costs and benefits.
A second important aspect of our framework is an integrated treatment of planning and control decisions. Planning and control are two sides of the same coin. Diagnostic and feedback measures inform organizations of how well they implemented the plan, thereby providing input for the next plan. Similarly, performance evaluation and incentive schemes arise in response to strategic aspects of the planning process. An integrated treatment highlights these links, permitting students to perceive planning and control decisions as part of the same framework