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ACC2200 1
Chapter1:Informationforcreatingvalueandmanagingresources1.WhatisManagementAccounting?ManagementaccountingreferstotheprocessesandtechniquesthatfocusontheeffectiveandefficientuseoforganisationalresourcestosupportmanagersintheirtasksofenhancingbothcustomerandshareholdervalueCustomervalue
Valueacustomerplacesonparticularfeaturesofaproduct–satisfyingcustomersiscriticaltoachievingincreasedsalesandmarketshare→achievingshareholdervalue
Shareholdervalue
Involvesimprovingtheworthofabusinessfromtheshareholders’orowners’perspective–increasedprofitability,increasedsharepriceanddividends.Whereaconflictbetweenincreasingcustomerorshareholdervaluearises,shareholdervalueislikelytobegivenpriority
1.1.ManagementAccountingSystemsAmanagementaccountingsystemisaninformationsystemthatproducestheinformationrequiredbymanagerstocreatevalueandmanageresources
• Formspartofanorganisation’swidermanagementinformationsystems• Managementaccountinginformationcanbeprovidedonaregularbasisandcaninclude:
o Costestimatesforproducinggoodsandserviceso Informationforplanningandcontrollingoperationso Informationformeasuringperformance
1.2.ManagementAccountingInformationThe focusofmanagementaccounting ison theneedsofmanagerswithin theorganisation.Becauseaccounting standardsapplyonlytoexternalfinancialreports,thereisgreatflexibilityindecidingthetypeofinformationthatshouldbegeneratedformanagersManager’s information needs vary, and as the nature of the resources they manage varies, the type of managementaccountinginformationrequiredwillalsovary.Otherfactorsthatcausemanagementaccountingsystemstodiffer,include:
• Differencesinproductionorservicetechnologies• Organisationalstructureandsize
• External environment in which the organisationcompetes
• LevelsofsophisticationofcomputersystemsManagement accounting information is relevant tomanagers from the top of the organisations through tomanagers inoperationalareasofabusiness.
• Seniormanagers=needinformationthatprovidesthemwithanoverviewofentireorganisation• Middlemanagers=needinformationontheirareasofresponsibility• Operationalmanagers=need information tohelp themmanage their specificoperationsonaday-to-daybasis, tohelpmeet
performancetarget1.3.DifferencesbetweenManagementsAccountingandFinancialAccountingInformation
ManagementAccounting FinancialAccounting
Usesofinformation
Internalmanagersandemployeesatalllevels Externalshareholders,creditors,banks,securitiesexchange,tradeunionsandgovernmentagencies
RegulationNoaccountingstandardsorexternalrulesareimposed.Informationisgeneratedtosatisfymanagersinformationneeds
Accountingstandardsandcorporationslawregulatethecontentofexternalfinancialreports
Sourceofdata
Bothfinancialandnon-financialdatadrawnfrommanysources–thecoreaccountingsystem;physicalandoperationaldatefromproductionsystems;andmarket,customerandeconomicdatafromsourcesexternaltotheorganisation
Financialdataalmostexclusivelydrawnfromorganisation’scoretransaction-basedaccountingsystem
Natureoftheinformation
Past,currentandfutureoriented;subjective;relevant;timely;andsuppliedatvariouslevelsofdetailtosuitmanager’sspecificneeds
Past;reliable;verifiable;nottimely;notalwaysrelevant;andhighlyaggregated
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1.4.ManagementAccountingandStrategyManagement accounting plays an important strategic role by contributing to the organisation’s formulation andimplementationofstrategyandbyhelpingmanagersimprovetheorganisationscompetitiveadvantage
VisionDesiredfuturestateoraspirationofanorganisation.Thevisionisoftenusedbyseniormanagementtofocustheattentionandenergyofstaffthroughouttheorganisations
Missionstatement
Astatementthatdefinesthepurposeandboundariesoftheorganisation
ObjectivesSpecificstatementsofwhattheorganisationsaimtoachieve,oftenquantifiedandrelatingtoaspecificperiodoftime.Objectivesareoftenfocusedonprofitability,growth,innovation,qualityofservice,etc.
Strategies
Thedirection that theorganisation intends to takeover the long term, tomeet itsmissionandachieve itsobjectives.Informulatingstrategies,decisionsarebasedonthefollowingquestions:• Inwhatbusinesswillweoperate• Howshouldwecompeteinthatbusiness• Whatsystemsandstructuresshouldwehaveinplacetosupportourstrategies?
1.4.1.OrganisationalStrategiesThefirstdecisioninvolvesformulatingacorporatestrategy.CorporatestrategyinvolvesmakingdecisionsaboutthetypesofbusinessesinwhichtheorganisationasawholewilloperateThesecondtypeofbusinessdecisions involvesbusinessstrategy.Business(orcompetitive)strategy isconcernedwiththewaythatabusinesscompeteswithin itschosenmarket(e.g. Jetstarwouldcompetewithvirginonbasisof lowcost,whileQantaswillcontinuetobehigherqualityandfullservice)The third type of decision is concerned with strategy implementation. Strategy implementation involves planning andmanagingtheimplementationofstrategies.Thiscanincludenewstructuresandsystems,suchas:
• Settingupnewbusinessunits• Implementingnewproductionprocesses• Implementingnewsoftwarepackages
• Developingnewmarketingapproaches• IntroducinginnovativeHRMpolicies
1.4.2.CompetitiveAdvantageTo create shareholder value, a business must develop and manage its sources of competitive advantage. Competitiveadvantage refers to advantages that a businessmay have over another,which are difficult to imitate. A firm can gain asustainablecompetitiveadvantagethroughadoptingabusinessstrategyofcostleadershipandproductdifferentiation
CostLeadership
Abusinessstrategywhereafirmisalowcostproducer,whichallowsthebusinesstosellitsgoodsorservicesatalowerpricethancompetitors
• Economiesofscaleinproduction• Superiorprocesstechnology• Tightcostcontrol• Costminimisation-marketing,production,R&Dandcustomerservice
ProductDifferentiation
Abusinessstrategywherebyafirmderivescompetitiveadvantagefromofferinggoodsorservicesthathavecharacteristicsdifferentfromthoseofferedbycompetitors.Differentiationstrategies:
• Highqualityproducts(Mercedes)• Strongbrandimage(Rayban)• Superiorcustomerservice• Productinnovation(Apple)
1.5.PlanningandControlPlanningisabroadconceptthatisconcernedwithformulatingthedirectionforfutureoperations• Necessarysoanorganisationcanconsiderandspecifyalltheresourcesthatwillbeneededinthefuture• Abudgetisadetailedplansummarisingthefinancialconsequencesofanorganisation’soperatingactivitiesfora
specificfuturetimeperiod• Managementaccountingsystemsaredesignedtoproducefrequentlyrequiredinformation(forcontrolpurposes),but
needtobeflexibleenoughtogeneratesomeinformationthatisneededforinfrequentoroneoffdecisions
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Controllingistheeffectiveresourcemanagementmustalsoincludesystemsforcontrol.Controlinvolvesputtinginplacemechanismstoensurethatoperationsproceedaccordingtoplanandthatobjectivesareachieved.
• Planswillnotbeeffectiveunlessthereissomewayofensuringtheyareachieved–thisistheroleofcontrolsystems• Controlsystemsarethesystemsandproceduresthatprovideregularinformationtoassistwithcontrol
In providing information for control, an aim of management accounting systems is to motivate employees to act in theinterestsoftheorganisations.Settingtargetsandthenmeasuringperformanceagainstthosetargetscanachievethis.Whenactual performance deviates significantly from expected performance, management can investigate the reasons for thisdeviationandcorrectiveactioncanbetakentoaddressperformanceproblems.
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Chapter2:CostTermsandConcepts2.1 ManagementAccountingInformation2.1.1.ComponentsofManagementAccountingSystemManagementaccountingsystemsaretailoredtoorganisationsneedsbuttheyoftenincludethefollowing:
Costingsystem Estimatesthecostofgoodsorservices,aswellastheycostoforganisationalunits,suchasdepartments
Budgetingsystem Usedtoprepareadetailedplan,whichshowsthefinancialconsequencesoftheorganisationsoperatingactivities,foraspecificfuturetimeperiod.Thesystemestimatesplannedrevenuesandcosts
Performancemeasurementsystem
Measuresperformancebycomparingactualresultswithsometarget
Costmanagementsystem
Focusesonimprovingtheorganisationscosteffectivenessthroughunderstandingandmanagingtherealcausesofcosts
2.2 TraditionalversusModernApproachestoManagementAccounting2.2.1 CostingSystems TraditionalSystems ModernSystems
CostingSystems
Estimate thecostsoforganisationalunits, suchasdepartments, andofproducts (goodsor services).In analysing costs they assume that productionvolumeistheonlyfactorthatcancausechange
Farmore detailed. Estimate the cost of the individualactivities performed in the organisation and use thisinformation to cost goods and services, customers,organisational unit and other items. Modern costingrecognises that production volume can cause costs tochange, but so can other factors. These systems arecalledactivity-basedcostingsystems.
2.2.2 BudgetingSystems TraditionalSystems ModernSystems
BudgetingSystems
Estimate planned revenues and costs fororganisational units, such as departments.Department budgets are aggregated to obtain abudgetfortheoverallorganisation.
Modern approach is called activity-based budgetingandisfarmoredetailedandbuiltaroundactivities
2.2.3 PerformanceMeasurementSystems TraditionalSystems ModernSystems
PerformanceMeasurementSystems
Providemeasuresoffinancialperformance.Focuslargely on controlling costs, by reportingdifferences between budgeted and actual costs.Monitorperformancewithintheorganisation
Provide measures of performance across a wholerange of critical success factors, such as quality,delivery, innovation and sustainability, as well asfinancialperformance.These factors derive from business’ competitivestrategyandarecriticaltoitssurvival.Modernsystemslookatwhatishappeningoutsidetheorganisations, analysing competitors, customersatisfaction and stakeholders. Includes balancedscorecard, benchmarking and activity-basedperformancemeasures
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2.2.4 CostManagementSystems TraditionalSystems ModernSystems
CostingSystems
Provide information to help managers controlcosts, by focusing ondifferences between accrualandbudgetedcosts.
Farmorepro-activeinprovidinginformationtomanageresources. Developed not only to control costs butreduce them. Identifies and eliminates wastefulactivities
2.3 CostClassifications:DifferentClassificationsforDifferentPurposesBeforemanagementaccountantscanclassifycosts,theyneedtoconsiderhowmanagerswillusetheinformation.Differentcostconceptsandclassificationsareusedfordifferentpurposes.Thetotaldollaramountofcostdoesnotchange;onlythewaywelookatit
Thesamecostscanbeclassifiedinanumberofwaysdependingontheintendeduseofcostinformation