ACCT 102 Management Accounting

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ACCT 102Management Accounting
Intro to MA

• Jeffrey Ng

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What is Management?

• Planning
• Always forward looking
• Determining objectives
• Identifying ways and means of attaining such
  objectives
• Anticipation of problems
• Identifying ways and means of solving or removing
  problems (including potential ones)
• Examples of tools used CSF and SWOT

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What is Management?

• Directing and Motivating
• Mobilizing people to carry out plans and run
  routine operations
• Managers assign tasks to employees, arbitrate
  disputes, answer questions, solve on-the-spot
  problems and make many other decisions that may
  affect employees and customers

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What is Management?

• Controlling
• Monitoring and evaluating whether the plans are
  being carried out in the manner that they should
  be implemented
• Performance measures
• You simply cant manage anything you cant
  measure Richard Quinn - Vice-President Sears
  Merchandising Group
• Measures provides clear, visible targets
  throughout the organization - Thomas Rosetta -
  Gilbarcos Manager

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What is Management?

• Performance evaluation
• Feedback should be positive and negative
• Aims
• Institution of improvements
• Implementation of corrective actions
• Means of motivation
• What gets measure gets done,
• But if we measure the wrong things,
• The wrong things will be done, and
• The wrong things may be done very well

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What is Management?

• Performance evaluation
• Feedback should be positive and negative
• Aims
• Institution of improvements
• Implementation of corrective actions
• Means of motivation
• What gets measure gets done,
• But if we measure the wrong things,
• The wrong things will be done, and
• The wrong things may be done very well

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What is Strategic Management?

• Strategic management involves a comprehensive
  analysis of the organizations environment
• The strategic management process involves
• Strategic analysis
• Strategic choice
• Strategic implementation
• Evaluation and control

Strategic Planning
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What is Strategic Management?

• Levels of strategic planning
• Corporate strategy
• Business strategy
• Functional strategy
• Benefits of strategic management
• Clearer sense of the strategic vision of the
  organization
• Sharper focus on what is strategically important
• Improved understanding of a rapidly changing
  environment

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What is Accounting?

• Definition
• Process of identifying, measuring, accumulating,
  analyzing, preparing, interpreting, and
  communicating information to meet the needs of
  the intended audience
• 2 main types
• Financial Accounting (FA)
• Management Accounting (MA)

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What is Management Accounting?

• Definition
• A discipline concerned with the preparation of
  financial and related information used by
  managers inside organizations to make strategic,
  organizational and operational decisions.
• Contrast with
• Financial Accounting is a discipline that
  generates general-purpose reports of financial
  operations (income statement) and financial
  position (balance sheet) of an organization, used
  by decision makers inside and outside the firm.

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The Changing Business Environment

• Revolutions in the business environment is having
  a profound effect on the practice of managerial
  accounting
• Just-In-Time (JIT)
• Total Quality Management (TQM)
• Process Reengineering
• Theory of Constraints (TOC)
• International competition
• E-Commerce

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Difference between FA and MA
Financial Accounting
Management Accounting

• A reporting system
• Information for internal and external users
• General purpose financial statements
• Long reporting period
• Statements highly aggregated

• A decision-making tool
• Information for internal users only
• Specific purpose information
• Reporting period is flexible, depending on need
• Information may be aggregated as needed

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Difference between FA and MA
Financial Accounting
Management Accounting

• Report on past decisions
• Reports prepared within the scope of law and GAAP
• Based on historical costs and other objective
  data
• Use as a starting point in evaluation and planning

• Future-oriented
• Reports not constrained by any rules
• Allow use of current or future costs, if
  applicable
• Use to delve deeper into the details of the
  organization

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Introduction to Cost
Competitive Strategies

• Quality - the degree to which products meet the
  customers needs

• All costs concept -
• To compete based on price, the seller must
  manage costs

Quality
Price/cost
Service
Service - the human touch
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Cost Concepts

• Regardless of the selected competitive
  strategy/strategies, cost management is a very
  important issue.
• The level of the cost drivers determines the
  amount of the various costs assigned to a cost
  object.

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Cost Concepts - Cost

• Cost
• Def Cash or cash-equivalent value sacrificed for
  goods and services that are expected to bring a
  current and/or future benefit to the
  organization.
• Cost can either be capitalized or expensed

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Cost Concepts Cost Object

• Cost Object
• Def Any item for which costs are accumulated and
  assigned
• Cost object may be a product, a department in the
  company, a project, an activity and so on. For
  example
• Wharton wants to know how much it costs to
  conduct a course in financial accounting. The
  cost object is the course in financial
  accounting.
• If a software developer wants to know the cost of
  developing a software, then the cost object is
  the software.
• In A(ctivity) B(ased) C(osting) - activities are
  the cost objects.

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Cost Concepts Cost Object

• Cost accumulation - Collection of cost data in
  some organized way through an accounting system
• Cost assignment - Tracing (for direct costs) and
  the allocating (for indirect costs) of
  accumulated costs to a cost object to help
  decision making, and facilitate product or
  customer profitability analysis

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Cost Concepts Cost Object

• Direct costs Costs related to a particular cost
  object that can be traced to it in an
  economically feasible way, e.g. DM or DL
• Indirect costs Costs related to a particular
  cost object through a selected cost allocation
  method, e.g. OH
• Factors affecting direct/indirect cost
  classifications
• Materiality of the cost in question
• Available information-gathering technology
• Design of operations
• Contractual arrangements

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Cost Concepts Cost Object

• Summary of Cost Objects
• Cost tracing - Assignment of direct costs to cost
  objects
• Cost allocation - Assignment of indirect costs
  to cost objects

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Cost Concepts Cost Driver

• Cost Driver A factor, such as the level of
  activity or volume, that causally affects costs
• A cause and effect relationship exists between a
  change in the level of activity or volume and
  change in the level of the total costs of that
  cost object. For example
• The number of copies of books printed is the cost
  driver of the cost of paper consumed.

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Cost Concepts Cost Driver

• Types of cost drivers
• Structural cost drivers Fundamental choices
  about the size and scope of operations and
  technologies employed in delivering products or
  services to customers
• Organizational cost drivers Choices concerning
  the organization of activities and the
  involvement of persons inside and outside the
  organization in decision making

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Cost Concepts Cost Driver

• Activity cost drivers Specific units of work
  (activities) performed to serve customer needs
  that consume costly resources

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Structural Cost Drivers
For a chain of discount stores--
Determine the type of technology to employ in the
store
Determine the type of construction
Determine the location
Determine the size of the stores
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Organizational Cost Drivers

• Deciding to work closely with a limited number of
  suppliers.
• Providing employees with cost information and
  authorizing them to make decisions.
• Deciding to reorganize the existing equipment in
  the plant so that sequential operations are
  closer.

Continued
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Organizational Cost Drivers

• Designing components of a product so they can
  only fit together in the correct manner.
• Deciding to manufacture a low volume product on
  low-speed, general-purpose equipment rather than
  high-speed, special-purpose equipment.

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Activity Cost Drivers
Customers
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Activity Cost Drivers
Examples

• Placing a purchase order for raw materials
• Inspecting income raw materials
• Moving items being manufactured between
  workstations
• Setting up a machine to work on a product
• Spending machine time working on a product
• Spending labor time working on a product
• Hiring and training a new employee
• Packing order for shipment
• Processing a sales order
• Shipping a product

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Strategic Cost Management
Strategic cost management has emerged from a
blending of three themes

• Cost driver analysisthe study of factors that
  cause or influence costs.
• Strategic position analysisan organizations
  basic way of competing to sell products or
  services.
• Value-chain analysisthe study of value-producing
  activities, stretching from basic raw materials
  to the final customer of a product or service.

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Strategic Position Analysis
Michael E. Porter identified three possible
strategic positions that lead to business success

• Cost leadership
• Product or service differentiation
• Market niche

Product or service differentiation involves
creating something that is perceived as unique
and worth a premium price.
Achieving cost leadership allows an organization
to achieve higher profits selling at the same
price as competition or by allowing the firm to
aggressively compete on the basis of price while
remaining competitive.
Focusing on a specific market niche such as a
buyer group, segment of the product, or
geographic market.