Primary functions of cost/management accounting systems

Topic One:
• Definition of accounting: the process of identifying, measuring and 1. Inventory valuation for internal and external profit measurement
communicating economic information to permit informed judgements and • Allocate costs between products sold and fully and partly completed
decisions by users of the information. products that are unsold.
• Users of accounting information can be divided into two categories:
2. Provide relevant information to help managers make better decisions
1. External parties outside the organization (financial accounting).
• Profitability analysis
2. Internal parties within the organization (management accounting).
• Product pricing
Differences between Financial and Management Accounting
Financial • Make or buy (Outsourcing)

• Produce general purpose statements • Product mix and discontinuation

• Externally oriented 3. Provide information for planning, control and performance measurement
• Required by law • Long-term and short-term planning (budgeting)
• Historic orientation • Periodic performance reports for feedback control
• Highly aggregated • Performance reports also widely used to evaluate managerial performance
• Conforms to external standards • Note that costs should be assembled in different ways to meet the above
• Emphasises objectivity but are quite subjective three requirements.

Management Going Concern

• Produce special purpose statements • Company will continue in operational existence in foreseeable future
• Internally oriented • Customer / supplier dependence
• Prepared as deemed useful • Borrowing issues
• Future orientation • Contingent liabilities
• Must be very specific • Fin risk measurement
• Has no external standards
• Using old fixed assets – lack funds
• Emphasizes relevance even if it is subjective
• Overtrading
Major differences between financial and management accounting:
Dangers of Ratio Analysis
• Statutory requirement for public companies to produce annual financial
accounts, whereas there is no legal requirement for management accounting. • Isolates problems …. Doesn’t identify causes
• Financial accounting reports describe the whole of the organization, whereas • Trend needs to be considered
management accounting focuses on reporting information for different parts of
the business. • Window Dressing
• Financial accounting reports must be prepared in accordance with generally • Accounting Policies … Impact / Changes
accepted accounting principles (e.g. SSAPs).
• Historical Cost
• Financial accounting reports historical information, whereas management
accounting places g eater emphasis on reporting estimated future costs and • Off Balance Sheet Financing
revenues. • Year End Date
• Management accounting reports are produced at more frequent intervals.
• Entities established at different times
Financial Statements Judgmental Areas
Shortcomings & Limitations of Traditional Accounting approaches & Financial
• Revenue Recognition - Leisurenet / Rank Xerox
Indicators
• Classification - WorldCom. / Sasol / Costs
• Practicing Managers dissatisfied with what they are getting
• Provisions - Depreciation / Inventory
• More analysis required
• Impairment
• More non-financial measures needed
• Amortization – Intangibles
• Excessive short term focus
• Materiality – Enron
• Lack of content
• Valuations - Inventory / R & D / Software
• Equal treatment / expectations of units
• Exceptional Items - Headline Earnings / Discontinued Business
• Off Balance Sheet Financing - Enron / Assoc cos / Outsourcing • Business Unit over Group
• Backward looking - not future orientated
FAIR VALUE ACCOUNTING
The changing business environment
• Largely limited to assets & liabilities assoc with financing activities
1. Organizations have faced dramatic changes in their business environment.
• Establishes “exit value” for shareholder reporting purpose
• Move from protected markets to highly competitive global markets
• “Historical cost accounting” is the default option
• Deregulation
o Bank loans
• Declining product life-cycles
o Deposits
2. To compete successfully in today’s environment companies are:
o Invest in subs • Making customer satisfaction an overriding priority.
o Insurance contracts • Adopting new management approaches.
o Performance obliges • Changing their manufacturing systems.
o Debt • Investing in AMT ’s.
o Resources 3. Above changes are having a significant impact on the MAS.
Problems arising from the use of typical Performance Measures
• Inappropriate at the Operations level
• Inclusion of allocated or non-controllable costs
• Excessive reliance on Financial Measures
• No link between Performance Measures & Strategic Objectives
• Checks & Balances required
• Too few / many Performance Measures
• Communicating the Measures
• Usable not Total Figures

Performance Measures should:

• Be expressed quantitatively rather than qualitatively so that they are
measurable;
• Be geared to the purposes of the organisation and;
• Evaluate both the processes themselves (e.g. the way deliveries of
products are scheduled) and the outputs of processes (e.g. the timeliness
of product deliveries to customers)
• Financial Measures are after the event.
• Non-Financial measures can precede the event
Performance Reporting Includes:
• Financial
• Customer
• Business Environment
• Processes & Activities
• Learning

Focus on customer satisfaction and new management approaches

1. Key success factors
• Cost efficiency –increased emphasis on accurate product costs and
cost management.
• Quality –TQM,quality measures.
• Time – educed cycle time,focus on non-value-added activities. Non-Financial Measures Include:
• Innovation – responsiveness in meeting customer requirements. • Material Waste Customer Service
• Product comparisons.
• Product Launches Quality
• Feedback on customer satisfaction.
• Health / Safety Workload
2. Continuous improvement
• Credit Note Analysis Stock Analysis
• Static historical standards no longer appropriate.
• Benchmarking. • Debtor Analysis Cancelled Orders
3. Employee empowerment • Changed Orders Customer Complaints
• Delegate more responsibility to people closest to operating processes • Processing Errors
and customers. Performance Measures should:
• Value chain analysis Suppliers, R &D, design, production, marketing, Non-Financial Indicators are:
• Directly relate to Strategy
distribution, customer service, customers. Internal customer
• Less capable of • Primarily use non-financial performance
perspective.
manipulation techniques
4. Social responsibility and corporate ethics
• Calculated quicker / timely • Vary between locations
Problem Issues • Meaningful to workers • Change over time as Company needs change

• Stock Ratios Debtors Ratios • More robust / objective • Be simple and easy to use
• Provide fast feedback to Operators and
• Creditors Ratios “Managing” the Ratio • Owned by people who Managers
produce them
• Unmet Demand Product Profitability • Be intended to foster improvement rather that
• Customer Profitability just monitoring