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Samenvatting - Management Accounting (BT2113)
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Summary of the Management Accounting course
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Week 1Chapter 1: cost management and strategy
Management accountants are the accounting and finance professionals who develop and use cost
management information to assist in implementing the organization’s strategy. Cost management
information consists of financial information about costs and revenues and nonfinancial information
about customer retention, productivity, quality and other key success factors for the organization.
Cost management is the development and use of cost management information.
Management accounting is a profession that involves partnering in management decision making,
devising planning and performance management systems, and providing expertise in financial
reporting and control to assist management in the formulation and implementation of an
organization’s strategy.
Management accountants use their unique expertise, working with the organization’s managers, to
help the organization succeed in formulating and implementing its strategy. Cost management
information is developed and used within the organization’s information value chain:
Management accountants gather and summarize data (stage 2) from business events (stage 1) and
then transform the data to cost management information (stage 3) through analysis and use of the
management accountants’ expertise. At stage 4, cost management information is combined with
other information about the organization’s strategy and competitive environment to produce
actionable knowledge. At stage 5, this knowledge is used to participate with management teams in
making decisions that advance the organization’s strategy.
In a typical organization, management accountants report
to the controller, a key accounting professional in the firm.
The controller, assisted by management accountants, has
a wide range of responsibilities. The chief financial officer
(CFO) has the overall responsibility for the financial
function, the treasurer manages investor and creditor
relationships, and the chief information officer (CIO)
manages the firm’s use of information technology.
In contrast to the cost management function, the financial
reporting function involves preparing financial statements
for external users. Cost management information is
developed for use within the firm to facilitate
management and is not needed to meet requirements
,(which financial reporting has to). The main focus of cost management information therefore must
be usefulness and timeliness; the focus of financial reports must be accuracy and compliance with
reporting requirements. However, strict adherence to accuracy can compromise the usefulness and
timeliness of the information. The function of the financial information systems department is to
develop and maintain the financial reporting system and related systems. The challenge for the
controller is to reconcile these different and maybe conflicting roles.
Cost management information is provided for each of the four major management functions:
strategic management, planning and decision making, management and operational control, and
preparation of financial statements. The most important function is strategic management: the
development and implementation of a sustainable competitive position in which the firm’s
competitive advantage provides continued success. A strategy is a set of goals and specific action
plans that, if achieved, provide the desired competitive advantage. Planning and decision making
involve budgeting and profit planning, cash flow management, and other decisions related to the
firm’s operations. Operational control takes place when mid-level managers monitor the activities
of operating-level managers and employees. In contrast, management control is the evaluation of
mid-level managers by upper-level managers. In preparation of financial statements, management
complies with the reporting requirements of relevant groups.
Cost management information is used to determine prices, to change product or service offerings to
improve profitability, to update manufacturing facilities in a timely fashion, and to determine new
marketing methods or distribution channels.
Service and warranty costs are often called downstream costs because they occur after
manufacturing.
A firm’s degree of reliance on cost management depends on the nature of its competitive strategy.
Many recent changes in the business environment have caused significant modifications in cost
management practices:
1. Increased global competition: affects both businesses and not-for-profit organizations
2. Lean manufacturing: speed-to-market
3. Advances in information technologies, the internet, and enterprise resource management (!)
4. Greater focus on the customer: increased consumer expectation for functionality/quality ->
shorter life cycle and more focus on adding new features as quickly as possible. This
changes managers’ orientation from low-cost production of large quantities to quality,
service, timeliness of delivery, and the ability to respond to the customer’s desire for specific
features -> greater variety of products with shorter life cycles
- The consequence of shorter product life cycles is that managers must take a more
integrative approach in their decision making, and be more flexible in their decisions
5. New forms of management organization
6. Changes in the social, political, and cultural environment of business
A key development that drives the extensive changes in the contemporary business environment is
the growth of international markets and trade due to the rise of economies throughout the world
and the decline of trade barriers -> NAFTA, CAFTA, WTO and EU.
,Economic nationalism is the ideology that promotes domestic economic growth and opposes
globalization, free trade, and immigration.
The competitive firm incorporates the emerging and anticipated changes in the contemporary
environment of business into its business planning and practices. Guided by strategic thinking, the
management accountant focuses on the factors that make the company successful rather than
relying only on costs and other financial measures.
Robert Kaplan’s classification of the stages of the development of cost management systems
describes this shift in focus:
1. Cost management systems are basic transaction reporting systems
2. As they develop into the second stage, cost management systems focus on external
financial reporting. The objective is reliable financial reports; accordingly, the usefulness for
cost management is limited
3. Cost management systems track key operating data and develop more accurate and
relevant cost information for decision making; cost management information is developed
4. Strategically relevant cost management information is an integral part of the system
The first two stages of cost system development focus on the management accountant’s
measurement and reporting role, and the third stage shifts to operational control. In the fourth
stage, the ultimate goal, the management accountant is an integral part of management, not a
reporter but a full business partner, working on management teams to implement the firm’s
strategy. This requires the identification of the firm’s critical success factors and the use of
analytical, forward-looking decision support. Critical success factors (CSFs) are measures of those
aspects of the firm’s performance essential to its competitive advantage and to its success.
, The first 6 methods focus directly on strategy implementation: the balanced scorecard and strategy
map, value chain, activity-based costing and management, business analytics, target costing and
life-cycle costing. The next 7 methods help to achieve strategy implementation through a focus on
process improvement: benchmarking, business process improvement, total quality management,
lean accounting, the theory of constraints, sustainability, and enterprise risk management.
Strategic information using critical success factors provides a road map for the firm to use to chart
its competitive course and serves as a benchmark for competitive success. Without strategic
information, the firm is likely to stray from its competitive course and to make strategically wrong
product decisions. To emphasize the importance of using strategic information, both financial and
nonfinancial, accounting reports are now often based on CSFs in four perspectives:
1. Financial performance
2. Customer satisfaction
3. Internal processes
4. Learning and growth
An accounting report based on the four perspectives is called a balanced scorecard (BSC). This
provides the basis for a more complete analysis than is possible with financial data alone.
A strategy map is a diagram that links the various perspectives in a balanced scorecard. For many
companies, high achievement in the learning and growth perspective contributes directly to higher
achievement in the internal process perspective, which in turn causes greater achievement in the
customer satisfaction perspective, which then produces the desired financial performance. This is
therefore a useful means in understanding how improvement in certain CSFs contributes to other
goals and to the ultimate financial results.
The value chain is an analysis tool organizations use to identify the specific steps required to
provide a competitive product or service to the customer. An analysis of the value chain helps
management discover which steps or activities are not competitive, where costs can be reduced, or
which activity should be outsourced. The analysis also finds ways to increase value for the
customer at one or more steps of the value chain. The key idea is that the firm should carefully
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