Prepared by
Anne Abraham
University of Western Sydney
Chapter 1
The role of accounting
information in
management decision
making
Management decision making
Organisational
vision
Organisational
strategies
Operating
plans
Actual
operations
Core
competencies
Overview of management decision making
Prepared by Anne Abraham, University of Western Sydney
2
MANAGEMENT DECISION MAKING
continued
• Organisational vision is the core purpose and
ideology which guides an entity’s
– overall direction
– approach to its stakeholders
• Organisation core competencies are the entity’s
strengths relative to competitors
Organisational
vision
Vision helps locates strengths
Strengths help shape vision
Prepared by Anne Abraham, University of Western Sydney
Core
competencies
3
MANAGEMENT DECISION MAKING
continued
• Organisational strategies
– Tactics that managers use to work toward the
organisational vision while taking advantage of the
core competencies
– Long term in nature
– Include organisation structure, financial structure,
and long-term resource allocation strategies
Prepared by Anne Abraham, University of Western Sydney
4
MANAGEMENT DECISION MAKING
continued
• Operating plans
– Involvement short-term implementation of
organisational strategies
– Include specific performance objectives such as
budgeted revenues and costs
• Actual operations
– Actions taken and the results achieved over a
period of time
– Data is collected and measured by the
organisation’s information system
Prepared by Anne Abraham, University of Western Sydney
5
MANAGEMENT DECISION MAKING
continued
• Measuring, monitoring and motivating
performance
– Managers use results of operations to monitor
performance and ensure it is in line with
organisational vision
– Results of operations make managers re-think
organisational vision or their view of the
organisation’s core competencies
Prepared by Anne Abraham, University of Western Sydney
6
COST AND MANAGEMENT ACCOUNTING FOR
DECISION MAKING
Financial accounting
prepares reports most
frequently used by
decision makers external
to the organisation
Management accounting
prepares reports most
frequently used by
decision makers internal
to the organisation
Cost accounting is a “method for measuring
the cost of a project, process, or thing”
It includes both financial and nonfinancial
information and is used for both financial
and
management
accounting
Prepared by Anne
Abraham,
University of Western Sydney
7
COST AND MANAGEMENT ACCOUNTING FOR
DECISION MAKING continued
External reporting
Shareholder reports
• Financial statements
• News releases
Other stakeholder reports
• Credit reports
• Inventory reports for
suppliers
Government reports
• Tax returns
• Cost reports
Internal reporting
Support organisational strategies
• Capital budgets
• Product development
• Analysis of potential
acquisitions
Support operating plans
• Operating budgets
• Analysis of product mix
• Cash flow plan
Monitor and motivate
• Actual vs planned performance
• Bonus computations
• Supplier quality
Prepared by Anne Abraham, University of Western Sydney
8
Key influences on management accounting
system structure
•
•
•
•
•
•
Organisational structure
Availability of information technology
Organisational strategies
Organisation view of management accounting
Types of decisions confronting managers
External influences
Prepared by Anne Abraham, University of Western Sydney
9
Cost and management accounting, yesterday
and tomorrow
• Early 1900s to mid 1970s: Cost accounting
practices changed little
• More global environment: Term ‘management
accounting’ used for range of activities
undertaken
• Today: Cost and accounting information used for
– decision making
– measuring and monitoring performance
– goal alignment
Prepared by Anne Abraham, University of Western Sydney
10
Relevant information
for decision making
• Relevant information
– Helps decision maker to evaluate and choose
among alternative courses of action
– Concerns the future
– Varies with the action taken
• Relevance of information depends on type of
decision and other factors
• Irrelevant information does not vary with the
action taken and therefore is not useful for
decision making
Prepared by Anne Abraham, University of Western Sydney
11
MANAGEMENT ACCOUNTING INFORMATION
AND THE QUALITY OF DECISION MAKING
• 2 issues:
– Quality and relevance of management accounting
information
– Quality of decision-making processes in use within
organisation
• Higher quality information will generally have
fewer uncertainties if it is based on viable
assumptions
Prepared by Anne Abraham, University of Western Sydney
12
MANAGEMENT ACCOUNTING INFORMATION
AND THE QUALITY OF DECISION MAKING
continued
Higher quality
information is
more
- certain
- comparable
- complete
- relevant
- timely
- valuable
Higher quality
reports are
more
- relevant
- understandable
- available
Higher quality
decision-making
process is more
- thorough
- unbiased
- focussed
- strategic,
creative
and visionary
Higher
quality
decisions
Path to higher quality management decisions
Prepared by Anne Abraham, University of Western Sydney
13
MANAGEMENT ACCOUNTING INFORMATION
AND THE QUALITY OF DECISION MAKING
continued
• Decision-useful information needs to be
considered in light of
– Opportunity costs
– Cost-benefit analysis
• Opportunity costs are the benefits foregone when
we choose one alternative over the next best
alternative
• Cost-benefit analysis is an evaluation of the
benefits derived from the information and the
costs of collecting it
Prepared by Anne Abraham, University of Western Sydney
14
VALUE CHAIN ANALYSIS:
A FRAMEWORK FOR MANAGEMENT
ACCOUNTING
• A value chain consists of the key activities
engaged in by an organisation or industry
• At the organisational level, the value chain is
usually viewed as a combination of key activities
and support activities
• The value chain provides a suitable framework for
considering a range of management accounting
issues
Prepared by Anne Abraham, University of Western Sydney
15
VALUE CHAIN ANALYSIS continued
• Focuses on activities
• Encourages a broader
organisational view
• Breaks down more
traditional representations
of organisational activity
• Externalises thinking by
incorporating suppliers and
customers
• Reinforces initiatives such
as ABC
• Provides foundation for
outsourcing and strategic
alliance decisions
• Supports initiatives like
supply chain analysis
• Categorises activities as
value-added and nonvalue-added
Prepared by Anne Abraham, University of Western Sydney
16
VALUE CHAIN ANALYSIS continued
• The supply chain is the flow of resources from the
initial suppliers through the delivery of goods and
services to customers and clients
• A value-added activity is one that is necessary and
that the customer would normally be prepared to
pay for
• A non-value-added activity is one that is wasteful
(unnecessary) and that the customer would not
normally be prepared to pay for
Prepared by Anne Abraham, University of Western Sydney
17
Cost objects and cost drivers
• A cost object is a something for which we
measure costs (e.g. product, service, production
activity, customer, product)
• A cost driver is the input or activity that causes
changes in the total cost for a cost object
– Structured: relate to underlying economic
structure of organisation
– Executional: relate to ability of organisation to do
what is does successfully
Prepared by Anne Abraham, University of Western Sydney
18
Cost objects and cost drivers continued
•
•
•
•
•
Structural cost
drivers
Scale
Scope
Experience
Technology
Complexity
•
•
•
•
•
•
Executional cost
drivers
Workforce involvement
Total quality management
Capacity utilisation
Plant/process layout
efficiency
Product configuration
Linkages with suppliers and
customers
Prepared by Anne Abraham, University of Western Sydney
19