Professional Documents
Culture Documents
Information
(Feedback)
Organizations
(Hierarchies)
Planning Control
Management
Markets
Resources/
Money
EXTERNAL
Society/wants
State
1) Economic Problem
Human wants are unlimited but the resources to satisfy these wants are limited.
This creates the economic problem of matching scarce resources with unlimited
wants in order to optimize the returns.
2) State
The State is formed to govern the people and their resources. A State consists of a
nation and land. Nation includes all the people in a state and land includes all the
natural resources. State is also creates money which is a commodity generally
accepted as a medium of exchange and has a measure of value
3) Markets
The resources/money at the disposal of individuals are limited. Also the capacity
of resources to satisfy human wants is limited due to law of diminishing marginal
utility.. There arises a need for exchange. People give up what they possess
(resources/money at their disposal) to get what they need (goods and
services/Money). The exchange takes place in markets.
4) Organization
In modern society wants are satisfied through goods and services produced
through concerted efforts of people. An organization is necessary to bring together
people of diverse skills in order to process the resources into finished goods and
services. The skill level of people differs. Organizations are formed to pursue goals
that are achieved more efficiently by the concerted efforts of a group of people than
by individuals working alone. Business organizations produce goods/provide
services. Organizations get resources (human skills are also marketable resources)
from market, process the resources to produce goods and services. The goods and
services are put back in the market for sale. The returns are distributed amongst the
providers of resources. (Theory of exchange)
5) Management
Management involves getting people/resources together to accomplish desired
goals. Management involves planning, organizing, resourcing, leading or directing,
and controlling an organization (a group of one or more people or entities) or effort
for the purpose of accomplishing a goal. Management performs two functions-
Planning and Control
a. Planning
Involves choosing goals, predicting results under various ways of
achieving those goals, and selecting the best course of action to reach the
desired goals
b. Control
Involves
i. Action that implements the planning decision and
ii. Performance evaluation of the personnel and operations
6) Information system
Information system provides feedback to the management and all the other
entities regarding the outcome of management decisions and also relating to
environmental changes both within the organization and external to it. Feedback plays
a major role in managerial function. It involves managers examining past
performance and systematically exploring alternative ways to improve future
performance. Planning and control are two sides of same coin. Where planning ends
control begins and control forces managers to re-plan to correct deviations.
Data
Information System Information
Organizations-
Inputs Storage/Transformation/Conversion Outputs
Value
Plan/Control
Management
Organizations represent concerted efforts of people who can produce more through
joint efforts than by individual effort. Organizations add value to resources.
Organizations process input resources they get from markets, transform them to
outputs in form of goods and services. Value is added through
storage/transformation/conversion processes. Management guides and directs the
organization through planning and control. Information systems act as feedback
mechanisms guiding planning and control. Information systems also gather data from
outside and provide information to outsiders.
Functions of an Organization
Information System
FINANCE
INPUTS OUTPUTS
OPERATIONS
MARKETING
Plan/Control
Management
Information System
Plan/Control
Management
Information System
Finance
Operation
s
R&D
INPUTS Design OUTPUTS
Production
Marketing
Marketing
Distribution
Customer
Services
Plan/Control
Management
Organizations add value to inputs to provide outputs. Value is added through efficient
operations and efficient marketing. The tasks an organization performs to add value to
resources constitutes its value chain. Value may be added through any of the activities on
the value chain. The Value chain activities include:
• Research and development(R &D): the generation and experimentation of ideas
resulting in creation of new products, services or processes
• Design of products, services, or processes- includes planning and engineering of
products, services or processes
• Production- involves coordination and assembly of resources to produce a product
or deliver a service
• Marketing- the process that enables individuals or groups (a) learn about products
or services and their value providing attributes (Advertising)(b) purchase those
products/services
Plan/Control
Management
• Distribution: the mechanism by which products or services are delivered to the
customer
• Customer service: the support activities provided to customers
(Source: Horngren, Foster, Datar (1996))
Management seeks information on all these value adding activities. The Management
Accounting/Information system collects and provides such information to the
management.
Accounting Information System
FINANCE
INPUTS OUTPUTS
OPERATIONS
MARKETING
Plan/Control
Management /Coordination
IV
I Cost Estimation
Standard Costs/Flexible and
Budgets/Activity Based Performance
Costs/Forecasts
Management Accounting System
Evaluation
II III
Budgeting Responsibility
Accounting/Cost
Accumulation/
Assignment
INPUTS OUTPUTS
OPERATIONS
Planning Control
Management /Coordination
Managerial Accounting is concerned with providing information to managers.
Management Accounting provides information to those inside the organization and who
are responsible for directing and controlling its operations/finance and marketing.
Managerial Accounting system provides support to the two fundamental managerial
functions viz Planning and Control.
A. PLANNING:
In planning, the manager outlines the steps to be taken to move the organization towards
its objectives. An organization prepares short term and long term plans. These plans serve
to coordinate, or weld together, the efforts of all the organization functions.
Flexible Budgets are useful in controlling overheads. Overheads include indirect costs
which do not have a direct relationship with volume of output. However, overheads vary
with level of production activity. Within a particular level of production activity the
overheads may remain same. But overheads may differ at another level of output. A
flexible budget estimates overheads at different level of production.
Forecasting is important for preparing sales budget. Forecasting acts as the starting point
for Revenue Budgets. Standard Costs, Flexible Budgets and Activity Based costs impact
help both Budgeting and Performance Appraisal.
b) Budgeting and Responsibility Accounting:( QUADRANT II)
A budget is a quantitative expression of a proposed future plan of action. It relates to a
particular set of time period. It acts as a blueprint for the organization to follow in the
budget time period. Budgets quantify management’s targets regarding future income,
cash flows, financial position. Budgets are projected financial statements. Budgets
include a budgeted income statement, budgeted cash flow statement, and budgeted
balance sheet.
Forecasts act as starting point of all the budgetary process. Forecasts help in preparing
revenue budgets.
In preparing Budgets, Standard Costs are used to estimate the direct costs of budgeted
activity (operations). Flexible Budgets provide an estimate of overheads for at a
particular level of budgeted activity.
B. CONTROL:
In Controlling, a management takes those steps that are necessary to ensure that every
part of the organization is functioning at maximum effectiveness and according to the
plans. To do this management studies the accounting and other reports, compares them
against plans set earlier. These comparisons show where operations are not proceeding
effectively, or where certain persons need help in carrying out their assigned duties.
Control, in large part, involves obtaining feedback on how well the organization is
moving toward its stated objectives. The feedback may suggest the need to replan, to set
new strategies, or to reshape the organizational structure.
Responsibility accounting is a system that measures the plans (by budgets) and actions
(by actual results) for each responsibility center. In simple words, Budgets are prepared
for and Costs are collected and accumulated in relation to a Responsibility Center
Costs: Costs are the resources sacrificed or foregone to achieve a specific objective. Costs
are the amount of money expended for production of a good or service.
Cost Accumulation: Management Accounting system accumulates costs for cost objects.
The cost are accumulated through natural classification like materials, labor, fuel,
advertising, or shipping. The cost accumulation is done through Cost Accounting
system.
Cost Assignment: Costs are assigned to cost objects. Costs are assigned through
1. Cost Tracing
2. Cost Allocation
Direct costs of a cost object can be directly traced to the particular cost object
Indirect costs of a cost objects cannot be so traced but has to be allocated using a cost
allocation method.
The terms cost tracing and cost allocation are usually used with reference to historic
costs.
Cost Accumulation and Cost Assignment help Cost Estimation and Performance
measurement.
Estimation of costs are made based using different costing techniques like Normal
Costing, ABC Costing, Standard Costing etc.
The end result of Performance Measurement is creation of variance reports which gives a
measure for the deviation of actual cost from planned costs. This facilitates managerial
control function. Managers inquire into the reasons for deviations and take corrective
action. If needed they may re-plan or even set up new standards/budgets.
MARKETING
Sales Budget
Selling/distribution OH Budget
Planning Control
Management /Coordination
3) Purpose of Budgeting:
1. Forces Planning: Budgets force managers to plan ahead for the activities of the
organization. The budgeting process compels managers at every level in the
organization, from chairman of the board to departmental supervisor to plan.
Budget is most useful when done as part of organization’s strategic analysis. In a
strategic analysis management considers how an organization can best combine
its own capabilities with opportunities available in the market to accomplish
overall objectives.
Strategic planning considers questions like:
1. What are the overall objectives of the organization?
2. What are the markets for the products, market segments, trends
in the market, product differentiation, market niche etc? How is
the organization affected by the economy- different rates like:
prices, wages, interest, foreign exchange etc?
3. Organizational forms and financial structures that suit the
accomplishment of strategy?
4. Alternative strategies and risks associated therewith
2. Facilitate Communication and Coordination: The budgeting process requires that
managers of different departments or divisions communicate about the plans they
have made. Also budgets provide GOAL CONGRUENCE and facilitate
COORDINATION of activities
Coordination is the meshing and balancing of all factors of production or services
and of all the departments and business functions so that the company can meet its
objectives. Communication is getting those objectives understood and accepted by
all departments and functions.
Coordination and communication go hand in hand.
Budgets provide a means for communicating plans. Also through a master budget
each department knows the plans of other departments. Production manager
knows sales plan, purchasing manager knows of production plan, finance manager
knows about operations plan etc. This facilitates coordination
3. Allocate Resources: Organizations have goals for market share, growth, dividend
payout etc. Non profit organizations may have social goals. Organizational plans
allocate resources and specify expectations. A budget specifies the expectations in
specific terms.
4. Evaluate Performance and Provide Incentives: Performance assessment: Budgets
act as guideposts for assessing success or failure of individual manages and
functional areas. Actual revenues, expenses, costs and other metrics are compared
with budgets to determine whether there is a lag or lead.
Budgeted performance measures are better than using past performance as a
means for judging actual results. Past performance may sometimes be below par
or substandard so may not be suitable for comparison of present performance.
Also performance expected in future may be different than what happened in past
because of changed circumstances and markets.
Budgets are prepared using standard costs and standard data. Also Budgets take
into account any expected changes because they are prepared within the
framework of organizations strategic plans. Budgets provide better measures for
performance assessment.
5. Provide Control: Initially a budget is a planning tool, but it is also useful as a
controlling tool. Comparison of actual performance with budgets highlights
variances. Analyses of variances reveal measures to be taken for better utilization
of organizations resources.