Managerial Accounting-Chapter

One: Cost Management and

Strategy
1-1: Management Accounting and the Role of Cost Management

Cost management information: is developed and used to implement the

organizations strategy.
o 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 Definition by IMA: is a profession that involves
partnering in management decision making, devising planning and
performance management systems, and proving expertise in financial
reporting and control to assist management in the formulation and
implementation of an organizations strategy
Management Accountants jobs: use unique expertise to help an
organization succeed in formulating and implementing its strategy
o Unique expertise includes:
Decision making
Planning
Performance management

1-2: Roles of the company

controller: has a wide range of responsibilities including: cost management,

financial reporting, maintaining financial information systems
CFO: has overall responsibility for the financial function
Treasurer: manages investor and creditor relationships
CIO: manages the firms information technology including computer systems
and communication

1-3: Functions of Management

Main focus of managerial accounting: timeliness and usefulness

Main focus on financial reports: accuracy and compliance
Four functions of Management
o 1. Strategic management: most important function. The
development and implementation of a sustainable competitive position
in which the firms competitive advantage provides continued success
Involves: identifying and implementing goals and action plans;
anticipating changes

Managers must think competitively, which requires strategy.

They must have the ability to solve problems form a crossfunctional view
Flexibility is importantdue to e-commerce, speed-to-market
and flexible management
Product life-cycles: the time from the introduction of a new
product to its removal from the market are expected to become
shorter.
Business functions: manager must think of the problem from
all four of these angles simultaneously to reach the goals
Marketing
Production
Finance
Accounting/controllership
2. Planning and decision making: involved budgeting and profit
planning cash flow management, and other decisions related to the
firms operations
3. Management and operational 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 mangers
4. Preparation for financial statements: management complies
with the reporting requirements of relevant groups and relevant federal
government authorities
Important to the other three roles, because most decisions are
based off the financial information

1-4: types of organizations

Business firms are usually categorized by industry

Main categories
o Merchandising: purchase goods for resale.
Wholesalers: merchandisers that sell to other merchandisers
Retailers: merchandisers that sell directly to customers
o Manufacturing: use raw materials, labor, and manufacturing facilities
and equipment to produce products
Downstream costs: service and warranty costs because they
occur after manufacturing
Upstream costs:
o Service: provide a service to customers that offers
convenience, freedom, safety or comfort.
o Government and not-for-profit organizations: provide services for
which no direct relationships exist between the amount paid and the
services provided. Both the nature of the services and the customers
that receive them are determined by government or philanthropic
organizations

Services called public goods (characteristics=impracticality of

limiting consumption to a single customer)
Organizations strategy between: 1) low-cost competition vs. 2) product
leadership (unique products)

1-5: The Contemporary business environment

Significant modifications in cost managerial practices

1. Increased global competition: key development of changes in the
business environment are due to the growth of international markets and
trade due to rising economics and decline of trade barriers
o NAFTA: north American free trade agreement;
o CAFTA: central America free trade agreement
o WTO: world trade organization
o EU: European Union
2. Lean manufacturing: New manufacturing technologies that
reduce waste and costs
o Example: just-in-time inventory methods to reduce cost and waste
of maintain large levels of raw materials and unfinished product.
o Lean methods applied in Japanese manufacturingquality
teams and statistical quality control
o Other changes: flexible manufacturing technologies to reduce
setup times
o Speed-to-market: the ability to deliver the product or service
faster than the competition
3. Advances in information technologies, the internet, and ERM
o Most fundamental of all business changes is the increasing use of
IT, internet and performance management systems
o New economy: rapid growth or internet-based firms, increased
use of internet for communications, sales, and business data
processing and the use of ERM (enterprise resource management)
o Importance: Have fostered the growing strategic focus by
reducing time required for processing transactions and by
expanding the individual managers access to information within
the firm, industry and business environment
4. Greater focus on customer: increased consumer expectation for
product functionality and quality.
o Translates to: shorter product life cycle, increased intensity of
competition
o Focus: customer satisfactionadding value
Quality
Service
Timeliness of delivery
Ability to respond to customers desire for specific features
5. New forms of managerial organization: hierarchy is being replaced
with more flexible organization that encourages teamwork and
coordination among functions. The reports now reflect multifunctional
roles and a variety of operating and financial information

including: product quality, unit cost, customer satisfaction, and

production bottlenecks
6. Changes in social, political, and cultural environment of business:
more ethnically and racially diverse workforce, changes in regulatory
requirements and a renewed sense of ethical responsibility among
managers and employees
o Focus the firm on factors outside the production of its product or
provision of its service to the ultimate consumer and the global
society in which the consumer lives
o

1-6: The strategic focus of cost management

Qualities of a competitive firm:

o Customer driven
o Incorporates the emerging and anticipated changes in the
contemporary business environment
o Uses advanced manufacturing and IT
o Anticipates effects of regulatory requirements and customers
tastes
Focus: managerial accounting focuses on the identification of measures that
are critical to the organizations success
Stages of development of cost management systems:
1. Stage 1: Cost management systems are basic transaction reporting
systems
2. Stage 2: Cost management focus on external financial reporting. The
objective is reliable financial reports; accordingly, the usefulness for cost
management is limited.
3. Stage 3: Cost management systems track key operating data and
develop more accurate and relevant cost information for decision making;
cost management information is developed.
4. Stage 4: Strategically relevant cost management information is an
integral part of the system
o First two stages: focus on the managerial accountants
measurement and reporting role
o Third stage: shifts to operational controls
o Fourth stage: the ultimate goal. Management accountant is an
integral part of management and implements the firms strategy
Identifies firms critical success factors: measures of
those aspects of the firms performance essential to its
competitive advantage and success
Could be financial or non-financial
Depend on the nature of the competition

1-7: Contemporary management techniques: the management

accountants response to the contemporary business environment

13 methods used to implement strategy to combat the six changes

in the contemporary business environment
o First six focus on strategy implementation:

1. Balance scorecard: An accounting report based on the four

perspectives (below); provides a basis for a more complete analysis
than is possible with financial data alone.
Critical success factors based on four perspectives:
Financial performance: measure of profitability and
market value, among others, as indicators of how well the
firm satisfies its owners and shareholders
Customer satisfaction: measure the quality, service,
and low cost, among others, as indicators of how well the
firm satisfies its owners and shareholders
Internal processes: measures of the efficiency and
effectiveness with which the firm produces the product or
service
Learning and growth: measures the firms ability to
develop and utilize human resources to meet its strategic
goals now and into the future
Strategy map: is a method that links the various
perspectives in a cause-and-effect diagram. It shows how
non-financial critical success factors can lead to financial
success
2. Value chain: is an analysis tool organizations use to identify the
specific steps required to provide a competitive product or service
to the customer
Importance: helps management discover which steps are
not competitive, where costs can be reduced or which
activity should be outsourced. Also, find steps that can add
value for the customer
3. Activity-based costing and management:
Activity-based costing: a costing approach that assigns
resource costs to cost objects based on activities performed
for those cost objects
Used to improve the accuracy of cost analysis by
improving tracing of costs to products or to individual
customers
Activity-based management: uses activity analysis to help
managers improve the value of products and services and
increase competitiveness
4. Business intelligence: is an approach to strategy in which the
management accountant uses data to understand and analyze
business performance
How: uses statistical analysis or regression to measure
customer satisfaction, predict customer behavior or develop
models for setting prices
Best used for: companies that have distinctive capability
which can be derived from measurable critical success
factors

5. Target costing: determines the desired cost for a product on the

basis of a given competitive price. Cost is thus determined by price.
6. Life-cycle costing: method used to identify and monitor the costs
of a product throughout its life cycle
Steps in life cycle: 1) research and development 2) product
designtarget costing, prototyping, and testing 3)
manufacturing, inspecting, packaging, and warehousing 4)
marketing, promotion and distribution 5) sales and service
Next 7 methods help to achieve strategy implementation through a
focus on process improvement
7. Benchmarking: a process by which a firm identifies its critical
success factors, studies the best practices of other firms for
achieving the CSF and them implements improvements
International benchmarking info.: International
Benchmarking Clearinghouse and the International
organization for standardization
8. Business process improvement: a management method by
which managers and workers commit to a program of continuous
improvement in quality and other CSF
9. Total quality management: a method by which management
develops policies and practices to ensure that the firms products
and services exceed customers expectations
Includes: increased product functionality, reliability,
durability, and serviceability
10.
Lean accounting: uses value streams to measure the financial
benefits of a firms progress in implementing lean manufacturing
11.
The theory of constraints: is used to help firms effectively
improve a very important CSF: cycle time (the rate at which raw
materials are converted to finished products)
Used to find bottlenecks
12.
Sustainability: means the balancing of the organizations short
and long term goals in all three dimensions of performancesocial,
environmental, and financial
Can be accomplished through: 1. Technology and 2.
New product development
13.
ERM (Enterprise Risk Management): a framework and
process that organizations use to manage the risks that could
negatively or positively affect the companys competitiveness and
success
Three types of risks
1. Hazards-flood or fire
2. Financial risks-change in interest rates, commodity
price fluctuations
3. Operating risks-employees, customers or products
4. Strategic risks-related to top management decisions
about the firms strategy and implementation

1-8: How a firm succeeds: The competitive Strategy

Strategy: is a plan to achieve competitive success

o Definition: a set of goals and specific action plans that, if achieved,
provide the desired competitive advantage OR a plan for using resources

Without a strategy, firms could make decisions without any good information
and end up not completing their mission

to achieve sustainable goals within a competitive environment.

1-9: Developing a competitive strategy

Two competitive strategies

o Cost leadership: a plan for using resources to achieve sustainable goals
within a competitive environment.

Makes sustainable profits at lower prices, therefore limiting the

growth of competitors and undercutting their profits
Usually has a large market share and avoids niche or segment
markets
Weakness: tendency to cut costs in a way that undermines the
demand for the product or servicecustomer has to see the
product as equivalent even at a low price to be successful
Cost advantage from: productivity in manufacturing process,
distribution or overall administration
o Product differentiation: creating a product or service that is unique
in some important way
Allows the firm to charge higher prices
Weakness: a firms tendency to undermine its strength by
attempting to lower costs or by ignoring the necessity of having
a continual and aggressive marketing plan to reinforce the
differentiation
Other strategic issues: when firms adopt both strategies at the same time.
They can only succeed if they do one strategy extremely well
Five steps in strategic decision making
1. Determine the strategic issues surrounding the problem
2. Identify alternative actions
3. Obtain information and conduct analysis of the alternatives
4. Based on strategy and analysis, choose and implement the
desired alternative
5. Provide an ongoing evaluation of the effectiveness of
implementation in step 4

1-10: The professional environment of cost management

Two types of organizations:

1. Ones that set rules and regulations
FTC (competitive practices, protects trade), SEC, IRS
Cost Accounting Standards Boardachieve uniformity
2. Ones that promote professionalism and competence
IMA
CIMA

ACCA
Follow ethicsskim over section in book

1-11: Information Value Chain

Information value chain:

o Stage one: business events
o Stage two: data
o Stage three: information
o Stage four: knowledge
o Stage five: decisions