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Lecture 2

AFM481 Lecture Notes - Lecture 2: Downside Risk, Key Management, Decision-Making
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2 Pages
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Spring 2018

Department
Accounting & Financial Management
Course Code
AFM481
Professor
Joyce Tian
Lecture
2

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Designing products or services to meet the needs and wants of customers
Producing products with zero (or minimal) defects and waste
Maintaining low inventories
operations throughout the value chain to deliver products and services that exceed customer
expectations
Time - meet or exceed customer's expectations of responsiveness in production, delivery, and
after-sale services
Innovation - innovative products in response to customer demand result in ongoing growth and
success
We want to continuously improve
Management accountants help managers track and compare a company's performance on KSF to
competitors and serve as benchmark
Central to success is a rigorous decision making process
Successful strategy implementation requires more than value chain and supply chain analysis and
execution of KSF.
e.g. Nicole's MIS reported a steady decline in revenue so want to increase revenue without
increasing costs (this is for a fictional national newspaper)
a.
Identify the problem and uncertainties1.
Need relevant and reliable information to help managers understand uncertainties and
make decisions
a.
e.g. Nicole asked her advertising sales manager to talk to current and potential advertisers
to get a better understanding of the market. Also review the effect that past price increases
had on readership
b.
Obtain information 2.
Nicole's analysis of the marketing information indicates that readers would be upset if price
increase and significant drop in readership volume
a.
In contrast, Nicole would not lose any advertisers if the advertise rates increases (more
revenue for them)
b.
Make prediction about the future3.
Increase advertising rates by 4%a.
Steps 1-4 is planning - purposeful analysis of information to select and rank in importance
the goals of an organization
b.
The most important planning tool is a budget- is the quantitative expression of
management's proposed plan of action; it is an aid to coordinating what must be done and
when to implement a successful plan.
c.
Decide on one of the available alternatives4.
Managers at the newspaper place take actions to implement the March 2016 budget.
Management accountants collect information to follow through on how actual performance
compares to planned or budgeted performance. The comparison of actual performance to
budgeted performance is the control or post decision role of information
a.
Implement the decision, evaluate performance, and learn5.
Decision making, planning, and control: the five step decision making process
Rewards linked to achievement motivate managers
A budget serves as both a control and a planning tool since it is a comparison benchmark
against actual performance
When exercising control, managers compare actual and targeted nonfinancial measures as well as
financial measures to take corrective actions
Good implementation requires the marketing, editorial, and production department to work
together and coordinate their actions and develop action plans
The questions as to why in exhibit 1-4, everything is unfavourable could prompt the newspaper's
publisher to take subsequent actions e.g. adding more sales personnel or making changes in
editorial policy
AFM 481 Page 3

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Description
operations throughout the value chain to deliver products and services that exceed customer expectations Designing products or services to meet the needs and wants of customers Producing products with zero (or minimal) defects and waste Maintaining low inventories Time - meet or exceed customer's expectations of responsiveness in production, delivery, and after-sale services Innovation - innovative products in response to customer demand result in ongoing growth and success Management accountants help managers track and compare a company's performance on KSF to competitors and serve as benchmark We want to continuously improve Successful strategy implementation requires more than value chain and supply chain analysis and execution of KSF. Central to success is a rigorous decision making process Decision making, planning, and control: the five step decision making process 1. Identify the problem and uncertainties a. e.g. Nicole's MIS reported a steady decline in revenue so want to increase revenue without increasing costs (this is for a fictional national newspaper) 2. Obtain information a. Need relevant and reliable information to help managers understand uncertainties and make decisions b. e.g. Nicole asked her advertising sales manager to talk to current and potential advertisers to get a better understanding of the market. Also review the effect that past price increases had on readership 3. Make prediction about the future a. Nicole's analysis of the marketing information indicates that readers would be upset if price increase and significant drop in readership volume b. In contrast, Nicole would not lose any advertisers if the advertise rates increases (more revenue for them) 4. Decide on one of the available alternatives a. Increase advertising rates by 4% b. Steps 1-4 is planning - purposeful analysis of information to select and rank in importance the goals of an organization c. The most important planning tool is a budget- is the quantitative expression of management's proposed plan of action; it is an aid to coordinating what must be done and when to implement a successful plan. 5. Implement the decision, evaluate performance, and learn a. Managers at the newspaper place take actions to implement the March 2016 budget. Management accountants collect information to follow through on how actual performance compares to planned or budgeted performance. The comparison of actual performance to budgeted performance is the control or post decision role of information When exercising control, managers compare actual and targeted nonfinancial measures as well as financial measures to take corrective actions Rewards linked to achievement motivate managers A budget serves as both a control and a planning tool since it is a comparison benchmark against actual performance The questions as to why in exhibit 1-4, everything is unfavourable could prompt the newspaper's publisher to take subsequent actions e.g. adding more sales personnel or making changes in editorial policy Good implementation requires the marketing, editorial, and production department to work together and coordinate their actions and develop action plans AFM 481 Page 3 Being flexible ensures that managers can seize unforeseen opportunities and remedy unforeseen threats to success. The plan is not a guarantee of any outcome. Key management accounting guidelines and organization structure Three guidelines help management accountants provide the most value to their companies in strategic and operational decision making: Cost-benefit approach Recognize both behavioural and technical considerations Use different costs for different purposes Cost-benefit approach Used to make resource allocations such that the expected benefits exceed the expected costs. e.g. whether to purchase a new software package or hire a new employee Often good ideas provide too little upside potential Upside potential can be high but that means downside risk is often quite high as well Behavioural and technical considerations Behavioural considerations motivate managers and employees to try to achieve the goals of the organization. Budgets improve decisions within an organization because of better collaboration, planning, and motivation. The technical considerations help managers make wise economic decision. Technical data (e.g. costs in various value chain categories) in an appropriate format (e.g. actu
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