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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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)

14. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

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

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

34. End of Topic 1
Thank you