Managers use management accounting information to develop, communicate, and imple- ment

strategy. They also use management accounting information to coordinate product design,
production, and marketing decisions and to evaluate performance

Difference between management accounting and finance

Management Financial Accounting

Accounting
Purpose of Help managers Communicate organization’s financial
information make decisions to position to investors, banks, regulators,
fulfill an and other outside parties
organization’s goals
Primary Managers of the External users such as investors,
users organization banks, regulators, and suppliers
Focus and Future-oriented Past-oriented (reports on 2010
emphasis (budget for 2011 performance prepared in 2011)
prepared in 2010)
Rules of Internal measures Financial statements must be prepared
measurement and reports
and reporting do not have to follow in accordance with GAAP and be
GAAP but are based certified by external, independent auditors
on cost-benefit
analysis
Time span and Varies from hourly Annual and quarterly financial reports,
type of information
reports to 15 to 20 years, primarily on the company as a whole
with financial and
nonfinancial reports
on products,
departments,
territories, and
strategies
 Behavioral Designed to influence Primarily reports economic events but
implications the behavior of also influences behavior because
managers and other manager’s compensation is often based on
employees reported financial results

Strategic Decisions and the Management

Accountant

Strategy specifies how an organization matches its own capabilities with the opportunities in the
marketplace to accomplish its objectives
or
Strategy describes how an organization will compete and the opportunities
its managers should seek and pursue.
Businesses follow one of two broad strategies.
It could be to be a COST leader, a DIFFERENTIATOR or a VALUE leader

For example
For cost leader or it can be value leader
 Some companies, such as Southwest Airlines and Vanguard (the mutual fund company) follow
a cost leadership strategy. They have been profitable and have grown over the years on the
basis of providing quality products or serv- ices at low prices by judiciously managing their
costs
 Other companies such as Apple Inc., the maker of iPods and iPhones, and Johnson & Johnson,
the pharmaceutical giant, follow a product differentiation strategy. They generate their profits
and growth on the basis of their ability to offer differentiated or unique products or services
that appeal to their customers and are often priced higher than the less-popular products or
services of their competitors.
It is differentiator and can be value leader also
Deciding between these strategies is a critical part of what managers do. Management accountants
work closely with managers in formulating strategy by providing informa- tion about the sources of
competitive advantage—for example, the cost, productivity, or efficiency advantage of their
company relative to competitors or the price in market

Strategic cost management describes cost management that specifically focuses on strategic
issues

Management accounting helps answer important questions:

 • Who are our most important customers, and how can we be competitive
and deliver value to them?
• What substitute products exist in the marketplace, and how do they differ
from our product in terms of price and quality?
Hewlett-Packard, for example, designs and prices new printers after comparing the
functionality and quality of its printers to other printers available in the
marketplace.
• What is our most critical capability? Is it technology, production, or
marketing? How can we leverage it for new strategic initiatives?
Kellogg Company, for example, uses the reputation of its brand to introduce new types of cereal

Does the firm have cash to support its strategy or requires additional
sources?
Value Chain and Supply Chain
Analysis and Key Success
Factors
Value chain is the sequence of business functions in which customer usefulness is added to
products. Exhibit 1-2 shows six primary business functions: research and develop- ment,
design, production, marketing, distribution, and customer service. We illustrate these
business functions using Sony Corporation’s television division

(Exhibit 1-2 depicts the usual order in which different business-function activities physically occur.
But does not imply that managers should proceed sequentially through the value chain when
planning and managing their activi- ties.) Companies gain (in terms of cost, quality, and the speed
with which new products are developed) if two or more of the individual business functions of the
value chain work concurrently as a team. Managers track the costs incurred in each value-chain
category. Their goal is to reduce costs and to improve efficiency
Only goal is to increase the value and decrease the cost in each step. More brief about department is
given below)

1. Research and development (R&D)—Generating and experimenting with ideas related to

new products, services, or processes. At Sony, this function includes research on alternative
television signal transmission (analog, digital, and high-definition) and on the clarity of
different shapes and thicknesses of television screens.
2. Design of products and processes—Detailed planning, engineering, and testing of
products and processes. Design at Sony includes determining the number of compo- nent
parts in a television set and the effect of alternative product designs on quality and
manufacturing costs. Some representations of the value chain collectively refer to the first
two steps as technology development.2
3. Production—Procuring, transporting and storing (also called inbound logistics),
coordinating, and assembling (also called operations) resources to produce a product or
deliver a service. Production of a Sony television set includes the procurement and
assembly of the electronic parts, the cabinet, and the packaging used for shipping.
4. Marketing (including sales)—Promoting and selling products or services to customers or
prospective customers. Sony markets its televisions at trade shows, via advertise- ments in
newspapers and magazines, on the Internet, and through its sales force.
5. Distribution—Processing orders and shipping products or services to customers (also
called outbound logistics). Distribution for Sony includes shipping to retail outlets, catalog
vendors, direct sales via the Internet, and other channels through which cus- tomers
purchase televisions.
6. Customer service—Providing after-sales service to customers. Sony provides customer
service on its televisions in the form of customer-help telephone lines, support on the Internet,
and warranty repair work.

 In addition to the six primary business functions, Exhibit 1-2 shows an administrative
function, which includes functions such as accounting and finance, human resource
man- agement, and information technology, that support the six primary business
functions.
 But many times administrative support function is considered within the primary
function
For example, included in the marketing function is the function of analyzing, reporting, and
accounting for resources spent in different marketing channels, while the production function
includes the human resource management function of training front-line workers.

Customer relationship management (CRM) to describe a strategy that integrates

people and tech- nology in all business functions to deepen relationships with customers,
partners, and distributors. CRM initiatives use technology to coordinate all customer-facing
activities
How do companies add value, and what are the dimensions
of performance that customers are expecting of companies?

Companies key success factors are cost and efficiency, quality, time, and innovation
to promote sustainability—the development and implementation of strategies to
achieve long-term financial, social, and environmental performance.
for that Management accountants help managers track performance of competitors on the key
success factors. Competitive information serves as a benchmark and alerts managers to market
changes. Companies are always seeking to continuously improve their operations.
For example These improvements can include on-time arrival for Southwest Airlines, customer
access to online auctions at eBay, and cost reduction on housing products at Lowes. Sometimes,
more-fundamental changes in operations, such as redesigning a manufactur- ing process to
reduce costs, may be necessary.
But most important part is execution rather than analysis of these value or supply chain
and take most time

Decision Making, Planning, and

Control: The Five-Step Decision-
Making Process
Case study for five-step decision-making process to make many different types of decisions.

The Daily News differentiates itself from its competitors based on in-depth analyses of news by its
highly rated journalists, use of color to enhance attractiveness to readers and advertisers, and a
Web site that delivers up-to-the-minute news, interviews, and analyses. It has substantial
capabilities to deliver on this strategy, such as an automated, computer- integrated, state-of-the-
art printing facility; a Web-based information technology infrastructure; and a distribution
network that is one of the best in the newspaper industry.
To keep up with steadily increasing production costs, Naomi Crawford, the manager of the Daily
News, needs to increase revenues.

To decide what she should do, Naomi works through the five-step decision-making
process.
1. Identify the problem and uncertainties. Naomi has two main choices:
 Increase the selling price of the newspaper, or
 increase the rate per page charged to advertisers.
The key uncertainty is the effect on demand of any increase in prices or rates. A decrease in demand
could offset any increase in prices or rates and lead to lower overall revenues.

 Product mixing decisions means like if company produce 2 product such that their some raw
material are little same so one have to take decision how much quantity should be supplied to
 which product so that they can get maximum profit

2. Obtain information. Gathering information before making a decision helps managers gain a better
understanding of the uncertainties.
 Naomi asks her marketing manager to talk to some representative readers to gauge their
reaction to an increase in the news- paper’s selling price.
 She asks her advertising sales manager to talk to current and potential advertisers to assess
demand for advertising.
 She also reviews the effect that past price increases had on readership. Ramon Sandoval, the
management accountant at the Daily News,
 presents information about the impact of past increases or decreases in advertising rates on
advertising revenues. He also collects and analyzes information on advertising rates charged
by competing newspapers and other media outlets.
3. Make predictions about the future. On the basis of this information, Naomi makes predictions about
the future.
 She concludes that increasing prices would upset readers and decrease readership.
 She has a different view about advertising rates. She expects a market-wide increase in
advertising rates and believes that increasing rates will have little effect on the number of
advertising pages sold.
Naomi recognizes that making predictions requires judgment. She looks for biases in her
thinking.
 Has she correctly judged reader sentiment or is the negative publicity of a price increase
overly influencing her decision making?
 How sure is she that competitors will increase advertising rates?
 Is her thinking in this respect biased by how competitors have responded in the past?
 Have circumstances changed?
 How confident is she that her sales representatives can convince advertisers to pay higher
rates?

Naomi retests her assumptions and reviews her thinking. She feels comfortable with her
predictions and judgments.
4. Make decisions by choosing among alternatives. When making decisions, strategy is a vital guidepost;
many individuals in different parts of the organization at different times make decisions. Consistency
with strategy binds individuals and timelines together and provides a common purpose for disparate
decisions. Aligning decisions with strategy enables an organization to implement its strategy and achieve
its goals. Without this alignment, decisions will be uncoordinated, pull the organization in different
directions, and produce inconsistent results.
Consistent with the product differentiation strategy, Naomi decides to increase advertising rates by
4% to $5,200 per page
Steps 1 through 4 are collectively referred to as planning.
 Planning :- comprises selecting organization goals and strategies, predicting
results under various alternative ways of achieving those goals, deciding how to
attain the desired goals, and communicating the goals and how to achieve them
to the entire organization. Management accountants serve as business partners
in these planning activities because of their understanding of what creates value
and the key success factors.
 The most important planning tool when implementing strategy is a budget. A budget is
the quantitative expression of a proposed plan of action by management and is an aid to
coordinating what needs to be done to execute that plan
5. Implement the decision, evaluate performance, and learn. Managers at the Daily News take actions to
implement the March 2011 budget. Management account- ants collect information to follow through
 on how actual performance compares to planned or budgeted performance (also referred to as
scorekeeping). Information on actual results is different from the pre-decision planning information.
Consider performance evaluation at the Daily News. During March 2011, the newspaper sold
advertising, issued invoices, and received payments. These invoices and receipts were
recorded in the accounting system.
Actual sale was less than the expected or predicted sale. . The average rate per page was $5,080,
compared with the budgeted $5,200 rate
(The comparison of actual performance to budgeted performance is the control or
post-decision role of infor mation. Control comprises taking actions that implement the
planning decisions, deciding how to evaluate performance, and providing feedback
and learning to help future decision making.
Measuring actual performance informs managers how well they and their sub- units are doing.
Linking rewards to performance helps motivate managers. These rewards are both intrinsic
(recognition for a job well-done) and extrinsic (salary, bonuses, and promotions linked to
performance).)

The performance report spurs investigation and learning. Learning is examining past performance
(the control function) and systematically exploring alternative ways to make better-informed
decisions and plans in the future. Learning can lead to changes in goals, changes in strategies,
changes in the ways decision alternatives are identified

The performance would prompt the management accountant to raise several questions directing the
attention of managers to problems and opportunities.
1. Is the strategy of differentiating the Daily News from other newspapers attracting more readers?
2. In implementing the new advertising rates, did the marketing and sales department make sufficient
efforts to convince advertisers that,
3. even with the higher rate of $5,200 per page, advertising in the Daily News was a good buy?
4. Why was the actual average rate per page $5,080 instead of the budgeted rate of $5,200?
5. Did some sales representatives offer discounted rates?
6. Did economic conditions cause the decline in advertis- ing revenues?
7. Are revenues falling because editorial and production standards have declined?

Answers to these questions could prompt the newspaper’s publisher to take sub- sequent actions, including,
for example, adding more sales personnel or making changes in editorial policy. Good implementation
requires the marketing, editorial, and production departments to work together and coordinate their
actions.

The management accountant could go further by identifying the specific advertisers that cut back or stopped
advertising after the rate increase went into effect. Managers could then decide when and how sales
representatives should follow-up with these advertisers
Key Management Accounting Guidelines
Three guidelines help management accountants provide the most value to their companies in
strategic and operational decision making:

1. Cost-Benefit Approach

Managers continually face resource-allocation decisions, such as whether to purchase a new

software package or hire a new employee. They use a cost-benefit approach when making
these decisions: Resources should be spent if the expected benefits to the company exceed the
expected costs.
Managers rely on management accounting infor mation to quantify expected benefits and
expected costs although all benefits and costs are not easy to quantify. Nevertheless, the cost-
benefit approach is a useful guide for making resource-allocation decisions
2. Behavioral and Technical Considerations

The technical considerations help managers make wise economic deci- sions by providing them
with the desired information (for example, costs in various value- chain categories) in an
appropriate format (such as actual results versus budgeted amounts) and at the preferred
frequency
The behavioral considerations encourage managers and other employees to strive for achieving the
goals of the organization. Both managers and management accountants should always
remember that management is not confined exclusively to technical matters. Management is
primarily a human activity that should focus on how to help individuals do their jobs better—
For example
by helping them to understand which of their activities adds value and which does not.
Moreover, when workers underperform, behavioral considerations suggest that
management systems and processes should cause managers to personally discuss with
workers ways to improve performance rather than just sending them a report high- lighting
their underperformance.

3. Different Costs for Different Purposes

managers use alternative ways to compute costs in different decision-making situations, because
there are different costs for different purposes. A cost concept used for the external-reporting
purpose of accounting may not be an appro- priate concept for internal, routine reporting to
managers.
 Basic Cost Terminology
1. Cost – sacrificed resource to achieve a specific objective
For example when we buy a flat than cost is basically the loss of money that we
need to do to buy flat
2. Actual cost – a cost that has occurred and it can be depicted at end of year

3. Budgeted cost – a predicted cost.It is our prediction that for this month our cost
will be this and can be predicted at starting of year or month

comparing budgeted costs to actual costs helps managers evaluate how well they did and
learn about how they can do better in the future

4. Cost object – anything of interest for which a cost is desired.it can be any
product or service or even a customer for example
Product- bmw
Service –barber
person- restaurant ( for restaurant food customer eat is cost object or customer
here is cost object)
5. Cost accumulation – a collection of cost data in an organized manner
. For example, BMW collects (accumulates) costs in various categories such as different types of
materials, different classifications of labor, and costs incurred for supervision.
BMW managers use this cost information in two main ways:
 when making decisions, for instance, on how to price different models of cars or
how much to invest in R&D and marketing and
 for implementing decisions, by influencing and motivating employees to act and
learn, for example, by rewarding employees for reducing costs.
 By improving where cost is high

6. Cost assignment – a general term that includes gathering accumulated costs to

a cost object.
 Tracing accumulated costs with a direct relationship to the cost object
 Allocating accumulated costs with an indirect relationship to a cost object
For example suppose we have car manufacturer , tracing would be cost that
occurred in raw material like tires steel or any other
Whereas electricity security fee is allocating of cost
Basically all direct cost are tracing and indirect cost are allocationg and have
same meaning
 Factors Affecting Direct/Indirect Cost Classifications
Several factors affect the classification of a cost as direct or indirect:

1. The materiality of the cost in question.

The smaller the amount of a cost—that is, the more immaterial the cost is—the
less likely that it is economically feasible to trace that cost to a particular cost
object. Consider a mail-order catalog company such as Lands’ End. It would be
economically feasible to trace the courier charge for deliver- ing a package to an
individual customer as a direct cost. In contrast, the cost of the invoice paper
included in the package would be classified as an indirect cost.…

2. Available information-gathering technology. Improvements in information-

gathering technology make it possible to consider more and more costs as direct
costs. Bar codes, for example, allow manufacturing plants to treat certain low-
cost materials such as clips and screws, which were previously classified as
indirect costs

3. Design of operations. Classifying a cost as direct is easier if a company’s

facility (or some part of it) is used exclusively for a specific cost object, such as a
specific product or a particular customer. For example, the cost of the General
Chemicals facility ded- icated to manufacturing soda ash is a direct cost of soda
ash
Cost-Behavior Patterns: Variable Costs and
Fixed Costs

1. Variable cost:- It is the cost which changes with level of

activity or production
For example if we are car manufacturer than increase in the
raw material will also result in increase in cost
2. Fixed cost- It doesn’t change with the production or activity
 For example electricity ,security etc like suppose we pay
500/month for security now this thing will not change even if
we increase the production it is fixed cost

  Total Cost Cost Per Unit

Variable Costs Change in proportion withoutput Unchanged in relation to output
More output = More cost

Fixed Costs Unchanged in relation to output Change inversely with output

More output = lower cost per unit

Example
If BMW buys a steering wheel at $60 for each of its BMW X5 vehi-
cles, then the total cost of steering wheels is $60 times the number of
vehicles pro- duced, as the following table illustratesThe steering
wheel cost is an example of a variable cost because total cost changes
in pro- portion to changes in the number of vehicles produced. The
cost per unit of a variable cost is constant.
For fixed cost
BMW incurs a total cost of $2,000,000 per year for supervisors who
work exclusively on the X5 line. These costs are unchanged in total
over a des- ignated range of the number of vehicles produced during a
given time span (see Exhibit 2-3, Panel B). Fixed costs become
smaller and smaller on a per unit basis as the number of vehicles
assembled increases as shown in above table