Performance Management and ControlSession 1 – Introduction

ByPeter Wheale

Introduction to the module.

Modern cost accounting provides key information to managers for their decision making process.

The study of modern cost accounting givesan insight into both the manager’s role andthe accountant’s role in an organisation.

Different cost concepts and terms are often used in accounting reports.

Managers who appreciate these concepts and terms are able:

– to make best use of the information provided and

– to avoid misuse of that information.

1 Differentiate management accounting from financial accounting and

cost

management

2 Recognise the growing role of strategy in management accounting

processes

3 Identify five broad purposes of accounting systems

4 Define and illustrate a cost object

5 Distinguish between direct costs and indirect costs

6 Explain cost drivers, variable costs and fixed costs

7 Explain relevant costs

8 Understand opportunity cost

1 Formulating overall strategies and long-range plans –

internal non-routine reporting

2 Resource allocation decisions, e.g. product

and customer emphasis and pricing – internal routine

reporting

3 Cost planning and cost control of operations and activities

– internal routine reporting

4 Performance measurement and evaluation of people –

internal non-routine reporting

5 Meeting external regulatory and legal reporting

requirements – external reporting

• Traditional MA activities include collecting,

classifying, processing, analysing and reporting

information to managers.

• Purpose is to aid internal planning & control of

activities.

• CIMA UK Definition: “A form of management

Accounting in which emphasis is placed on

information which relates to factors external to the

firm, as well as non-financial information and

internally generated information – per Official terminology (CIMA

2000).

• SMA is oriented towards the future

• Emphasis is on enterprise’s position relative to that

of its competitors (Per Horngren et al).

• Bromwich sees SMA as going beyond collecting

data on business and their competitors, to consider

benefits products offer to customers and how these

contribute to building and sustaining competitive

advantage.

• Focus is on addressing critical success factors

(CSF) needed for a business to obtain a

sustainable competitive advantage in its markets.

• Competitor Accounting Sources:

– Competitors financial statements

– Press releases and trade journals

– Discussions with suppliers & joint customers

– Manufacturing processes (e.g. whether competitor runs a two-shiftsystem).

• With this data obtain an idea of competitor’s costs relative your firm’scosts.

• Performance measures: for example, ROCE – relates operating profit tocapital employed.

• From SMA perspective, risk is the volatility in returns

from a product, customer or market segment relative

to that of its competitors used as a benchmark (Per

Management Quarterly journal of the ICAEW – JAN 2001)

• Example in mobile telecom sector key benchmark now is

“Average revenue per user”.

• To improve it requires an understanding of the key drivers

(e.g. after-sale care) of volatility for products or market

segments.

• Also check with competitors comparable knowledge to

determine value-enhancing strategies.

• Product differentiation: An organisation’s ability to offer

products or services that are perceived by its customers to

be superior and unique relative to those of its competitors(Per Horngren et al).

• Examples: HP printers, Coca-cola, Rolex watches – Can

charge high price leading to higher sales revenue &

ultimately +NPV.

• Cost Leadership (Porter): Through efficiency

improvements, elimination of waste and tighter cost

control (e.g. Black & Decker tools, insurance products).

• Porter (2001) has stated that “only by integrating the

internet into overall strategy will it help achieve

competitive advantage”.

• The opportunity cost of holding stock is the profit forgone

from tying up money in stock and not investing it

elsewhere.

• Economies of scale – aids cost leadership

objective.

• Learning curve – costs decline with learning

(applies to labour intensive sectors).

• Target cost – review prices accepted by market.

Deduct return required from price to derive target

cost per unit.

• Low business & financial risk – lower overall risk

leading to lower cost of capital.

• Per Simmonds (1988) – Indicators for measuringcompetitive position:– Sales revenue relative to total market (monitor changes)

– Profit and return on sales (gross margins)

– Volume & unit costs.

• Information required:– Competitors costs/ policies

– Market share – by product

• Taken from Wilson & Chua

Details Sales

Market

share %

Relative

market

share %

£000S

Total market: Last year 5,200

This year 7,500

Firm A : Last year 1000 19.23%

This year 1200 16.00%

Close competitor: Last year 1200 23.08% 1.20

This year 2000 26.67% 1.67

Lead competitor: Last year 2200 42.31% 2.20

• PMC enables business to devise performance

management systems that monitor progress against

internal and external benchmarks.

• Helps to formulate business strategy.

• Covering modern techniques, decision making, budgeting

and standard costing, and how a business should be

managed and controlled.

• C.T. Horngren, Management and Cost Accounting (5th ed),

chps 1 & 2.

C.T. Horngren, Management and Cost Accounting, (5th ed), Pearson.

C. Dury, Management and Cost Accounting (8th ed), Thomson.

*R. Simons, (2000) Performance Measurement and Control Systems for Implementing

Strategy, Prentice-Hall.

*ASB (1993) Operating and Financial Review, Accounting Standards Board.

*M. Miller (2000) ‘The History of Finance: An Eyewitness Account’, Journal of

Applied Corporate Finance, Vol. 13, pp. 8-14.

P. Weetman, Management Accounting, (3rd ed) FT Prentice-Hall.