Overview:

 This module is on management accounting information for creating value.

 The changes that have taken place in the business environment in recent years.
 Take note of the case studies throughout your reading and the key factors in the
design of the Management Accounting System (MAS).
Recent changes in the Australian business environment:

 Increased global competition

 Changes in the regulatory environment affecting the industry, the public sector, and
labour markets
 Increasing customer demands
 Rapid advances in technology
 Increased reliance on strategic alliances
 Increasing awareness of sustainability issues, especially climate change
 Growth of the service sector
 New organisational structures, strategies, and management philosophies
Contemporary management accounting responses to recent changes in the business
environment

 Increased global competition

o Better cost information is needed to remain competitive with techniques such
as activity analysis, ABC, process view, ABM, BPR, life cycle management,
target costing, throughput accounting.
 Advances in manufacturing technologies
o Just-in-time inventory
o Quality improvements
o Flexible manufacturing
o Increased facilities cost relative to costs of labour and materials
 Advances in information technologies
o Such as computerisation, specialised software, internet, e-commerce, and
telecommunications. These can enhance supply chain management.
 Political, economic, social, and cultural changes
o SPMS such as the BSC.
o Benchmarking
o Sustainability reporting and environmental management accounting
o Continuous improvement
 New forms of management organisations
o Change from command-and-control organisation to a flexible form that
encourages teamwork and coordination across functions. The need for
performance reports and measures, and reward systems.
  Focus on the customer
o Changing emphasis from low-cost production of large quantities to quality,
service, timely delivery, response to customer requests for specific features.
The need for CRM, and customer performance measures.
The changing focus of contemporary management accounting

 The focus has changed from cost control to strategic resource management.
 Increasing emphasis on accountability to a broader range of stakeholders.
 Strategic resource management is the creation of value through the effective and
efficient use of all resources.
 Value creation refers to both customer value and shareholder value.
 Customer value is the value a customer places particular features of a product.
 Shareholder value is the value the shareholders place on a business.
 Resources include not only the financial resources of an organisation but also the non-
financial resources.
 Non-financial resources include information, processes, employees, customers, and
suppliers.
 Management accounting provides information to assist managers to create value.
o Still involves many of the conventional (traditional) techniques.
o Supplemented by contemporary (modern) techniques.
 However, some organisations may not yet be focused on strategic resource
management and may rely on more traditional tools.
The purposes of contemporary management accounting
 A modern management accountant, as a “business partner”, requires an understanding
of the business and competitive environment (political, economic, social,
technological, environmental, and legal factors) and how a strategic focus is critical to
survival and growth of an organisation.
 This Involves:
o Identifying and solving problems from a cross functional or process view
o Supporting formulation and implementation of strategy
o Contributing to improving competitive advantage
o Providing information to manage resources through planning and control
systems
 The Process View: a Recurring Theme in CMA
o Traditional costing systems – tend to focus on functions of departments in
organisational charts.
o Contemporary and strategic costing systems – focus on the interconnected
chain of activities of production and keeping customers happy. This approach:
  Directs attention towards the causes of costs
 Allows for a variety of cost objects such as products, quality,
processes, customers, and suppliers
 Helps identify critical success factors enabling management of
activities and elimination of non-value activities for continuous
improvement of product and process design
 Is consistent with the “value chain” concept of costs
 Is consistent with a team approach, flattened hierarchical structures and
decentralised responsibilities.
 Supporting Formulation and Implementation of Strategy
o Management accounting can support management with formulation and
implementation of strategy by operationalising an organisation’s:
 Vision – the desired future state or aspiration of an organisation
 Mission statement – Defines the purpose and boundaries of the
organisation
 Objectives (or goals) – Specific statement of what the organisation
aims to achieve, often quantified and relating to a specific period of
time.
 Strategies – the direction that the organisation intends to take over the
long term to meet its mission and achieve its objectives
 Contributing to Improving Competitive Advantage (Business Strategy)
o Business or Competitive Strategy – is the way in which a firm positions and
distinguishes itself from its competitors and achieves competitive advantages
o Competitive Advantage – is the advantages a business may have over another
that are difficult to imitate. Michael Porter identified two types of competitive
advantage:
 Cost leadership – Through economics of production, superior process
technologies and tight cost control to provide the same of better value
to customers at a lower cost than competitors. E.g. redesign a product
with fewer parts to lower cost of production and maintenance after
purchase.
 Product differentiation – Superior quality, customer service, delivery
performance, product features to increase customer value by increasing
what the customer receives (customer realisation). E.g. computer
retailer may offer on-site repair service, a feature not offered by local
competitors.
o Today it means competing simultaneously on quality, cost, and time (QCT) to
maximise customer satisfaction i.e. the “strategic triangle” (Quality, Cost and
Time).
o Management accounting assists in strategic positioning and meeting QCT
goals of an organisation.
o Quality – physical characteristics of the product, its features, and its functions,
reliability in its use, and after sale support.
o Cost for customer – total “cost of ownership” from purchase to disposition.
o Cost for producer – all “value chain” costs from design to recycling or
disposition.
 o Time – products available when needed; speed of introduction of new features
or technologies; and production start to finish cycle time.
 Providing Information for Planning and Control
o Management accounting systems provide information (costing, budgeting, and
performance measurement) needed for planning and control
o Planning is formulating the objectives and direction for future operations and
specifying resources needed in the future. Planning may be long term or short
term
o Strategic planning is long term planning to achieve organisational objectives,
usually undertaken by senior managers with a three to five-year timeframe.
Long term plans need to be linked to budgeting systems.
o Budgets – are short term operational plans
o Control systems – such as performance measurement systems, provide
regular information to assist with control
o Control – involves evaluating performance against plans and take corrective
action
o The management accounting system (MAS) provides performance reports for
control by comparing actual performance with plans, targets, or budgets
 Providing Estimates for Costing Goods and Services
o Needed to support range of decisions
o Costing for financial reporting consist of manufacturing costs only
o However, management decisions may require product costs to include other
product related costs
o Other product related costs may include for example marketing and customer
support
o Conventional (traditional) approaches use simplistic methods to value
products for external financial reporting, is considered too inaccurate for
decision making
o Contemporary approach such as activity-based costing (ABC) systems, used to
provide for accurate estimates of product costs for decision making
Considerations in the design of the management accounting system
 Management Information Needs
o MAS will differ due to nature of resources managed, production of service
technologies, organisational structure, organisation size, external environment
in which the organisation competes and level of sophistication of computer
systems.
 Behavioural Issues:
o An awareness of the expected and unexpected outcomes of management
accounting systems
o What gets measured gets managed
o A key purpose of management accounting systems is to motivate managers
and employees to direct their efforts towards achieving the organisation’s
goals, that is achieving goal congruence.
 o An important motivational tool is the use of performance measures that reflect
organisation objectives and reward systems
 Cost vs Benefit:
o Costs
 Salary of accounting personnel
 Cost of purchasing and operating computers
 Cost of gathering, storing, and processing data
 Cost of manager’s time to read, understand and use the info
o Benefits
 Improved decisions
 More effective planning
 Greater operational efficiency
 Better control
 Improved customer shareholder value
Different costs for different purposes
 The Emphasis on Cost
o Why do management accountants pay so much attention to costs?
 Historic focus on production costs – to value inventory and COGS for
external reporting
 Ready availability of cost data within the transaction-based accounting
system
 Importance of cost information in managers’ decisions
 Used to make decisions and manage various sources of customer value
and shareholder wealth
 Strategic cost management is required in the contemporary
environment
o However non-financial information has assumed increased importance in
contemporary management accounting systems
 Different Cost Classification for Different Purposes
o Depends on the strategic emphasis, the question to be answered and the
intended use of the cost information
o The same cost can be classified in a number of ways
o The same bundle of costs in the ledger can be analysed and dissected in
different ways
 Classifying Costs Behaviour
o Managers need to know how costs change as the level of activity (work
performed e.g. units produced, kms driven, hours worked, number of setups or
production runs, orders processed etc) in the business changes.
o Variable Costs
 Change in total in direct proportion to a change in the level of activity
o Fixed Costs
 Remain unchanged in total despite changes in the level of activity
o How does ABC affect distinction between fixed and variable?
 Direct and Indirect Costs
o Traceability – classification as direct or indirect depends on the cost object.
For instance:
 Product cost objects (note potential distinction between external
financial “costs” as required by accounting standard and costing for
internal management purposes)
 Direct product costs are manufacturing costs that can be traced
efficiently
o Indirect product costs are manufacturing costs that cannot be traced to
products efficiently
o Cost Objects
 Conventional (traditional) accounting: products, projects, contracts,
and departments are cost objects
 Contemporary management accounting may also include cost objects
that provide information useful to management e.g. activities,
processes, customers, suppliers, quality
 Note that the total of the bundle of costs recorded in the ledger is the
same but it is analysed differently according to the chosen cost objects
 It is often important to measure and allocate the costs that managers
can be held accountable for in the cost objects of responsibility centres
(organisational sub-units: cost centres, investment centres, strategic
business units (SBUs))
 Costs that can be traced to a particular responsibility centre are direct
costs of that responsibility centre
 Costs that relate to responsibility centres, but cannot be traced
precisely to specific responsibility centres are indirect costs of those
responsibility centres
 Controllable and Uncontrollable Costs
o Managers’ performance evaluation can be enhanced by classifying
responsibility centre costs as either controllable by the manager or
uncontrollable
o Ideally, managers should be held responsible only for costs they can control or
significantly influence
o Some costs are controllable in the long term but not the short term
 Classifying Costs Across the Value Chain
o The value chain is a set of linked processes or activities that begins with
acquiring resources and ends with providing and supporting products or
services that customers value
o Internal Linkages – are relationships among activities that are performed
within a particular firm’s section of the industry value chain
o External Linkages – describe the relationship of a firm’s value-chain activities
that are performed with its suppliers and customers
 Upstream Costs (Product or Period Cost)?
 o Research and development costs include the costs involved in developing new
products and processes
o Design costs include the costs associated with designing a product or
production process
o Supply costs are the costs of sourcing and managing incoming parts,
assemblies, and supplies
 Production Costs
o The costs incurred to collect and assemble the resources used to produce a
product or service
 Downstream Costs (Product or Period Cost)?
o Marketing costs are the costs of selling products and the costs of advertising
and promotion
o Distribution costs are the costs of storing, handling, and shipping finished
products
o Customer service costs are the costs of serving customers, including after-
sales service