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Victoria University of Wellington
ACCY 130
Dr Philip Colquhoun

Management Accounting: Behavioral Implications •As measurements are made on operations, individuals and groups behaviour changes -People react when they are being measured, and they react to the measurements -They focus on the variables and behaviour being measured and spend less attention on those not measured •When the measurements are used not only for information, planning, and decision-making, but also for control, evaluation, and reward, employees and managers place great pressure on the measurements themselves •Managers and employees may take unexpected and undesirable actions to influence their score on the performance measure •Managers seeking to improve current bonuses based on reported number (financial or non-financial) may skip discretionary expenditures that may have improve performance in future periods Financial and management account major differences:  Nature of the reports produced  Level of detail  Regulations  Reporting interval  Time orientation  Range and quality of information Management Accounting Balanced Scorecard •Reading = Atkinson, A.A., Kaplan R.S., Matsumura, E.M. & Young S.M. (2 012), “Chapter 2: The Balance Scorecard and Strategy Map”, Management Accounting: Information for Decision-Making and Strategy Execution (sixth edition) Pearson, New Jersey. Balanced Scorecard  Linking short term actions and long term strategy  Shortcomings of financial reporting/accounting o Past info o Excludes ‘intangible assets’ that help driver profit o One dimension of business activity  The Balanced Scorecard (BSC) provides a system for measuring and managing all aspects of a company’s performance  The scorecard balances traditional financial measures of success, such as profits and return on capital, with nonfinancial measures of the drivers of future financial performance  The role for the BSC is to provide needed specificity that makes vision, mission, and strategy statements meaningful and actionable for employees  Strategy is key for BSC Strategy •A strategy accomplishes two principal functions: •Creating a competitive advantage by positioning the company in its external environment with resources to support customers better than its competitors •Having a clear strategy provides clear guidance for how internal resources should be used to gain a competitive advantage in the marketplace Strategy and the BSC •A BSC tells the story of the business unit’s strategy •A BSC identifies and makes explicit the hypotheses about the cause-and-effect relationships between: •Outcome measures in the Financial and Customer perspectives •Performance drivers of those outcomes in the Internal and Learning and Growth perspectives BSC Perspectives - Financial - Customer - Process - Learning and Growth Template Financial Perspective •The ultimate objective for profit-maximizing companies •Financial performance measures indicate whether the company’s strategy, implementation, and execution are contributing to bottom-line improvement •A Company’s financial performance can be improved in two ways: -Companies generate revenue growth by: •Selling new products •Selling to new customers •Selling in new markets •Increased productivity occurs by: •Lowering direct and indirect expenses •Utilizing their financial and physical assets more efficiently Customer Perspective •This perspective typically includes several common measures of the successful outcomes from a well-formulated and implemented strategy, for example: •Achieve customer satisfaction and loyalty •Acquire new customers •Increase market share •Enhance customer profitability •Companies must also identify the objectives and measures for the value proposition it offers customers Customer Perspective – value proposition •The value proposition is the unique mix of product, price, service, relationship, and image offered to the targeted customers •Defines the company’s strategy •Communicates what the company expects to do for its customers better or differently from its competitors •Value propositions used successfully by different companies include: •“Best buy” or lowest total cost •Product innovation and leadership •Complete customer solutions Internal Process Perspective •Means by which the organization will: •Create and deliver the value proposition for customers •Achieve the productivity improvements for the financial objectives •The Internal perspective identifies the critical processes to achieve its objectives •Organizations perform many different processes, which may be classified into four groupings: •Operating processes •Customer management processes •Innovation processes •Regulatory and social processes Learning and Growth Perspective •Identifies objectives for the people, systems, and organizational alignment that create long-term growth and improvement •E.g.:•the employee capabilities, skills, technology, and organizational alignment •Investments needed to improve the skills of employees, enhance information technology and systems, and align people to the company’s objectives •Identifies how executives mobilize their intangible assets to drive improvement in the internal processes most important for implementing their strategy •Examines each of the processes they selected in the internal perspective Key features of all aspects of BSC •Objectives •Concise statements that articulate what the organization hopes to accomplish •Action phrases - Tell the story of the strategy through the cause-and- effect relationships •Measures •Provide specificity and reduce the ambiguity that is inherent in word statements •Specifying exactly how an objective is measured will give employees a clear focus for their improvement efforts •Once the objectives have been translated into measures, managers select targets for each measure •Targets and Initiatives •Targets establish the level of performance or rate of improvement required for a measure •Initiatives are the short-term programs and action plans that will help achieve the stretch targets established for its measures BSC in Nonprofits and Government Organizations - The BSC is especially well-suited for nonprofit and government organizations (NPGOs) - Their success has to be measured by their effectiveness in providing benefits to constituents - Cannot use the standard BSC architecture where financial objectives are the ultimate, high-level outcomes to be achieved Full Costing —Definitons: ◦Direct costs – A cost that can be identified with a specific cost unit. ◦Indirect costs – The element of cost that cannot be directly measured in respect of particular cost unit (everything except direct costs). ◦Cost unit – normally a product (good or service) Full cost = Direct cost of the unit + Fair share of indirect cost (Overheads) Uses of full cost: - Assessing relative efficiency - Exercising control - Assessing performance - Pricing and output decisions Full cost for single product —Business situation – business produces many products but all the same. (Not that often the case in real world !) —Don’t need to worry about direct and indirect —Total costs divided by total number produce = full cost for individual product —Of course problem of timing and valuation for items held over multiple periods, for example … ◦Inventory ◦Fixed assets – depreciation Class example: —Your company produces and sells bulk freshly squeezed Kiwifruit juice. ◦Each month you expected to produced 200 bottles ◦Each bottle requires 40 kg of kiwifruit and takes 4 hours labour to produce. ◦Budgeted Costs are: –Kiwifruit per kg = $1.50 (total = $1.50 * 40 kg * 200 bottles = $12,000) –Other materials = $50 per bottle (total = $50 * 200 bottles = $10,000) –Labour is $20 per hour (total = $20 * 4 hours * 200 bottles = $16,000) –Overheads are estimated at $3,000 per month. —Required: Calculate the full cost of each bottle of kiwifruit juice Full cost for multiple products —Business situation – business produces at least two different products. ◦Each product has different mix of resources used ◦Some resources used can be identified/assigned to specific product – direct costs –E.g.: material, labour (some) ◦Other resources cannot be identified to specific product – indirect costs or overheads or common costs –E.g. factory overheads, common materials, administration costs, —Three step process: ◦Identify direct cost (normally per unit) ◦Allocate indirect costs – more difficult ◦Add together = full cost —Identifying direct costs ◦Normally working at per unit level ◦In real world – know your business ◦In class – will be either obvious or identified Indirect costs (overheads) —What are we trying to achieve? ◦Reasonable allocation – based some identifiable criteria (called absorption rate) ◦But not able to identify the product that ‘caused’ the actual cost —Why do decision makers care? ◦Impact on decisions relating to pricing, evaluation of efficiency and performance, and control. ◦Different criteria will lead to different numbers and hence decisions Allocation of indirect costs 1.Identify all costs (within pool) ◦You could/would have more than one pool in organisation. 2.Determine absorption basis for the pool ◦Based on business model ◦No one correct basis –Labour hours is the most common, –Others include: machine hours, labour cost, student numbers (university), bed days/hours (hospital), client minutes or billing dollars (professional firms), –In class - told 3.Determine absorption rate o Total overhead cost divide by total number of absorption units (eg total labour hours) = absorption rate 4.Apply rate to product o Absorption Rate * absorption units (eg labour hours) for that product Determining full cost
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