Chapter 1 considers the role of accounting and accountants in organisations.
-Management accounting, financial accounting and cost accounting
-Accounting systems and management controls
-costs, benefits and context
-Value creation
-Digitalisation: management accounting’s most important challenge
(1) Management accounting, financial accounting and cost accounting
Management accounting = measures, analyses and reports financial information and non-
financial information that are intended primarily to assist managers in fulfilling the goals of
the organisation.
Management accounting information do not have to follow set principles or rules, the key
questions are always (1) How will this information help managers do their jobs better (2) do
the benefits of producing this information exceed the costs and (3) does the information
recognise what is specific about the organisational context.
Financial accounting = focuses on external reporting that is directed by authoritative
guidelines. Organisations are required to follow these guidelines in their financial reports to
outside parties. Financial accounting is guided by prescribed accounting standards.
Management accounting is not restricted by accounting principles!
The work of management and financial accounting can be categorized as:
- Regulations
- Range and detail of information
- Reporting interval
- Time period
Cost accounting = measures and reports financial and non-financial information related to
the organisations acquisition or use of resources. It provides information for both
management accounting and financial accounting.
We use the term cost management = to describe the actions managers undertake in the
short-run and long-run planning and control of costs that increase value for customers and
lower the costs of products and services.
Ultimately management accounting's primary purpose is to enhance value creation within
both private and public sector organisations. The management accountant must make use of
a sound body of knowledge as well as abide by ethical guidelines.
,Strategic decisions and management accounting
A strategy describes how an organisation creates value for its customers while distinguishing
itself from its competitors. A company might use one of the two broad strategies: Cost
leadership strategy or product differentiation strategy. Sources of competitive advantage to
make a decision are determined by (1) The company’s cost, productivity or efficiency
advantage relative to competitors or (2) the premium prices a company can charge over its
costs from distinctive product or service features.
Management accounting information helps managers focus on strategic issues by answering
question such as the following:
- Who are our most important customers, and what critical capability do we have to be
competitive and deliver value to our customer?
- What is the bargaining power of our customers?
- What is the bargaining power of our suppliers?
- What substitute products exist in the marketplace, and how do they differ from our
product in terms of features, price, cost and quality?
- Will adequate cash be available to fund the strategy or will additional funds need to
be raised?
New circumstances are also reshaping management accounting activities like; big data,
internet of things and artificial intelligence. Innovations are and will continue to be of interest
to management accountants because they link in to measuring, analysing and reporting of
financial information and non-financial information that are intended to assist managers in
fulfilling enterprise strategies.
(2) Accounting systems and management controls
,The major purposes of accounting systems
there are 5 broad purposes:
1. Formulating overall strategies and long-range plans
2. Resource allocation decisions such as product and customer emphasis and pricing
3. Cost planning and cost control of operations and activities
4. Performance measurement and evaluation of people
5. Meeting external regulatory and legal reporting requirements where they exist
Some present-day key influences on changes in accounting information include:
- An Increased pace of change in the business world
- Shorter product life cycles and competitive advantages
- A requirement for more strategic action by management
- Digital transformation of companies and new business models
- The outsourcing of non-value-added but necessary services
- Increased uncertainty and the explicit recognition of risk
- Novel forms of reward structures
- Increased regulatory activity and altered financial reporting requirements
- More complex business transactions
- Increased focus on customer satisfaction
- New ethics of enterprise governance
- The need to recognise intellectual capital
- Enhancing knowledge management processes
Planning and control
planning = defines as choosing goals, predicting results under various ways of achieving
those goals, and then deciding how to attain the desired goals
budget = is the quantitative expression of a plan of action and an aid to the coordination and
implementation of the plan.
Control = covers both the action that implements the planning decision and deciding on
performance evaluation and the related feedback that will help future decision making.
Understanding the reasons for any difference between actual results and budgeted results is
an important part of management by exception. Which is the practice of concentrating on
areas not operating as expected.
Variance = refers to the difference between the actual results and the budgeted amounts.
Feedback: a Major key
Feedback involves managers examining past performance and systematically exploring
alternative ways to improve future performance. It can lead to a variety of responses,
including the following:
- Tracking growth
- Searching for alternative means of operating
- Changing methods for making decisions
- Making predictions
- Changing operations
, - Changing the reward system
Scorekeeping, attention-directing and problem-solving functions
Management accountants can be considered to perform three important functions in their
reporting: Scorekeeping, attention directing and problem solving.
Scorekeeping = refers to the accumulation of data and the reporting of reliable results to all
levels of management.
Attention directing = attempts to make visible both opportunities and problems on which
managers need to focus. Attention directing should focus on all opportunities to add value to
an organisation and not just on cost-reduction opportunities.
Problem solving = refers to the comparative analysis undertaken to identify the best
alternatives in relation to the organization’s goals
(3) costs, benefits and context
Management accounting systems are affected as much by behavioral and social factors as
by technical ones.
The measurement of costs and benefits of developing and using information are seldom
easy. This is because we cannot assume rational-economic behaviour on the part of
managers and accountants.
(4) Value creation
The design of a management accounting system should be guided by the challenges facing
managers. Key themes of planning and control are:
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