Week 1
Tuesday, March 2, 2021
8:31 PM
AUSTRALIAN ORGANISATIONS IN THE TWENTY-FIRST CENTURY
Ongoing trade liberalisation through continued negotiation of free trade agreements, and harmonisation of
standards and regulations, are reducing trade barriers and increasing competitive pressures around the world.
With many tariffs, quotas and subsidies reduced or eliminated, businesses are exposed to a global marketplace, and
can no longer ignore the activities of companies overseas, particularly within the Asian region.
E-commerce sites (e.g. Amazon, Alibaba, Expedia) and peer-to-peer platforms (e.g. Airbnb, Uber) have challenged
traditional ‘bricks and mortar’ modes of business operation in many areas, including retail, travel and transportation.
Technological innovation has also lowered the cost of doing business, facilitating access to global market
opportunities for large and small businesses alike.
In terms of overall economic activity, there has been a structural shift towards services sectors, with growth areas in
Australia encompassing tourism, education and ‘knowledge-based’ industries, such as software programming and
consulting.
Increasing reliance on strategic alliances, outsourcing and various business networks have created more complicated
business structures and relationships, and led to the emergence of virtual organisations.
Increased labour mobility has added to the complexity of managing human resources.
In summary, twenty-first century businesses face a more global, fluid and technologically influenced competitive
environment than ever before.
WHAT IS MANAGEMENT ACCOUNTING?
Management accounting refers to the processes and techniques that focus on the effective and efficient use of
organisational resources to support managers in their tasks of enhancing both customer value and shareholder value
customer value—the value that a customer places on particular features of a product
Shareholder value is also a key focus for managers and involves improving the worth of the business from the
shareholders’, or owners’, perspective
Resources can be defined broadly to include not only the financial resources of the organisation, but also nonfinancial resources such as information, work processes, employees, committed customers and suppliers. Nonfinancial resources determine the capabilities and competencies of the organisation, which allow it to survive and
prosper in an increasingly turbulent global environment
Management accounting systems
A management accounting system is an information system that produces the information required by managers to
create value and manage resources. It forms part of an organisation’s wider management information systems.
Management accounting information can be provided on a regular basis and can include estimates of the costs of
producing goods and services, information for planning and controlling operations, and information for measuring
performance.
Management accounting systems also provide information on an ad hoc basis, to satisfy the short-term and longterm decision-making needs of management.
For example, manufacturing organisations may need information about the prices of competitors’ products in order
to be able to determine a competitive price for their own product.
Management accounting information
The focus of management accounting is on the needs of managers within the organisation. Because accounting
standards apply only to external financial reports, there is great flexibility in deciding the type of information that
should be generated for managers.
As managers’ information needs vary, and as the nature of the resources that they manage varies, the type of
management accounting information required will also vary.
Other factors that cause management accounting systems to differ include
 differences in production or service technologies,
 organisational structure and organisation size,
 the external environment in which the organisation competes, and
 the levels of sophistication of computer systems.
Finally, it should be noted that management accounting information is relevant to managers from the top of the
organisation through to managers in operational areas of a business.
Senior managers need information that provides them with an overview of the entire organisation, whereas
middle managers require more detailed information about their areas of responsibility. And
operational managers will need information to help them manage their specific operations on a day-to-day
basis, to help ensure that their performance targets are met.
Mgt acct and financial accounting information
Financial accounting is concerned with preparing and reporting accounting information for parties outside the
organisation.
One part of a firm’s accounting system that is common to both financial accounting and management accounting is
the costing system. The costing system (or cost accounting system) estimates the cost of goods and services, as well
as the cost of organisational units, such as departments.
management accounting uses
 Managers may need information about product costs for a range of strategic and operational purposes including
o setting prices,
o controlling operations and
o making decisions about the continuation of a particular product.
financial accounting uses
 product cost data are also used to value inventory in a manufacturer’s balance sheet and cost of goods sold on
the income statement
Management accountants within organisations
Most large Australian organisations have a ‘finance function’, which is the group of staff who undertake a variety of
accounting activities.
Within the finance function, the senior accountant may have one of a number of different titles, including
 chief financial officer (CFO), financial controller, finance manager, financial analyst, business analyst,
general manager of accounting and group accountant.
In some businesses, accounting staff may be found in each operating division, as well as at the corporate level.
Accounting staff may be located close to the operations of the business.
In some organisations, accountants are clearly designated as either management accountants or financial
accountants. In other businesses the distinction may be blurred, with many accountants being responsible for both
functions.
However, it should also be noted that the various processes and techniques that we describe as management
accounting may be undertaken by managers in other areas of a business.
MANAGEMENT ACCOUNTING PROCESSES AND TECHNIQUES
Management accounting:
 supports the organisation’s formulation and implementation of strategy, and contributes to improving
sources of competitive advantage
 provides information to help manage resources, through systems for planning (such as budgets) and
control (such as performance measures)
 provides estimates of the costs of the organisation’s output (goods and services), to support both the
strategic and operational decision needs of managers.
MANAGEMENT ACCOUNTING AND STRATEGY
In many organisations in the twenty-first century, management accountants play an important strategic role by
 contributing to the organisation’s formulation and implementation of strategy and by
 helping managers improve the organisation’s competitive advantage
Many organisations formulate a vision, which describes the desired future state or aspiration of the organisation
While not all organisations specify vision and mission statements, they all have objectives in some form. Objectives
(or goals) are specific statements of what the organisation aims to achieve, often quantified and relating to a specific
period of time
Organisational strategies
The strategies of an organisation specify the direction that the organisation intends to take over the long term to
achieve its mission and meet its objectives. The strategies will focus on ways to manage the organisation’s resources
to create value for customers and shareholders.
Management accounting: contributing to strategy
Strategic planning
Strategic planning is the term given to long-term planning, usually undertaken by senior managers, normally with a
3–5 year timeframe.
Strategic planning involves
 making corporate strategy decisions about the types of businesses and markets in which the organisation
operates, and
 business (or competitive) strategy decisions about how the business is to compete within its particular markets.
Strategic planning draws on a wide range of management accounting information from
 the costing, budgeting and performance measurement systems, as well as
 information from special studies internal and external to the organisation.
Implementing strategies
Once strategies have been formulated, managers at all levels of the organisation share the responsibility for
implementing them.
Management accountants can play an important role in this process using the planning and control systems
described below.
Long-term plans need to be linked to the budgeting system, to produce annual budgets that support the
organisation’s strategies.
Likewise, performance measurement systems can be used to compare actual outcomes to budgets and other targets
that focus on the organisation’s strategic objectives.
MANAGEMENT ACCOUNTING FOR PLANNING AND CONTROL
Planning
Planning is a broad concept that is concerned with formulating the direction for future operations.
Plans are necessary so an organisation can consider and specify all of the resources that will be needed in the
future—be they financial or non-financial.
Planning activities occur at many levels within an organisation.
Many organisations develop strategic plans that normally involve a 3–5-year timeframe. However, most
organisations also prepare short-term or operational plans, called budgets. A budget is an example of a detailed plan
that summarises the financial consequences of an organisation’s operating activities for a specific future period,
usually one year.
Controlling
Control involves putting in place mechanisms to ensure that operations proceed according to plan and that
objectives are achieved.
Plans will not be effective unless there is some way of ensuring that they are achieved. This is the role of control and
control systems.
Control systems are the systems and procedures that provide regular information to assist with control.
COSTING FOR DECISION MAKING
Estimates of the cost of producing goods and services are often needed to support a range of operational and
strategic decisions that confront managers.
In manufacturing firms, and in some service firms, routine systems are established to estimate the cost of goods and
services. Sometimes this forms a part of the financial accounting system.
However, sometimes costs that are estimated for management decisions are produced outside of the financial
accounting framework.
Financial data within an organisation’s primary accounting system are usually prepared for external reporting
purposes
Thus, these are governed by traditional accounting conventions (‘generally accepted accounting principles’ or GAAP)
including legally enforceable accounting standards. However, the costing information produced by the financial
accounting system may not be adequate for managers’ decisions.
SOME IMPORTANT CONSIDERATIONS IN THE DESIGN OF MANAGEMENT
ACCOUNTING SYSTEMS
BEHAVIOURAL ISSUES
When designing and implementing management accounting systems, we need to be conscious of the ways in which
information impacts on individual behaviour, that is, the behaviour of managers and other people within (and
sometimes external to) an organisation.
Motivating managers and other employees
A key purpose of the management accounting system is to motivate managers and other employees to direct their
efforts towards achieving the organisation’s goals.
In management accounting, performance measurement systems are a key source of information for motivation. One
means of motivating people to commit to the organisation’s goals is to measure their performance in achieving
performance targets. Such performance can be used as the basis for providing rewards.
COSTS AND BENEFITS OF INFORMATION
The costs of providing management accounting information to managers include the salary cost of accounting
personnel, the cost of purchasing and operating computers, the cost of gathering, processing and storing
information, and the cost of the time spent by managers to read, understand and use the information.
The benefits include improved decisions, more effective planning, greater efficiency of operations at lower costs,
better control, and improved customer and shareholder value
MANAGEMENT ACCOUNTING RESPONSES TO THE CHANGING BUSINESS
ENVIRONMENT
MANAGEMENT ACCOUNTING INFORMATION
COMPONENTS OF A MANAGEMENT ACCOUNTING SYSTEM
Management accounting systems are tailored to an organisation’s needs but they often include the following:
 costing system (or cost accounting system) that estimates the cost of goods or services, as well as the cost of
organisational units, such as departments
 budgeting system that is used to prepare a detailed plan showing the financial consequences of the
organisation’s operating activities for a specific future period. The system estimates planned revenues and costs
 performance measurement system that measures performance by comparing actual results with some target
 cost management system that focuses on improving the organisation’s cost effectiveness through
understanding and managing the real causes of costs.
COST CLASSIFICATIONS: DIFFERENT CLASSIFICATIONS FOR DIFFERENT
PURPOSES
WHAT ARE COSTS?
Costs are resources given up to achieve a particular objective. In accounting, they are usually measured in monetary
terms—which, in Australia, means in dollars.
Generally, costs are incurred to obtain future benefits. If the benefits extend beyond the current accounting period,
the costs are recorded as assets. As the benefits are used, the costs are no longer regarded as assets, but are
expensed.
Where benefits from a cost are confined to the current period, the cost is recorded as an expense rather than an
asset. An expense is the cost that is used up in the generation of revenue
Before management accountants can classify costs, they need to consider how managers will use the information.
Different cost concepts and classifications are used for different purposes.
The same cost can be classified in a number of ways, depending on the intended use of the cost information.
CLASSIFYING COSTS ACCORDING TO THEIR BEHAVIOUR
Management accountants can help managers to understand the way costs behave as the level of activity in the
business changes. The level of activity refers to the level of work performed in the organisation. The activity causes
the cost and, for this reason, the level of activity is often referred to as the level of cost driver.
Activity can be expressed in many different ways, including units produced, kilometres driven, pages printed
and hours worked.
A variable cost changes in total, in direct proportion to a change in the level of activity or cost driver.
An example is the electricity used to manufacture a product, which may increase in proportion to the number
of units of the product manufactured.
A fixed cost remains constant in total despite changes in the level of activity.
For example, the cost of rent of a manufacturing plant will remain the same no matter what the level of
production.
Fixed costs in the long term can change
DIRECT AND INDIRECT COSTS
One of the important functions of management accounting is to measure the costs of cost objects. A cost object is
simply an item for which management wants a separate measure of costs.
Products, projects, contracts and departments are common cost objects in traditional costing systems. Cost objects
of modern costing systems often include activities, suppliers and customers, as well as products.
Costs can be classified as direct or indirect, depending on whether they can be traced to cost objects.
A direct cost is a cost that can be identified with, or traced to, a particular cost object in an economic manner.
 Generally, there is a physically observable relationship between the cost (or the resource that it reflects) and the
cost object. Consider, for example, this book as a cost object. The cost of paper is a direct cost of this book.
In contrast, an indirect cost is a cost that cannot be identified with, or traced to, the cost object in an economic
manner.
 The salary of the managing editor of McGraw-Hill Education Australia is an indirect cost of this book. She
oversees the editing of all books and it is not easy to identify her time with any one book.
Direct and indirect costs of responsibility centres
In management accounting, we call the areas of the business where managers are held accountable for activities and
performance responsibility centres.
A cost that can be traced to a particular department, or responsibility centre, is called a direct cost of the
department. The salary of a radiographer is a direct cost of the X-ray department at St John’s Hospital in Hobart.
The salary of a plant manager at the pharmaceutical manufacturer AstraZenica Australia is an indirect cost of each of
the plant’s production departments. While the manager’s duties are important to the smooth functioning of each of
the production departments, there is no precise way of tracing part of his or her salary to each department.
Direct and indirect costs of products
Manufacturing costs that can be traced to products in an economic manner are direct product costs. These include
direct material and direct labour.
Indirect product costs are the manufacturing costs that cannot be traced to products in an economic manner. As
discussed later in this chapter, these costs are called manufacturing overhead.
CONTROLLABLE AND UNCONTROLLABLE COSTS
Performance evaluation can be enhanced by classifying responsibility centre costs, such as department costs, as
either controllable by the manager or uncontrollable.
If a manager can control or significantly influence the level of a cost, then that cost is classified as a controllable cost
of that manager.
Costs that a manager cannot significantly influence are classified as uncontrollable costs.
Ideally, when evaluating performance, managers should be held responsible only for costs they can control.
COSTS ACROSS THE VALUE CHAIN
The value chain is a set of linked processes or activities that begins with acquiring resources and ends with providing
(and supporting) goods and services that customers value.
Management accountants can use various cost classifications within the upstream, downstream and manufacturing
areas to help them assign costs to products, and to provide other information to help manage resources efficiently
and effectively in order to create value.
UPSTREAM COSTS
Research and development (or R & D) costs include all the costs involved in developing new products or processes.
Design costs include all the costs associated with designing a product, as well as the costs of designing the processes
that will be used to produce the new product.
Supplier costs refer to the costs of sourcing and managing incoming parts, assemblies and supplies.
PRODUCTION COSTS
Production costs include the costs incurred to collect and assemble the resources used to produce a product.
In a manufacturing business these costs are often referred to as manufacturing costs or factory costs.
DOWNSTREAM COSTS
Marketing costs refer to the overall costs of selling products, such as salaries, commissions and travel costs of sales
personnel, and the costs of advertising and promotion.
Distribution costs cover the costs of storing, handling and shipping finished products.
Customer service costs include all the costs of serving customers, such as the costs of answering customer enquiries,
after-sales service and warranty claims.
MANUFACTURING COSTS
In a manufacturing business, the production costs are often referred to as manufacturing costs. They include all
costs incurred within the factory area, whereas costs incurred outside the manufacturing area (i.e. in upstream and
downstream areas) are sometimes described as non-manufacturing costs.
Manufacturing costs are usually divided into three categories:
 direct material,
 direct labour and
 manufacturing overhead (or indirect manufacturing costs).
This classification, as direct or indirect costs, assumes that products are the relevant cost objects.
DIRECT MATERIAL
Raw material that:
 is consumed in the manufacturing process
 is physically incorporated into the finished product
 can be traced to products in an economic manner
is called direct material.
DIRECT LABOUR
The cost of salaries, wages and labour on-costs for personnel who work directly on the manufactured product is
usually classified as direct labour.
MANUFACTURING OVERHEAD
All other costs of manufacturing are classified as manufacturing overhead, sometimes called indirect manufacturing
costs or factory burden costs.
Manufacturing overhead covers all manufacturing costs other than direct material and direct labour costs.
It includes the cost of indirect materials and indirect labour, which covers any material and labour, used in
production, that is not classified as direct.
Manufacturing overhead also includes the costs of depreciation and insurance of the factory and manufacturing
equipment, utilities such as electricity, as well as the costs of manufacturing support departments.
CONVERSION AND PRIME COSTS
Direct labour costs and manufacturing overhead are often combined and called conversion costs, since they are the
costs of converting raw material into finished products.
The costs of direct material and direct labour are often combined and called prime costs, as they are the major costs
that can be directly associated with the product.
PRODUCT COSTS
Managers need estimates of product costs to assess product profitability and control costs, to decide whether to
make the product in-house or to outsource it, and (sometimes) to set product prices, as well as to value inventory
and cost of goods sold in the balance sheet and income statement.
The problem is that managers need different measures of product cost for different purposes.
PRODUCT COSTS FOR FINANCIAL ACCOUNTING REPORTS
For financial accounting reports (i.e., the balance sheet and the income statement), a product cost is a cost assigned
to goods that were either manufactured or purchased for resale. The product cost is regarded as part of the asset
inventory until the goods are sold.
Period costs
All costs that are not product costs are called period costs. These costs are expensed in the accounting period in
which they are incurred rather than being attached to units of purchased or produced goods.
PRODUCT COSTS FOR DECISION MAKING
While inventory valuations for financial accounting reports are limited to manufacturing costs, managers often need
a wider definition of product cost for decision making.
For example, in setting a product’s price, managers may need an estimate of all the costs associated with
developing, producing and selling the product.
Selling expenses usually include the costs of selling goods or services and the costs of distribution.
Administrative expenses refer to the costs of running the business as a whole, and include the costs of senior
management as well as a range of (non-manufacturing) support services.
Cost of goods sold are the cost of
 Direct materials,
 Direct labour and
 Overheads
Attached to the units sold
Cost of goods manufactured comprises of total cost of goods completed during the current period