BUSINESS
PLANNING
AND
STRATEGIC
PERFORMANCE
EVALUATION
Topic 1. The Nature of
Management Accounting
Imagine that you are the owner of a small
clothing chain in suburban Boston
Balancing organizational tensions
§ Balancing profit, growth and control
§ Balancing short-term results against longterm capabilities and growth opportunities
§ Balancing performance expectations of
different constituencies
§ Balancing opportunities and attention
§ Balancing the motives of human behaviour
Assumptions about human behavior
§ People want to contribute
§ People choose to do right
§ People strive to achieve
§ People like to innovate
§ People like to do competent work
Organizational blocks and need for
management control
§ People do not understand goals and
strategies developed by top managers or
how they contribute to them
§ Businesses create pressure and temptations
§ People do not have resources needed to
meet goals and pursue strategies
§ People do not automatically agree with
goals and strategies
Key Definitions
§ Management control is a systematic process
by which organisation´s higher level
managers influence the organisation´s
lower-level managers to implement
organisational strategies
§ Management accounting includes a set of
techniques, processes, and practices
designed to assist management in the
formulation and implementation of an
organization strategy.
Key Definitions
§ Management accounting (MA) is
concerned with preparation and use of
§ Monetary information and plans
§ Nonmonetary information (e.g. product/service
quality, customer satisfaction)
§ Most of the MA principles are independent
of the type of an organization
§ Management accounting is summary
information
Management Accounting as Profession
§ The members of organization who are
responsible for the design and operation of
management accounting system are called
management accountants
§ Professional program: designation of Certified
Management Accountant (CMA)
§ Highest-level management accountant is
called the controller (inward-directed tasks)
§ The treasurer is responsible for more outwarddirected tasks (e.g. obtaining funds)
Key Definitions
§ Management accountants are deeply
involved in processes related to the
§ identification
§ measurement
§ accumulation
§ analysis
§ preparation
§ interpretation, and
§ communication of the information needed by
management to perform its functions
Management Accounting vs.
Financial Reporting
§ Lufthansa Group - https://investorrelations.lufthansagroup.com/en/publicatio
ns/financial-reports.html#cid11051
Monthly report for a new branch office
Management Accounting vs.
Financial Reporting (1/2)
Dimension
Management Accounting
Financial Accounting
Necessity
Optional
Required
Purpose
A means to the end of
assisting management
Produce statements for outside
users
Users
Relatively small group,
known identity
Relatively large group, mostly
unknown
Underlying Structure
Varies according to the use
of information
One basic equation: Assets =
Liabilities + Owners’ equity
Source of Principles
Whatever is useful to
management
GAAP
Time orientation
Historical and estimates of
the future
Historical
Management Accounting vs.
Financial Reporting (2/2)
Dimension
Management Accounting
Financial Accounting
Information Content
Monetary and nonmonetary
Primarily monetary
Information precision
Many approximations
Fewer approximations
Report Frequency
Varies with purpose, weekly
and monthly are common
Quarterly and annually
Report timeliness
Reports are issued promptly
after the end of period
covered
Delay of weeks of even months
Report entity
Responsibility centers
Overall organization
Liability potential
Virtually none
Few lawsuits, but threat is
always present
Similarities
§ Management cannot base its reporting
system on unverifiable, subjective estimates
of profits
§ Summaries of documents (or computer
records) provide the same raw information
used both in financial and management
accounting
§ Both are used in decision-making
Types of Management Accounting
Information
§ Information in management accounting system
is used for
§ Measurement (of revenues, costs, assets etc)
§ Control
§ Choice among alternative courses of action
§ Historical data
§ Score-keeping – How are we doing?
§ Attention-directing – What problems require looking
into?
§ Future Estimates
§ Problem-solving – What is the best way to deal with
the problem?
Measurement
§ Management accounting system focuses
on the measurement of full costs
§ Full cost accounting measures resources
used in performing some activity
§ Direct costs can be directly traced to the goods
or services
§ Indirect costs – share of costs incurred jointly
producing these and other goods and services
§ Full cost accounting is not restricted to
measuring the costs of manufactured goods
Control
§ The management accounting system is
structured so that it measures costs by
responsibility centres
§ Responsibility centre is an organization unit
headed by a manager who is responsible
for its operations and performance
§ Estimates of future responsibility costs are
used the annual planning process called
budgeting
Alternative Choice Decisions
§ Comparison of the estimated costs to be
incurred for each of the alternatives being
considered
§ This information cannot be obtained directly
from the management accounting system
(costs specific to the alternative)
§ Differential costs – historical-based future
estimates describe how costs will be
different for two or more alternatives
Monthly report for a new branch office
The branch manager is pleased that the
report shows a 1,461$ profit instead of the
expected loss of $375
What questions can be raised about the
performance of the Eastside Branch and
its manager based on information in the
report?
Monthly report for a new branch office
General observations
§ Different numbers of different purposes (ex.
“cost”)
§ Degree of approximation in high for future
estimates
§ Working with incomplete data
§ Accounting evidence is only partial
evidence
§ People, not numbers, get things done
Reference
§ Anthony, Robert N., David F. Hawkins, and
Kenneth A. Merchant. Accounting: text and
cases. McGraw-Hill, 2011, Chapter 15