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Management Control

Management Control. EMBA 5403 Fall 2010 Mugan. Accounting?. AUDITING. Financial Managerial Cost Auditing Tax. COST. FINANCIAL. TAX. MANAGERIAL. The Role of Accounting. Application of Managerial Accounting. Applies to all types of business -

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Management Control

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  1. Management Control EMBA 5403 Fall 2010 Mugan

  2. Accounting? AUDITING • Financial • Managerial • Cost • Auditing • Tax COST FINANCIAL TAX MANAGERIAL Mugan

  3. The Role of Accounting Mugan

  4. 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 Mugan

  5. 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 Mugan

  6. 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 Mugan

  7. 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 Mugan

  8. 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 Mugan

  9. Main activities • Planning- strategic and operational • budgeting • Implementing/Directing • Generate, analyze and report relevant information • Controlling • Actual vs budget comparison • Analysis and interpretation • Feedback Mugan

  10. 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 Mugan

  11. 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 Mugan

  12. 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 Mugan

  13. 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 Mugan

  14. Planning • Objectives should be inline with the overall objective of increasing shareholders’ wealth • E.g. increase sales by 10% in Central Anatolia – objective Mugan

  15. Select alternative that does the best job of furtheringorganization’s objectives. Develop budgets to guideprogress toward theselected alternative. Planning Identifyalternatives. Mugan

  16. 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 Mugan

  17. 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 Mugan

  18. 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 Mugan

  19. Exh. 1-1 Planning and Control Cycle Formulating long-and short-term plans (Planning) Begin Comparing actualto planned performance (Controlling) Implementing plans (Directing and Motivating) DecisionMaking Measuringperformance (Controlling) Mugan

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  21. 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) Mugan

  22. 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 Mugan

  23. Comparison Mugan

  24. 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 Mugan

  25. Making Planning Decisions How should we finance our operations? What customers should we target? What price should we charge? What products or services should we provide? Which projects should we choose? Mugan

  26. 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 Mugan

  27. 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 Mugan

  28. The Changing Business Environment • Just-in-time production • Total quality management • Process reengineering • Theory of constraints • International competition • E-commerce Business environment changes in the past twenty years Mugan

  29. Just-in-Time (JIT) Systems Receivecustomerorders. Complete productsjust in time toship customers. Scheduleproduction. Complete partsjust in time forassembly into products. Receive materialsjust in time forproduction. Mugan

  30. JIT Consequences Zero productiondefects Improvedplant layout Reducedsetup time Flexibleworkforce JIT purchasing Fewer, but more ultrareliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries. Mugan

  31. Higher qualityproducts Increased throughput Benefits of a JIT System Reducedinventorycosts Freed-up funds Greatercustomersatisfaction More rapidresponse tocustomer orders Mugan

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  34. ContinuousImprovement is Systematic problem solving using tools such as benchmarking Total Quality Management (TQM) TQM improves productivity by encouraging the use of fact and analysis for decision making and if properly implemented, avoids counter-productive organizational infighting. Mugan

  35. Process Reengineering Anticipated results: Process is simplified. Process is completed in less time. Costs are reduced. Opportunities for errors are reduced. A business processis diagrammedin detail. Every step inthe businessprocess mustbe justified. The process is redesignedto eliminate allnon-value-added activities Mugan

  36. 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. Process Reengineering versus TQM Mugan

  37. A constraint(also called a bottleneck) is anything that prevents you from getting more of what you want. Theory of Constraints The constraint in a system is determinedby the step that has thesmallest capacity. Mugan

  38. Theory of Constraints 2. Allow the weakest link to set the tempo. Only actions that strengthen the weakest link in the “chain” improve the process. 3. Focus on improving the weakest link. 1. Identify the weakest link. 4. Recognize that the weakest linkis no longer so. Mugan

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  40. Increasing sophisticationin international markets. Improvementsin globaltransportationsystems. Fewer tariffs, quotas, and other barriersto free trade. An excellent management accounting system is neededto succeed in today’s competitive global marketplace. International Competition Competition has become worldwide in most industries. Mugan

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  42. E-Commerce In 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 Mugan

  43. Code of Conduct forManagement Accountants The Institute of Management Accountant’s (IMA) Standards of Ethical Conduct for Practitionersof Management Accounting and Financial Management have two major parts offering guidelines for:  Ethical behavior.  Resolution for an ethical conflict. Mugan

  44. Codes of Conduct onthe International Level The Guidelines on Ethics for ProfessionalAccountants, issued by the InternationalFederation of Accountants (IFAC), govern the activities of professional accountants worldwide. In addition to competence, objectivity, independence,and confidentiality, the IFAC’s code deals withthe accountant’s ethical responsibilities in: Taxes Fees and commissions Advertising and solicitation Handling of monies Cross-border activities. Mugan

  45. Accounting for Managers: Interpreting Accounting Information for Decision-Making  By: Paul M. Collier Price: $58.50Format:  Adobe Reader PDF eBooksRequirements:  Free Adobe Reader & Digital Editions (More Details)Restrictions:  No printing, No copy and paste (More Details)Platforms:  Windows Vista / XP / 2000, Mac OS X+, Palm OS (More Details)Features:  Advanced navigation, search, bookmarks, and multiple viewing options. Mugan

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