Managerial Decision Making and the Accountant Chapter 18 Managerial Decision Making and the Accountant Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

Chapter 18 Overview 18.1 Management accounting 18.2 Decision making 18.3 Planning 18.4 Budgets 18.5 Control Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

Chapter 18 Objectives Compare needs of internal and external users of accounting information Identify the inadequacy of external reports when making internal decisions Examine the decision making process Distinguish between planning and control Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

Chapter 18 Objectives Compare needs of internal and external users of accounting information Identify the inadequacy of external reports when making internal decisions Examine the decision making process Distinguish between planning and control Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

Chapter 18 Objectives Explain the advantages of planning Describe the role of control Highlight the importance of relevance in relation to information that is supplied Identify structures relating to control Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

Introduction This chapter introduces: Shifting the focus from external to internal The focus is now on supporting managers The difference in information Flexible, timely and relevant Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.1 Management accounting Shift in focus Previously, attention was directed toward providing information for external users We are now focusing on providing internal information for management Management accounting information Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.1 Management accounting Shift in Focus Management accounting information Focuses on the future Often involves estimates and guesswork Is not governed by rules or regulation Is flexible, easily changed and manipulated Is used to support management tasks Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.1 Management accounting Functions of management Management accounting supplies information to managers to help them: Plan the entity’s activities Control the entity’s activities Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.1 Management accounting Functions of Management Hundreds of decisions are made by managers which are supported by accounting data Examples include: What products/services to make or provide What price to charge for these products How many to make, store and sell Who to hire and what machines to purchase Where to locate operations Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

DATA  Process  Information  Decision 18.2 Decision making Decisions = choosing between alternatives To choose the best alternative you require appropriate information This information must be derived from data DATA  Process  Information  Decision Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.2 Decision making The Decision making process Recognise problem Define problem Determine the alternative options Evaluate the alternatives Choose the preferred option Implement Monitor and evaluate results Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.3 Planning Purpose To achieve the entity’s mission Once goals and objectives are made plans are required to achieve them They may be short-term (operational) The may be long-term (strategic) Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.3 Planning Strategic Planning For profit making entities the aim is to generate shareholder value Usually 3-5 years ahead Broad impact Set at the highest level of an entity Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.3 Planning Operational planning Narrow focus on specific activities Relate to day-to-day operations of an entity Set at all levels of an entity These ‘small’ steps lead to ‘bigger’ steps Operational plans must be consistent with longer term strategic plans (goal congruency) Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.3 Planning Planning and Budgeting Resources are required to implement plans efficiently and effectively People Materials Time Budgets list the resources allocated Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.3 Budgets Budgets express plans in financial form Budgets are: Documents to communicate what is required Resource usage plans Mechanisms for evaluation and control Tools to achieve co-ordination and co-operation Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.3 Budgets Sales budget Starting point for operational plans By first determining how many units of a product/service you are going to provide you are able to determine the resources required Starting here will determine estimates of revenues and profits, and evaluate whether the entity’s goals and objectives will be achieved Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.4 Control Many things do not go ‘according to plan’ Over consumption of resources Failure to achieve objectives So, plans need to be constantly monitored to determine if they have been achieved If deviations occur, corrections are made Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.4 Control Managers control by ‘exercising influence’ over matters they have power over People are ‘controlled’ through the use of performance measures, rewards and penalties Other resources are controlled when managers decide how they will be utilised Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.4 Control Evaluation is a key part of control Managers may be evaluated based on Past performance Comparison to other managers Pre-determined objectives Resources may be evaluated by comparing actual results with planned results using a variety of performance measures Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.4 Control Organisational Structure Two approaches to an entity’s structure are Centralisation Decentralisation These relate to how much ‘power’ or decision making authority is delegated down from the top of an entity Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.4 Control Organisational Structure The more power that is delegated downward, the more decentralised an entity becomes Managers lower down in an entity are given greater power and are held responsible for their actions Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

18.4 Control Organisational Structure Decentralised entitys may hold a manager responsible for the level of: Expense only (expense centre) Revenue only (revenue centre) Revenue and expenses (Profit centre) Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes

Summary The focus has shifted to internal management accounting Managers are focusing on planning and control and the aim of accounting in this situation is to support management Budgets are a key component of management accounting information Copyright  2004 McGraw-Hill Australia Pty Ltd. PPTs t/a Accounting by Jackling et al Prepared by Courtney Clowes