,MODULE 1
INTRODUCTION
INTRODUCTION
Structure of Modern organization
Managers have three roles:
1. Planning
Setting goals and objectives for the organizations and determining how to achieve them.
2. Directing and Motivating
Overseeing day-to-day operations and keeping the organization functioning smoothly.
3. Controlling
Evaluating the performance against the plan and making adjustments to keep the organization pressing
toward its goal.
The Controlling circle
Information needed in this process:
- Costs
- Price
- Efficiency and capacity
- Regulations
- Performance
- Performance deviations
- etc.
Managing cost is important in an organization.
,Potential problems:
▪ Employees do not work hard
▪ Employees fail to follow the standards, quality is low
▪ Goals are too hard / easy
▪ Plans are not optimal
Managings people’s behavior is crucial in organisations.
Two Types of Accounting Information
1. Financial Accounting
Managers preparing and providing information to outsiders. E.g. financial statements.
2. Management Accounting
Managers collecting and using information to make decisions. E.g. cost information collected and
organized by managers.
Control problems
Control problems are any problems, issues, weaknesses or vulnerabilities that are likely to cause negative
organization outcomes and hinder an organization from achieving its goal.
▪ Managers fail to make the best decisions.
▪ Employees fail to exhibit desired behaviors.
Reasons:
▪ Lack of information
Managers are not able to make the best decision for the organization if they do not have sufficient
information about the current situation and future strategy.
Employees will perform poorly if they do not have sufficient information about what the organization
expects them to achieve and how to achieve it.
▪ Adverse selection
Can happen when there are limitations relating to employee selection mechanism.
- Employees lack the right skills and abilities
- Employees’ preferences are different from what the company needs
Can happen when there are limitations relating to promotion mechanism.
Peter principle: employees are promoted based on their performance in their current role, rather that the
abilities relevant to the intended role → causes that we promote people that are not competent for the
intended role.
▪ Agency issue (moral hazard)
Principal-agent relationship: agents are hired to act on the principal’s
behalf / best interests. However, both are self-interested and want to
maximize different things. There is asymmetric information between
them. The principal can’t oversee the agent. The agent has more
information than the principal and could therefore act in their own self-
interest.
, Management Control System
A Management Control System (MCS) is an integrated use of different mechanisms to gather and use the
information about the organizational performance.
Functions:
▪ It collects and analyses management accounting information.
▪ It provides feedback to employees and managers → facilitates learning and better practices
▪ Integrated use of MCSs can turn into corporate cultures that attract the right employees and motivate
the right behaviors.
Three common management control systems:
▪ Costing system
▪ Planning and budgeting system
▪ Performance measurement and rewards system (PMRS)
1 VOLUME-BASED COSTING SYSTEM
BASIC COST CONCEPTS
General Cost Classification
Costs incurred by firms can be classified as manufacturing costs and non-manufacturing costs.
There are three kinds of manufacturing (product) costs:
1. Direct materials materials that can be traced to a product directly, like wood to make a table.
2. Direct labor labor costs that can be traced to a product, like labor costs of
assembly-line workers.
3. Indirect/overhead costs all costs of manufacturing a product other than direct materials and
direct labor, like factory utilities, depreciation of equipment, etc.
these are product costs that cannot be directly traced to a cost object.
There are two kinds of non-manufacturing (period) costs:
1. Marketing/selling costs all costs incurred to secure customer orders and get the products into
the hand of the customers, like advertising, shipping, sales salaries.
2. Administrative costs all costs associated with general management of the organization as a
whole, like executive compensation, secretarial salaries, depreciation of office
building.
How to allocate overhead?
If we only have one type of products, we allocate overhead equally to each product.
Allocation rate (or burden rate) = overhead / number of products
If we have several different product lines, we can still allocate overhead equally to each product. Allocation
rate (or burden rate) = overhead / variable costs or number of products
Advantage: it’s quick and easy! There are some problems with this method though.
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