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Slide 16.

Chapter 16
Functions of
management accounting

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.2

Definition of accounting
The process of
identifying,
measuring and
communicating financial information about
an entity.
To permit
informed judgements and
decisions by users of the information.
Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.3

Management accounting
Identifying, measuring and communicating
for:
informed judgements and decisions by
internal users of the information.

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.4

Contingency approach
Control systems depend on
the external environment of the business,
the production technology,
the size of the organisation and
the corporate strategy.

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.5

Internal users questions (1)


Shall I invest in manufacturing more soap
powder, or do I switch resources into
toothpaste?
Information required:
Relative demand for each product.
Actions of competitors.
Costs of inputs (materials, labour).
Availability of suitable labour.
Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.6

Internal users questions (2)


Shall I continue offering a television repair service
as support for my sales of televisions?
Information required:
Market research on demand.
Sales with/without repair service.
What competitors are doing.
Cost of repairs.
Profit margin.

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.7

Internal users questions (3)


Is it cost effective to have three separate
locations at which my tenants can pay their
rent?
Information required:
Cost of maintaining offices, staff.
Cost of reducing staff.
Rent payments may reduce, cost of
chasing.
Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.8

Internal users questions (4)


Will this investment in a new factory pay for
itself over the next ten years?
Information required:
Cost of investment.
Cost of capital (borrowing/raising equity).
Future cash flows.
Discounted cash flow.
Sensitivity analysis.
Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.9

Strategic management accounting


Identification, Measurement and
Communication of cost data in situations
where the organization is being judged against
the performance of competitors.

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.10

Needs of internal users


Judgements
Is the performance of line managers
adequate?
Is this division performing at a high
standard?
Decisions
Shall we buy another delivery vehicle?

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.11

Management functions
Planning
Decision making
Control

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.12

Planning
Immediate future.
Longer term.
For example,
Sales.
Production.
Capital expenditure.

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.13

Decision-making

About resources.
About activities.
Financial matters, particularly cost.
Impact on employees.
Impact on competitors.

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.14

Control
Is outcome in accordance with the initial plans
and objectives?
Plans include costs and profit
Timely, relevant and accurate information.
Cost measurement.
Effective communication.
Organisational structure.
Responsibility and authority.
Cascade down/flow upwards
Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.15

Organisation chart
Chair of the board of directors
Managing
director
Production
director
Production
supervisor

Personnel
director
Personnel
manager

Salaries and
wages
co-ordinator

Finance
director

Sales
director

Financial
controller

Sales
co-ordinator

Financial accounting

Creditors
ledger
supervisor

Debtors
ledger
supervisor

Credit
controller

Management accounting
Management
accountant

Project
accountant

Systems
accountant

Part of an organization chart for a manufacturing company, illustrating line


relationships within the overall finance function of the business
Figure 16.1

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.16

Decision-making
Identify the objectives of the proposed shop
in terms of target sales, target profit and
target return on capital employed.
Planning

Locate suitable premises to rent or buy.


Collect data about expected customers,
similar shops in the area, complementary businesses,
access and expected demand.

Decision-making

Evaluate the options and make a decision,


having regard to the objectives.
Implement the decision.

Control

Compare the actual outcome with the plan.


Decide how to deal with divergences from plan.

Figure 16.2

Managing a decision on the location of a new business


Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.17

Management accounting
Directing attention
Keeping the score
Solving problems

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.18

Directing attention
Who should take action?
Whose responsibility is this loss?
Who is to be congratulated on this favourable
result?
Highlight those costs which have departed from
expectations
Fairness and timeliness.
Responsibility.
Recognise achievements.
Demonstrate accountability.
Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.19

Keeping the score


How much?
How many?
Record-keeping and
monitoring accounting records against physical
quantities and measures.
Completeness and fairness,
matching costs to a time period,
matching costs to an item of output and
matching costs against revenue of the period.
Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.20

Solving problems
Why did that plan go well?
Why did that action fail?
Which of these three choices is the best to
take?
Relevance
Choices
Base for understanding the problem.
Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.21

Cycle of profit planning and control


Measuring
performance
Implementing
plans

Keeping the score

Solving problems

Environment

Directing attention
Objectives

Operating plans
Strategy
Figure 16.3

Stages in the cycle of profit planning and control


Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011

Slide 16.22

Language of management accounting


No standard set of wording.
CIMA guidance and definitions.
Use:
Quick checklist, Appendix 1.
Index.

Pauline Weetman, Financial and Management Accounting, 5th edition Pearson Education 2011