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SECOND EDITION
MANAGEMENT
ACCOUNTING
AN INTEGRATIVE APPROACH
C.J. McNAIR-CONNOLLY | KENNETH A. MERCHANT

Management
Accounting
A N I N T EG R A T I V E A P P R OA CH
SECON D E D I T I ON
D ED I CA T ED T O :
To Cyndi, who at her first job interview for accounting asked,

“What answer do you want?” While there are better or
worse answers, her spirit will always live on.
— C.J .
To my wife, Gail Worth Merchant.

— KENNETH
Management Accounting, Second Edition

Copyright © 2019 by Institute of Management Accountants, Inc. All Rights Reserved.
No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any
form or by any means – electronic, mechanical, photocopying, recording or otherwise – without
prior written permission from the publisher, except for the inclusion of brief quotations in a review.
For information about this title or to order other books and/or electronic media, contact the publisher:
IMA
10 Paragon Drive, Suite 1
Montvale, NJ 07645-1760
(800) 638-4427 or +1(201) 573-9000
www.imanet.org
ISBN: 978-0-9995004-9-1
Printed in the United States of America

Cover and Interior design: 1106 Design
No part of this publication may be reproduced, stored in a retrieval system,

or transmitted by any means, electronic or mechanical, without prior written
permission of Institute of Management Accountants (IMA®).
II
About IMA (Institute Of ®
Management Accountants)
IMA® , named 2017 Professional B ody of the Year by The A ccountant/ International A ccounting
B ulletin, is one of the largest and most respected associations focused exclusively on advancing
the management accounting profession. Globally, IMA supports the profession through research,
the CMA ® (Certifi ed Management A ccountant) program, continuing education, netw orking,
and advocacy of the highest ethical business practices. IMA has a global netw ork of more than
100,000 members in 140 countries and 300 professional and student chapters H eadquartered in
Montvale, N.J., U SA , IMA prov ides localized serv ices through its four global regions: T he A mericas,
A sia/ Pacifi c, Europe, and Middle East/ India. F or more information about IMA , please v isit
w w w.imanet.org.
About the CMA (Certified ®
Management Accountant)
IMA ’s globally recognized CMA® (Certifi ed Management A ccountant) is the leading certifi cation
for management accountants and fi nancial professionals in business. Earning the CMA requires
a mastery of advanced- level know ledge in four critical areas: fi nancial planning, analysis, control,
and decision support. F or more information about the CMA certifi cation program, please v isit
w w w.imanet.org/cma- certifi cation.
Student Membership
You are eligible to receive a complimentary one-year student membership to IMA . T hrough your
course instructor, learn how to obtain this valuable career benefi t, a $39 value.
III
About the Authors
C.J. MCNA IR-CO NNO LLY, PH.D., CMA , is know n for her innovative w ork in cost man-
agement and control systems. B ased on a multitude of fi eld studies conducted over almost 35
years, plus a lifetime of w orking in practical settings, she brings a common- sense perspective
that emphasizes how management accounting is applied by modern organizations. Dr. McNair-
Connolly has published ex tensively on such topics as performance management, capacity cost
management, lean/ process management, and strategic cost management.
K ENNET H A . MERCHA NT, PH.D., CPA , is the Deloitte & Touche L L P Chair of A ccountancy
at the U niversity of Southern California w here he prev iously served as the Dean of the L eventhal
School of A ccounting. H e prev iously taught at H arvard U niversity and the U niversity of California,
B erkeley. H is research interests span the areas of management accounting, management control
systems, accounting ethics, and corporate governance, and, on those topics, he has w ritten 11
books and more than 80 articles.
Preface
Management A ccounting: A n Integrated A pproach, authored by Dr. C.J. McNair- Connolly and
Dr. K enneth A . Merchant, refl ects the lessons learned from a combined 75+ years of applied
research into modern management accounting practice in a w ide variety of organizations. A s
such, the approach taken di ers signifi cantly from that used in other management accounting
tex tbooks today. Starting from a basic set of tools developed in Chapters 1-5, these tools are then
applied across fi ve decision domains: product, process, entity, customer/ market, and value chain.
U nify ing the discussion is the core management process: Plan- Do- Check-A djust. T he learning
objective behind this approach is best stated as: U se a range of realistic settings to build students’
ability to e ectively analy ze problems and opportunities and communicate recommendations to
management. T he result? Students complete the course w ith an integrated, pow erful set of ana-
ly tical tools and approaches that they can apply throughout their academic and organizational
careers. Topics and analyses each have a logical placement w ithin the tex t — as part of the set of
key management accounting tools or a situation w here the tools can be applied.
In addition to building students’ analy tical skills, the tex t is also developed around three com-
panies: Easy A ir (airline; Chapters 1-5), K inkaid Cabinets (manufacturing; Chapters 6- 9), and
IV
Prestige A uto (dealership/serv ice; Chapters 10-14). A set of database problems, constructed as
separate w orkbooks in Excel, refl ect the performance issues these companies face. Combined
w ith the integrative framew ork — w hich includes both fi nancial and nonfi nancial metrics, analyses,
and potential behav ioral impacts of measurement — these three company settings reinforce the
message that companies use management accounting tools and techniques to address a multi-
tude of problems and opportunities.
In this, the second edition, the basic structure of the tex t and its focus on building an integrated
analy tical tool set applicable to a broad range of settings and issues remain intact. T he focus in
the rev ision process has been on ensuring that errors and omissions have been addressed and
that formulas and discussions have been analy zed to ensure their clarity and informativeness.
Specifi cally, the follow ing changes have been made:
• T he data tables for the airline industry and Easy A ir, the fi rst focus organization, have been
updated to incorporate 2017 results.
• A n ex tensive, comprehensive line- by- line edit of the entire tex t w as conducted.
• Verifi cation that all numerical detail and the related discussions are consistent.
• Structural and content analyses of all tables in the tex t w ere completed, including problem
material, to identify any errors, omissions, or related issues and make necessary changes.
• A ll database problem instructions w ere rev iew ed to ensure that designated w orksheets
and templates are correctly identifi ed and instructions for problem completion are clear
and logical.
• A ll problem material in the tex t w as checked and modifi ed, if necessary, to ensure correctness
and consistency.
• R ev iew, and correction/ modifi cation if necessary, of all formulas used in the tex t to enhance
clarity w as completed.
• Careful ex amination of all ex amples, discussions, and defi nitions to ensure clarity and consis-
tency w as undertaken.
• Correction of all identifi ed ty pos, aw kw ard grammar, and related issues w as completed.
• R ev iew of all fi gures used in the tex t, making corrections and adjustments w here needed,
w as conducted.
• F ull editorial rev iew of all author and early adopted recommended changes w as completed.
• “In the New s” and “L ooking B ack” sections w ere updated w here needed improvements
w ere identifi ed.
• R ev iew and correction/clarifi cation of solutions in Solutions Manual w here needed has
been completed.
In other w ords, the entire tex t has been carefully read, edited, analy zed, clarifi ed, and, w here nec-
essary, corrected. W hile it is quite likely some issues may remain, signifi cant e ort has gone into
identify ing and eliminating errors and clarify ing discussions, formulas, tables, fi gures, and analy-
ses. A ll remaining issues are the responsibility of the authors.
V
Acknowledgements
REVIEWERS
Many thanks to the follow ing indiv iduals w ho generously volunteered their time and ex pertise.
George Joseph, U niversity of Massachusetts L ow ell; L orenzo Patelli, U niversity of Denver;

Mohammad Nurunnabi, Prince Sultan U niversity ; Dennis J. George, U niversity of Dubuque; Diane
Miller, Central Christian College of K ansas; Deron A dam W atanabe du Pon, V irginia Poly technic
Institute & State U niversity ; Todd A . Shaw ver, B loomsburg U niversity of Pennsy lvania; Cathy
Margolin, U niversity of Phoenix ; K aren Mattison, Presby terian College; Sajay Samuel, Penn
State; B ruce R . Neumann, U niversity of Colorado Denver; Steven A . H irsch, Metropolitan State
U niversity ; Joshua Zender, H umboldt State U niversity ; B . Douglas Clinton, Northern Illinois
U niversity ; Christopher P. A quino, Niagara U niversity ; Gregory L . Dav is, U niversity of Illinois at
U rbana- Champaign; Doni Suzanne Mollus, Northw est Missouri State U niversity ; Stacy B oyer- Dav is,
Northern Michigan U niversity ; Jeanne Dav id, U niversity of Detroit Mercy ; V icki Jobst, B enedictine
U niversity ; K aren Dav ies, U niversity of South Dakota; R obert Goodw in, U niversity of Tampa;
L ourdes F. W hite, U niversity of B altimore, Jidong Zhang, W inona State U niversity ; Saurav Dutta,
Curtin U niversity.
VI
C O N T E N T S
C H A P T E R O N E
BUSINESS PLANNING AND ANALYSIS: AN INTEGRATIVE FRAMEWORK FOR MANAGEMENT ACCOUNTING . . . . . . 1
C H A P T E R T W O
MEASURING AND EVALUATING PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . 41
C H A P T E R T H R E E
DEFINING AND USING COST ESTIMATES . . . . . . . . . . . . . . . . . . . . . . . . . . 91
C H A P T E R F O U R
COST POOLS, CAPACITY, AND ACTIVITY- BASED COSTING . . . . . . . . . . . . . . . . . . . . 165
C H A P T E R F I V E
UNDERSTANDING THE MANAGEMENT PROCESS. . . . . . . . . . . . . . . . . . . . . . . . 217
C H A P T E R S I X
PLANNING IN THE PRODUCT DOMAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
C H A P T E R S E V E N
ASSESSING AND IMPROVING PRODUCT PROFITABILITY . . . . . . . . . . . . . . . . . . . . . 337
C H A P T E R E I G H T
SETTING PROCESS EXPECTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393
C H A P T E R N I N E
EVALUATING AND IMPROVING PROCESS PERFORMANCE . . . . . . . . . . . . . . . . . . . . 455
C H A P T E R T E N
SETTING PERFORMANCE EXPECTATIONS AT THE ENTITY LEVEL . . . . . . . . . . . . . . . . . . 503
C H A P T E R E L E V E N
SETTING PERFORMANCE EXPECTATIONS IN LARGE, COMPLEX ORGANIZATIONS . . . . . . . . . . . . . 565
C H A P T E R T W E L V E
EVALUATING AND IMPROVING ENTITY PERFORMANCE . . . . . . . . . . . . . . . . . . . . . 625
C H A P T E R T H I R T E E N
SETTING AND ACHIEVING TARGETS IN THE CUSTOMER DOMAIN . . . . . . . . . . . . . . . . . . 675
C H A P T E R F O U R T E E N
STRATEGIC COST MANAGEMENT AND THE VALUE CHAIN DOMAIN. . . . . . . . . . . . . . . . . . 725
VII
VIII
C H A P T E R O N E
Business Planning and Analysis:

An Integrative Framework for
Management Accounting
T he culminat ing point of administ rat ion is to k now w ell how much
pow er, great or small, w e ought to use in all circumst ances.
1
M O N T E S Q U I E U
C H A PT E R RO A D MA P L E A RN I N G O B J E C T I V E S
1. The World of Management: An Overview After studying this chapter, you should be able to:
What Is a Manager? 1. Explain the basic nature of managerial work.
Types of Managerial Work 2. Discuss the management process and describe how management
2. The Management Process and the Role of Management Accounting accounting supports these e orts.
3. What Is Business Planning and Analysis? 3. Describe how a BPA lens a ects management accounting practices and
BPA as a Tool to Integrate Management Accounting Practices how these di er from financial accounting.
A Financial vs. Managerial Perspective 4. Identify the primary types of information in a management accounting
4. The BPA Integrated Framework and Management Accounting database and analyze the concept of a decision domain and how it is
The BPA Database applied to organizations.
The Decision Domains 5. Illustrate how measurements influence decision making and behavior
5. Management Accounting: Real World—Real Issues in organizations.
Analyzing Performance 6. Interpret the IMA Statement of Ethical Professional Practice that guides
Management Accounting in Action the use and presentation of information within organizations.
6. IMA Statement of Ethical Professional Practice 7. Describe the various career paths open to management
7. The Management Accounting Professional accounting professionals.
1 The Forbes Scrapbook of Thoughts on the Business of Life, Chicago: Triumph Books, 1992: p. 182.
1
CH A PT ER O NE
S
U CCE SS IN B U SIN E SS B O IL S D O W N T O MA N A G E R S MA K IN G G O O D D E CI-
sions. Behind every such decision lies a management accounting database supported by an
information network that either formally (for example, with rules or policies) or informally
(for instance, the culture of an organization) links the organization’s people and progress
across space and time. This network of information, and the data that flows through this network, defines
and shapes the practice of management accounting, which is the focus of this textbook.
This book is built around three unique features:
1. An integrative framework that uses a business planning and analysis perspective to
emphasize the relationship between management accounting and management decision
making, control, and information.
2. Three Excel-based databases that illustrate how organizations use information to com-
plete the management accounting processes of planning, decision making, and control.
3. Three industry settings (an airline, a kitchen cabinet manufacturer, and an automobile
dealership) to help you understand management accounting in action.
The overriding objective is to improve your existing critical thinking skills by helping you learn to
analyze and respond to the challenges faced every day by organizations and the managers who run them.
T he World of Management: A n O verview
This chapter introduces the management process—w hat managers do to ensure that their organization
achieves its objectives. We will approach management accounting from a business planning and analysis
(BPA) perspective, which, when applied to management accounting issues, includes all of the activities
in which managers use information, whether for planning, decision making, or control.
Information lies at the center of the management process. Information
is data that has been organized to meet a specific need during decision
OBJECTIVE 1 making and analysis. It is the lifeblood of any organization, essential to
E x p lain t he b asic nat ur e effective decision making and the actions of management. A key focus of
o f m anag er ial w o r k . this book is to illustrate and explain what types of information are used
during the various stages of the management process. This chapter focuses
on understanding the basic elements of the integrative management
accounting framework and how it relates to the work done by business managers. Attention then turns
to how management accounting informs BPA, the key differences between a management accounting
vs. a financial accounting perspective, and what career options exist for the management account-
ing professional.
Let us begin by taking a look at the role of management in organizations and how management
accounting serves the organizations’ information and decision-making needs. As the “In Context” discus-
sion of Easy Air suggests, these needs span the gamut of a business, from strategic decisions such as what
2 MA NA GEMENT A CCO UNT ING

B U SINESS PL A NNING A ND A NA LY SIS: A N INT EGR A T IV E F R A MEW O R K F O R MA NA GEMENT A CCO U NT ING
markets and customers to serve, to basic operational details (for example, what food to serve on a specific
flight). The “In Context” discussions are used throughout the text to help illustrate the role of management
accounting in a realistic business setting.
IN CO N T E X T Easy A ir: Confronting the Problem

Easy A ir Chief O perating O cer (CO O) F ran Conte stared out of the
w indow of her o ce. Ly ing open on the desk behind her w ere the
most recent fi gures from the fi nance department. Profi ts w ere dow n
for the third quarter in a row, lost and damaged baggage claims w ere
soaring, and Easy A ir’s on- time arrival and departure performance w as
abysmal. T he trends w ere troubling, and it w as F ran’s job to change
them. In the 20 years since she and F rank R usso founded Easy A ir, they had faced constant
challenges. B ut at the end of the day, they had alw ays found a w ay to improve perfor-
mance and make money at the same time—until now.
Easy A ir, headquartered in the Midw est, fl ies only one ty pe of plane, the A irbus 321.
T his means one kind of spare parts and one maintenance routine, w hich greatly simpli-
fi es Easy A ir’s operations. Each plane has the same seating confi guration, making it quite
simple to sw itch aircraft (or “tails”) betw een routes and fl ights. Easy A ir o ers only one
class of serv ice—no- frills coach seating—and only one fare for each fl ight. No matter w hen
or how the passengers for a specifi c fl ight book and pay for their travel, they pay the
same price.
Emphasizing point- to- point serv ice, Easy A ir fl ies directly betw een secondary airports
located near major cities and population centers. Initially a regional carrier serv ing the
Chicago/ Milw aukee/ Indianapolis market, the company has grow n steadily over the last
20 years to become the 10th largest air carrier in the U nited States, serv ing all major cities
from K ansas City, Mo., to the eastern seaboard.
W ith this grow th, operations have become increasingly complex . Corporate headquar-
ters has been relocated fi ve times, each time to a signifi cantly larger space. F light opera-
tions, once housed in a single room, now has its ow n dedicated w ing. A dvertising, initially
run by F rank, now has more than 150 employees w ho coordinate ad campaigns, design
promotions, and manage a w ide- ranging set of corporate programs. W hile F rank still has
the fi rst chair he bought for himself w hen Easy A ir w as founded, the company bears little
resemblance to the fl edgling airline of its early years.
U nfortunately, some of the di erences betw een the Easy A ir of the past and today ’s
company are not as positive. Easy A ir built its reputation on hassle- free, on- time, depend-
able air travel. B ut w ith grow th has come a rapid decline in performance, as the most recent
fi nancial and operational reports so clearly demonstrate. F ran’s challenge is to deter-
mine w hat Easy A ir can do to reverse these trends. H ow can profi ts be improved w ithout
increasing fares or reducing the level of serv ice Easy A ir prov ides to its customers? Should
MA NA GEMENT A CCO UNT ING 3

CH A PT ER O NE
some routes be cut, or should new ones be added? W ould it be better to low er fares to fi ll
empty seats, or raise them to increase the revenue earned per passenger mile fl ow n?
B efore she could answ er these questions, F ran knew she needed more information in
order to properly analy ze the current situation, identify options for improvement, make
choices, and track the impact of any changes made. F or this, she w ould have to call upon
her management accounting systems and analysts.
WHAT IS A MANAGER?
An organization is the sum of the skills and efforts of its people. Every individual is an essential part of the
complex web of actions and relationships that define and shape the modern business organization. The
coordinated effort of these actions and relationships results in products and services that customers are
willing to buy.
In an effective business organization, individuals have different roles and responsibilities. Not everyone
makes the product or calls on customers to secure sales of these products. Some individuals are directly
involved in producing the firm’s goods and services, while others support these efforts. Some perform the
tasks they are assigned, while others—the managers—determine what should be done.
Managers are those indiv iduals in an organization w ho are responsible for the w ork performed by one or
more other people. Managers define the goals and objectives for those under their direction. They organize
the work so that the team, or work group, can achieve these objectives. Managers also take on the respon-
sibility for ensuring that the efforts of the work group yield the desired outcomes. This includes securing
and mobilizing needed resources, evaluating progress towards defined goals, and making adjustments to
both plans and individual or group actions when needed.
TYPES OF MANAGERIAL WORK

As Table 1.1 shows, there are many different types and levels of managers in organizations. Management
accounting supports each level of management, providing the specific type of information needed to make
strategic, tactical, and operational decisions; control operations at all levels; and make adjustments to how
work is done.
The lowest level of management is the operational manager, who structures, manages, and directly participates
in the day-to-day activities that result in the production or support of the products and services o ered by the fi rm . Also
known as a “supervisor,” the operational manager is only one step removed from the actual daily work of the
organization. Work at this level is organized along two primary dimensions: horizontal (process-based) or verti-
cal (function-based). Management accounting supports analysis and decision making across both dimensions.
F unctional managers translate organizational objectives into practical goals, establish performance evalua-
tion criteria, ensure that leading- edge practices are applied, and assign indiv iduals to purposeful tasks and activ-
ities. They focus on a specific type of work, such as finance, marketing, or manufacturing. For example,
when you choose a major in college, you are making the choice of a “function” or type of work that you
will do when you graduate. A functional manager oversees the “vertical” or top-to-bottom flow of work,
information, relevant objectives, and decisions in an organization.

TABLE 1.1 MANAGEMENT LEVELS AND ACT IVIT IES
Management Level Ty pes of A ctiv ities Performed
Establish the vision for the organization.
Develop strategy and key objectives.
Secure required capital and other key resources.

Top
Management Define the organizational structure.
Team Assign responsibility for decision making and results.
Establish expectations and criteria for evaluation performance.
Set the tone for management and the organizational culture.
Establish e ective relationships with key customers and suppliers of process output.
Define standards of performance for activities within the process.
Coordinate individual and group e orts to optimize performance and minimize disruptions, variance,
Process and errors.
Managers
E ectively negotiate for and obtain needed process resources.
Identify and implement best practices.
Create and execute continuous improvement initiatives.
Translate organizational objectives into functional goals and objectives.
Identify key activities and performance requirements.
Organize and assign operational managers to specific activities and functional goals and objectives.
Functional
Managers Establish performance evaluation criteria for the operational managers and their work groups.
Negotiate and obtain required resources.
Ensure that leading- edge practices are implemented.
Translate functional and process objectives into key activity and task goals to guide their employees’ e orts.
Organize and assign individuals to specific activities.
Assign specific goals and evaluate resulting progress.
Negotiate and secure needed resources.

Operational
Managers Identify and resolve operational problems.
Ensure coordination with other work groups.
Support learning and continuous improvement within the work group.
Report results and problems to a ected managers.

CH A PT ER O NE
Process managers, on the other hand, defi ne standards of performance, establish relationships w ith key
customers and suppliers, and coordinate indiv idual and group e orts to achieve objectives. They oversee spe-
cific clusters or chains of activities—in other words, how the efforts of individuals, teams, and functional
groups are linked together to produce products and services for the firm’s customers. A process manager
emphasizes the organization’s “horizontal” or cross-functional efforts. Process and functional managers
jointly oversee the work of operational managers.
T he top management team establishes the v ision; sets the strategy; secures required capital and key
resources needed to produce, deliver, and support the fi rm’s products and serv ices; builds the culture of the
organization; defi nes the organization’s structure; and assigns responsibility for achiev ing organizational objec-
tives. Like an army general, top management either directly or indirectly performs command and control
activities that shape the efforts of every individual in the organization. Responsible for the performance of
the entire organization, the top management’s vision shapes the organization’s potential and performance.
L O O K IN G B A CK T he F ive Basic Tasks of a Manager

More than 60 years ago, Peter Drucker published his fi rst major book on
the work of managers in organizations. It is as pertinent today as it
w as then.
T he manager has the task of creating an organization that is larger
than the sum of its w orking parts, making it a productive entity that
turns out more output than the sum of the resources used to produce
this output. T he task of organizing the entity to be productive requires the manager to
make e ective use of w hatever benefi ts there are available in his resources—especially in
the human resources—and neutralize w hatever w eaknesses are discovered.
T here are fi ve basic activ ities that comprise the w ork of the manager:
1. Managers set objectives for their employees and determine w hat needs to
be done to reach these objectives. T hrough e ective communication of these
objectives to the w orkforce, managers optimize organizational actions.
2. Managers organize the activ ities of the organization. T hey analyze the activ ities,
decisions, and relations needed to get work done and then select the people
w ho w ill manage the work and ensure that it is done e ectively and e ciently.
3. Managers motivate and communicate w ith their employees. U sing e ective
team- building approaches, they ensure the smooth functioning of w ork units.
4. Managers measure outcomes. B y analy zing outcomes using accurate and
e ective measurements, they ensure that the w orkforce understands w hat
needs to be done and w hy each activ ity and outcome is important. A man-
ager analy zes performance, appraises it, and interprets it.
5. Managers develop people. B ased on the w ay that they deal w ith their w ork-
force, managers either improve or destroy employee motivation, focusing
their attention on either the right or w rong things. T hey bring out w hat is

best in each indiv idual, or w hat is w orst in them. A ll of this is done based on
the manner in w hich the manager deals w ith the w orkforce.
A ll managers perform these activ ities w hen they manage—w hether they are conscious
of these facts or not. T hey may do them w ell, or they may do them quite poorly, but they
alw ays do them.
Peter Drucker, The Practice of Management, New York: Harper & Row Publishers, 1954: pp. 341- 344.
T he Management Process and the Role of Management A ccounting
Managers work in all parts of the organization, overseeing everything from the processing of an invoice to
the development of new products and services. Even so, the work that managers do has a common struc-
ture, as Peter Drucker suggests. This structure reflects key management
work of setting objectives, organizing work flows, motivating and com-
municating, measuring, and developing their staff so they are better able OBJECTIVE 2
to do their work. We call this structure the management process, a con- D iscuss t he m anag em ent
tinuous cycle of e ort, action, achievement, target setting, and grow th that p r o cess and d escr ib e how
underlies all managerial w ork . It has four primary components: Plan, Do, m anag em ent acco unt ing
sup p o r t s t hese ef f o r t s.
Check, and Adjust; it is often referred to in organizations and manage-
ment literature as PDCA. It uses resources to accomplish organizational
goals and is illustrated in Figure 1.1. Managers are responsible for plan-
ning how the resources will be deployed. They also provide leadership, making sure that the work their
subordinates do is well-organized and controlled. With a constant eye on the targeted objectives, effective
managers coordinate, support, and direct the efforts of their work group to achieve desired results.
ADJUST PLAN
CHECK DO
FIGURE 1.1 T HE MANAGEMENT PROCESS

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The first PDCA component—“plan” —requires making a decision about something that has not yet hap-
pened . When managers plan, they are projecting into the future, thinking through the many different
paths and potential pitfalls that may lie ahead. Like an explorer in a new world, the manager is constantly
scanning the environment, looking for clues and confirmation that the path being followed will lead to the
desired goal—maximizing the value the organization creates for its stakeholders.2
Let us think about the various plans an organization might make. For instance, a cell phone producer
such as Apple or Motorola has to determine what features it wants to offer in its various models. It has to
plan on the size of the phone, its weight, the features it will provide, and the service providers with which
it wants to partner. Should the cell phone have a built-in keyboard like a BlackBerry, or have one that digi-
tally “pops up” like an iPhone? How big should the screen be? These are all decisions that are made during
the planning phase of the management process.
Manufacturers must consider a variety of options when designing their products. In this case, the
decision revolves around the options that cell phone manufacturers must take into account when design-
ing new models or versions. Color, size, weight, options, battery life, and type of display screen are just a
few of the issues that have to be considered.
Unfortunately, there is no one right way or one right approach for an organization—just a series of better-
or-worse options. The manager uses various types of tools and techniques to identify and compare, and then
chooses among these options. After the required choices are made, actions are set in motion to achieve the desired
results. The actions that are taken make up the “do” that is the primary purpose of an organization. “Do” is the basis
for satisfying customers and earning revenues. The decisions the cell phone developer makes during the plan-
ning stage define what needs to be done to bring the phone to the market.
As events unfold and actions are taken, it becomes important for managers to measure progress toward
the organization’s goals. A measure is a quantifi cation of the dimensions, size, or capacity of any object of inter-
est based on comparing it to a standard or defi ned scale or measurement system . Measures are used both to
keep track of ongoing operations and to assess progress toward defined goals. “Check” describes the com-
parison of actual results to the original plan. Managers can use many different tools to complete this part of the
process, including variance analysis, trend analysis, and profitability analysis. These are all part of the basic
tool set that shapes the analysis completed by management accountants. You will learn more about these
tools in Chapter 5. As you will see, they are an integral part of organizational and management learning and
improvement. For the cell phone companies, the number of customers who choose their various models
define the profitability of the cell phones offered to the public.
If the measured outcomes are in line with expectations, work continues. On the other hand, if out-
comes are not acceptable or if any unexpected changes have occurred in the situation, managers may need
to make adjustments. “Adjust” is the final activity in the PDCA cycle, or the management process. The goal
of the “check and adjust” sequence is to ensure that good outcomes can be repeated and bad ones eliminated, or
at least minimized. In some cases, it may even become necessary to change the defined goals and objectives
2 A stakeholder is anyone who has an interest in, or is a ected by, the performance of an organization. A customer is a stakeholder. Other stakeholders include the owners, employees,
and organization’s business partners.

to address new challenges or opportunities. For our cell phone example, Apple might find problems like it
did with the placement of the antenna on the iPhone 4. This problem led to adjustments in how the model
was designed in order to improve the phone’s network connectivity.
The management process, therefore, includes all of the activities and actions taken to keep the organization
on track3—to check on outcomes and then make adjustments to improve performance against goals. Managing
an organization is a dynamic process of planning and control, action, and adjustment. An effective manage-
ment accounting system has to be equally dynamic. It has to be designed to fit the unique needs of the organi-
zation, reflect the goals and objectives being pursued, and change as conditions or organizational needs evolve
over time. When we merge the structures, objectives, and tenets of the management process with the measure-
ments, analytical approaches, and focus of the management accounting system, we are adopting an integrated
approach that is the essence of all business planning and analysis.
W hat Is Business Planning and A nalysis?
Business planning and analysis (BPA) is a discipline that

can trace its roots back to the earliest days of the “managed”
organization.4 BPA is, in fact, the application and extension OBJECTIVE 3
of the focus and practices that define management account- D escr ib e how a B P A lens af f ect s
ing. The resulting integrated approach emphasizes how m anag em ent acco unt ing p r act ices and
resources are used to complete work in the organization, how t hese d if f er f r o m f inancial acco unt ing .
assess progress toward goals, analyze results and opportuni-
ties, and develop performance evaluation systems..
BPA AS A TOOL TO INTEGRATE MANAGEMENT ACCOUNTING PRACTICES

BPA and management accounting have the same roots in effective management practice, but BPA moves
beyond traditional management accounting logic and analysis in several ways:
1. BPA emphasizes the entire management process, while traditional management account-
ing tends to focus more on cost and profitability analysis.
2. BPA creates an integrated analytical approach, underscoring the fact that management
accounting analysis is based upon a logical set of tools, techniques, and concepts all focused on
understanding and improving organizational performance and decision making.
3 This definition was first developed and presented in the context of management control in Kenneth A. Merchant, Control in Business Organizations, Boston: Pitman Publishing, 1985. In
this text, the control function is presented as an integral part of the management process, not as a separate management function.
4 In much of the early management writing in the 20th Century, the term “cost accounting” was used in place of, or interchangeably with, “management accounting.” By the mid-1950s,
these two terms had taken on quite di erent meanings, with cost accounting defined as an extension of financial accounting that emphasized inventory valuation issues. At this point,
management accounting became the dominant term used to describe the use of financial information in planning, decision making, and control.

CH A PT ER O NE
3. Management accounting based on the BPA framework utilizes an integrated database in

its analysis. Organizations today rely heavily on databases, often called data warehouses,
to support analysis of potential projects or outputs, decision making, and comparison of
actual results with the planned outcomes.
A FINANCIAL VS. MANAGERIAL PERSPECTIVE

While BPA is a logical extension of traditional management accounting that reflects and meets the
needs of today’s management team, this integrated approach has a less explicit tie to the field of financial
accounting. In many ways, management accounting precedes financial accounting in the life of an orga-
nization. Financial accounting takes a historical perspective, effectively “tallying up” the results of prior
periods with an eye toward entity performance. Management accounting develops a set of potential activ-
ities, projects, and outputs, supports the decision-making process, aids in the negotiations that result in
the deployment of firm capital and resources to specific uses, and provides the information that is used to
evaluate and reward performance.
INCO ME PROJECT ED INCO ME

STAT EMENT JA N. 1 STAT EMENT
12// 31// 20 x6 20x7 12// 31// 20 x7
minus minus
= =
H istorical fi nancial
performance in 20x 6
plus plus informs plans and
projected results in 20x 7.
= =
BA LA NCE SHEET PROJECT ED BA LA NCE SHEET

12/ 31/ 20x6 12/ 31/ 20x7
FIGURE 1. 2 TYPICAL FINANCIAL ACCOUNT ING STAT EMENT S
The output of financial accounting is a set of financial statements that includes a balance sheet, income
statement, and statement of cash flows as illustrated in Figure 1.2. It is designed to meet the information
needs of a wide range of external users, such as investors and taxing authorities. In order to ensure that
these outside parties can rely on the data in the published financial statements, and compare these results

to those of other firms, financial accounting has to rely on a large number of rules and regulations. We call
these rules and regulations GAAP, or Generally Accepted Accounting Principles.
As we consider the problems and challenges managers face, we become less focused on rules and more
concerned with developing decision-relevant information. By definition, information developed for man-
agement’s use in planning has to be ex ante, or pre-decision, in nature. This information includes creating
estimates, building scenarios, and predicting results rather than compiling and summarizing prior events.
In management accounting, ex post, or historical, results are used in decision analysis and choice to
allow the comparison of actual results to what was planned, but the goal of these comparisons is to create
new plans and make adjustments to current processes and procedures, not solely to judge past results. Past
results are just one part of the complete set of information used during the management process to explore
opportunities and solve problems at all levels of the organization.
Financial and management accounting should be mirror images of each other in a well-run organiza-
tion. Where management accounting and analysis emphasize the future, financial accounting shines light
on the outcomes of past actions. Where financial accounting looks outward to external users, management
accounting applications focus on meeting internal information needs. Each organization has unique forms
and uses for management accounting information, but financial accounting presents a comparable set of
data and reports for external use by adhering to a defined body of rules and regulations. The better the
management accounting analytics and resulting information systems are, the more accurately management
can predict and shape future results. Management accounting, as informed by BPA, hands off key infor-
mation to financial accounting using budgets (formal business plans) and performance targets. They are
complementary, not competing, information systems.
T he BPA Integrated F ramework and Management A ccounting
As you are beginning to see, management accounting using

a BPA framework encompasses the vast range of issues and OBJECTIVE 4
objectives, questions, and answers that are part of the every- I d ent if y t he p r im ar y t y p es o f inf o r m at io n
day life of a manager. It is not a “subject” one learns, but in a m anag em ent acco unt ing d at ab ase and
rather a set of tools and techniques that are part of every analy z e t he co ncep t o f a d ecisio n d o m ain
and how it is ap p lied t o o r g aniz at io ns.
decision, every action, and every evaluation made within
an organization.
In other words, the integration of management accounting and BPA provides information to help
managers identify and understand the options available to their organization (plan), choose a future
course of action (do), and then ensure that the actions taken achieve the desired ends (check and adjust).
The complete integrated framework is illustrated in Figure 1.3.

CH A PT ER O NE
ADJUST
ENT IT Y PLAN
PR O C E SS PR O D U C T
T H E B PA
DA T A B A SE
C U ST O ME R / SU PPLY
MA R K E T CHA IN
CHECK DO
FIGURE 1. 3 T HE INT EGRAT ED FRAMEWORK
The integration of management accounting and BPA provides managers with the tools needed to
make decisions, then act on and evaluate them. There are three primary parts that comprise the BPA inte-
grated framework:
1. The databases that contain information about the financial and nonfinancial resources
and results of the management process.
2. The management process that identifies the Plan-Do-Check-Adjust sequence that helps
the organization achieve its goals.
3. The five decision domains around which the discussion about the application of the inte-
grated framework within organizations is organized.
The integrated framework is more than a learning or organizational tool. It encapsulates the essence
of the work done by managers in organizations—the dynamic give-and-take, action and reaction, and
plan and adjust that make the world of business so exciting. We have already discussed the manage-
ment process in some depth, so we now turn our attention to the remaining two parts of the integrative
framework: the management accounting database and the decision domains.
THE BPA DATABASE

Information is the lifeblood of any organization. It is the basis for planning, or providing a baseline of
knowledge upon which to build future plans. Information provides insights into current trends in cus-
tomer requirements, competitive structures, and the general economic conditions facing the organization.
Information also serves as the basis for analyzing and evaluating results. Throughout the management
process, information is both used and created.

Information is data that is imbued w ith a purpose. In management accounting, we focus on data that
captures key characteristics of the organization and its performance. This data comes from a number of
sources, such as the general ledger of the organization, where data from financial transactions is recorded.
Data is also collected about the production of the firm’s goods and services. Figure 1.4 shows the six pri-
mary sources of data that make up the BPA integrated database: economic trend data, financial account-
ing, management accounting, operations data, marketing data, and supply chain information.
The management process is defined and constrained by the data available within an organization. This
data is built up over time using the combined inputs of the organization’s financial results (for example, reve-
nues, costs, and profits) and nonfinancial performance metrics that capture operational and strategic efforts
and results (such as market share, quality, and customer satisfaction). Data is transformed into information
during the management process, and it is then used to analyze issues across the five decision domains.
• Revenues earned
• Expenses incurred
• Cash generated and used
• Asset values
• General economic trends and • Material and labor costs

conditions • Overhead costs
• Laws and regulations • Budget information
• Technological developments • Standards
• International trade and • Activity cost and driver information
governance issues • Capacity data
• Value created
• Competitive trends • Chain capabilities

• Customer needs • New materials or services
• Market share • Supplier performance
• Market prices • Supplier capacity
• Customer satisifaction • Prices and availability of
• Distribution channel performance goods and services
• Units produced
• Earned hours
• Materials and labor used
• Process productivity
• Process quality
• Process capacity utilization
FIGURE 1. 4 T HE SIX PRIMARY SOURCES OF DATA T HAT COMPRISE T HE BPA DATABASE
THE DECISION DOMAINS

While the management process is relatively stable, it is applied in a vast number of unique situations.
At any given time, attention can be focused on specific business processes, products, customers or mar-
kets, the entire organization, or external relationships (for instance, the organization’s supply chain).
These different situations, or decision domains, are clusters of decisions that are made by the same type
and level of manager or address a similar set of opportunities and issues. They present unique opportu-
nities and challenges to the company and the people who work in it.

CH A PT ER O NE
As shown in Figure 1.5, organizations have five primary decision domains:

1. The process domain: The focus is on how work is done. A process is the linked set of actions and
outcomes that are used to meet customer expectations on an ongoing basis. When you choose your
classes at school, you are using your school’s registration process.
2. The product domain: The focus is on all of the decisions and activities that directly or indi-
rectly support the products or services offered by an organization to its customers. In the
product domain, what is accomplished with an organization’s resources is emphasized. A
question about how much it costs to make one pair of blue jeans is answered in the prod-
uct domain.
3. The customer/market domain: The focus is on the decisions and activities that affect a spe-
cific part, or segment, of the firm’s customers or markets. This includes all of the analysis and
decisions that tie to a specific customer or market segment. If a company is trying to decide
if it should begin doing business in China, for instance, it is concerned with an issue that falls
within the customer/market domain.
4. The supply chain domain: The focus is on the decisions that affect the firm’s relationships
with its suppliers and trading partners. The company that makes the denim fabric used in
making a pair of blue jeans is part of the industry’s supply chain. When we look outside of the
boundaries of the organization, we are looking at issues that fall in the supply chain domain.
5. The entity domain: The focus is on planning, achieving, and evaluating results for the
entire organization. The other four domains fall within the entity domain. When we calcu-
late the annual budget for a company, we are applying management accounting within the
entity domain.
ADJUST
ENT IT Y PLAN
PR O C E SS PR O D U C T
C U ST O ME R / SU PPLY
MA R K E T CHA IN
CHECK DO
FIGURE 1. 5 T HE DECISION DOMAINS

The decision domains are used to organize the tools, techniques, and topics that make up modern
management accounting practice. In each domain, the same concepts, logic, and analytical tools are used,
but are just applied to a different set of problems. In other words, while there are many different issues
that arise in the course of doing business and many different questions that managers must answer on any
given day in an organization, the underlying flow of the management process remains relatively stable. It
begins with identifying opportunities and challenges, and gathering information about the issue. Analysis
and decision making follow, setting in motion the actions that managers believe will help them accom-
plish the organization’s goals.
One of the hardest things for organizations to implement is the sharing of decision making through-
out the organization. This is especially true in entrepreneurial firms. Often the entrepreneur does not want
to let go of the reins. It is a wise entrepreneur who realizes he or she cannot be an expert at everything.
One such entrepreneur was Dane Miller, founder of Biomet, one of the world’s largest manufacturers of
medical equipment. Facing problems managing the growth of the firm, Dane agreed to a merger with
Zimmer, another company in the orthopedic market. Trained as a biomechanical engineer, he was very
gifted when it came to inventing complicated new medical equipment, but he knew he did not know it all.
When it came time to buy half a million dollars’ worth of computer equipment, he turned to those
individuals in the organization who would know the right thing to do—he moved the decision into the
right decision domain: the process domain. In all matters, Dane forced decisions down to the level where
they could be best made. While that is not always easy in a culture that defers to senior management,
Dane credited this delegation of decisions to the individuals skilled in the various domains as the reason
for his company’s growth from a start-up to its subsequent merger to form Zimmer Biomet in 2015, a
firm that now has estimated net assets in excess of $27.2 million. The merger was formally approved on
February 16, 2015, six days after Dane passed away. The culture of delegation and trust that Dane built
lives on in the company.
Management A ccounting: Real World—Real Issues
In order to help you understand the concept of decision domains and decision making, it is useful to first
get a better understanding of the environment in which a company operates. Since the company being
focused on in this chapter is Easy Air, let us take a look at the challenges it faces.
The airline industry is one of the most highly regulated and highly taxed industries in the United
States. In 1914, the first commercial airline operation was started to transport passengers from Tampa to
St. Petersburg, Fla., using a Benoist seaplane.5 While this first flight was not subject to federal regulations,
5 Teo Ozdener, “Quality Management Systems and the Aviation Regulatory Environment,” Handbook of Airline Operations, G.F. Butler and M.R. Keller, eds., New York: Aviation Week/
McGraw- Hill, 2000: pp. 19- 20.

CH A PT ER O NE
within weeks, the U.S. Army Signal Corps established the Aircraft Production Board to control quality
and schedules in the aviation industry. As Table 1.2 suggests, this was only the tip of the iceberg in terms
of aviation regulations.
TABLE 1. 2 REGULAT IONS AND T HE AIRLINE INDUST RY
Date A gency or A ct F ocus
1914 Aircraft Production Board Controls quality and scheduling within the aviation industry.
National Advisory Committee for Provides recommendations and oversight for aeronautic activities; became the
1915 Aeronautics National Aeronautics and Space Administration (NASA) in 1958.
Focuses on licensing, air tra c control, accident investigation, and the testing of
1926 Air Commerce Act
aircraft and engines; it is the foundation for all aviation regulations.
Air Transport Association of America Represents the airline industry; it is still the only aviation trade association for the
1936 formed principal U.S. airlines.
1938 Civil Aeronautics Act Creates Civil Aeronautics Authority (CAA), which is responsible for all civil aviation.
Establishes the CAB, an o shoot of the CAA, to oversee airline industry routes, rates,
1940 Civil Aeronautics Board
and antitrust and business practices.
Creates the Federal Aviation Agency (FAA) and mandates, through statutes, the
1958 Federal Aviation Act improvement of air tra c control and other aspects of air safety; today, the FAA
controls all navigable U.S. airspace.
The Department of Transportation Creates the National Transportation Safety Board (NTSB) to investigate accidents; FAA
1966 created also moved into this department; renamed the Federal Aviation Administration in 1967.
Makes NTSB an independent agency charged with investigating all

1974 Independent Safety Board Act
transportation accidents.
Aerospace Basic Quality System Sets an industry quality standard for aircraft manufacture and maintenance;
1997 Standard developed by the FAA, Department of Defense, and NASA.
Makes broad- sweeping changes to the security systems in U.S. airports on the heels
2001 Transportation Security Act of the 9/11terrorist attacks; the administrative bureau created by this act continues to
issue regulations that a ect every traveler every day.
Focuses on preventing excessive tarmac delays, increasing information availability on

2009- Enhancing Airline Passenger flight reliability, and fare structures; as of 2012, these two major acts (EAPPs), created
2012 Protections Acts under this umbrella legislation, are projected to impose major compliance costs
on airlines.
All of these organizations, along with Congress and state bodies, continue to create new regulations and requirements for the
airline industry. The FAA periodically issues Federal Aviation Requirements (FARs) to control the design, manufacturing, and
O ngoing
certification of airline engines, as well as certify airlines, pilots, mechanics, and related functions. While the FARs only mandate
inspections, the FAA Advisory Circulars emphasize internal audits and the use of specific corrective or preventive actions.

Federal Aviation Requirements impose operational requirements on airlines, including several man-
datory management positions: director of operations, director of maintenance, chief inspector, and chief
pilot. Most airlines also have specific positions for in-flight and dispatch operations, all of which report to
the vice president of operations, as detailed in Figure 1.6.
FIGURE 1. 6 BASIC AIRLINE ORGANIZAT IONAL ST RUCT URE
ANALYZING PERFORMANCE
It is in this complex environment that Fran and her management team at Easy Air have to successfully and
profitably compete. Although Easy Air posted profits during most of its years of operations, it has become
very difficult to make money in the era after the aircraft-based bombings of the World Trade Center and
the Pentagon on September 11, 2001, with its environment of increased
taxes, heightened fare-based competition, and major additions to the body
of FAA regulations governing airline operations. All of these challenges OBJECTIVE 5
have been enhanced by concerns with terrorism and its impact on the I llust r at e how m easur em ent s
flying public. In addition, Easy Air must deal with a traveler who accepts inf luence d ecisio n
fewer frills but expects more convenience and reliability than passengers m ak ing and b ehav io r
in o r g aniz at io ns.
did in the 1990s. Air travel is no longer a luxury, enjoyed by few, but a

CH A PT ER O NE
central means of travel the majority of Americans use. Today, airplanes are to modern travel what buses
and trains were to travelers in earlier eras.6
The airline industry uses many traditional measures of performance, such as operating revenue, oper-
ating profit, and net income. There are also many measures of performance that are unique to the indus-
try, including revenue passenger miles, available seat miles (an industry capacity measure), and passenger
load factor. Table 1.3 summarizes recent results for the industry in general, for large national carriers such
as Easy Air, and for Easy Air itself.
TABLE 1. 3 SUMMARY OF OPERAT ING RESULT S 7
Measures A irline Industry National Carriers Easy A ir

($s stated in millions) 20x 7 20x 6 20x 7 20x 6 20x 5 20x 4
Operating revenues $ 222,127.9 $ 210,287.5 $ 160,524.8 $ 152,097.5 $ 9,522.0 $ 9,112.7
Operating expenses $ 205,146.2 $ 143,300.0 $ 143,313.7 $ 106,400.0 $ 8,536.5 $ 7,430.9
Operating income (loss) $ 16,981.7 $ 66,987.5 $ 17,211.1 $ 45,697.5 $ 985.5 $ 1,781.8
Available seat miles 1,740,439.0 1,664,780.8 809,088.9 780,823.2 62,993.5 53,986.0
Revenue passenger miles 1,435,274.5 1,372,278.9 684,221.4 659,977.5 53,796.4 48,215.4
Passenger load factor 82.5% 82.4% 84.6% 84.6% 85.4% 85.1%
Revenues and revenue passenger miles both trended down for the two-year period, with a similar
impact on the average fare-per-seat mile flown for both the industry and for Easy Air. Specifically, the indus-
try as a whole earned $0.1548 per seat mile flown in 20x7 (that is, stated in millions, $222,127.90 divided by
1,435,274.50 revenue passenger miles), up from $0.1532 per revenue seat mile in 20x6, a drop of 1%.
Many of the questions that arise from these numbers involve the product domain—the cost and profit
of flying passengers. Specifically, what are the costs to serve one passenger on one flight? How many pas-
sengers are needed to break even, the point in operations w here the total costs to meet customer needs exactly
match the revenue earned from these activ ities, which in this case would mean to meet the unavoidable costs
of one flight? One route? Are some routes more profitable than others? Why or why not?
To begin to understand these issues, Fran asked Sanjiv Dugal, one of her senior financial analysts, to
develop a cost estimate for operating a flight and serving a specific customer, along with summary statis-
tics for Easy Air for the period 20x4 to 20x6. Table 1.4 presents the results of Sanjiv’s initial work.
6 Throughout the first five chapters, heavy reliance is placed on the report “Consumer Regulation and Taxation of the U.S. Airline Industry: Estimating the Burden for Airlines and the
Local Impact,” by Darryl Jenkins, Joshua Marks, and Michael Miller, Bethesda, Md.: The American Aviation Institute, 2011.
7 The source for these statistics is the U.S. Transportation Department Bureau of Statistics, specifically www.transtats.bts.gov, obtained on June 6, 2018.

TABLE 1. 4 SUMMARY OF EASY AIR’ S PERFORMANCE 20x4- 20x6
Perfomance Indicator 20x6 20x5 20x4
Total flights flown 3,575,240 3,489,434 3,297,515
Total passengers flown 373,369,464 363,557,175 342,354,639
Total revenue seat miles flown (in thousands) 54,405,612 53,796,413 48,215,413
Available seat miles (in thousands) 63,557,958 62,993,458 56,657,360
Average miles per passenger flight 265 260 233
Number of stations 120 112 106
Total operating revenue (in thousands) $ 9,303,359.7 $ 9,521,965.1 $ 9,112,713.1
Total operating expenses (in thousands) $ 8,899,038.1 $ 8,536,503.9 $ 7,430,858.9
Operating profit (in thousands) $ 404,321.6 $ 985,461.2 $ 1,681,854.1
Average revenue per revenue seat mile flown $ 0.171 $ 0.177 $ 0.189
Average expense per revenue seat mile flown $ 0.164 $ 0.159 $ 0.154
Average profit per revenue seat mile flown $ 0.007 $ 0.018 $ 0.035
Average load factor (% seats filled per flight) 85.6% 85.4% 85.1%
Average on- time performance rating 88.5% 92.5% 95.3%
Number of baggage claims 250,200 179,100 155,800
Number of customer complaints 380,100 295,300 245,500
Number of ground/gate delays 3,800 2,100 1,800
Number of canceled flights 1,425 950 600
Number of purchase orders 800,000 765,000 725,000
Number of deplane/enplane events 7,150,480 6,978,868 6,595,031
Number of bags handled 298,695,571 290,845,740 273,883,711
Number of tickets issued 410,706,410 399,912,892 376,590,103
Number of reservations 466,711,830 454,466,468 427,943,299
Number of ads placed 1,675,000 1,273,000 1,527,600

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For Easy Air, the picture was even worse than it was for the industry as a whole and for other national
carriers, with average fare per revenue seat mile dropping from $0.189 in 20x4 to $0.177 in 20x5, or a drop
of 6.3%. Unless things changed, the average fare for 20x7 would drop to $0.171, or another 3.4%.
Easy Air had run a series of promotions in 20x6 to boost its load factor, offering “buy one, get one free”
deals for any passenger booking two or more flights at one time. The multiple flights applied to one person
traveling multiple times between two cities, or for two or more people traveling on the same plane. Looking
at these results, it is easy to understand why Fran is so concerned about Easy Air’s performance. Revenues are
down while passenger miles flown have increased—the gains have come at the cost of profits. Full planes that
come close to losing money are not a good idea if Easy Air wants to remain in business.
Knowing these results and measurements is clearly important, but what Fran needs to know is how Easy
Air can reverse these negative trends. The information we have so far shows us the results of the work done
by the company. To change these results, however, Fran and her team have to turn their attention inward to
gain a better understanding of Easy Air’s processes, costs, and capabilities. Performance improvements, such
as those needed at Easy Air, require analysis and decision making across all five of the decision domains.
Revenues and the number of passengers flown climbed over the past three years, but profits actually
dropped. Looking at the cost picture, there was a small increase in the average expenses per passenger
flight, but given the related increase in average miles flown, it appears that these costs actually held fairly
steady. Using the information in Table 1.4, we can begin to develop an idea of the profit Easy Air made per
passenger. Specifically:
Estimated revenue per passenger mile fl ow n—20x 7 $ 0.171

Less: average cost per passenger mile flow n – 0.164
A verage profi t per passenger mile fl ow n in 20x 7 $ 0.007
T imes: average nautical miles per flight × 265
Estimated profi t per passenger per fl ight in 20x 7 $ 1.855
It appears that one of the problems facing the airline industry is that average revenue and operating
profit per mile flown are quite low. The industry results for 20x7 were $0.153 of revenue per passenger
mile flown (as calculated from Table 1.3). It would appear that even though this metric is declining at
Easy Air, the firm is still well-positioned in the industry. That said, far too little is being earned per rev-
enue passenger mile. If the company raises prices, however, it will likely reduce the number of passen-
gers who opt to fly Easy Air because of the high elasticity in the industry with respect to fares. In other
words, Easy Air would face a rapid drop in demand for its air travel if the price of air travel increases.
The good news is that Easy Air did post an operating profit over this period due to its lower administra-
tive costs. However, it would not take much of a drop in average fares or number of passengers flown to
put Easy Air in the unhappy position of posting a loss.

As we can see from the nonfinancial information in Table 1.4, while the passenger load factors have
decreased slightly, there is also a less than desirable increase in problems. Baggage claims are up, on-time
arrival performance is slipping, and complaints are growing. Armed with this information about the chal-
lenges facing Easy Air, let us rejoin Fran as she meets with Sanjiv to discuss his findings.
IN CO N T E X T Easy A ir: Compiling the Data

“Sanjiv, if I’m reading these numbers correctly, w e are barely breaking
even on a passenger’s fl ight. Even w orse, it seems that as w e’re getting
busier, our passengers are becoming less and less happy w ith us.
Neither of these trends is very good.”
“A re you really surprised? I thought everyone knew that baggage
problems are on the rise. T he hum in ground ops is that w e can’t seem
to turn around a plane as fast as w e once did. T hey ’d like us to increase the time w e give
them to deplane a fl ight, clean the plane, and then reboard new passengers by 10 minutes.
T hat w ould improve the on- time performance, at least in their v iew. I think w e just have to
loosen our standards a bit and w e’ll be okay !”
“I know we have problems, Sanjiv, but I don’t think we have enough information to come up
w ith an answer yet,” Fran replied. “Ground ops may want more time, but that’s not the answer.
A ctually, wouldn’t that just create more problems? How could we service our existing routes and
flights if we spend 50% more time on the ground than we do today? Do you have a Plan B?”
“Not right o the top of my head, but I’m sure there are other options,” Sanjiv replied.
“Great! To get us started, then, I w ant you to pull together some backup information,
starting w ith the nonfi nancial performance issues, such as baggage claims. W hat’s hap-
pening? W hy ? W hat w ould it take to fi x the problems apart from spending a gazillion
dollars, w hich w e clearly can’t do?
“A sk Sherry Patterson and R udy Mendez to help you hunt dow n the information. W hat
I w ould like to be able to see is a recap of the issues, some ex planation of w hy w e’re
hav ing these problems, and w hat you think w e can do to fi x them. Can w e get together
again nex t w eek and discuss your progress? A nd, thank you in advance!”
“T hat sounds like a good plan, F ran. See you nex t w eek, same time, same place,
better information.”
A s Sanjiv left, Fran’s thoughts turned to the past. W hat had happened to make Easy A ir’s
performance falter so? W here had they lost their way, and w hat was to be done? Was their strat-
egy flawed? Before the week was up, she would need to speak w ith V ince Rosman, Easy A ir’s
chief executive o cer and one of her oldest and most trusted friends. Easy A ir needed to make
some changes—that was clear—but exactly w hat those changes were was far less obvious.

CH A PT ER O NE
Finding answers to questions such as those Fran at Easy Air raises is one of the primary goals of a
modern management accounting professional. Using information from a variety of sources, both financial
and nonfinancial, analyses are created that explore the impact of different assumptions and scenarios on a
firm’s profits and performance. Management accounting is not a static exercise with clearly defined bound-
aries and results, but rather a way of thinking about a problem. It is a set of analytical tools that are used to
explore a wide variety of potential outcomes, looking for the approach that will provide the greatest benefit
to the company’s stakeholders per dollar and effort expended. There is no one right answer in management
accounting, but rather better or worse ways to analyze a problem.
While there are very few rules guiding management accounting analysis in practice, there are cri-
teria and guidelines that influence how information is used and analysis completed. We will be discussing
these issues throughout the text.
MANAGEMENT ACCOUNTING IN ACTION

Management accounting practice is based upon measurement. Cost is a measure of the economic value
of the resources consumed by different types of work. Quality is a measure of a product’s or service’s
inherent value—its degree of perfection. Timeliness metrics have to do with such things as the reliable
meeting of a schedule, the timely arrival of a product, and so on. In fact, we often talk about wanting the
right product, at the right price, the right time, and the right place as the basis for successful competition
in the marketplace.
We measure in order to understand what is happening and to learn how to improve performance.
Within an organization, however, the role of measurement extends beyond these basic objectives to
include the use of measurements to influence individual and group behavior. When an event or outcome
is measured, it takes on an additional level of meaning in an organization. Because something is mea-
sured, it is seen as being more important than other events or outcomes that are not measured.
Measurement has another unique feature: It creates v isibility , or the ability to see and act upon a spe-
cifi c result or event . When we measure, therefore, we draw attention to a specific event or outcome. For
instance, Fran now knows that baggage-handling problems have increased significantly over the past year.
She is aware of that fact because baggage-handling claims are one of the key measurements used by man-
agement to track the performance of Easy Air. In other words, this measure makes the baggage-handling
problems visible, which creates the basis for analysis and action. If the baggage claim measure is also
used in the evaluation of the affected operational managers, their behavior is likely to change. Being held
accountable for results directs attention to a key performance criteria and underscores the fact that cur-
rent conditions are no longer acceptable. In other words, management gets what it measures and rewards.
The use of measurement by organizations impacts behavior in many different ways. As the previous
example suggests, a measure can be used to draw attention to an undesirable situation and encourage
individuals to search for solutions to the problem. A measure can be used to motivate an individual to
achieve a specific objective, such as reducing the baggage claim frequency to no more than one error per
thousand bags handled.

If a specific measure is used by management to evaluate and reward performance, individuals will likely
“move mountains” to make sure they perform well on the measured criterion. Unfortunately, not every action
taken by individuals to meet their goals or score well on a specific measure is equally good for the organiza-
tion. Some measures can actually create dysfunctional behavior on the part of the individual or group.
The role of measurement is so important in management accounting that two chapters are devoted to
the topic. Specifically, Chapter 2 takes a broad view of measurement, spanning the full range of financial
and nonfinancial metrics used in modern organizations and the behavioral issues they raise. In Chapter 3,
attention is focused on different measures of cost, or resource consumption, within an organization.
One of your first goals in this course should be to gain a better understanding of the different types of
measurements we use in a BPA-driven management accounting system, including their relative strengths
and weaknesses. Once these basics are mastered, you will be better able to apply these metrics to analyze
different decisions and opportunities.
IMA Statement of Ethical Professional Practice
Unlike financial accounting, management accounting practice follows

few formal regulations, rules, or procedures. Different numbers are used
for different purposes, with experience and common sense serving as the OBJECTIVE 6
primary guides to the choice of specific measures and decision models. I nt er p r et t he I M A S t at em ent o f
Even though there is no one right way to complete an analysis of a prob- E t hical P r o f essio nal P r act ice t hat
lem or estimate the potential impact of a decision, a series of ethical g uid es t he use and p r esent at io n o f
inf o r m at io n w it hin o r g aniz at io ns.
guidelines has been developed to reduce the potential for distortion and
fraudulent practices among management accountants and related busi-
ness professionals.8 IMA® (Institute of Management Accountants) has developed a set of ethical guidelines, called
the IMA Statement of Ethical Professional Practice, to assist in the practice of management accounting (see Figure
1.7). These guidelines are very important given that there are very few rules or regulations guiding the develop-
ment of internal information. Internal auditing does provide some guidance, but, in many settings, the only rules
available to guide why, what, where, when, and how analysis and measurement are applied are the ethics of the
management accountant.
The decision to falsify information, whether about a company or your own record, is unethical, and, in the
extreme, illegal. The IMA Statement focuses on the specific issues faced by professionals who develop, main-
tain, and manage the use and disclosure of financial information, but its message applies to every manager.
8 The IMA Statement was developed for management accounting, but actually serves as a set of guidelines that should be followed by any individual who prepares information for use in
any manner in or outside the organization.

CH A PT ER O NE
The objective of the IMA Statement (Figure 1.7) is to establish clear responsibilities and expectations for the
preparation of unbiased information and analysis within an organization. Avoiding conflicts of interest is one
way that bias can be reduced. For instance, it is probably not a good idea for the manager who is responsible for
awarding bonuses for sales performance to be eligible to receive such a bonus. The temptation to award a bonus
to oneself might be an overpowering incentive to manipulate reported results.
IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE

Members of IMA shall behave ethically. A commitment to ethical professional practice includes
overarching principles that ex press our values and standards that guide member conduct.
PRINCIPLES
IMA ’s overarching ethical principles include: H onesty, F airness, O bjectiv ity, and
R esponsibility. Members shall act in accordance w ith these principles and shall encourage
others w ithin their organizations to adhere to them.
STANDARDS
IMA members have a responsibility to comply w ith and uphold the standards of Competence,
Confi dentiality, Integrity, and Credibility. Failure to comply may result in disciplinary action.
I. COMPETENCE
1. Maintain an appropriate level of professional leadership and ex pertise by
enhancing know ledge and skills.
2. Perform professional duties in accordance w ith relevant law s, regulations,
and technical standards.
3. Prov ide decision support information and recommendations that are accu-
rate, clear, concise, and timely. R ecognize and help manage risk.
II. CONFIDENTIALITY
1. K eep information confi dential except w hen disclosure is authorized or
legally required.
2. Inform all relevant parties regarding appropriate use of confi dential informa-
tion. Monitor to ensure compliance.
3. R efrain from using confi dential information for unethical or illegal advantage.
III. INTEGRITY
1. Mitigate actual confl icts of interest. R egularly communicate w ith business
associates to avoid apparent confl icts of interest. A dv ise all parties of any
potential confl icts of interest.

2. R efrain from engaging in any conduct that w ould prejudice carry ing out
duties ethically.
3. A bstain from engaging in or supporting any activ ity that might discredit
the profession.
4. Contribute to a positive ethical culture and place integrity of the profession
above personal interests.
IV. CREDIBILITY
1. Communicate information fairly and objectively.
2. Prov ide all relevant information that could reasonably be ex pected to infl uence
an intended user’s understanding of the reports, analyses, or recommendations.
3. Report any delays or defi ciencies in information, timeliness, processing, or
internal controls in conformance w ith organization policy and/or applicable law.
4. Communicate professional limitations or other constraints that w ould pre-
clude responsible judgment or successful performance of an activ ity.
RESOLVING ETHICAL ISSUES

In apply ing the Standards of Ethical Professional Practice, the member may encounter
unethical issues or behav ior. In these situations, the member should not ignore them, but
rather should actively seek resolution of the issue. In determining w hich steps to follow, the
member should consider all risks involved and w hether protections ex ist against retaliation.
W hen faced w ith unethical issues, the member should follow the established policies
of his or her organization, including use of an anony mous reporting system if available.
If the organization does not have established policies, the member should consider
the follow ing courses of action:
• T he resolution process could include a discussion w ith the member’s imme-
diate superv isor. If the superv isor appears to be involved, the issue could be
presented to the nex t level of management.
• IMA o ers an anony mous helpline that the member may call to request how
key elements of the IMA Statement of Ethical Professional Practice could be
applied to the ethical issue.
• T he member should consider consulting his or her ow n attorney to learn of
any legal obligations, rights, and risks concerning the issue.
If resolution e orts are not successful, the member may w ish to consider disassociat-
ing from the organization.
IMA Ethics Helpline Number for callers in the U.S. and Canada: (800) 245- 1383
In other countries, dial the AT&T USA Direct Access Number from www.att.com/esupport/traveler.jsp?tab=3, then the above number.
FIGURE 1. 7 IMA STAT EMENT OF ET HICAL PROFESSIONAL PRACT ICE

CH A PT ER O NE
While paying an unearned bonus would not be desirable, the real problem that this type of miscon-
duct causes falls downstream when another manager or group uses the falsified information to make
other decisions. Once false data enters into the organization’s information system, it can create unantici-
pated problems and crises. Information plays such a central role in modern organizations that protecting
its validity and reliability is critical.
The IMA Statement was originally designed for management accountants, but a careful reading of its
content suggests that these are rules that should be followed by everyone in an organization. Whether a
manager is completing financial analysis for use by others in the organization, defining a marketing strat-
egy, or evaluating the productivity of a production plant or service location, the work that is done must be
completed with competence, respecting confidentiality, reflecting personal integrity, and ensuring objec-
tivity. These are the rules that define ethical business practice, no matter where or when these activities
take place.
T he Management A ccounting Professional
Management accounting is more than a set of tools and techniques; it is a unique management perspective
that emphasizes decision making and control within organizations. It is an approach that is used, either
explicitly or implicitly, by every manager, every day.
Even though management accounting is a specific analytical approach to planning, decision making,
and control, it is clear that not everyone in an organization has the same level of expertise in completing
the analysis and data collection that lies at the heart of the
discipline. Some individuals will merely draw upon the
results of the management accounting analysis. Others,
OBJECTIVE 7 whom we refer to as management accounting profession-
D escr ib e t he v ar io us car eer p at hs o p en t o als, create the data, systems, and analysis that make up the
m anag em ent acco unt ing p r o f essio nals. management accounting integrated framew ork , which is
used in decision making in all types of organizations. In
many organizations, the title of financial or business ana-
lyst may be used, but the activities and analytics that are used remain the same.
There are many different career paths that can be pursued by someone with advanced management
accounting skills. Some of the positions held by management accounting professionals include business
analyst, financial analyst, management consultant, controller, chief budget officer, and accountant general.
The combination of financial and analytical business skills makes a powerful, flexible combination of tal-
ents that opens doors and provides the basis for a challenging, dynamic career.

IN T H E N E W S Lessons in Ethics
U nfortunately, there alw ays seem to be fresh ex amples of indiv iduals
or organizations caught doing something unethical.
In O ctober 2015, short seller A ndrew L eft accused drug company
Valeant of using specialty pharmaceutical company Philidor to artifi -
cially infl ate its sales. Valeant denied the charges. B ut because Valeant
had never discussed its close ties to Philidor, it raised questions about
Valeant’s and Philidor’s sales practices. It also shook investors’ confi dence in Valeant,
w hich had racked up debt as it acquired companies.
If Philidor broke any law s, Valeant might be on the hook. Valeant employees appear
to have w orked at Philidor under aliases to hide their identities. More importantly, Valeant
had paid $100 million for an undisclosed option to acquire Philidor w ithout further pay-
ment w henever it w anted, essentially giv ing Valeant ow nership of the company.
Valeant has appointed a special committee of its board and an outside investigator to
look into the company ’s ties to Philidor, but it has yet to report its fi ndings. Valeant said
that Philidor sales never amounted to more than 7% of its total sales.
In the w ake of these revelations, Valeant’s shares fell 75% to just over $70 from a high
of $260. F urther contributing to the stock’s fall w as the accusation in summer 2016 that
Valeant w as price gouging, buy ing the rights to drugs and rapidly raising their prices.
Members of Congress have called for an investigation into the company ’s drug pricing prac-
tices. A nd in early October, the company confi rmed that it had received a federal subpoena.
Many w ell- know n hedge funders, including B ill A ckman, w ho had defended the com-
pany, su ered big losses in the w ake of the scandal.
Source: www.fortune.com/2015/12/27/biggest- corporate- scandals- 2015/accessed on August 28, 2016.
Summary
Managers are responsible for the work performed by one or more other persons. They define the goals and
objectives for their work group, organize and assign tasks and activities, mobilize resources to attain objec-
tives, and evaluate and adjust activities and performance to ensure that goals are met. There are many different
levels of managers in organizations, including operational, functional, process, and top management positions.
The work that managers do has a common structure, which we call the management process. The
management process has four primary components: plan, do, check, and adjust.
Business planning and analysis (BPA) includes all of the activities and actions taken to keep the
organization on track—to check and then make adjustments to improve performance. The BPA-based
management accounting approach is a modern version of a discipline that can trace its roots back to the

CH A PT ER O NE
earliest days of the “managed” organization. This modern version of management accounting has a larger
scope and greater emphasis on the management process than its predecessors.
The integrated management accounting database, the management process, and the decision domains
make up the integrated framework that defines this book and the way in which common management
issues are addressed through the BPA-based management accounting techniques and analysis. The inte-
grated framework serves to organize your learning experience around the “Plan-Do-Check-Adjust” cycle
that defines management work. Six primary sources of data make up the integrated database: economic
trend data, financial accounting data and metrics, management accounting analysis and metrics, opera-
tions data, marketing data, and supply chain information.
While the management process is relatively stable in nature, it is applied in a vast number of unique sit-
uations. These different situations, or decision domains, are clusters of decisions that are made by managers
of the same type and level or address a similar set of opportunities and issues. There are five primary decision
domains in organizations: product, process, customer/market, supply chain, and entity. We use the decision
domains to organize the tools, techniques, and topics that make up modern management accounting practice.
The product domain includes all of the decisions and events tied to the full set of products and ser-
vices offered by an organization to its customers. In the process domain, we focus on how work is done.
The customer/market domain includes all of the analysis and decisions that tie to a specific customer or
market segment. The supply chain domain emphasizes the relationships between a firm and its primary
trading partners (such as suppliers and customers). Within the entity domain, our attention centers on
planning and achieving results for the entire organization.
Measurement puts subjective words and concepts into objective terms. We measure in order to under-
stand what is happening and to learn how to improve performance. Measurement has another unique fea-
ture—it makes an outcome or event visible. The use of measurement by organizations impacts behavior in
many different ways.
The IMA Statement of Ethical Professional Practice requires that individuals who develop and use
information should strive to meet the principles of competence, confidentiality, integrity, and objectivity.
Finally, there are many different career paths that can be pursued by someone with advanced management
accounting skills, among them are business analyst, financial analyst, management consultant, controller,
chief budget officer, and accountant general.
Key Terms
A djust: a change in the current w ork to improve matches the revenue earned from these
performance and the potential to reach the activ ities.
fi rm’s objectives. Business planning and analysis: w hat managers
Breakeven: the point in operations in w hich the do to ensure that an organization reaches
total costs to meet customer needs exactly its objectives.

Check: the comparison of current results to the O perational managers: indiv iduals w ho struc-
plan. ture, manage, and directly participate in the
Cost: the economic value of the resources con- day- today activ ities that result in the pro-
sumed in completing activ ities, products, duction or support of the products and ser-
and serv ices. v ices o ered by the fi rm.
Customer/ market domain: the area of an orga- Planning: “decision making in advance”;
nization that focuses on the decisions and involves setting objectives and then deter-
activ ities that a ect a specifi c part, or seg- mining w hat needs to be done to reach
ment, of the fi rm’s customers or markets. them.
Decision domain: a cluster of decisions that Process domain: the area in organizations
address a similar set of opportunities or focused on how w ork is done.
issues. Process managers: indiv iduals w ho defi ne stan-
Do: the coordinated set of goal- directed actions dards of performance, establish relation-
that facilitate how the products and ser- ships w ith key customers and suppliers, and
v ices of the fi rm are manufactured and coordinate indiv idual and group e orts to
supported. achieve goals.
F unctional managers: indiv iduals w ho trans- Product domain: the area in organizations that
late organizational objectives into practical determines all of the decisions and activ ities
goals, establish performance evaluation cri- that directly or indirectly support the prod-
teria, ensure that leading- edge practices are ucts or serv ices o ered to its customers.
applied, and assign indiv iduals to purpose- Supply chain domain: the area that covers the
ful tasks and activ ities. decisions that a ect the fi rm’s relationships
Information: data that is instilled w ith a w ith its suppliers and trading partners.
purpose. Top management team: the group that estab-
Manager: the indiv idual w ho is responsible for lishes the v ision; sets the strategy ; secures
the w ork performed by one or more other required capital and key resources needed
people. to produce, deliver, and support the fi rm’s
Management accounting professional: one products and serv ices; builds the culture of
w ho creates the data, systems, and analysis the organization; defi nes the organization’s
that make up the management accounting structure; and assigns responsibility for
integrated framew ork. achiev ing organizational objectives.
Management process: a continuous cycle of Visibility: the ability to be seen; w hen w e mea-
e ort and action that underlies all manage- sure, w e draw attention to a specifi c event
rial w ork. It is made up of four key activ ities: or outcome.
plan, do, check, and adjust.
Nonfinancial data: information that focuses on
various aspects of performance, such as the
quality of the fi rm’s activ ities, products, or
serv ices.

CH A PT ER O NE
Q uestions
1. W hat are the primary di erences betw een management accounting and fi nan-
cial accounting?
2. H ow does the B PA perspective infl uence the practice of management accounting?
3. W hat is the key attribute that changes data into information?
4. W here do costs occur in organizations?
5. W hat is the management process?
6. W hat are the fi ve decision domains? W hat are the responsibilities of each?
7. W hat are the primary ty pes of managers in an organization? H ow do their tasks di er?
8. W hat are the four components of the IMA Statement of Ethical Professional Practice? W hy
do w e need an ethical code in this area of management?
Exercises
1. LEV ELS O F MA NA GEMENT. U sing the follow ing list of tasks, identify the ty pe of
manager w ho w ould have responsibility for the task’s planning and completion. U se “T ”
for top management, “P ” for process managers, “F ” for functional managers, and fi nally
“O ” for operational managers. If a task is done by more than one ty pe of manager, include
all of the relevant letters.
a. Establish strategic objectives e. Negotiate for needed resources

b. Develop financial statements f. Define organizational structure
c. Coordinate individual and group efforts g. Create continuous improvement initiatives
d. Assign specific individuals to tasks
2. LEV ELS O F MA NA GEMENT. U sing the follow ing list of tasks, identify the ty pe of
manager w ho w ould have responsibility for the task’s planning and completion. U se “T ”
for top management, “P ” for process managers, “F ” for functional managers, and fi nally

“O ” for operational managers. If a task is done by more than one ty pe of manager, include
all of the relevant letters.
a. Assign operational managers to key activities e. Establish performance requirements for other
b. Assign specific goals and evaluate managers
performance f. Set tone for organizational culture
c. Identify and implement best practices g. Define standards of performance for activities
d. Oversee the production of product from raw in a process
materials through shipping
3. DECISIO N DO MA INS. F or the follow ing list of decisions and activ ities, please iden-
tify w hich domain is a ected. Specifi cally, use “P ” for process, “R ” for product, “C” for
customer/ markets, “S” for supply chain, and “E” for entity domains. O nly one domain is
responsible for each decision.
a. Setting the price for a firm’s services e. Determining which features to offer on differ-
b. Deciding to compete in a specific market ent models of products
segment f. Negotiating contracts with raw material
c. Developing an annual plan for the suppliers
organization g. Evaluating top management’s performance
d. Developing the sequence of production
activities
4. DECISIO N DO MA INS. F or the follow ing list of decisions and activ ities, please iden-
tify w hich domain is a ected. Specifi cally, use “P ” for process, “R ” for product, “C” for
customer/ markets, “S” for supply chain, and “E” for entity domains. O nly one domain is
responsible for each decision.
a. Setting up a distribution channel for a series d. Implementing continuous improvement of

of products activities
b. Creating a strategy for a specific customer e. Developing a product marketing plan
segment f. Directing the work of many functions
c. Developing the plan to create a strong culture g. Reporting to company stakeholders

CH A PT ER O NE
5. MA NA GEMENT PRO CESS. R eorganize the activ ities in the follow ing sequences so
that they match the four stages of the management process. Put “plan” activ ities fi rst, fol-
low ed by “do” activ ities, then “check” activ ities, and fi nally “adjust” activ ities.
a. Change objectives, complete products, set e. Complete financial statements, set financial
objectives, analyze results reporting goals, complete analysis of perfor-
b. Establish market price, put “sale” price on mance shortfalls, change financial objectives
product, sell product, check sales figures f. Set daily output goals, assign workers to
c. Reset production goals, make production plan, activities, change work assignments, verify
inventory products made, make products output achieved
d. Evaluate performance, assign objectives to g. Evaluate supplier performance, negotiate
managers, develop strategic plan, develop a supplier agreements, accept materials from
new strategic plan supplier, find a new supplier
6. MA NA GEMENT PRO CESS. F or the follow ing list of activ ities, identify w hether it is a
“P ” or “plan” activ ity, “D” or “do” activ ity, “C” or “check” activ ity, or an A or “adjust” activ-
ity. O nly one letter should be assigned to each activ ity.
a. Create strategic plans h. Develop a marketing strategy

b. Analyze performance reports i. Coordinate activities between functions
c. Provide a service j. Complete a performance evaluation
d. Renegotiate supplier contracts k. Change employee goals
e. Check actual output against plan l. Create annual performance goals for employees
f. Complete financial statements m. Hire new employees
g. Sell products n. Renegotiate labor contracts
7. IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE. F or each of the fol-

low ing activ ities, identify w hat aspect of the IMA Statement is being v iolated. U se “C” for
competence, “N” for confi dentiality, “O ” for objectiv ity, and “I” for integrity. You may use
more than one letter if you feel the activ ity a ects more than one area.
a. Issue false financial statements e. Have someone else complete your homework
b. Take money for work you did not complete f. Talk about the new products your company is
properly making to your friends
c. Change results to make a manager look better g. Agree to develop the performance metrics for
to his or her boss a job that will impact your own annual bonus
d. Agree to do a job for which you have no
expertise

8. IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE. F or each of the fol-

low ing activ ities, identify w hat aspect of the IMA Statement is being v iolated. U se “C” for
competence, “N” for confi dentiality, “O ” for objectiv ity, and “I” for integrity. You may use
more than one letter if you feel the activ ity a ects more than one area.
a. Sell your product’s secret formula to a e. Fail to check the tax laws before completing
competitor your firm’s tax returns
b. Change how you calculate a performance f. Neglect to tell your teacher that you were
measure for marketing without telling anyone given too many points on a test
c. Fail to attend a refresher course g. Call your friends to let them know what was
d. Let a friend copy your company’s budget for a on this week’s quiz
school project
Problems
1. MA GNIT UDE O F CHA NGE. B ill L arkin, president of L M L andscaping, has recently
completed a course in management accounting, giv ing him new skills w ith w hich to ana-
ly ze his company. H e pulls together the follow ing information.
Measure 20x6 20x5 20x4

A nnual profits $225,500 $198,875 $150,250
Number of employees 15 12 8
Number of customers 250 175 100
REQUIRED:
a. You have agreed to help Bill by calculating the absolute size, or magnitude, of
change in each of these categories.
b. What do the numbers suggest?
A H E L P IN G H A N D
In the problem above, w e have learned how to calculate the magnitude
of change in a specifi c measure, a critical concept in management
accounting. L et us look a bit more carefully at the concept before w e
move on to more problems. W hen w e calculate change, w e have to
choose a starting point and then calculate the actual change in that

CH A PT ER O NE
measure from one point to another, such as betw een the years 20x 6 and 20x 5. W e then
take this amount of change and div ide it by our basis or fi rst number in our change equa-
tion to derive the percentage change. L et us try it w ith formulas:
Magnitude of change: Value at Point (b) less Value at Point (a), or

(b – a)
Percentage change: Degree of change div ided by Value at Point (a),
or
(b - a)
a
W e can use any point in a range of numbers as our basis point. In other w ords, w e
could hold 20x 4 as the constant basis, or (a), in all of our equations and then look at the
change across the years. W e could just as easily have chosen 20x 6 and w orked backw ards
in time. A s you may guess, w hat baseline you choose w ill change your numerical results.
R ule of thumb? If you w ant to gauge improvement over time, use the oldest date as the
baseline. W ant to assess loss? U se the most current date. In the problem below, w e w ill
also look at percentage change year by year. T hese are di erent pieces of information,
both of w hich can have value in decision making. L et us try this now focusing on the per-
centage change in L M L andscaping’s key metrics.
2. PERCENTA GE CHA NGE. Now that B ill has gotten another class under his belt, he
w ants to understand the relative impact, in percentage terms, of the changes in his busi-
ness. So using the data from Problem 1 above:
REQUIRED:
a. Calculate the percentage change in each of Bill’s three key variables. Start with
20x6 and work backwards.
b. Decide what you would suggest to Bill now.
3. MA GNIT UDE O F CHA NGE. A mos B undy runs a small convenience store. H is sales
are booming, but he is not quite sure w hy. H e o ers three main serv ices: basic grocery
sales, ready- to- eat sandw iches, pastries, and co ee, and pizza in three di erent varieties
(cheese, cheese and sausage, and cheese and pepperoni). Since you stop at A mos’s store
almost every day for co ee, you o er to help him look at his sales numbers. H e has pulled
the follow ing information together for you.

Sales Item January F ebruary March A pril
Grocery sales $1,525.00 $1,385.00 $1,250.00 $1,100.00
Deli and co ee $950.00 $850.00 $675.00 $550.00
Pizza $895.00 $975.00 $1,200.00 $1,675.00
REQUIRED:
a. Calculate the absolute change in each category of sales items across the four
months of this year.
b. What do the numbers suggest?
4. PERCENTA GE CHA NGE. You decide to take the analysis a bit further. U sing the results
you obtained in Problem 3 and the lessons you have learned about percentage change, do
the follow ing:
REQUIRED:
a. Calculate the percentage change by o ering for Bundy’s store. Start with April
and work backward to J anuary.
b. What do these percentages suggest? Does it di er from the information you
got when you only used the amount of change in your original analysis? Why or
why not?
5. DEGREE O F CHA NGE. Darby Computer A ssociates prov ides computer serv ices to
both small businesses and indiv iduals. It has faced changing conditions in the market-
place, one characterized by constant changes in both hardw are and softw are. A dd to that
the seemingly endless v iruses, and Darby Computer faces a major challenge to the busi-
ness to stay current and focused on w here attention needs to be. T he follow ing data sum-
marizes key business statistics for the last four years.
Measure 20x6 20x5 20x4 20x3

Businesses served 125 135 153 189
Indiv idual customers 988 885 825 725
Classes attended 35 27 22 18
Average hours to complete a job 10.5 9.0 8.25 7.75
Average monthly profits $25,323 $26,619 $28,555 $32,683

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Managerial Accounting An Integrative Approach 2Nd Edition C J Mcnair Connoly Online Ebook Texxtbook Full Chapter PDF

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Managerial Accounting: An Integrative

Approach 2nd Edition C J

Financial and Managerial Accounting John J. Wild

Faith Based ACT for Christian Clients An Integrative

Introduction to Managerial Accounting (ISE HED IRWIN

Statistics using R an integrative approach 2nd Edition

Managerial Accounting: Tools for Business Decision

Principles of Microeconomics: An Integrative Approach,

Managerial Accounting For The Hospitality Industry, 2nd

Anatomy & Physiology: An Integrative Approach 4th

C.J. McNAIR-CONNOLLY | KENNETH A. MERCHANT

To Cyndi, who at her first job interview for accounting asked,

To my wife, Gail Worth Merchant.

Management Accounting, Second Edition

Printed in the United States of America

No part of this publication may be reproduced, stored in a retrieval system,

About the CMA (Certiﬁed ®

George Joseph, U niversity of Massachusetts L ow ell; L orenzo Patelli, U niversity of Denver;

Business Planning and Analysis:

T he World of Management: A n O verview

2 MA NA GEMENT A CCO UNT ING

IN CO N T E X T Easy A ir: Confronting the Problem

MA NA GEMENT A CCO UNT ING 3

TYPES OF MANAGERIAL WORK

4 MA NA GEMENT A CCO UNT ING

TABLE 1.1 MANAGEMENT LEVELS AND ACT IVIT IES

Management Level Ty pes of A ctiv ities Performed

Establish the vision for the organization.

Develop strategy and key objectives.

Secure required capital and other key resources.

Establish expectations and criteria for evaluation performance.

Set the tone for management and the organizational culture.

Deﬁne standards of performance for activities within the process.

Identify and implement best practices.

Create and execute continuous improvement initiatives.

Translate organizational objectives into functional goals and objectives.

Identify key activities and performance requirements.

Negotiate and obtain required resources.

Ensure that leading- edge practices are implemented.

Organize and assign individuals to speciﬁc activities.

Assign speciﬁc goals and evaluate resulting progress.

Negotiate and secure needed resources.

Ensure coordination with other work groups.

Support learning and continuous improvement within the work group.

Report results and problems to a ected managers.

MA NA GEMENT A CCO UNT ING 5

L O O K IN G B A CK T he F ive Basic Tasks of a Manager

6 MA NA GEMENT A CCO UNT ING

T he Management Process and the Role of Management A ccounting

FIGURE 1.1 T HE MANAGEMENT PROCESS

MA NA GEMENT A CCO UNT ING 7

8 MA NA GEMENT A CCO UNT ING

W hat Is Business Planning and A nalysis?

Business planning and analysis (BPA) is a discipline that

BPA AS A TOOL TO INTEGRATE MANAGEMENT ACCOUNTING PRACTICES

MA NA GEMENT A CCO UNT ING 9

3. Management accounting based on the BPA framework utilizes an integrated database in

A FINANCIAL VS. MANAGERIAL PERSPECTIVE

INCO ME PROJECT ED INCO ME