SAMENVATTING STRATEGIC
MANAGEMENT ACCOUNTING
2021 – 2022
Inhoud
1. Activity Based Costing ......................................................................................................................... 7
1.1. Activity Based Costing versus traditional costing .................................................................... 7
1.1.1. ABC cost hierarchies ........................................................................................................ 7
1.1.2. ABC in practice................................................................................................................. 7
1.1.3. Activity cost drivers ......................................................................................................... 7
1.1.4. Extending ABC ................................................................................................................. 8
1.1.4.1. Customer Profitability Analysis ............................................................................... 9
1.2. ABM: Customer Profitability Analysis.................................................................................... 11
1.2.1. Customer profitability profiles ...................................................................................... 11
1.3. ABM: Total Cost of Ownership .............................................................................................. 12
1.3.1. A set of financial and non-financial criteria................................................................... 12
1.3.2. Weighted average ......................................................................................................... 12
1.3.3. Total cost of ownership ................................................................................................. 13
1.4. Time Driven Activity Based Costing (TDABC)......................................................................... 14
1.4.1. Time equations .............................................................................................................. 15
2. Inventory management ................................................................................................................. 16
2.1. Economic Order Quantity (EOQ) ........................................................................................... 16
2.1.1. Basic EOQ assumptions ................................................................................................. 16
2.1.2. EOQ calculation ............................................................................................................. 17
2.1.3. Reorder point (RP) ......................................................................................................... 18
2.1.4. Safety Stock ................................................................................................................... 18
2.1.5. Conflicts between EOQ decision model & manager’s performance evaluation ........... 19
2.2. Just-in-Time (JIT) Purchasing ................................................................................................. 19
2.2.1. Relevant costs in JIT Purchasing .................................................................................... 19
2.2.2. JIT purchasing and supply-chain analysis ...................................................................... 20
2.3. Inventory management and Materials Requirement Planning (MRP) .................................. 20
2.3.1. Materials Requirement Planning ................................................................................... 20
2.3.2. Inventory management and JIT production .................................................................. 20
2.3.2.1. ERP systems ........................................................................................................... 20
, 2.3.3. Effect of JIT systems on product costing ....................................................................... 21
2.4. Backflush costing ................................................................................................................... 21
2.5. Lean accounting..................................................................................................................... 21
2.5.1. Performance measures and control .............................................................................. 22
3. Allocating support department costs ............................................................................................ 22
3.1. Stage 1: From service to production department ................................................................. 22
3.1.1. Direct Allocation method .............................................................................................. 23
3.1.2. Sequential Allocation method ....................................................................................... 24
3.1.3. Reciprocal Allocation method ....................................................................................... 24
3.2. Stage 2: Allocations to the products ..................................................................................... 26
4. Pricing decisions and cost management ....................................................................................... 26
4.1. Time horizons and pricing ..................................................................................................... 26
4.2. Alternative LR pricing approaches......................................................................................... 26
4.2.1. Market-based approach ................................................................................................ 27
5. Data analytic thinking and prediction ........................................................................................... 28
5.1. Data science and management accounting .......................................................................... 28
5.1.1. Components of data science ......................................................................................... 28
5.1.2. Data science framework ................................................................................................ 28
5.1.2.1. Gain a business understanding of the problem .................................................... 28
5.1.2.2. Obtain and explore data ........................................................................................ 29
5.1.2.3. Prepare data .......................................................................................................... 29
5.1.2.4. Build a model ......................................................................................................... 29
5.1.2.5. Evaluating the model ............................................................................................. 33
5.1.2.6. Visualize and communicate insights...................................................................... 34
5.1.2.7. Deploy the model .................................................................................................. 34
6. The control function of management ........................................................................................... 35
6.1. Management control............................................................................................................. 35
6.1.1. Objective setting............................................................................................................ 35
6.1.2. Strategy formulation ..................................................................................................... 35
6.1.3. Management control..................................................................................................... 36
6.2. Causes of management control problems ............................................................................ 37
6.2.1. Lack of direction ............................................................................................................ 37
6.2.2. Motivational problems .................................................................................................. 37
6.2.3. Personal limitations ....................................................................................................... 38
6.3. Control problem avoidance ................................................................................................... 38
6.3.1. Activity elimination........................................................................................................ 38
6.3.2. Automation.................................................................................................................... 38
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, 6.3.3. Centralization ................................................................................................................ 39
6.4. Control alternatives ............................................................................................................... 39
7. Management control alternatives and their effects ..................................................................... 40
7.1. Results controls ..................................................................................................................... 40
7.1.1. Elements ........................................................................................................................ 40
7.1.1.1. Defining the performance dimensions .................................................................. 40
7.1.1.2. Measuring performance ........................................................................................ 41
7.1.1.3. Setting performance targets ................................................................................. 41
7.1.1.4. Providing rewards .................................................................................................. 41
7.1.2. Conditions determining the effectiveness of results controls ...................................... 41
7.1.2.1. Knowledge of desired results ................................................................................ 42
7.1.2.2. Ability to influence desired results (controllability) .............................................. 42
7.1.2.3. Ability to measure controllable results effectively................................................ 42
7.1.3. Pros and cons of results controls .................................................................................. 42
7.2. Action, personnel and cultural controls ................................................................................ 43
7.2.1. Action controls .............................................................................................................. 43
7.2.2. Personnel/cultural controls ........................................................................................... 44
7.2.2.1. Personnel controls ................................................................................................. 44
7.2.2.2. Cultural controls .................................................................................................... 45
7.3. Control system tightness ....................................................................................................... 45
7.3.1. Tight action controls ...................................................................................................... 45
7.3.1.1. Behavioral constraints ........................................................................................... 45
7.3.1.2. Preaction reviews .................................................................................................. 46
7.3.1.3. Action accountability ............................................................................................. 46
7.3.2. Tight results controls ..................................................................................................... 46
7.3.2.1. Definitions of desired results................................................................................. 46
7.3.2.2. Performance measurement .................................................................................. 46
7.3.2.3. Incentives............................................................................................................... 46
7.3.3. Tight personnel/cultural controls .................................................................................. 47
7.3.4. Control combinations .................................................................................................... 47
7.4. Control system costs ............................................................................................................. 47
7.4.1. Behavioral displacement ............................................................................................... 47
7.4.2. Gamesmanship .............................................................................................................. 47
7.4.3. Operating delays............................................................................................................ 48
7.4.4. Negative attitudes ......................................................................................................... 48
7.5. Designing and evaluating management control systems...................................................... 48
8. Financial results control systems................................................................................................... 49
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, 8.1. Responsibility centers............................................................................................................ 49
8.1.1. Measuring the performance of RC managers ............................................................... 49
8.1.2. Types of responsibility centers ...................................................................................... 50
8.1.2.1. Expense centers ..................................................................................................... 50
8.1.2.2. Revenue centers .................................................................................................... 51
8.1.2.3. Profit/investment centers ..................................................................................... 51
8.1.3. Organization structure .................................................................................................. 52
8.1.4. Financial responsibility centers: transfer pricing .......................................................... 53
8.1.5. Why and how are TP used? ........................................................................................... 53
8.1.6. A well designed TP system ............................................................................................ 53
8.1.7. MCS aspects................................................................................................................... 54
8.1.8. Calculation of MCS TP.................................................................................................... 55
8.1.8.1. Market-based transfer pricing............................................................................... 55
8.1.8.2. Variable cost-based transfer pricing...................................................................... 55
8.1.8.3. Full cost-based transfer pricing ............................................................................. 56
8.1.8.4. Negotiated transfer price ...................................................................................... 56
8.1.8.5. Dual pricing ............................................................................................................ 56
8.1.9. Calculation of goal congruent TP................................................................................... 56
8.1.10. Transfer pricing example ............................................................................................... 57
8.2. Planning and budgeting ......................................................................................................... 59
8.2.1. Planning cycle ................................................................................................................ 59
8.2.2. Characteristics of a budget ............................................................................................ 59
8.2.3. Budgeting and management control............................................................................. 59
8.2.4. The budget preparation process ................................................................................... 60
8.2.5. Decisions related to basic budgetary process ............................................................... 60
8.2.5.1. Length of budgeting process ................................................................................. 60
8.2.5.2. Controlling discretionary expenditures ................................................................. 60
8.2.5.3. Budget participation .............................................................................................. 60
8.2.6. Decisions related to budget targets .............................................................................. 61
8.2.6.1. Types of financial performance targets ................................................................. 61
8.2.6.2. Budget target difficulty.......................................................................................... 62
9. Performance measurement issues and their effects .................................................................... 63
9.1. Financial performance measures and their effects ............................................................... 63
9.1.1. Summary measures ....................................................................................................... 63
9.1.1.1. Market measures................................................................................................... 63
9.1.1.2. Accounting measures ............................................................................................ 64
9.1.2. Investment and operating myopia ................................................................................ 64
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, 9.1.3. ROI performance measures........................................................................................... 65
9.1.3.1. Economic Value Added (EVA) ................................................................................ 65
9.1.3.2. Problems cause by ROI-measures ......................................................................... 65
9.1.3.3. Other issues ........................................................................................................... 67
9.1.3.4. The fixed assets portion ........................................................................................ 67
9.1.3.5. Misleading performance signals ............................................................................ 68
9.2. Remedies to the myopia problem ......................................................................................... 68
9.2.1. Overcoming myopia ...................................................................................................... 68
9.2.1.1. The Balanced Scorecard (BSC) ............................................................................... 69
9.2.1.2. Evaluating the BSC-approach?............................................................................... 73
10. Corporate Governance, important control-related roles and ethics ........................................ 75
10.1. Corporate Governance and Boards of Directors ............................................................... 75
10.1.1. Corporate governance regimes (world) ........................................................................ 75
10.1.2. Relevant issues .............................................................................................................. 76
10.1.3. Literature on Corporate Governance ............................................................................ 76
10.1.4. Board of directors .......................................................................................................... 76
10.1.5. Audit committees .......................................................................................................... 77
10.1.6. Compensation committees ........................................................................................... 77
10.1.7. Internal governance mechanisms ................................................................................. 78
10.1.8. External governance mechanisms ................................................................................. 78
10.1.9. Sarbanes-Oxley Act (2002) ............................................................................................ 78
10.1.9.1. Key provisions ........................................................................................................ 79
10.1.9.2. Section 404 ............................................................................................................ 79
11. International transfer pricing .................................................................................................... 80
11.1. Transfer pricing from a MCS point of view........................................................................ 80
11.2. Transfer pricing from an international point of view ........................................................ 80
11.3. Legal framework ................................................................................................................ 81
11.4. Arm’s length principle (ALP) .............................................................................................. 81
11.4.1. Guidance for applying ALP............................................................................................. 82
11.4.2. Transfer pricing methods .............................................................................................. 82
11.4.2.1. CUP method........................................................................................................... 83
11.4.2.2. Resale price method .............................................................................................. 84
11.4.2.3. Cost-plus method .................................................................................................. 85
11.4.2.4. Profit split method................................................................................................. 86
11.4.2.5. TNMM/CP method ................................................................................................ 87
11.4.3. Comparables .................................................................................................................. 89
11.4.4. Functional analysis ........................................................................................................ 90
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,11.4.4.1. Functions ............................................................................................................... 90
11.4.4.2. Assets ..................................................................................................................... 90
11.4.4.3. Risks ....................................................................................................................... 90
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, MODULE 1: STRATEGIC COST ACCOUNTING
1. Activity Based Costing
1.1. Activity Based Costing versus traditional costing
Traditional ABC
CD = cost driver RD = resource driver
CP = cost pool AD = activity driver
1.1.1. ABC cost hierarchies
ABC uses a 4-level cost structure to determine how far down the production cycle costs should be
pushed:
1. Unit level (output level): for activity that must be done for each unit of production (e.g.
machine related activity cost pool)
2. Batch level: for activity that must be done for each batch of products (e.g. inspection, set-up,
material handling, shipping, quality assurance…)
3. Product-sustaining level: includes activities needed to support an entire product line but that
are not always performed every time a new unit of batch is introduced (e.g. engineering costs)
4. Facility-sustaining level (general operations level): required in order for the entire production
process to occur (e.g. management salaries, plant depreciation, property taxes, plant
maintenance, insurance…)
1.1.2. ABC in practice
STAGE 2: identify cost drivers for each cost
STAGE 1: identify activity cost pools (which pool, then assign the costs in each cost pool
fall into the 4-level cost structure) to the product lines in proportion of each
cost driver consumed by each product line
Design of ABC system: requires activity analysis based on information systems and interviews to
identify
• costs
• activities
• resource time per activity
• cost drivers
1.1.3. Activity cost drivers
Goal = best cost system, not most accurate one → balance the cost of errors resulting from inaccurate
estimates with the cost of measurement (trade-off!)
• The more complex the cost system, the more accurate = lower costs because of errors (no
under or overallocation)
• The more complex the cost system, the more work there is = higher costs because of setting
up the system
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, ➔ Most companies limit their activity dictionary to 30-50 activities and choose ACD that can be
obtained simply and are available within their organization’s existing information system
➔ Most of the benefits of a more accurate cost system can be obtained with simple ABC systems
Transaction drivers Duration drivers Intensity drivers
1. Transaction drivers: used to count the frequencies of an activity (e.g. # setups)
o Advantage: the least expensive type of cost driver
o Disadvantage: the least accurate type of cost driver
➔ Assumption: the same quantity of resources is required every time an activity is performed
➔ Recommended: if the variation in the quantity of resources used by each activity is small
enough (e.g. all setup times are between 30 and 35 minutes)
2. Duration drivers: represent the amount of time required to perform an activity (e.g. setup
time)
o Advantage: more accurate
o Disadvantage: more expensive because they require an estimate of time needed each
time an activity is performed
➔ Assumption: all hours are equally costly but does not reflect the higher costs that may be
required on some setups (e.g. extra personnel, more skilled personnel, more expensive
machinery…)
➔ Recommended: should be used when significant variations exist in the amount of activity
required for different outputs (e.g. setup times range from 30 minutes to 6 hours)
3. Intensity drivers: directly charge for the resources used each time an activity is performed
o Advantage: the most accurate activity cost driver
o Disadvantage: the most expensive cost driver to implement
➔ Recommended: should be used only when the resources associated with performing an
activity are both expensive and variable each time an activity is performed
Warning signs that suggest that ABC could help a firm:
• Significant overhead costs allocated using one or two cost pools
• Most or all overhead is considered unit level
• Products that consume different amounts of resources
• Products that a firm should successfully make and sell consistently show small profits
• Operations staff disagreeing with accounting over manufacturing and marketing costs
➔ ABC implementation is widespread in a variety of applications outside manufacturing including
health care, banking, telecommunications, retailing, transportation…
1.1.4. Extending ABC
Activity Based Management (ABM) = use cost accounting data to affect future costs rather than to
simply reflect past costs
➔ Assign costs to activities that are associated with new cost objects
o CPA (Customer Profitability Analysis): the support of particular customers
o TCO (Total Cost of Ownership): the use of particular suppliers
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,1.1.4.1. Customer Profitability Analysis
= analysis of costs and revenues per customer (group)
Why?
• Increased costs of marketing, selling, distribution and administrative (MSDA)
• Increased importance of customer satisfaction and market-oriented strategies
How?
• Allocate MSDA based on ABC because many costs are not related to number of products (cost
hierarchy):
o Individual customers
o Market segments
o Distribution channels
• Cost object = customer (group)
Customer-cost analysis
1. Customer output unit level costs: per unit
2. Customer batch level costs: e.g. cost per customer order or per delivery
3. Customer sustaining costs: cost to support individual customers regardless of number of units
or batches
4. Distribution channel costs: relate to distribution channel rather than to each unit or customer
(e.g. salary of wholesale distribution manager versus retail distribution manager)
5. Division sustaining costs: costs that cannot be traced to a product, customer or even a
distribution channel (e.g. salary of the division manager)
EXAMPLE:
• Alpha and Beta generate about equal revenue
• In many respects, however, the customers were not similar
Beta
o Places many small orders for special products
o Requires expedited delivery
o Tends to pay slowly
→ increased demands on order processing, invoicing and accounts receivable process
Alpha
o Orders only a few products and in large quantities
o Places its orders predictably and with long lead times
o Requires little sales and technical support
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, Conventional cost accounting system CPA
→ Allocation MSDA expenses: 35% of sales
CPA has a completely different outcome than the conventional system
CPA steps:
1. Study the resource spending of the various accounts
2. Identify the activities performed by the resources
3. Select activity cost drivers to link each activity to the customers
o Transactional activity cost drivers (number of orders/mailings)
o Duration drivers (estimated time and effort)
o Intensity drivers when readily-available (actual freight/travel expenses)
4. Use a customer cost hierarchy
o Order related activities (e.g. handle customer orders, ship to customers…)
o Customer sustaining activities (e.g. service customers, travel to customers,
provide marketing and technical support…)
Characteristics of high and low cost-to-serve customers
HIGH COST-TO-SERVE CUSTOMERS LOW COST-TO-SERVE CUSTOMERS
• Order custom products • Order standard products
• Small order quantities • High order quantities
• Unpredictable order arrivals • Predictable order arrivals
• Customized delivery • Standard delivery
• Change delivery requirements • No changes in delivery requirements
• Manual processing • Electronic processing (EDI)
• Large amounts of presales support • Little to no presales support (standard
(marketing, technical and sales pricing and ordering)
resources) • No postsales support
• Large amounts of postsales support • Replenish as produced
(installation, training, warranty, field • Pay on time
service)
• Require company to hold inventory
• Pay slowly (high accounts receivable)
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