Management Control : Management Control Accounting? : Fall 2008 Mugan 2/ 45 Accounting? Financial
Tax COST MANAGERIAL FINANCIAL AUDITING TAX The Role of Accounting : Fall 2008 Mugan 3/ 45 The Role of Accounting Application of Managerial Accounting : Fall 2008 Mugan 4/ 45 Application of Managerial Accounting Applies to all types of business -
Service, Merchandising, and Manufacturing
Applies to all forms of business organizations –
Proprietorships, Partnerships, and Corporations
Applies to not-for-profit as well as profit-oriented companies Accounting and Accountability : Fall 2008 Mugan 5/ 45 Accounting and Accountability Process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by the users of the information (American Accounting Association, 1966)
Stewardship function:usually owners and managers are separate
Increase shareholders’ wealth
Financial Accounting Differences and Similarities : Fall 2008 Mugan 6/ 45 Differences and Similarities Both deal with the same accounting data
Both managerial and financial accounting deal with economic events of a business
Both require that economic events be quantified and communicated to interested parties
Financial – external
Determining unit cost - managerial accounting,
Reporting Cost of Goods Sold -financial accounting Managerial or Management Accounting : Fall 2008 Mugan 7/ 45 Managerial or Management Accounting Industrial Revolution – more complex production process
Cost became important
Cost accounting (forerunner of managerial accounting)
Cost of an object – product, segment, division
First book 1897 – Garcke and Fell – Factory Accounting
20th century – multinationals, and large companies
Management accounting term used after Second World War Management or Managerial Accounting : Fall 2008 Mugan 8/ 45 Management or Managerial Accounting Assist managerial decisions
Provide timely and accurate information to control costs and to measure and improve productivity; and devise improved production process
Accurate costs important for
Response to rival products Main activities : Fall 2008 Mugan 9/ 45 Main activities Planning- strategic and operational
Generate, analyze and report relevant information
Actual vs budget comparison
Analysis and interpretation
Feedback Managerial Accounting : Fall 2008 Mugan 10/ 45 Managerial Accounting Process of
Communicating information in pursuit of a company’s goals
Managerial accountants – business partners/consultants in companies
Provides information to managers Technology and Managerial Accounting : Fall 2008 Mugan 11/ 45 Technology and Managerial Accounting New techniques created new roles for management accountants
New technologies demanded new control techniques
Emerging service organizations
Teams with people from production, marketing, engineering, etc.
More flexible approaches to effective cost controls Managerial Accounting Objectives : Fall 2008 Mugan 12/ 45 Managerial Accounting Objectives Provide information for planning and decision making – be a part of it
Assist managers in daily control of operations
Motivate the managers and other employees towards the company goals-goal congruence
Performance measurement of managers
Strategic planning – determine competitive position and long-run success of the company Characteristics : Fall 2008 Mugan 13/ 45 Characteristics Internal – manager oriented
Future looking – planning
More timely and relevant data necessary
Adaptive to changing business environment
Cross-functional – brings together production, marketing, managerial accountants and other key personnel Planning : Fall 2008 Mugan 14/ 45 Planning Objectives should be inline with the overall objective of increasing shareholders’ wealth
E.g. increase sales by 10% in Central Anatolia – objective Planning : Fall 2008 Mugan 15/ 45 Planning Identifyalternatives. Directing : Fall 2008 Mugan 16/ 45 Directing Coordinate diverse activities and human resources
Implement planned objectives
Provide incentives to motivate employees
Hire and train employees including executives, managers, and supervisors
Produce smooth-running operation Controlling : Fall 2008 Mugan 17/ 45 Controlling Process of keeping activities on track
Determine whether goals are met
Decide changes needed to get back on track
May use an informal or formal system of evaluations
Employee job assignments
Routine problem solving
Decision making is not a separate management function, but the outcome of the exercise of good judgment in planning, directing, and controlling.
Feedback in the form of performance reportsthat compare actual results with the budgetare an essential part of the control function Management Control : Fall 2008 Mugan 18/ 45 Management Control Assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objective
Has financial and non financial performance measurement
Concerned with the implementation of strategies and
Task control Planning and Control Cycle : Fall 2008 Mugan 19/ 45 Planning and Control Cycle DecisionMaking Formulating long-and short-term plans (Planning) Measuringperformance (Controlling) Implementing plans (Directing and Motivating) Comparing actualto planned performance (Controlling) Begin Exh.
1-1 Slide 20: Fall 2008 Mugan 20/ 45 Management accounting system : Fall 2008 Mugan 21/ 45 Management accounting system To control costs
To measure and improve productivity
To devise improved production process
To decide on new products
To decide on obsolete products
To decide on prices
To respond to rival products (Johnson and Kaplan, 1987) Cost Management Perspective : Fall 2008 Mugan 22/ 45 Cost Management Perspective Provide highest quality service/goods with lowest possible cost
Determine cost of resources consumed in company’s activities
Eliminate non-value added activities as much as possible
Determine efficiency and effectiveness of all major activities
Identify and evaluate new activities that can improve the performance of the company Comparison : Fall 2008 Mugan 23/ 45 Comparison Strategic Cost Management : Fall 2008 Mugan 24/ 45 Strategic Cost Management Value chain
Get raw materials and other resources
Research and development – including quality assessment
Should understand the value chain
Cost drivers in activities
Managing the cost relationships to a company’s advantage – strategic cost management Making Planning Decisions : Fall 2008 Mugan 25/ 45 Making Planning Decisions What customers should we target? What products or services should we provide? How should we finance our operations? What price should we charge? Which projects should we choose? Cost – Benefit Analysis : Fall 2008 Mugan 26/ 45 Cost – Benefit Analysis Cost- using resources to achieve a benefit
Benefits- aspects of a decision that help the organization
Analysis: the process of analyzing alternative decisions to determine which decision has the greatest benefit relative to its cost Discussion Question : Fall 2008 Mugan 27/ 45 Discussion Question A finance professor and a marketing professor were recently comparing notes on their perceptions of corporations. The finance professor claimed that the goal of a corporation should be to maximize the value to the shareholders. The marketing professor claimed that the goal of a corporation should be to satisfy customers.
What are the similarities and differences in these goals? Zimmerman, 2003; p.24 The Changing Business Environment : Fall 2008 Mugan 28/ 45 Just-in-time production
Total quality management
Theory of constraints
E-commerce Business environment changes in the past twenty years The Changing Business Environment Just-in-Time (JIT) Systems : Fall 2008 Mugan 29/ 45 Complete productsjust in time toship customers. Complete partsjust in time forassembly into products. Scheduleproduction. Receive materialsjust in time forproduction. Receivecustomerorders. Just-in-Time (JIT) Systems JIT Consequences : Fall 2008 Mugan 30/ 45 Flexibleworkforce Reducedsetup time Zero productiondefects JIT Consequences Improvedplant layout JIT purchasing
Fewer, but more ultrareliable suppliers.
Frequent JIT deliveries in small lots.
Defect-free supplier deliveries. Benefits of a JIT System : Fall 2008 Mugan 31/ 45 More rapidresponse tocustomer orders Freed-up funds Reducedinventorycosts Greatercustomersatisfaction Benefits of a JIT System Slide 32: Fall 2008 Mugan 32/ 45 Slide 33: Fall 2008 Mugan 33/ 45 Total Quality Management (TQM) : Fall 2008 Mugan 34/ 45 Total Quality Management (TQM) TQM improves productivity by encouraging the use of fact and analysis for decision making and if properly implemented, avoids counter-productive organizational infighting. Process Reengineering : Fall 2008 Mugan 35/ 45 Process Reengineering The process is redesignedto eliminate allnon-value-added activities Every step inthe businessprocess mustbe justified. A business processis diagrammedin detail. Anticipated results:
Process is simplified.
Process is completed in less time.
Costs are reduced.
Opportunities for errors are reduced. Process Reengineering versus TQM : Fall 2008 Mugan 36/ 45 Process Reengineering versus TQM Process Reengineering
Radically overhauls existing processes.
Likely to be imposed from above and to use outside consultants. Total Quality Management
Tweaks existing processes to realize gradual improvements.
Uses a team approach involving people who work directly in the process. Theory of Constraints : Fall 2008 Mugan 37/ 45 A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want. The constraint in a system is determinedby the step that has the smallest capacity. Theory of Constraints Theory of Constraints : Fall 2008 Mugan 38/ 45 4. Recognize that the weakest linkis no longer so. 1. Identify the weakest link. 2. Allow the weakest link to set the tempo. 3. Focus on improving the weakest link. Only actions that strengthen the weakest link in the “chain” improve the process. Theory of Constraints Slide 39: Fall 2008 Mugan 39/ 45 International Competition : Fall 2008 Mugan 40/ 45 International Competition Competition has become worldwide in most industries. Slide 41: Fall 2008 Mugan 41/ 45 E-Commerce : Fall 2008 Mugan 42/ 45 E-Commerce In recent years, many dot.com businesses failed that might have benefited from the application of managerial accounting tools:
Capital budgeting Code of Conduct forManagement Accountants : Fall 2008 Mugan 43/ 45 Code of Conduct forManagement Accountants The Institute of Management Accountant’s (IMA) Standards of Ethical Conduct for Practitionersof Management Accounting and Financial Management have two major parts offering guidelines for:
? Ethical behavior.
? Resolution for an ethical conflict. Codes of Conduct onthe International Level : Fall 2008 Mugan 44/ 45 Codes of Conduct onthe International Level In addition to competence, objectivity, independence,and confidentiality, the IFAC’s code deals withthe accountant’s ethical responsibilities in:
Fees and commissions
Advertising and solicitation
Handling of monies
Cross-border activities. The Guidelines on Ethics for ProfessionalAccountants, issued by the InternationalFederation of Accountants (IFAC), govern the activities of professional accountants worldwide.