Welcome to Strategy and cost
management
Jens Ocksen Jensen
Erik Søndergaard
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Chapter 1
The Accountant’s Role
in the Organisation
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Introduction
Modern cost accounting provides key
information to managers for their decision
making process.
The study of modern cost accounting
gives an insight into both the manager’s
role and the accountant’s role in an
organisation.
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Learning Objectives
1 Differentiate management accounting from financial accounting
and cost management
2 Recognise the growing role of strategy in management
accounting processes
3 Identify five broad purposes of accounting systems
4 Understand how accounting can influence planning, control and
decision making
5 Distinguish between the scorekeeping, attention-directing and
problem-solving functions of management accounting
6 Recognise that economic benefits and costs are to be
considered alongside contextual and organisational process
issues in the design, implementation and use of accounting
systems
7 Describe evolving themes that are shaping management
accounting systems
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Learning Objective 1
Differentiate management
accounting from financial
accounting and cost
management
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Learning Objective 1 (continued)
Management Accounting ... Measures and
reports financial and non-financial information
that helps managers make decisions to fulfil the
goals of an organisation.
Financial Accounting ... Focuses on reporting to
external parties.
It measures and records business transactions.
It provides financial statements based on
generally accepted accounting principles.
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Learning Objective 1 (continued)
Cost Accounting ... Provides information for both
management accounting and financial accounting.
It measures and reports financial and non-financial
data that relates to the cost of acquiring or
consuming resources by an organisation.
Cost Management ... Describes the activities of
managers in short- run and long-run planning and
control of costs.
It includes the continuous reduction of costs. It is a
key part of general management strategies and their
implementation.
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Cost Accounting and Cost Management
Cost Accounting
Identification and Measurement
Financial
Accounting
Management
Accounting
Cost Management
Planning and Control
“Looking behind the numbers”
1. Knowing purpose
2. Gathering information
3. Choosing alternatives
“Using the numbers”
1. Implementing choice
2. Evaluating performance
Feedback
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Learning Objective 2
Recognise the growing role of
strategy in management
accounting processes
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Learning Objective 2 (continued)
The growing role for
management accountants…
 Increased focus on expansionist, risky
and entrepreneurial strategies.
 Aim to create, not preserve shareholder
value in the short term
 Increase focus to external sources for
opportunities
 All this means an increased role for
management accountants
 Assist management to make balanced decisions
 Monitor and evaluate strategic and operational progress
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Learning Objective 3
The five major broad purposes
of accounting systems..
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Learning Objective 3 (continued)
1 Formulating overall strategies and long-range
plans – internal non-routine reporting.
2 Resource allocation decisions, e.g. product and
customer emphasis and pricing – internal routine
reporting.
3 Cost planning and cost control of operations and
activities – internal routine reporting.
4 Performance measurement and evaluation of
people – internal non-routine reporting.
5 Meeting external regulatory and legal reporting
requirements – external reporting.
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Learning Objective 3 (continued)
Internal Routine Reporting:
This purpose covers information provided for decisions that occur with some
regularity:
 Daily reports
 Weekly reports
Internal Non-routine Reporting
This purpose covers information for
precedent:
decisions that occur irregularly or even without
 Outsourcing
 Design of a special cost control tracking system
External Reporting
 This purpose covers information provided to investors, government authorities, and
other outside company stakeholders on the organisation’s financial position,
operations and related activities.
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Learning Objective 4
Understand how accounting can
influence planning, control and
decision making..
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Learning Objective 4 (continued)
What is Planning?
It is deciding on organisation goals, predicting results
under various alternative ways of achieving those
goals, and then deciding how to attain those desired
goals.
What is Control?
It is deciding and taking actions that implement the
planning decisions, and ... deciding on performance
evaluation and the related feedback that will help
future decision making.
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Learning Objective 4 (continued)
What are Budgets?
They are quantitative expressions of a proposed plan of
action by management for a future time period and an aid
to the coordination and implementation of the plan.
What is a Performance Report?
This is a report that compares actual results with
budgeted amounts.
The performance report of Surrey Specialty Ltd for the
month of January shows the following:
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Learning Objective 4 (continued)
Performance Report
Surrey Specialty Ltd, Jan 2005
Budget
Actual
Revenues
£57,000 £60,000
Cost of goods sold 40,000
43,400
Wages
6,700
7,000
General
1,300
900
Fixed costs
5,000
5,000
Operating income £ 4,000 £ 3,700
Variance
£3,000 F
3,400 U
300 U
400 F
------£ 300 U
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Learning Objective 4 (continued)
Performance Report
 The performance report indicates that although
actual revenues exceeded the budgeted amount
by £3,000, operating income was £300 less than
budgeted.
 The report could spur investigation and further
decisions.
 Did the purchasing department pay more than
expected for the merchandise?
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Learning Objective 4 (continued)
Performance Report
 Yes, actual cost of goods sold were 72% of revenues
instead of the budgeted 70%.
Revenues
Cost of goods sold
Gross margin
Budget % Actual %
£57,000 100 £60,000 100
40,000 70 43,400 72
£17,000 30 £16,600 28
Feedback ...
o involves managers examining past performance and
systematically exploring alternative ways to make
better informed decisions in the future.
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Accounting and Decision Making
Accounting provides decision support for decision making.
Planning
-Defining goals
-Determining relevant
information
-Formulating alternatives
-Deciding methods
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Controlling
-Implementing
the choice
-Evaluating
performance
Three important roles of management
accountants:
1. Problem solving
2. Scorekeeping
3. Attention directing
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Learning Objective 5
Distinguish between the
scorekeeping, attention-directing
and problem-solving functions of
management accounting…
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Learning Objective 5 (continued)
Problem Solving... involves comparative analysis for
decision making with an element of analytical review.
This role asks, of the several alternatives available,
which is the best?
Scorekeeping ... involves accumulating data and
reporting reliable results to all levels of management.
This role asks how is the business doing?
Attention Directing ... involves helping managers
properly focus their attention.
Attention directing should focus on all opportunities to
add value to an organisation, not just cost-reduction
opportunities.
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Learning Objective 5 (continued)
Management Accountants ... serve each of
these three roles in both planning and control
decisions.
The problem-solving role is most marked for
planning decisions.
The scorekeeping and attention-directing roles
are most important for control decisions.
Management accountants increasingly are
viewing managers as their customers.
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Learning Objective 6
Recognise that economic benefits
and costs are to be considered
alongside contextual and
organisational process issues in
the design, implementation and
use of accounting systems
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Learning Objective 6 (continued)
Key Guidelines:
1 Cost-benefit approach
2 Full recognition to behavioural as well as
technical considerations
3 Use of different costs for different
purposes
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Learning Objective 6 (continued)
Cost-Benefit Approach…
A cost-benefit approach should be used in order to
spend resources if they promote decision making that
better achieves organisational goals in relation to the
costs of those resources.
Behavioural and Technical Considerations…
A management accounting system should have two
simultaneous missions for providing information:
1 To help managers make wise economic decisions
2 To help managers and other employees to aim and
strive for goals of the organisation
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Learning Objective 6 (continued)
Different Costs for Different Purposes…
A cost concept used for the external reporting purpose
need not be the appropriate concept for the purpose of
internal routine reporting to managers.
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Learning Objective 7
Describe evolving themes that
are shaping management
accounting systems
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Learning Objective 7 (continued)
Customer
Focus
Value-Chain
and Supply-Chain
Analysis
Success Factors
Time, Quality,
Cost, Innovation
Continuous
Improvement
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Learning Objective 7 (continued)
 Customer Focus
The challenge facing managers is to continue
investing sufficient (but not excessive) resources
in customer satisfaction such that profitable
customers are attracted and retained.
 Continuous improvement
Continuous improvement by competitors creates
a never-ending search for higher levels of
performance within many organisations.
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Learning Objective 7 (continued)
 Key Success Factors
are operational factors that directly affect
economic viability of the organisation.
the
Cost – organisations are under continuous pressure to
reduce costs.
Quality – customers are expecting higher levels of
quality.
Time – organisations are under pressure
to
complete activities faster and to meet promised delivery
dates more reliably.
Innovation – there is now heightened recognition that a
continuing flow of innovative products or services is a
prerequisite to the ongoing success of
most
organisations.
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Learning Objective 7 (continued)
 Value-Chain and Supply-Chain Analysis This
theme has two related aspects:
1 Treat each of the business functions in the value chain as
an essential and valued contributor.
2 Integrate and coordinate the efforts of all business
functions in addition to developing the capabilities of each
individual business function.
Supply chain – describes the flow of goods, services and
information from cradle to grave, regardless of whether
those activities occur in the same organisation or other
organisations.
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Budget assumptions
Sales price /pcs
Sales pcs.
Mat.cost./pcs
Labor cost/pcs
Overheadcosts
Long term loan int
100
10000
20
20
500000
5
kr
Depreciations
pcs Investments
kr
Interest bankfacility
kr
Acc.rec. credit time
kr
Acc.payab. credit time
% p.a.Repaym.longterm loan
Operating income statement
Year total
Sales revenue
Material costs
Labor costs
Contribution-I
Overheadcosts
Contribution-II
Depreciations
Interests long loan
Interests bankfacility
Operating income
Balance
CASH-BUDGET
CASH-BUDGET
50000
100000
10
30
60
12000
Primo
Assets
Plant/equipm.
Acc.receivabl
Assets total
Liabilities
Equity capital
Long term loan
Acc. payables
Bankfacility/cash
Liabilities total
Ultimo
175000
120000
295000
75000
120000
25000
75000
295000
Year total
Contribution-II
Acc.rec.primo
Acc.rec.ult.
Acc.payables primo
Acc.payables ult.
Cash from activities
Repayment long loan
Interest long loan
Investments
Total cash
Bankfacility-primo
Bankfacility-ultimo
before interests
Interest bankfinancing
Bankfacility-ultimo
kr
kr.
% p.a.
days
days
kr
Year total
Receipts
Collection from customers
Total receipts
Disbursements
Payroll
Direct materials paym.
Overhead-payments
Investm.payments
Interests/repayments
Total disbursements
Receipts-disbursements
Bankfacility primo cash
Bankfacility ult.cash
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