Management Accounting Samenvatting
Chapter 1 Cost management and strategy
Management accounting and the role of cost management
A firm must define clearly what it menas by success in its mission statement. Then it must devevelop
a road map to accomplish that mission, which we call strategy. Strategy a plan to achieve
competitive success.
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 (decision making, planning, performance
management, and more), 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, from stage 1 through stage 5, as shown
below:
- Stage 1: business events
- Stage 2: data
- Stage 3: information
- Stage 4: knowledge
- Stage 5: decisions
At lower stages of the 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, management accountants use this k
knowledge 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 has
a wide range of responsibilities, including cost management, financial
reporting, maintaining of financial information systems, and other
reporting functions. The chief financial officer (CFO) has the overall
responsibility, 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
such as investors and government regulators.
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
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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 such as payroll, financial security systems, and tax preparation.
The four functions of management
Cost management information is provided for each of the four major management functions: (1)
strategic, (2) planning and decision making, (3) management and operational control, and (4)
preparation of financial statements. The most important function is strategic management, which is
the development and implementation of 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. Strategic management involves
identifying and implementing these goals and action plans. Next, management is responsible for
planning and decision making, which involve budgeting and profit planning, cash flow management,
and other decisions related to the firm’s operations, such as deciding when to lease or buy a facility,
when to repair or replace a piece of equipment, when to change a marketing plan, and when to
begin development of a new product.
Cost management information is needed for each of the four management functions:
Strategic management Cost management information is needed to
make sound strategic decisions regarding
choice of products, manufacturing methods,
marketing techniques and distribution
channels, customer profitability, and other
long-term issues
Planning and decision making Cost management information is needed to
support recurring decisions regarding replacing
equipment, managing cash flow, budgeting
materials purchases, scheduling production and
pricing
Management and operational control Cost management information is needed to
provide a fair and effective basis for identifying
inefficient operations and to reward and
motivate the most effective managers
Preparation of financial statements Cost management information is needed to
provide accurate accounting for inventory and
other assets, in compliance with reporting
requirements, for the preparation of financial
reports and for use in the three other
management functions
The third area of responsibility, control, consists of two functions, operational and management
control.
- Operational control takes place when mid-level managers monitor the activities of
operating-level managers and employees.
- Management control is the evaluation of mid-level managers by upper-level managers.
In the fourth function, preparation of financial statements management complies with the
reporting requirements of relevant groups (such as the financial accounting standards board) and
relevant federal government authorities. The financial statement preparation role has recently
received a renewed focus as countries throughout the world have adopted IFRS. The financial
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statement information also serves the other three management functions, because this information
is often an important part of planning and decision making, control, and strategic management.
Strategic management and the strategic emphasis in cost management
Strategic thinking involves anticipating changes; products, services, and operating processes are
designed to accommodate expected changes in customer demands. Flexibility is important. The
ability to make fast changes is critical as a result of the demands of the new management concepts of
e-commerce, speed-to-market, and flexible manufacturing. Product life cycles- the time from the
introduction of a new product to its removal from the market – is expected to become shorter and
shorter. Success in the recent past days or months is no longer a measure of ultimate success; the
manager must be driving the firm by using the windshield, not the rear-view mirror.
The strategic emphasis also requires creative and integrative thinking, that is, the ability to identify
and solve problems from a cross-functional view.
Types of organizations
Merchandising firms purchase goods for resale. Merchandisers that sell to other merchandisers are
called wholesalers; those selling directly to consumers retailers.
- Examples: Walmart, Target and Amazon.
Manufacturing firms use materials, labor, and manufacturing facilities and equipment to produce
products. They sell these products to merchandising firms or to other manufacturers as materials to
make other products.
- Examples: Ford, General Electric and Cisco Systems.
Service firms provide a service to customers that offers convenience, freedom, safety, or comfort.
Common services include transportation, health care, financial services (banking, insurance,
accounting), personal services (physical training, hair styling), and legal services. In the US, service
industries are growing at a much faster rate than manufacturing or merchandising, in part because of
the increased demand for leisure and convenience and society’s increased complexity and need for
information.
Governmental and not-for-organizations provide services, much like the firms in service industries.
However, these organizations provide the services for which no direct relationship exists between
the amount paid and the services provided. Instead, both the nature of these services and customers
who receive them are determined by government or philanthropic organizations. The resources are
provided by governmental units and/or charities. The services provided by these organizations are
often called public goods to indicate that no typical market exists for them. Public goods have a
number of unique characteristics, such as the impracticality of limiting consumption to a single
customer (clean water and police and fire protection are provided for all residents).
Both large and small firms in all types of industries use cost management information. A firm’s
degree of reliance on cost management depends on the nature of its competitive strategy. Many
firms compete on the basis of being the low-cost provider of the industry’s goods or services; for
these firms, cost management is critical. Other firms, such as cosmetics, fashion and pharmaceutical
firms, compete on the basis of product leadership, in which the unusual or innovative features of the
product make the firm successful. For these firms, that critical management concern is maintaining
product leadership through product development and marketing. The role of cost management is to
support the firm’s strategy by providing the information managers need to succeed in their product
development and marketing efforts, such as the expected cost of adding a new product feature, the
defect rate of a new part, or the reliability of a new manufacturing process.
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Not-for-profit and governmental organizations also must have a strategy to accomplish their mission
and have a strategy to accomplish their mission and satisfy their constituents. Historically,
governmental units and not-for-profit agencies have tended to focus on their responsibility to spend
in approved ways rather than to spend in efficient and effective ways. Increasingly, however, these
types of organizations are using cost management for efficient and effective use of their financial
resources.
The contemporary business environment
Many changes in the business environment in recent years have cause significant modifications in
cost management practices. The primary changes are:
1. Increased global competition
2. Lena manufacturing
3. Advances in information technologies, the internet, and enterprise resource management
4. Greater focus on the customer
5. New forms of management organization
6. Changes in the social, political, and cultural environment of business
The global business environment
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. Businesses and not-for-profit organizations, as well as consumers
and regulators, are all significantly affected by the rapid growth of economic interdependence and
increased competition from other countries. The NAFTA, CAFTA, WTO, EU, and the growing number
of alliances among large multinational firms clearly indicate that the opportunities for growth and
profitability lie in global markets. Most consumers benefit as low-cost, high-quality goods are traded
worldwide. Managers and business owners know the importance of pursuing sales and operating
activities in foreign countries, and investors benefit from the increased opportunities for investment
in foreign firms.
A force against globalization: Brexit and economic nationalism
Economic nationalism the ideology that promotes domestic economic growth and opposes
globalization free trade, and immigration.
Lean manufacturing
To remain competitive in the face of the increased global competition, firms around the world are
adopting new manufacturing technologies. These include just-in-time inventory methods to reduce
the cost and waste of maintaining large levels of materials and unfinished products. Also, many firms
are adopting the lean methods applied in Japanese manufacturing that have produced significant
cost and quality improvements through the use of quality teams and statistical quality control. Other
manufacturing changes include flexible manufacturing techniques developed to reduce setup times
and allow fast turnaround of customer orders.
Use of information technology, the internet, and enterprise resource management
Perhaps the most fundamental of all business changes has been the increasing use of information
technology, the internet, and performance management systems. This new economy is reflected in
the rapid growth of internet-based firms.
- The increased use of the internet for communications, sales, and business data processing;
and the use of enterprise management systems.
These technologies have fostered the growing strategic focus in cost management by reducing the
time required for processing transactions and by expanding the individual manager’s access to
information within the firm, the industry, and the business environment around the world.
