SP JAIN GLOBAL SCHOOL OF
MANAGEMENT
MANAGEMENT ACCOUNTING
EMBA – ME - ELO – 01
19TH NOVEMBER 2020
ASSESSMENT TASKS
TYPE
Class Participation
th
Quiz (27 Nov 2020)
Exercises (28th Nov 2020)
Final Exam
TOTAL
WEIGHTAGE
10%
20%
30%
40%
100%
STRATEGIC COST MANAGEMENT
1. New definition of Management Accounting
2. Elements of Contemporary Business Environment
3. Role of Cost Management in Global Economy
4. Increased coverage of Sustainability
5. Balanced Score Card (BSC)
6. Case Study: Netflix: International Expansion
MANAGEMENT ACCOUNTING
Management Accounting involves:
1. Partnering in management decision making
2. Devising planning and performance management
systems
3. Providing expertise in financial reporting and control
4. Assist management in the formulation and
implementation of organization’s strategy
CFO is the business partner of the CEO
STRATEGIC MANAGEMENT
• Strategic Management is
the development and
implementation of a
sustainable competitive
position.
• Strategy is all about
shutting the unwanted
doors to keep only one
door open.
MANAGEMENT FUNCTIONS
Cost Management Information is provided for four crucial
management functions:
1. Strategic Management – choice of products; manufacturing
methods; marketing techniques and channels; customer
profitability assessment and long-term issues
2. Planning and Decision making – replacing equipment; managing
cash flow; budgeting; scheduling of production; pricing of products
3. Management and Operational Control – identification of
inefficiencies; rewarding system
4. Preparation of Financial Statements – accurate accounting of
inventory; compliance with reporting requirements
DEMANDS OF MODERN BUSINESS
1. Effective Strategic Management
2. Strategic Thinking involves anticipating changes,
products and services – flexibility is the key to
success
3. Product life cycles is becoming shorter and shorter
4. Creative and Integrative Thinking is very crucial
5. Environment is dynamic and highly competitive
6. Satisfying customer needs and sustaining it over a
long period of time is challenging
CONTEMPORARY BUSINESS ENVIRONMENT
1.Increase in Global competition
2.Lean Manufacturing
3.Advancement in Technology
4.Greater focus on customer
5.New forms of management organisation
6.Changes in political, social and cultural
environment of business
CONTEMPORARY BUSINESS ENVIRONMENT
• Wal-Mart’s Motto - “Save Money – Live Better”
• Target’s Motto - “Expect More-Pay Less”
• NIKE: To bring inspiration and innovation to every athlete* in the world.
(*If you have a body, you are an athlete)
• Google Motto – “Do the right thing”
• Amazon’s Motto - Work Hard. Have Fun. Make History
ROLE OF MANAGEMENT ACCOUNTANT IN
CONTEMPORARY BUSINESS ENVIRONMENT
1. Integral part of the management
2. Business Partner
3. Part of the management team to implement the
business strategy
BUSINESS WORLD TODAY
NEGATIVE VUCA TO POSITIVE VUCA
GETTING READY – 2020 PERFECT VISION
PIPELINE TO PLATFORM TRANFORMATION
2010
2020
CONTEMPORARY MANAGEMENT TECHNIQUES
1. The Balanced Scorecard
and Strategy Map
2. The Value Chain Analysis
3. Activity Based Costing and
Management
4. Business Intelligence
5. Target Costing
6. Life Cycle Costing
7. Benchmarking
8. Business Process
Improvement
9. Total Quality Management
10.Lean Accounting
11.The Theory of Constraints
12.Enterprise Sustainability
13.Enterprise Risk
Management
CONTEMPORARY MANAGEMENT TECHNIQUES
1. The Balanced Scorecard and the Strategy Map
The Balanced Scorecard (BSC)
An accounting report that addresses a firm’s
performance in four areas: financial, customer, internal
business processes, and innovation and learning
The Strategy Map
The strategy map is a method, based on the balanced
scorecard, which links the four perspectives in a causeand-effect diagram.
BALANCED SCORE CARD
The balanced score card consists of four perspectives or
groupings of critical success factors:
1. The financial perspective – financial performance
measures such as operating income and cash flow
2. Customer perspective – customer satisfaction measures
3. Internal process – productivity and speed of processes
4. Learning and growth – new products, new innovations,
employee training, etc.
STRATEGY MAP
A Strategy Map is a cause-and-effect diagram of the relationships
among the BSC perspectives.
CONTEMPORARY MANAGEMENT TECHNIQUES
2. The Value Chain Analysis
An analysis tool used to identify the specific steps
required to provide a competitive product
Helps identify steps that can be eliminated or outsourced
3. Activity-Based Costing and Management
Activity-Based Costing (ABC) improves the tracing of
costs to individual products and customers
Activity-Based Management (ABM) improves operational
and management control
CONTEMPORARY MANAGEMENT TECHNIQUES
4. Business Intelligence
• an approach to strategy implementation in which the
management accountant uses data to understand and
analyze business performance.
5. Target Costing
• Target Cost = Market-determined price – Desired
Profit
• A method that has resulted from intensely
competitive markets
CONTEMPORARY MANAGEMENT TECHNIQUES
6. Life-Cycle Costing
• Costs should be monitored throughout a product’s life
cycle – from research and development to production
to sales & service
7. Benchmarking
• Process by which a firm identifies its Critical Success
Factors (CSFs), studies the best practices of other
firms in achieving these CSFs, and institutes change
based on the assessment results
CONTEMPORARY MANAGEMENT TECHNIQUES
8. Business Process Improvement
• This technique involves managers and workers
committing to a program of continuous improvement
in quality and other CSFs
9. Total Quality Management (TQM)
• A technique by which management develops policies
and practices to ensure the firm’s products and
services exceed customer’s expectations
CONTEMPORARY MANAGEMENT TECHNIQUES
10. Lean accounting uses value streams to measure the
financial benefits of a firm’s progress in implementing
lean manufacturing.
11. The Theory of Constraints (TOC)
• Helps firms improve cycle-time (i.e., the rate at which
raw materials can be converted to finished products)
CONTEMPORARY MANAGEMENT TECHNIQUES
12. Enterprise Sustainability means the balancing of the
company’s short-term and long-term goals in all three
dimensions of performance – social, environmental, and
financial.
13. Enterprise risk management is a framework and
process that firms use to managing the risks that could
negatively or positively affect the company’s
competitiveness and success.
COMPETITIVE STRATEGIES
• A firm succeeds by implementing a set of policies,
procedures, and approaches to business called strategy
• Strategy must have a long-term focus and adapt to the
changing environment
• Cost management information should be used to develop
and monitor strategic information
PEPSICO STORY
Nooyi's strategic redirection of PepsiCo, called “Performance with a
Purpose”, has been largely successful and involved creating long-term growth
while leaving a positive impact on society and the environment. She
reclassified PepsiCo's products into three categories: "fun for you" (such as
potato chips and regular soda), "better for you" (diet or low-fat versions of
snacks and sodas), and "good for you" (items such as oatmeal). She moved
corporate spending away from junk foods and into the healthier alternatives,
with the aim of improving the healthiness of even the "fun" offerings.
COMPETITIVE POSITIONING
Michael Porter’s Competitive Advantage
❑Cost Leadership—outperform competitors by producing at
the lowest cost, consistent with quality demanded by the
consumer
❑ Differentiation—creating value for the customer through
product innovation, product features, customer service, etc.
that the customer is willing to pay for
The Five Steps of
Strategic Decision Making
1. Determine the Strategic Issues Surrounding the Problem
2. Identify the Alternative Actions
3. Obtain Information and Conduct Analyses of the
Alternatives
4. Based on Strategy and Analysis, Choose and Implement the
Desired Alternative
5. Provide an On-going Evaluation of the Effectiveness of
implementation in Step 4.
VALUE CHAIN ANALYSIS
1. Value Chain Analysis is a strategic analysis tool used to better
understand the firm’s competitive advantage, to identify where
value to customers can be increased or costs reduced, and to
better understand the firm’s linkages with suppliers, customers
and other firms in the industry.
2. There are three phases in Value Chain, viz., (a) Upstream (b)
Operations and (c) Downstream
3. Upstream is product development and linkage with suppliers
4. Downstream is the customer delivery, service and related
activities
SUSTAINABLE SUCCESS – 9 S MODEL OF SFM
•
•
•
•
•
•
•
•
Selectivity – choice and focus on core competence
Systems – robust system of accounting, reporting, analysis, enabling decisions
Sensitivity – effective use of financial information for commercial decisions
Structural Flexibility – sum total of qualitative and quantitative adaptability and
adjustability – under tough market conditions enables the firm to convert
threats into opportunities and losses into profits
Soul Searching for continued benchmarking
Strategic Cost Management – Activity based costing, life-cycle based costing,
notional cost-benefit analysis, etc.
Sustainability – sustained competitive advantage – survival of the fittest
Sanctity – ethical economics of business
• Superiority – position of leadership
INNOVATION – ONLY WAY FORWARD
• Understand core business processes and their relationship to your company’s
competitive advantage
• Consider the needs of all customer, internal and external
• Challenge assumptions about the status quo
• Question all manual processes in this digital era
• Have regular meetings solely to generate new ideas on process improvement
• Highlight the success of meaningful and lasting changes
• Leverage accomplishments and share ideas
• Learn from the successes of others in t he organisation
• Hold all employees accounting for improving the business in some way
CASE STUDY PREPARATION
Those who have not read
the case studies
Those who have partly
read the case studies
Those who have read the
case studies
NETFLIX – CASE STUDY
1. Conduct a SWOT analysis of Netflix and provide strategic
suggestions.
2. Define Netflix’s competitive advantage. Why is Netflix so
successful?
3. How would you recommend that Netflix overcome its
challenges in the international market?
4. Moving forward, what future strategic initiatives Hastings
might consider?
BASIC COST MANAGEMENT CONCEPTS
1. Costs, Cost Driver, Cost Objects
2. Cost Assignment and Cost Allocation
3. Direct and Indirect Costs
4. Cost Drivers and Cost Behaviour
5. Fixed and Variable Costs
6. Step Costs
7. Unit Cost and Marginal Cost
8. Product and Service Costing
9. Cost Information
10.Case Study: Arkansas Egg Company
COST/COST DRIVER/COST OBJECT
A Cost is incurred when a resource is used for some purpose.
Cost Pools are the meaningful groups into which costs are
often collected.
Cost Driver is any factor that causes a change in the cost of
an activity.
Cost Object is any product, service, customer, activity, or
organizational unit to which costs are assigned for some
management purpose.
Value Stream is a group of related products
COST ASSIGNMENT
Cost Assignment is the process of assigning costs to cost
pools or from cost pools to cost object.
Direct Cost can be conveniently and economically traced
directly to a cost pool or cost object.
Indirect Cost has no convenient or economical trace from the
cost to the cost pool or from cost pool to the cost object.
Assignment of Indirect Costs to cost pools and cost objects is
called Cost Allocation.
The Assignment of Indirect Cost is made by Cost Drivers.
The cost drivers used to allocate costs are often called
allocation bases.
OVERHEAD, PRIME COST & CONVERSION COST
Overhead: All indirect costs are commonly combined into a
single cost pool called overhead or in a manufacturing firm,
factory overhead.
Prime Costs refers to direct materials and direct labour that
are combined into a single amount.
Conversion Costs refers to direct labour and overhead
combined into a single amount.
Activity based Cost Drivers are identified by using activity
analysis
Volume based cost drivers are identified with volume
COST DRIVERS AND COST BEHAVIOUR
Cost Driver is any factor which causes a change in the cost
of an activity.
Cost Behaviour is the sensitivity of costs to change in
production or sales volumes
FIXED COST AND VARIABLE COST
Variable Cost: It is the change in the total cost associated
with each change in the quantity of the cost driver.
Fixed Cost: It is the portion of the total cost that does not
change with a change in the quantity of cost driver within the
relevant range
The range of the cost driver in which the actual value of the
cost driver is expected to fall and for which the relationship to
total cost is assumed to be approximately linear is called the
relevant range.
Mixed Cost is a term used to refer to the total cost that
includes both Fixed Cost and Variable Cost.
EXAMPLES OF COSTS – BMW ASSEMBLY PLANT
Cost Object:
BMW X5
VARIABLE
COSTS
FIXED COSTS
DIRECT COSTS
Tyres used in the
Assembly
INDIRECT COSTS
Power cost of Chennai Plant
where multiple products of
BMW are being assembled
Salary of the Supervisor
Annual Lease rental for the
on Assembly line of BMW Chennai plant where
X5
multiple products of BMW
are being assembled
EXAMPLES OF COSTS – BELT MANUFACTURING UNIT
Suppose you are making leather belts and cost of leather is $10
per belt (Variable Cost) and you have rented a workshop which is
costing you $3,000 per month (Fixed Cost). Calculate the Total
and Per Unit Cost for making 1,000 Leather Belts in a month.
PARTICULARS
1 Belt
Total in USD
Leather Cost
1,000 Belts
Per Unit in USD
Total in USD
Per Unit in USD
10
10
10,000
10
Workshop Rent
3,000
3,000
3,000
3
Total
3,010
3,010
13,000
13
Total Variable Cost varies with the number of units produced but the Variable per
unit remains constant. Total Fixed Cost will remain constant but will vary with the
number of units produced.
STEP COSTS
A cost is said to be a Step Cost when it varies with the cost
driver but does so in steps, at discrete points.
UNIT COST AND MARGINAL COST
Unit Cost: Total
Manufacturing Cost
divided by number of
units produced is the Unit
Cost.
Marginal Cost: The
variable cost incurred for
producing one more unit.
STRUCTURAL AND EXECUTIONAL COST DRIVERS
Structural Cost Drivers: They are
strategic in nature and involve plans
and decisions that have long term
effect with regard to the issue such as
scale, experience, technology and
complexity.
Executional Cost Drivers: They are
factors the firm can manage in shortterm, operational decision making to
reduce cost. These include workforce
empowerment; design of the
production process and supplier
relationships.
PRODUCT COST
Product Cost: For a manufacturing firm, product cost is the
cost necessary to complete the product: direct materials,
direct labour and factory overhead.
Cost of Goods Sold: It is the cost of the product transferred
to the income statement when inventory is sold.
Period Costs: It includes the Selling, General and
Administrative costs that are necessary for the management
of the company but are not involved directly or indirectly in
the manufacturing process
COST OF GOODS SOLD VS. INVENTORY COST
• If Samsung produces 5 Million Mobile Devices in a
month at a total manufacturing cost of $ 400 Million.
The average cost per unit is $80 (i.e. 400/5).
• If out of the 5 million units produced the sales is 4.7
million and balance 300,000 units are lying in
Inventory, then we need to capture the Cost of Goods
Sold in the Income Statement whilst the Inventory
Cost will be carried to the Balance Sheet.
Cost of goods sold 4.7m x 80 = $376 m
Inventory Cost 300k x 80 = $24 m
EXAMPLES OF PERIOD COSTS – BANK
Cost Object:
MORTGAGE LOANS
VARIABLE
COSTS
FIXED COSTS
DIRECT COSTS
Fee paid to property loan
appraisers for each
mortgage loan
INDIRECT COSTS
Courier charges incurred
for delivering
documents to lawyers,
loan appraisers and
customers
Salary paid to the executives Golf Tournament
in the Mortgage Loan
Sponsorship cost paid
Department of the bank
by the bank
COST OF MANUFACTURING - EXAMPLE
The breakdown of the cost of the components of the iPhone 11 Pro
Max is as follows:
•Screen: $66.50
•Battery: $10.50
•Triple Camera: $73.50
•Processor, Modems, and Memory: $159
•Sensors, Holding Material, Assembly, and Other: $181
Total Cost: $490.50
Selling Price: $1,099 to $1,499
SERVICE COSTING
Service Cost: For a
service organisation, the
Service Costing is the cost
incurred for rendering a
particular service to a given
customer.
Service Costing is used
within an organisation when
services are rendered by
one department to the other.
ATTRIBUTES OF COST INFORMATION
Accuracy: Inaccurate data can mislead, resulting in
potentially costly mistakes. A primary way to ensure
accuracy of data for decision making is to design and
monitor an effective system of internal accounting controls.
Timeliness: The cost information must be available on a
timely manner to facilitate effective decision making. The
cost of delay can be significant in many decisions.
Cost and Value of Cost Information: The Cost
Information involves a preparation cost and value to the
user.
CASE STUDY PREPARATION
Those who have not read
the case studies
Those who have partly
read the case studies
Those who have read the
case studies
CASE STUDY: ARKANSAS EGG COMPANY
1. What are the main short-term issues for Cox?
2. What is the key decision that must be made?
3. When must that decision be made?
4. Using the analysis of financial and non-financial data,
what alternatives are available for Michael Cox?
Thank You!
For any queries, please write to:
tpanand@leapexcellence.com