Management Accounting and Management Decisions 1 Management Accounting and Management Decisions

Management Accounting for Managers Management accounting exists because managers require information to make decisions Primary focus of management accounting is towards users within an organization Management accounting does not exist to generate data, but it exists because managers require information for decisions Framework for Management Accounting Management accounting is: user driver (not data driver) and is used to make decisions MA Info System Internal use > external Multiple users w/ various purposes Info for product costing, pricing and segment profitability Strategic Planning Management Control Operational Control Focus on organization’s objectives Effectiveness and efficiency of resource use Effectiveness and efficiency of tasks

Frameworks for Management Accounting OPERATIONAL MANAGEMENT STRATEGIC CONTROL CONTROL PLANNING Structured Accounts receivable Budget analysis Tanker fleet mix Order entry Short-term Warehouse and forecasting factory location Inventory reordering Engineered costs Inventory control Variance analysis Mergers and acquisitions Semi- Structured Production scheduling Overall budget Capital acquisition analysis Bond trading Budget preparation New product planning Cash management Unstructured PERT COST systems Sales and production R and D planning Across the top is the “type of decisions” to be made Across the side is the characteristics of decisions Structured are routine and normal decisions where info requirements and decision processes are relatively well understood (monthly revenue forecasts) Unstructured: are unique and uncommon and thus info and decision processes need to be developed for that decision. eg. Expansion of Area G to accommodate donation of equipment from industry, equipment from Devon eviction plus growing R&D program

Management Decision Process 1. Identify the problem. 2. Perform the necessary quantitative and qualitative analyses. 3. Identify alternative solutions to the problem. 4. Evaluate the alternative solutions. Key to successful management accountant …. To clearly understand the decision to be made in order to capture the correct information. The following process is very effective Problem: fibre program growing, need more space to accommodate equipment but does benefit outweigh the cost (ie are they making enough money to justify cost) Possible solutions included: a new building, renovating existing space, addition to current space 5. Recommend one of the alternative solutions. 6. Implement the recommendation.

Management accounting is …. The process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information that assists managers in making decisions Following diagram illustrates 3 roles of management accountant

Accounting Information Management Major Means: Accounting Information Major Ends: Helping Decisions Problem-solving information Managers for long-range planning and special decisions 2. Attention-directing information 2. Managers for planning and controlling routine operations 1 – usually associated with non-recurring decisions – identifying possible courses of action w/ recommendations 2 – helps to focus on operating problems, imperfections, inefficiences and opportunities Associated with current planning and control and the recurring routine internal accounting reports 3 – accumulation of info to evaluate org’s performance and position 3. Scorekeeping information 3. Outsiders for investors, tax collectors, regulators & others

Planning and Controlling Evaluation Action Planning involves setting objectives and the means to their attainment What is desired? When and how is it to be accomplished? How is success to be evaluated? Controlling involves the implementation of plans and the use of feedback to monitor achievements These three are intertwined in reality … but often separated for study purposes and often with job duties (managers plan, financial administrators creates budget, financial stuff do ledges, A/R, A/P etc) What happens when activities are no longer intertwined???? No accountability, no responsibility, FAILURE!! BUM plans program and determines appropriate budget … Sr management sees overall numbers, adjusts and sends back BUM has two options: implement original plan or implement Sr Mgmt plan Either way: failure expected (original plan won’t meet sr mgmnt targets) or (w/o competencies, resources to deliver)

Performance Reports Feedback provided by comparing results with plans and by highlighting variances Reports: Budget amounts Actual amounts Deviations or Variance Explanation

Performance Report

Example #1: The Parent Teacher Organization (PTO) of Trudeau Elementary School held a fund-raising fair in the school gymnasium. The PTO president had prepared the following budget, assuming 200 attendees who spend an average of $20 each, and donations of all other resources: Revenues $4,000 Costs:  Food and beverages 800  Prizes 500  Supplies 300  Custodial services 200 Total costs $1,800 Income $2,200 Afterwards, the PTO treasurer determined that 150 people had attended the fair, and total revenues were $2,250. Cost of food and beverages was $750. All prizes were awarded. Supplies cost $180, and custodial services were $500 due to damage to the gymnasium floor.

Example #1: (cont’d) Prepare a performance report that shows how actual results differ from budgeted results. Which variances deserve further examination? Management by Exception

Management Accounting Roots based in manufacturing Evolved to include service organizations Elements applicable to non-profits Key Success Factors The factors that must be managed successfully to achieve organizational success Key success factors: Profit margin per unit, low costs, revenue

Introduction to Market Product Life Cycle The various stages through which a product passes, from conception and development through introduction into the market through maturation and, finally, withdrawal from the market Sales over Typical Product Life Cycle Why is this here?? During the planning process .. Managers must recognize revenues and costs over the life cycle. Accounting needs to track actual costs/revenues Periodic comparisions b/w planned and actual allows managers to asses the current profitability of a product, determine its current product life cycle stage and make any needed changes in strategy How does this impact you if you manufacture VCR’s? How does this differ from a DVD manufacturer? Product Development Introduction to Market Mature Market Phase-Out of Product

The Value Chain Value chain is the set of business functions that add value to the products or services of an organization Research and Development Product & Service Process Design Customer Service CUSTOMER FOCUS Accountants play a role in all areas: R&D & design stages is the greatest contribution of accountant – estimated revenue and cost data so engineers/managers can reduce life cycle costs Prod’n – track effects of production improvements, budgeting/performance reports Marketing – cost/benefit analysis Distribution – can determine best option (direct to retailer or wholesaler, how to transport etc) Cust Service – warranty, repair costs, cost of goods returned The value chain, adding value and focusing on the customer are key to companies. Therefore book will often use this focal point. Distribution Production Marketing

Example 2: Starbucks Value Chain For each activity, identify the value chain function that is being performomed: Process engineers investigate methods to reduce the time to roast coffee beans and better preserve their flavor A direct-to-your-home mail order system is established to sell custom coffees Arabica coffee beans are purchased and transported to company processing plants Focus groups investigate the feasibility of a new line of Frappuccino drinks A hot line is established for mail-order customers to call with comments on quality and speed of delivery Each company owned retail store provides information to customers about the process used to make its coffee products Process Design Distribution Production R&D Customer Service Marketing

Two Themes There are two themes when choosing among accounting systems and methods Cost-Benefit Theme How well the system and methods will achieve management goals in relation to their costs? Incremental cost of implementing versus incremental benefits Behavioral Theme How will the system and methods affect the decisions (behavior) of managers? Budgets force managers to plan Performance reports have enormous impact on behavior Cost/benefit theme: Hospital eg Behavior: performance reports can provide desirable and undesired motivation. … the choices of content, format, timing and distribution of performance reports should all be made within an understanding of the impact on motivation.

Distinctions Between Management Accounting and Financial Accounting Primary Users Choices Behavioural Implications Time Focus Time Span Reports Activities Management Accounting Organization managers Costs versus benefits Influence on managerial behaviour Future orientation Flexible Detailed Less sharply defined Financial Accounting External parties G.A.A.P. Measurement of economic activity Past orientation Less flexible Summary reports More sharply defined

Additional Topics Line versus Staff authority Controller versus Comptroller versus Treasurer JIT and CIM philosophy Professional Ethics Adapting to Change

Suggested Problems Summary Problems 1, 2, 4 (page 27) Questions 2-4, 6-8, 10, 12, 16 (page 31) Problems 2, 8, 12 (page 32) Case 2 (page 37)

Assignments Due January 15 Chapter 1 Assignment Question 9 Problem 3, 7, 11 Case 1, 2 Accounting Resume Readings Chapter 2 Chapter 3

Case 1: Augustana Coffee News You are the owner of “Augustana Coffee News”, a newsprint paper that is free to the public. Revenue is based solely on advertising sales. Identify all costs involved in operating this business. Identify any assumptions made