Lecture 1: Introduction to Modern Management Accounting
Lecture 1: Introduction to Modern Management Accounting 04 October 2010
Topics • Forces of change • Contemporary issues • The "new economy" • Costing
Reading • Strategic Finance (Chapter 1,2)
Forces of Change Traditional Management Accounting Model
Budgets are the accounting tool for implementing the planning action Control is the capturing of the difference in actual to planned results List of Forces of Change in Management Accounting The 1970s were hard times Started with OPEC prices ↑ Any company that faces constraints becomes inward facing This leads to management accounting Servicing the needs of the services industries The west became more service orientated 80% of OECD GDP is accounted for by the service sector The advent of technology Meant companies became more complex Subservience to financial accounting The residues of Japan + new influences By the late 1970s Japan was taking over western markets Japanese management influenced western management accounting Strategizing accounting Accounting for intellect Management Accounting versus Financial Accounting Users Standards Levels of detail ○ Time focus / personalisation Volume of information New Management Accounting Model
Changes in Management Accounting Backward looking → Forward looking Internal focus → External perspective Product/Services → Customers and markets Financial data → Financial and non-financial information Functional → Process Information → Knowledge The Traditional Finance Function
7.5 pence in every £1 spent goes to the finance department We can cut costs by outsourcing services
Course Notes Page 1
Key Points • Forces of change in MA • MA vs. FA • Contemporary issues of MA • Cost management issues • Absorption costing • Variable costing • CVP analysis • CVP assumptions (5)
We can cut costs by outsourcing services Most of the transaction processing can be outsourced because it's cheaper and customers don't care Other functions are difficult to outsource Contemporary Issues in Management Accounting More complex production requires less labour costs but more overheads • Most products have shortening life cycles Products are enhanced at a greater pace
Increasing Trends Affecting Management Accounting Use of more flexible organisational technologies Product complexity and diversity Capital intensiveness in many industries Outsourcing / Supply chain changes Quality management E-business application Management Accounting Concerns of Organisations ○ 60% - Activity based costing ○ 52% - Cost of quality reporting ○ 46% - Target costing ○ 44% - Strategic management accounting ○ 11% - Life cycle costing Satisfaction of Management Approaches
As we move to the right, we see that management use and are most satisfied with externally approaches The "New Economy" The advent of the internet and better technology has led to a new economy This has created a new dimension for businesses
Pure e-business may have high percentage of fixed costs Emerging Cost Management Issues Digital vs. physical Cost structure changes Intellectual capital / Knowledge management Dynamic trading Versioning of products Scalability Corporate governance / corporate performance
Costing Important Words to Learn ○ Fixed costs ○ Variable costs ○ Semi-fixed costs ○ Semi-variable costs ○ Traceable costs Direct materials Direct labour ○ Untraceable costs Factory overhead (Variable vs fixed) ○ Period costs ○ Product costs Absorption Costing Normally externally focused Also known as function costing
Course Notes Page 2
Topics • Forces of change • Contemporary issues • The "new economy" • Costing
Reading • Strategic Finance (Chapter 1,2)
Forces of Change Traditional Management Accounting Model
Budgets are the accounting tool for implementing the planning action Control is the capturing of the difference in actual to planned results List of Forces of Change in Management Accounting The 1970s were hard times Started with OPEC prices ↑ Any company that faces constraints becomes inward facing This leads to management accounting Servicing the needs of the services industries The west became more service orientated 80% of OECD GDP is accounted for by the service sector The advent of technology Meant companies became more complex Subservience to financial accounting The residues of Japan + new influences By the late 1970s Japan was taking over western markets Japanese management influenced western management accounting Strategizing accounting Accounting for intellect Management Accounting versus Financial Accounting Users Standards Levels of detail ○ Time focus / personalisation Volume of information New Management Accounting Model
Changes in Management Accounting Backward looking → Forward looking Internal focus → External perspective Product/Services → Customers and markets Financial data → Financial and non-financial information Functional → Process Information → Knowledge The Traditional Finance Function
7.5 pence in every £1 spent goes to the finance department We can cut costs by outsourcing services
Course Notes Page 1
Key Points • Forces of change in MA • MA vs. FA • Contemporary issues of MA • Cost management issues • Absorption costing • Variable costing • CVP analysis • CVP assumptions (5)
We can cut costs by outsourcing services Most of the transaction processing can be outsourced because it's cheaper and customers don't care Other functions are difficult to outsource Contemporary Issues in Management Accounting More complex production requires less labour costs but more overheads • Most products have shortening life cycles Products are enhanced at a greater pace
Increasing Trends Affecting Management Accounting Use of more flexible organisational technologies Product complexity and diversity Capital intensiveness in many industries Outsourcing / Supply chain changes Quality management E-business application Management Accounting Concerns of Organisations ○ 60% - Activity based costing ○ 52% - Cost of quality reporting ○ 46% - Target costing ○ 44% - Strategic management accounting ○ 11% - Life cycle costing Satisfaction of Management Approaches
As we move to the right, we see that management use and are most satisfied with externally approaches The "New Economy" The advent of the internet and better technology has led to a new economy This has created a new dimension for businesses
Pure e-business may have high percentage of fixed costs Emerging Cost Management Issues Digital vs. physical Cost structure changes Intellectual capital / Knowledge management Dynamic trading Versioning of products Scalability Corporate governance / corporate performance
Costing Important Words to Learn ○ Fixed costs ○ Variable costs ○ Semi-fixed costs ○ Semi-variable costs ○ Traceable costs Direct materials Direct labour ○ Untraceable costs Factory overhead (Variable vs fixed) ○ Period costs ○ Product costs Absorption Costing Normally externally focused Also known as function costing
Course Notes Page 2
