Chapter 1 Management accounting: information for creating value and managing resources Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Outline Australian organisations in the 21st century What is management accounting? Management accounting and financial accounting information Management accountants within organisations Management accounting processes and techniques Planning and control Important considerations in the design of management accounting systems Management accounting and the changing business environment Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Australian organisations in the 21st century Increasing global competition in the 1990s Reduction or elimination of input tariffs, quotas and bounties Deregulation of telecommunications industry Corporatisation and privatisation of public sector bodies competing with private sector Changes in the regulation of labour markets (Cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Australian organisations in the 21st century (cont.) Shift from primary production to exporter of resources, to manufacturer, to resurgence of mineral resources Australia is primarily a service-based economy Rapid and unpredictable change Increasing customer demands Rise of the Internet and e-commerce Climate change New organisational structures, strategies and management philosophies Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

What is management accounting? … the processes and techniques that focus on the effective and efficient use of organisational resources to support managers in their tasks of enhancing both customer value and shareholder value (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

What is management accounting? (cont.) 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 Determine the capabilities and competencies of the organisation Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting systems Systems that produce the information required by managers to create value and manage resources Include estimates of the costs of producing goods and services, information for planning and controlling operations and information for measuring performance Ad-hoc information to satisfy managers’ short term and long term decision-making needs Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting information Focus is on the needs of managers within the organisation Flexibility in the nature of information supplied Influences Managers’ information needs, nature of the resources they manage Production and service technologies, organisational structure, organisational size, the external environment, level of sophistication of computer systems Used by senior managers through to operational managers Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting and financial accounting information The practice of preparing and reporting accounting information for parties outside the organisation Costing systems are common to both financial and management accounting A system that estimates the cost of goods and services as well as the cost of organisational units, such as departments Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accountants within organisations Most large organisations have a ‘finance function’ at the corporate level Senior accountants Financial controller, chief accountant, finance manager, general manager (GM) of accounting, group accountant Accounting staff may be found in each operating division Management accounting activities increasingly involve managers from other functional areas of the business Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting processes and techniques Support the organisation’s formulation and implementation of strategy Contribute 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 (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting processes and techniques (cont.) Provide information to help manage resources, through systems of planning and control Provide estimates of the costs of an organisation’s outputs, to support the strategic and operational decision needs of managers Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting and strategy Management accounting can support the organisation's formulation and implementation of strategy Vision The desired future state or aspiration of an organisation Used by senior managers to focus the attention and energies of staff Mission statement Defines the purpose and boundaries of the organisation (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting and strategy (cont.) Objectives Specific statement of what the organisation aims to achieve Often quantified 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 Focus on ways to manage the organisation's resources to create value for customers and shareholders (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting and strategy (cont.) Major decisions in formulating strategies In what business will we operate? How should we compete in that business? What systems and structures should we have in place to support our strategies? Corporate strategy Making choices 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, the choice of corporate strategy is influenced by the expectations of major shareholders and securities market (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting and strategy (cont.) Business (or competitive) strategy The way a business competes within its chosen market Distinct business strategies for each business unit Strategy implementation Putting plans into place to implement and support a chosen business strategy New structures, new systems, new production processes, new marketing approaches, new HRM policies (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting and strategy (cont.) Competitive advantage Advantages that a business may have over another that are difficult to imitate, achieved through ... Cost leadership Economies of production, superior process technologies, tight cost control Product differentiation Superior quality, customer service, delivery performance, product features (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting and strategy (cont.) Strategic planning Long-term planning, usually undertaken by senior managers with a three- to five-year timeframe Involves corporate strategy decisions Draws on management accounting information Implementing strategies Managers at all levels share the responsibility for implementation Long-term plans linked to budgeting systems Performance measurement systems compare actual outcomes to targets Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

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 Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Controlling Involves putting mechanisms in place to ensure that operations proceed according to plan and that objectives are achieved Management accounting information provides information for control by comparing actual performance with plans, targets or budgets Control systems are the systems and procedures that provide regular information to assist in control Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Costing goods and services Estimates of the cost of producing goods and services are needed to support a range of operational and strategic decisions Routine costing systems form part of the financial accounting system, so product costs are prepared to meet external reporting purposes Product costs are sometimes produced outside of the financial accounting system, to better meet managers’ decision-making needs These costs may not comply with GAAP or accounting standards Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Some important considerations in the design of management accounting systems Behavioural issues Information may impact on individual behaviour, so management accounting systems may have expected and unexpected outcomes A key purpose of management accounting systems is to motivate managers and employees to direct their efforts towards achieving the organisation’s goals Budgeting systems, performance measurement and reward systems may be used as motivational tools (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Some important considerations in the design of management accounting systems (cont.) There are costs and benefits of generating and providing management accounting information Costs Salary of accounting personnel Purchasing and operating computers Gathering, storing and processing data, Managers’ time to read, understand and use the information (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Some important considerations in the design of management accounting systems (cont.) Benefits Improved decisions More effective planning Greater operational efficiency at lower costs Better control Improved customer and shareholder value Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting design: contingency and institutional theories Contingency theory – design is influenced by the organisational context External environment, technology, organisational structure and size, national and organisational culture, and strategy These factors cause systems to be different Institutional theory – design is influenced by institutional forces, which explain similarities The need to achieve legitimacy within and beyond their organisation The tendency for firms to imitate ‘good practice’ of other firms Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting responses to the changing business environment By the 1990s, many organisations realised that they needed to improve their product and service quality, delivery responsiveness and cost performance in order to improve market share and profits Adoption of new management structures, systems and practices, including new management accounting techniques and systems (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting responses to the changing business environment (cont.) Conventional management accounting systems Includes budgeting, costing systems and financial performance measurement systems In wide use for many decades and still used in many organisations Contemporary management accounting systems Includes activity-based costing, performance measurement systems (such as balanced scorecards), cost management systems (such as business process re-engineering), new approaches to customer profitability analysis and supplier cost analysis (cont.) Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Management accounting responses to the changing business environment (cont.) Contemporary management accounting techniques have developed to support the adoption of new structures, systems and practices Some organisations continue to use conventional management accounting systems, while others are in the midst of implementing contemporary systems Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith

Summary Management accounting supports managers in enhancing customer value and shareholder value Systems to support formulation and implementation of strategy Process improvements and cost management techniques Information for planning and control Product costs for strategic and operational decisions Contemporary management accounting techniques have developed to support new organisational structures, systems and practices, which are a response to a rapidly changing business environment Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith Prepared by Kim Langfield-Smith