Description
management accounting and financial accounting, framework for management accounting, objective cost management, characteristics of cost management. It also includes cost management and strategic decision making
Cost Management and Strategic Decision Making
Evaluating Opportunities and Leading Change
TESTS
? There will be one or two mid-term exams (for 30 percent
of your grade) and a comprehensive final exam (40 percent of your grade). ? Questions in exams are a combination of essays, multiplechoice and problems. ? These questions require specific understanding of the materials discussed in the textbook, class lectures and handout materials. ? Note: Student must use their own calculators for all quizzes and exams.
2
FCQ
? There will be MANY unannounced quizzes during the semester. ? Each quiz contains one or more problem(s) from the most
recently lectured materials. ? These quizzes are very similar to the problems at the end of each chapter of your textbook with minor changes. ? These quizzes and projects count for 20 percent of your grade.
3
CLASS PARTICIPATION
? Every student is required to participate in the class discussions. ? Students are encouraged to bring in to the class articles from business journals. ? During the first 15 minutes of every class meeting students are allowed to discuss those article(s) in the class. ? Other students may comment or question the
presenter.
4
ATTENDANCE POLICY
? Attendance is as per Institute policy ? Do not enter after the class has started ? Once Seated cannot leave the class, however, may leave the class immediately after attendance ? Your attendance is required for all announced exams and unannounced quizzes, however
5
The accounting process
Economic activities
Accounting “links” decision makers with economic activities ? and with the results of their decisions.
Accounting
information
Actions (decisions)
Decision makers
Types of Accounting Information Financial Tax
Managerial
Information System
Cost & Revenue Determination ?Job costing ?Process costing ?ABC ?Sales Assets & Liabilities ?Plant and equipment ?Loans & equity ?Receivables, payables & cash Cash Flows ?From operations ?From financing ?From investing
Information Users ?Investors ?Creditors ?Managers ?Owners ?Customers ?Employees ?Regulatory agencies -SEC -IRS -EPA
Decision Support ?CVP analysis ?Performance evaluation ?Incremental analysis ?Budgeting ?Capital allocation ?Earnings per share ?Ratio analysis
Distinctions Between Management Accounting and Financial Accounting
Management Accounting Primary Users Choices Organization managers Costs versus benefits Financial Accounting External parties G.A.A.P.
Behavioural Implications
Time Focus Time Span Reports Activities
Influence on managerial behaviour
Future orientation Flexible Detailed Less sharply defined
Measurement of economic activity
Past orientation Less flexible Summary reports More sharply defined
The Past
? Cost Accounting
Focused On
? Recording Data
? Measured And Reported Costs
Information about decision-making authority, for decision-making support, and for evaluating and rewarding decision-making performance.
Information useful in assessing both the past performance and future directions of the enterprise and information from external and internal sources.
Objectives of Managerial Reporting
Information useful to help the enterprise achieve its goal, objectives and mission.
Characteristics of Management Accounting Information
Timeliness A Means to an End Identify DecisionMaking Authority
Measures Efficiency and Effectiveness
Oriented Toward Future
Management Accounting for Managers
? Management accounting exists because managers
require information to make decisions ? Primary focus of management accounting is towards users within an organization ? Management accounting does not exist to generate data, but it exists because managers require information for decisions Framework for Management Accounting
Strategic Planning Management Control Operational Control
Focus on organization’s objectives
Effectiveness and efficiency of resource use Effectiveness and efficiency of tasks
Frameworks for Management Accounting
OPERATIONAL CONTROL
Accounts receivable Order entry
MANAGEMENT CONTROL
Budget analysis Short-term forecasting Engineered costs Variance analysis Overall budget Budget preparation
STRATEGIC PLANNING
Tanker fleet mix Warehouse and factory location
Structured SemiStructured
Inventory reordering Inventory control Production scheduling Bond trading Cash management
Mergers and acquisitions Capital acquisition analysis New product planning
Unstructured PERT COST systems
Sales and production
R and D planning
Management Decision Process
1. Identify the problem. 2. Perform the necessary quantitative and qualitative analyses. 3. Identify alternative solutions to the problem. 4. Evaluate the alternative solutions. 5. Recommend one of the alternative solutions. 6. Implement the recommendation.
Management
Major Means: Accounting Information 1. Problem-solving information Major Ends: Helping Decisions 1. Managers for long-range planning and special decisions
2. Attention-directing information
2. Managers for planning and controlling routine operations
3. Scorekeeping information
3. Outsiders for investors, tax collectors, regulators & others
Planning and Controlling
Planning
Evaluation Action
? Planning involves setting objectives and the means to their attainment
? What is desired? ? When and how is it to be accomplished? ? How is success to be evaluated?
? Controlling involves the implementation of plans and the use of feedback to monitor
achievements
Product Life Cycle
? The various stages through which a product passes, from conception and development through introduction into the market through maturation and, finally, withdrawal from the market
Sales over Typical Product Life Cycle
Product Development
Introduction to Market
Mature Market
Phase-Out of Product
The Value Chain
? Value chain is the set of business functions that add value to the
products or services of an organization
Research and Development Customer Service Product & Service Process Design
CUSTOMER FOCUS
Distribution Production
Marketing
Question
? What is now the primary objective of cost management?
Characteristics of Cost Management
What is Cost Management?
?
Characteristics of Cost Management
What is Cost Management? In addition to measuring and reporting costs, it is a philosophy, an attitude, and a set of techniques to create more customer value at a lower cost.
?
The Future
? Cost Management
Will Provide Information for Decisions Related To:
?
?
?
The Future
? Cost Management
Will Provide Information for Decisions Related To:
Improving Products, Services, and Use of Resources
?
?
The Future
? Cost Management
Will Provide Information for Decisions Related To:
Improving Products, Services, and Use of Resources
Supporting Strategies
?
The Future
? Cost Management
Will Provide Information for Decisions Related To:
Improving Products, Services, and Use of Resources
Supporting Strategies
Systematically Reducing Costs
Define Managerial Accounting
Managerial accounting is the process of ? Identifying ? Measuring ? Analyzing ? Interpreting ? Communicating Information in pursuit an organization’s goals
Managerial versus Financial Accounting
Accounting System (accumulates financial and managerial accounting data) Managerial Accounting Information for decision making, planning, and controlling an organization’s operations. Internal Users Financial Accounting Published financial statements and other financial reports.
External Users
How Managerial Accounting Adds Value to the Organization
? Providing information for decision making and ?
?
? ?
planning. Assisting managers in directing and controlling activities. Motivating managers and other employees towards organization’s goals. Measuring performance of activities, managers, and other employees. Assessing the organization’s competitive position.
Managing Resources, Activities, and People
An organization . . .
Directing
Acquires Resources
Organized set of activities
Decision Making
Controlling
Planning
Hires People
Work of Management
Planning
Directing and Motivating
Controlling
Planning
Identify
alternatives.
Select alternative that does
the best job of furthering organization’s objectives.
Develop budgets to guide
progress toward the selected alternative.
Directing and Motivating
Directing and motivating involves managing day-today activities to keep the organization running smoothly.
? Employee work assignments.
? Routine problem solving.
? Conflict resolution. ? Effective communications.
Controlling
The control function ensures that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.
Exh. 1-1
Planning and Control Cycle
Formulating long-and short-term plans (Planning) Comparing actual to planned performance (Controlling)
Begin
Decision Making
Implementing plans (Directing and Motivating)
Measuring performance (Controlling)
Organizational Structure
Decentralization is the delegation of decision-making authority throughout an organization.
Corporate Organization Chart
Board of Directors President Purchasing Personnel Vice President Operations Chief Financial Officer Controller
Treasurer
The Chief Financial Officer (CFO)
A member of the top management team responsible for:
? Providing timely and relevant data to support
planning and control activities. ? Preparing financial statements for external users.
Controller
The chief managerial and financial accountant responsibility for:
? Supervising accounting personnel
? Preparation of information and reports, managerial
and financial ? Analysis of accounting information ? Planning and decision making
Treasurer
Responsible for raising capital and safeguarding the organization’s assets. ? Supervises relationships with financial institutions. ? Work with investors and potential
investors. ? Manages investments. ? Establishes credit policies. ? Manages insurance coverage
Internal Auditor
Responsible for reviewing accounting procedures, records, and reports in both the controller’s and the treasurer’s area of responsibility. ? Expresses an opinion to top management regarding the effectiveness of the organizations accounting system.
Who Are Cost Managers?
? They serve as communicators of company
values to employees. ? They have diverse educational backgrounds. ? They need broad knowledge of the organization. Competence is a given!
Who Are Cost Managers?
AWARENESS CREATIVITY They exhibit attributes of DILIGENCE OPENNESS HONESTY
Characteristics of Cost-Management Analysts
Cost analysts use cost accounting and other data to?
Characteristics of Cost-Management Analysts
Cost analysts use cost accounting and other data to:
Improve products
Improve resource use
Improve services
Support strategies
Reduce costs
What are the Characteristics of Cost-Management Analysts?
Characteristics of Cost-Management Analysts
Integrity
Broad knowledge of the business
Ability to work in cross-functional teams
Ethical Standards for CostManagement Analysts
Cost-management analysts must maintain high standards of ethical behavior because they can control the information used for important strategic management decisions.
Professional Ethics
?Competence
?Confidentiality
?Integrity
?Credibility
Ethical Behavior
Follow applicable laws, regulations and standards.
Maintain professional competence.
Competence
Prepare complete and clear reports after appropriate analysis.
Ethical Behavior
Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage.
Confidentiality
Ensure that subordinates do not disclose confidential information.
Ethical Behavior
Avoid conflicts of interest and advise others of potential conflicts. Do not subvert organization’s legitimate objectives.
Integrity
Recognize and communicate personal and professional limitations.
Ethical Behavior
Avoid activities that could affect your ability to perform duties.
Refrain from activities that could discredit the profession.
Integrity
Communicate unfavorable as well as favorable information.
Refuse gifts or favors that might influence behavior.
Ethical Behavior
Communicate information fairly and objectively.
Objectivity
Disclose all information that might be useful to management.
Team Focus
? Earlier – Management responsibilities were defined by their FUNCTIONAL ROLES ? FUNCTIONAL ROLES - Narrowly Defined - Jobs That Focus On Specific Activities
Team Focus
? Now – Decisions are made by CROSSFUNCTIONAL MANAGEMENT TEAMS
? CROSSFUNCTIONAL MANAGEMENT TEAMS -
Involves bringing together individuals from diverse functions and backgrounds to generate innovative solutions to problems.
Team Focus
? ENTREPRENEURIAL DECISON MAKING
? Focuses On Finding New Opportunities;
Informed of, But Not Restricted By The Past
What is Strategic Decision Making?
Strategic Decision Making
Strategy
An organization’s overall plan or policy to achieve its goals.
Key questions?
Strategic Decision Making
Strategy An organization’s overall plan or policy to achieve its goals.
Key questions
Where do we want to go?
How do we want to get there?
Where do We Want to Go? – Strategic Missions
• New market potential • Be early entrant • Achieve growth • Capture market share
Build • Continuing market • Maintain growth • Be a major player • Protect market share
High
REWARDS
Hold
Medium
Harvest
• Continuing market • Maintain cash flow • Maintain volume • Cut costs
Low
Divest
• Declining market • Exit at lowest cost • Minimize losses • Find a buyer quickly
Low
Medium
RISK
High
How Do We Want to Get There?
Managers are more successful in attaining objectives if they:
Understand sources and threats to competitive advantages.
Use effective decision making techniques.
Competitive advantages exist in a value chain that enables an organization to provide more value at a lower cost than its competitors.
Choosing A Long Term Strategy
? Identify The Organization’s Source Of “Competitive Advantage”.
? A competitive advantage is anything the
organization can do better than its competitors to provide valued products and services for which customers will pay higher prices.
Cost Management Systems
? Determine
Objectives
efficiency and effectiveness of major activities. ? Identify and evaluate new activities that can improve performance.
Cost Management System
Example: Should We Outsource Accounts Receivable?
COSTS OF OUTSOURCING
QUALITATIVE 1. Loss of direct contact with customers 2. Adverse effects of personnel reduction
BENEFITS OF OUTSOURCING
QUALITATIVE 1. Quality of service
Example: Should We Outsource Accounts Receivable?
COSTS OF OUTSOURCING
QUANTITATIVE 1. Contracted service 2. Contracted Administration 3. Total quantifiable costs
BENEFITS OF OUTSOURCING
QUANTITATIVE 1. Personnel cost savings 2. Facilities cost savings 3. Support cost savings
What is the Value Chain?
Scale and Scope Of Operations
? THE VALUE CHAIN
? A set of linked operations or processes that are
involved in providing goods & services to customers.
Begin by obtaining resources.
End by providing goods & services that the customers want.
Scale and Scope Of Operations
? THE VALUE CHAIN
? A set of linked operations or processes that are
involved in providing goods & services to customers.
Everything in between is the Value Chain
Begin by obtaining resources.
End by providing goods & services that the customers want.
Value Chain
The value chain describes the activities that increase the value of an organization’s products or services.
Production Marketing R& Customer Distributio Design D Service n
What is a Process?
? PROCESS
? A related set of tasks that transforms inputs into ? ? ? ? ? ? ? ?
identifiable outputs Research and development Design Supply Production Marketing Distribution Customer service Support services
Strategic Cost Management and the Value Chain
Product Design Production Research and Development Securing raw materials and other resources
Marketing
Distribution Customer Service
Start
What is the Value Chain?
Where do we want to go? How do we want to get there? Physical resources
Support services •Accounting •Human resources •Legal services •Information systems •Telecommunications
Human resources
R& D
Desig n
Supply
Production Marketing
Distribution
Customer service
Value of products and services
Primary processes
Activities
Production Marketing R& Customer Distributio Design D service n
Non ValueValue Added Added Activity: Activity: Does this Hmmmm…? Customers add value? perceive as no value. adding value. Evaluate each activity
Does this add value?
Value Added Activity: Customers perceive as adding value.
Can we improve the activity?
Non ValueAdded Activity: Customers perceive no value.
Can we eliminate the activity?
Value Chain
R&D Research and Development
Creating a new product.
Value-Added
Non Value-Added
Value Chain
Design
Developing and engineering the new product.
Value-Added
Non Value-Added
Value Chain
Production
Producing the product.
Value-Added
Non Value-Added
Value Chain
Marketing
Informing potential customers about the product.
Value-Added
Non Value-Added
Value Chain
Distribution
Delivering the product to customers.
Value-Added
Non Value-Added
Value Chain
Customer Service CS
Supporting customers who use the product.
Value-Added
Non Value-Added
Outsourcing and the Value Chain
Focus resources on parts of the value chain that are most important to company goals.
What is most likely to be outsourced? Outsource those value chain processes that can be done more efficiently by others.
Potential problem?
Outsourcing and the Value Chain
Focus resources on parts of the value chain that are most important to company goals. Outsource those value chain processes that can be done more efficiently by others.
What is most likely to be outsourced? Information services, legal, logistics, human resources, payroll, accounting, tax. Potential problem Loss of control and internal expertise.
Alternative Value Chain Configurations
? This is a technique for identifying opportunities for
improvement and measuring the effects of proposed improvement by comparing both the cost and benefits of a proposal. Cost benefit analysis
QUANTITATIVE INFORMATION QUALITATIVE INFORMATION
Managerial Decisions
What adds value to the firm?
Carmen’s Cookies
Are costs greater than benefits? What are Carmen’s cost drivers? What are Carmen’s differential revenues? What are Carmen’s differential costs?
Cost Benefit Analysis
Consider both the costs and benefits of a proposal.
Is the cost greater than the benefit?
Don’t Expand
Expand
Cost Driver
What are Carmen’s cost drivers?
Cost Drivers Factors that cause or drive cost
What drives my cost?
These are estimates and require assumptions.
Some may be realized
Some may not be realized
Cost Driver
Rent
Number of storefronts
Insurance
Labor Ingredients
Number of cookies
Differential Costs
Costs that change in response to a particular course of action.
Differential costs
differ between actions.
Differential Revenues
Revenues that change in response to a particular course of action.
Differential revenues
differ between actions.
Differential Costs, Revenues & Profits
CARMEN’S COOKIES
Projected Income Statement For One Week
(1) Status Quo Original Shop Sales Only (2) Alternative Wholesale & Retail Distribution Difference (3)
Sales revenue ………...
Costs …………………… Food …………………… Labor ………………….. Utilities …………………. Rent ……………………. Other ………………….. Total costs ……………. Operating profits …….
$6,300
$8,505a
$2,205
a
1,800 1,000 400 1,250 1,000 $5,450 $850
2,700b 1,500b 600b 1,250 1,200c $7,250 $1,255
900 500 200 ----200 $1,800 $405
35 percent higher than status quo
50 percent higher than status quo 20 percent higher than status quo
b
c
Budget
A financial plan for the revenues and resources needed to meet financial goals.
CARMEN’S COOKIES
Budgeted Costs For the Month Ending April 30
Number of cookies Food Flour Eggs Chocolate Nuts Other Total Food $2,200 4,700 1,900 1,900 2,200 12,900 Labor Manager Other Total Labor Utilities Rent Total cookie costs 3,000 1,500 4,500 1,800 5,000 $24,200 32,000
Actual to Budget Comparison
CARMEN’S COOKIES
Actual vs Budgeted Costs For the Month Ending April 30
Difference Actual Number of cookies sold Costs Food Flour $2,100 $2,200 $(100) 32,000 Budget 32,000 (Variance) 0
Eggs
Chocolate Nuts Other Total Food
5,200
2,000 2,000 2,200 $13,500 2,200
4,700
1,900 1,900 0 $12,900
500
100 100 $600
Actual to Budget Continued
Difference Actual Labor Manager Other Total Labor Utilities Rent Total cookie costs 3,000 1,500 4,500 1,800 5,000 $24,800 5,000 $24,200 1,500 4,500 1,800 0 $600 3,000 0 0 0 0 Budget (Variance)
Quantitative Information
? Quantitative Information can be measured relatively easily and is usually expressed in Rupees or other quantities relating to size,
frequency, etc.
Qualitative Information
? Qualitative Information is descriptive and is based on characteristics or perceptions, such as relative desirability, rather than quantities.
Competitive Advantages, Sources and Threats
Product Strategy Low Cost Production Source of Capability Create New Knowledge Product Differentiation Imitate Others Market Focus
Suppliers
Business Unit Strategy Build
Hold
Harvest Divest
Formulation of Strategic Action Plans
An 8-step process
1. Identify need for change. 2. Create team to lead and manage change. 3. Create vision of the change and strategy for achieving vision. 4. Communicate vision and strategy for change and have change team act as a role model. 5. Encourage innovation and remove obstacles to change. 6. Ensure that short-term achievements are frequent and obvious. 7. Use successes to create opportunities for improving entire organization. 8. Reinforce culture of more improvement, better leadership, more effective management.
Evaluating Plans and Outcomes
Operational performance analysis Strategic performance analysis
Has short-run performance met expectations?
Has long-run performance met expectations?
Evaluating Plans and Outcomes
Variance Analysis
Cost Benefit Analysis
Variances are the differences between a plan’s actual and expected quantities.
The Changing Business Environment
? Just-in-time production
? Total quality management ? Process reengineering
? Theory of constraints
? International competition ? E-commerce
Business environment changes in the past twenty years
Evolution and Adaptation in Managerial Accounting
E-Business Service vs. Manufacturing Firms Emergence of New Industries Global Competition Focus on the Customer Cross-Functional Teams Computer-Integrated Manufacturing Product Life Cycles Time-Based Competition
Change
Information and Communication Technology
Just-in-Time Inventory Total Quality Management Continuous Improvement
The Balanced Scorecard
How do we look to owner’s?
Financial Perspective Goals Measures
In which activities must we excel?
Customer Perspective Goals Measures
How do customers see us?
Operations Perspective Goals Measures
Innovation Perspective Goals Measures
How can we continue to improve?
Just-in-Time (JIT) Systems
Receive customer orders.
Complete products just in time to ship customers.
Schedule production.
Receive materials just in time for production.
Complete parts just in time for assembly into products.
JIT Consequences
Improved plant layout Zero production defects
Reduced setup time
Flexible workforce
JIT purchasing Fewer, but more ultrareliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries.
Benefits of a JIT System
Reduced inventory costs Freed-up funds
Higher quality products
Greater customer satisfaction
Increased throughput
More rapid response to customer orders
Total Quality Management (TQM)
TQM improves productivity by encouraging the use of fact and analysis for decision making and if properly implemented, avoids counter-productive organizational infighting.
Continuous Improvement Systematic problem solving using tools such as benchmarking
is
Choosing A Long Term Strategy
BENCHMARKING
Identify
Competitive Advantage
Threats
Assignment
? How do companies use benchmarking to make important decisions?
Process Reengineering
A business process is diagrammed in detail.
Anticipated results: Process is simplified. Process is completed in less time. Costs are reduced. Opportunities for errors are reduced.
The process is redesigned to eliminate all non-value-added activities
Every step in the business process must be justified.
Process Reengineering versus TQM
Process Reengineering
? Radically overhauls
Total Quality Management
? Tweaks existing
existing processes.
? Likely to be imposed
processes to realize gradual improvements.
? Uses a team approach
from above and to use outside consultants.
involving people who work directly in the process.
Theory of Constraints
A sequential process of identifying and removing constraints in a system.
Restrictions or barriers that impede progress toward an objective
Theory of Constraints
A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want.
The constraint in a system is determined by the step that has the smallest capacity.
Theory of Constraints
Only actions that strengthen the weakest link in the “chain” improve the process.
1. Identify the weakest link. 2. Allow the weakest link to set the tempo.
3. Focus on improving the weakest link.
4. Recognize that the weakest link is no longer so.
International Competition
Increasing sophistication in international markets.
Fewer tariffs, quotas, and other barriers to free trade.
Competition has become worldwide in most industries.
Improvements in global transportation systems.
An excellent management accounting system is needed to succeed in today’s competitive global marketplace.
Question
? Stallion Gears is considering cessation of its consumer division due to rising litigation cost, but this will put 400 people out of work.
Stallion’s President is concerned about the morale of the other workers. Is this decision quantitative or qualitative in nature?
Question
? What is the style of management that puts several people from different areas together to generate innovative problem solutions?
A. Functional Role Management B. Cross-Functional Team Decision Making C. Entrepreneurial Decision Making
Question
? What is the “set of linked operations that are involved in providing goods & services to customers”?
A. Production Chain B. Value-Added Process C. Value Chain
Question
?
CMC helps companies adapt organizational structures to current industry trends. Recently, the CEO approached Aplab Ltd., a hi-tech research company that offered a contract to CMC to assist in reorganizing the company. CMC reported the following costs and revenues during the past year. CMC’s Annual Statement Sales Costs Labour Equipment Lease Rent Salaries Other Costs Total Costs Operating Profit Rs. 1.20 crores Rs. 57.00 lacs Rs. 8.40 lacs Rs. 5.40 lacs Rs 35.00 lacs Rs. 3.80 lacs Rs. 1.17 crores Rs. 3.20 lacs
?
?
If CMC decides to take the contract to help the company reorganize, it will hire a full-time consultant at Rs.13.40 lacs. Equipment Lease will increase by 5%, it must buy certain computer Equipment. Supplies will increase by an estimated 10% and other costs by 15%. Existing building has space for new consultant and no new person would be required. What costs would be incurred as a result of taking the contract? If the contract will pay Rs. 15 lacs in the 1st year, should CMC accept it? What considerations other than costs are necessary for making a decision?
? ?
Assignment
? How does outsourcing affect an organization's value chain?
Assignment
? Suppose you are the VP of the largest department store in the region. The President calls you and says “though we are the largest
store, only 30% of the sales are from locals. Find out why the balance are not?” Why could this be a critical question and how would you organize the team to find the answers?
Assignment
? “If every manager minimizes the cost of process he or she supervises, overall cost of the company will decrease.” Do you think this is a
wise strategy? Why or why not?
Assignment
? What is a virtual organisation?
Group Assignment
? Identify 2 companies from any
industry, find their most recent annual reports on the net. From the Director’s reports – identify and list the similarities and differences in these 2 competitors’ declared strategies.
End of Lecture
doc_686917483.pptx
management accounting and financial accounting, framework for management accounting, objective cost management, characteristics of cost management. It also includes cost management and strategic decision making
Cost Management and Strategic Decision Making
Evaluating Opportunities and Leading Change
TESTS
? There will be one or two mid-term exams (for 30 percent
of your grade) and a comprehensive final exam (40 percent of your grade). ? Questions in exams are a combination of essays, multiplechoice and problems. ? These questions require specific understanding of the materials discussed in the textbook, class lectures and handout materials. ? Note: Student must use their own calculators for all quizzes and exams.
2
FCQ
? There will be MANY unannounced quizzes during the semester. ? Each quiz contains one or more problem(s) from the most
recently lectured materials. ? These quizzes are very similar to the problems at the end of each chapter of your textbook with minor changes. ? These quizzes and projects count for 20 percent of your grade.
3
CLASS PARTICIPATION
? Every student is required to participate in the class discussions. ? Students are encouraged to bring in to the class articles from business journals. ? During the first 15 minutes of every class meeting students are allowed to discuss those article(s) in the class. ? Other students may comment or question the
presenter.
4
ATTENDANCE POLICY
? Attendance is as per Institute policy ? Do not enter after the class has started ? Once Seated cannot leave the class, however, may leave the class immediately after attendance ? Your attendance is required for all announced exams and unannounced quizzes, however
5
The accounting process
Economic activities
Accounting “links” decision makers with economic activities ? and with the results of their decisions.
Accounting
information
Actions (decisions)
Decision makers
Types of Accounting Information Financial Tax
Managerial
Information System
Cost & Revenue Determination ?Job costing ?Process costing ?ABC ?Sales Assets & Liabilities ?Plant and equipment ?Loans & equity ?Receivables, payables & cash Cash Flows ?From operations ?From financing ?From investing
Information Users ?Investors ?Creditors ?Managers ?Owners ?Customers ?Employees ?Regulatory agencies -SEC -IRS -EPA
Decision Support ?CVP analysis ?Performance evaluation ?Incremental analysis ?Budgeting ?Capital allocation ?Earnings per share ?Ratio analysis
Distinctions Between Management Accounting and Financial Accounting
Management Accounting Primary Users Choices Organization managers Costs versus benefits Financial Accounting External parties G.A.A.P.
Behavioural Implications
Time Focus Time Span Reports Activities
Influence on managerial behaviour
Future orientation Flexible Detailed Less sharply defined
Measurement of economic activity
Past orientation Less flexible Summary reports More sharply defined
The Past
? Cost Accounting
Focused On
? Recording Data
? Measured And Reported Costs
Information about decision-making authority, for decision-making support, and for evaluating and rewarding decision-making performance.
Information useful in assessing both the past performance and future directions of the enterprise and information from external and internal sources.
Objectives of Managerial Reporting
Information useful to help the enterprise achieve its goal, objectives and mission.
Characteristics of Management Accounting Information
Timeliness A Means to an End Identify DecisionMaking Authority
Measures Efficiency and Effectiveness
Oriented Toward Future
Management Accounting for Managers
? Management accounting exists because managers
require information to make decisions ? Primary focus of management accounting is towards users within an organization ? Management accounting does not exist to generate data, but it exists because managers require information for decisions Framework for Management Accounting
Strategic Planning Management Control Operational Control
Focus on organization’s objectives
Effectiveness and efficiency of resource use Effectiveness and efficiency of tasks
Frameworks for Management Accounting
OPERATIONAL CONTROL
Accounts receivable Order entry
MANAGEMENT CONTROL
Budget analysis Short-term forecasting Engineered costs Variance analysis Overall budget Budget preparation
STRATEGIC PLANNING
Tanker fleet mix Warehouse and factory location
Structured SemiStructured
Inventory reordering Inventory control Production scheduling Bond trading Cash management
Mergers and acquisitions Capital acquisition analysis New product planning
Unstructured PERT COST systems
Sales and production
R and D planning
Management Decision Process
1. Identify the problem. 2. Perform the necessary quantitative and qualitative analyses. 3. Identify alternative solutions to the problem. 4. Evaluate the alternative solutions. 5. Recommend one of the alternative solutions. 6. Implement the recommendation.
Management
Major Means: Accounting Information 1. Problem-solving information Major Ends: Helping Decisions 1. Managers for long-range planning and special decisions
2. Attention-directing information
2. Managers for planning and controlling routine operations
3. Scorekeeping information
3. Outsiders for investors, tax collectors, regulators & others
Planning and Controlling
Planning
Evaluation Action
? Planning involves setting objectives and the means to their attainment
? What is desired? ? When and how is it to be accomplished? ? How is success to be evaluated?
? Controlling involves the implementation of plans and the use of feedback to monitor
achievements
Product Life Cycle
? The various stages through which a product passes, from conception and development through introduction into the market through maturation and, finally, withdrawal from the market
Sales over Typical Product Life Cycle
Product Development
Introduction to Market
Mature Market
Phase-Out of Product
The Value Chain
? Value chain is the set of business functions that add value to the
products or services of an organization
Research and Development Customer Service Product & Service Process Design
CUSTOMER FOCUS
Distribution Production
Marketing
Question
? What is now the primary objective of cost management?
Characteristics of Cost Management
What is Cost Management?
?
Characteristics of Cost Management
What is Cost Management? In addition to measuring and reporting costs, it is a philosophy, an attitude, and a set of techniques to create more customer value at a lower cost.
?
The Future
? Cost Management
Will Provide Information for Decisions Related To:
?
?
?
The Future
? Cost Management
Will Provide Information for Decisions Related To:
Improving Products, Services, and Use of Resources
?
?
The Future
? Cost Management
Will Provide Information for Decisions Related To:
Improving Products, Services, and Use of Resources
Supporting Strategies
?
The Future
? Cost Management
Will Provide Information for Decisions Related To:
Improving Products, Services, and Use of Resources
Supporting Strategies
Systematically Reducing Costs
Define Managerial Accounting
Managerial accounting is the process of ? Identifying ? Measuring ? Analyzing ? Interpreting ? Communicating Information in pursuit an organization’s goals
Managerial versus Financial Accounting
Accounting System (accumulates financial and managerial accounting data) Managerial Accounting Information for decision making, planning, and controlling an organization’s operations. Internal Users Financial Accounting Published financial statements and other financial reports.
External Users
How Managerial Accounting Adds Value to the Organization
? Providing information for decision making and ?
?
? ?
planning. Assisting managers in directing and controlling activities. Motivating managers and other employees towards organization’s goals. Measuring performance of activities, managers, and other employees. Assessing the organization’s competitive position.
Managing Resources, Activities, and People
An organization . . .
Directing
Acquires Resources
Organized set of activities
Decision Making
Controlling
Planning
Hires People
Work of Management
Planning
Directing and Motivating
Controlling
Planning
Identify
alternatives.
Select alternative that does
the best job of furthering organization’s objectives.
Develop budgets to guide
progress toward the selected alternative.
Directing and Motivating
Directing and motivating involves managing day-today activities to keep the organization running smoothly.
? Employee work assignments.
? Routine problem solving.
? Conflict resolution. ? Effective communications.
Controlling
The control function ensures that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.
Exh. 1-1
Planning and Control Cycle
Formulating long-and short-term plans (Planning) Comparing actual to planned performance (Controlling)
Begin
Decision Making
Implementing plans (Directing and Motivating)
Measuring performance (Controlling)
Organizational Structure
Decentralization is the delegation of decision-making authority throughout an organization.
Corporate Organization Chart
Board of Directors President Purchasing Personnel Vice President Operations Chief Financial Officer Controller
Treasurer
The Chief Financial Officer (CFO)
A member of the top management team responsible for:
? Providing timely and relevant data to support
planning and control activities. ? Preparing financial statements for external users.
Controller
The chief managerial and financial accountant responsibility for:
? Supervising accounting personnel
? Preparation of information and reports, managerial
and financial ? Analysis of accounting information ? Planning and decision making
Treasurer
Responsible for raising capital and safeguarding the organization’s assets. ? Supervises relationships with financial institutions. ? Work with investors and potential
investors. ? Manages investments. ? Establishes credit policies. ? Manages insurance coverage
Internal Auditor
Responsible for reviewing accounting procedures, records, and reports in both the controller’s and the treasurer’s area of responsibility. ? Expresses an opinion to top management regarding the effectiveness of the organizations accounting system.
Who Are Cost Managers?
? They serve as communicators of company
values to employees. ? They have diverse educational backgrounds. ? They need broad knowledge of the organization. Competence is a given!
Who Are Cost Managers?
AWARENESS CREATIVITY They exhibit attributes of DILIGENCE OPENNESS HONESTY
Characteristics of Cost-Management Analysts
Cost analysts use cost accounting and other data to?
Characteristics of Cost-Management Analysts
Cost analysts use cost accounting and other data to:
Improve products
Improve resource use
Improve services
Support strategies
Reduce costs
What are the Characteristics of Cost-Management Analysts?
Characteristics of Cost-Management Analysts
Integrity
Broad knowledge of the business
Ability to work in cross-functional teams
Ethical Standards for CostManagement Analysts
Cost-management analysts must maintain high standards of ethical behavior because they can control the information used for important strategic management decisions.
Professional Ethics
?Competence
?Confidentiality
?Integrity
?Credibility
Ethical Behavior
Follow applicable laws, regulations and standards.
Maintain professional competence.
Competence
Prepare complete and clear reports after appropriate analysis.
Ethical Behavior
Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage.
Confidentiality
Ensure that subordinates do not disclose confidential information.
Ethical Behavior
Avoid conflicts of interest and advise others of potential conflicts. Do not subvert organization’s legitimate objectives.
Integrity
Recognize and communicate personal and professional limitations.
Ethical Behavior
Avoid activities that could affect your ability to perform duties.
Refrain from activities that could discredit the profession.
Integrity
Communicate unfavorable as well as favorable information.
Refuse gifts or favors that might influence behavior.
Ethical Behavior
Communicate information fairly and objectively.
Objectivity
Disclose all information that might be useful to management.
Team Focus
? Earlier – Management responsibilities were defined by their FUNCTIONAL ROLES ? FUNCTIONAL ROLES - Narrowly Defined - Jobs That Focus On Specific Activities
Team Focus
? Now – Decisions are made by CROSSFUNCTIONAL MANAGEMENT TEAMS
? CROSSFUNCTIONAL MANAGEMENT TEAMS -
Involves bringing together individuals from diverse functions and backgrounds to generate innovative solutions to problems.
Team Focus
? ENTREPRENEURIAL DECISON MAKING
? Focuses On Finding New Opportunities;
Informed of, But Not Restricted By The Past
What is Strategic Decision Making?
Strategic Decision Making
Strategy
An organization’s overall plan or policy to achieve its goals.
Key questions?
Strategic Decision Making
Strategy An organization’s overall plan or policy to achieve its goals.
Key questions
Where do we want to go?
How do we want to get there?
Where do We Want to Go? – Strategic Missions
• New market potential • Be early entrant • Achieve growth • Capture market share
Build • Continuing market • Maintain growth • Be a major player • Protect market share
High
REWARDS
Hold
Medium
Harvest
• Continuing market • Maintain cash flow • Maintain volume • Cut costs
Low
Divest
• Declining market • Exit at lowest cost • Minimize losses • Find a buyer quickly
Low
Medium
RISK
High
How Do We Want to Get There?
Managers are more successful in attaining objectives if they:
Understand sources and threats to competitive advantages.
Use effective decision making techniques.
Competitive advantages exist in a value chain that enables an organization to provide more value at a lower cost than its competitors.
Choosing A Long Term Strategy
? Identify The Organization’s Source Of “Competitive Advantage”.
? A competitive advantage is anything the
organization can do better than its competitors to provide valued products and services for which customers will pay higher prices.
Cost Management Systems
? Determine
Objectives
efficiency and effectiveness of major activities. ? Identify and evaluate new activities that can improve performance.
Cost Management System
Example: Should We Outsource Accounts Receivable?
COSTS OF OUTSOURCING
QUALITATIVE 1. Loss of direct contact with customers 2. Adverse effects of personnel reduction
BENEFITS OF OUTSOURCING
QUALITATIVE 1. Quality of service
Example: Should We Outsource Accounts Receivable?
COSTS OF OUTSOURCING
QUANTITATIVE 1. Contracted service 2. Contracted Administration 3. Total quantifiable costs
BENEFITS OF OUTSOURCING
QUANTITATIVE 1. Personnel cost savings 2. Facilities cost savings 3. Support cost savings
What is the Value Chain?
Scale and Scope Of Operations
? THE VALUE CHAIN
? A set of linked operations or processes that are
involved in providing goods & services to customers.
Begin by obtaining resources.
End by providing goods & services that the customers want.
Scale and Scope Of Operations
? THE VALUE CHAIN
? A set of linked operations or processes that are
involved in providing goods & services to customers.
Everything in between is the Value Chain
Begin by obtaining resources.
End by providing goods & services that the customers want.
Value Chain
The value chain describes the activities that increase the value of an organization’s products or services.
Production Marketing R& Customer Distributio Design D Service n
What is a Process?
? PROCESS
? A related set of tasks that transforms inputs into ? ? ? ? ? ? ? ?
identifiable outputs Research and development Design Supply Production Marketing Distribution Customer service Support services
Strategic Cost Management and the Value Chain
Product Design Production Research and Development Securing raw materials and other resources
Marketing
Distribution Customer Service
Start
What is the Value Chain?
Where do we want to go? How do we want to get there? Physical resources
Support services •Accounting •Human resources •Legal services •Information systems •Telecommunications
Human resources
R& D
Desig n
Supply
Production Marketing
Distribution
Customer service
Value of products and services
Primary processes
Activities
Production Marketing R& Customer Distributio Design D service n
Non ValueValue Added Added Activity: Activity: Does this Hmmmm…? Customers add value? perceive as no value. adding value. Evaluate each activity
Does this add value?
Value Added Activity: Customers perceive as adding value.
Can we improve the activity?
Non ValueAdded Activity: Customers perceive no value.
Can we eliminate the activity?
Value Chain
R&D Research and Development
Creating a new product.
Value-Added
Non Value-Added
Value Chain
Design
Developing and engineering the new product.
Value-Added
Non Value-Added
Value Chain
Production
Producing the product.
Value-Added
Non Value-Added
Value Chain
Marketing
Informing potential customers about the product.
Value-Added
Non Value-Added
Value Chain
Distribution
Delivering the product to customers.
Value-Added
Non Value-Added
Value Chain
Customer Service CS
Supporting customers who use the product.
Value-Added
Non Value-Added
Outsourcing and the Value Chain
Focus resources on parts of the value chain that are most important to company goals.
What is most likely to be outsourced? Outsource those value chain processes that can be done more efficiently by others.
Potential problem?
Outsourcing and the Value Chain
Focus resources on parts of the value chain that are most important to company goals. Outsource those value chain processes that can be done more efficiently by others.
What is most likely to be outsourced? Information services, legal, logistics, human resources, payroll, accounting, tax. Potential problem Loss of control and internal expertise.
Alternative Value Chain Configurations
? This is a technique for identifying opportunities for
improvement and measuring the effects of proposed improvement by comparing both the cost and benefits of a proposal. Cost benefit analysis
QUANTITATIVE INFORMATION QUALITATIVE INFORMATION
Managerial Decisions
What adds value to the firm?
Carmen’s Cookies
Are costs greater than benefits? What are Carmen’s cost drivers? What are Carmen’s differential revenues? What are Carmen’s differential costs?
Cost Benefit Analysis
Consider both the costs and benefits of a proposal.
Is the cost greater than the benefit?
Don’t Expand
Expand
Cost Driver
What are Carmen’s cost drivers?
Cost Drivers Factors that cause or drive cost
What drives my cost?
These are estimates and require assumptions.
Some may be realized
Some may not be realized
Cost Driver
Rent
Number of storefronts
Insurance
Labor Ingredients
Number of cookies
Differential Costs
Costs that change in response to a particular course of action.
Differential costs
differ between actions.
Differential Revenues
Revenues that change in response to a particular course of action.
Differential revenues
differ between actions.
Differential Costs, Revenues & Profits
CARMEN’S COOKIES
Projected Income Statement For One Week
(1) Status Quo Original Shop Sales Only (2) Alternative Wholesale & Retail Distribution Difference (3)
Sales revenue ………...
Costs …………………… Food …………………… Labor ………………….. Utilities …………………. Rent ……………………. Other ………………….. Total costs ……………. Operating profits …….
$6,300
$8,505a
$2,205
a
1,800 1,000 400 1,250 1,000 $5,450 $850
2,700b 1,500b 600b 1,250 1,200c $7,250 $1,255
900 500 200 ----200 $1,800 $405
35 percent higher than status quo
50 percent higher than status quo 20 percent higher than status quo
b
c
Budget
A financial plan for the revenues and resources needed to meet financial goals.
CARMEN’S COOKIES
Budgeted Costs For the Month Ending April 30
Number of cookies Food Flour Eggs Chocolate Nuts Other Total Food $2,200 4,700 1,900 1,900 2,200 12,900 Labor Manager Other Total Labor Utilities Rent Total cookie costs 3,000 1,500 4,500 1,800 5,000 $24,200 32,000
Actual to Budget Comparison
CARMEN’S COOKIES
Actual vs Budgeted Costs For the Month Ending April 30
Difference Actual Number of cookies sold Costs Food Flour $2,100 $2,200 $(100) 32,000 Budget 32,000 (Variance) 0
Eggs
Chocolate Nuts Other Total Food
5,200
2,000 2,000 2,200 $13,500 2,200
4,700
1,900 1,900 0 $12,900
500
100 100 $600
Actual to Budget Continued
Difference Actual Labor Manager Other Total Labor Utilities Rent Total cookie costs 3,000 1,500 4,500 1,800 5,000 $24,800 5,000 $24,200 1,500 4,500 1,800 0 $600 3,000 0 0 0 0 Budget (Variance)
Quantitative Information
? Quantitative Information can be measured relatively easily and is usually expressed in Rupees or other quantities relating to size,
frequency, etc.
Qualitative Information
? Qualitative Information is descriptive and is based on characteristics or perceptions, such as relative desirability, rather than quantities.
Competitive Advantages, Sources and Threats
Product Strategy Low Cost Production Source of Capability Create New Knowledge Product Differentiation Imitate Others Market Focus
Suppliers
Business Unit Strategy Build
Hold
Harvest Divest
Formulation of Strategic Action Plans
An 8-step process
1. Identify need for change. 2. Create team to lead and manage change. 3. Create vision of the change and strategy for achieving vision. 4. Communicate vision and strategy for change and have change team act as a role model. 5. Encourage innovation and remove obstacles to change. 6. Ensure that short-term achievements are frequent and obvious. 7. Use successes to create opportunities for improving entire organization. 8. Reinforce culture of more improvement, better leadership, more effective management.
Evaluating Plans and Outcomes
Operational performance analysis Strategic performance analysis
Has short-run performance met expectations?
Has long-run performance met expectations?
Evaluating Plans and Outcomes
Variance Analysis
Cost Benefit Analysis
Variances are the differences between a plan’s actual and expected quantities.
The Changing Business Environment
? Just-in-time production
? Total quality management ? Process reengineering
? Theory of constraints
? International competition ? E-commerce
Business environment changes in the past twenty years
Evolution and Adaptation in Managerial Accounting
E-Business Service vs. Manufacturing Firms Emergence of New Industries Global Competition Focus on the Customer Cross-Functional Teams Computer-Integrated Manufacturing Product Life Cycles Time-Based Competition
Change
Information and Communication Technology
Just-in-Time Inventory Total Quality Management Continuous Improvement
The Balanced Scorecard
How do we look to owner’s?
Financial Perspective Goals Measures
In which activities must we excel?
Customer Perspective Goals Measures
How do customers see us?
Operations Perspective Goals Measures
Innovation Perspective Goals Measures
How can we continue to improve?
Just-in-Time (JIT) Systems
Receive customer orders.
Complete products just in time to ship customers.
Schedule production.
Receive materials just in time for production.
Complete parts just in time for assembly into products.
JIT Consequences
Improved plant layout Zero production defects
Reduced setup time
Flexible workforce
JIT purchasing Fewer, but more ultrareliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries.
Benefits of a JIT System
Reduced inventory costs Freed-up funds
Higher quality products
Greater customer satisfaction
Increased throughput
More rapid response to customer orders
Total Quality Management (TQM)
TQM improves productivity by encouraging the use of fact and analysis for decision making and if properly implemented, avoids counter-productive organizational infighting.
Continuous Improvement Systematic problem solving using tools such as benchmarking
is
Choosing A Long Term Strategy
BENCHMARKING
Identify
Competitive Advantage
Threats
Assignment
? How do companies use benchmarking to make important decisions?
Process Reengineering
A business process is diagrammed in detail.
Anticipated results: Process is simplified. Process is completed in less time. Costs are reduced. Opportunities for errors are reduced.
The process is redesigned to eliminate all non-value-added activities
Every step in the business process must be justified.
Process Reengineering versus TQM
Process Reengineering
? Radically overhauls
Total Quality Management
? Tweaks existing
existing processes.
? Likely to be imposed
processes to realize gradual improvements.
? Uses a team approach
from above and to use outside consultants.
involving people who work directly in the process.
Theory of Constraints
A sequential process of identifying and removing constraints in a system.
Restrictions or barriers that impede progress toward an objective
Theory of Constraints
A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want.
The constraint in a system is determined by the step that has the smallest capacity.
Theory of Constraints
Only actions that strengthen the weakest link in the “chain” improve the process.
1. Identify the weakest link. 2. Allow the weakest link to set the tempo.
3. Focus on improving the weakest link.
4. Recognize that the weakest link is no longer so.
International Competition
Increasing sophistication in international markets.
Fewer tariffs, quotas, and other barriers to free trade.
Competition has become worldwide in most industries.
Improvements in global transportation systems.
An excellent management accounting system is needed to succeed in today’s competitive global marketplace.
Question
? Stallion Gears is considering cessation of its consumer division due to rising litigation cost, but this will put 400 people out of work.
Stallion’s President is concerned about the morale of the other workers. Is this decision quantitative or qualitative in nature?
Question
? What is the style of management that puts several people from different areas together to generate innovative problem solutions?
A. Functional Role Management B. Cross-Functional Team Decision Making C. Entrepreneurial Decision Making
Question
? What is the “set of linked operations that are involved in providing goods & services to customers”?
A. Production Chain B. Value-Added Process C. Value Chain
Question
?
CMC helps companies adapt organizational structures to current industry trends. Recently, the CEO approached Aplab Ltd., a hi-tech research company that offered a contract to CMC to assist in reorganizing the company. CMC reported the following costs and revenues during the past year. CMC’s Annual Statement Sales Costs Labour Equipment Lease Rent Salaries Other Costs Total Costs Operating Profit Rs. 1.20 crores Rs. 57.00 lacs Rs. 8.40 lacs Rs. 5.40 lacs Rs 35.00 lacs Rs. 3.80 lacs Rs. 1.17 crores Rs. 3.20 lacs
?
?
If CMC decides to take the contract to help the company reorganize, it will hire a full-time consultant at Rs.13.40 lacs. Equipment Lease will increase by 5%, it must buy certain computer Equipment. Supplies will increase by an estimated 10% and other costs by 15%. Existing building has space for new consultant and no new person would be required. What costs would be incurred as a result of taking the contract? If the contract will pay Rs. 15 lacs in the 1st year, should CMC accept it? What considerations other than costs are necessary for making a decision?
? ?
Assignment
? How does outsourcing affect an organization's value chain?
Assignment
? Suppose you are the VP of the largest department store in the region. The President calls you and says “though we are the largest
store, only 30% of the sales are from locals. Find out why the balance are not?” Why could this be a critical question and how would you organize the team to find the answers?
Assignment
? “If every manager minimizes the cost of process he or she supervises, overall cost of the company will decrease.” Do you think this is a
wise strategy? Why or why not?
Assignment
? What is a virtual organisation?
Group Assignment
? Identify 2 companies from any
industry, find their most recent annual reports on the net. From the Director’s reports – identify and list the similarities and differences in these 2 competitors’ declared strategies.
End of Lecture
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