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 - 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 - 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 - - 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 - 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
