Week 1 – Understanding Processes and Value CreationManagement Accounting 1 (ACCT2522) Notes Week 1...
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Management Accounting 1 (ACCT2522) Notes Week 1 – Understanding Processes and Value Creation Comparison of Management Accounting and Financial Accounting Information Management accounting Financial accounting Users of information Internal – mangers and employees at all levels External – shareholders, creditors, banks, securities exchange, trade unions and government agencies Regulations No accounting standards or external rules Must follow externally imposed rules Source of data Both financial and non-financial data from many sources Financial data almost exclusively drawn from the transaction-based accounting system Nature of the information • Past, current and future oriented – subjective with emphasis on the future • Timely and relevant • Supplied at various levels of detail to suit managers’ specific needs • Past - objective with historical orientation (reliable) • Verifiable • Not timely and relevant • Highly aggregated information Uses of Management Accounting Information To be effective and efficient à improve customer value and shareholder value, management accounting: • Supports the organisation’s formulation and implementation of strategy (long-term vs. short-term plan) o Strategic plan – long-term planning to achieve the organisation’s objectives, usually undertaken by senior managers o Implementing strategies à long-term plans needs to be implemented across all levels of the organisation • Contributes to continuous improvement of the organisation’s competitive advantage, especially in terms of quality, time and cost o Management accounting information should be shaped around the organistion’s source of competitive advantage. E.g.: if a firm competes mainly on low cost, its management accounting information should focus on product costs and tight cost control. o If a firm uses a differentiation strategy, it should focus on measuring and reporting performance around the sources of differentiation (quality, delivery, time, flexibility and innovation).
Transcript of Week 1 – Understanding Processes and Value CreationManagement Accounting 1 (ACCT2522) Notes Week 1...
ManagementAccounting1(ACCT2522)Notes
Week1–UnderstandingProcessesandValueCreation
Comparison of Management Accounting and Financial Accounting Information
Managementaccounting FinancialaccountingUsersofinformation
Internal–mangersandemployeesatalllevels External–shareholders,creditors,banks,securitiesexchange,tradeunionsandgovernmentagencies
Regulations Noaccountingstandardsorexternalrules MustfollowexternallyimposedrulesSourceofdata Bothfinancialandnon-financialdatafrom
manysourcesFinancialdataalmostexclusivelydrawnfromthetransaction-basedaccountingsystem
Natureoftheinformation
• Past,currentandfutureoriented–subjectivewithemphasisonthefuture
• Timelyandrelevant• Suppliedatvariouslevelsofdetailtosuit
managers’specificneeds
• Past-objectivewithhistoricalorientation(reliable)• Verifiable• Nottimelyandrelevant• Highlyaggregatedinformation
Uses of Management Accounting Information
Tobeeffectiveandefficientàimprovecustomervalueandshareholdervalue,managementaccounting:
• Supportstheorganisation’sformulationandimplementationofstrategy(long-termvs.short-termplan)o Strategic plan – long-term planning to achieve the organisation’s objectives, usually undertaken by senior
managerso Implementingstrategiesàlong-termplansneedstobeimplementedacrossalllevelsoftheorganisation
• Contributes to continuous improvement of the organisation’s competitive advantage, especially in termsof quality,
timeandcosto Management accounting information should be shaped around the organistion’s source of competitive
advantage.E.g.: ifafirmcompetesmainlyonlowcost, itsmanagementaccountinginformationshouldfocusonproductcostsandtightcostcontrol.
o Ifafirmusesadifferentiationstrategy, itshouldfocusonmeasuringandreportingperformancearoundthesourcesofdifferentiation(quality,delivery,time,flexibilityandinnovation).
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• Providesinformationtohelpmanageresources,throughsystemsforplanning (suchasbudgets)andcontrol (suchasperformancemeasures)
o Control involvesputting inplacemechanisms toensure thatoperationsproceedaccording toplanand thatobjectivesareachieved.
o Plansare ineffectiveunless there iswaysofensuring that theyareachieved.This is the roleof control andcontrolsystems.
• Providesestimates of the costs of theorganisation’s output, to support both the strategic andoperational decisionneedsofmangers.
• Assistinperformanceevaluation
What is Management Accounting?
“Theprocessesandtechniquesthatfocusontheeffectivenessandefficientuseoforganisationalresources,tosupportmanagersintheirtasksofenhancingbothcustomervalueandshareholdervalue”
Customer value
Customervalueisthevaluewhichacustomerplacesonthefeatureofaparticulargoodorservice.ThemostimportantbeingQTC:
• Cost – amount of resources consumed in a process. Processesmust use as little resources are required to produceproductorservices
• Quality–thedegreetowhichaproduct/servicemeetsexpectations• Time–theamountoftimeittakesforprocessestooccurandtheon-timeperformanceofthebusinessinallaspects
o Twodimensions:durationandtimelinesso Understanding theamountof time taken toperformeachactivityhelpmanagers recogniseanybottlenecks
thatmayexistintheprocessThese ‘primary’processparametersareall interrelated. Ifcostwasreducedtoavery lowamount, thequalitymightworsen.Likewise,ahighqualityproductmaytakeaverylongtimetoproduceandthuslowerthefirm’stimeliness.‘Secondary’ process values are process attributes that are crucial in supporting andmonitoring improvement efforts. Theseinclude:
• Responsiveness – customers seek greater customisation of products. Processes should be able to flexibliy andefficientlycopewithchangingpatternsofdemand
• Productivityo Increasedconsistency(reducedvariability)enhancesproductivity.Processvariabilityincreasestime,costand
complexityrelatingtonon-valueaddedactivities• Linkages–interdependenciesbetweenactivities
o Whenconsidering improvementefforts,wemust recognise the linkagesbetweenactivities:achange inonefunctionalareamayhaveanadverseornoimpactonwork inotherareas,therefore improvementgoalmaynotbeachievedandcustomersusuallydonotseethevalueofanimprovementinisolationfromtheprocessasawhole
o E.g.reducingcostinoneactivitymayincreasecostsinotheractivities• Innovativenessandempowerment–employeeempowermentisthekeytoinnovativeness
Resources
Resources – inputs into an oganisation’s production processes. It includes financial and non-financial (e.g. information,workprocesses,employees,committedcustomersandsuppliers),tangibleandnon-tangibleinputsofanorganisation.
Resources Activities Products/Services
ValueCreation
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Processes A process is a group of logically related (interdependent) activities which, when performed in sequential order, utilise theresourcesofabusinesstoproduceadefiniteresult.Fromthis,wecandefineanactivityasasubsetofaprocessi.e.aunitofwork;stepinaprocess.Processescaneitherbeoperationaloradministrative.Toclassifyaprocessintoeitherofthesecategoriesrequiresknowledgeof the firmand its context.E.g. anaccountant fillinga tax return fora carmanufacturerwouldbe seenasanadministrativeprocess,whereasanaccountantthatdoestaxreturnforclientswouldseethisasanoperationalprocess
Process Analysis
Fourobjectivesofprocessanalysis(collectively,theyareusuallyknownasUMPPorUMPPS):
1. UnderstandingThisprocessdividesthebusinessintoprocessesandactivitieswhichmakesiteasierformanagementtounderstandthestructureandflowofthebusiness.Itbecomesaloteasiertoseerelationshipsbetweenactivities/processesandthelinksbetweenthem.Thisisusuallydonewithprocessmapping
2. MonitoringThisobjectiveinvolvescontinuallymonitoringprocessesandimprovingonthemwithcomparisontobenchmarksandtargets.ThisisusuallydonebyutilisingStatisticalProcessControl(SPC)
3. PrioritisingThisprocessallowsmanagementtodecidewhichprocessesaremostcriticaltothebusiness’survivalandthusallowthemtoappropriatelyaddressissuesinatimelymannerThisisusuallyachievedwiththeaidofaParetodiagram
4. ProblemsolvingProcessanalysisassistinproblemsolvingbyrecognisingwhereandwhyaproblemoccurs,andbysuggestingapproachestotheseproblems
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Practical Issue in Cost Estimation
Whydosomemanagersprefertousejudgmentinsteadofqualitativeanalysis(eventhoughjudgmentispronetoerror)?• Lackofknowledge
• Data
o Timerequiredtocollectorcollatedatao Problemswithdata:
§ Missingdata–misplacedsourcedocumentsorfailuretorecordatransactionaccuratelycanresultinmissingdata
§ Outliers –extremeobservationsof cost/activitymay representhighlyunusual circumstances, theymay be eliminated from analysis. If outliers are a result of errorsà corrected/eliminated fromanalysis
§ Mismatched time periods – units of time for which dependent and independent variables aremeasuredmaynotmatch
§ Trade-offsinchoosingthetimeperiod(accuracyvstimeliness)• Increasingthenumberofobservationsincreasestheaccuracyofcostfunctions• However, we want the cost functions to describe current or future cost relationships. By
extending theperiodanalysis further into thepast to includemoreobservations, thecostswillnotbecurrentandworkpracticesandtechnologymayhavechangedduringthatperiod
§ Allocatedfixedcosts–fixedcostsaresometimesallocatedonaperunitbasis• E.g. fixedMOHcostssuchas theproductionmanager’s salarymaybeallocatedtounitsof
production–asaresult, suchcostsmayappear tobevariable,but inpracticetheydonotbehaveinavariablemanner
§ Inflation–duringperiodsofinflation,historicaldatamaynotreflectfuturecostbehaviour• Solution:adjusthistoricaldatawithcurrentinflationrate• Notabigissue–inflationrateisgenerallylow
• The learningcurve–newemployeestakelongertodothingswhentheyhavestayedforalongerperiodoftime,will
startdoingthingsfaster.Thiscomplicatesthecostprocess
• Alowpriorityisgiventohighaccuracy(cost-benefitprinciple)o Subjectivecostestimatesmaybegoodenough,dependingontheuseofthisinformation
𝑃𝑟𝑒𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝑚𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑟𝑎𝑡𝑒 = 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑚𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑐𝑜𝑠𝑡 𝑑𝑟𝑖𝑣𝑒𝑟
1. ApplytheMOHcosttotheproductbasedonthepredeterminedMOHrate
AppliedMOH=PredeterminedMOHrate×Quantityofcostdriverconsumedbytheproduct
Avocado Toys Limited manufactures Darth Potato and Storm TrooperPotato.Itsmanufacturingplanthas:
• Twosupportdepartments:MaintenanceandQualityControl• Twoproductiondepartments:MouldingandAssembly
PlantwidemethodStep1:IdentifytheMOHcostdriver
• DirectlabourhoursStep2:CalculateMOHrateperunitofcostdriver
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BudgetedMOH=180000+90000+50000+35000=$355000Budgetedlevelofcostdriver(fromdirectlabourhoursoftable2)=1000+20000+14000+48000=83000Step3:ApplyMOHcoststotoylines
DP’squantityofcostdriver(21000DLH)comesfromhoursofmouldingDLandassemblyDLSTP’s quantity of cost driver (62 000 DLH) comesfrommouldingDLandassemblyDL
• Disadvantage:doesnottakeintoaccountthepossibilitythatdifferentdepartmentsmayhavedifferentcostdrivers• Ideally,mouldingdepartmentandassemblydepartmentsshouldhavedifferentcostdrivers:
o Moulding–machineintensiveo Assembly–labourintensive
2. Departmental Method
Two-stagecostallocationprocess:1. MOHcostsareallocatedtoproductsviadepartments
o MOHcostsareassignedtoproductionandsupportdepartments§ Thisstepiscalledcostdistributionandmayinvolvebothtracingandallocatingcosts§ MOHcostsareindirectproductcosts,butsomeofthemmaybethedirectcostsofdepartment
o MOHcostsappliedtoproducts§ Thisstepiscalledsupportdepartmentcostallocation§ Supportdepartmentcostsmustbereassignedtoproductiondepartmentsbecause,instagetwo,
overheadisappliedtoproductsusingoverheadratesforeachproductiondepartment2. SeparateMOHratesarecalculatedforeachproductiondepartment,usingdifferentcostdrivers
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Allocating Support Department Costs
Purpose:toinformusersofcostsofusingservices,toassistinplanningandcontrolactivities.Allocationmethodsusedincludedirect:
1. Directmethod2. Step-downmethod3. Reciprocalmethod
Lectureexample:
1. Direct Method
Support departments costs are allocated directly to endproduction/service departments. It does not consider thatsupport departments may provide service to other supportdepartments.Advantage:simpleallocationDisadvantage:ignoresthefactthatsomesupportdepartmentsprovideservicetosupportothersupportdepartments
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The following schedule reflects the use of theMaintenanceDepartment’s andQuality Control Department’s services by thevariousdepartments:
2. Step-Down Method
Partially accounts for the provision of services betweensupportdepartments.Costsareassignedinsequentialorder.
Steps:
1. Determinesequenceofallocatingsupportdepartmentcoststoothersupportdepartments
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o Ruleofthumb:startwithsupportdepartmentthatservesthelargestnumberofsupportdepartments;howeverifmorethanonesupportdepartmentsservethesamenumbersupportdepartments,allocatetheonewiththebiggestbudgetedcostfirst
2. Allocatethetotalofoperatingsupportdepartmentcoststodepartmentsthatuseitsservice
