IDC Notes

Topic 1: Introduction to Information for Decisions and

Management Accounting Definition

  • “The processes and techniques that focus on the effective and efficient use of organisational resources to support managers in their tasks of enhancing both customer value and shareholder value”

  • Management accounting systems -> management accounting information -> used by managers

Management Accounting vs. Financial Accounting

  • Management Accounting:

    • Internal users: managers and employees at all levels.

    • No accounting standards or external rules are imposed. Information is generated to satisfy managers' information needs.

    • Both financial and non-financial data drawn from many sources—the core accounting system; physical and operational data from production systems; and market, customer and economic data from sources external to the organization.

    • Past, current and future-oriented; subjective; relevant; timely; and supplied at various levels of detail to suit managers' specific needs.

  • Financial Accounting:

    • External users: shareholders, creditors, banks, securities exchange, trade unions and government agencies.

    • Accounting standards and corporations law regulate the content of external financial reports.

    • Financial data almost exclusively drawn from the organization's core transaction-based accounting system.

    • Past; reliable; verifiable; not timely; not always relevant; and highly aggregated.

Why Organizations Need Management Accounting

  • Small businesses:

    • Centralized decision-making.

    • Require basic financial info.

    • Simple MA functions, e.g., bookkeeping.

  • Large businesses emerged:

    • Decentralized decision-making.

    • Require financial and non-financial info.

    • More sophisticated MA functions.

  • Information flows to managers to inform them about the operations of the business.

  • Information flows from managers to inform, direct and motivate employees.

Evolution of Management Accounting Information

  • Small business: Small-sized, functionally unspecialised firm

  • Large scale functionally specialised, capital intensive firm

  • Vertically integrated firm

  • Multi-division firm

  • Flat organisations: Self empowered teams

  • Business alliances

Overview of Practical Management Accounting Innovations (Table 1.1)

Economic system

Organisational form

Main objective

Management accounting system

Management control application

Market coordination

Small business

Efficient spot market transactions

Double-entry bookkeeping

Market transactions

Hierarchical instead of market coordination

Small sized, functionally unspecialised firm

Productivity improvements

Direct labor and conversion cost

Productivity

Functional specialisation

in large firms operating in oligopolistic markets

Large scale, functionally specialised and capital intensive firm

Low cost, volume and high quality by specialisation

Product and overhead Contribution margin cost

Production innovation Definition of property claims

Integrating value chains

within organisational structures

Vertically integrated firm

Capturing benefits generated in buying and selling organisations

Efficiency Capital cost Budgeting information

Operational control Pricing Equipment modifications

Expansion of hierarchical coordination

to multiple products More dynamic markets More competitive markets

Multi-divisional firm

Economies of scope Diversification of business risk Economies of scale and scope Risk management Proactive management

Cash Flow Return on Investment Model based ROI budgets Revisions of sales forecasts Transfer pricing

Investments Coordination across the value chain Detailed operational control Connecting short-term and long-term planning Optimising capacity use Coordination of internal transactions

Flat organisations Self empowered teams Business alliances

RI, EVA ABC/ABM BSC Business analytics

Optimise economic value Better decisions about cost and price Proactive strategic decisions

Key Influences

  • Teamwork & presentation skills

  • Relevance: Strategy analysis, digitalization, data analytics, etc.

  • Value: Performance measurement, data analytics, etc.

  • Trust: Better planning, rational and ethical decision making, etc.

Case Study Analysis

  • Why is it important?

    • "Cases teach students how to apply theory in practice and how to induce theory from practice. The case method cultivates the capacity for critical analysis, judgment, decision-making, and action.” - Harvard Business Publishing Education

  • Allows you to:

    • Differentiate – evaluate many different elements of a situation at once, isolate critical facts and systematically analyse the situation

    • Speculate – imagine different scenarios or analyze the potential outcome of a decision; coping with uncertainty captured in the case through missing data or information that appears contradictory

    • Integrate – requires you to look at the ‘big picture’; form a holistic perspective by integrating the impact of various decisions and environmental influences on all parts of the organization.

Case Study Analysis Process

  • Step 1: Gaining familiarity

    • Read quickly through the case to get an overall sense of the case

    • Use the initial read-through to assess possible links to key concepts

    • Read through the case again, in depth and annotate as you read

    • Evaluate how key concepts might inform decisions or suggest solutions

    • After developing an initial recommendation, skim through the case again to assess the consequences of your proposed actions

  • Step 2: Identify problems

    • List all indicators (include anything unexpected, or undesirable)

    • Look broadly at symptoms

  • Step 3: Conduct analyses

    • Determine the area where identified problems reside

    • Then see which tools and techniques relating to that topic area are appropriate to conduct analysis

  • Step 4: Propose alternative solutions

    • What are possible solutions? What are the alternatives?

    • Assess the consequences of key alternatives

  • Step 5: Make recommendations

    • Complete your analysis by recommending a course of action