Accounting  the process of identifying, measuring and communicating economic information to

permit informed judgements and decisions by users of the information.

Management Accounting  is concerned with the provision of information to people within

the organization to help them make better decisiond and imporve the efficientcy and
effectivenss of existing operations such as Managers, Employees

Financial Accounting  is concerned with the provision of inoformation to external parties

outside the org. such as shareholders, creditors and gov. agencies

Could be called internal and external reporting

The biggest differences between these two are legal requirements (some information has to be
shared with the public, others for internal uses not), financial accounting reports describe thw
whole of the business, whereas man. Ac. Focuses on small parts of the org., time dimensions
– fin. Ac. Reports what happened in the past in an org., ma. Ac. Is concerned with future
information as well as past information (future for decisions)

Once the course of action has been selected it should be implemented (4) as part of the
budgeting and long-term planning process. Budget  financial plan for implementing the
decisions that management has made. Budgets are inicially prepared at the departement level
and then merged together into a single statement for the organization as a whole also known
as master budget which consists of budgeted profit and cash flow statements.

The managerial function of control consists of measurement, reporting and correction of

performance in an attempt to ensure that the firms objectives and plans are achieved (5/6). To
monitor performance the accountant produces performance reports  compare actual
outcomes (actual costs and revenues) with planned outcomes.
TQM  total quality management, describes a situation in which all business functions are
involved in a process of continuous quality improvement

Cycle time  length of time from start to completion of a product or service, consists of sum
of processing time, move time, wait time and inspection time, emphasis for management to
keep cycle time low (also lean manufactoring)

Benchmarking  technique as a mechanism for achieving continous improvement, continous

process of measuring a firms products, services or activities against the other best perfroming
org. either internal or external to the firm

Important changes that influenced the management accounting practice  globalization of

world trade, changing product life cycles, advances in manufactoring, focus on environmental
and ethical issues, greater emphasis on value creation, the need to become customer driven

Functions of management accounting  should generate information to meet the following

requirments – allocate costs between cost of goods sold and inventories for internal and
external profit, provide relevant information to help managers make better decisions, provide
information for planning, control, performance measurements and continous improvement

Key success factors that directly affect customer satisfaction  cost efficiency, quality, time,
and innovation and continous improvement

2. Introduction to cost terms and concepts

Cost objective  any activity for which a separate measurement of cost is desired, cost of
something is called cost objective for example cost of a product.

Cost collection system  1) accumulates costs by classyifing them into certain categories
such as direct labor, material costs, etc), 2) then assigned to cost objectives

Direct and indirect costs  both categories can be further divided into direct material and
labor costs and indirect material and labor costs. Direct material costs  the material costs
that can be specifically and exclusively identified with a particular cost object. For example
wood used for a chair. Direct labor cost  labour costs that can be specifically and exlusively
identified with a particular cost object, wages for employees. Indirect costs  cannot be
identified specifically and exclusively with a given cost object. Consist of indirect labour,
materials and expenses. Indirect costs are also called overhead. Manufactoring overheads
include all the cost of manufacuring apart from direct labour and material cost. Administrative
overheads consist of all costs associated with the general administration of the orgainzation
that cannot be assigned to manufatroing ex. Top executive salaries, general accounting,
secretearial, research and dev. Costs. Also heating, fixes of machines all these costs are
indirect or overhead costs.
Direct costs are more easily to distiniguish. Its more difficult with indirect costs, to trace them
an estimate must be bade of resources consumed by cost objectives using cost allocations 
process of assigning costs when a direct measure does not exist

Period and product costs  product costs are the costs that are identified with goods
purchased or produced for resale. Period costs are costs that are not specifically related to
manufacturing or purchasing a product.

Variable costs  vary in direct proportion to the volume of activity, doubling the level of
activity will double the total variable costs, ex. Are direct materials, energy to operate the
machines and sales comissions

Fixed costs  remain constant over wide ranges of activity for a specific period of time. They
are not affected by changes in activity. Even if nothing is sold, stays the same. Ex.
Depreciation of equimpent, property loans, taxes, insurance cost.

Step-fixed costs  within a given time period they are fixed within specified activity levely,
but they are eventually subject to spet increases or decreases by a constant amount at various
activity levels

Relevant and irrelevant costs and revenues  for decision making costs and revenues can be
classified into these categories. Relevant ones are those future costs and revenues that will be
changed by a decision. Irrelevant are those that will not be affected by the decision.

Sunk cost  cost of resources already acquired where the total will be unaffected by the
choice between various alternatives. Costs that have been created by a decision made in the
past and that cannot be changed by any decision in the future

Opportunity costs  cost that measures the opportunity that is lost or sacrificed when the
choice of one course of action requires that an alternative course of action is given up.
Part 2 – Cost Accumulation for inventory valuation and profit measurement

3 – Cost Assignment

Costs are assigned to cost objects can be divided into direct costs and indirect costs (also
overhead). Direct can be accurately traced to cost object, which is not possible with indirect
ones. Where a cost can be directly assigned to a cost object is called direct-cost tracing. For
indirect costs we use cost allocation – process of assigning costs when the quantity of
resources cosnumed by a particular cost object cannot be directly measured.

Direct costing system  also known as marginal costing system, assigns only direct costs to
cost objects wheeeas an absorption costing system – assigns both direct and indirect cost to
cost objects. Absorption can be divided into traditional costing systems and activity based
costing (ABC).

Assigning direct costs to cost objects  using data to identify and record the resources
consumed by cost objects. For example direct labor, time spent is recorded on a time sheet
or job card. Details of the customers account number, job number or the products code are
also entered on these docs. The employees hourly rate of pay is then entered so that the
direct labour cost for the employee can be assigned to the appropriate cost object. For
direct materials the doc. Is a materials requisition. In many org. the recording procedure for
direct costs is computerized using bar codes.

Two-stage allocation process  overhead should not be measured plant wide they should
be divided into departments where they happen. First stage – overheads are assigned to
cost centres (cost pools), a location where overhead costs are initally assigned. Normaly
these are departements. Second stage – costs accumulated in the cost centres are allocated
to cost objects using selected allocation bases. The more cost centres the more detailed and
exact the costs are but also more complex.
Part 3 – Information for Decision Making

8 – Cost-Volume-Profit Analysis

Examines the relationship between changes in activity and changes in total sales revenue,
costs and net profit. Allows us to predict what will happen to the financial results if a specific
level of activity or volume fluctuates, important for analyising for example Break-even-point
(point where neither a profit nor loss will occure).

9 – Measuring Relevant costs and revenues for decision making

For making decisions its relevant to have only the relevant costs and revenues that are
applicable to the alternatives being considererd. Relevant costs and revenues are only those
that will be affected by the decision, relevant financial inputs for decision making purporses
are thererfore future cash flows. Irrelevant costs consist of sunk costs, allocated costs and
future costs that do not differ between alternative. Relavant costs are future costs that do
differ between alternatives.

10 – Pricing decisions and profitability analysis

Most firms have to decide on a price for their product or service, sometimes the overall
market suuply and demand creates the price and the firm has little or no influence over the
selling price. Especially when there are many firms in one product-segment with little
variation. For example wheat, coffee, rice and sugar prices are set for the market as a whole
based on the forces of supply and demand. Firms that have little or no influence over the
prices are price takers. Firms who do have an influence in setting the price through special
features for example are called price setters.

Selling prices are mostly created by using the product cost plus a desired profit margin
added. This approach is called cost-plus pricing. Mostly used for customized
products/services

If we have a non-customized product for example most companies are selling hundreds if
not thousand units on the market, so how to create a price. Mostly companies come up with
different possibilites for sales volume (how many pieces will be sold) and then they use
different prices for achieving these sales volumes.

Target costing  opposite idea of cost-plus pricing. Here the starting point is the
determination of the target selling price, next a desired profit margin is deducted to get a
target cost for the product. The aim is to ensure that the future cost will not be higher than
the target cost

Generally companies should concentrate on long-run pricing decisions and short-run

decisions should be viewed as representing abnormal situations.
Pricing policies

Price skimming policy  attempt to exploit those sections of the market that are relatively
insensitive to price changes. For ex. High initial prices may be charged to take advantage of
the novelty appeal of a new product, once the market becomes saturated the price can be
reduced to attract that part of the market that has not yet been exploited.

Penetration pricing policy  based on the concept of charging low prices initially with the
intention of gaining rapid acceptance of the product. Appropriate when close substitutes are
available or when the market is easy to enter.

Product life cycle stages  introductory, growth, maturity and decline. t the introductory
stage, the product is launched and there is minimal awareness and acceptance of it. Sales
begin to expand rapidly at the growth stage, because of introductory promotions and
greater customer awareness, but this begins to taper off at the maturity stage as potential
new cus- tomers are exhausted. At the decline stage, sales diminish as the product is
gradually replaced with new and better versions

Pareto analysis  20 percent of x account for 80percent of x, for example 20% of customers
account for 80% of the revenue

12 – Decision making under considerations of risk and uncertainty

Risk – is applied to a situation where there are several possible outcomes and there is
relevant past experience to enable statistical evidence to be produced for predicting the
possible outcomes

Uncertainty – exists where there are several possible outcomes, but there is little previous
statistical evidence to enable the possible outcomes to be predicted

Probability – the likelihood that an event or state of nature will occur

Expected value – is calculated by weighing each of the possible outcomes by its associated
probability. The sum of these weighted outocmes is called the expected value of the
probability distribution.

Decision tree – analytical tool useful where there are many possible outcomes for various
alternatives, and some outcomes are dependent on previous outcomes. Diagramm that
shows the possible courses of actions, the potential events together with their potential
outcomes and associated probabilites.
Maximin, maximax – in situations in which uncertainty applies it is not possible to assign
meaningful estimates of prob. To possible outcomes. Then these maximin and maximax are
used. Maximin criterion assumes that the worst possible outcome will occur and that the
decision should be based on the largest payoff under this assumption. The maximax is the
opposite and is based on the assumption that the best possible payoff will occur. The regret
criterion is based on the fact that having selected an alternative that does not turn out to be
the best, the decision maker will regret not having chosen another alternative. Aim is to
minimize the maximum possible regret.

13 – Capital Investment Decisions

The decisions that involve current outlays in return for a stream of benefits in future years.
So capital investment decisions are long-term. These decisions normally represent the most
important decisions that an org. makes, since they commit a substantial proportian of a
firms resources. For example investments in plants or machinery, research and
development. Also gov. do capital investment for ex. When investing in infrastructure such
as roads and and railways. Individual inve. Dec. include buying a house for example.

Time value of money – concept that 1$ received in the future is not equal to 1$ received
today

Opportunity cost of an investment – if cash is invested in a capital project it cannot be

invested elswewhere to earn a return
Part 4 – Information for planning, control and performance measurement

15 – The budgeting process

Vision statement  clarifies the beliefs and governing principles of an organization what it
wants to be in future or how it wants the world in which it operates to be. In contrast a
mission statement  is more action oriented, includes a description in very general terms of
what the organization does to achieve its vision, its broad purpose and reason for existence.

Functions of budgets – planning annual operations, coordinating the activities of the various
parts of the org., communicating plans to the various responsible managers, motivating
managers to meet goals, controlling activities, evaluating performance of managers

Master budget consists of budgeted profit and loss acount, a balance sheet and a cash
budget statement

Activity based budgeting  aims to manage costs more effectively by authorizing the supply
of only those resources that are needed to perform activities required to meet the budgeted
production and sales volume

16 – Management Control Sytems

= refer to the collection of practices such as budgetary planning and control etc.

Control at different organizational levels – strategic control and management control.

Strategic control has an external focus, emphasis on how a firm, given its strenghts and
weaknesses and limitations can compete with other firms in the same industry.
Management control consist of a collection of control mechanisms that have a shoter term –
internal focus. Aim is to influence employee baehaviours in desirable ways in order to
increase the achievement of the org. objectives.

Three categories of control mechanism – 1) action (behavioroul) control, 2) personnel,

cultural and social control, 3) results (output) control

1) Action or behaviroural controls  involve observing the actions of individuals as they

go about their work. Having superiors watch and guide the actions of subordinates.
Foer exampel if the supervisor watches the workers on the assembly line and
enusrues the work is done exactly as prescribed.

2) Personel, cultural and social control  involve the selection of people who have
already been socialized into adopting particular norms and patterns of behaviour
required to achieve an org. objectives. ocial/cultural controls rep- resent a set of
values, social norms and beliefs that are shared by members of the organization and
that influence their actions. Control is exercised by individuals over one another – for
example, procedures used by groups within an organization to regulate performance
of their own members and to bring them into line when they deviate from group
norms.
 3) Results or output controls  involve collecting and reporting info about the
outcomes of work effort. For example revenus, costs or profits.

Responsibility center  unit of a firm such as a department or division where an individual

manager is held responsible for the units performance such as cost or expenses centres,
revenue centres, profit centres and investment centres. Fundamental part of management
accounting control systems

Management accounting control systems have two core elements – 1) formal planning
process such as budgeting and long-term planning. 2) responsibility accounting, which
involves the creation of respo. Centres.

Objective of responsibility accounting – to accumulate costs and revenues for each individual
resp. centre so that the deviations from a perfomrance target can be attributed to the
individual who is accountable for the resp. centre.

17 - Standard costing and variance analysis 1

Standard costing is most suited to an organization whose activities consist of a series of

common or repetitive operations where the input required to produce each unit of output
can be specified. A standard costing system can be applied to organizations that produce
many different products, as long as production consists of a series of common operations.
For example, if the output from a factory is the result of five common operations, it is
possible to produce many different product variations from these operations. It is therefore
possible that a large product range may result from a small number of common operations.
Standard costs are developed for repetitive operations and product standard costs can be
derived simply by combining the standard costs from the operations which are necessary to
make the product. Example burger king.

19 – Divisional Financial performance measures

Functional organizational structure  all activities of a similar type within a company are
placed under the control of the appropriate departmental head.
Divisionalized organizational structure  split up into divisions in accordance with the
products that are made. Many global copanies establish divisions according to geogrpahical
regions. Each divisional manager is responsible for all of the operations relating to his or her
partticular proeuct. This will normally lead to decentralization of the decision-making
process. The divisional managers will nromally be free to set selling prices, choosw which
market to sell in, make product mix and output decisions etc. In non-divisional org. pricing,
product mix and output dec. will be made by central management.
Advantage divisionalization  decision-making process can be improved by both the quality
of the decision and the speed of the decision, quality vise because the divisional manager is
more informed about the situation and has more knowledge thant the general head
manager, and speed because infromation does not have to pass along the chain of command
to and from top management

Disadvantage divisionalization  danger that divisions may compete with one another
excessively and that divisional managers may be encouraged to take action that will increase
their own profits at the expense of the profits of other divisions and the company as a
whole, may affect cooperation between the divisions

Divisionalized structure is most suited to large companiex that are engaged in several
dissimilar acitivites. For example Unilever, Siemens, Mitsubishi, Samsung. For successful
divisionlaiuzation it is important that the activiteis of a division be as independent as
possible of other acitvities.

Controllable profit  should be used for measuring managerial performance, this is

computed by deducting from divisional revenues all those costs that are controllable by a
divisional manager. This shows the skills of the manager to use its resources effectively. It
should not be interpreted in isolation if its used to evaluate the perf. Of a div. manager.
Should be evaluated erelaitve to a budgeted peerformance so that market conditions and
size are taken into accoutn

Return on investment  ROI, is synonymous with the accounting rate of return (ARR). ROI
expresses divisional profit as a percentage of the assets employed in the division. Only
difficult to measure the performance of divisional managers. ROI is so widely used because it
being a ratio it can be usded for interdivision and interfirm comparisions where the size of
the divisions or firms differ.

Residual income  this is a better evaluation for divisional managers than ROI, is a
controllable profit less a cost of capital charge on the investment controllable by the divisional
manager.

EVA  Economic value added, can be used to measure the performance of companies as a
whole or different divisions within a divisionalized copany. EVA was developed by Stern
Stewart with the aim of producing an overall financial measure that encourages senior
managers to concentrate on the delivery of shareholder value. They consider that the major
aim of managers of companies whos shares are traded in the stock market should be to
maximize shareholder value, this management principle is also known as value-based-
management (VBM), states that management should first and foremeost conisder the
interests of shareholders in its business decisions.
20 – Transfer pricing in divisionalized companies

Part five – Strategic performance and cost management and challenges for the future

21 – Strategic performance management

Strategies can be defined as the means by which an organization plans to achieve its
objectives. The chosen strategies have an important influence in determining what
performance measures might be appropriate. The linking of strategies and performance
measures thus promotes organizational behaviour that supports the implementation of the
chosen strategies. There are three generic strategies in order to achieve competitive
advantage:

1) cost leadership strategy  an enterprise aims to be the lowest cost producer within
the industry thus enabling it to compete on the basis of lower selling prices rather
than providing unique products or services. The source of this competitive advantage
may arise from factors such as economies of scale, access to favourable raw
materials prices and superior technology

2) differentation strategy  the enterprise seeks to offer products or services that are
considered by its customers to be superior and unique relative to its competitors.
Examples include the quality or dependability of the product, after-sales service, the
wide availability of the product and product flexibility
 3) focusing strategy  involves seeking competitive advantage by focusing on a narrow
segment of the market that has special needs that are poorly served by other
competitors in the industry. A focusing strategy recognizes that differences can exist
within segments (e.g. customers and geographical regions) of the same market.
Competitive advantage is based on adopting either a cost leadership or product
differentiation strategy within the chosen segment.

In practice, firms may choose a combination of the three strategies within the different
markets in which they operate. Strategic positioning relates to the choise of the opitmal mix
of the three general strategies.

Also differnetation in defender and prospector strategies. Defender org. perceive a grread
deal of stability in their external envi. And conentrate on a narrow and limited mix of
products and customers. They compete on product price, quality and customer service
rather than innovation and product ans market dev. And do this by focusing on making
operations efficient htrough cost, quality and service leadership. They engage in little
product or market development. Prospectors perceive high uncertainty in their environment
and are continually seraching for new market opportunites. They are the cretors of change.
They compete through new product innovations and market devlopment. The marketing
and research and development functions dominante finance and production, so efficiency
and profit performance are not as important as maintining an industry leadership in product
innovation, tesla for example.

A firm’s choice of performance measures and the emphasis given to them will be influenced
by the strategic position it adopts. For example, a firm pursuing a cost leadership or
defender strategy will give greater emphasis to cost-based measures and quality and
output/input efficiency measures. In contrast, a firm pursuing a differentiation or prospector
strategy will give greater emphasis to marketing mea- sures such as percentage market
share, percentage of sales from new products, percentage of sales from new markets etc.
The performance management system is most effective when it fits with business strat- egy.
Without such a fit, what is being measured (and communicated as important) and what is
actually important to the firm are not synchronized with one another.
Alternative performance management frameworks are:

- results/determinants framework
- the performance pyramid
- the balance scorecard
- the performance prism framework

Most commonly accepted one is the balance scorecard.

Balance scorecard  A strategic management tool that integrates financial and non-
financial measures of performance in a single concise report, with the aim of incorporating
performance measurement within the strategic management process. The balance
scorecard philosophy creates a strategic focus by translating an organizatons strategy into
operational objectives and perfromance measures for the following four perspectives –
financial p. (how do we look to shareholders?) customer p. (how do customers see us?)
internal business p. (what must we excel at to satisfy our shareholders and customers?)
learning and growth p. (how can we continue to imporve and create value?)
Biggest limitation of balance scorecard – the missing time component, presents a problem
when there are differences in the timing of the effects of the various lead mearues resulting
in the outcomes occruing at different point in time.

Lead and lag measures  Lag measures are outcome measures that mostly fall within the financial perspective
and are the results of past actions. Lag measures generally do not incorporate the effect of decisions when they are
made. Instead, they show the impact of the decisions as their impact materializes and this can be long after the
decisions were made. Lead measures are generally non-financial measures that are the drivers of future financial
performance.
22 – Strategic cost management and value creation

Life cycle cost management  its important to identify the costs incurred during the
different stages of a products life cycle. Three stages are – the planning and design stage, the
manufacturing stage and the service and abondonment stage. Commited or locked-in costs
are those that have not been incurred but that will be incurre in the future on the basis of
decisions that have already been made.

Target costing  a technique that focuses on managing costs during a products planning
and design phase. 4 different stages:

Reverse engineering  involves examining a competitors product in order to identify

opportunities for product improvement and/or cost reduction. The aim is to benchmark
provisional product designs with the designs of competitors and to incoroporate any
observed relative advantages of the competitors approach to product design.

Value analysis  is a systematic eaxmination of factors affecting the cost of a product or

service in order to devise means of achieving the specified purpose at the required standard
of quality and reliability at the target cost. Might inlcude questions like – can it be
simplified? Is it necessary? Are all the features necessary? Etc.
Both of these methods focus on product design to achieve cost reductions.

Value added and non value-added activities  to identify and priorituzed the potential for
cost reduction many org. have found it useful to classify activities in these two types. Value
added activities are activities that custmers perceive as adding usefulness or value to the
produc or service they purchase. For example painting a car would be a value-added activity
in an organization that manufactures cars. Non-value added activities are activiteis where
there is an opportunity for cost reduction without reducing the products service potential to
the customer. Examples are inspecting, storing and moving raw materials and performing
set-ups. Cost of these activities can be reduced without reducting the value for the
customer. Should be theses activities that customers hould not be expected to pay for.
Activities can be undertaken more effectively at a lower cost by finding ways of reducing set-
up times, material movements and inventory levels and also imporinvg production flows.
Taking action to reduce or eliminate non-value-added activities is given top priority because
by doing so the org. permanently reduces the cost it incurs wihout reducing the value of the
product for the customer.

JIT for example is a way of reducing non-value-added costs. The aims of JIT are to reduce waste
by producing the required items, at the required quality and in the required quantities, at the precise time
at which they are required. In other words, nothing is purchased or produced until it is needed. JIT
manufactur- ing is a demand pull manufacturing system that pulls products through the manufacturing
process. Each operation produces only what is necessary to meet the demand of the following operation.
Pro- duction is not undertaken until there is a signal from the following process indicating a need to
produce. The demand pull process starts with customer demand for a finished product and works all the
way back to the demand for direct materials that arrive just in time to be used in the production process.
JIT production aims to keep the materials moving in a continuous flow with no stoppages and no storage.
23 – Challenges for the future

Environemental and sustainability issues

Greenwashing  gives the impression of adoption of sustainability practices to gain external legitimacy
and to mitigate pres- sures for environmental reform.

The principle of sustainability requires that companies should operate in ways that secure
long-term economic performance by avoiding short-term behaviour that is socially or
environmentally wasteful. Shared value is recommmended -- policies and operating practices
that enhance the competitiveness of a company while simultaneously advancing economic and social
conditions in the communities in which it operates

Examples:
Focus on ethical behavior

Examples would be the VW scandal, which resulted in the company paying 18billion$ to
cover the costs of legal action, compensation, also public distrust etc.

Companies should have a code of ethics where its stated what and how they are operating.

Information technology

Enterprise resource planning systems (ERPS), that is illustrating the whole company and its
processes digitally like SAP become increasingly important.

Big data  describes the large volume of raw data, boht structured and unstructured, that
inundates a business on a daily basis. Analysing this data to obtain meaningful information
that is useful for decision making.

Intellectual capital and the knowledge base economy

During the past two decades the worlds economy has rapidly changed form an industrial to a
knowledge base. In the new knowledge economy, wealth is created by developing and
managing knolwedge. These value creating knowledge ressources are commonly reffered to
as itellectual capital. For example the org. reputation, the morale of its staff, customer
satisfaction, knowledge and skills of employees, relationships with suppliers etc. these are all
intangible asset