Management Accounting for
Multinational Companies
Igor Baranov
Associate Professor
Graduate School of Management
St.Petersburg State University
INTRODUCTION
What are we going to discuss?
Management accounting in an organization
Cost Management Concepts and Cost Behavior
Full (absorption) costing
Strategic cost management
Operational and strategic activity-based management
“Beyond budgeting”
Life-cycle, target and kaizen costing
Differential cost analysis for marketing and production
decisions
Budgeting, responsibility centers, and performance
evaluation
Balanced scorecard
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Textbooks
Blocher, Chen, Cokins, Lin. Cost
Management: A Strategic Emphasis. 2005.
Reference textbooks (Introduction of
Management Accounting)
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Grading Policy
Problem sets – 30%
Group work (presentation + report) – 20%
Mid-term exam – 10%
Final exam – 40%
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Contacts
Igor Baranov
Office: 228 (A.Schultz building)
Office hours: by appointment
E-mail: baranov@gsom.pu.ru
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Introduction
to Performance Management
and Management Accounting
Learning Objectives
Distinguish between managerial & financial
accounting.
Understand how managers can use
accounting information to implement
strategies.
Identify the key financial players in the
organization.
Understand managerial accountants’
professional environment.
Master the concept of cost.
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Compare Financial
& Managerial Accounting
Financial Accounting Managerial Accounting
Deals with reporting Deals with activities
to parties outside the inside an
organization organization
Highly regulated Unregulated
Primarily uses May use projections
historical data about the future
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Management Accounting Information (1)
The Institute of Management Accountants
has defined management accounting as:
A value-adding continuous improvement
process of planning, designing, measuring and
operating both nonfinancial information
systems and financial information systems that
guides management action, motivates
behavior, and supports and creates the cultural
values necessary to achieve an organization’s
strategic, tactical and operating objectives
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Management Accounting Information (2)
Be aware that this definition identifies:
Management accounting as providing both
financial information and nonfinancial information
The role of management information as
supporting strategic (planning), operational
(operating) and control (performance evaluation)
management decision making
In short, management accounting
information is pervasive and purposeful
It is intended to meet specific decision-making
needs at all levels in the organization
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Management Accounting Information (3)
Examples of management accounting
information include:
The reported expense of an operating
department, such as the assembly department of
an automobile plant or an electronics company
The costs of producing a product
The cost of delivering a service
The cost of performing an activity or business
process – such as creating a customer invoice
The costs of serving a customer
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Management Accounting Information (4)
Management accounting also produces
measures of the economic performance of
decentralized operating units, such as:
Business units
Divisions
Departments
These measures help senior managers
assess the performance of the company’s
decentralized units
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Management Accounting Information (5)
Management accounting information is a
key source of information for decision
making, improvement, and control in
organizations
Effective management accounting systems
can create considerable value to today’s
organizations by providing timely and
accurate information about the activities
required for their success
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Changing Focus
Traditionally, management accounting information
has been financial information
Management accounting information has now
expanded to encompass information that is
operational and nonfinancial:
Quality and process times
More subjective measurements (such as customer
satisfaction, employee capabilities, new product
performance)
Three dimensions:
Financial / Non-financial information
Internal / External information
Operational / Strategic information 15
Financial v. Management Accounting
Financial Accounting Management Accounting
Deals with reporting Deals with activities
to parties outside the inside an organization
organization Deals with
Deals with the responsibilities centers
organization as a within the organization
whole as well as with the
Highly regulated organization as a whole
Primarily uses Unregulated
historical data May use projections
about the future
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A Brief History (1 of 4)
In the late 19th century, railroad managers
implemented large and complex costing systems
Allowed them to compute the costs of the
different types of freight that they carried
Supported efficiency improvements and pricing
in the railroads
The railroads were the first modern industry to
develop and use broad financial statistics to
assess organization performance
About the same time, Andrew Carnegie was
developing detailed records of the cost of
materials and labor used to make the steel
produced in his steel mills
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A Brief History (2 of 4)
The emergence of large and integrated
companies at the start of the 20th century
created a demand for measuring the performance
of different organizational units
DuPont and General Motors are examples
Managers developed ways to measure the return
on investment and the performance of their units
After the late 1920s management accounting
development stalled
Accounting interest focused on preparing
financial statements to meet new regulatory
requirements
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A Brief History (3 of 4)
It was only in the 1970s that interest
returned to developing more effective
management accounting systems
American and European companies were under
intense pressure from Japanese automobile
manufacturers
During the latter part of the 20th century
there were innovations in costing and
performance measurement systems
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The Evolution of Management
Accounting
Stage
Transformation
1990s
Transformation
1980s
Transformation
1950s
Transformation
1910s
Focus
Cost Information Reduction of Creation of Value
Determination for Waste of through Effective
and Financial Management Resources in Resource Use
Control Planning and Business
Control Processes
C1 - ‹#›
A Brief History (4 of 4)
The history of management accounting comprises
two characteristics:
1. Management accounting was driven by the evolution
of organizations and their strategic imperatives
When cost control was the goal, costing systems became
more accurate
When the ability of organizations to adapt to environmental
changes became important, management accounting
systems that supported adaptability were developed
2. Management accounting innovations have usually
been developed by managers to address their own
decision-making needs
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Work Activities
That Will Increase In Importance 2000+3yrs
More Most
time critical
CUSTOMER & PRODUCT PROFITABILITY
x 3
PROCESS IMPROVEMENT
New! 4 5
PERFORMANCE EVALUATION
LONG-TERM, STRATEGIC PLANNING
New! 2 1
COMPUTER SYSTEMS & OPERATIONS 3 4
COST ACCOUNTING SYSTEMS
MERGERS, ACQUISITIONS & DIVESTMENTS
PROJECT ACCOUNTING
EDUCATING THE ORGANIZATION
INTERNAL CONSULTING New! 1 x
FINANCIAL & ECONOMIC ANALYSIS 5 2
QUALITY SYSTEMS & CONTROLS New! x x
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
PERCENT
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Source: The Practice Analysis of Management Accounting, 1996, p.14; Counting More, Counting Less…, 1999, p. 17.
Management Accounting Systems
Absorption (full) costing
Volume-based costing
Activity-based costing
Direct (marginal, variable, differential)
costing
Responsibility accounting
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Key Financial Players
President and
Chief Executive Officer
Finance Other
Vice-President (CFO) Vice-Presidents
Treasurer Controller Internal Audit
Management Financial Tax
Accounting Reporting Reporting
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Finance function:
Russian companies (traditional)
General Director
Chief
Finance Director
Accountant
Accounting Finance Planning Wages
Department Department Department Department
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Finance function:
Russian companies (modern)
General Director
Chief
Finance Director
Accountant
Management
Accounting Finance Accounting /
Department Department Budgeting
Department
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Professional Environment
Institute of Management Accountants (IMA)
Sponsors Certified Management Accountant &
Certified Financial Management programs
Publishes a journal, policy statements and research
studies on management accounting issues
www.imanet.org
Chartered Institute of Management
Accounting (CIMA)
Leading professional organization in England and
Wales
Sponsors certificate and diploma programs
www.cimaglobal.org
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Professional diploma (CIMA)
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Cost Management Concepts
and Cost Behavior
Match Terms & Definitions
Cost The return that could not be
realized from the best forgone
alternative use of a resource
Opportunity
Cost A cost charged against revenue
Expense Costs not directly related to a
cost object
Cost Object Any item for which a manager
wants to measure a cost
Direct Cost Costs directly related to a cost
object
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Indirect Cost A sacrifice of resources
Information in Management Accounting
Revenue Cash Inflow
(-) Costs (-) Cash Outflow
= Profit = Net Cash Flow
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Opportunity Cost
An opportunity cost is the sacrifice you make
when you use a resource for one purpose instead
of another
Opportunity costs = explicit costs + implicit costs
that do not appear anywhere in the accounting
records
Machine time used to make one product cannot
be used to make another, so a product that has a
higher contribution margin per unit may not be
more profitable if it takes longer to make.
Management accountants often use the concept
of opportunity cost for decision making
Economic Profit v. Accounting Profit
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Classification of Costs
Variable / Fixed costs
Direct / Indirect costs
Prime costs / Overheads
Cost hierarchy (types of activities and
their associated costs) New!
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Nature of Fixed & Variable Costs
Variable costs - change in total as the level of activity
changes
There is a definitive physical relationship to the activity
measure
Fixed costs - do not change in total with changes in activity
levels
Accounting concepts of variable and fixed costs are short
run concepts
Apply to a particular period of time
Relate to a particular level of production
Relevant range is the range of activity over which the firm
expects cost behavior to be consistent
Outside the relevant range, estimates of fixed and variable
costs may not be valid
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Types of Fixed Costs (1)
Capacity costs- fixed costs that provide a firm
with the capacity to produce and/or sell its goods
and services
Also know as committed costs and typically relate to a
firm’s ownership of facilities and its basic organizational
structure
Capacity costs may cease if operations shut down, but
continue in fixed amounts at any level of operations
Examples: property taxes, executive salaries
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Types of Fixed Costs (2)
Discretionary costs - need not be incurred in the
short run to operate the business, however,
usually they are essential for achieving long-run
goals
Also referred to as programmed or managed
costs
Examples: research and development costs,
advertising
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Semifixed Costs
Refers to costs that increase in steps
Example: A quality-control inspector can
examine 1,000 units per day. Inspection costs
are semifixed with a step up for every 1,000
units per day
Distinction between fixed and semifixed is
subtle
Change in fixed costs usually involves a change in
long-term assets: a change in semifixed costs often
does not
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Cost Object
Acost object is something for which
we want to compute a cost:
A product
A pair of pants
A product line
Women’s boot cut jeans
An organizational unit
The on-line sales unit of a clothing retailer
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Direct Cost
A cost of a resource or activity that is
acquired for or used by a single cost
object
Cost object = A dining room table
Cost of the wood that went into the dining
room table
Cost object = Line of dining room tables
A manager’s salary would be a direct cost if a
manager were hired to supervise the
production of dining room tables and only
dining room tables
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Indirect Cost
The cost of a resource that was acquired
to be used by more than one cost object
The cost of a saw used in a furniture
factory to make different products
It is used to make different products such as
dining room tables, china cabinets, and dining
room chairs
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Direct or Indirect?
A cost classification can vary as the chosen cost
object varies
Consider a factory supervisor’s salary
If the cost object is a product the factory supervisor’s
salary is an indirect cost
If the factory is the cost object, the factory supervisor’s
salary is a direct cost
A cost object can be any unit of analysis including
product, product line, customer, department,
division, geographical area, country, or continent
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Designing of Costing System for
Performance Measurement
Divide organization into different types of
responsibility centers
Choose cost objects
Classify costs into direct and indirect
Define direct costs for decision making purposes
Allocate indirect costs
Set performance indicators for products
(services), organizational units, and managers
Manage performance through management
accounting system
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Responsibility Centers
A responsibility center is a division, department,
or a person responsible for managing a group of
activities in the organization
Responsibility centers can be classified as follows:
Standard cost centers - mgmt is responsible for
controlling costs
Overhead centers – mgmt is responsible for controlling
overheads
Revenue centers - mgmt is responsible for managing
revenues
Profit centers - mgmt is responsible for both revenues
and costs
Investment centers - mgmt is responsible for revenues,
costs, and assets
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