Week 1 Everything Flashcards
Management accounting
Management accounting is the process of identifying, collecting and analysing accounting data for the management team to make decisions and to assess organisational efficiencies and effectiveness. The value chain specifies the domain for management accounting processes
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
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
External reporting
Includes Shareholder reports such as financial statements.
Other stakeholder reports such as credit reports
Government reports such as tax returns
Internal reporting
Support organisational strategies such as capital budgets
Support operating plans such as operating budgets
Monitor and motivate such as comparing actual performance to planned performance
Organisational vision
Organisational vision is the core purpose and ideology which guides an entity’s overall direction and approach to its stakeholders
Organisation core competencies
Organisation core competencies are the entity’s strengths relative to competitors
Organisational vision and mission
Vision helps locate strengths and the core competencies help shape vision
Organisational strategies
Future Focused (high value add)
Low-cost strategy
A differentiation strategy
Future Focused (high value add)
Tactics that managers use to work toward the organisational vision while taking advantage of the core competencies. They are long term in nature. Include organisation structure, financial structure, and long-term resource allocation strategies
Management accounting practices include techniques to help with investment appraisal
Low-cost strategy
Economies of scale in production. Experience curve effects. Tight cost control
Cost minimisation in R&D, service, sales force, advertising
A differentiation strategy
Creating something customers perceive as being unique/. Brand loyalty, superior customer service, dealer network, product design and product features, technology
Management Decisions: Operating Plans
Short-term focused (modest value-add)
Operating plans (budgets)
Actual operations
Operating plans (budgets)
Generally involves planning for a short-term time frame (generally up to 12 months). Include specific performance objectives such as budgeted revenues and costs
Actual operations
Measures actions taken and the results achieved over a period of time. Compares actuals with proposed plans (budgets). Feedback, corrective actions and learning
Decisions confronting managers
Measuring, monitoring and motivating performance
Role of financial and non-financial information
Goal Kicking versus Goal Keeping
Proactive or Reactive
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
Role of financial and non-financial information
Management accounting is not just providing financial information for decisions but also relies on non-financial and qualitative data to inform decisions
Relevant information
Helps decision maker to evaluate and choose among alternative courses of action. It concerns the future. Varies with the action taken
Irrelevant information does not
vary with the action taken and therefore is not useful for decision making
Decision-useful information
…. needs to be considered in light of:
Opportunity costs and cost benefit analysis
Opportunity costs
Opportunity costs are the benefits foregone when we choose one alternative over the next best alternative
cost benefit analysis
Cost-benefit analysis is an evaluation of the benefits derived from the information and the costs of collecting it
Goal Kicking versus Goal Keeping
The role of the Chief Financial Officer (CFO) is to manage both “goal keeping” and “goal kicking” roles. Strategic management accounting tends to be “goal kicking” focused. Cost accounting contributes to the “goal keeping” role. At times, these two roles can conflict
Proactive or Reactive
Should management be conservative or take risks?
Should they be strategic or react when uncertainty exists?
A value chain
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 domain provides a suitable framework for considering a range of management accounting issues
Value chain analysis key terminology
Supply chain
Value-added activity
Non-value-added activity
Supply chain
The supply chain is the flow of resources from the initial suppliers through the delivery of goods and services to customers and clients
Value-added activity
A value-added activity is one that is necessary and that the customer would normally be prepared to pay for
Non-value-added activity
A non-value-added activity is one that is wasteful (unnecessary) and that the customer would not normally be prepared to pay for
Value chain approaches
The external or industry value chain
The external or industry value chain
The external or industry value chain incorporates the value-creating activities which span the industry from the initial raw material to the end consumer. Organizations ‘choose’ to operate in certain parts of the chain, from the fully vertically integrated organization to the core-activity focused organization (see companies A-G on following slide)
External value chain
11/3/19
Internal value chain
Every organisation has their own internal value chain. This provides the opportunity to understand the behaviour of costs and the sources of differentiation.
The internal value chain is a collection of the key activities/functions performed to
Design; Produce; Market; Deliver; and Support its product(s)/service(s).
The internal value chain
11/3/19
Value chain analysis provides:
An understanding of supplier all the way through to distributor. VCA relationship is reflected in costs, costs are transferred in every value-added activity and end users (consumers) ultimately pay for the profit margins made throughout the value chain
costs are calculated as:
cost of goods sold (GOGS) or costs of services and period costs (all other expenses incurred through the value chain)
The three steps for conducting a value chain analysis
Separate the organisation’s operations into primary and support activities
Allocate cost to each activity
Identify the activities critical to customer satisfaction and market success
Value chain advantage (relative to competitors)
Reduced costs, enhanced differentiation, or both
inventory cost reduction;
lower manufacturing costs;
lower product development costs;
fewer resources wasted on
non-value-added activities;
reduction in transaction costs (information systems sharing)
improved supplier relations;
fewer barriers and faster response to changing market demands
Cost objects and cost drivers
Management of the value chain requires an understanding of the nature of costs and the drivers of costs
Cost objects
A cost object is: a thing or activity for which we measure costs (from individual product/service to division or entire organisation)
cost driver
A cost driver is: an input of activity that causes changes in total cost for a cost object
If the cost object of interest is the value chain, cost drivers can be considered in terms of:
Structural cost drivers (relating to size and complexity)
Executional cost drivers (relating to the management of people and operations)
Structural cost drivers
Relates to the company’s underlying structure and strategy:
Scale
Scope
Experience
Technology
Complexity
Executional cost drivers
Scaled with performance (people and operations):
Workforce involvement
TQM
Capacity utilisation
Plant layout efficiency
Product configuration
Linkages with suppliers or customers
Key value chain decisions
Who to engage strategic alliances with
Whether to outsource or keep in-house
Is the organisational structure suitable?
The value chain, corporate structure & control
Structures can be centralised or decentralised.
The larger the company and the more decentralised the company is:
The greater the organisational complexity (structural cost drivers) and the greater the need for accounting to help manage relationships within (and outside) the organization (executional costs drivers)
Centralised v decentralised
11/3/19
Strategic Business Unit: Large Diverse Company
11/3/19
