Management Control EMBA 5403 Fall 2010 Mugan. Fall 2010Mugan2/ 45 Accounting? Financial Managerial Cost Auditing Tax COST MANAGERIAL FINANCIAL

Management Control

EMBA 5403Fall 2010Mugan

Fall 2010 Mugan 2/ 45

Accounting?

Financial Managerial Cost Auditing Tax

COST

MANAGERIAL

FINANCIAL

AUDITING

TAX


The Role of Accounting

Role Users Decisions Preferred CharacteristicsManagerial Internal Managers Planning Measure Inputs and Outputs

Directing TimelinessControlling Identify Responsibility

Forward-Looking

Financial Shareholders Investment VerifiableCreditors Credit Measure Organizational ValueOther External Measure Risk of OrganizationUsers Consistent with IFRS

Tax Taxing Authorities Tax Liability VerifiableMeasure Past Income


Application of Managerial Accounting

Applies to all types of business - Service, Merchandising, and Manufacturing

Applies to all forms of business organizations – Proprietorships, Partnerships, and Corporations

Applies to not-for-profit as well as profit-oriented companies


Accounting and Accountability Process of identifying, measuring, and

communicating economic information to permit informed judgements and decisions by the users of the information (American Accounting Association, 1966)

Stewardship function:usually owners and managers are separate Increase shareholders’ wealth

Financial Accounting


Differences and Similarities Both deal with the same accounting data Both managerial and financial accounting

deal with economic events of a business Both require that economic events be

quantified and communicated to interested parties Financial – external

Managerial- internal Determining unit cost - managerial accounting, Reporting Cost of Goods Sold -financial accounting


Managerial or Management Accounting Industrial Revolution – more complex production

process Cost became important Cost accounting (forerunner of managerial

accounting) Cost of an object – product, segment, division

First book 1897 – Garcke and Fell – Factory Accounting 20th century – multinationals, and large companies

Performance evaluation Budgeting

Management accounting term used after Second World War


Management or Managerial Accounting

Assist managerial decisions Provide timely and accurate information

to control costs and to measure and improve productivity; and devise improved production process

Accurate costs important for Pricing decisions New product Response to rival products


Main activities Planning- strategic and operational

budgeting Implementing/Directing

Generate, analyze and report relevant information

Controlling Actual vs budget comparison Analysis and interpretation Feedback


Managerial Accounting Process of

Identifying Measuring Analyzing Interpreting Communicating

information in pursuit of a company’s goals Managerial accountants – business

partners/consultants in companies Provides information to managers


Technology and Managerial Accounting

New techniques created new roles for management accountants

New technologies demanded new control techniques

Emerging service organizations Teams with people from production,

marketing, engineering, etc.

More flexible approaches to effective cost controls


Managerial Accounting Objectives Provide information for planning and

decision making – be a part of it Assist managers in daily control of

operations Motivate the managers and other

employees towards the company goals-goal congruence

Performance measurement of managers Strategic planning – determine competitive

position and long-run success of the company


Characteristics Internal – manager oriented Future looking – planning Involves estimates More timely and relevant data necessary Adaptive to changing business environment Cross-functional – brings together

production, marketing, managerial accountants and other key personnel


Planning

Objectives should be inline with the overall objective of increasing shareholders’ wealth E.g. increase sales by 10% in Central

Anatolia – objective


Planning

Identifyalternatives.

Identifyalternatives.

Select alternative that does the best job of furtheringorganization’s objectives.

Select alternative that does the best job of furtheringorganization’s objectives.

Develop budgets to guideprogress toward theselected alternative.

Develop budgets to guideprogress toward theselected alternative.


Directing Coordinate diverse activities and human

resources

Implement planned objectives

Provide incentives to motivate employees

Hire and train employees including executives, managers, and supervisors

Produce smooth-running operation


Controlling Process of keeping activities on track Determine whether goals are met Decide changes needed to get back on track May use an informal or formal system of evaluations Employee job assignments Routine problem solving Conflict resolution Effective communications

Decision making is not a separate management function, but the outcome of the exercise of good judgment in planning, directing, and controlling.

Feedback in the form of performance reportsthat compare actual results with the budgetare an essential part of the control function


Management Control Assure that resources are obtained

and used effectively and efficiently in the accomplishment of the organization’s objective

Has financial and non financial performance measurement

Concerned with the implementation of strategies and Task control


Planning and Control Cycle

DecisionMaking

Formulating long-and short-term plans

(Planning)

Formulating long-and short-term plans

(Planning)

Measuringperformance (Controlling)

Measuringperformance (Controlling)

Implementing plans (Directing and Motivating)

Implementing plans (Directing and Motivating)

Comparing actualto planned

performance (Controlling)

Comparing actualto planned

performance (Controlling)

Begin

Exh.1-1



Management accounting system To control costs To measure and improve productivity To devise improved production process To decide on new products To decide on obsolete products To decide on prices To respond to rival products (Johnson and

Kaplan, 1987)


Cost Management Perspective

Provide highest quality service/goods with lowest possible cost

Objectives: Determine cost of resources consumed in

company’s activities Eliminate non-value added activities as much as

possible Determine efficiency and effectiveness of all

major activities Identify and evaluate new activities that can

improve the performance of the company


Comparison


Strategic Cost Management Value chain

Get raw materials and other resources Research and development – including quality

assessment Product design Production Marketing Distribution Customer service

Should understand the value chain Cost drivers in activities Managing the cost relationships to a company’s advantage –

strategic cost management


Making Planning Decisions

What customers should we target?

What customers should we target?

What products or services should we

provide?

What products or services should we

provide?

How should we finance our operations?

How should we finance our operations?

What price should we charge?

What price should we charge?

Which projects should we choose?

Which projects should we choose?


Cost – Benefit Analysis

Cost- using resources to achieve a benefit

Benefits- aspects of a decision that help the organization

Analysis: the process of analyzing alternative decisions to determine which decision has the greatest benefit relative to its cost


Discussion Question A finance professor and a marketing

professor were recently comparing notes on their perceptions of corporations. The finance professor claimed that the goal of a corporation should be to maximize the value to the shareholders. The marketing professor claimed that the goal of a corporation should be to satisfy customers.

What are the similarities and differences in these goals? Zimmerman, 2003; p.24


Just-in-time production Total quality

management Process reengineering Theory of constraints International competition E-commerce

Just-in-time production Total quality

management Process reengineering Theory of constraints International competition E-commerce

Business environment changes in the past

twenty years

The Changing Business Environment


Complete productsjust in time to

ship customers.

Complete productsjust in time to

ship customers.

Complete partsjust in time for

assembly into products.

Complete partsjust in time for

assembly into products.

Scheduleproduction.

Scheduleproduction.

Receive materialsjust in time for

production.

Receive materialsjust in time for

production.

Receivecustomer

orders.

Receivecustomer

orders.

Just-in-Time (JIT) Systems


Flexibleworkforce

Flexibleworkforce

Reducedsetup time

Reducedsetup time

Zero productiondefects

Zero productiondefects

JIT Consequences

Improvedplant layout

Improvedplant layout

JIT purchasingFewer, but more ultrareliable suppliers.

Frequent JIT deliveries in small lots.Defect-free supplier deliveries.

JIT purchasingFewer, but more ultrareliable suppliers.

Frequent JIT deliveries in small lots.Defect-free supplier deliveries.


More rapidresponse to

customer orders

More rapidresponse to

customer orders

Freed-up fundsFreed-up fundsReducedinventory

costs

Reducedinventory

costs

Greatercustomer

satisfaction

Greatercustomer

satisfactionHigher qualityproducts

Benefits of a JIT System

Increased throughput


CHOPPING INVENTORIES AT PORSCHEIndustry insiders were writing off Porsche as an independent carmaker in the

earlier 1990s. Sales in 1992 were down to less than 15,000 cars, one-fourth their 1986 peak, and losses had mounted to $133 million. That’s when Wendelin Wiedeking became the top manager at the revered, but ailing, company.

Wiedeking hired two Japanese efficiency experts to help overcome Porsche’s stubborn traditionalism. “They immediately tackled a wasteful inventory of parts stacked on shelves all over the three-story Stuttgart factory. One of the experts handed Wiedeking a circular saw. While astounded assembly workers watched, he moved down an aisle and chopped the top half off a row of shelves.”

They proceeded to overhaul the assembly process, slashing the time required to build the new 911 Carrera model from 120 hours down to just 60 hours. They cut the time required to develop a new model from seven years to just three years. And a quality-control program has helped reduce the number of defective parts by a factor of 10. As a consequence of these, and other actions, the company’s sales have more than doubled to about 34,000 cars, and earnings were about $55 million in the latest fiscal year.

Source: David Woodruff, “Porsche Is Back—And Then Some,” Business Week, September 15, 1997, p. 57.


Disadvantage:Just-In-Time (JIT) systems have many advantages, but they are vulnerable to unexpected disruptions in supply. A production line can quickly come to a halt if essential parts are unavailable. Toyota, the developer of JIT, found this out the hard way. One Saturday, a fire at Aisin Seiki Company’s plant in Aichi Prefecture stopped the delivery of all brake parts to Toyota. By Tuesday, Toyota had to close down all of its Japanese assembly lines. By the time the supply of brake parts had been restored, Toyota had lost an estimated $15 billion in sales.Source: “Toyota to Recalibrate ‘Just-in-Time,’” International Herald Tribune, February 8, 1997, p. 9.


is

Total Quality Management (TQM)

ContinuousImprovement

TQM improves productivity by encouraging the use of fact and analysis for decision making and if properly implemented,

avoids counter-productive organizational infighting.

Systematic problem solving using tools such as benchmarking


Process Reengineering

The process is redesignedto eliminate all

non-value-added activities

The process is redesignedto eliminate all

non-value-added activities

Every step inthe businessprocess mustbe justified.

Every step inthe businessprocess mustbe justified.

A business processis diagrammed

in detail.

A business processis diagrammed

in detail.

Anticipated results:Anticipated results: Process is simplified. Process is completed

in less time. Costs are reduced. Opportunities for

errors are reduced.

Anticipated results:Anticipated results: Process is simplified. Process is completed

in less time. Costs are reduced. Opportunities for

errors are reduced.


Process Reengineering versus TQM

Process Reengineering

Radically overhauls existing processes.

Likely to be imposed from above and to use outside consultants.

Total Quality Management

Tweaks existing processes to realize gradual improvements.

Uses a team approach involving people who work directly in the process.


A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want.

The constraint in a system is determinedby the step that has the smallest capacity.

The constraint in a system is determinedby the step that has the smallest capacity.

Theory of Constraints


4. Recognize that the weakest linkis no longer so.

4. Recognize that the weakest linkis no longer so.

1. Identify the weakest link.

1. Identify the weakest link.

2. Allow the weakest link to set the tempo.

2. Allow the weakest link to set the tempo.

3. Focus on improving

the weakest link.

3. Focus on improving

the weakest link.

Only actions that strengthen the weakest link in the “chain” improve the process.

Theory of Constraints


THE CONSTRAINT IS THE KEYThe Lessines plant of Baxter International makes medical products such as sterile bags. Management of the plant is acutely aware of the necessity to actively manage its constraints. For example, when materials are a constraint, management may go to a secondary vendor and purchase materials at a higher cost than normal. When a machine is the constraint, a weekend shift is often added on the machine. If a particular machine is chronically the constraint and management has exhausted the possibilities of using it more effectively, then additional capacity is purchased. For example, when the constraint was the plastic extruding machines, a new extruding machine was ordered. However, even before the machine arrived, management had determined that the constraint would shift to the blenders once the new extruding capacity was added. Therefore, a new blender was already being planned. By thinking ahead and focusing on the constraints, management is able to increase the plant’s real capacity at the lowest possible cost.Source: Eric Noreen, Debra Smith, and James Mackey, The Theory of Constraints and Its Implications for Management Accounting (Montvale, NJ: The IMA Foundation for Applied Research, Inc.), p. 67.


International Competition

Competition has become worldwide in most industries.

Fewer tariffs, quotas, and

other barriersto free trade.

Fewer tariffs, quotas, and

other barriersto free trade.

Improvementsin global

transportationsystems.

Improvementsin global

transportationsystems.

An excellent management accounting system is neededto succeed in today’s competitive global marketplace.

An excellent management accounting system is neededto succeed in today’s competitive global marketplace.

Increasing sophisticationin international markets.Increasing sophisticationin international markets.


GLOBAL FORCESTraditionally, management accounting practices have differed significantly from one country to another. For example, Spain, Italy, and Greece have relied on less formal management accounting systems than other European countries. According to Professor Norman B. Macintosh, “In Greece and Italy the predominance of close-knit, private, family firms motivated by secrecy, tax avoidance, and largesse for family members along with lack of market competition (price fixing?) mitigated the development of management accounting and control systems. Spain also followed this pattern and relied more on personal relationships and oral inquisitions than on hard data for control.” At the same time, other Western European countries such as Germany, France, and the Netherlands developed relatively sophisticated formal management accounting systems emphasizing efficient operations. In the case of France, these were codified in law. In England, management accounting practice was influenced by economists, who emphasized the use of accounting data in decision making. The Nordic countries tended to import management accounting ideas from both Germany and England.A number of factors have been acting in recent years to make management accounting practices more similar within Europe and around the world. These forces include: intensified global competition, which makes it more difficult to continue sloppy practices; standardized information system software sold throughout the world by vendors such as SAP, PeopleSoft, Oracle, and Baan; the increasing significance and authority of multinational corporations; the global consultancy industry; the diffusion of information throughout academia; and the global use of market-leading textbooks.Sources: Markus Granlund and Kari Lukka, “It’s a Small World of Management Accounting Practices,” Journal of Management Accounting Research 10, 1998, pp. 153–171; and Norman B. Macintosh, “Management Accounting in Europe: A View from Canada,” Management Accounting Research 9, 1998, pp. 495–500.


E-CommerceIn recent years, many dot.com businesses

failed that might have benefited from the application of managerial

accounting tools: Cost concepts Cost estimation Cost-volume-profit Activity-based costing Budgeting Decision-making Capital budgeting


Code of Conduct forManagement Accountants

The Institute of Management Accountant’s (IMA) Standards of Ethical Conduct for Practitioners

of Management Accounting and Financial Management have two major parts offering

guidelines for: Ethical behavior.

Resolution for an ethical conflict.


Codes of Conduct onthe International Level

In addition to competence, objectivity, independence,and confidentiality, the IFAC’s code deals with

the accountant’s ethical responsibilities in:Taxes

Fees and commissionsAdvertising and solicitation

Handling of moniesCross-border activities.

In addition to competence, objectivity, independence,and confidentiality, the IFAC’s code deals with

the accountant’s ethical responsibilities in:Taxes

Fees and commissionsAdvertising and solicitation

Handling of moniesCross-border activities.

The Guidelines on Ethics for ProfessionalAccountants, issued by the International

Federation of Accountants (IFAC), govern the

activities of professional accountants worldwide.

The Guidelines on Ethics for ProfessionalAccountants, issued by the International

Federation of Accountants (IFAC), govern the

activities of professional accountants worldwide.


Accounting for Managers: Interpreting Accounting Information for Decision-Making By: Paul M. Collier Price: $58.50Format: Adobe Reader PDF eBooks

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Management Control EMBA 5403 Fall 2010 Mugan. Fall 2010Mugan2/ 45 Accounting? Financial Managerial Cost Auditing Tax COST MANAGERIAL FINANCIAL