Welcome to Strategy and cost management

1. Welcome to Strategy and cost management Jens Ocksen Jensen Erik Søndergaard

6. Chapter 1 The Accountant’s Role in the Organisation

7. Introduction • Modern cost accounting provides key information to managers for their decision making process. • The study of modern cost accounting gives an insight into both the manager’s role and the accountant’s role in an organisation.

8. Learning Objectives • Differentiate management accounting from financial accounting and cost management • Recognise the growing role of strategy in management accounting processes • Identify five broad purposes of accounting systems • Understand how accounting can influence planning, control and decision making • Distinguish between the scorekeeping, attention-directing and problem-solving functions of management accounting • Recognise that economic benefits and costs are to be considered alongside contextual and organisational process issues in the design, implementation and use of accounting systems • Describe evolving themes that are shaping management accounting systems

9. Learning Objective 1 Differentiate management accounting from financial accounting and cost management

10. Learning Objective 1 (continued) Management Accounting ...Measures and reports financial and non-financial information that helps managers make decisions to fulfil the goals of an organisation. Financial Accounting ...Focuses on reporting to external parties. It measures and records business transactions. It provides financial statements based on generally accepted accounting principles.

11. Learning Objective 1 (continued) Cost Accounting ...Provides information for both management accounting and financial accounting. It measures and reports financial and non-financial data that relates to the cost of acquiring or consuming resources by an organisation. Cost Management ...Describes the activities of managers in short- run and long-run planning and control of costs. It includes the continuous reduction of costs. It is a key part of general management strategies and their implementation.

12. Cost Accounting and Cost Management Cost Accounting Identification and Measurement Financial Accounting Management Accounting Cost Management “Looking behind the numbers” “Using the numbers” 1. Knowing purpose 1. Implementing choice 2. Gathering information 2. Evaluating performance 3. Choosing alternatives Planning and Control Feedback

13. Learning Objective 2 Recognise the growing role of strategy in management accounting processes

14. Learning Objective 2 (continued) The growing role for management accountants… • Increased focus on expansionist, risky and entrepreneurial strategies. • Aim to create, not preserve shareholder value in the short term • Increase focus to external sources for opportunities • All this means an increased role for management accountants • Assist management to make balanced decisions • Monitor and evaluate strategic and operational progress

15. Learning Objective 3 The five major broad purposes of accounting systems..

16. Learning Objective 3 (continued) • Formulating overall strategies and long-range plans – internal non-routine reporting. • Resource allocation decisions, e.g. product and customer emphasis and pricing – internal routine reporting. • Cost planning and cost control of operations and activities – internal routine reporting. • Performance measurement and evaluation of people – internal non-routine reporting. • Meeting external regulatory and legal reporting requirements – external reporting.

17. Learning Objective 3 (continued) Internal Routine Reporting: This purpose covers information provided for decisions that occur with some regularity: • Daily reports • Weekly reports Internal Non-routine Reporting This purpose covers information for decisions that occur irregularly or even without precedent: • Outsourcing • Design of a special cost control tracking system External Reporting • This purpose covers information provided to investors, government authorities, and other outside company stakeholders on the organisation’s financial position, operations and related activities.

18. Learning Objective 4 Understand how accounting can influence planning, control and decision making..

20. Learning Objective 4 (continued) What is Planning? • It is deciding on organisation goals, predicting results under various alternative ways of achieving those goals, and then deciding how to attain those desired goals. What is Control? • It is deciding and taking actions that implement the planning decisions, and ... deciding on performance evaluation and the related feedback that will help future decision making.

21. Learning Objective 4 (continued) What are Budgets? • They are quantitative expressions of a proposed plan of action by management for a future time period and an aid to the coordination and implementation of the plan. What is a Performance Report? • This is a report that compares actual results with budgeted amounts. • The performance report of Surrey Specialty Ltd for the month of January shows the following:

22. Learning Objective 4 (continued) • Performance Report

23. Learning Objective 4 (continued) Performance Report • The performance report indicates that although actual revenues exceeded the budgeted amount by £3,000, operating income was £300 less than budgeted. • The report could spur investigation and further decisions. • Did the purchasing department pay more than expected for the merchandise?

24. Learning Objective 4 (continued) Performance Report • Yes, actual cost of goods sold were 72% of revenues instead of the budgeted 70%. Budget%Actual % Revenues £57,000 100 £60,000 100 Cost of goods sold 40,000 70 43,400 72 Gross margin £17,000 30 £16,600 28 Feedback ... • involves managers examining past performance and systematically exploring alternative ways to make better informed decisions in the future.

25. Accounting and Decision Making Accounting provides decision support for decision making. • Three important roles of management • accountants: • 1. Problem solving • 2. Scorekeeping • 3. Attention directing Planning -Defining goals -Determining relevant information -Formulating alternatives -Deciding methods Controlling -Implementing the choice -Evaluating performance

26. Learning Objective 5 Distinguish between the scorekeeping, attention-directing and problem-solving functions of management accounting…

27. Learning Objective 5 (continued) Problem Solving...involves comparative analysis for decision making with an element of analytical review. This role asks, of the several alternatives available, which is the best? Scorekeeping ... involves accumulating data and reporting reliable results to all levels of management. This role asks how is the business doing? Attention Directing ... involves helping managers properly focus their attention. Attention directing should focus on all opportunities to add value to an organisation, not just cost-reduction opportunities.

28. Learning Objective 5 (continued) Management Accountants ... serve each of these three roles in both planning and control decisions. The problem-solving role is most marked for planning decisions. The scorekeeping and attention-directing roles are most important for control decisions. Management accountants increasingly are viewing managers as their customers.

29. Learning Objective 6 Recognise that economic benefits and costs are to be considered alongside contextual and organisational process issues in the design, implementation and use of accounting systems

30. Learning Objective 6 (continued) Key Guidelines: • Cost-benefit approach • Full recognition to behavioural as well as technical considerations • Use of different costs for different purposes

31. Learning Objective 6 (continued) Cost-Benefit Approach… A cost-benefit approach should be used in order to spend resources if they promote decision making that better achieves organisational goals in relation to the costs of those resources. Behavioural and Technical Considerations… A management accounting system should have two simultaneous missions for providing information: • To help managers make wise economic decisions • To help managers and other employees to aim and strive for goals of the organisation

32. Learning Objective 6 (continued) Different Costs for Different Purposes… A cost concept used for the external reporting purpose need not be the appropriate concept for the purpose of internal routine reporting to managers.

33. Learning Objective 7 Describe evolving themes that are shaping management accounting systems

34. Learning Objective 7 (continued) Success Factors Time, Quality, Cost, Innovation Customer Focus Value-Chain and Supply-Chain Analysis Continuous Improvement

35. Learning Objective 7 (continued) • Customer Focus The challenge facing managers is to continue investing sufficient (but not excessive) resources in customer satisfaction such that profitable customers are attracted and retained. • Continuous improvement Continuous improvement by competitors creates a never-ending search for higher levels of performance within many organisations.

36. Learning Objective 7 (continued) • Key Success Factors are operational factors that directly affect the economic viability of the organisation. • Cost– organisations are under continuous pressure to reduce costs. • Quality – customers are expecting higher levels of quality. • Time – organisations are under pressure to complete activities faster and to meet promised delivery dates more reliably. • Innovation – there is now heightened recognition that a continuing flow of innovative products or services is a prerequisite to the ongoing success of most organisations.

37. Learning Objective 7 (continued) • Value-Chain and Supply-Chain Analysis This theme has two related aspects: • Treat each of the business functions in the value chain as an essential and valued contributor. • Integrate and coordinate the efforts of all business functions in addition to developing the capabilities of each individual business function. • Supply chain – describes the flow of goods, services and information from cradle to grave, regardless of whether those activities occur in the same organisation or other organisations.