eldenburg_4e_ppt_ch01.pdf

Chapter 1 The role of accounting in management decision making  Learning objectives After studying this presentation you should be able to: 1.1 recognise the types of decisions managers make for an organisation 1.2 discuss the role of cost and management...

Chapter 1 The role of accounting in management decision making  Learning objectives After studying this presentation you should be able to: 1.1 recognise the types of decisions managers make for an organisation 1.2 discuss the role of cost and management accounting information in management decision making 1.3 communicate how managers can make higher quality decisions using accounting information 1.4 describe the value chain framework and its applications in management accounting. Overview of management decision making  Management decision making Organisational vision: the core purpose and ideology of the entity. may be divided into written statements: – vision statement: theoretical description of what the organisation should become – mission statement: high-level declaration of the organisation’s purpose – core values statement: summary of beliefs that define the organisation’s culture.  Management decision making Organisational core competencies are the entity’s strengths relative to competitors. Organisational strategies: tactics used to take advantage of core competencies while working towards organisational vision relate to provision of direction and guidance for long- term decisions.  Management decision making Operating plans are specific short-term decisions for day-to-day activities. Actual operations are various actions taken and results achieved over a period of time. Measuring, monitoring and motivating performance: information used by managers towards achieving organisational vision.  Cost and management accounting for decision making Cost accounting is a technique or method for measuring the cost of a project, process or thing (IMA). Management accounting is the process of gathering, summarising and reporting financial and non-financial information used internally by managers to make decisions. Financial accounting is the process of preparing and reporting financial information used by decision makers outside of the entity. Cost and management accounting for decision making  Cost and management accounting for decision making Key influences on management accounting system structure: organisational structure availability of information technology organisational strategies culture and organisational vision organisational view of management accounting types of decisions external influences.  Cost and management accounting for decision making Cost and management accounting, yesterday and tomorrow: cost accounting techniques date back to early 1800s changes were minimal until mid 1970s globalisation led to expansion of activities undertaken and hence ‘management accounting’ became the terminology used organisations will continue to change and so must management accounting.  Cost and management accounting for decision making Relevant information for decision making: helps user to evaluate and choose among alternative courses of action concerns the future and varies with the action taken. The decision at hand and the nature of the cost object will determine the cost data required and how the data is used. Management accounting information and the quality of decision making Two issues regarding decision making: quality and relevance of management accounting information quality of decision-making processes in use within organisation. Management accounting information and the quality of decision making Higher quality information will generally have fewer uncertainties if it is based on viable assumptions; however, it still imperfect. For information to be useful, two issues: impact of opportunity costs and the associated risks benefits derived need to exceed the cost of collection.  Value chain analysis: a framework for management accounting Value chain: key activities engaged in by the organisation or industry. Value chain analysis: a framework for management accounting  Value chain analysis: a framework for management accounting Value chain analysis: focuses on activities encourages a broader organisational view breaks down more traditional representations of organisational activity externalises thinking by incorporating suppliers and customers reflects value chain relationships in terms of costs  Value chain analysis: a framework for management accounting Value chain analysis: reinforces initiatives such as activity-based costing (ABC) provides foundation for outsourcing and strategic alliance decisions. supports initiatives like supply chain analysis. enables financial measurement of downstream and upstream activities. categorises activities as value-added and non-value- added.  Value chain analysis: a framework for management accounting Before activities in the value chain can be improved or eliminated, need to be identified and classified: value-added activity: one that is necessary and that the customer would normally be prepared to pay for non-value-added: one that is wasteful (unnecessary) and that the customer would not normally be prepared to pay for. Value chain analysis: a framework for management accounting  Value chain analysis: a framework for management accounting Cost object: something for which we measure costs (e.g. product, service, production activity, customer, product). Cost driver: the input or activity that causes changes in the total cost for a cost object. They are either: structured: relate to underlying economic structure of organisation executional: relate to ability of organisation to do what is does successfully. Value chain analysis: a framework for management accounting The value chain and organisational structure The larger and the more decentralised a company is, the greater the organisational complexity (structural cost drivers) and the greater the need for accounting to help manage relationships within (and outside) of the organisation (executional cost drivers).  Summary The decisions that managers make in organisations relate to organisational vision, core competencies, organisational strategies, operating plans and actual operations. Cost accounting information is used for both management and financial accounting activities. Internal and external reports are prepared using software. Relevant information helps decision makers choose among alternative courses of action.  Summary Decision-useful information involves a consideration of opportunity costs and cost–benefit analysis. Higher quality information leads to higher quality decisions. A value chain can be described as the key activities engaged in by the organisation or industry. A company’s structure, product offerings and value chain design are strongly related. Companies might operate in one industry or across multiple industry value chains and restructure accordingly.