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Financial Decision Making & Control Short Summary
- Instelling
- Erasmus Universiteit Rotterdam (EUR)
Financial Decision Making & Control Short Summary
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Voorbeeld van de inhoud
Chapter 1: introduction to management accountingAccounting = process of identifying, measuring, and communicating economic information
to permit informed judgement and decisions by users of the information
2 types of accounting
1. Management accounting = information to people within the organization to help
them make decisions and improve efficiency and effectiveness
2. Financial accounting = information to external parties outside organization including
general public
Main difference between the 2:
- Legal requirements
- Focus individual part or segment of business
- GAAP
- Time dimension
- Report frequencies
Decision-Making & control process
1. Identifying objectives
- Mostly maximizing shareholder’s wealth AKA maximizing PV future cash flows
2. Search for alternative courses of action
- Product development (new product), market development (new market),
diversification (new product & new market)
- Most difficult and most important stage decision making!
3. Select appropriate alternative course of action
- Alternatives evaluated and choose which best satisfies objectives organization
4. Implementation of decisions
- Budget created = financial plan
- Budget of each department are merged into master budget (budgeted profit and
cash flow statements)
5. Comparing actual and planned outcomes and responding to divergencies
- Managerial function of control = measurement, reporting and correction of
performance
- Performance reports are used
à management by exception (focus on ‘vital few’ not ‘trivial many’)
Impacts of changing business environments on management accounting
• Global competition
• Changing product life cycles
• Advances in manufacturing technologies
• Impact information technology and digitalization
1
, • Environmental and sustainability issues
• Pressure to adopt higher standard of ethical behavior
• Focus on value creation
• Customer orientation
Key success factors company:
- Cost efficiency
- Quality
- Time competitive weapon
- Innovation
Cost accounting = cost accumulation for inventory valuation for external reporting and
internal profit measurement
Management accounting = providing appropriate information for decision making and
performance evaluation
2
, Chapter 2: introduction to cost terms and concepts
Cost object = any activity for which a separate measurement costs is desired
Cost collection system:
1. Accumulates costs by categories (direct or indirect) or by behavior (fixed or variable)
2. Assigns costs to costs objects
Manufacturing costs
Direct material costs Material costs specifically, and exclusively
measured and identified with a particular
cost object (object is a product, physical
observation)
Direct labor costs Labor costs specifically and exclusively
identified with particular cost object
Indirect costs = Overhead Costs that cannot be identified specifically
exclusively with cost object
Cost allocation = process of assigning costs when direct measure does not exist for the
quantity of resources consumed by a particular cost object
Product costs VS period costs
Product costs Costs that are identified with goods
purchases or produced for resale
(inventory, WIP until sold and after that
expensed)
- Manufacturing costs
Period costs Costs not specifically related to
manufacturing or purchasing a product or
providing a service (not included inventory
but treated as expense when incurred)
- Non-manufacturing costs
Cost Behavior
Variable costs Vary with in direct proportion to volume of
activity
Fixed costs Remain constant over wide ranges of
activity for a specified time period, not
affected by changes in activity
Semi-fixed / Step-fixed costs Within a given period they are fixed within
specified activity levels, but eventually they
are subject to step increases or decreases
by a constant amount at various critical
levels (longer periods of time)
Semi-variable / mixed costs Include fixed and variable component
3
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