Management Accounting: A Strategic Approach

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Management Accounting A Strategic Approach
IMAs main magazine is called Strategic Finance
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Management Accounting A Tool for Decision Making
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Objectives
1. Contrast financial and management accounting
and explain why financial accounting is not
sufficient for internal decision
making. 2. Explain how an organizations mission,
goals, and strategies affect management
accounting. 3. Discuss the fundamental changes
affecting the nature of competition. 4. Differenti
ate among structural, organizational, and
activity cost drivers.
After studying this chapter, you should be able
to
Continued
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Objectives
5. Explain how technology has influenced cost
drivers and cost behavior. 6. Discuss the impact
employee empowerment can have on the activities
used to serve customers and how management
accounting can be an important part of employee
empowerment.
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If you dont have competition, youre in the
wrong business.
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Statements
The income statement is a summary of economic
events during a period of time, showing the
revenue generated by operating activities, the
expenses matched to those revenues, and any gains
and losses attributed to the period.
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Statements
The statement of cash flows is a summary of
resource inflows and outflows stated in terms of
cash.
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Statements
The balance sheet is a picture of the economic
health of an organization at a specific time,
showing the organizations assets and the claim
on those assets.
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Assist in Decision Making
Management accounting provides a framework to
evaluate information in light of an
organizations goals.
Management accounting is a process for obtaining
and analyzing relevant information to help
achieve organizational goals.
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Assist in Decision Making
Management accounting provides information to
managers and other persons inside the
organization.
Management accounting information exists to serve
the needs of management.
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Differences Between Financial and Management
Accounting
Financial Accounting
Management Accounting
A reporting system
A decision-making tool
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Differences Between Financial and Management
Accounting
Financial Accounting
Management Accounting
Information for internal and external users
Information for internal users only
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Differences Between Financial and Management
Accounting
Financial Accounting
Management Accounting
General purpose financial statements
Special purpose information
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Differences Between Financial and Management
Accounting
Financial Accounting
Management Accounting
Statements highly aggregated
Information may be aggregated as needed
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Differences Between Financial and Management
Accounting
Financial Accounting
Management Accounting
Relatively long reporting period
Reporting period may be long or short, depending
on need
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Differences Between Financial and Management
Accounting
Financial Accounting
Management Accounting
Report on past decisions
Oriented toward future decisions
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Differences Between Financial and Management
Accounting
Financial Accounting
Management Accounting
Often required by law or generally accepted
accounting principles
Not required by law or generally accepted
accounting principles
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Differences Between Financial and Management
Accounting
Financial Accounting
Management Accounting
Must conform to external standards
No external standards
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Differences Between Financial and Management
Accounting
Financial Accounting
Management Accounting
Emphasize objective data
Allows subjective data if relevants
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Strategy Cost Management
Strategic cost management has emerged from a
blending of three themes

• Cost driver analysisthe study of factors that
  cause or influence costs.
• Strategic position analysisan organizations
  basic way of competing to sell products or
  services.
• Value-chain analysisthe study of value-producing
  activities, stretching from basic raw materials
  to the final customer of a product or service.

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A mission is the basic pur-pose toward which
activities are directed, typical ongoing and not
precisely measurable.
A goal is a definable, measurable objective.
A strategy is a course of action that will assist
in achieve one or more goals.
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Strategic Position Analysis
Michael E. Porter identified three possible
strategic positions that lead to business success

• Cost leadership
• Product or service differentiation
• Market niche

Product or service differentiation involves
creating something that is perceived as unique
and worth a premium price.
Achieving cost leadership allows an organization
to achieve higher profits selling at the same
price as competition or by allowing the firm to
aggressively compete on the basis of price while
remaining competitive.
Focusing on a specific market niche such as a
buyer group, segment of the product, or
geographic market.
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Planning, Organizing, and Controlling are a
Continuous Cycle
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Competition
Competition takes place on three dimensions.
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An Activity (A Unit of Work)
Waiter or Waitress Activity

• Seat customer and offer menu
• Take customer order
• Bring order to kitchen
• Bring to food to customer
• Replenish beverages
• Determine and bring bill to customer
• Collect money and give change
• Clear table

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Structural, Organizational, and Activity Cost
Drivers
Structural cost drivers are fundamental choices
about the size and scope of operations and
technology employed in delivering products or
services to customers.
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Structural, Organizational, and Activity Cost
Drivers
Organizational cost drivers are choices
concerning the organization of activities and
choices concerning the involvement of persons
inside and outside the organization in decision
making.
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Structural, Organizational, and Activity Cost
Drivers
Activity cost drivers are specific units of work
(activities) performed to serve customer needs
that consume costly resources.
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Structural Cost Drivers
For a chain of discount stores--
Determine the type of technology to employ in the
store
Determine the type of construction
Determine the location
Determine the size of the stores
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Organizational Cost Drivers

• Deciding to work closely with a limited number of
  suppliers.
• Providing employees with cost information and
  authorizing them to make decisions.
• Deciding to reorganize the existing equipment in
  the plant so that sequential operations are
  closer.

Continued
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Organizational Cost Drivers

• Designing components of a product so they can
  only fit together in the correct manner.
• Deciding to manufacture a low volume product on
  low-speed, general-purpose equipment rather than
  high-speed, special-purpose equipment.

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Activity Cost Drivers
Customers
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Activity Cost Drivers
Examples

• Placing a purchase order for raw materials
• Inspecting income raw materials
• Moving items being manufactured between
  workstations
• Setting up a machine to work on a product
• Spending machine time working on a product
• Spending labor time working on a product
• Hiring and training a new employee
• Packing order for shipment
• Processing a sales order
• Shipping a product

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Changing Total Cost Structure
Total costs
0
Units manufactured
0
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Benefits of Empowerment

• Reduced cost
• Faster decisions
• A feeling of ownership of decisions

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Developing and Using Performance Measures Based
on Missions and Plans
Mission
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C
1
hapter
The End
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