Chapter 1
Accounting, costing and strategy
Management accounting, Financial accounting and cost accounting
Management accounting=measures and reports financial information as
well as other types of information that are intended primarily to assist
managers in fulfilling the goals of the organisation. The application of the
principles of accounting an financial management tpo create, protect,
preserve and increase value for the shareholder of for-profit and not-for-
profit enterprises in the public and private sectors.
CIMA=chartered institute of management accountants= the largest
association of management accountants in the UK.
Financial accounting=focuses on external reporting that is directed by
authoritative guidelines. Is guided by prescribed accounting principles;
these define the set of revenue and cost measurement rules and the types
if item that are classified as assets, liabilities or owners equity in balance
sheets.
Cost accounting=measures and reports financial and non-financial
information related to the organisation’s acquisition or consumption of
resources.
Management accounting is not restricted by those accounting principles
acceptable for financial reporting.
While the work of management accountants and financial accountants
tends to be organisation-specific, some broad differences generally exist:
- regulations: MA for internal use, FA reports required to be prepared
according to accounting regulations.
- range and detail of information: MA; encompass financial, non-financial
and qualitative info. FA; broad based, lacking detail and intended to
provide an overview of the position and performance of an org over time.
- reporting interval: MA; frequently, FA; annually.
- time period: MA; historical and current info. FA; info on the performance
and position for the past period.
Cost management and accounting systems
Cost management= to describe the actions mangagers undertake in the
short-run and long-run planning and control of costs that increase value for
customers and lower the costs of products and services.
Important component: the recognition that prior management decisions
often commit the organisation to the subsequent incurrence of costs.
Managers around the world are increasingly aware of the importance of
the quality and timeliness of products and services sold to their external
customers.
In many org’s, accountants are regarded as hybrid accountants, who
combine the skills of business managers with those of accountants.
Strategic decisions and management accounting
Many org’s seek to be more expansionist, entrepreneurial, risk taking and
innovative as a conscious move away from inwardly focused management
techniques.
,Studies reveal that companies that emphasise creating long-term value for
shareholders are likely to outperform those that focus on preserving
shareholder value in the short term. Companies whose primary focus is on
internal control and value preservation do not increase their stock market
valuations as effectively as those that look outside for opportunities to
create value.
The trend for professional institutes of management accounting is to
reorient the field towards strategic management information preparation
and analysis and the actual participation of management accountants in
such activities.
The shift towards managerial and strategic engagement rather than just
acting as providers of largely financial information about enterprises
allows management accountants to align their work to the changing
business and organisational landscape.
Accounting systems and management controls
The major purposes of accounting systems
5 broad purposes:
1) formulating overall strategies and long-range plans new product
development and investment in both tangible and intangible assets, and
frequently involves special-purpose reports.
2) resource allocation decisions such a product and customer emphasis
and pricing
3) cost planning and cost control of operations and activities
4) performance measurement and evaluation of people
5) meeting external regulatory and legal reporting requirements where
they exist.
Each of these purposes stated may require a different presentation or
reporting method.
The nature of management-oriented accounting information alters in line
with changes in the business environment.
Planning and control
Planning=choosing goals, predicting results under various ways of
achieving those goals, and then deciding how to attain the desired goals.
Budget=the quantitative expression of a plan of action and an aid to the
coordination and implementation of the plan
Control=covers both the action that implements the planning decision and
deciding on performance evaluation and the related feedback that will
help future decision making.
Management by exception=the practive of concentrating on areas not
operating as expected and placing less attention on areas operating as
expected. Understanding the reasons for any difference between actual
results and budgeted results is an important part of it.
Variance=refers to the difference between the actual results and the
budgeted amounts.
A well-conceived plan includes enough flexibility so that managers can
seize opportunities unforeseen at the time the plan is formulated.
, Do not underestimate the role of individuals and groups in management
control systems. Both accountants and managers should always
remember that management control systems are not confined to technical
matters such as the type of computer system used and the frequency with
which reports are prepared.
Feedback: a major key
Feedback involves managers examining past performance and
systematically exploring alternative ways to improve future performance.
Use of feedback:
-tracking growth
- searching for alternative means of operating
- changing methods for making decisions
- making predictions
- changing operations
- changing the reward system
Scorekeeping, attention-directing and problem-solving functions
Attention-directing: attempts to make visible both opportunities and
problems on which managers need to focus.
Scorekeeping=refers to the accumulation of data and the reporting of
reliable results to all levels of management.
Problem solving=refers to the comparative analysis undertaken to identify
the best alternatives in relation to the organisation’s goals.
Accountants serving the scorekeeping function accumulate data and
report the results to alle levels of management.
Many organisations which autoate scorekeeping have management
accountants concentrating solely on the attention-directing or problem-
solving function.
Costs, benefits and context
Management accounting as emcompassing the assessment of costs,
benefits and context one criterion for choosing among alternative
accounting systems is how well they are perceived to help achieve
organisational goals in relation to the costs of those systems and the
context within which they are to operate.
As customers, managers buy a more elaborate management accounting
system when its perceived expected benefits exceed its perceived
expected costs and only after due consideration of contextual factors is
undertaken.
The measurement of costs and benefits and developing an understanding
of context is seldom easy. This is because we cannot assume rational-
economic behaviour on the part of managers and accountants.
Organisational context is important to consider, but so too is country
context in the design of management accounting systems and in
understanding differences in the ways in which their information output is
used.
Some organisations will face important barriers in implementing new
accounting systems whereas others will not.
Accounting, costing and strategy
Management accounting, Financial accounting and cost accounting
Management accounting=measures and reports financial information as
well as other types of information that are intended primarily to assist
managers in fulfilling the goals of the organisation. The application of the
principles of accounting an financial management tpo create, protect,
preserve and increase value for the shareholder of for-profit and not-for-
profit enterprises in the public and private sectors.
CIMA=chartered institute of management accountants= the largest
association of management accountants in the UK.
Financial accounting=focuses on external reporting that is directed by
authoritative guidelines. Is guided by prescribed accounting principles;
these define the set of revenue and cost measurement rules and the types
if item that are classified as assets, liabilities or owners equity in balance
sheets.
Cost accounting=measures and reports financial and non-financial
information related to the organisation’s acquisition or consumption of
resources.
Management accounting is not restricted by those accounting principles
acceptable for financial reporting.
While the work of management accountants and financial accountants
tends to be organisation-specific, some broad differences generally exist:
- regulations: MA for internal use, FA reports required to be prepared
according to accounting regulations.
- range and detail of information: MA; encompass financial, non-financial
and qualitative info. FA; broad based, lacking detail and intended to
provide an overview of the position and performance of an org over time.
- reporting interval: MA; frequently, FA; annually.
- time period: MA; historical and current info. FA; info on the performance
and position for the past period.
Cost management and accounting systems
Cost management= to describe the actions mangagers undertake in the
short-run and long-run planning and control of costs that increase value for
customers and lower the costs of products and services.
Important component: the recognition that prior management decisions
often commit the organisation to the subsequent incurrence of costs.
Managers around the world are increasingly aware of the importance of
the quality and timeliness of products and services sold to their external
customers.
In many org’s, accountants are regarded as hybrid accountants, who
combine the skills of business managers with those of accountants.
Strategic decisions and management accounting
Many org’s seek to be more expansionist, entrepreneurial, risk taking and
innovative as a conscious move away from inwardly focused management
techniques.
,Studies reveal that companies that emphasise creating long-term value for
shareholders are likely to outperform those that focus on preserving
shareholder value in the short term. Companies whose primary focus is on
internal control and value preservation do not increase their stock market
valuations as effectively as those that look outside for opportunities to
create value.
The trend for professional institutes of management accounting is to
reorient the field towards strategic management information preparation
and analysis and the actual participation of management accountants in
such activities.
The shift towards managerial and strategic engagement rather than just
acting as providers of largely financial information about enterprises
allows management accountants to align their work to the changing
business and organisational landscape.
Accounting systems and management controls
The major purposes of accounting systems
5 broad purposes:
1) formulating overall strategies and long-range plans new product
development and investment in both tangible and intangible assets, and
frequently involves special-purpose reports.
2) resource allocation decisions such a product and customer emphasis
and pricing
3) cost planning and cost control of operations and activities
4) performance measurement and evaluation of people
5) meeting external regulatory and legal reporting requirements where
they exist.
Each of these purposes stated may require a different presentation or
reporting method.
The nature of management-oriented accounting information alters in line
with changes in the business environment.
Planning and control
Planning=choosing goals, predicting results under various ways of
achieving those goals, and then deciding how to attain the desired goals.
Budget=the quantitative expression of a plan of action and an aid to the
coordination and implementation of the plan
Control=covers both the action that implements the planning decision and
deciding on performance evaluation and the related feedback that will
help future decision making.
Management by exception=the practive of concentrating on areas not
operating as expected and placing less attention on areas operating as
expected. Understanding the reasons for any difference between actual
results and budgeted results is an important part of it.
Variance=refers to the difference between the actual results and the
budgeted amounts.
A well-conceived plan includes enough flexibility so that managers can
seize opportunities unforeseen at the time the plan is formulated.
, Do not underestimate the role of individuals and groups in management
control systems. Both accountants and managers should always
remember that management control systems are not confined to technical
matters such as the type of computer system used and the frequency with
which reports are prepared.
Feedback: a major key
Feedback involves managers examining past performance and
systematically exploring alternative ways to improve future performance.
Use of feedback:
-tracking growth
- searching for alternative means of operating
- changing methods for making decisions
- making predictions
- changing operations
- changing the reward system
Scorekeeping, attention-directing and problem-solving functions
Attention-directing: attempts to make visible both opportunities and
problems on which managers need to focus.
Scorekeeping=refers to the accumulation of data and the reporting of
reliable results to all levels of management.
Problem solving=refers to the comparative analysis undertaken to identify
the best alternatives in relation to the organisation’s goals.
Accountants serving the scorekeeping function accumulate data and
report the results to alle levels of management.
Many organisations which autoate scorekeeping have management
accountants concentrating solely on the attention-directing or problem-
solving function.
Costs, benefits and context
Management accounting as emcompassing the assessment of costs,
benefits and context one criterion for choosing among alternative
accounting systems is how well they are perceived to help achieve
organisational goals in relation to the costs of those systems and the
context within which they are to operate.
As customers, managers buy a more elaborate management accounting
system when its perceived expected benefits exceed its perceived
expected costs and only after due consideration of contextual factors is
undertaken.
The measurement of costs and benefits and developing an understanding
of context is seldom easy. This is because we cannot assume rational-
economic behaviour on the part of managers and accountants.
Organisational context is important to consider, but so too is country
context in the design of management accounting systems and in
understanding differences in the ways in which their information output is
used.
Some organisations will face important barriers in implementing new
accounting systems whereas others will not.
