Week 1 Flashcards
(43 cards)
Management accounting
Management function that is heavily involved in providing accurate and internal financial reporting, allowing management to implement the organization’s strategy. It employs cost management information, a combination of financial information about costs and non-financial information about success factors related to an organization, like quality and productivity.
5 stages of information processing in an organisation
- A business event occurs;
- Accountants collect data regarding the event;
- Data is transformed to (cost management) information;
- Cost management information is combined with general information about the strategy and the environment to produce knowledge;
- Knowledge is used to make decisions.
The 4 functions of Management
- Strategic management
- Planning and decision-making
- Management and operational control
- Preparation of financial statements
Strategic management
Development and implementation of a sustainable competitive position in which the firm’s competitive advantage provides continued success.
Planning and decision-making
Budgeting and profit planning, cash flow management, and other decisions related to the firm’s operations.
Management and operational control
The former involves the evaluation of mid-level managers by upper-level managers, while the latter takes place when mid-level managers monitor the activities of operating-level managers and employees;
Preparation of financial statements
Management seeks to comply with reporting standards of relevant groups and relevant federal authorities.
Major types of organizations
- Merchandising firms
- Manufacturing firms
- Service firms
Merchandising firms
Firms that purchase goods for resale. These firms use cost management information to manage stocking, distribution, and customer service;
Manufacturing firms
Use raw materials, labor, facilities and equipment to produce products, which are then sold either to merchandising firms, or to other manufacturing firms as raw materials to make other products.
These firms use cost management information to manage production costs.
Service firms
Provide services that offer convenience, freedom, safety or comfort. Common
examples are transportation, health care, legal services, etc. These firms use cost management information to identify the most profitable services and to manage the cost of providing them.
Public goods
Governmental and NPOs provide a service as well, but these services do not have a direct relationship between the amount paid and the services provided. Instead, the nature of these services and the customers that receive them are decided by the government or some philanthropic association.
The Global Business Environment
The growth of international markets and trade has led to great changes in the business environment. The rise of trade agreements, such as the NAFTA, EU, CAFTA or the WTO, has led to opportunities for growth and profits in the global market.
Consumers benefit as well, because they can own high-quality goods at lower costs.
Lean Manufacturing
Firms are innovating in different ways to remain competitive in the rise of global competition.
Lean manufacturing, like just-in-time inventory, can help reduce the cost of waste and storage. Japanese firms have introduced manufacturing ways that improve Cost and quality by using quality control and quality teams.
Flexible manufacturing has also been developed to reduce setup times and have a faster turnaround of customer orders.
Use of IT, Internet and Enterprise Resource Management
The rise of the internet and technology has been fundamental to business changes. The growth of internet firms, such as Google or Amazon, have increased the use of the internet for communication, sales, data processing and enterprise resources management systems.
These innovations have allowed firms to be able to reduce time in processing or widening a firm’s information base, aiding cost management.
Focus on the Customer
As businesses shifted their focus to account for the customers in recent years, so have cost management practices, which now include customer preferences and satisfaction.
Management Organization
Management organization has changed in such a way that hierarchical firms are being replaced by flexible forms, profit-based to performance-based and so on.
In response to this, cost management practices have also changed to be more beneficial to cross-functional teams and various organizational forms.
The strategic focus of cost management
Cost management goes through a series of stages, progressing in terms of complexity:
1. Systems are used for basic transaction reporting purposes;
- The focus is on producing external, reliable financial reports;
- Accurate and relevant cost information is developed by gathering data on operations;
- Cost management information is factored into the strategic decision-making process.
The final step requires identification of the firm’s critical success factors (CSFs), or measures of a firm’s performance that is essential to its competitive advantage.
Methods that focus directly on strategy implementation
- Balanced Scorecard: involving the creation of an accounting report based on the perspectives of financial performance, customer satisfaction, internal processes as well as learning and growth and using a strategy map or cause-and-effect diagram summing up the factors;
- Value Chain: going through the steps to create and provide a product or service;
- Activity Based Costing and Management (ABC/M): tracking costs to products or individual customers in order to improve product value and firm competitiveness;
- Business Analytics: simply the use of information from statistical analysis to analyse performance via factors, such as consumer satisfaction;
- Target Costing: laying out a desired cost for production based on competitive prices;
- Life-Cycle Costing: overseeing the cost of a product throughout its life cycle.
Seven methods have been developed to implement strategy
- Benchmarking: identifying CSFs and comparing them with the competitors and improve over competitors;
- Business process improvement: implementing continuous improvement in quality and other CSFs;
- Total quality management: policies and practices in order to exceed customer expectations on quality;
- Lean accounting: used in tandem with lean manufacturing: analysing value streams to pinpoint where manufacturing methods lead to improved profitability;
- Theory of constraints: improving the rate at which raw materials are converted to finished products;
- Sustainability: balancing social, environmental and financial performance indicators;
- Enterprise risk management: using a framework to manage risks that include hazardous,financial, operating and strategic risks.
Developing a firm’s competitive strategy
1) Cost leadership: basically providing the product at the lowest cost to undermine competitor profitability, requiring efficient production and typically employing economies of scale. Example: all the discount supermarkets students shop at.
2) Differentiation: the focus on producing the highest quality product that gives consumers unique value, making a relatively more expensive price worthwhile. Example: famous shoe brand students want to buy from, but are unable to do because they lack funds.
The five steps of strategic decision-making
Step 1: Determine strategic issues relevant to the problem in question.\
Step 2: Determine alternative actions.
Step 3: Obtain data, transform it into information and conduct analyses of alternatives.
Step 4: Choose and implement the best alternative based on analysis and overall firm strategy.
Step 5: Evaluate the effectiveness of the selected alternative over time.
Costs, cost drivers, cost objects and cost assignment
A company is subject to a cost when it uses a resource to perform some action, like purchasing raw materials to manufacture a product.
Cost are tied to cost drivers, or factors that cause a change in total cost.
Costs are also tied to specific products, services, customers, activities or organizational units that are known as cost objects.
Costs are grouped into cost pools, categorized by type of cost, source or responsibility.
Cost assignment
Refers to the process of assigning resource costs to cost pools, and from cost
pools to cost objects. There are two types of cost assignment:
1) Direct tracing, which is used for assigning direct costs, or costs that can be easily traced to a cost pool or cost object, like the associated materials that are used to create a product;
2) Allocation, which is used for assigning indirect costs, or costs that cannot be economically and easily traced to a cost pool or object, as is the case with costs like the electricity to power a factory, as the cost of keeping the lights on cannot really be traced to specific product.
