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1

ManagementAccounting and

Management Decisions

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Management Accounting for Managers

• Management accounting exists because managers require information to make decisions

• Primary focus of management accounting is towards users within an organization

• Management accounting does not exist to generate data, but it exists because managers require information for decisions

Framework for Management Accounting

Strategic Planning

Management Control

Operational Control

Focus on organization’s objectives

Effectiveness and efficiency of resource use

Effectiveness and efficiency of tasks

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Frameworks for Management Accounting

OPERATIONAL MANAGEMENT STRATEGIC

CONTROL CONTROL PLANNING

Structured Accounts receivable Budget analysis Tanker fleet mix

Order entry Short-term Warehouse and

forecasting factory location

Inventory reordering Engineered costs

Inventory control Variance analysis Mergers and acquisitions

Semi-

Structured Production scheduling Overall budget Capital acquisition analysis

Bond trading Budget preparation New product planning

Cash management

Unstructured PERT COST systems Sales and production R and D planning

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Management Decision Process

1. Identify the problem.

2. Perform the necessary quantitative and qualitative analyses.

3. Identify alternative solutions to the problem.

4. Evaluate the alternative solutions.

5. Recommend one of the alternative solutions.

6. Implement the recommendation.

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Management accounting is ….

• The process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information that assists managers in making decisions

• Following diagram illustrates 3 roles of management accountant

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Management

Major Means:Accounting Information

1. Problem-solving information

2. Attention-directing information

3. Scorekeeping information

Major Ends:Helping Decisions

1. Managers for long-range planning and special decisions

2. Managers for planning and controlling routine operations

3. Outsiders for investors, tax collectors, regulators & others

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Planning and Controlling

• Planning involves setting objectives and the means to their attainment• What is desired?• When and how is it to be accomplished?• How is success to be evaluated?

• Controlling involves the implementation of plans and the use of feedback to monitor achievements

Planning

ActionEvaluation

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Performance Reports

• Feedback provided by comparing results with plans and by highlighting variances

• Reports:• Budget amounts • Actual amounts • Deviations or Variance• Explanation

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Performance Report

Budgeted Amounts

Actual Amounts

Deviations or Variances Explanation

Revenue

Various Expenses

Net Income

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Example #1:• The Parent Teacher Organization (PTO) of Trudeau Elementary

School held a fund-raising fair in the school gymnasium. The PTO president had prepared the following budget, assuming 200 attendees who spend an average of $20 each, and donations of all other resources:

• Revenues $4,000Costs:  Food and beverages 800  Prizes 500  Supplies 300  Custodial services 200Total costs $1,800Income $2,200

• Afterwards, the PTO treasurer determined that 150 people had attended the fair, and total revenues were $2,250. Cost of food and beverages was $750. All prizes were awarded. Supplies cost $180, and custodial services were $500 due to damage to the gymnasium floor.

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Example #1: (cont’d)

• Prepare a performance report that shows how actual results differ from budgeted results.

• Which variances deserve further examination?

Management by Exception

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Management Accounting

• Roots based in manufacturing• Evolved to include service organizations• Elements applicable to non-profits

Key Success Factors• The factors that must be managed successfully to

achieve organizational success

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Product Life Cycle• The various stages through which a product passes,

from conception and development through introduction into the market through maturation and, finally, withdrawal from the market

ProductDevelopment

Introduction to Market

MatureMarket

Phase-Outof Product

Sales over TypicalProduct Life Cycle

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The Value Chain• Value chain is the set of business functions that add value

to the products or services of an organization

CUSTOMERFOCUS

Researchand

Development

Marketing

Production

Product& ServiceProcessDesign

Distribution

CustomerService

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Example 2: Starbucks Value Chain• For each activity, identify the value chain function

that is being performomed:• Process engineers investigate methods to reduce the

time to roast coffee beans and better preserve their flavor• A direct-to-your-home mail order system is established to

sell custom coffees• Arabica coffee beans are purchased and transported to

company processing plants• Focus groups investigate the feasibility of a new line of

Frappuccino drinks• A hot line is established for mail-order customers to call

with comments on quality and speed of delivery• Each company owned retail store provides information to

customers about the process used to make its coffee products

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Two Themes

• There are two themes when choosing among accounting systems and methods

• Cost-Benefit Theme• How well the system and methods will achieve

management goals in relation to their costs?• Incremental cost of implementing versus incremental

benefits

• Behavioral Theme• How will the system and methods affect the decisions

(behavior) of managers?• Budgets force managers to plan• Performance reports have enormous impact on behavior

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Distinctions Between Management Accounting and Financial Accounting

ManagementAccounting

Organization managers

Costs versus benefits

Influence on managerial behaviour

Future orientation

Flexible

Detailed

Less sharply defined

FinancialAccounting

External parties

G.A.A.P.

Measurement of economic activity

Past orientation

Less flexible

Summary reports

More sharply defined

Primary Users

Choices

BehaviouralImplications

Time Focus

Time Span

Reports

Activities

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Additional Topics

• Line versus Staff authority• Controller versus Comptroller versus Treasurer• JIT and CIM philosophy• Professional Ethics• Adapting to Change

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Suggested Problems

• Summary Problems 1, 2, 4 (page 27)• Questions 2-4, 6-8, 10, 12, 16 (page 31)• Problems 2, 8, 12 (page 32)• Case 2 (page 37)

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Assignments Due January 15

• Chapter 1 Assignment• Question 9• Problem 3, 7, 11• Case 1, 2

• Accounting Resume

• Readings• Chapter 2• Chapter 3

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Case 1: Augustana Coffee News

• You are the owner of “Augustana Coffee News”, a newsprint paper that is free to the public. Revenue is based solely on advertising sales.

• Identify all costs involved in operating this business. Identify any assumptions made