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MANAGEMENT ACCOUNTING: INFORMATION THAT CREATES VALUE

Mgt Acc System an inf. system collets operational & fin data, process it, store it & report it to users (Workers, Managers & Executives)

Mgt Acc Inf Calculated cost of a product or an activity or a department in a recent time period

Mgt Accounting process of producing operating & financial information for org employees & managers (prooduces inf that helps internal users in an org make better decision

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Who should study Mgt Accounting?

1. Individuals expect to become management accountant

2. Scientists & engineers their works controlled by mgt accounting inf.

3. Individuals expect to become managers/leaders of staff position: market research, investment analysis, human resources mgt, R & D, information system & strategic planning

FINANCIAL AND MANAGEMENT ACCOUNTING: BASIC FEATURE

FEATURE FINANCIAL ACCOUNTING MANAGERIAL ACCOUNTING

Audience External Internal

Purpose Reports on past performance to ext parties, contracts with owners & lenders

Inform internal decisions made by employees & managers; feedback & control on operating performance

Timeliness Delayed, historical Current & future oriented

Restrictions Regulated, rules driven by GAAP & Govt authorities

No regulations; systems & inf determined by mgt to meet strategic & operational needs

Type of inf. Financial measurement only Financial, operational and physical measurements on processes, tech, suppliers, customers & competitors

Nature of inf. Objective, auditable, reliable, consistent & precise

More subjectives & judgemental, valid, relevant & accurate

Scope Highly aggregate; reports on entire organization

Disaggregate; inform local decisions & actions

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1. Informational summary for operators data on quantity of materials, supplies & labors and on the amount of machine time used to produce a service ; quantity of output ;and quality information (proportion of repairs completely without additional work or number of defects detected while producing a service)

2. Informational frequency for operators accurate quantitative information about inputs used, output produced, and quality of service or production process timely (daily or after each job)

Use for management accounting information Automobile Dealership – Discription of task and information needs.

Barry the President of Beck’s Motor needs report on:

a. Strategic information overall profitability of the dealership monthly (new car sales, used car sales, car repairs and services, and parts sales), market opportunities, competitive threats, and technological innovations

b. Financial and operating statistics on critical success factors (firm’ indicators of long long term value and profitability creation): quality, time, cost reduction, customer service or prduct performance

c. Comparion of the performance of his dealership and competitors (Benchmarking): Volume, efficiency and profitability

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Manager of the Automotive Service Department – Description of task and information needsJenifer Green is the manager of service department, supervises 24 michanics

Jenifer needs information:

The use of the service department’s resources

The efficiensy of the mechanics

The quality of the work performed

The accurate cost for each of the repair service

The profitability of the service department

All mechanics are working on jobs or not hours actually spent repairing and maintaining cars Vs the hours for which mechanics

ara paid

Department has unused capacity

Department has full capacity

Reduce the size of the service department

Adding additional resources

Quantitiy of resources used for maintenance and repairs.

Actual labors and machine times, quantity of materials and supplies vs standards

Find jobs or mechanics are generating defects, rework and customer compalints

Weekly or monthly report on the profit and loss and segmented reports

Repair cost for used cars when a customer purchase new car by trade in

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Functions of Mgt Accounting

1. Operation control provide feedback inf. about the efficiency

2. Product and customer costing cost of product and cost to market the product to customers

3. Management control provide inf on the performance of managers and operating units

Financial Information

Operational Information

Senior Executives

Middle Managers

Operators

(Workers)

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Development in Management Control

In the century of 19, company focused on a single product or service Aggregate financial and operating statistics were adequate for perf measurement and mgt decision

In the early decades of 20th century many innovations in mgt acc systems DuPont Company (vertically integrated manufacturing organization (one or some materials used to produce a diversified mix of chemical products

Techniques for coordinating operating activities in the different activities:

a.Operating budgets

b.Capital budgets

Innovation at DuPont Corp Performance Measure of ROI

Operating Income : Investment

Or

Operating Income Sales

----------------------------- * -----------------------

Sales Investment

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Division 1Division 1 Division 2Division 2

Operating IncomeOperating Income $ 800,000$ 800,000 $ 300,000$ 300,000

InvestmentInvestment $ 20,000,000$ 20,000,000 $ 3,000,000$ 3,000,000

ROIROI 4 %4 % 10 %10 %

Management Accounting System at General Motors at 1920 by Chief executive, Alfred Sloan.

GM introduced management accounting

a. “Centralized control with decentralized responsibiity”

• Centralized control fin inf received by corporate managers periodically about division operations and profitability

• Decentraliezd responsibility authority that division managers had to make decisions on pricing, product mix, customers relationship, product design, acquisition of materials, and appropriate operating processes based on information about local opportunities and operating conditions

b. “An annual operating budgeting process” process ensured consistency of operating among divisions, capital requirements of those divisions, nd between top mgt’s financial goals and each div mangers’ operating targets.

c. “Weekly sales report and monthly flexible budgets”

d. . “Annual divisional performance reports, including ROI

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Service Organization

Financial InstitutionFinancial Institution Commercia banks, investment banks, and insurance companiesCommercia banks, investment banks, and insurance companies

TransportationTransportation Railroads, airlines, truck lines, and bus companiesRailroads, airlines, truck lines, and bus companies

TelecomunicationsTelecomunications Local phone services, long distance voice and data communicationsLocal phone services, long distance voice and data communications

MerchandisingMerchandising Supermarkets, department stores, and wholesalersSupermarkets, department stores, and wholesalers

Professional servicesProfessional services Consulting, public accounting, engineering and software firmsConsulting, public accounting, engineering and software firms

Health careHealth care HospitalsHospitals

• Do not produce a product

• Sensitive to the timeliness and the quality of the services provided to their custimers

• Deliver in real time directly to the customers

• Defects are more likely, more noticeable and the consequences more severe as dissatisfied customers move to other suppliers after an unhappy experiences

Need accurate, relevant, and timely management acoounting informations

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Changing Competitive Environments

1. Deregulation of service companies Elimination of pricing, product mix, and geographic and competitive restrictions. Transportation and telecomunication companies are permitted to enter and leave markets and set prices

2. Manufacturing and services organizatons in the global environments competitors from global companies; global networks for rising capitals, for acquiring raw materials; and distributing the finished product to the markets in the world

Need Accurate and relevant information on company’s Actual Costs for:

1. Help engineers design products produced efficiently

2. Signal to improve the quality, efficiency and speed in manufacturing operations

3. Guide product mix decision

4. Choose amng alternative suppliers

5. Negotiate about price, product features, quality, delivery, and services to customers