AC2097 Management Accounting 2023 PDF

Undergraduate study in Economics, Management, Finance and the Social Sciences Management accounting A. Nayak AC2097 2023 Management accounting A. Nayak AC2097 2023 Undergraduate study in Economics, Management, Finance and the Social Sciences This subject guide is for a 200 course offered as part of the University of London’s undergraduate study in Economics, Management, Finance and the Social Sciences. This is equivalent to Level 5 within the Framework for Higher Education Qualifications in England, Wales and Northern Ireland (FHEQ). For more information see: london.ac.uk This subject guide was prepared for the University of London by: Amanda Nayak MSc FCCA. It draws on the material in the previously published editions of the guide by: Professor M. Mongiello PhD ACA, Pro Vice-Chancellor, Business and Science, The University of Law. This is one of a series of subject guides published by the University. We regret that due to pressure of work the author is unable to enter into any correspondence relating to, or arising from, the guide. If you have any comments on this subject guide, please communicate these through the discussion forum on the virtual learning environment. University of London Publications Office Stewart House 32 Russell Square London WC1B 5DN United Kingdom london.ac.uk Published by: University of London © University of London 2023 The University of London asserts copyright over all material in this subject guide except where otherwise indicated. All rights reserved. No part of this work may be reproduced in any form, or by any means, without permission in writing from the publisher. We make every effort to respect copyright. If you think we have inadvertently used your copyright material, please let us know. Contents Contents Introduction............................................................................................................. 1 About this edition........................................................................................................... 1 Aims.............................................................................................................................. 1 Changes to the syllabus.................................................................................................. 3 Learning outcomes......................................................................................................... 4 Employability outcomes.................................................................................................. 4 Why study management accounting?.............................................................................. 4 Organising your studies.................................................................................................. 5 Essential reading............................................................................................................ 7 Further reading............................................................................................................... 7 Online study resources.................................................................................................. 10 Examination advice...................................................................................................... 11 Abbreviations............................................................................................................... 13 Chapter 1: Management accounting and its strategic context............................. 15 1.1 Introduction........................................................................................................... 15 1.2 Sources of management accounting information..................................................... 16 1.3 Different functions of management accounting....................................................... 17 1.4 The decision-making process................................................................................... 17 1.5 The impact of technology on management accounting............................................. 18 1.6 Management accounting and organisational strategy.............................................. 19 1.7 Customer focus...................................................................................................... 19 1.8 Accounting information and decision making.......................................................... 21 1.9 Management accountants in their organisations..................................................... 22 1.10 Cost terms and concepts....................................................................................... 23 1.11 Suggested questions from your textbook............................................................... 24 1.12 A reminder of your learning outcomes................................................................... 24 1.13 Sample examination questions.............................................................................. 24 Chapter 2: Full absorption costing methods......................................................... 25 2.1 Introduction........................................................................................................... 25 2.2 Uses of information provided by cost allocation....................................................... 26 2.3 Definitions of cost objects....................................................................................... 26 2.4 Flow of accounting entries...................................................................................... 27 2.5 Product or service direct costs................................................................................. 27 2.6 Reallocating cost centre costs to products............................................................... 28 2.7 Under- or over-absorption of overheads.................................................................. 32 2.8 S implicity of assumptions in determining the cost driver.......................................... 33 2.9 U sing full absorption costing for quoting and negotiating with clients..................... 33 2.10 Cost assignment in non-manufacturing organisations............................................ 35 2.11 U ses, criticisms and limitations of full absorption costing....................................... 35 2.12 Suggested questions from your textbook............................................................... 36 2.13 A reminder of your learning outcomes................................................................... 37 2.14 Sample examination questions.............................................................................. 37 Chapter 3: Inventory and process costing and capacity management................. 39 3.1 Introduction........................................................................................................... 39 3.2 Identifying the need to use process costing and the basic method........................... 40 3.3 Process costing and accounting for wastage (losses)............................................... 40 3.4 Process costing where there is work in progress...................................................... 41 i AC2097 Management accounting 3.5 Hybrid or operation costing..................................................................................... 46 3.6 Capacity concepts and capacity management.......................................................... 46 3.7 Suggested questions from your textbook................................................................. 47 3.8 A reminder of your learning outcomes..................................................................... 47 3.9 Sample examination question................................................................................. 48 Chapter 4: Activity-based costing (ABC)............................................................... 49 4.1 Introduction........................................................................................................... 49 4.2 Activity-based costing............................................................................................. 50 4.3 Product cost-subsidisation...................................................................................... 51 4.4 Activity cost centres................................................................................................ 51 4.5 Cost drivers............................................................................................................ 52 4.6 Activity-based costing applied................................................................................. 54 4.7 Brief notes on ABC................................................................................................ 56 4.8 Benefits of ABC...................................................................................................... 57 4.9 Issues and problems............................................................................................... 58 4.10 Suggested questions from your textbook............................................................... 59 4.11 A reminder of your learning outcomes................................................................... 59 4.12 Sample examination question............................................................................... 59 Chapter 5: Activity-based management (ABM)..................................................... 61 5.1 Introduction........................................................................................................... 61 5.2 Activity-based costing as a management tool.......................................................... 62 5.3 Activity-based budgeting........................................................................................ 66 5.4 Activity-based management in service organisations................................................ 67 5.5 Suggested questions from your textbook................................................................. 67 5.6 A reminder of your learning outcomes..................................................................... 67 5.7 Sample examination questions................................................................................ 68 Chapter 6: Cost-volume-profit analysis................................................................. 71 6.1 Introduction........................................................................................................... 71 6.2 Cost classifications................................................................................................. 72 6.3 Using contribution analysis for decision making...................................................... 74 6.4 Cost accounting for cost management.................................................................... 76 6.5 The economics of cost-volume-profit analysis.......................................................... 76 6.6 Suggested questions from your textbook................................................................. 80 6.7 A reminder of your learning outcomes..................................................................... 80 6.8 Sample examination question................................................................................. 80 Chapter 7: Application of cost-volume-profit analysis.......................................... 81 7.1 Introduction........................................................................................................... 81 7.2 The use of break-even analysis in decision making................................................... 82 7.3 Cost drivers and estimation methods...................................................................... 83 7.4 Using contribution analysis for decision making...................................................... 83 7.5 Learning curve analysis........................................................................................... 85 7.6 Suggested questions from your textbook................................................................. 89 7.7 A reminder of your learning outcomes..................................................................... 89 7.8 Sample examination questions................................................................................ 89 Chapter 8: Relevant information in decision making............................................ 91 8.1 Introduction........................................................................................................... 91 8.2 Choosing appropriate information.......................................................................... 92 8.3 Relevance and the value of information................................................................... 93 8.4 Opportunity costs................................................................................................... 95 8.5 Identifying relevant costs........................................................................................ 96 ii Contents 8.6 B ases and implications of outsourcing (or ‘make‑or‑buy’)....................................... 100 8.7 Determining the use of limiting factors.................................................................. 100 8.8 Customer profitability analysis and relevant cost................................................... 103 8.9 Suggested questions from your textbook............................................................... 103 8.10 A reminder of your learning outcomes................................................................. 103 8.11 Sample examination questions............................................................................ 103 Chapter 9: Decision making with constraints and uncertainty........................... 105 9.1 Introduction......................................................................................................... 105 9.2 Resource allocation with theory of constraints....................................................... 106 9.3 Throughput accounting and the theory of constraints.................................................111 9.4 Uncertainty of information – probability analysis................................................... 112 9.5 Decision trees....................................................................................................... 113 9.6 Maximin, maximax and regret criteria................................................................... 114 9.7 Performance evaluation........................................................................................ 115 9.8 Suggested questions from your textbook............................................................... 116 9.9 A reminder of your learning outcomes................................................................... 116 9.10 Sample examination questions............................................................................ 117 Chapter 10: Theory and practice of pricing......................................................... 119 10.1 Introduction....................................................................................................... 119 10.2 Economic aspects of pricing................................................................................ 120 10.3 Marketing aspects of pricing............................................................................... 121 10.4 Managerial issues in pricing................................................................................ 122 10.5 Regulation......................................................................................................... 122 10.6 Strategy and pricing............................................................................................ 122 10.7 Costing and pricing........................................................................................... 122 10.8 Short-run pricing................................................................................................ 123 10.9 Long-run pricing................................................................................................. 124 10.10 Making the pricing decision.............................................................................. 124 10.11 Cost-plus pricing methods................................................................................ 125 10.12 Suggested questions from your textbook........................................................... 126 10.13 A reminder of your learning outcomes............................................................... 126 10.14 Sample examination question........................................................................... 126 Chapter 11: Target costing, value engineering and customer profitability analysis................................................................................................................ 129 11.1 Introduction....................................................................................................... 129 11.2 Target costing..................................................................................................... 130 11.3 Value added and non-value added costs............................................................. 131 11.4 Benchmarking.................................................................................................... 132 11.5 B usiness process re-engineering and just-in-time systems.................................... 133 11.6 Lean accounting................................................................................................. 134 11.7 Customer profitability analysis............................................................................ 134 11.8 Suggested questions from your textbook............................................................. 135 11.9 A reminder of your learning outcomes................................................................. 135 11.10 Sample examination questions.......................................................................... 136 Chapter 12: Long-term decision making, capital budgeting, and lifecycle budgeting and costing........................................................................................ 137 12.1 Introduction....................................................................................................... 137 12.2 Capacity concepts and capacity management...................................................... 138 12.3 P rocess of investigating the need for capital expenditure..................................... 138 12.4 The time value of money..................................................................................... 138 iii AC2097 Management accounting 12.5 Methods of assessing the viability of long-term capital expenditure (capital budgeting)................................................................................................................. 139 12.6 C omparing the results with accounting performance measures............................ 140 12.7 Income tax factors.............................................................................................. 142 12.8 Lifecycle budgeting and costing.......................................................................... 143 12.9 P ost-investment audit of capital budgeting and lifecycle costing.......................... 145 12.10 Suggested questions from your textbook........................................................... 145 12.11 A reminder of your learning outcomes............................................................... 145 12.12 Sample examination questions.......................................................................... 145 Chapter 13: Strategic budgeting and control..................................................... 147 13.1 Introduction....................................................................................................... 147 13.2 Strategy, planning and budgeting........................................................................ 148 13.3 Budgets as part of management control.............................................................. 149 13.4 Detailed budget preparation............................................................................... 149 13.5 Master budget and other budgets....................................................................... 150 13.6 Rolling budgets.................................................................................................. 152 13.7 Methods of budgeting for support centres........................................................... 152 13.8 Assessing the plans............................................................................................ 155 13.9 Criticisms of the budgetary process..................................................................... 155 13.10 Suggested questions from your textbook........................................................... 155 13.11 A reminder of your learning outcomes............................................................... 155 13.12 Sample examination questions.......................................................................... 155 Chapter 14: Budgeting and control..................................................................... 159 14.1 Introduction....................................................................................................... 159 14.2 Management control systems............................................................................. 160 14.3 Budget and responsibility accounting.................................................................. 160 14.4 Setting standard costs........................................................................................ 162 14.5 Flexible budgets and management control.......................................................... 163 14.6 C alculating variances and reconciling budgeted and actual performance............. 165 14.7 Using variance analysis for organisational learning.............................................. 166 14.8 K aizen budgeting and performance measurement (and management)................. 166 14.9 Suggested questions from your textbook............................................................. 166 14.10 A reminder of your learning outcomes............................................................... 166 14.11 Sample examination question........................................................................... 167 Chapter 15: Variance analysis – further issues.................................................... 169 15.1 Introduction....................................................................................................... 169 15.2 Input mix and yield variances............................................................................. 170 15.3 Sales mix variances............................................................................................. 172 15.4 Planning and operational variances..................................................................... 176 15.5 Investigating variances and changing standards.................................................. 177 15.6 Suggested questions from your textbook............................................................. 178 15.7 A reminder of your learning outcomes................................................................. 178 15.8 Sample examination questions............................................................................ 178 Chapter 16: Divisional performance measurement systems............................... 181 16.1 Introduction....................................................................................................... 181 16.2 Creating divisions............................................................................................... 182 16.3 Investment centres............................................................................................. 182 16.4 Goal congruence................................................................................................ 183 16.5 Measuring performance...................................................................................... 183 16.6 Return on investment......................................................................................... 184 iv Contents 16.7 Divisional acceptance of new investment opportunities...................................................188 16.8 Residual income (RI)........................................................................................... 189 16.9 Economic value added (EVA®)........................................................................... 190 16.10 U sing current cost to measure and compare divisional performance................... 190 16.11 Non-financial measures of performance............................................................ 191 16.12 Suggested questions from your textbook........................................................... 192 16.13 A reminder of your learning outcomes............................................................... 192 16.14 Sample examination questions.......................................................................... 192 Chapter 17: Transfer pricing and its effect on performance management systems.......................................................................................... 195 17.1 Introduction....................................................................................................... 195 17.2 Purposes of transfer pricing................................................................................ 196 17.3 Transfer pricing methods..................................................................................... 196 17.4 Multinational transfer prices............................................................................... 203 17.5 Suggested questions from your textbook............................................................. 204 17.6 A reminder of your learning outcomes................................................................. 204 17.7 Sample examination questions............................................................................ 205 Chapter 18: Strategic performance management – the use of non-financial performance measures........................................................................................ 209 18.1 Introduction....................................................................................................... 209 18.2 Vision, mission, strategy and operations.............................................................. 210 18.3 Strategic use of the balanced scorecard............................................................... 211 18.4 The balanced scorecard (BSC)............................................................................. 212 18.5 Fitzgerald and Moon’s results and determinants framework for measurement in service industries........................................................................................................ 214 18.6 U sing different designs of financial and non-financial information....................... 215 18.7 Not-for-profit organisations................................................................................ 215 18.8 Suggested questions from your textbook............................................................. 218 18.9 A reminder of your learning outcomes................................................................. 218 18.10 Sample examination question........................................................................... 218 Chapter 19: Cost management and environmental accounting.......................... 221 19.1 Introduction....................................................................................................... 221 19.2 Quality cost management................................................................................... 221 19.3 Environmental management accounting.............................................................. 225 19.4 Suggested questions from your textbook............................................................. 226 19.5 A reminder of your learning outcomes................................................................. 227 19.6 Sample examination questions............................................................................ 227 Chapter 20: Future trends in strategic management accounting....................... 229 20.1 Introduction....................................................................................................... 229 20.2 M anagement accounting supports management strategy.................................... 230 20.3 Digital transformation......................................................................................... 233 20.4 Enterprise governance and the strategic scorecard.............................................. 234 20.5 Suggested questions from your textbook............................................................. 235 20.6 A reminder of your learning outcomes................................................................. 235 20.7 Sample examination question............................................................................. 235 v AC2097 Management accounting Notes vi Introduction Introduction About this edition This 2023 edition of the subject guide is a revision of the 2019 guide by Amanda Nayak which was a development of Marco Mongiello’s 2016 edition, which in turn built on Thomas Ahrens’ 2009 amended edition. Throughout the various editions, many of the elements that contribute to this subject guide have changed. The syllabus has been amended to incorporate recently developed management accounting approaches and techniques. There is also a greater emphasis on examining your ability to perform calculations, because many of you are considering becoming accountants and will need these skills. The main textbook has been changed to Bhimani, A., C.T. Horngren, S.M. Datar and M. Rajan Management and cost accounting (2023) 8th edition. This textbook provides clear, worked examples of the techniques being learned and others from the real world. Your study of the subject should encourage you to reflect on the topics and to try to relate them to your own experience, where possible. In the field of management accounting, newer techniques are continuing to be developed to meet changing environmental, communication and technological challenges. Organisations can be small and local or large and international; production-based, service-based or not-for-profit. So, you will need an understanding of both simple and sophisticated techniques. Indeed, Marco Mongiello’s view of management accounting, with which I agree, is that ‘traditional techniques and concepts are not surpassed or made obsolete by new and more sophisticated ones, but instead are put in different perspectives and work together with the newer techniques’. The subject guide is structured into 20 chapters. This enables you to ‘digest’ the topics in small chunks and, ideally, whether you are taught by a tutor or are studying on your own, to assign a chapter per lesson. On the VLE you will find a sample examination paper, a sample commentary and answers to the end of chapter sample examination questions. Management accounting has developed more and more strategic relevance in the management of organisations. Hence, in this subject guide we regularly make reference to strategy. The influence on organisational strategy is introduced in Chapter 1, then throughout the guide we explain concepts and techniques in light of this. In Chapter 20 we compare more traditional approaches to management accounting with how it is used in strategic contexts. I owe a debt of gratitude to Thomas Ahrens for his invaluable work on the initial editions of this subject guide and to Marco Mongiello for allowing me to keep or rephrase substantial parts of his material. Aims This course is designed to equip you with knowledge of the concepts and the ability to apply techniques of management accounting, in order to be able to contribute to the success of an organisation. Modern management accounting is concerned with decision making, planning and control. It supports decision makers in their daily and strategic decisions, contributes 1 AC2097 Management accounting to short- and long-term planning and produces information for control, performance measurement and management. This may also include non- financial information in management accounting reports, where it is used in combination with financial information to construct broader pictures of the contribution that different processes, procedures, functions, activities and divisions make to the strategic achievements of a firm. The course follows on from AC1025 Principles of accounting. There are some areas which cover the same topics, but in this course our study is either wider or deeper than was expected of you before. This subject guide covers the syllabus as follows. Chapter 1 gives particular emphasis to the role played by management accounting in supporting managerial decision making, including a discussion of the changing business environment and management accounting’s strategic role. We also revise cost terms and concepts covered in AC1025. Chapter 2 explores the theory and practice of allocating and absorbing costs to cost objects (products, services and cost centres) and how the data obtained should be interpreted and used. Chapter 3 covers the purpose of finding out the cost per unit of processed products using both FIFO and weighted average methods, and how to calculate this. It also looks at methods of dealing with losses in process. The chapter finishes by introducing capacity management, which is explored in detail in later chapters. Chapter 4 discusses the changed business environment, which requires more accurate measurement of the costs of inputs. It also covers how to calculate activity-based costs (ABC). Chapter 5 follows on from Chapter 4 with a discussion of the extended use of ABC techniques for managerial decision making using activity-based management (ABM) and activity-based budgeting (ABB). Chapter 6 goes over break-even analysis (studied in AC1025) and applies it to situations where there are several products. We then look at using contribution analysis for decision making and operating leverage. Chapter 7 looks at techniques available to determine cost behaviour. It also focuses on the impact of the learning curve on product/service costs. Chapter 8 revises the concepts of sunk cost, opportunity cost, already controlled and not yet controlled cost. It illustrates how to identify the appropriate cost for different decisions, such as outsourcing, and discusses some of the potential longer-term impacts of short-term decisions. Chapter 9 looks at the financially optimal use of constrained factors including the use of linear programming, shadow prices, throughput accounting and the theory of constraints. We also cover several methods of dealing with uncertainty: probability analysis, decision trees, maximin, maximax and regret criteria. Chapter 10 covers various aspects of the theory and practice of pricing and the different ways in which cost supports the pricing decision. Chapter 11 describes the changes to the business and technological environment which have enabled greater awareness of customer 2 Introduction preferences, particularly for mass-produced products. There have also been other changes, such as shorter product lifecycles and increased pressure for efficiency throughout the organisation. This chapter looks at target costing, identification of value added and non-value added activities, benchmarking, business process engineering, just-in-time systems (JIT), lean accounting and the purpose and scope of customer profitability analysis. Chapter 12 discusses the management of capacity in the long term. It summarises methods of long-term investment appraisal and compares the results with those from short-term accounting performance measures. It also covers lifecycle costing. Chapters 13–15 build on material in AC1025 to cover budgeting and the use of variances in greater detail. Chapter 13 covers the purposes and preparation of budgets, including rolling and zero- based budgeting and activity-based budgeting. Chapter 14 discusses responsibility accounting and the managerial roles of budgets. We explain how to calculate flexed budgets and explain variance analysis. Finally for this section, Chapter 15 explains the purposes of and calculations for input mix and yield variances, sales mix variances, planning and operational variances and the investigation of variances. Chapter 16 explores the measurement of divisional performance, including how to define income and investment. The strengths and limitations of the measurement methods, return on investment, residual income and economic value added are explained and discussed. Chapter 17 focuses on the purposes and methods of transfer pricing and discusses multinational transfer pricing. Chapter 18 defines lead and lag performance measures and looks at the use of the balanced scorecard and Fitzgerald and Moon’s results and determinants framework. We also discuss the use of non-financial performance indicators in the profit and not-for-profit sectors. Chapter 19 looks at the management and measurement of quality costs and environmental costs and how this information is used. Chapter 20 looks at the strategic use of budgeting, the balanced scorecard, the theory of constraints, customer profitability analysis and lean accounting. It describes the different uses of management accounting and strategic management accounting. This final chapter also looks at the impact of the internet and technological change on management and on the management accounting function. Finally, it explains the concept of enterprise governance. Changes to the syllabus The material contained in this subject guide reflects the syllabus for the year 2023–2024. The up-to-date course syllabus for AC2097 Management accounting can be found in the course information sheet, which is available on the course VLE (virtual learning environment) page. The field of accounting changes regularly, and there may be updates to the syllabus for this course that are not included in this subject guide. Any such updates will be posted on the VLE. It is essential that you check the VLE at the beginning of each academic year (September) for new material and changes to the syllabus. Any additional material posted on the VLE will be examinable. 3 AC2097 Management accounting Learning outcomes At the end of this course, and having completed the Essential reading and activities, you should be able to: discuss the changing role of management accounting critically evaluate the uses of management accounting information for strategic decision making in various business contexts select, devise and apply different types of cost and revenue analysis and explain their different roles for supporting operational and strategic managerial decisions design and prepare budgets and explain their use in planning and control design and use variances to support feedback, analysis and control identify and discuss different methods of investment appraisal discuss various approaches to performance measurement and control in various types of organisations, and devise and evaluate indicators of performance relate the use of management accounting information to the expanding availability of data and global reach through the use of IT and the internet. Employability outcomes Below are the three most relevant skill outcomes for students undertaking this course which can be conveyed to future prospective employers: 1. persuasion and negotiation 2. communication 3. digital skills. Why study management accounting? Whether an organisation is profit seeking or not for profit, one of the key aims of the decision makers of an organisation will be to use resources in the most efficient way possible. Resources are scarce and their efficient use enables the fuller achievement of any organisation’s ultimate goals. Management accounting provides techniques and concepts to measure the use of resources and how they are linked to the provision of services and products. It also informs the organisation’s decision makers on revenue generation through sales quantities and prices and the generation of grants and tariffs. Broadly, it has two aims: 1. to support decision making about the allocation of resources 2. to support the design of activities, processes and procedures, evaluate their effectiveness and make proposals for their improvement. Hence, studying management accounting is relevant in any context where resources are used: in commercial firms of any type, not-for-profit organisations, governments and charities. As an accountant, your role in an organisation may require you to advise management on methods of measuring the performance of employees compared to the resources that they have used. This may require you to choose how to allocate costs to one person’s actions or another’s. Your choices will have important effects on how people behave in the firm, 4 Introduction what decisions they take and what their priorities are. They may even affect pay or promotion. Also, your organisation may wish to measure your performance, for the same reasons. If this is the case, you will want to be able to discuss the methods of such measurement. The questions of how to measure, what to measure, who to give this information to and when, are what constitute management (or managerial) accounting. So, whether or not you want to be a specialist in this field, you will become involved in discussions of performance and the uses of resources. It is from this perspective that you should aim to acquire management accounting knowledge and skills. Organising your studies This course builds on the knowledge and skills you acquired in AC1025. So, before beginning this course, it is recommended that you go back to that learning material and refresh your memory. The subject guide is intended to lead you through your learning of management accounting. Using your textbooks and their companion websites as tools, the subject guide provides you with a framework for your study; it contains aims and learning objectives for each topic, which should help you focus more clearly on what is expected of you in the assessment. The subject guide also points to the most important issues in each topic and provides some additional explanations and cross references, so that you can see the links between different topics. The worked examples and activities are aimed at making your learning as active as possible. How you use the textbook depends very much on whether you attend a teaching institution or whether you study independently. However, it is important to remember that under no circumstances is the subject guide meant to replace the textbook. Relevant reading is listed at the beginning of each chapter of the subject guide. When the Essential reading also includes journal articles, they are mostly available through the University of London Online Library. If you study at a teaching institution If you are receiving regular instruction at a teaching institution I recommend that you read through each chapter of the subject guide before your class. This will give you the opportunity to participate in and contribute to the classes more effectively. The introduction to each chapter should help you to reflect on what to expect in the remainder of the chapter. Try to read the whole chapter in one go, even though this may result in a somewhat superficial overview. After your class you should read the chapter again, paying more attention to the details and working through the examples. It is paramount that you allow enough time every week to go through the activities in each chapter of the guide. These are designed to develop your reasoning and check whether you have understood and learned a topic. Where possible, try to explain the topics to others (experts and non- experts alike); you will soon realise that by explaining a topic you gain a fuller grasp of it. The main role of the textbook is to complement, in greater detail, what you learn from your tutor in class. You should combine what you learn from this subject guide, your classes and the textbook to construct your own critical 5 AC2097 Management accounting view of each topic and to get a deeper grasp of concepts and techniques. I would recommend that you read the relevant textbook material both before and after the relevant seminars or lectures. I also recommend that you use the textbooks’ companion websites if they are accessible to you. As you will see from example examination papers, the numerically based questions always require you to provide comments concerning the information shown by your answers and how it can be used in an organisational setting. If you study independently If you study by yourself, this subject guide, the textbook, the companion websites (where applicable) and the other readings are your main sources of knowledge. In the same way as indicated above, I recommend that you read a whole chapter of the subject guide in one go, using the introduction to each chapter to help you reflect on what to expect. After that, go to the textbook(s) and read the relevant chapters alongside the subject guide, which will help you navigate through them. You must try to construct your own critical view of each topic and to obtain a firm grasp of specific concepts and techniques. It is paramount that you allow enough time to go through the activities in each chapter of the subject guide and that you try to explain the topics to others in order to fully develop your own understanding. Make sure that you understand the logic of the learning objectives at the beginning of each chapter of the subject guide as well as those in the textbooks. As you read, try to relate what you are reading to the learning objectives for each chapter. The textbooks’ companion websites, if you can access them, are an invaluable source of interactive learning material. I recommend you use them immediately upon completing a chapter if possible. Regardless of whether you have access to the companion websites, you should immediately attempt a few of the exercises provided at the end of each chapter, because practising is the best way to consolidate your learning. Leave a few exercises and do them one or two days later to check that you have retained what you learned. If you study by yourself you should especially benefit from the fact that both the subject guide and the textbooks take a holistic approach to the subject of management accounting, though in different ways. Although topics are presented in separate chapters, they are interrelated. An example in the subject guide is activity-based costing (ABC), which has its own chapter (Chapter 4), but is also referred to in Chapter 5, where the technique is applied in a more strategic context. The advantage of this holistic approach is that it explains the relevance of certain techniques in relation to different ideas within management accounting. So, if you want to find out more about a particular topic or technique in the textbook, first consult the glossary and then the index of the book. Follow up the references from the index to find out how the topic or technique relates to different ideas. It is helpful to look back regularly at the earlier chapters of the subject guide, in order to refresh and reinforce your understanding of earlier topics. It is also a good idea to follow up some of the references cited in the textbook as well as the suggestions for further reading which are given in this subject guide. Once you have started to study you will be able to evaluate how long it should take you to proceed further and complete your study. Allow enough 6 Introduction time to fully prepare for a lecture or study session, to organise your notes after the lecture (if you are on a taught programme), to read the guide, the Essential reading and Further reading and to do the exercises. Essential reading Bhimani A., C.T. Horngren, S.M. Datar and M. Rajan Management and cost accounting. (Harlow: Pearson Education, 2023) 8th edition [ISBN 9781292436029 (print); 9781292436043 (ebook (ePub) format).] Throughout this subject guide, references to ‘the textbook’ are to this book. This textbook provides plenty of examples. I recommend that you ensure that you have access to this textbook (and its companion website) for at least the period of time when you are studying for this course. It is also available as a PDF and as an ebook. It is therefore not advisable to buy it second hand, as access codes will only work for one user and for a limited period. Detailed reading references in this subject guide refer to the eighth edition of Bhimani et al. (2023). New editions may have been published by the time you study this course. You can use a more recent edition; use the detailed chapter and section headings and the index to identify relevant readings. Also check the VLE regularly for updated guidance on readings. For revision and examination preparation, you should also go through the Study skills module, which is available on the VLE. Further reading Please note that as long as you read the Essential reading you are then free to read around the subject area in any text, paper or online resource. You will need to support your learning by reading as widely as possible and by thinking about how these principles apply in the real world. To help you read extensively, you have free access to the virtual learning environment (VLE) and University of London Online Library (see below). Unless otherwise stated, all websites in this subject guide were accessed in May 2023. We cannot guarantee, however, that they will stay current and you may need to perform an internet search to find the relevant pages. The following book stands out as further reading: Drury, C. Management and cost accounting. (London: Cengage, 2018) 10th edition [ISBN 9781473748873]. This textbook has been recommended previously so you may be able to get hold of a copy from another student. It provides comprehensive insights into the theory behind methods and techniques in management accounting. Other useful texts for this course include: Ahrens, T. and C.S. Chapman ‘New measures in performance management’ in Bhimani, A. (ed.) Contemporary issues in management accounting. (Oxford: Oxford University Press, 2006) [ISBN 9780199283361] pp.1–19. Ahrens, T. and C.S. Chapman ‘Accounting for flexibility and efficiency: a field study of management control systems in a restaurant chain’, Contemporary Accounting Research 21(2) 2004, pp.271–301. Ahrens, T. and C.S. Chapman ‘Occupational identity of management accountants in Britain and Germany’, European Accounting Review 9(4) 2000, pp.477–98. Balakrishnan, R. and G.B. Sprinkle ‘Integrating profit variance analysis and capacity costing to provide better managerial information’, Issues in Accounting Education 17(2) 2002, pp.149–61. 7 AC2097 Management accounting Banker, R.D., I.R. Bardhan and T. Chen ‘The role of manufacturing practices in mediating the impact of activity-based costing on plant performance’, Accounting, Organizations and Society 33(1) 2008, pp.1–19. Bhimani, A. Accounting disrupted: How digitalization is changing finance (Hoboken, New Jersey: Wiley, 2021) 1st edition [ISBN 9781119720065]. Brown, P. ‘A model for effective financial analysis’, Journal of Financial Statement Analysis 3(4) 1998, pp.60–63. Chapman, C.S. and W.F. Chua ‘Technology-driven integration, automation and standardisation of business processes: implications for accounting’ in Bhimani, A. (ed.) Management accounting in the digital economy. (Oxford: Oxford University Press, 2003) [ISBN 9780199260386] pp.74–94. Christensen, C., S.P. Kaufman and W.C. Shih ‘Innovation killers’, Harvard Business Review 86(1) 2008, pp.98–105. Collingwood, H. ‘The earnings game: everyone plays, nobody wins’, Harvard Business Review 79(6) 2001, pp.65–74. Cooper, R. ‘Explicating the logic of ABC’, Management Accounting November 1990, pp.58–60. Cooper, R. and W.B. Chew ‘Control tomorrow’s cost through “today’s design’’’, Harvard Business Review 74(1) 1996, pp.88–97. Cooper, R. and R.S. Kaplan ‘The promise – and peril – of integrated cost systems’, Harvard Business Review 76(4) 1998, pp.109–19. Cooper, R. and R.S. Kaplan ‘Measure costs right: make the right decisions’, Harvard Business Review 66(5) 1988, pp.96–103. Covaleski, M.A., J.H. Evans III, J.L. Luft and M.D. Shields ‘Budgeting research: three theoretical perspectives and criteria for selective integration’, Journal of Management Accounting Research 15 2003, pp.3–51. Davila, A. and G. Foster ‘The adoption and evolution of management control systems in entrepreneurial companies: evidence and a promising future’ in Chapman, C.S., A.G. Hopwood and M.D. Shields (eds) Handbook of management accounting research, volume 3. (Oxford: Elsevier, 2009) [ISBN 9780080554501] pp.1323–36. Davila, T. and M. Wouters ‘Managing budget emphasis through the explicit design of conditional budgetary slack’, Accounting, Organizations and Society 30 2005, pp.587–608. Friedman, A.L. and S.R. Lyne ‘Activity-based techniques and the death of the bean counter’, European Accounting Review 6(1) 1997, pp.19–44. Fitzgerald, L. and P. Moon Performance management in service industries: making it work. Chartered Institute of Management Accountants Research Series (Oxford: CIMA Publishing, 1996) [ISBN 9781874784524]. Goldratt, E.M. and J. Cox The goal: a process of ongoing improvement. (London: Routledge/Gower, 1994) 3rd edition [ISBN 9780566086656]. Hope, J. and R. Fraser ‘Who needs budgets?’, Harvard Business Review 81(2) 2003, pp.108–15. Hopper, T., T. Koga and J. Goto ‘Cost accounting in small and medium sized Japanese companies: an exploratory study’, Accounting & Business Research 30(1) 1999, pp.73–87. Ittner, C. and D. Larcker ‘Extending the boundaries: nonfinancial performance measures’ in Chapman, C.S., A.G. Hopwood and M.D. Shields (eds) Handbook of management accounting research, volume 3. (Oxford: Elsevier, 2009) [ISBN 9780080554501] pp.1235–52. Ittner, C. and D. Larcker ‘Moving from strategic measurement to strategic data analysis’ in Chapman, C.S. (ed.) Controlling strategy: management, accounting and performance measurement. (Oxford: Oxford University Press, 2005) [ISBN 9780199280636] pp.86–105. Ittner, C. and D. Larcker ‘Coming up short on nonfinancial performance measurement’, Harvard Business Review 81(11) 2003, pp.88–95. Jones, R. and M. Pendlebury Public sector accounting. (Harlow: FT Prentice Hall, 2010) 6th edition [ISBN 9780273720362]. 8 Introduction Johnson, H. and R. Kaplan Relevance lost: the rise and fall of management accounting. (Boston: Harvard Business School Press, 1987) [ISBN 9780875841380]. Kaplan, R.S. ‘Conceptual foundations of the balanced scorecard’ in Chapman, C.S., A.G. Hopwood and M.D. Shields (eds) Handbook of management accounting research, volume 3. (Oxford: Elsevier, 2009) [ISBN 9780080554501] pp.1253–70. Kaplan, R.S. and S.R. Anderson ‘Time-driven activity-based costing’, Harvard Business Review 82(11) 2004, pp.131–38. Kaplan, R.S. and R. Cooper Cost and effect: using integrated systems to drive profitability and performance. (Boston: Harvard Business School Press, 1998) [ISBN 9780875847887]. Kaplan, R.S. and D.P. Norton ‘Transforming the balanced scorecard from performance measurement to strategic management: part I’, Accounting Horizons 15(1) 2001a, pp.87–105. Kaplan, R.S. and D.P. Norton ‘Transforming the balanced scorecard from performance measurement to strategic management: part II’, Accounting Horizons 15(2) 2001b, pp.147–61. Krakhmal, V. ‘Customer profitability accounting in the context of hotels’ in Harris, P. and M. Mongiello (eds) Accounting and financial management: developments in the international hospitality industry. (Oxford: Elsevier, 2006) [ISBN 9780750667296] pp.188–210. Labro, E. ‘Analytics of costing system design’ in Bhimani, A. (ed.) Contemporary issues in management accounting. (Oxford: Oxford University Press, 2006) [ISBN 9780199283361] pp.217–42. Marginson, D. and S. Ogden ‘Coping with ambiguity through the budget: the positive effects of budgetary targets on managers’ budgeting behaviours’, Accounting, Organizations and Society 30(5) 2005, pp.435–56. Merchant, K. and W. van der Stede Management control systems: performance measurement, evaluation and incentives. (Harlow: Pearson Education, 2011) 3rd edition [ISBN 9780273737612]. Narayanan, V.G. and R.G. Sarkar ‘The impact of activity-based costing on managerial decisions at Insteel Industries – a field study’, Journal of Economics & Management Strategy 11(2) 2002, pp.257–88. Passov, R. ‘How much cash does your company need?’, Harvard Business Review 81(11) 2003, pp.119–28. Ranganathan, J. and D. Ditz ‘Environmental accounting: a tool for better management’, Management Accounting February 1966, pp.38–40. Roslender, R. and S.J. Hart ‘In search of strategic management accounting: theoretical and field study perspectives’, Management Accounting Research 14(3) 2003, pp.255–79. Sahay, S.A. ‘Transfer pricing based on actual cost’, Journal of Management Accounting Research 15 2003, pp.177–93. Sherman, D. and D. Young ‘Tread lightly through these accounting minefields’, Harvard Business Review 79(7) 2001, pp.129–35. Simmonds, K. ‘Strategic management accounting’, Management Accounting 59(4) 1981, pp.26–29. Van der Rest, J.I. ‘Room rate pricing: a resource-advantage perspective’ in Harris, P. and M. Mongiello (eds) Accounting and financial management: developments in the international hospitality industry. (Oxford: Elsevier, 2006) [ISBN 9780750667296] pp.211–39. Wagner, S. and L. Dittmar ‘The unexpected benefits of Sarbanes-Oxley’, Harvard Business Review 84(4) 2006, pp.133–40. 9 AC2097 Management accounting Online study resources In addition to the subject guide and the Essential reading, it is crucial that you take advantage of the study resources that are available online for this course, including the VLE and the Online Library. You can access the VLE, the Online Library and your University of London email account via the Student Portal at: https://my.london.ac.uk You should have received your login details for the Student Portal with your official offer, which was emailed to the address that you gave on your application form. You have probably already logged in to the Student Portal in order to register! As soon as you registered, you will automatically have been granted access to the VLE, Online Library and your fully functional University of London email account. If you have forgotten these login details, please click on the ‘Forgot Password’ link on the login page. The VLE The VLE, which complements this subject guide, has been designed to enhance your learning experience, providing additional support and a sense of community. It forms an important part of your study experience with the University of London and you should access it regularly. The VLE provides a range of resources for EMFSS courses: Course materials: Subject guides and other course materials available for download. In some courses, the content of the subject guide is transferred into the VLE and additional resources and activities are integrated with the text. Readings: Direct links, wherever possible, to essential readings in the Online Library, including journal articles and ebooks. Video content: Including introductions to courses and topics within courses, interviews, lessons and debates. Screencasts: Videos of PowerPoint presentations, animated podcasts and on-screen worked examples. External material: Links out to carefully selected third-party resources. Self-test activities: Multiple-choice, numerical and algebraic quizzes to check your understanding. Collaborative activities: Work with fellow students to build a body of knowledge. Discussion forums: A space where you can share your thoughts and questions with fellow students. Many forums will be supported by a ‘course moderator’, a subject expert employed by LSE to facilitate the discussion and clarify difficult topics. Past examination papers: We provide up to three years of past examinations alongside Examiners’ commentaries that provide guidance on how to approach the questions. Study skills: Expert advice on getting started with your studies, preparing for examinations and developing your digital literacy skills. Note: Students registered for Laws courses also receive access to the dedicated Laws VLE. 10 Introduction Some of these resources are available for certain courses only, but we are expanding our provision all the time and you should check the VLE regularly for updates. Making use of the Online Library The Online Library (https://onlinelibrary.london.ac.uk) contains a huge array of journal articles and other resources to help you read widely and extensively. To access the majority of resources via the Online Library you will either need to use your University of London Student Portal login details, or you will be required to register and use an Athens login. The easiest way to locate relevant content and journal articles in the Online Library is to use the Summon search engine. If you are having trouble finding an article listed in a reading list, try removing any punctuation from the title, such as single quotation marks, question marks and colons. For further advice, please use the online help pages (https://onlinelibrary. london.ac.uk/resources/summon) or contact the Online Library team using the ‘Chat with us’ function. Examination advice Important: the information and advice given here are based on the examination structure used at the time this guide was written. Please note that subject guides may be used for several years. Because of this we strongly advise you to always check both the current Programme Regulations for relevant information about the examination, and the VLE, where you should be advised of any forthcoming changes. You should also carefully check the rubric/instructions on the paper you actually sit and follow those instructions. This course is examined by an unseen, written examination which lasts for three hours 15 minutes. Now that examinations are being submitted online, some extra time is given for submission, to enable students to upload their answers. You should read the rules carefully as they may change from year to year as technology changes. There is a change to the requirements and structure of the paper from 2022 onwards, detailed below. There are two sections on the examination paper. Section A contains five calculation-based questions. Section B has two questions requiring only written answers (no calculation). You must answer three questions from Section A (each carries 25 marks) plus two questions from Section B. The first section B question requires you to choose two topics from four and write bullet points on these topics; each topic can earn up to 5 marks. The second question requires an essay on a relevant topic; there is a choice of two topics and the essay carries 15 marks. Where a question requires you to answer several parts, the number of marks for each part is shown. Typically, questions that ask you to perform calculations also ask you to interpret your results. Essay questions give you a further choice of sub-questions. To enable you to practise the type of questions you may encounter in the examination, at the end of each chapter in the subject guide you will be given one or two sample examination questions. Note that the questions cannot always be answered with reference to that chapter alone, but may require you to integrate material from other chapters and previous courses, such as AC1025. 11 AC2097 Management accounting Past examination papers and the associated Examiners’ commentaries are valuable resources that you can access online when preparing for the examination. You should be aware, however, that the syllabus was revised in 2022, so bear this in mind as you look at them. Remember, it is important to check the VLE for: up-to-date information on examination and assessment arrangements for this course where available, past examination papers and Examiners’ commentaries for the course which give advice on how each question might best be answered. Studying and practising In order to equip you with the ability to understand and perform a role as a management accountant, this course requires you to develop good quantitative skills and an understanding of the purpose of the calculations you do. Therefore, in order to achieve a good pass mark, you need to do lots of practice with calculation questions. The questions in the examination will be no harder than those in this subject guide or the suggested questions from the textbook. You should therefore take the opportunity to practise those questions if you have not done so already. Examination preparation In order to get a high mark in the examination you may wish to read around the subject using the ‘Further reading’ lists provided in this guide, or you could do your own literature research – and we would encourage you to do so. However, this is optional. On the other hand, it is vital that you read all of the Essential reading and attempt the suggested questions from the textbook, all of which have answers provided at the back of the textbook so that you can assess whether your answer is along the right lines and see where there are gaps or weaknesses in your understanding. You must also answer the sample examination questions at the end of each chapter of the subject guide, each of which, likewise, has answer guidance available on the VLE. The end-of-chapter examination questions and the sample examination paper provided on the VLE are the best preparation for the current examination paper. Previous examination papers (from 2020 onwards) can be used for practice, with caution. Examination presentation Examiners want to give you as many marks as possible, so your work needs to be clearly presented and easy to read and your workings need to be shown, even if you used a calculator to do them. It is easy to do all of your workings using a good calculator, but it is also easy to put a wrong figure into the calculator when you are in a hurry. If an answer you have given is wrong and there are no workings presented on your examination script, then no marks can be given. But if you write down your workings it is easy for the examiners to see where the mistake has occurred and give fair marks to the correct parts of the calculation. When answering essay questions (in Section B) it is not acceptable to write down everything you know about the subject and assume that the examiners will extract the information that actually addresses the 12 Introduction question. At this academic level you need to show that you are able to be selective in choosing the issues that are relevant and that you are able to organise them in a clear and understandable way. Practise this skill under timed conditions in order to perform well in the examination. More general guidance on good academic practice and performing well in assessments can be found in the Study skills module, which is available on the VLE. Abbreviations For your ease of reference, the following is a list of abbreviations that you will encounter in this subject guide and in the readings for this course. ABC activity-based costing ABM activity-based management AVCO average cost CVP cost-volume-profit analysis Depn depreciation EVA® economic value added FIFO first in, first out IRR internal rate of return Hr hour JIT just-in-time inventory system LIFO last in, first out Mtr metre O’head overhead R&D research and development ROI return on investment TOC theory of constraints WIP work in progress 13 AC2097 Management accounting Notes 14 Chapter 1: Management accounting and its strategic context Chapter 1: Management accounting and its strategic context 1.1 Introduction The basic concepts and terms of management accounting have been introduced in AC1025 Principles of accounting. In particular, Chapters 13 to 19 of that subject guide should provide you with an initial framework to place management accounting into the context of the modern business environment and the provision of information. I strongly recommend that you go back and revisit this learning material prior to proceeding with this chapter. This chapter aims to develop the subject of management accounting by explaining in more detail how management accounting supports and contributes to the day to day and strategic achievements of an organisation. This chapter should help you to get the best out of Chapters 1 and 2 of your textbook. 1.1.1 Aim The aim of this chapter is to clarify the importance of the management accounting function in organisations, in the context of their business model and strategy. This entails exploring the role of the management accountant in organisational practice. 1.1.2 Learning outcomes By the end of this chapter, and having completed the Essential reading and activities, you should be able to: distinguish between financial accounting, management accounting and cost accounting explain how management accounting information can be used for scorekeeping, attention directing and problem solving identify the major purposes of management accounting information understand the different steps in the decision-making, planning and control process describe the impact of the changing environment on management accounting discuss the importance of the management accounting function for the strategic success of an organisation explain the value chain framework for classifying and analysing dimensions of performance in different parts of the organisation, according to its functions describe the supply chain and indicate its strategic purpose identify the key success factors for companies explain why continuous improvement and benchmarking are important for business success discuss the challenges and role of management accountants in an organisation’s decision-making process define the basic terms and concepts used in management accounting. 15 AC2097 Management accounting 1.1.3 Essential reading Bhimani A., C.T. Horngren, S.M. Datar and M. Rajan Management and cost accounting. (Harlow: Pearson Education, 2023) 8th edition. Chapters 1 and 2. 1.1.4 Further reading Ahrens, T. and C.S. Chapman ‘New measures in performance management’ in Bhimani, A. (ed.) Contemporary issues in management accounting. (Oxford: Oxford University Press, 2006) pp.1–19. Ahrens, T. and C.S. Chapman ‘Occupational identity of management accountants in Britain and Germany’, European Accounting Review 9(4) 2000, pp.477–98. Chapman, C.S. and W.F. Chua ‘Technology-driven integration, automation and standardisation of business processes: implications for accounting’ in Bhimani, A. (ed.) Management accounting in the digital economy. (Oxford: Oxford University Press, 2003) pp.74–94. Cooper, R. and R.S. Kaplan ‘The promise – and peril – of integrated cost systems’, Harvard Business Review 76(4) 1998, pp.109–19. Davila, A. and G. Foster ‘The adoption and evolution of management control systems in entrepreneurial companies: evidence and a promising future’ in Chapman, C.S., A.G. Hopwood and M.D. Shields (eds) Handbook of management accounting research, volume 3. (Oxford: Elsevier, 2009) pp.1323–36. Drury, C. Management and cost accounting. (London: Cengage, 2018) 10th edition. Chapter 1 ‘Introduction to management accounting’, Chapter 2 ‘An introduction to cost terms and concepts’ and Chapter 22 ‘Strategic cost management and value creation’, section ‘Cost management and the value chain’, pp.613–15. Friedman, A.L. and S.R. Lyne ‘Activity-based techniques and the death of the bean counter’, European Accounting Review 6(1) 1997, pp.19–44. Ittner, C. and D. Larcker ‘Extending the boundaries: nonfinancial performance measures’ in Chapman, C.S., A.G. Hopwood and M.D. Shields (eds) Handbook of management accounting research, volume 3. (Oxford: Elsevier, 2009) pp.1235–52. Ittner, C. and D. Larcker ‘Moving from strategic measurement to strategic data analysis’ in Chapman, C.S. (ed.) Controlling strategy: management, accounting and performance measurement. (Oxford: Oxford University Press, 2005) pp.86–105. Johnson, H. and R. Kaplan Relevance lost: the rise and fall of management accounting. (Boston: Harvard Business School Press, 1987) Roslender, R. and S.J. Hart ‘In search of strategic management accounting: theoretical and field study perspectives’, Management Accounting Research 14(3) 2003, pp.255–79. 1.2 Sources of management accounting information Management accounting analyses, in detail, financial accounting information. It provides measurements and records of business transactions from diverse sources. It scrutinises past transactions from sales, purchases and expense records, payroll, the fixed asset inventory and other financial records. Transactions are traced to the centre responsible for making decisions relating to cost management and use of resources in that centre. Management accountants are also involved in obtaining information on the business environment in order to inform managers charged with deciding how to respond to business pressures and opportunities. They also create ad hoc and ‘notional’ (or ‘figurative’) accounting information, for example, opportunity costs and notional charges, to make managers aware of costs that are not easily visible. In conjunction with functional managers, they produce calculations for one-off, short-term decision making, and budgets and forecasts for long-term investment. 16 Chapter 1: Management accounting and its strategic context Management accounting information must mirror the strategic relevance of the decisions it is required to support. It must assist the decision makers by facilitating their decision-making process, and contain adequate detail to allow an informed decision to be made. The design of the management information system should enable information to be produced quickly, so that decision makers have the financial information they need to evaluate alternative scenarios and all foreseeable consequences of their decisions, within a competitive timeframe. Activity 1.1 Using the sections in the textbook ‘Cost management and accounting systems’ and ‘Strategic decisions and management accounting’, make notes on: how past decisions can affect current costs the importance of good-quality and timely accounting information the development of electronic communications and computer simulations and the potential they offer for better market opportunities, their use in simulating management decision alternatives, and how this can inform the design of accounting information. 1.3 Different functions of management accounting Management accounting activities can be classified as scorekeeping, attention directing and problem solving. Scorekeeping is a very important task, because without analysed data of what has happened previously it is difficult to monitor performance and decide how to move forward. This function is now mostly automated so computerised information can be provided in real time and for routine reports. Managers and accountants are vital in designing the level of detail the system must produce. In today’s world, as well as providing financial statistics, a management accounting system may be required to include statistics on workflows, efficiency, on-time deliveries, new customers, customer retention and any other routine activity which can be monitored. The attention-directing function of management accounting may be partly met by the automated system, which can highlight variances from expected performance. But management accountants should also seek out new opportunities to be exploited by the company. Problem solving refers to any short- or long-term decision which requires ad hoc financial information to be produced in order to choose between various alternatives. As mentioned above, the accounting system should be designed to produce this information on demand. 1.4 The decision-making process Managers are continually involved in situations where they need to make choices and decisions, implement actions and measure the effects of those actions to inform decisions in the future. Management accounting information is required to inform them of the financial aspect of the decision-making process. Both Drury (2018) and Horngren et al. (2014) provide diagrams showing the decision-making process. You may wish to look at these as Further reading. The six steps outlined by Drury (2018, p.7) are split into two subsections: planning and control. 17 AC2097 Management accounting In the planning process: 1. Identify objectives. 2. Search for alternative courses of action. 3. Select appropriate courses of action. 4. Implement the decisions. In the control process there are the final two steps: 5. Compare actual and planned outcomes. 6. Respond to divergences from the plan. Bhimani et al. (2023) take a different approach, described in the section in Chapter 1 ‘Accounting systems and management controls’. They integrate these activities by describing the major purposes of accounting systems as follows: 1. Formulating overall strategies and long-range plans. 2. Resource allocation decisions. 3. Cost planning and cost control of operations and activities. 4. Performance measurement and the evaluation of people. 5. Meeting external regulatory and legal reporting requirements, where they exist. Bhimani et al. (2023) also link the accounting role of planning, control and feedback in Exhibit 1.4. You should read the section on ‘Accounting systems and management controls’, noting particularly that using management accounting information is never simply a technical exercise. It always involves people. In providing and interpreting information, management accountants need to be constantly aware that people’s actions are represented in the numbers and so people are emotionally invested in them. We must also remember that the numbers do not tell the whole story. 1.5 The impact of technology on management accounting Bhimani et al. (2023) suggest that digitalisation is the greatest opportunity and challenge both for business and for the role of the management accountant. Specifically, you should read about: digital disruption and rapid cognitive development data availability (both structured and unstructured) and the opportunities and challenges it poses artificial intelligence and robotics block chain big data and robotics. All these developments impact on the technology used within the organisation and can give the management accounting function new opportunities to provide more information more quickly. But they also bring about the risk of loss of data and fraud, if the technologies are not developed appropriately to avoid this. 18 Chapter 1: Management accounting and its strategic context 1.6 Management accounting and organisational strategy Horngren et al. identify the following questions, where management accounting information can help to formulate strategy: Who are our most important customers and how can we be competitive and deliver value to them? What substitute products (or services) exist in the market place, and how do they differ from our products (or services) in terms of features, price, cost and quality? What is our critical capability? Is it technology, production or marketing? How can we leverage it for new strategic initiatives? Will adequate cash be available to fund the strategy, or will additional funds need to be raised? Horngren et al., 2014, p.27. Management accounting information is usually tailored around the specific strategic priorities of an organisation. 1.7 Customer focus Companies recognise that, in a competitive marketplace, all their activities should work towards meeting their customers’ needs. This involves ensuring that all activities provide value in the most effective and efficient way. This may also require working cooperatively with suppliers and customers who are not the final customer. Ways in which companies now ensure that they are using their resources to meet customer needs are: the value chain and supply chain concepts focusing on key success factors working to continuously improve and measuring this by benchmarking against competitors. 1.7.1 The value chain The value chain approach argues that each activity is the customer of the previous one: the second activity is the customer of the first activity, the third activity is affected by work of the second activity, etc. (e.g. the work of the design group (customer) is affected by the work of the research and development group (provider)). Therefore, the views of the ‘customer’ can be used to provide feedback information for assessing the quality of the preceding activity (e.g. the production group may discover that the design group has not specified the quality of the materials to be used with sufficient accuracy, thus requiring the production group to experiment with different qualities of material or refer the problem back to design). A diagram of the value chain can be found in your textbook, Chapter 1, Exhibit 1.4. According to Bhimani et al. (2023) Chapter 1, the activities which add value are: 1. research and development (R&D) 2. design 3. production 4. marketing 5. distribution 6. customer service. 19 AC2097 Management accounting However, the activities included will vary depending on the type of organisation. The value of each activity is measured by the receiving group (perhaps by comparing how much it would cost if the company were to use an outside source) and then compared with the cost incurred by the previous department in providing it. The type of detailed analyses which might be necessary in this process can be illustrated by the needs of the R&D department and the design department. For example, when managing research and development, it is probably useful to know the amount of resources which has been allocated to each research project, and how this should be split between human resources such as scientists, skilled workers, unskilled workers and consultants; raw materials; and other rights (e.g. licences to use others’ intellectual property). The design department may have the same categories of cost, but they are likely to change in proportion to what R&D spends. For example, at the design stage it is likely that fewer scientists but more skilled workers will be used than at the stage of research and development. Exhibit 2.3 in Chapter 2 of the textbook identifies the cost drivers which might apply in each part of the value chain. Activity 1.2 Apply the concept of a value chain to any familiar production process and reflect on what categories of costs would apply to each activity of the value chain. Repeat the same exercise with another familiar production process and compare the two, phase by phase. It should be possible to draw some conclusions based on the strategic relevance of each phase in different contexts. This exercise is particularly interesting when reflecting on firms that are operating in similar conditions but clearly have different strategic goals: for example, one firm’s key success factor may be innovation, whereas the other firm’s key success factor may be increasing efficiency in order to facilitate lower prices. This activity can be enhanced by obtaining the annual reports of different firms and researching some information about the firms’ respective focus in the allocation of their resources. 1.7.2 The supply chain The supply chain extends this idea further and looks at the chain of activities from original supplier to final customer, incorporating the activities of all the different companies involved. In the textbook, Chapter 1, Exhibit 1.5 is a diagram of a supply chain. This has led to greater cooperation between supplier and purchaser companies, but also raises issues of which company will pay for changes or how this can be reflected in prices between companies. The supply chain will involve several different companies who are trading with each other but are all affected by the final customer. The total profit is not realised until the final customer buys the product. An example of the supply chain for a supermarket selling cauliflowers could be as follows: Company A Company B Company C Customer Cauliflower farmer Packer Supermarket Suppose the supermarket demands only white cauliflowers because they think that is what their customers expect. However, due to climatic 20 Chapter 1: Management accounting and its strategic context conditions the farmer’s whole crop is more yellow than white, even though the size and flavour are the same. The supermarket refuses to buy the yellow cauliflowers. The farmer will have to destroy most of the crop (some may be sold in the farm shop or at low prices to animal feed companies). The packer will lose business. The shortage of white cauliflowers will drive up the price which the supermarket pays to other cauliflower suppliers, if they can be found. The higher price will be passed on to the customer who might not buy cauliflowers at that price. If market research had been done and the supermarket discovered that customers don’t necessarily want white cauliflowers and are happy with yellow ones (perhaps at a slightly lower price), each company in the supply chain would have been able to continue making profits. In order not to take all the impact of lower profits from yellow cauliflowers, the supermarket would therefore start the bargaining process along the supply chain, to agree new prices between the companies. Activity 1.3 Choose a product that you have bought and find out (or imagine) how many different companies were involved in providing this product. This includes shipping raw materials and bringing goods to shops (or postal delivery if it was an online purchase). 1.7.3 Key success factors It can be argued that, to be successful, a company has to perform well in several aspects. These can be identified as: Cost – being cost efficient. Quality – meeting customer expectations and competitive pressures. Time – needed to bring a product/service to market or to deliver to customers. Innovation – in products and services. 1.7.4 Continuous improvement Continuous improvement is necessary for many companies to maintain their profitability and presence in the marketplace. The push towards continuous improvement is often driven by competitors. If they are continually innovating, there are few circumstances in which similar companies should not also be innovating. The improvements made may be in products or processes. Bhimani et al. (2023) describe examples of ways in which companies strive to imp

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