Master Studiengang Hochschule Darmstadt SS 2018 …

Management Accounting – Dr. Ralf Anacker SS 2018 Seite 1

Master Studiengang

Hochschule Darmstadt SS 2018

Management Accounting - Teil I

Dr. Ralf Anacker

Frankfurt, April 2018


Contents

1. Definition of Management Accounting

2. Managing Cost

3. Decision Making

4. Budgeting / Controlling

5. Performance Measurement / Benchmarking


1. Learning objectives

• This chapter provides an introduction to Management Accounting

• Role of Management Accounting function

• Examine the difference between Management Accounting and Financial

Accounting and introducing Cost Accounting


1. Overview

Purpose of management

accounting system

Basics to

management

accounting

Planning, control

an decision making

Management

accounting

systems

Financial accounting

management

accounting

cost accounting

Design of

management

accounting

systems

Management

accounting function

Defintion of

Management

Defintion of

Accounting

Financial accounting

Cost accounting


1.1 Definition of Management

• Five functions of management (Henri Fayol management guru):

• Forsight and planning / forecast

• setting up plans and forecasts for the future / budgeting

• strategic planning and operational planning

• Organizing

• Organize the resources of a business; meaning they arrange the different

elements of organization into a efficient order or structure

• Resources involve asstes , funds human resource and information

• Managers choose a hierarchical structure for managing the resources of a

compagny


1.1 Definition of Management

• Commanding and leading / Decision making

• most obvious function for the manager

• influencing people to reach a desired goal (e.g. increasing revenues, to reach

a budgeted profit, or to quanrantee specific quality standards in production)

• commanding: communication of goals and tasks

• leading: includes additionally influencing people through chosen structure

(organizational chart defining responsabilities or a process in production)

• Coordinating

• managers must harmonizes and integrate the strucures, the processes and the

activities performed by the people in the company

• Monitoring / Control

• checking if the organization‘s activities are consistent with the targets and goals

• projects have to be completed as planned and rules have to be followed

• Deviation from targets have to be detected and reported and to be corrected


1.2 Definition of Accounting

• What is accounting?

• Accounting denotes the system that records, analyzes and reports all business

transactions of a company

• systematic and comprehensive system

• provide useful information to users

• record only quantitative information / financial data

• record business transactions (transaction is any event that affects the stocks

and flows of goods and resources such as inventories and machines)

• Accounting is the lanquage used to describe and report the financial

performance of a business organization

• user can be outside or inside a company


1.3 Management Accounting vs. Financial Accounting

Accounting systems

Financial Accounting

Focuses on external

reporting that directed by

authoritative quidelines

(e.g. IFRS, US GAAP), HGB)

Management Accounting

Measures and reports

financials as well as other

types of information that are

intended to support managers

in decision making

Cost Accounting


1.4 Financial Accounting as a corporate governance

tool

• The objective of general purpose financial reporting is to provide finnacial

information about the reporting entity that is useful to existing and potential

investors, lenders and other creditors in making decisions about providing

resources to the entity (Consceptual Framework of IFRS, p. A27

• Regulation:

• Accounting standards (e.g. US-GAAP, HGB) and international IFRS

• Stock exchanges listing requirements

• Key elements of financial statements according IFRS:

• Statement of financial position (balance sheet)

• Income statement and statement of comprehensive income

• Statement of changes in equity

• Cash flow statement


1.5 Cost Accounting

• Cost Accounting provides information for both management accounting and

financial accounting. It measures reports financial and non-financial data that

relates to the cost of acquiring or consuming resources by an organisation

- Preparing statements (e.g. the construction of budgets and costing statements)

- Cost data collection

- Measuring inventory costs, and the costs and profitability of products and

services


1.6 Management Accounting as an enable feature of

organizations

• Management Accounting measures and reports financial and non-financial

information that helps managers make decision to fullfil the goals of an

organisation. It is mainly directed towards internal users (there are no statutory

requirements)

• It is historical but also foward looking

• It comprises the identification, generation, analysis, interpretation, presentation

and use of information relevant to a broad range of activities:

• planning activities

• control activties

• performance measurement

• decision making


1.6 Definition of Decision-making (Chapter 3)

• A function of management is decision-making. Managers at all levels make

decisions.

• There are long-tem and short-term decisions

• Decision making always involves a choice between alternative courses of action

� management accountant provide information to the management

• Decision-making process

• Define the problem

• Identify decision-making criteria

• Develop alternative solutions which might contribute towards achieving them

• Collect and analyse relevant data about each alternative

• Select an alternative, state the expected outcome and check the outcome with

the overall goals or objectives

• Implement the decision


1.6 Planning, Directing and Controlling

Management Decision

Planning Controlling

Business Value

Directing

• Management Accounting providing the information needed to support the decision

making process

• Business value results from good management decisions

• Quality decision can only consistent occur by reliance on information


1.6 Planning (Chapter 4)

Planning

Strategy BudgetsPositioning

• Planning: -it is about thinking ahead – to decide on a course of action to reach desired

outcomes.

• Planning must occur at all levels

• High Level of setting strategy –>.How to establish an optimum position to maximize the

potential for realization of goals


1.6 Planning, control and decision-making

• Planning forces management to think ahead systematically in the short term and

long term. The organisation have to implemented a planning process. Planning

involves the following:

• Establishing overall objectives

• Selecting appropriate strategies to achieves those objectives

• Setting targets for each strategy

• Formulating detailed plans for achieving those targets

• Objectives of organisations:

• A vision / Core Values

• A mission – organisation‘s fundamental purpose

• An objective is the aim or goal of an organisation

• Formulating detailed plans for achieving those targets


1.6 Vision, Mission, Strategy

• Vision / Core Values:

Fair play, human dignity, ethics, employment, quality, customer services etc.

If an organization does not cause it members to understand and focus on thes

important elements, it will soon becoming solely „profit centric“

� short term focus

• Mission:

Mission statements provide a snapshot of the organization and provide a focal

point against which to match ideas and actions

Definition of the organization‘s purpose and direction

• Objectives:

The objective of a business organization must includes delivery of goods or

services while providing a return (i.e. driving performance) for its investors


1.6 Example for vision


1.6 Example for mission / Leitbild


1.6 Example for objectives


1.6 Positioning (Chapter 4)

Positioning

Cost/Volume Profit

Analysis (CVP)

Branding/

Pricing Global Trade

and Transfer

• CVP is important to understand the nature of cost behavior

• Management Accounting performs complex analysis related to global business activities

• Branding/Pricing: To build a brand requires considerable investment with an uncertain

payback

• Decisions about positioning a company‘s products and services are quite complex

• MA helping the manager to correctly interpret and utilize the information


1.6 Definition of Budgeting (Chapter 4)

• A nessecary planning component ist budgeting. Budgets outline the financial

plans for an organization.

• Operating Budgets – A plan must provide definition of anticipated revenues and

expenses of an organization and more. These operating budgets can become

fairly detailed, to the level of mapping specific inventory purchase and staffing

plans.

• Capital Budgets - Operating budgets will als reveal the need for capital

expenditures relating to new facilities and equipment. These longer term

expenditure decision must be evaluated logically to determine whether an

investment can be justified and what rate and duration of payback is likely to

occur. � equity and debts

• Financial Budgets – A company musst assess financing needs, including an

evaluation of potential cash shortages. � liquidity


1.6 Definition of Controlling

• A management control system is a system involving organisational information

seeking and gathering, accountability and feedback designed to ensure that the

enterprise adapts to changes in its substantive environment and that the work

behaviour of its employees is measured by reference to a set of operational sub-

goals (which conform with overall objectives) so that the discrepancy between

the two can be reconciled and corrected for.


1.6 Controlling tasks

• Once a decision has been taken on any aspect of business activity, management

must be in a position to control the activity and to have a view on whether the

outcome is in accordance with the initial plans and with the objectives derived

from those plans. This might involve identifying areas in the business where

managers are in a position to control and account for costs and, in some cases,

profit.

• To implement the control process, individual managers will require timely,

relevant and accurate information about the part of the business for which they

are responsible.

• Measurement, including cost measurement, is therefore an important ingredient

in carrying out the control function.

• To carry out the control function, a management control system is needed.

A useful definition of a management control system is the following:


1.7 Information in a Management Accounting system

• Useful management accounting information should demonstrate specific

qualitiesH

• Relevance: Information should have a purpose

• Completeness: All information they need to do the job properly

• Reliability: Information should be sufficiently accurate for ist purpose

• Clarity: The user have to understand the information

• Confidence: Information must be trusted by the managers who are expected to

use it

• Communication: Managers are given the authority to do certain tasks, and they

must be given the information they need to do them. For example an office

manager might be responsible for controlling expenditure in his office and

given a budget expenditure limit for the year. The manager needs information

about the current total expenditure is to date.


1.7 Information in a Management Accounting system

• Useful management accounting information should demonstrate specific

qualitiesH

• Volume: An inappropriate amount of information cannot be handled

• Timing: If the information is not avaible until after a decision is made, the

information serve no purpose

• Channel of information: Information should be accessible through appropriate

channels of communication

• Cost: Information should have some value


1.8 Design of Management Accounting system

Output

required

Sources of

input data

• Planning

• Control decision

• Monitoring process

• Information from internal sources

• Information from external sources

• How freqently it should be provided (monthly, weekly e.g.)

• The methods or techniques of management accounting will be used Processing

involved


1.9 Examples for Management Accounting reports

Documents

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