ACC602 STRATEGIC MANAGEMENT ACCOUNTING College of Business, Hospitality and Tourism studies (CBHTS) SCHOOL OF ACCOUNTING

Lecture 1 An Overview of Management Accounting Slides adapted from Langfield-Smith et al., McGraw-Hill Textbook Reference: Management Accounting 7e, 6e, 5e or 4e: Information for Managing and Creating Value Chapters 1 & 2 Lecture 1 An Overview of Management Accounting

What is management accounting? … the processes and techniques that focus on the effective use of organisational resources to support managers in their tasks of enhancing both customer value and shareholder value continued

What is management accounting? Customer value The value that a customer places on particular features of a product or service Shareholder value The value that shareholders or owners place on a business Resources Financial and non-financial, including information, work processes, employees, committed customers and suppliers

Management accounting information Focus is on the needs of managers within the organisation Great flexibility in the nature of information that is supplied (certain information is based on judgements) Influenced by Production and service technologies, organisational structure, organisational size, level of sophistication of computer systems Relevant to senior managers through to operational managers

Management accounting processes and techniques Supports the organisation’s formulation and implementation of strategy Contributes to improving the organisation’s competitive advantage in terms of quality, delivery, time, flexibility, innovation and cost, through modern process improvement and cost management techniques continued

Management accounting processes and techniques Provides information to help managers manage their resources through systems of planning and control Provides estimates of the costs of an organisation’s outputs, to support the strategic and operational decision-making needs of managers

Management accounting and strategy Management accounting can support the organisation's formulation and implementation of strategy Mission statement Defines the purpose and boundaries of the organisation Vision The desired future state or aspiration of an organisation Used by senior managers to focus the attention and energies of staff continued

Management accounting and strategy Objectives Specific statement of what the organisation aims to achieve, often quantified, and relates to a specific period of time Strategies The direction that the organisation intends to take over the long term to meet its mission and achieve its objectives Ways to manage the organisation's resources to create value for customers and shareholders continued

Management accounting and strategy Major decisions in formulating strategy What business will we operate in? How should we compete in that business? What systems and structures should we have in place to support our strategies? Corporate strategy Decisions about the types of businesses to operate in, which businesses to acquire and divest, and how best to structure and finance the organisation In publicly-listed companies, strategy may be heavily influenced by the expectations of major shareholders and share market continued

Management accounting and strategy Business (or competitive) strategy The way a business competes within its chosen market Specific business strategies for each business unit Strategy implementation Putting plans into place to implement and support business strategies New structures, new systems, new production processes, new marketing approaches, new HRM policies continued

Management accounting and strategy Competitive advantage Cost leadership Through economies of production, superior process technologies and tight cost control Product differentiation Superior quality, customer service, delivery performance, product features Management accounting systems should provide information to support the formulation and implementation of an organisation's strategies

Planning A broad concept that is concerned with formulating the direction for future operations Allows an organisation to consider and specify all resources needed in the future Occurs at all levels of the organisation A budget is an example of a short-term plan that summarises the consequences of an organisation’s operating activities for a specified time period (topic 2)

Controlling Involves putting mechanisms in place to ensure that operations proceed according to plan, and objectives are achieved Management accounting information provides information for control by comparing actual performance against plans, targets or budgets Control systems are the systems and procedures that provide regular information to assist in control

Management accounting information Management accounting systems need to be tailored to an organisation’s needs Components Costing system Budgeting system Performance measurement system Cost management system

Emphasis on costs Why do management accountants pay so much attention to costs? Historic focus on production costs—to value inventory and COGS for external reporting Ready availability of cost data within the transaction-based accounting system Importance of cost information in managers’ decisions Non-financial information has assumed increased importance in contemporary management accounting systems Used to make decisions and manage various sources of customer value and shareholder wealth

Classifying costs according to their behaviour Managers must understand how costs change as the level of activity in the business changes The level of activity is the level of work performed in the organisation Units produced, kilometres driven, hours worked Variable costs Change in total in direct proportion to a change in the level of activity Fixed costs Remain unchanged in total despite changes in the level of activity Semi-variable costs and step fixed cost

Direct and indirect costs In responsibility centres The costing system may measure the costs of managers’ individual areas of responsibility Responsibility centre A sub-unit of an organisation where the managers are held accountable for the unit’s activities and performance Costs that can be traced to a particular responsibility centre are direct costs of that centre Costs that relate to responsibility centres, but cannot be traced precisely to specific responsibility centres are indirect costs of those centres continued

Direct and indirect costs Product costs Manufacturing costs that can be traced to products in an economic manner are direct product costs Indirect costs are manufacturing costs that cannot be traced to products in an economic manner Whether a cost is classified as direct or indirect depends on the nature of the cost object

Controllable and uncontrollable costs Controllable Costs are those that a manager can significantly influence Uncontrollable Costs are costs that a manager cannot influence significantly Ideally, managers should be held responsible only for costs they can control or significantly influence Some costs are controllable in the long term but not the short term

Costs across the value chain Upstream costs Research and development costs include the costs involved in developing new products and processes Design costs include the costs associated with designing a product or production process Supply costs are the costs of sourcing and managing incoming parts, assemblies and supplies continued

Costs across the value chain Production costs The costs incurred to collect and assemble the resources used to produce a product or service Downstream costs Marketing costs are the costs of selling products and the costs of advertising and promotion Distribution costs are the costs of storing, handling and shipping finished products Customer service costs are the costs of serving customers, including after-sales service

Manufacturing costs Manufacturing costs are incurred within the factory area, whereas upstream and downstream costs are sometimes called non-manufacturing costs Manufacturing costs include three categories: direct material, direct labour and manufacturing overhead This classification as direct or indirect costs assumes that products are the relevant cost objects Under conventional product costing, only manufacturing costs are included in product costs continued

Manufacturing costs Direct material Material that is consumed in the manufacturing process Physically incorporated into the finished products and Can be traced to products conveniently Direct labour The cost of wages and labour on-costs of staff who work directly on manufacturing a product However, contractual arrangements sometimes mean that such labour is a committed cost continued

Manufacturing costs Manufacturing overhead All manufacturing costs other than direct material and direct labour Also called indirect manufacturing costs or factory burden Includes the cost of indirect material and indirect labour, depreciation and insurance on factory equipment, utilities and the costs of manufacturing support departments Includes cost of overtime premium and idle time Manufacturing support department Do not work directly on producing products but are necessary for the manufacturing process to occur continued

Manufacturing costs Conversion costs The total of direct labour and manufacturing overhead costs The cost of converting material into a product Prime costs The total of direct material and direct labour costs The major cost associated with producing a product

Product Costs Costs assigned to goods that were either manufactured or purchased for resale. Managers need estimates of product costs: to assess product profitability, to decide whether to make the product in-house or outsource it, to set product prices, and to value inventory and COGS in the balance sheet and income statement

Period Costs Are expensed in the accounting period in which they are incurred rather than being attached to units of purchased or produced goods Examples: salaries of sales personnel, advertising expenditure, depreciation of office equipment (but not depreciation of manufacturing equipment), and the salaries of top management Period costs are generally classified as either selling or administrative expenses Selling expenses usually include the costs of selling goods or services and the costs of distribution Administrative expenses refer to the costs of running the business as a whole, and include the costs of senior management as well as a range of (non-manufacturing) support services

Question How does management accounting differ from financial accounting? Note: Complete the tutorial questions on topic 1.

Reference: Smith, L. (etal), 6th ed, “Management Accounting 6/e – Information for Managing and Creating Value. McGraw Hill. Australia.Pages 3-72.

End of Topic 1 Thank you