MANAGEMENT ACCOUNTING
CONTROL
Benoit Stevens 2020
Master 1 – Gestion d’entreprise
Soline Hubrecht – Gwenaelle Van de Venne
1
, TABLE OF CONTENT
1 INTRODUCTION TO MANAGEMENT ACCOUNTING ..................................................................... 7
1.1 DEFINITION ............................................................................................................................. 7
1.2 USERS OF ACCOUNTING INFORMATION CAN BE DIVIDED INTO TWO CATEGORIES.......................................... 7
1.3 ACCOUNTING INFORMATION FOR WHAT PURPOSES ............................................................................ 7
1.3.1 FINANCIAL ACCOUNTING .................................................................................................................... 7
1.3.2 COST ACCOUNTING ........................................................................................................................... 8
1.3.3 MANAGEMENT ACCOUNTING .............................................................................................................. 8
1.4 THE OBJECTIVES OF COST AND MANAGEMENT ACCOUNTING SYSTEMS ...................................................... 8
1.5 MAJOR DIFFERENCES BETWEEN FINANCIAL AND MANAGEMENT ACCOUNTING ............................................ 8
1.6 1.5. COST AND MANAGEMENT ACCOUNTING IN PRACTICE ................................................................... 9
1.6.1 THE COMPLETE CYCLE ........................................................................................................................ 9
1.7 THE MANAGEMENT ACCOUNTANT IS A BUSINESS PARTNER .................................................................. 12
2 COURSE OVERVIEW: LEARNING OBJECTIVES ............................................................................ 13
2.1 BUILDING BLOCKS – THE “WHY” AND THE “WHAT”.......................................................................... 13
3 AN INTRODUCTION TO COST TERMS AND CONCEPTS ............................................................... 14
3.1 COST OBJECTS & COST CENTERS .................................................................................................. 14
3.2 FOCUS ............................................................................................................................... 14
3.3 DIRECT AND INDIRECT COSTS ...................................................................................................... 15
3.4 CATEGORIES OF MANUFACTURING COSTS...................................................................................... 16
3.5 ASSIGNING DIRECT AND INDIRECT COSTS TO COST OBJECTS ................................................................. 16
3.6 PERIOD AND PRODUCT COSTS ..................................................................................................... 17
3.7 TREATMENT OF PRODUCT AND PERIOD COSTS ................................................................................. 18
3.8 COST BEHAVIOR CLASSIFICATION ................................................................................................. 18
3.8.1 COST BEHAVIOR.............................................................................................................................. 19
3.9 RELEVANT AND IRRELEVANT COST AND REVENUES ............................................................................ 20
3.10 AVOIDABLE AND UNAVOIDABLE COSTS ........................................................................................ 21
3.11 MARGINAL AND INCREMENTAL COSTS/REVENUES........................................................................... 21
3.12 OTHER COSTS ...................................................................................................................... 21
3.13 COST AND MANAGEMENT ACCOUNTING INFORMATION SYSTEM ......................................................... 21
4 COST ASSIGNMENT AND ACTIVITY-BASED COSTING ................................................................. 22
4.1 COST OBJECTS (REMINDER)........................................................................................................ 22
4.2 ASSIGNMENT OF DIRECT AND INDIRECT COSTS ................................................................................. 22
4.2.1 COST DRIVER OR ALLOCATION BASE .................................................................................................... 23
4.3 CAUSE-AND-EFFECT ALLOCATION & ARBITRARY ALLOCATION ............................................................... 23
4.4 2 TYPES OF COST SYSTEM .......................................................................................................... 24
4.5 GENERATING RELEVANT COST INFORMATION .................................................................................. 24
4.6 DIFFERENT COSTS FOR DIFFERENT PURPOSES .................................................................................. 24
4.7 ASSIGNING DIRECT COSTS TO COST OBJECTS.................................................................................... 26
4.8 ASSIGNING INDIRECT COSTS USING BLANKET OVERHEAD RATES............................................................. 26
2
,4.8.1 A VERY SIMPLISTIC APPROACH ........................................................................................................... 26
4.8.2 AN APPROACH THAT IS A BIT MORE ELABORATED .................................................................................. 26
4.8.3 CONCLUSIONS ................................................................................................................................ 27
4.9 COST CENTRE OVERHEAD RATES .................................................................................................. 27
4.10 THE 2-STAGE ALLOCATION PROCESS ........................................................................................... 27
4.10.1 TRADITIONAL SYSTEM .................................................................................................................... 27
4.10.2 TRADITIONAL COSTING SYSTEM: A STEP BY STEP APPROACH .................................................................. 28
4.10.3 HOW MANY COST CENTRES DO WE NEED?......................................................................................... 29
4.11 ABC SYSTEM ....................................................................................................................... 31
4.12 ABC COSTING SYSTEM: A 4 STEPS APPROACH ................................................................................ 32
4.12.1 IDENTIFY ACTIVITIES ...................................................................................................................... 32
4.12.2 ASSIGN RESOURCE COSTS TO ACTIVITIES ............................................................................................ 32
4.12.3 IDENTIFY OUTPUTS (COSTS DRIVER) .................................................................................................. 32
4.12.4 ASSIGN ACTIVITY COSTS TO OUTPUTS ................................................................................................ 32
4.13 A COMPARISON OF TRADITIONAL AND ABC SYSTEM: SUMMARY .......................................................... 36
4.14 BUDGETED OVERHEAD RATES ................................................................................................... 37
4.15 UNDER AND OVER-RECOVERY OF OVERHEADS ............................................................................... 38
4.16 NON-MANUFACTURING OVERHEADS (INDIRECT)............................................................................ 38
4.17 COST ASSIGNMENT IN NON-MANUFACTURING ORGANIZATION ........................................................... 39
4.18 EXERCISE : SOME DEFINITIONS .................................................................................................. 39
5 ACCOUNTING ENTRIES FOR A JOB COSTING SYSTEM ................................................................ 41
5.1 OBJECTIVES........................................................................................................................... 41
5.2 JOB COSTING VS PROCESS COSTING? ........................................................................................... 41
5.3 INTEGRATED VS INTERLOCKING ACCOUNTING SYSTEM ........................................................................ 41
5.4 PRICING: THE ISSUE OF RAW MATERIALS ........................................................................................ 41
5.5 EXERCISE .............................................................................................................................. 48
5.6 INCOME EFFECTS OF ALTERNATIVE COST ACCUMULATION SYSTEMS ....................................................... 48
5.7 ABSORPTION COSTING SYSTEM (FULL COSTING) ............................................................................... 48
5.8 VARIABLE COSTING SYSTEM ....................................................................................................... 49
5.9 ABSORPTION VS VARIABLE COSTING ............................................................................................. 49
5.9.1 EXAMPLES .................................................................................................................................. 50
5.10 THE PROS AND THE CONS ........................................................................................................ 52
5.10.1 SOME ARGUMENTS IN SUPPORT OF VARIABLE COSTING ........................................................................ 52
5.10.2 SOME ARGUMENTS IN SUPPORT OF ABSORPTION COSTING ................................................................... 52
5.10.3 CONCLUSION ............................................................................................................................... 53
5.10.4 ALTERNATIVE DENOMINATOR LEVEL MEASURES .................................................................................. 53
5.11 VOLUME VARIANCE - EXAMPLE ................................................................................................. 53
6 COST-VOLUME-PROFIT ANALYSIS (CVP)................................................................................... 55
6.1 COST-VOLUME-PROFIT (CVP) ANALYSIS ........................................................................................ 55
6.2 CURVILINEAR CVP RELATIONSHIPS ............................................................................................... 55
6.3 LINEAR CVP RELATIONSHIPS - RELEVANT RANGE .............................................................................. 56
6.4 THE BREAK-EVEN CHART ........................................................................................................... 57
6.5 ONE PRODUCT COST-VOLUME-PROFIT MODEL............................................................................... 58
6.5.1 EXAMPLE....................................................................................................................................... 58
6.6 CVP ANALYSIS: NON-GRAPHICAL COMPUTATIONS ............................................................................ 58
6.7 CVP MAIN ASSUMPTIONS .......................................................................................................... 59
3
, 6.8 MULTI-PRODUCT COST-VOLUME-PROFIT ANALYSIS ........................................................................... 60
6.8.1 CHANGES IN FIXED COSTS ................................................................................................................. 60
6.9 MULTI-PRODUCT CVP MODEL ................................................................................................... 60
6.10 OPERATING LEVERAGE............................................................................................................ 62
EXERCISE ...................................................................................................................................... 63
7 WHAT IS A STRATEGY............................................................................................................. 64
7.1 WHAT IS EXACTLY STRATEGIC/LONG RANGE PLANNING? .................................................................... 65
7.2 DIFFERENCE WITH A BUSINESS PLAN ............................................................................................. 65
7.3 WHY SHOULD YOU EMBARK ON STRATEGIC PLANNING?.................................................................... 65
7.4 AGREE ON A STRATEGIC PLANNING PROCESS ................................................................................... 67
7.5 CARRY OUT AN ENVIRONMENTAL SCAN ......................................................................................... 67
7.5.1 DEFINE OR REVIEW THE ORGANIZATION'S VALUES, COMMUNITY VISION, AND MISSION ................................ 67
7.6 WHAT IS A VISION STATEMENTS? ................................................................................................ 67
7.7 WHAT IS A MISSION STATEMENTS? ............................................................................................. 68
7.8 VISION STATEMENT VS. MISSION STATEMENT ................................................................................. 68
7.9 CREATING DIRECTION ............................................................................................................... 69
7.10 DEFINE A SERIES OF GOALS/STRATEGIES/PRIORITIES....................................................................... 69
7.11 DEVELOP AN ACTION PLAN ...................................................................................................... 69
7.12 STRATEGIC PLANNING PROCESS ................................................................................................. 70
8 INTRODUCTION ..................................................................................................................... 71
8.1 CONTEXT & INTRODUCTION: PLANNING, BUDGETING AND FORECLOSING IS THE SPOTLIGHT......................... 71
8.2 LINKING BUDGET WITH THE LONG-TERM PLAN (IMPORTANT!) ............................................................. 72
8.3 DEFINITION ........................................................................................................................... 72
9 THE MULTIPLE FUNCTIONS OF BUDGETS................................................................................. 74
9.1 WHAT IS THE BUDGET FOR (IMPORTANT!)...................................................................................... 74
9.2 CONFLICTING ROLE OF BUDGET ................................................................................................... 75
9.3 LINKING BUDGET WITH THE LONG-TERM PLAN ................................................................................ 75
10 THE BUDGET CYCLE ............................................................................................................. 75
10.1 ADMINISTRATION OF THE BUDGETING PROCESS ............................................................................. 75
10.1.1 THE CORPORATE BUDGET COMMITTEE .............................................................................................. 76
10.1.2 FINANCE BUSINESS PARTNER / FINANCIAL PLANNING ANALYST .............................................................. 76
10.1.3 PLANNING & REPORTING TEAM ....................................................................................................... 76
10.2 BUDGET PREPARATION AT KNOWLEDGEABLE PLANNER LEVEL ............................................................. 77
10.3 ADMINISTRATION OF THE BUDGETING PROCESS ............................................................................. 77
10.4 STAGES IN THE BUDGETING PROCESS .......................................................................................... 77
10.5 BUDGET TIME LINES AT UCB .................................................................................................... 78
10.6 BUILDING A MASTER BUDGET ................................................................................................... 79
11 THE DIFFERENT BUDGETING TECHNIQUE .............................................................................. 80
4
CONTROL
Benoit Stevens 2020
Master 1 – Gestion d’entreprise
Soline Hubrecht – Gwenaelle Van de Venne
1
, TABLE OF CONTENT
1 INTRODUCTION TO MANAGEMENT ACCOUNTING ..................................................................... 7
1.1 DEFINITION ............................................................................................................................. 7
1.2 USERS OF ACCOUNTING INFORMATION CAN BE DIVIDED INTO TWO CATEGORIES.......................................... 7
1.3 ACCOUNTING INFORMATION FOR WHAT PURPOSES ............................................................................ 7
1.3.1 FINANCIAL ACCOUNTING .................................................................................................................... 7
1.3.2 COST ACCOUNTING ........................................................................................................................... 8
1.3.3 MANAGEMENT ACCOUNTING .............................................................................................................. 8
1.4 THE OBJECTIVES OF COST AND MANAGEMENT ACCOUNTING SYSTEMS ...................................................... 8
1.5 MAJOR DIFFERENCES BETWEEN FINANCIAL AND MANAGEMENT ACCOUNTING ............................................ 8
1.6 1.5. COST AND MANAGEMENT ACCOUNTING IN PRACTICE ................................................................... 9
1.6.1 THE COMPLETE CYCLE ........................................................................................................................ 9
1.7 THE MANAGEMENT ACCOUNTANT IS A BUSINESS PARTNER .................................................................. 12
2 COURSE OVERVIEW: LEARNING OBJECTIVES ............................................................................ 13
2.1 BUILDING BLOCKS – THE “WHY” AND THE “WHAT”.......................................................................... 13
3 AN INTRODUCTION TO COST TERMS AND CONCEPTS ............................................................... 14
3.1 COST OBJECTS & COST CENTERS .................................................................................................. 14
3.2 FOCUS ............................................................................................................................... 14
3.3 DIRECT AND INDIRECT COSTS ...................................................................................................... 15
3.4 CATEGORIES OF MANUFACTURING COSTS...................................................................................... 16
3.5 ASSIGNING DIRECT AND INDIRECT COSTS TO COST OBJECTS ................................................................. 16
3.6 PERIOD AND PRODUCT COSTS ..................................................................................................... 17
3.7 TREATMENT OF PRODUCT AND PERIOD COSTS ................................................................................. 18
3.8 COST BEHAVIOR CLASSIFICATION ................................................................................................. 18
3.8.1 COST BEHAVIOR.............................................................................................................................. 19
3.9 RELEVANT AND IRRELEVANT COST AND REVENUES ............................................................................ 20
3.10 AVOIDABLE AND UNAVOIDABLE COSTS ........................................................................................ 21
3.11 MARGINAL AND INCREMENTAL COSTS/REVENUES........................................................................... 21
3.12 OTHER COSTS ...................................................................................................................... 21
3.13 COST AND MANAGEMENT ACCOUNTING INFORMATION SYSTEM ......................................................... 21
4 COST ASSIGNMENT AND ACTIVITY-BASED COSTING ................................................................. 22
4.1 COST OBJECTS (REMINDER)........................................................................................................ 22
4.2 ASSIGNMENT OF DIRECT AND INDIRECT COSTS ................................................................................. 22
4.2.1 COST DRIVER OR ALLOCATION BASE .................................................................................................... 23
4.3 CAUSE-AND-EFFECT ALLOCATION & ARBITRARY ALLOCATION ............................................................... 23
4.4 2 TYPES OF COST SYSTEM .......................................................................................................... 24
4.5 GENERATING RELEVANT COST INFORMATION .................................................................................. 24
4.6 DIFFERENT COSTS FOR DIFFERENT PURPOSES .................................................................................. 24
4.7 ASSIGNING DIRECT COSTS TO COST OBJECTS.................................................................................... 26
4.8 ASSIGNING INDIRECT COSTS USING BLANKET OVERHEAD RATES............................................................. 26
2
,4.8.1 A VERY SIMPLISTIC APPROACH ........................................................................................................... 26
4.8.2 AN APPROACH THAT IS A BIT MORE ELABORATED .................................................................................. 26
4.8.3 CONCLUSIONS ................................................................................................................................ 27
4.9 COST CENTRE OVERHEAD RATES .................................................................................................. 27
4.10 THE 2-STAGE ALLOCATION PROCESS ........................................................................................... 27
4.10.1 TRADITIONAL SYSTEM .................................................................................................................... 27
4.10.2 TRADITIONAL COSTING SYSTEM: A STEP BY STEP APPROACH .................................................................. 28
4.10.3 HOW MANY COST CENTRES DO WE NEED?......................................................................................... 29
4.11 ABC SYSTEM ....................................................................................................................... 31
4.12 ABC COSTING SYSTEM: A 4 STEPS APPROACH ................................................................................ 32
4.12.1 IDENTIFY ACTIVITIES ...................................................................................................................... 32
4.12.2 ASSIGN RESOURCE COSTS TO ACTIVITIES ............................................................................................ 32
4.12.3 IDENTIFY OUTPUTS (COSTS DRIVER) .................................................................................................. 32
4.12.4 ASSIGN ACTIVITY COSTS TO OUTPUTS ................................................................................................ 32
4.13 A COMPARISON OF TRADITIONAL AND ABC SYSTEM: SUMMARY .......................................................... 36
4.14 BUDGETED OVERHEAD RATES ................................................................................................... 37
4.15 UNDER AND OVER-RECOVERY OF OVERHEADS ............................................................................... 38
4.16 NON-MANUFACTURING OVERHEADS (INDIRECT)............................................................................ 38
4.17 COST ASSIGNMENT IN NON-MANUFACTURING ORGANIZATION ........................................................... 39
4.18 EXERCISE : SOME DEFINITIONS .................................................................................................. 39
5 ACCOUNTING ENTRIES FOR A JOB COSTING SYSTEM ................................................................ 41
5.1 OBJECTIVES........................................................................................................................... 41
5.2 JOB COSTING VS PROCESS COSTING? ........................................................................................... 41
5.3 INTEGRATED VS INTERLOCKING ACCOUNTING SYSTEM ........................................................................ 41
5.4 PRICING: THE ISSUE OF RAW MATERIALS ........................................................................................ 41
5.5 EXERCISE .............................................................................................................................. 48
5.6 INCOME EFFECTS OF ALTERNATIVE COST ACCUMULATION SYSTEMS ....................................................... 48
5.7 ABSORPTION COSTING SYSTEM (FULL COSTING) ............................................................................... 48
5.8 VARIABLE COSTING SYSTEM ....................................................................................................... 49
5.9 ABSORPTION VS VARIABLE COSTING ............................................................................................. 49
5.9.1 EXAMPLES .................................................................................................................................. 50
5.10 THE PROS AND THE CONS ........................................................................................................ 52
5.10.1 SOME ARGUMENTS IN SUPPORT OF VARIABLE COSTING ........................................................................ 52
5.10.2 SOME ARGUMENTS IN SUPPORT OF ABSORPTION COSTING ................................................................... 52
5.10.3 CONCLUSION ............................................................................................................................... 53
5.10.4 ALTERNATIVE DENOMINATOR LEVEL MEASURES .................................................................................. 53
5.11 VOLUME VARIANCE - EXAMPLE ................................................................................................. 53
6 COST-VOLUME-PROFIT ANALYSIS (CVP)................................................................................... 55
6.1 COST-VOLUME-PROFIT (CVP) ANALYSIS ........................................................................................ 55
6.2 CURVILINEAR CVP RELATIONSHIPS ............................................................................................... 55
6.3 LINEAR CVP RELATIONSHIPS - RELEVANT RANGE .............................................................................. 56
6.4 THE BREAK-EVEN CHART ........................................................................................................... 57
6.5 ONE PRODUCT COST-VOLUME-PROFIT MODEL............................................................................... 58
6.5.1 EXAMPLE....................................................................................................................................... 58
6.6 CVP ANALYSIS: NON-GRAPHICAL COMPUTATIONS ............................................................................ 58
6.7 CVP MAIN ASSUMPTIONS .......................................................................................................... 59
3
, 6.8 MULTI-PRODUCT COST-VOLUME-PROFIT ANALYSIS ........................................................................... 60
6.8.1 CHANGES IN FIXED COSTS ................................................................................................................. 60
6.9 MULTI-PRODUCT CVP MODEL ................................................................................................... 60
6.10 OPERATING LEVERAGE............................................................................................................ 62
EXERCISE ...................................................................................................................................... 63
7 WHAT IS A STRATEGY............................................................................................................. 64
7.1 WHAT IS EXACTLY STRATEGIC/LONG RANGE PLANNING? .................................................................... 65
7.2 DIFFERENCE WITH A BUSINESS PLAN ............................................................................................. 65
7.3 WHY SHOULD YOU EMBARK ON STRATEGIC PLANNING?.................................................................... 65
7.4 AGREE ON A STRATEGIC PLANNING PROCESS ................................................................................... 67
7.5 CARRY OUT AN ENVIRONMENTAL SCAN ......................................................................................... 67
7.5.1 DEFINE OR REVIEW THE ORGANIZATION'S VALUES, COMMUNITY VISION, AND MISSION ................................ 67
7.6 WHAT IS A VISION STATEMENTS? ................................................................................................ 67
7.7 WHAT IS A MISSION STATEMENTS? ............................................................................................. 68
7.8 VISION STATEMENT VS. MISSION STATEMENT ................................................................................. 68
7.9 CREATING DIRECTION ............................................................................................................... 69
7.10 DEFINE A SERIES OF GOALS/STRATEGIES/PRIORITIES....................................................................... 69
7.11 DEVELOP AN ACTION PLAN ...................................................................................................... 69
7.12 STRATEGIC PLANNING PROCESS ................................................................................................. 70
8 INTRODUCTION ..................................................................................................................... 71
8.1 CONTEXT & INTRODUCTION: PLANNING, BUDGETING AND FORECLOSING IS THE SPOTLIGHT......................... 71
8.2 LINKING BUDGET WITH THE LONG-TERM PLAN (IMPORTANT!) ............................................................. 72
8.3 DEFINITION ........................................................................................................................... 72
9 THE MULTIPLE FUNCTIONS OF BUDGETS................................................................................. 74
9.1 WHAT IS THE BUDGET FOR (IMPORTANT!)...................................................................................... 74
9.2 CONFLICTING ROLE OF BUDGET ................................................................................................... 75
9.3 LINKING BUDGET WITH THE LONG-TERM PLAN ................................................................................ 75
10 THE BUDGET CYCLE ............................................................................................................. 75
10.1 ADMINISTRATION OF THE BUDGETING PROCESS ............................................................................. 75
10.1.1 THE CORPORATE BUDGET COMMITTEE .............................................................................................. 76
10.1.2 FINANCE BUSINESS PARTNER / FINANCIAL PLANNING ANALYST .............................................................. 76
10.1.3 PLANNING & REPORTING TEAM ....................................................................................................... 76
10.2 BUDGET PREPARATION AT KNOWLEDGEABLE PLANNER LEVEL ............................................................. 77
10.3 ADMINISTRATION OF THE BUDGETING PROCESS ............................................................................. 77
10.4 STAGES IN THE BUDGETING PROCESS .......................................................................................... 77
10.5 BUDGET TIME LINES AT UCB .................................................................................................... 78
10.6 BUILDING A MASTER BUDGET ................................................................................................... 79
11 THE DIFFERENT BUDGETING TECHNIQUE .............................................................................. 80
4
