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Strategic Cost Management and Management Accounting

Objectives of the Chapter

• Define management and its objectives.

• Define strategic cost management.

• Define management accounting and its objectives.

• Understand the relationship between financial accounting and management accounting.

• Identify the relationship of management accounting with cost accounting.

• Recognize the need for accounting information by management.

• Understand the changing roles of traditional accountants to financial managers.

• Examine the role of management accountants in performance control and decision-making.

• Learn about organizational structure and the role of accounting.

• Understand financial management responsibilities.

• Differentiate the roles of financial officers (controller vs. treasurer).

• Understand different management terms and the necessity for an information system.

• Learn about management accounting system characteristics and components.

• Know the procedures for setting up management accounting systems.

Introduction to Management

• Definition: Management entails planning, organizing, leading, and controlling organizational objectives.

  • Planning: Setting goals, strategies, and tactics.

  • Controlling: Evaluating goal accomplishment and performance review.

• Decision Making: Choices depend on

  • Manager goals

  • Expected outcomes of alternatives

  • Available information

Focus of the Chapter

• Information generation and usage for decision-making.

• Organizational changes affecting needed information.

• Decision framing in relation to management accountants' involvement.

Strategic Cost Management Defined

• Objective: Implement cost management techniques to reduce costs while enhancing a business's strategic position.

• Cost management methods apply across different types of organizations.

• Key Strategies:

  1. Streamline transactions between support departments and operating units.

  2. Establish transfer pricing systems for decentralized units.

  3. Create pseudo profit centers to encourage profit-maximizing behavior.

Management Accounting Defined

• Focus: Information needs for internal managers regarding planning, controlling, and decision-making functions.

• Activities Involved: Identifying, measuring, analyzing, preparing, interpreting, and communicating organizational data.

• Key Characteristics:

  • Not regulated by GAAP (Generally Accepted Accounting Principles).

  • Focused on relevant data for particular managerial purposes.

Objectives of Management Accounting

1. Provide decision-making information for managers.

2. Assist in directing and controlling operations.

3. Motivate managers toward organizational goals.

4. Measure performance of managers and sub-units.

Relationship of Management Accounting with Other Accounting Fields

• Financial Accounting:

  • Developed for external decision-making.

  • Generates balance sheets and income statements per GAAP.

• Cost Accounting:

  • Integrates functions of both financial and management accounting.

  • Focuses on determining costs of products/services.

Changes in Accounting Roles

• Transition from traditional accounting towards a financial management focus.

• Importance of financial management for better products/services, higher employee wages, and returns for investors.

Financial Management Responsibilities

• Key Tasks:

  1. Forecasting and Planning: Coordinate with executives on future plans.

  2. Capital Investment: Identify and raise capital aligning with growth needs.

  3. Controlling and Coordinating: Ensure efficient operations affecting financial implications.

Basic Duties of Financial Officers

Controller Duties

• Planning, controlling, designing the cost accounting system.

• Preparing performance reports.

• Conducting internal audits and tax administration.

Treasurer Duties

• Financial planning and fund management.

• Managing cash, fundraising, and working capital.

• Overseeing investments and distributions of corporate earnings.

Ethical Conduct for Management Accountants

• Promote high standards of integrity and ethical behavior.

• Adhere to professionalism and respect confidentiality.

• Recognize and act upon conflicts of interest.

Professional Conduct Guidelines

1. Competence: Maintain professional knowledge and skills.

2. Confidentiality: Protect sensitive information.

3. Integrity: Ensure fair representation of information.

4. Objectivity: Communicate information without bias.

Importance of Accounting Information

• Essential for decision making across various managerial functions.

• Need for accurate, timely data to enhance organizational success.

Elements and Characteristics of Good Accounting Systems

• Essential Elements:

  • People, procedures, equipment, and documentation.

• General Guidelines:

  • Flexibility, reliability, simplicity, helpfulness, economy, and control mechanisms.

Sources of Accounting Data

• Common transaction systems: Order Entry, Cash Receipts, Purchases, Production Planning, General Accounting systems.

• Transform raw data into meaningful reports for decision-making.

Components of a Computerized Accounting System

1. Inputs: Resources required for production.

2. Processes: Managerial activities that convert inputs into outputs.

3. Outputs: Resulting products, services, or information.

4. Feedback: Insight on performance relative to objectives.