Accounting for Decision Making

(ADM)

Session 1

Introduction to Management Accounting

ASSESSMENT SCHEME, WEIGHTAGE & TEXT-BOOK

Evaluation
 Quizzes (25%):
o The course will have a minimum 3 quizzes. Out of the 3 quizzes 2 will be individual quizzes and
1 will be a group quiz. The mode of conducting the quiz will be communicated during the
session.

 Group Project (15%)

o The details regarding the group will be shared separately during the course sessions.

 Mid-term examination (20%)

o Midterm will be conducted separately. It will consist of numerical, conceptual and application-
based questions.

 End term exam (40%)

o End term will consist of the course covered during all the sessions. It will consist of numerical,
conceptual and application-based questions.

PRESCRIBED TEXT BOOK

Ronald W. Hilton, David E. Platt, Managerial Accounting Creating Value in a Global

Business Environment, 2014 Edition (9e), McGraw Hill Publication
 Requests/ Faculty Expectations

1. Read the material [both the textbook and case, if any

assigned] before the sessions.
2. Submit Chapter-end assignments & Case Work on
Time
3. Let the learning sequence be… Self-reading-listening to
the lecture – active participation in case and class-room
discussions- re-reading the class-room discussion –
working out the chapter end problems and cases
Learning Objectives (LO) - Session 1

 What is Management Accounting

 Distinguish Financial Accounting from Management Accounting
 Strategic Decisions & Management Accountants
 Five Steps of Decision-Making process
 Management Accounting Guidelines
 Cost Concepts and terminologies (Cost Object)
 What Is Managerial Accounting ?
Process of providing financial and other related information to managers
to help them make good decisions.

Helps managers in three general ways:

 Compiling information about costs of products and services to

make decisions (what product or services should we offer to the market; how much
should we charge for those products or services; should we outsource the making of the
product to another organization)

 Planning for the future activities of the organizations through compiling budgets or
evaluating whether to invest in certain programs or other decisions about the organization's future

 Monitoring actual results compared to planned results – so that

managers can take corrective actions when needed or capitalize on positive new developments as
they arise
 6

Management Accounting Report

Contrast the report with a financial accounting report

 7

Solution

• MA report has included

– non-monetary information [ on jobs and number of
employees]
- future [ planned] as well as past [actual]information
-------optional for financial statements

– MA report focuses on a segment [ service department],

has less emphasis on precision [planned numbers are
rounded]

– The info. in the MA report is not an end in itself-

means to the end
Contemporary view of Accounting Information 8

Traditional
Non-Financial
Financial
Information
Accounting
Information

Other Quantitative Qualitative

Financial
Information Information
Information
• Percentage of defects • Customer
• Assets
• Number of Customer Satisfaction
• Liabilities
complaints • Employee
• Gross Margin
• Units in Inventory Satisfaction
• Operating
• Budgeted hours • Product or
Expenses
• Warranty claims Service quality
• Reputation
 Three Sets of Books

GAAP - Generally Accepted Accounting Principles

IFRS -International Financial Reporting Standards
FASB -Financial Accounting Standards Board SEC - Securities and Exchange Commission
IASB- International Accounting Standards Board IRS - Internal Revenue Service
External & Internal Users of Accounting Information
 11

Difference between Financial and Management

Accounting
Financial Versus Managerial Accounting
Financial Accounting
 Let’s check your understanding

Take a moment to recall and jot down (here or on a piece of

paper) the three broad ways managerial accounting
differs from financial accounting, helping to inform
managers.
 Major Differences Between
15

Management and Financial Accounting

Financial, Cost and Management Accounting
16

Summarized

Financial Accounting Cost Accounting Management Accounting

Focuses on reporting Measures, analyzes Measures, analyzes, and

financial information to and reports reports financial and non-
external parties such as financial and non- financial information that
investors, governmental financial helps managers make
agencies, banks, and information related decisions to fulfill
suppliers, based on to the costs of organizational goals.
GAAP. acquiring or using Management accounting need
resources in an not be GAAP compliant.
organization.
 17

Strategic Decisions and the Management

Accountant

• Strategy specifies how an organization matches its own capabilities

with the opportunities in the marketplace (Strategy
vs Tactical decision)

• There are two broad strategies:

• cost leadership strategy
• product differentiation strategy

• Management Accountants work closely with managers in various

departments to formulate strategies by providing information about
the sources of competitive advantage.
– Company’s cost, productivity and efficiency advantage relative to competitors
– Premium prices a company can charge relative to the costs by adding features
that make the product and service distinctive.
 18

Strategic Decisions and the Management

Accountant
Strategic cost management describes cost management that specifically
focuses on strategic issues.

Management Accounting information helps managers formulate

strategy by answering questions such as the following:
 Who are our most important customers and how do we deliver
value to them? (E.g., Amazon.com, Toyota, Nike)
 What substitute products exist in the market? How do they differ
from ours? (E.g., Hewlett- Packard)
 What is our most critical capability? What do we do best? (E.g.,
Kellogg Company)
 What is the bargaining power of our customers and suppliers?
 Will adequate cash be available to fund the strategy or is outside
financing needed? (E.g., P&G acquisition of Gillette)
 Decision-making, Planning and Control: 19

The Five-step Decision-making Process – Managers use to make

different types of decisions

Planning

1. Identify the problem/uncertainties

2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing among alternatives
5. Implement the decision, evaluate performance and learn.

Control
 20

Planning and Control Systems

Planning consists of
1. selecting an organization’s goals and strategies
2. predicting results under various alternative ways of achieving
those goals
3. deciding how to attain the desired goals, and
4. communicating the goals and how to achieve them to the entire
organization.

Management accountants serve as business partners in these

planning activities because they understand the key success
factors and what creates value.
 21

Planning and Control Systems

Control comprises:
 taking actions that implement the planning decisions
 evaluating past performance, and
 providing feedback and learning to help future decision
making.

The most important planning tool when implementing strategy

is a budget.

A budget is the quantitative expression of a proposed plan of

action by management and is an aid to coordinating what needs
to be done to execute that plan.
 22

Management Accounting Guidelines

Three guidelines help management accountants provide the

most value to the strategic and operational decision-making
of their companies:

1. Cost-benefit approach compares the benefits of an action/purchase to

the costs. Generally, of course, the benefits should exceed the costs.
(Eg. Resource- Allocation decision)
2. Behavioral and technical considerations recognize, among other
things, that management is primarily a human activity that should focus
on encouraging individuals to do their jobs better.
3. Managers use alternative ways to compare costs in different decision-
making situations because there are different costs for different
purposes.
 23

MCQ

1) Management accounting ________.

• A) focuses on estimating future revenues, costs, and other

measures to forecast activities and their results
• B) provides information about the company as a whole
• C) reports information that has occurred in the past that is verifiable
and reliable
• D) provides information that is generally available only on a
quarterly or annual basis
 24

MCQ

2) Managers use management accounting information to

________.

• A) help external users such as investors, banks, regulators, and

suppliers
• B) communicate, develop, and implement strategies
• C) communicate a firm's financial position to investors, banks,
regulators, and other outside parties
• D) ensure that financial statements are consistent with the SEC
rules
 25

MCQ

3) Which of the following statements refers to management

accounting information?

• A) There are no regulations governing the reports.

• B) The reports are generally delayed and historical.
• C) The audience tends to be stockholders, creditors, and tax
authorities.
• D) It primarily measures manager's compensation on reported
financial results.
 26

MCQ

4) Which of the following deals with management accounting?

• A) identifying the costs of acquiring the resources of the company

• B) developing budgets
• C) preparing the income statement
• D) preparing the statement of cash flows
 27

MCQ

5) Financial accounting provides a historical perspective,

whereas management accounting emphasizes ________.

• A) the future
• B) past transactions
• C) a current perspective
• D) reports to shareholders
 28

MCQ

6) When managers determine whether it is less expensive

to buy products from a vendor or make them in house they
are performing ________.

• A) Cost-benefit analysis
• B) Supply-chain analysis
• C) Value-chain analysis
• D) Research and development
 29

MCQ

7) Rules for measurement and reporting for management

accounting ________.

• A) state that information must only be useful to management.

• B) do not need to follow GAAP but must meet the cost-benefit test.
• C) must follow GAAP.
• D) must follow GAAP, IRS rules or government standards.
 Basic Cost Concept
30

What does the word Cost mean to you ?

• Cost is the amount of expenditure actual (incurred) or notional

(attributable) relating to cost object.

• When cost is incurred, it can be in the form of deferred cost (asset)

or expired cost(expense).

• Deferred costs are capitalized costs and known as assets. Example-

plant, equipment, building, inventory, prepaid rent and insurance.

• When these deferred cost are used up or give up their usefulness,

they are written off or expensed and to that extent they become
expense
 Accountants View of Cost

• Cost – a sacrificed or forgone resource to achieve a

specific objective.

• Actual cost – a cost that has incurred (historical or past)

• Budgeted cost – a predicted (forecasted or future) cost

 32

Cost Object
A product, service, customer, department, process, or
anything that we want to know the cost of

• Cost Object – anything for which a separate cost

measurement is desired
• Cost object may be:
1. A product-
2. A process-
3. A service-
4. A department-
5. A program-
6. A project-

• Note: Cost object chosen should be appropriate to the purpose for

COST OBJECT EXAMPLE: BMW’s Chennai Plant

Makes several types of cars and sports activity vehicles at this plant.
What are the Cost Objects?

Cost Object Illustration

Product A BMW X6 sports activity vehicle

Telephone hotline providing information and
Service assistance to BMW dealers

R&D project on DVD system enhancement in

Project BMW cars

Herb Chambers Motors, a dealer that

Customer purchases a broad range of BMW vehicles

Setting up machines for production or

Activity maintaining production equipment

Environmental, Health and Safety

Department
department
Cost Unit as a unit of quantity of product, service or time (or a
combination of those) in relation to which costs may be
ascertained or expressed.
Choice of cost unit depends on the nature of the product
manufactured, methods of production and trade practices.
 Implications

Manager wants to know the budgeted and actual cost.

How does a cost system determine the costs of various cost objects?

Two Stages:

• Cost Accumulation – the collection of cost data in an organized way by

means of an accounting system

• Cost Assignment – a general term that encompasses the gathering of

accumulated costs to a cost object in two ways:
– Tracing costs with a direct relationship to the cost object, and
– Allocating accumulated costs with an indirect relationship to a cost
object.