EVOLUTION OF MANAGEMENT

ACCOUNTING

1-1
4-2 LECTURE COVERAGE

 Evolution of management accounting using IFAC

model

 Relevance lost –relevance of traditional management

accounting techniques in the modern business
environment
 Outline
 Organisations in the 21st century
 What is management accounting?
 Management accounting vs financial accounting
information
 Management accountants within organisations
 Management accounting and strategy
 Planning and control
 Important considerations in the design of
management accounting systems
 Management accounting responses to the changing
business environment

1-3
Organisations in the 21st century

 Organisations have faced increasing global competition

since the early 1990s
 Corporatisation and privatisation of public sector bodies
competing with private sector
 Rise of the service-based economy
 Rapid and unpredictable changes
 Increasing customer demands
 Challenge traditional business operation

(cont.)

1-4
Organisations in the 21st century
(cont.)
 Rise of e-commerce, rapid changes in technology, reliance
on strategic alliances, business networks, global mobility of
labour

 Climate change issues

 Better way to compete
 Organisational structure, strategies and philosophies
 MA focus has to keep pace with the information needs of
contemporary organisation

1-5
What is management accounting?

 … the processes and techniques that focus on the effective

and efficient use of organisational resources to support
managers in their tasks of enhancing both customer value
and shareholder value (IFAC 2002)

 Value creation is the central focus of contemporary

manager

(cont.)

1-6
What is management accounting?
(cont.)
 Customer value
 The value that a customer places on particular features of a
product or service
 Key concern

 Shareholder value
 The value that shareholders or owners place on a business
 Key strategic objective

(cont.)

1-7
What is management accounting?
(cont.)
 Resources
 Efficient and effectiveness is critical to create values
 MA techniques and process assist managers
 to identify and manage driver to make decision
 provides information to perform work

 Financial and non-financial, including information, work

processes, employees, committed customers and suppliers
 Determine the capabilities and competencies of the organisation

1-8
Management accounting systems

 Systems that produce the information required by managers

to create value and manage resources
 Information provided on a regular basis includes
 Estimates of the costs of producing goods and services
 Information for planning and controlling operations
 Information for measuring performance
 Ad-hoc information may also be supplied to satisfy managers’
short-term and long-term decision-making needs

1-9
Management accounting information

 Focus is on the needs of managers within the organisation

 Flexibility in the types of information provided
 Influenced by
 Managers’ information needs, nature of the resources they
manage
 Differences in production and service technologies,
organisational structure, organisational size, the external
environment, level of sophistication of computer systems
 Used by senior managers through to operational managers

1-10
Management accounting and
financial accounting information
 Financial accounting
 External reporting
 The practice of preparing and reporting accounting information
for parties outside the organisation
 Management accounting
 Focus on satisfying needs of internal users i.e. managers
 Costing systems are common to both financial and
management accounting
 A system that estimates the cost of goods and services as well as
the cost of organisational units, such as departments

1-11
Management accounting vs financial
accounting

1-12
Management accountants within
organisations
 Most large organisations have a ‘finance function’ at
the corporate level
 Senior accountants
 Financial controller, chief accountant, finance manager, general
manager (GM) of accounting, group accountant

 Accounting staff may be found in operating divisions as

well as corporate level
 Financial accounting function may be distinct from
management accounting function
 Managers from other functional areas may also
undertake management accounting activities (i.e. PMS,
new costing system)

1-13
Management accounting processes
and techniques
MA focus on the effective and efficient use of resources;
 Support the organisation’s formulation and
implementation of strategy
 Contribute to improving the organisation’s competitive
advantage through process improvement and cost
management techniques
 Provide information to help manage resources through
systems of planning and control
 Provide estimates of the costs of an organisation’s
outputs, to support the strategic and operational
decision needs of managers

1-14
Management accounting
and strategy
 Management accountants contribute to an organisation’s
formulation and implementation of strategy
 Vision
 The desired future state or aspiration of an organisation
 Used by senior managers to focus the attention and energies of
staff
 Mission statement
 Defines the purpose and boundaries of the organisation

(cont.)

1-15
Management accounting
and strategy (cont.)
 Objectives (or goals)
 Specific statements of what the organisation aims to achieve
 Often quantified
 Relates to a specific period of time
 Strategies
 The direction that the organisation intends to take over the long
term to meet its mission and achieve its objectives
 Focus on ways to manage the organisation’s resources to create
value for customers and shareholders

(cont.)

1-16
Management accounting
and strategy (cont.)
 Major decisions in formulating strategies
– In what business will we operate?
– How should we compete in that business?
– What systems and structures should we have in place to support our strategies?

1. Corporate strategy

 Choices about the types of businesses to operate in, which

businesses to acquire and divest and how best to structure
and finance the organisation
 In publicly listed companies, the choice of corporate
strategy is influenced by the expectations of major
shareholders and securities market

(cont.)

1-17
Management accounting
and strategy (cont.)
2. Business (or competitive) strategy
 The way a business competes within its chosen market
 Distinct business strategies for each business unit

3. Strategy implementation
 Planning and managing the implementation of strategy
 New structures, new systems, new production processes, new
marketing approaches, new human resource management
policies

(cont.)

1-18
Management accounting
and strategy (cont.)
 Competitive advantage
 Advantages that a business may have over another that are
difficult to imitate, achieved through
 Cost leadership
 Economies of production, superior process technologies, tight cost
control

 Product differentiation
 Superior quality, customer service, delivery performance, product
features

(cont.)

1-19
Management accounting:
contribute to strategy
 Management accountant should tailor information to support
formulation and implementation of their organisation’s
strategies

1-20
Management accounting:
contribute to strategy (cont.)
 Strategic planning
 Long-term planning, usually undertaken by senior managers with
a three to five-year timeframe
 Involves corporate strategy decisions
 Draws on management accounting information
 Implementing strategies
 Managers at all levels share the responsibility for implementation
 Long-term plans need to be linked to budgeting systems
 Performance measurement systems compare actual outcomes
to budgets and other targets

1-21
 MA techniques/information should be developed to support
organisation’s competitive advantage

 Cost leadership strategy

– MA info focus on product cost and tight cost control

 Product differentiation strategy

– Source of differentiation i.e. quality, delivery, time, flexibility and
innovation

Management accounting:
contribute to CA

1-22
Management accounting-Planning
and control mechanism
 The mechanism support resource management
 Planning is a broad concept that is concerned with formulating
the direction for future operations
 Allows an organisation to consider and specify all resources
needed in the future
 Occurs at all levels of the organisation
 A budget is an example of a short-term plan that summarises the
consequences of an organisation’s operating activities for a
specific future time period

1-23
Controlling
 Involves putting mechanisms in place to ensure that
operations proceed according to plan and that objectives
are achieved
 Management accounting information provides information
for control by comparing actual performance with plans,
targets or budgets
 Control systems are the systems and procedures that provide
regular information to assist in control

1-24
Management accounting: Costing
goods and services
 Estimates of the cost of producing goods and services are
needed to support a range of operational and strategic
decisions
 Routine costing systems are a part of the financial
accounting system, so product costs are prepared to meet
external reporting purposes
 Different product costs may also be produced outside of the
financial accounting system, to better meet managers’
decision-making needs
 These costs may not comply with GAAP or accounting standards

1-25
Some important considerations in
the design of MAS
 Behavioural issues
 Information may impact on individuals’ behaviour, so
management accounting systems may have expected and
unexpected outcomes
 A key purpose of management accounting systems is to motivate
managers and employees to direct their efforts towards
achieving the organisation’s goals
 Budgeting systems, performance measurement and reward systems
may be used as motivational tools

(cont.)

1-26
Some important considerations in
the design of management
accounting systems (cont.)
 There are costs and benefits of generating and providing
management accounting information
 Costs include
 Salary of accounting personnel
 Purchasing and operating computers
 Gathering, storing and processing data
 Managers’ time to read, understand and use the information

(cont.)

1-27
Some important considerations in
the design of management
accounting
 Benefits include systems (cont.)
 Improved management decisions
 More effective planning
 Improved operational efficiency at lower cost
 Better control
 Improved customer and shareholder value

1-28
Management accounting design:
contingency and institutional theories
 Contingency theory
 The design of a management accounting system is influenced by
specific aspects of the organisation’s context
 External environment, technology, organisational structure, size,
national and organisational culture, and strategy
 Institutional theory
 The design is influenced by institutional forces, which explain
similarities
 The need to achieve legitimacy within and beyond their organisation
 The tendency for firms to imitate ‘good practice’ of other firms

1-29
Management accounting responses
to the changing business
environment
 By the 1990s, many organisations realised that they needed to
improve their product and service quality, delivery
responsiveness and cost performance in order to improve
market share and profits
 Adoption of new management structures, systems and
practices, including new management accounting
techniques and systems

(cont.)

1-30
 Management accounting responses
to the changing business
environment (cont.)
 Conventional management accounting systems
 Include budgeting, costing systems and financial performance
measurement systems
 Still widely used in many organisations
 Contemporary management accounting systems
 support the adoption of new structures, systems and practices
 Includes activity-based costing, performance measurement
systems (e.g. balanced scorecards), cost management systems
(e.g. business process re-engineering), new approaches to
customer profitability analysis and supplier cost analysis
(cont.)

1-31
Management accounting responses
to the changing business environment
(cont.)

(cont.)

1-32
Management accounting responses to the
changing business environment (cont.)

1-33
4-
34
Summary
 Management accounting supports managers in
enhancing customer value and shareholder value
 Systems to support formulation and implementation of
strategy
 Process improvements and cost management
techniques
 Information for planning and control
 Product costs for strategic and operational decisions
 Contemporary management accounting techniques
have developed to support new organisational
structures, systems and practices, as a response to a
rapidly changing business environment

1-35