Managerial Accounting

Managerial Accounting

Professor Francesca Culasso

Università degli Studi di Torino

Business and Management – 2nd Year

Contents

Lecture N. Topics

• Lecture 1: Introduction and Cost Classification
  • The managerial control system
  • Strategic planning and managerial control
  • The managerial control mechanism
  • General firm’s structure
  • The technical and accounting tools used in managerial control
  • Cost and Cost Classification
  • Operating Costs
  • Manufacturing Costs
  • Non-manufacturing Costs
  • Non-Operating Costs
  • Variable Costs
  • Fixed Costs
  • Mixed Costs
  • Income Statement
• Lecture 2: Cost-Volume-Profit Analysis
  • BEP analysis
• Lecture 3: BEP in multi-production firms
  • Operating Leverage
• Lecture 4: Operating Decisions and Economic Convenience
• Lecture 5: Budgeting
  • Commercial Budget
  • Production Budget
  • Staff Budget
• Lecture 6: Budgeted Funds Flow Statement
  • Budgeted Balance Sheet

Lecture 1 – Introduction and Cost Classification

Chapter 1 and chapter 2, slides 1 -2

Management accounting is a system that supports managers in the decision-making process. It is not compulsory, but can be useful in every kind of company, also in non-profit ones and public administration. It was born in the early 19th Century in the American railways companies and was initially mainly focused on financial information, even though nowadays it comprehends a wider set of tools. Therefore, we could talk about managerial control in general.

While Financial Accounting was referred to financial institution external to the company, to the owners and other shareholders (which were interested in past results, already achieved), Managerial Accounting is addressed to managers, so to the internal part of the company (internal prospective).

The Managerial Control System

It’s a system used by managers at various levels to assess that the management is carried out efficiently and effectively, enabling the company to reach the established goals, defined during the strategic planning process. The scope is to provide managers relevant information of the company, to evaluate the efficiency of the Value Chain (a value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market).

Nowadays Managerial Accounting is not only accounting, not only financial information, because there is some non-financial information which is very important:

• Competition shares of the market
• Customer satisfaction qualitative survey
• Attitude to innovate number of projects

As we have said in the definition, this system tries to improve the efficiency (the attitude of the company to save resources) and the effectiveness (the attitude to reach the established goals concerning output in quantity and quality). Usually, the efficiency can be measured by financial indicators: COSTS, more precisely full cost which can be compared with the full cost of my competitors (financial indicators).

From what concerns effectiveness, it can be expressed by the number of products that can be sold in the market in comparison with the market demand, so QUANTITY, but also related to the QUALITY of them, measured by the customers’ feedback or number of damaged products for instance. Quality can also consist in flexibility, the attitude of changing things, my product, in order to satisfy the change in orders (non-financial indicators).

Someone has said there is a financial indicator for the effectiveness, which is revenue, but it is a short-run information, because revenue reflects past actions, while it is important to know how’s the company now, in order to understand the possible revenues in the future. Moreover, profit is the perfect synthesis of efficiency and effectiveness but just in the short-run.

Strategic Planning and Managerial Control

The strategic planning activity concerns long-term decisions and it is characterized by a long-term view, so for instance, which product the company will sell in the future and with which technology? More precisely, it consists of selecting organization goals, predicting results under various alternative ways of achieving these goals, and then deciding how to attain the desired goals. It is usually made by the CEO, together with the board of directors.

On the other hand, the managerial control deals with monitoring the management variables over a short period (one-year cycle). It plans the activity of the manager for one year and with the achieved result, the company should be able to reach the goals in the strategic plan. It verifies the current goals and also the strategic goals of the future. It works coherently with the long-term goals defined by the CEO in the strategic planning activity.

The Managerial Control Mechanism

The managerial control mechanism is a feedback system:

1. Managers of the company agree about the target, they define the goals for each managerial area (usually to be achieved within one year, annual goals) through budgeting.
2. There is the moment in which actions are carried out, managers make decisions and do actions. During this period, the managers control works, it measures the progress, the results and calculates variances between the previous goals and the actual results achieved; so, in this way it is possible to understand the causes of these variances and where to act in order to improve the results.
3. Determine necessary correction and apply them on goals or on action.

GEN N Then there is the "Current Control Phase", providing managers with information about the results they are progressively achieving to improve decision and results, till the 31st of December.

END OF N There is the "Consumptive Control Phase" after the 31st of December, to make the evaluation and rewarding of the managers, we can say if managers have done a good job. This information is given to the Human Resources Area in order to support it to make evaluation on managers.

General Firm’s Structure

CEO Board of Directors

• Marketing and Human
  • R & D
  • Purchase
  • ICT
  • Quality
• CFO*
  • Manufacturing
  • Selling
  • Resources
  • Financial
  • Managerial
  • Corporate

The person in chief of the Manager Control System, that coordinates and organizes it, is situated in the CFO* (Administration, Finance and Control Area), it is called the controller and it is chief of the Management Accounting Process. So, the controller has the duty to control goals and their achievement, examine results and the differences between them and the original goals, identifying variances. Control means monitoring, to deal with management accounting and financial accounting.

The Technical and Accounting Tools used in Managerial Control

There are several accounting techniques:

• General Accounting and Financial Statement Analysis: they are very useful also in managerial accounting, in fact through these techniques we are able to collect financial information about the past between the company and third parties (e.g., actual costs, actual revenues, actual credits etc.) Very useful to know the actual trend of the company, but not sufficient for the aims of management accounting, because this requires also more analytical information about the company and the units in which the company can be articulated.
• Cost Accounting: this is an analytical tool, because through this technique the manager can know the analytical cost of something that stays into the company (e.g., how much does a single pizza cost) during both the preventive phase, as a target cost, and in the current and consumptive phases, as the actual cost achieved. These data are not implied in the general income statement (by nature) where costs are classified under some aggregations.
• Budgeting System: is an accounting tool, we will arrive to build a budgeted income statement and a budgeted balance sheet for instance. It has been developed to plan goals, actions and use of resources for the financial year, in the preventive control phase. The budget is a quantitative expression of a proposed plan of action by management for a specific period and is an aid to coordinating what needs to be done to implement that plan.
• Managerial Reporting: is another tool, that supports managers during above the second and third phase in the managerial control process, where variations between goals and results are evaluated, with respect of every year but also every month.
• Non-economic Information: the most recent report includes on one side the financial information (short-run oriented) and on the other side the non-economic information (long-run oriented)

So, the Managerial Reporting bring us to a Balance Scorecard: kind of reporting in which finance indicators balanced perfectly with the non-financial indicator (so short-run is integrated with the long-run prospective and his strategic goals).

Cost and Cost Classification

A cost is a monetary amount that the firm has to burden itself in order to achieve a product or a service in order to be able to generate revenues or to achieve a specific goal. We should distinguish between Actual Cost and Budgeted Cost.

Budgeted Cost: so, cost we should spend in order to be efficient in the future.

Actual Cost: cost already registered, spent.

Cost Objects: objects in which the company is interested in determining the cost; for instance, determining the cost of a product could help in deciding whether continuing to produce it or not. Some examples are finished products, various departments, plants, customers, processes, geographical area where the company sell. In fact, only knowing the costs of certain objects is easy to make decisions.