1. Copyright 1998 Dekker, Ltd. 1

2. 2 Managerial Accounting Essentials Become Familiar with Terminology Emphasize Basic Concepts Behind Activity-Based Cost and ABM Apply concepts thru Class Exercises Become Familiar with Terminology Emphasize Basic Concepts Behind Activity-Based Cost and ABM Apply concepts thru Class Exercises

3. Copyright 1998 Dekker, Ltd. 3 Managerial Accounting Essentials This introductory course in Managerial Accounting with an emphasis on Activity-Based Cost and Management is based on the textbook, Management Accounting, 2 ed., written by Anthony A. Atkinson, Rajiv D. Banker, Robert S. Kaplan, and S. Mark Young. Concepts and terms from Chapters 1 through 5 plus 9 and 10 will be highlighted for this course. Conventions used throughout the course: - indicates a definition - indicates a key concept or equation This introductory course in Managerial Accounting with an emphasis on Activity-Based Cost and Management is based on the textbook, Management Accounting, 2 ed., written by Anthony A. Atkinson, Rajiv D. Banker, Robert S. Kaplan, and S. Mark Young. Concepts and terms from Chapters 1 through 5 plus 9 and 10 will be highlighted for this course. Conventions used throughout the course: - indicates a definition - indicates a key concept or equation

4. Copyright 1998 Dekker, Ltd. 4 Objectives of Management Accounting Improve the quality of operations Lower the cost of operations Increase the responsiveness of operations for customer needs Improve the quality of operations Lower the cost of operations Increase the responsiveness of operations for customer needs

5. 5 Lesson 1 - Management Accounting - Information that Creates Value Differences between financial and management accounting The informational needs of management accounting Activities as the primary focus for measuring and managing performance Differences between financial and management accounting The informational needs of management accounting Activities as the primary focus for measuring and managing performance

6. Copyright 1998 Dekker, Ltd. 6 Basic Features of Accounting

7. Copyright 1998 Dekker, Ltd. 7 Management Accounting System Operational and Financial Data Management Accounting Information INPUTS PROCESSING OUTPUTS

8. Copyright 1998 Dekker, Ltd. 8 Management Accounting The process of identifying, measuring, reporting and analyzing financial as well as operating information for the internal users regarding the economic condition of an organization

9. Copyright 1998 Dekker, Ltd. 9 Comparisons of the Systems Managerial Accounting Internal constituencies Feedback and control Current, future oriented Process driven Financial, operational, physical measures More subjective More drill-down Financial Accounting External constituencies Past performance Historically oriented Rules driven Only financial measures Objective Highly aggregate Financial Accounting External constituencies Past performance Historically oriented Rules driven Only financial measures Objective Highly aggregate

10. Copyright 1998 Dekker, Ltd. 10 The Various Levels for Reporting Senior Executives Upper/ Middle Management Upper/ Middle Management Operational

11. Copyright 1998 Dekker, Ltd. 11 Operational Level Level of detail –Disaggregate Types –Inputs used –Outputs produced –Quality of service or production process –Very current Frequency –Very Frequent Level of detail –Disaggregate Types –Inputs used –Outputs produced –Quality of service or production process –Very current Frequency –Very Frequent

12. Copyright 1998 Dekker, Ltd. 12 Middle/Upper Management Level of detail –More aggregate Types –Resources used –Efficiency –Quality of work performed –Profitability –Current and future Frequency –Frequent Level of detail –More aggregate Types –Resources used –Efficiency –Quality of work performed –Profitability –Current and future Frequency –Frequent

13. Copyright 1998 Dekker, Ltd. 13 Senior Executives Level of detail –Highly aggregate Types –Profitability –Market opportunities and threats –Customer loyalty and satisfaction –Technological innovations –Current and future Frequency –Less Frequent Level of detail –Highly aggregate Types –Profitability –Market opportunities and threats –Customer loyalty and satisfaction –Technological innovations –Current and future Frequency –Less Frequent

14. Copyright 1998 Dekker, Ltd. 14 Functions of Management Accounting Information Operational Control Customer Costing Product Costing Management Control

15. Copyright 1998 Dekker, Ltd. 15 Functions of Management Accounting Information

16. Copyright 1998 Dekker, Ltd. 16 Service Industries and Companies

17. Copyright 1998 Dekker, Ltd. 17 Activities Represent the “verbs” of a company Are “Product-Oriented” Work output will have a discrete unit of measurement These “verbs” consume an organization’s resources and employees Represent the “verbs” of a company Are “Product-Oriented” Work output will have a discrete unit of measurement These “verbs” consume an organization’s resources and employees

18. Copyright 1998 Dekker, Ltd. 18 Activity-based Costing A procedure that measures the costs of objects, such as products, services and customers. Activity-based costing (ABC) first assigns resource costs to the activities performed by the organization. Then activity costs are assigned to the products, customers, and services that benefit from or are creating the demand for the activities. A procedure that measures the costs of objects, such as products, services and customers. Activity-based costing (ABC) first assigns resource costs to the activities performed by the organization. Then activity costs are assigned to the products, customers, and services that benefit from or are creating the demand for the activities.

19. Copyright 1998 Dekker, Ltd. 19 Produce a product Indirect contact with customers Have inventory Quality to build into production process Produce a product Indirect contact with customers Have inventory Quality to build into production process Provide a service, generally no product More direct contact with customers No inventory, per se Quality hard to control in advance Manufacturing vs Service Function Service Organization Manufacturing Organization

20. Copyright 1998 Dekker, Ltd. 20 Continuous Improvement Empowering employees to continually problem-solve and search for ways to improve organizational processes

21. Copyright 1998 Dekker, Ltd. 21 Employee Empowerment Managers give employees who are closest to operating processes, customers, and suppliers the rights to make decisions. Employees are encouraged to solve problems and devise creative new approaches for performing work and satisfying customers. Managers give employees who are closest to operating processes, customers, and suppliers the rights to make decisions. Employees are encouraged to solve problems and devise creative new approaches for performing work and satisfying customers.

22. Copyright 1998 Dekker, Ltd. 22 Employee Empowerment Enables Sharing pertinent financial information with operators allows them to do the following: –Identify the opportunities for significant cost reduction –Set priorities for improvement projects –Make tradeoffs among alternative ways to improve operations –Evaluate proposed investments to improve operations –Assess the consequences of their improvement activities Sharing pertinent financial information with operators allows them to do the following: –Identify the opportunities for significant cost reduction –Set priorities for improvement projects –Make tradeoffs among alternative ways to improve operations –Evaluate proposed investments to improve operations –Assess the consequences of their improvement activities

23. Copyright 1998 Dekker, Ltd. 23 Total Quality Management A philosophy that attempts to eliminate all defects, waste, and activities that do not add value to customers

24. Copyright 1998 Dekker, Ltd. 24 Balanced Scorecard A multi-dimensional measurement system that translates an organization’s mission and strategy into performance measures.

25. Copyright 1998 Dekker, Ltd. 25 Balanced Business Scorecard Financial Perspective How do we look to our shareholders? Business Process What business processes are the value drivers? Organization Learning Are we able to sustain innovations, change and improvement? Vision & Strategy Customer Perspective How do we look to our customers?

26. Copyright 1998 Dekker, Ltd. 26 The Internal Business Process Perspective Identify the Market Create the Product/ Service Offering Build the Products/ Service Deliver the Products/ Services Service the Customer Customer Need Identified Customer Need Satisfied Innovation Process Operations Process Post-Sale Service Process

27. Copyright 1998 Dekker, Ltd. 27 Behavioral Implications of Management Accounting Information Information is never neutral People react to measurements People familiar with “old” systems often resist “new” systems Unexpected actions may result as employees respond to new performance measures Information is never neutral People react to measurements People familiar with “old” systems often resist “new” systems Unexpected actions may result as employees respond to new performance measures

28. Copyright 1998 Dekker, Ltd. 28 Applying the Concepts The Differences Between Financial and Managerial Accounting Exercise #1 Read Problem #1-16, on page 37, of Management Accounting, and answer the following question: What are the advantages and disadvantages of having separate departments for financial accounting and management accounting? The Differences Between Financial and Managerial Accounting Exercise #1 Read Problem #1-16, on page 37, of Management Accounting, and answer the following question: What are the advantages and disadvantages of having separate departments for financial accounting and management accounting?

29. Copyright 1998 Dekker, Ltd. 29 Applying the Concepts Employee Empowerment Exercise #2 Read the information provided in Case Study # 1-20, on page 38, of Management Accounting, and answer the following questions: 1. What information needs did the production workers have in the old environment? 2. What information do you recommend be supplied to the production workers in the new environment that emphasizes quality, defect reduction, problem-solving, and teamwork? Employee Empowerment Exercise #2 Read the information provided in Case Study # 1-20, on page 38, of Management Accounting, and answer the following questions: 1. What information needs did the production workers have in the old environment? 2. What information do you recommend be supplied to the production workers in the new environment that emphasizes quality, defect reduction, problem-solving, and teamwork?

30. 30 Lesson 2 - The Organization as a System of Activities The organization as a sequence of activities in a value chain The role of the customer in defining focus The nature of value- added and nonvalue- added activities The organization as a sequence of activities in a value chain The role of the customer in defining focus The nature of value- added and nonvalue- added activities

31. Copyright 1998 Dekker, Ltd. 31 Value Chain A sequence of activities that creates a good or service in which each step of the sequence should add something that the customer values to the product. Customer Product Activities

32. Copyright 1998 Dekker, Ltd. 32 Key Elements of the Value Chain (3) Output Activities Selling, shipping service (2) Processing Activities Making, moving, storing inspecting (1) Input Activities Product design, process design, purchasing, receiving, hiring, training (4) Administrative Activities Personnel, finance, legal, accounting, research

33. Copyright 1998 Dekker, Ltd. 33 Stakeholders Those people, groups, or institutions who define an organization’s success or who can affect its ability to achieve its objectives.

34. Copyright 1998 Dekker, Ltd. 34 process objectives relating to customers value chain/process constraints effects of value chain design on stakeholders other than customers Stakeholder Objectives: customers employees suppliers owners community Organization Objectives Organization Control Customer Satisfaction with Products Process Control Value chain design and operation Domain of Management Accounting the organization’s primary values compare actual with plan effects of customer satisfaction on other stakeholders compare actual with plan products Stakeholders, the Value Chain and Organization Objectives

35. Copyright 1998 Dekker, Ltd. 35 Stakeholder Groups Each group makes contributions to the organization, has requirements the organization must meet, and has an effect on the value chain EmployeesCommunity CustomersSuppliers Owners

36. Copyright 1998 Dekker, Ltd. 36 Process Control Assesses the operating performance of the value chain in meeting customer requirements Focuses on short-term, is often continuous Measures short-term performance against short- run targets or standards Assesses the operating performance of the value chain in meeting customer requirements Focuses on short-term, is often continuous Measures short-term performance against short- run targets or standards

37. Copyright 1998 Dekker, Ltd. 37 Critical Success Factors Elements of performance required for an organization’s success, for example, for customers, service, quality, and cost; for employees, job satisfaction and safety; for partners and owners, an adequate return on investment; on the community, conformance to laws

38. Copyright 1998 Dekker, Ltd. 38 Examples of Critical Success Factors Service Quality Cost Safety JobSatisfactionConformance to Laws to Laws CustomerEmployeeCommunity

39. Copyright 1998 Dekker, Ltd. 39 Service The product’s tangible and intangible features promised to the customer; service is also known as value in use

40. Copyright 1998 Dekker, Ltd. 40 Quality The difference between the promised and the realized level of service; conformance to specifications

41. Copyright 1998 Dekker, Ltd. 41 Service and Quality What the customer wants What the customer is promised What the customer is given The Service GapThe Quality Gap

42. Copyright 1998 Dekker, Ltd. 42 Customer Performance

43. Copyright 1998 Dekker, Ltd. 43 Necessary Qualities of Performance Effectiveness –Ability to accomplish objectives –Determined by process design Effectiveness –Ability to accomplish objectives –Determined by process design Efficiency –Ability to use fewest possible resources to accomplish objectives –Determined by process design and how the process operates

44. Copyright 1998 Dekker, Ltd. 44 Critical Performance Indicators Consider activities from the customer’s perspective Evaluate using customer- validated measures Are comprehensive Provide feedback Consider activities from the customer’s perspective Evaluate using customer- validated measures Are comprehensive Provide feedback

45. Copyright 1998 Dekker, Ltd. 45 Customer Validation Inputs Resources used in activities Outcomes How the customer values the result of the activity Process Activities which transform resources into outputs Outputs Physical measures of activity

46. Copyright 1998 Dekker, Ltd. 46 Inputs, Outputs, and Outcomes

47. Copyright 1998 Dekker, Ltd. 47 Signals A warning signal triggers an investigation into the cause of an underlying problem A diagnostic signal provides evidence of the nature of an underlying process problem and may suggest a way to deal with it A warning signal triggers an investigation into the cause of an underlying problem A diagnostic signal provides evidence of the nature of an underlying process problem and may suggest a way to deal with it

48. Copyright 1998 Dekker, Ltd. 48 Control The set of methods and tools that organization members use to keep the organization on track toward achieving its objectives

49. Copyright 1998 Dekker, Ltd. 49 Control May Be Exercised By: Ensuring compliance with standard operating procedures Motivating people to be creative in meeting customer objectives Ensuring compliance with standard operating procedures Motivating people to be creative in meeting customer objectives

50. Copyright 1998 Dekker, Ltd. 50 Control - Accounting the Old Way Emphasis on potential or past performance encourages working harder and faster Associated with “Managing by the Numbers” Emphasis on potential or past performance encourages working harder and faster Associated with “Managing by the Numbers”

51. Copyright 1998 Dekker, Ltd. 51 Problems with Managing by the Numbers Ineffective Assumes cost to be the only relevant measure of performance Does not recognize the reasons for costs in an organization Ineffective Assumes cost to be the only relevant measure of performance Does not recognize the reasons for costs in an organization

52. Copyright 1998 Dekker, Ltd. 52 Control - Accounting Under ABC Emphasis on improving processes and eliminating things that do not improve the product encourages working smarter

53. Copyright 1998 Dekker, Ltd. 53 Understanding Cost Control Under Activity-Based Management Activity-Based Management approaches costs by studying the need, effectiveness, and efficiency of activities which create the costs

54. Copyright 1998 Dekker, Ltd. 54 How Activities Create Cost Activities UndertakenResources UsedCosts Activity 1 Value added, inefficient Activity 2 Nonvalue added, efficient Activity 3 Nonvalue added, ineffcient Activity 4 Value added, efficient Materials Labor Equipment $

55. Copyright 1998 Dekker, Ltd. 55 Value-Added Activities An activity that, if eliminated, in the long run would reduce the product’s or service’s value to the customer An activity that, if eliminated, in the long run would reduce the product’s or service’s value to the customer

56. Copyright 1998 Dekker, Ltd. 56 NonValue-Added Activity An activity that presents the opportunity for costs reduction without reducing the product’s or service’s potential value to the customer An activity that presents the opportunity for costs reduction without reducing the product’s or service’s potential value to the customer

57. Copyright 1998 Dekker, Ltd. 57 Steps in Activity Analysis (1) Identify process activities (1) Identify process activities (2) Chart the existing process (2) Chart the existing process (3) Classify all activities (3) Classify all activities (4) Continuously improve all activities and plan to eliminate nonvalue-added activities (4) Continuously improve all activities and plan to eliminate nonvalue-added activities

58. Copyright 1998 Dekker, Ltd. 58 Applying the Concepts Product Service Features Exercise #1 For each of the following products, what are the three most important elements of service: 1television set 2visit to the doctor 3trip on an airplane Product Service Features Exercise #1 For each of the following products, what are the three most important elements of service: 1television set 2visit to the doctor 3trip on an airplane

59. Copyright 1998 Dekker, Ltd. 59 Applying the Concepts The Elements of Quality Exercise #2 For each of the following products, suggest three measures of quality: 1television set 2visit to the doctor 3trip on an airplane The Elements of Quality Exercise #2 For each of the following products, suggest three measures of quality: 1television set 2visit to the doctor 3trip on an airplane

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