Strategic Management

Accounting
Session 1: Introduction to Management Accounting
and the Role of the Management Accountant
Dr James Prescott
Introduction to Management Accounting and
the role of the Management Accountant
 Learning Outcomes
 Understand the scope of management accounting
 Understand the differences between management accounting and financial
accounting
 Understand and reflect on the role of the management accountant in the
organisation
 Understand the significance of maintaining ethical standards
Introduction to Management Accounting and
the role of the Management Accountant

 Content:
1. Management Accounting Defined
2. Management Accounting and Financial Accounting
3. The Role of the Management Accountant
4. Branches of Management Accounting
5. Lean Production
6. Theory of Constraint
7. Ethics and Management Accounting
Introduction to Management Accounting and
the role of the Management Accountant

 Management Accounting Defined (internal use)

1. Management accounting is focused on providing information to
managers and stakeholders who are internal to the organisation
and who directly control its operations
Management Accounting and Financial
Accounting
 Financial and management accounting represent two significant sub-
disciplines within accounting. The following table sets out the focus of each in
relation to a number of factors;
Financial Accounting Management Accounting

Users External to the organisation Normally internal to the organisation and are in
a position of control
Reporting Historically based Future emphasis
timeframe
Verifiability Focus on Objectivity and verifiability Emphasis on Relevance
and Relevance
Precision and Emphasis on Precision Emphasis on Timeliness
Timeliness
Subject Company wide reporting Focus is on segment or product and service
reporting
Rules Must comply with GAAP/IFRS and prescribed Not bound by GAAP/IFRS or any other format
formats
Requirements Mandatory for external reports Not Mandatory
The Role of the Management Accountant
 Primary Function of Cost and Management
Accountants(forecast)
1. Inventory valuations for internal and external profit measurement
2. Provide Relevant information to help managers make better decisions
3. Provide information for planning control and performance measurement
The Role of the Management Accountant
 Inventory Valuation and Profit Measurement
1. Consider a situation where a company has produced three products (A,B and
C) during the period. The total costs for the period are £40 000.Product A has
been sold for £20 000, product B has been completed but is in finished goods
stock, and product C is partly completed. Costs must be traced to products to
value stocks and cost of goods sold.

£ £
Sales 20 000
Production cost 40 000
Less Closing stocks
(B =£18 000,C =£8 000) 26 000
Cost of goods sold (A =£14 000) 14 000
Profit 6 000
The Role of the Management Accountant
 Inventory Valuation and Profit Measurement

2. Approximate but inaccurate individual

product costs may be appropriate for
profit measurement for financial accounting.

Example
Production expenses for the period = £10m
Costs of products sold = £7m
Cost of products not sold = £3m

Note focus is on aggregate figures for financial accounting.

The Role of the Management Accountant
 Cost information for providing guidance
for decision-making
In theory cost information computed for stock valuation ought
not to be used for decision-making.

Example: Short-term decision

A company is negotiating with a customer for the sale of XYZ.
The cost recorded for stock valuation purposes is:

£
Direct materials 200
Direct labour 150
Fixed overheads 300
650
The Role of the Management Accountant
 Cost information for providing guidance
for decision-making

The maximum selling price that can be negotiated is £500

per unit for an order of 100 units over the next three
months.
Should the company accept the order?

Spare capacity
Additional relevant costs (100 × £200) £20 000
Additional sales revenue £50 000
Contribution to profits £30 000
The Role of the Management Accountant
 Operational Control and Performance Measurement
The allocation of costs to products is not particularly useful for cost
control purposes. Instead, costs should be traced to responsibility/cost
centres to the person who is accountable for controlling the costs.
Example
Budgeted costs per unit:
Product 1 Product 2 Product 3 Total
£ £ £ £
Cost centre A 10 40 70 120
Cost centre B 20 50 80 150
Cost centre C 30 60 90 180
60 150 240 450
Budgeted and
actual production
(units) 1000 1000 1000
The Role of the Management Accountant
 Operational Control and Performance Measurement
Comparison of actual with budgeted costs by products

Product 1 Product 2 Product 3 Total

£000 £000 £000 £000
______________________________________________________________
Budgeted cost 60 150 240 450
(1,000 ×£60)
Actual cost 70 170 270 510
______________________________________________________________
Variance 10A 20 A 30A 60A
______________________________________________________________

The variances are not identified to responsibility (cost centres)

The Role of the Management Accountant
Operational Control and Performance Measurement
Comparison of actual with budgeted costs by cost centres

Cost centre Cost centre Cost centre

A B C Total
£000 £000 £000 £000
_______________________________________________________
Budgeted cost 120 150 180
(1,000 × £120)
Actual costs 130 150 230
_______________________________________________________
Variance 10A – 50A 60A
_______________________________________________________

Notes
1.Performance reports analysed in far more detail for cost centre managers.
2.Should not be used as a punitive device (identify areas where managers need to
focus their attention).
3.Non-financial critical success factors are also of vital importance and should be
included on the performance reports.
The Role of the Management Accountant

 The role of management accountants can be broken down into three

components including;
1. Planning
2. Controlling
3. Decision Making
The Role of the Management Accountant
 Planning
The planning process will normally include the following three steps
1. Establishing Goals and Objectives (Strategic Planning)
2. Determination of how the goals will be achieved (Operational planning)
3. Development of Budgets or financial plans

These three steps are linked with each later step providing greater detail of the
previous step.
The Role of the Management Accountant
 Planning
Since the strategic and operational plan will require the input and participation of
several departments, the planning process will including seeking answers to questions
from different perspectives. The answers to each of the following questions will
involve the input of the management accountant.
1. Marketing
1. How much should we budget for TV, print and internet advertising?
2. How many sales people should we plan to hire to serve a new territory?
2. Operational Management
1. How many units should we plan to produce next period?
2. How much should we budget for next period’s utility expenses?
3. Human Resources
1. How much should we spend on staff development?
2. How much should we plan to spend on recruitment advertising?
The Role of the Management Accountant
 Control
The control function gathers feedback to ensure that plans are being followed.
Performance reports and variance to budget analysis is an essential part of the
control function. Some control questions may include
1. Marketing
1. Is the budgeted price cut resulting in increased sales as expected?
2. Are we accumulating too much inventory over the holiday shopping period?
2. Operational Management
1. Did we spend more or less than expected for the units we actually produce?
2. Are we achieving the goals of reducing the number of defective units
produced?
3. Human Resources
1. Is our employee retention rate exceeding our goal?
2. Are we meeting our goal of completing timely performance appraisals?
The Role of the Management Accountant
 Decision Making
This involves making a selection among competing alternatives. These would
normally include determining what we should sell, to who and using what
method.
1. Marketing
1. Should we sell our services as one bundle or as separate items?
2. Should we sell directly to customers or through a distribution network?
2. Operational Management
1. Should we buy a new piece of equipment or upgrade the existing one?
2. Should we redesign our manufacturing process to lower inventory levels?
3. Human Resources
1. Should we hire on-site medical staff or pay medical insurance for our staff?
2. Should we hire temporary workers or full time employees?
The Changing Business Environment

 Organizations have faced dramatic changes in their business

environment. These include;
• Move from protected markets to highly competitive global markets
• Declining product life-cycles
• Growth in service industry
• Advances in manufacturing technology
• Environmental issues
The Changing Business Environment

 To compete successfully in today’s environment

companies are:

• Making customer satisfaction an overriding priority.

• Adopting new management approaches.

• Changing their manufacturing systems.

• Investing in AMT ’s.

The Changing Business Environment

 Continuous Improvement
 Static historical standards no longer appropriate.
 Benchmarking.
 Employee empowerment
 Delegate more responsibility to people closest to operating processes and
customers.
 Social responsibility and corporate ethics.
 International Convergence of management Accounting
 Management Accounting can be observed at both the macro and micro level
 Macro refers to concepts and techniques
 Micro refers to the behavioural patterns of use
 There is a tendency towards globalisation at the macro level
Branches of Management Accounting

 The branches, functions and responsibilities of

management accountants are broad and varied.
Their function will therefore entail a number of
skillsets including;
1. Strategic Management Skills
2. Enterprise Risk Management
3. Process management
Branches of Management Accounting

Strategic Management Skills

 A strategy is a “game plan” that enables a
company to attract customers by
distinguishing itself from competitors.
 The focal point of a company’s strategy should
be its target customers
Branches of Management Accounting
Strategic Management Skills
 Customer Value Propositions
Branches of Management Accounting
Enterprise Risk Management
 Thisis a process used by a company to
proactively identify and manage risk
 Once a company identifies its risks, one of the
most common risk management tactics is to
reduce risk by implementing specific controls
Branches of Management Accounting
Enterprise Risk Management
Branches of Management Accounting
Process Management
 A business process is a series of steps that are
followed in order to carry out some task in a
business
 The following functions make up the value chain
Lean Production
▪ Lean production sometimes called ‘just in time’ (JIT) is
based on producing and delivering products or services
as an when there is an expressed need for it.
▪ Production is triggered by a derived demand. This type
of production relies on an environment of pre-orders or
where there is a well-established and steady demand
for the product.
▪ The manufacture of cars and planes will normally follow
this process given the significant cost of over or under
production
Lean Production
Lean Production
 Traditional Manufacturing
Lean Production
 Because lean thinking only allows production in
response to customer orders, the number of units
produced tends to equal the number of units sold.
 The lean approach also results in fewer defects, less
wasted effort, and quicker customer response times
than traditional production methods.
Theory of Constraints
 The theory of constraint (TOC) is based on the
observation that effectively managing the
constraint is the key to success.
 A constraint (also called a bottleneck) is anything
that prevents you from getting more of what you
want.
 The constraint in a system is determined by the
step that has the smallest capacity.
Theory of Constraints
Ethics and Management Accounting
Code of Conduct for Management
Accountants
 The Institute of Management Accountant's (IMA)
Statement of Ethical Professional Practice
consists of two parts that offer guidelines for;
• Ethical Behaviour
• Resolution for an ethical conflict.
 .
Ethics and Management Accounting
IMA Guidelines for Ethical Behaviour

Ethics and Management Accounting
IMA Guidelines for Ethical Behaviour

Ethics and Management Accounting
IMA Guidelines for Ethical Behaviour

Ethics and Management Accounting
IMA Guidelines for Ethical Behavior
Ethics and Management Accounting
IMA Guidelines for Resolution of Ethical Conflicts
Follow employer’s established policies.
For an unresolved ethical conflict:
 Discuss the conflict with immediate supervisor or next
highest uninvolved managerial level.
 Ifimmediate supervisor is the CEO, consider the board
of directors or the audit committee.
 Contact with levels above the immediate supervisor
should only be initiated with the supervisor’s knowledge,
assuming the supervisor is not involved.
Ethics and Management Accounting
IMA Guidelines for Resolution of Ethical
Conflicts
For an unresolved ethical conflict: (continued)
 Except where legally prescribed, maintain
confidentiality.
 Clarifyissues in a confidential discussion with
an objective advisor.
 Consult an attorney as to legal obligations.
Ethics and Management Accounting
Why have ethical standards?
Questions
1. Briefly discuss the differences between management and
financial accounting
2. Discuss the circumstances normally required to exist for
lean production to be most effective
3. Identify and discuss three factors that have contributed to
the changes in the environment for management
accounting
4. Discuss the role of management accounting in terms of
control
5. Describe the role of ethical conduct in the management
accounting profession
6. Identify and discuss the three stages of planning and the
role of the management accountant.