1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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