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Summary Management Accounting International Business
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Summary Management Accounting International Business
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Management accounting - IBWEEK 1
Chapter 2
An accounting system is a formal mechanism for gathering, organizing, and communicating information
about an organization's activities for different users, and thus for different purposes. These users face
different challenges, make different decisions, and have different requirements in terms of information
content and quality.
Financial accounting is a branch of accounting producing for external decision-makers a mandatory,
standardized, audited, periodic and synthetic financial representation of an organization’s transactions
with, as well as rights and duties towards, external stakeholders.
Users of and uses for financial accounting:
- Customers – to assess whether it is financially sustainable and therefore can be reliable
partner in the future
- Suppliers – need financial statements to assess whether it is financially sustainable and
reliable, but also to determine whether it will be able to pay its bills -> notion of liquidity
- Banks and other creditors – interested in liquidity, but also in solvency, i.e. the ability
to reimburse long-term debts
- Actual and potential shareholders – to asses not only liquidity and solvency, but also
the company’s ability to create enough value to remunerate their investment
Limitations of financial accounting:
- Lack of details – does not tell about the flow of resources within the organization and how value
is created or destroyed
- Regular and distant intervals – produced on annual or quarterly basis
➔ Lacks both relevance and timeliness
Management accounting is a branch of accounting producing for internal decision-makers the
financial and non-financial information they need about internal flows of resources, when they need it,
to obtain resources or make the best possible use of available resources.
For each kind of decision, management accounting helps managers in distinct phases of the decision
making process:
1. Directing attention – signalling opportunities and threats managers should address
2. Formulating problems – identifying stakes and formalizing both goals and constraints
3. Designing solutions – showing managers levers on which they can act to achieve their goals
4. Evaluating and selecting solutions – anticipating and assessing potential financial and
non- financial consequences of alternative courses of action
5. Organizational learning – linking decisions made financial and non-financial consequences
6. Evaluating and rewarding performance – making managers accountable for the financial
and non-financial consequences of the decision they make
,Formulating problems and designing solutions followed by evaluating and selecting solutions are so
closely related that they are often subsumed into a single phase called problem solving.
If the same people are involved in all phases at once, problems will often be defined based on the
solutions these people have in mind, not on the actual stakes or challenges. Decision-makers can also
fail to consider alternative, sometimes better, solutions, or lack objectivity in assessing their
consequences. For these reasons, it is often beneficial not only to separate these steps of the decision-
making process, but also to delegate them to different teams.
Management accounting makes managers continuously question the relation between decisions,
actions and success or failure. The information it provides should help managers distinguish
between four different situations:
- Success because people stick to the plan
- Failure because people depart from the plan
- Success because people depart from the plan
- Failure because people stick to the plan
By collecting a wide array of information and investigating in detail what happened, management
accounting suggests whether people are doing things right (single-loop learning) and whether they are
doing the right things (double-loop learning).
Financial accounting Management accounting
For external decision makers For internal decision makers
Focused on external transactions Focused on internal transactions
Required, mandatory Optional, voluntary
Public Private
Comparable Unique
Standardized Customized
Regulated Flexible
General Specific
Purely financial Diverse: financial and non-financial
Aggregated Decomposed
Synthetic Detailed
Exhaustive Relevant
Retrospective Prospective
Oriented towards the past Oriented towards the future
Objective Objective and subjective
Accurate Approximate
Reliable Tentative
Periodic Timely
Regular On demand
Verifiable
Audited
,Chapter 3
A cost accounting system or costing system is a set of rules, methods and techniques used to estimate
the resources consumed to produce an output or achieve a goal. In the context of costing, these goals
are usually referred to as cost objects.
Cost object is any output or goal for which resources were consumed and for which decision-makers
desire a separate estimation of costs
Resource allocation consists in deciding for which goals limited resources should be consumed.
A process is the sequence of tasks and activities consuming resources (inputs like materials, labour,
equipment) to produce and output (e.g. a product or service). These resources are usually limited: the
supply of materials, labour hours, or machine hours is not infinite.
Bottlenecks are steps in the process which constraints the total production and force other steps to
remain idle for some period of time.
Efficiency refers to the quantity of resources consumed to obtain a result. The less resources are
consumed to produce the same result, the more efficient a process is. Efficiency is often computed as
output divided by input. There can also be tasks consuming a lot of resources without adding much
value.
Processes can be optimized to become more efficient, either by allocating additional resources or by
reallocating them on tasks creating more value. A well designed cost system, by revealing for what goals
resources are concretely consumed, can therefore give managers both direction and motivation for
process optimization:
- Shows inefficient uses of available resources, like bottlenecks, spillage or non-value-adding tasks
- Gives a greater control over costs by identifying their causes
- Reveals best practices by comparing the resources consumed by different processes to produce
the same result
Asset valuation consists in estimating the value, or monetary equivalent, of an asset (e.g. receivable,
inventory, piece of equipment, etc.).
There are typically there competing ways to assess a value:
- Economic value (utility, discounted cash flows)
- Market value (price, opportunity cost)
- Book value (historical cost)
Assigning to products an estimated value of all resources which were consumed to produce them is
therefore one of the major challenges of management accounting
The problem is partly simplified, at the expense of relevance, when management accounting is designed
to support financial accounting in the production of financial statements. It has then to complay with
prevailing Accounting Standards (International Accounting Standards, Generally Accepted Accounting
Principles, etc)
, Exercise 1. Associate the following usages of costing to the three main purposes of costing: resource
allocation, process optimization, and asset valuation
1. Add production costs to the inventory in the balance sheet
This affects the value of a short-term asset on the balance sheet, one of the financial statements,
so this is asset valuation
2. Compare the production costs of different factories making the same product in similar
quantities
It is important to consider the potential consequence of the comparison. The most likely
consequence is to identify the best practices to share them across factories: this is process
optimization. But it is also possible that, if after some time a factory is still underperforming, this
comparison may justify shifting resources away from this factory towards more efficient ones.
This is resource allocation.
3. Compute the costs of goods sold in the income statement
This affects the income statement, a financial statement, and results from the valuation of the
inventory. This is therefore related to asset valuation
4. Compare the cost of making a product to its market price
If the cost of a product is greater than its price on the market, it is not profitable. This would
typically trigger an eFFort to reduce costs (process optimization). And if eFForts to reduce costs
are insufficient, the product may be dropped to focus resources on profitable ones (resource
allocation).
5. Benchmark the resources consumed by different departments for the same kind and level of
services
Same as 2 or 4. The consequences of the comparison determines whether it is process
optimization (identify best practices) or resource allocation (disengage from the less efficient
department)
These examples suggest that resource allocation and process optimization are close to each other. First,
we try to improve processes (process optimization), and if it fails, the inefficient processes are
abandoned to orient resources to better ones (resource allocation)
Asset valuation on the other hand is clearly distinct. Tied to financial accounting, it is less intended to
support internal decision making.
Costing is a process itself: it is a sequence of activities consuming resources to produce information
which allows managers to achieve the goals.
1. Cost recognition and accumulation
2. Cost classification (inventoriability and traceability)
3. Computation of allocation rates
4. Cost assignment (tracing and allocation)
5. Asset valuation and reporting
Cost recognition and accumulation
Costs must first be recognized and accumulated.
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