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Wk1 management accounting
- 1. Management accounting Week 1 Introduction Tutor: Paula Burn
- 2. The course Twelve weeks of 2 hours This combines lectures and seminar activity Your participation is a prerequisite not an option! Assessment by examination Based on professional accountancy style questions Recommended text book – Drury C. (2008) Management and Cost Accounting 7th ed. South- Western Cengage Learning Further reading will be recommended within the course 2
- 3. The aim To establish how companies make good strategic decisions What are the relevant financial and non-financial factors that should be considered in analytical techniques? What are the limitations of the processes used? How valid are the decisions reached? 3
- 4. The examination 3 hours 3 questions Mix of computation and discussion Covering the learning outcomes 4
- 5. Why produce accounts? Accounting provides financial and non-financial information to help inform good decision making 5
- 6. Who for? Internal users External users • Management • Financial accounting accounting • Legal requirement of • No legal requirement all companies to • A growth area in produce audited management planning accounts • Interested in cash flow • Must meet defined and prospective rules and regulations profitability • Provides historical • Provides forward information projections 6
- 7. Strategic Management Accounting “The term, ..., may no longer be very useful when describing a set of advanced management accounting techniques or an approach to competitive financial analysis” “it would be useful to understand how techniques diffuse into more general practice and into organisational processes” Kim Langfield-Smith Strategic management accounting: how far have we come in 25 years? Accounting, Auditing & Accountability Journal; Vol 21 No 2 p 204-228 Emerald group publishing ltd. 7
- 8. What is SMA? Making management accounting more strategic... Roslender and Hart 2003:272 The provision and analysis of management accounting data about a business and its competitors, for use in developing and monitoring business strategy. Simmonds 1981:26 The provision and analysis of financial information on the firm‟s product markets and competitors‟ costs and cost structures... Bromwich 1990:28 The blending of financial analysis elements.....- value analysis, strategic positioning analysis, and cost 8 driver analysis, Shank and Govindarajan 1994:xiii
- 9. The internal accounting information Strategic decisions Operating decisions • Long term • Short term • Need to consider • Dependent on the outside influences resources • External shocks – available often • How can the uncontrollable and company returns unknown from the limited resources 9
- 10. Companies need to grow Three basic options Develop new products for existing markets Develop new products for new markets Develop new markets for existing customers 10
- 11. What are the companies trying to achieve? Customer satisfaction 11
- 12. Continuous improvement Corporate Employee ethics empowerment Social Customer Total value responsibility chain analysis satisfaction Time Cost efficiency management Total quality management Delivering customer satisfaction 12 Adapted from Drury 2008
- 13. Definition of a decision... The cognitive process of reaching a decision. A position or opinion or judgment reached after consideration Choosing between alternative courses of action using cognitive processes - memory, thinking, evaluation, etc The process of mapping the likely consequences of decisions, working out the importance of individual factors, and choosing the best course of action to take. 13
- 14. Making a good decision... Define the situation/decision to be made Identify the important criteria for the process and the result Consider all possible solutions Calculate the consequences of these solutions versus the likelihood of satisfying the criteria Choose the best option Any internet search will give you a huge amount of information on techniques and analysis but they pretty much all boil down to the above process! 14
- 15. What are we trying to do? Analyse alternatives Find the options that will optimise returns Optimal returns primarily focused on best future net cash flow Other criteria are becoming increasingly important Develop a budget (normally within an action plan Monitor performance reports Assess against success criteria Adapt as necessary! 15
- 16. That is; become good strategic management accountants! 16
- 17. Management accounting aims to be:- Inventive (has none of the constraints of financial accounting, it is internal) Provide forecasts and predictions Generate estimates Be forward thinking It makes use of historical information, but is predictive It can be influential Add value And provide competitive advantage 17
- 18. Management accounting – a growing phenomenon Changing practice in business has led to the increasing use of, and interest in management accounting: Primarily 1. The increase in globalisation and greater competition 2. The shift away from protected publicly owned industry to privatisation and free markets 3. A reduction in the time frame for product life cycles 18
- 19. Enterprise resource planning systems (ERPS) The introduction of easily accessible data bases have changed the way accounts work and companies compile accounting information All information is more current Entry into a single system has become the norm Access is available to managers at all levels in all departments Accountants can now analyse and provide consultancy skills rather than be number crunchers 19
- 20. Where has it come from? Strategic Management Accounting has its roots in the Scientific Management Movement of 1800 to 1915 and included Adam Smith, Babbage, Townes and Taylor. Frederick Taylor is particularly remembered and his techniques are still in use today and referred to as “taylorism”. Taylor developed his methods during the „mechanisation of metal working.‟ He defined a job as consisting of Method, Skill and Measurement. This was an approach using scientific methodology to optimize output and began to set productivity standards. His theories were refined and developed and are the basis of “Time and Motion studies” 20
- 21. Our focus; Decide what information is needed Look at techniques that will provide meaningful and relevant information in the decision making process Establish what are the relevant costs in any production process How are costs composed and how are they linked 21
- 22. To provide information that:- Enables the allocation of costs between goods sold and inventories Helps managers make better decisions Enables management to plan, control, measure performance and promote continuous improvement 22
- 23. SMA techniques Cost control or Cost management? 23
- 24. Cost management Focus on; Cost reduction Continuous improvement Positive change Not; Cost containment Aim Reduce costs and improve customer satisfaction 24
- 25. Why has it developed? Traditional cost control systems are used routinely and continuously to keep track of costs An accounting information system Cost management used when an opportunity to reduce costs is spotted Many of the techniques are not reliant on an accounting system 25
- 26. Life cycle costing The cost of a product from the birth of an idea to its death Three stages 1. Product planning and design phase 2. Product manufacturing and sales phase 3. Post sales service and abandonment phase Looking for cost savings in stage 1, led to the development of Target costing 26
- 27. Target costing 1. Determine the target price which customers will be prepared to pay for the product 2. Deduct a target profit margin to establish the target cost 3. Estimate the actual cost of producing the product 4. If... estimated cost > target cost investigate ways to reduce actual cost 27
- 28. Achieving target cost Tear-down analysis Examine a competitor‟s product looking for product improvement Or cost reduction opportunity Value engineering Identify improved product designs that reduce the manufacturing costs without impairing functionality Or eliminate unnecessary functions that raise costs and for which the customer is not prepared to pay extra Accurate cost measurement systems All of this only works if cost can be measured 28 accurately
- 29. Kaizen costing Again from Japan Once in production are there opportunities to make small improvements to the process that will reduce costs Looking for ways to increase efficiency! Employee empowerment 29
- 30. Just in time systems Aim To eliminate or reduce the costs of non-value added activities Produce the required item, in the desired quantity, at the required quality, at the required time Minimise inventories Reduce cycle time Have flexible production lines 30
- 31. Reading Journal paper supplied, SMA; how far have we come in 25 years Chapter 1 & 22 Research A journal article discussing one of the techniques mentioned in the last section This will be the basis of our first discussion next week. 31
Editor's Notes
- Expect; informed discussion, feedback, tutorial exercises to be completed
- A general principle that explains and endorses the production of any accounts. The non-financial information published in the required company reports is very important when considering the overall performance of any organisation.
- This is on the VLE for you to read. Please also read the relevant chapters in the book.
- What is important here – we are moving away from just looking at the numbers! Non-financial information is also important.
- You have to be competitive, make profits and ultimately – keep your customers happy! Therefore, are you using all your resources effectively, or should you be trying something new?This is ultimately a decision making process.
- This is a global change and the theory tends to be consistent across the world. Macro levelOn a micro level – cultural forces impacts on the resulting analysis of data and therefore the decisions madeCompanies are more internationally focused, products are developed with cross cultural targets...Privatisation is also a global issue – esp. with the fall of communism and the lifting of global trading restrictionsProducts become obsolete with increasingly short life spans. I was over the moon with a tape deck, can’t cope with an iPod.
- The days of accountants just collating numerical data are long gone...
- Time and motion studies were big in the 1970s and really were the beginning of mega bucks for consultants.
- Remember, the aim of all good companies is to improve customer satisfaction while making profits. Cost management clearly key, could use the term cost reduction
- Looking for opportunities to perform processes more effectively and efficiently and therefore leading to a cost reduction.This opportunity may have come from an accounting source but not necessarily.In week 1 you were asked to look yo the total quality management theories of Deeming.
- Traditional management accounting systems look only at the costs during the manufacturing phase of a product.Think about Nuclear electricity, the cost of closing an obsolete plant has consistently been a cost problem. Originally ignored as something to worry about when the time came, now part of the original design and planning phase.Concorde, while listed as a profitable example of an aircraft, it never recouped its original r&d budget!The research and development costs, and the post production disposal costs, are treated as period costs and effectively ignored in the manufacturing faceLife cycle costing tries to look at the whole picture, and identify anywhere in the procedure effective cost reductions can be madeThe phases; cost spend and allocation will eventually meet, initially expenditure is low, but funds will have to be allocated ready for the production phase, traditional costing systems only acknowledge costs as they are spent. Actually it is difficult to significantly alter budgets once they have been committed. Approximately 80% of costs are committed to the whole process during the product planning and design phase.Clearly the opportunity for cost management is greatest during this planning and design phase! Once the production phase starts, the costs are pretty much locked in.Once the production stage is in process and during the final stage – looking to contain costs, as opportunities for cost management are rare.
- Widely used by Japanese companies and now being incorporated in companies in Europe and the USAStage 1 is hugely dependent on thorough market research, of particular importance will your product be able to differentiate itself from competitor products. (current example – Gillette used aggressive marketing strategy to introduce Mach 3 – but really how different are razors!)Stage 2 - all companies have an expected rate of return on investments and this is used to determine the profit margin for any given productStage 4 – if the estimated cost is less than the target cost all systems go – but if notHow can actual costs realistically be reduced?Because this is occurring during the design phase a team approach can be used. Are there design elements that add to the cost unnecessarily? Customers need to be prepared to pay for additional design features...Have additional functions been added that are desirable but not a necessity? Mobile phones....Need to eliminate product function that adds cost but do not increase market price.
- 1 - Historically Japan has not been recognised for its entrepreneurial skills or new product development – they did however take the best designs available in the electronic and car markets and make them cheaper than their competitors – thus becoming a major manufacturing country!Are there standardised industry components that can replace specialist components currently in the design? This normally leads to industry price reductions2 - Functional analysis allows the individual components of a product to be analysed separately.I will pay extra for a flip phone, but I do not care about camera and mp3 options.The car industry – mercedes and bmw basic price does not include much. Most options are extras. Other manufacturers – luxuries included.Ryan air – you pay for what you want to use, keeping underlying cost low.Comparison is between cost and customer satisfaction. If cost > satisfaction – get rid Costs must truly reflect cause and effect. Back to our ABC cost drivers to reflect realistic share of overhead costs...Example page 541-543
- Who is best placed to spot where in a production line efficiency could be improved? The employees are highly regarded as part of the overall team and it is their input that enables these smaller cost reduction opportunities to be spotted and developed.Japanese companies often give factories small cost reduction targets to meet through this process during the course of a financial year.
- Another Japanese creation, much credited for the success of japanese companies in the 1980s. The goals;Eliminate non value activities – in the processing and production phase, raw materials being stored, goods waiting for inspection, waiting for packaging and delivery etc 5 steps process time, inspection time, move time, queue time and storage timeZeroinventoryZero defectsBatch sizes of 1 – instead of having production lines that process batches of individual products, move to a flow philosophy. Investment in high tech machinery that can be adjusted automatically, production based on similar type components rather than individual products. Also enables a company to react more flexibly to short term changes in supply and demand.No breakdowns100% reliability for on time delivery service.While this might be unrealistic in the real world, it sets the targets to encourage continuous improvement and strive for excellence.