Chapter 1 – the manager and mgmt. accountant
Cost accounting information is used to make decisions related to r&d, budgeting, and pricing. An
example of a ‘pricing structure’ is a ‘flat fee’ across products or a ‘3 tier price point system’ where you
charge according to the popularity of the product. This is used when we want fewer customers but
higher revenues
Financial accounting, mgmt. accounting and cost accounting
Costs are allocated by category (materials, labour and shipping) and you should see how costs change
related to revenues. Companies create a data warehouse or ‘info barn’ to serve the needs of managers,
example, distribution managers need to sales order qty per region and delivery dates to ensure timely
delivery. A sales manager is interested in total dollar amt of sales to determine commissions to be paid
Sales order database will contain detailed information about product, qty ordered, selling price and
delivery dates for each sales order. The database stores information allowing different managers to
access whatever they need
Financial accounting focuses on reporting to external parties and it affects managers decisions and
actions through ‘compensation.’ Mgmt. accounting measures, analyses and reports financial and non
– financial information that helps managers make decisions which help achieve goals. Mgmt.
accounting information have no defined rules and its used to develop, communicate and implement
strategy
Cost accounting measures, analyses and reports financial and non – financial information relating to
the costs of acquiring or using resources and provides information to for mgmt. and financial
accounting, example, a cost account function is calculating costs of a product answers mgmt.
accountings decision making needs (product pricing and promotion) and financial accountings
inventory valuation needs. Use cost and mgmt. accounting interchangeably
Cost mgmt. describes a managers activities to use resources in a way to increase value to customers
and to achieve goals. Cost mgmt. decisions are whether to enter new markets, implement new
processes, and change product designs. Cost mgmt. includes decisions to incur additional costs in
order to enhance revenues and profits
FURPT
Focus
Users
Rules of measurement
Purpose
Time span
Mgmt. accounting
Future oriented (budget)
Managers
Internal reports don’t need
GAAP but are based on cost
benefit analysis
Helps managers make decisions
to fulfil goals
From hourly to many years,
includes both financial and non –
financial information
Financial accounting
Past oriented (past results)
External parties
Financial statements prepared
as per GAAP and certified by
external auditors
Communicate firms’ financial
position to outside parties
Annual and quarterly financial
reports
strategic decisions and the mgmt. accountant
strategy is all about using your capabilities to match opportunities in the marketplace in order to
accomplish objectives. Theres a cost leadership strategy in which you provide quality products at a
cheap price and a product differentiation strategy that is to offer unique products at higher prices.
There are sources of competitive advantage such as cost, productivity, or efficiency advantage of their
firm relative to competitors or the premium prices that can be charged relative to the costs of adding
features that make products distinctive
strategic cost mgmt. is cost mgmt. focusing on strategic issues such as who are the main customers
and how can we be competitive and add value to them, building an IT infrastructure, CIM plants and
responding to changing customer tastes. What substitutes exist in the marketplace and how do they
differ from our product in terms of price and quality. What is your most critical capability i.e.,
technology, production or marketing and how can you leverage it for new strategic initiatives. Will
adequate cash be available or will additional funds need to be raised
value chain and supply chain analysis and key success factors
customer experience is determined by a fair price, quality products which are delivered in a timely way
and what value or usefulness a customer derives from it
value chain analysis
sequence of business functions in which customer usefulness is added to products
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R&D
Design of products and processes – effect of alternative product designs on quality and
manufacturing costs
Production – procuring, transporting and storing (inbound logistics), coordinating and
assembling (operations) resources to produce a product
Marketing (including sales) – ads in newspapers and magazines, internet, and through sales
force
Distribution – processing orders and shipping products (outbound logistics), shipping to retail
outlets, catalog vendors, direct sales via the internet
Customer service – providing after sales service to customers through help lines, internet
support and warranty repair work
Note – the first 2 can be referred to as ‘technology development’, there is also an ‘administrative
function which is accounting and finance, human resource mgmt. and IT that support the 6 listed
above. Customer relationship mgmt. (CRM) describes a strategy that integrates people and technology
in all business functions to deepen relations with customers, partners and distributors. The significance
of the value chain function depends on the industry you operate in, example, healthcare requires more
focus and resources to be devoted towards R&D and managers need to assess costs in each value chain
category (outsourcing vs inhouse manufacturing)
Supply chain analysis
It describes the flow and goods and information from the initial sources of materials to delivery of
products to customers. The part of the value chain associated with production and distribution is the
supply chain
Pepsi requires suppliers to deliver small quantities of materials to the production floor to reduce
material handling costs. To reduce inventory levels, Walmart asks its suppliers to be responsible for
and manage inventory at both their own warehouses and at Walmart as well
Key success factors
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Cost and efficiency – setting up machines or distributing products that cause costs to rise.
Monitor marketplace to determine prices customers will pay. Mgmt. accounting information
helps calculate a target cost = target price – operating income per unit. To achieve target cost,
managers eliminate some activities such as rework and reduce costs of performing activities
in all value chain functions
Supply chain for a bottling company
Suppliers of Cola concentrate ingredients – concentrate manufacturer – bottling – dist. – retail –
customer
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Quality – TQM, minimal waste and defects and minimal inventories
Time – new product development time, with technological innovations there are shorter
product life cycles, understand the costs and benefits of a product over its life cycle. Customer
response time is the speed at which a firm responds to customer requests. The primary cause
of delay is bottlenecks that occur when the work to be performed on a machine exceeds
available capacity
Innovation
By designing products that can be recycled, you improve efficiency, cost and quality, competitive
information serves as a benchmark, fundamental changes in operations such as redesigning a
manufacturing process to reduce costs
Decision making, planning and control: the 5 step decision making process
1) Identify the problem and uncertainties
a. Either increase the selling price or rate per page charged to advertisers, the
uncertainty is effect on demand and a decrease in demand could offset any increase
in prices and lead to overall revenues
2) Obtain information
a. Speak to current and potential advertisers to assess demand for advertising and study
effect of past price increases
3) Make future predictions
a. Will competitors increase rates as well, how have they responded in the past, have
circumstances changed
4) Make decisions by choosing among alternatives
The first 4 steps are referred to as ‘planning’ which is selecting goals and strategies, predicting results
under various ways of achieving those goals, deciding how to achieve desired goals, communicate
goals and how to achieve them to the firm
The most imp planning tool when implementing strategy is a budget, which is a proposed plan of action
by mgmt. and coordinates what needs to be done to achieve said plan
5) Implement decision, evaluate performance and learn
a. Collect information and assess how actual performance compares to budgeted
performance (scorekeeping). The comparison of actual to budgeted performance is
the control or post decision role of information. Control comprises taking actions that
implement the planning decisions, deciding how to evaluate performance, and
providing feedback
b. A budget is a benchmark against which actual performance is compared
Key mgmt. accounting guidelines
Cost benefit approach – resource allocation decisions (whether to buy new software package, hire
new employee), a cost benefit approach is used when making these decisions and the benefits should
outweigh the costs
Behavioural and technical considerations – technical considerations help make wise economic
decisions by providing them with the desired information (costs in various value chain categories). The
behavioural considerations encourage staff to achieve goals
Line and staff relationships – line mgmt. (production, marketing and distribution mgmt.) is responsible
for achieving goals, example, managers of manufacturing divisions target particular levels of budgeted
operating income and certain levels of product quality and safety. Staff mgmt. (mgmt. accountants, IT,
HR) provide support to line mgmt., example, a plant manager (line function) is responsible for investing
in new equipment whereas a mgmt. accountant (staff function) helps the plant manager by preparing
detailed operating cost comparisons of alternative pieces of equipment
Other topics in the chapter
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Wholesale costs
Network & transaction fees
Other operating costs
Enterprise resource planning (ERP systems)
Cut costs by outsourcing
Sales representatives
Sold ads, issued invoices, received payments
Identify specific advertisers that cut back or stopped advertising after the rate increase
Advertising costs can be capitalised and then amortised or written off as expenses over several
years
Sarbanes Oxley legislation focuses on improving internal control, corporate governance,
monitoring of managers and disclosure practices of public corporations
Risky mortgage lending would be profitable if housing prices declined