MG020. General Management. Management. Management Accounting and Control Systems. Heba El-Sayed. Open School of Management

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1 MG020 General Management Management Management Accounting and Control Systems Heba El-Sayed Open School of Management

2 Open School of Management Open School of Management is a division and trademark of Open.PS The Open Professional School SE. Copyright 2015 by Open.PS The Open Professional School SE. Find us on All rights reserved. The entire content of this module book (e. g. text, pictures, illustrations, tables, etc.) and each selection of it is subject to the copyright and other intellectual property rights or other protective rights of Open.PS The Open Professional School SE (Open.PS) or other owners. Any exploitation of this module book and its parts (reproduction, photocopying, scanning, storing in a retrieval system, publishing, distribution, transmission (in any form or by any means, electronic or mechanical), broadcasting, selling, making derivative works, etc.) beyond that permitted within the tight constraints of the copyright laws without the prior written permission of the copyright owner is unlawful and punishable by law. The mentioning of trademarks, descriptive names, registered names, etc., in this course book, which may be subject to the intellectual property rights of the respective owners does not imply that they are exempt from the relevant intellectual property rights or protective rights and therefore free for use. Although every precaution has been taken to verify the accuracy of the information contained herein, Open.PS assumes no responsibility for any errors or omissions. No liability is assumed for damages that may result from the use of information contained within.

3 General Management Management Accounting and Control Systems Heba El-Sayed

4 Contents Introduction Introduction to management accounting Why management accounting? Cost and management accounting The different classifications of costs Cost-volume-profit anyalsis Cost-volume-profit analysis (CVP) Some common indicators of risk: margin of safety (MOS) Limitations of CVP analysis Costing for operational decision-making Pricing and assessing special contracts Product mix decisions when resources are constrained Make or buy decisions (outsourcing) Discontinuation of products and departments Full costing What is full costing? Approaches to the allocation of indirect costs Traditional approach Activity-based costing (ABC) Critical evaluation of ABC Budgeting and budgetary control What is a budget? And what is its role in an organization? Behavioral aspects of budgeting Different budgets and their interrelationships Interlinking budgets Budgeting for control purposes Investigating variances Criticisms of budgeting... 50

5 General Management 6 Performance measurement systems The need for effective performance measurement systems Development of an effective performance measurement system Financial vs. nonfinancial performance measures Balanced scorecard (BSC) Benefits and limitations of the balanced scorecard Solutions for Exercises Bibliography Further readings About the author Open School of Management

6 6 General Management Introduction The relevance of management accounting is pervasive. Whenever you need to make a decision, whether a minor, day-to-day one or one with long-term implications, you cannot get away from the use of management accounting. In private enterprises, public services, nongovernmental organizations, or even churches or mosques, management accounting is becoming indispensable. In this course you will learn about the techniques that can help management make better short-term and long-term decisions regarding pricing, volume of output, and resource allocation. You will also study how budgeting is used for planning and management control purposes, and the importance of nonfinancial measures in projecting for the future and evaluating performance. This material will provide you with a general understanding of the world of management accounting techniques and practices. It consists of the following six chapters. Chapter 1 introduces you to the importance of management accounting and its role in organizations. It highlights the importance of costing in management accounting and explains the major relevant cost terms used in product and service costing. Chapter 2 helps you understand the concept of Cost-Volume-Profit (CVP) analysis and examines the use of CVP in managerial decision-making. Chapter 3 reflects on the notion of relevant information and marginal analysis and demonstrates how they are used in short-term decision-making. Chapter 4 shows you how the full cost of a product or service is calculated. It will explain how to calculate and compare product and service costing using traditional and activity-based costing (ABC) methods. It also discusses how ABC can be used for improving cost management and profitability. Chapter 5 explains the role of management accounting in planning and control. It demonstrates the process of putting together an organization s master operating budget. It will also show how to develop a flexible budget to calculate and interpret variances. Chapter 6 describes the use of the balanced scorecard in planning, management control, and performance measurement.

7 Management Accounting and Control Systems 7 So welcome to the management accounting course! We hope you find it a rich and rewarding experience. General learning outcomes After you have worked through this study material, you will develop a number of skills: Understanding of the basic concepts, practices, and principles of management accounting, from the vantage point of a decision-maker who needs this information to inform her/his judgment. Interpret, and critically appraise, the use of cost and management accounting techniques within their organizational context. Appreciate the behavioral and social dimensions affecting the design of managerial accounting and control systems in organizations. Be able to think in logical and structured ways about the financial and nonfinancial implications of managerial decisions. This will include the ability to reflect critically on complex managerial decisions. The ability to apply management accounting techniques and provide recommendations to improve business processes. Open School of Management

8 8 General Management Chapter 1: Introduction to management accounting Learning outcomes After you have worked through this chapter you will: Understand the importance of management accounting and why it is needed within organizations. Understand the various cost terms and classifications used in management accounting. Realize why these different classifications exist. 1.1 Why management accounting? Can you recall a decision you have made in your life which you regard as life-changing? I am sure you can, as life consistently presents us with many choices, and we have to decide which option to choose. All of us make personal decisions on a daily basis, some of which are simple, such as what to eat, what to wear, or where to spend your holiday, while others are more difficult and critical, such as deciding to get married, changing career, quitting a job, or buying a new house. In making those critical decisions we often discuss and seek help from family and friends. In a similar manner to personal decisions, managers too have to make lots of business decisions every day, such as: should they produce this product or service, should they increase the price of a product, what types of investments should they make, should they open a new store or close an old one. But unlike personal decisions, managers cannot discuss their options with friends or family, nor can they rely on hunch and instinct. Instead, they need the professional help of management accountants who provide them with the information they need to make decisions, and to plan for both the short- and the long-term future of their organizations.

9 64 General Journalistic Management Working Techniques Bibliography Atkinson, A., Kaplan, R., Matsumura, E., & Young, M. (2012) Management Accounting: Information for Decision-making and Strategy Execution, 6th edn. London: Pearson. Harvey, J. (2008) Performance Measurement. CIMA, Topic Gateway Series, No. 9, London. Kaplan, R. & Norton, D. (1992) The balanced scorecard: Measures that drive performance. Harvard Business Review, Jan/Feb. Kaplan, R. & Norton, D. (1996) Balanced Scorecard: Translating Strategy into Action. Boston, MA: Harvard Business School Press. Nørreklit, H. (2000) The balance on the balanced scorecard a critical analysis of some of its assumptions. Management Accounting Research, 11(1), pp Otley, D. (2006) Trends in budgetary control and responsibility accounting. Chapter 13 in Contemporary Issues in Management Accounting (ed. A. Bhimani). Oxford: Oxford University Press, pp

10 Management E005 / Title Accounting of this Course and is Control Written Systems in Gray 65 Further readings Budgeting Covaleski, M. & Dirsmith, M. (1983) Budgeting as a means for control and loose coupling. Accounting, Organizations and Society, 8(4), pp Davila, T. & Wouters, M. (2005) Managing budget emphasis through the explicit design of conditional budgetary slack. Accounting, Organizations and Society, 30, pp Davis, S., DeZoort, T., & Kopp, L.S. (2006) The effect of obedience pressure and perceived responsibility on management accountants creation of budgetary slack. Behavioral Research in Accounting, 18, pp Performance measurement and balanced scorecard Chenhall, R. (2006) The contingent design of performance measures. In Contemporary Issues in Management Accounting (ed. A. Bhimani). Oxford: Oxford University Press, pp Fitzgerald, L. (2007) Performance measurement. In Issues in Management Accounting (eds. T. Hopper, D. Northcott, & R. Scapens). London: Prentice Hall, pp Kaplan, R. & Norton, D. (1996) Using the balanced scorecard as a strategic management system. Harvard Business Review, Jan/Feb. pp Nørreklit, H. & Mitchell, F. (2007) The balanced scorecard. In Issues in Management Accounting (eds. T. Hopper, D. Northcott, & R. Scapens). London: Prentice Hall, pp Open School of Management

11 66 Title General of this Management Chapter here in eight words About the author Dr. Heba El-Sayed is a lecturer at Manchester Business School, the University of Manchester (United Kingdom). She holds an MSc in Accounting and a PhD in Accounting and Information Systems. Heba teaches Management Accounting and Business Information Systems at both the undergraduate and postgraduate levels. Her research interest focuses on the interface between accounting and modern information technologies including Web 2.0, Enterprise Systems, and Cloud computing in both large organizations and SMEs. Heba s research interests also include: changes in management control and patterns of accountability enabled by new technologies; management accounting and control practices in emerging and less developed economies; and the use of innovative technologies for social and financial inclusion.

12 Management MG020 General Management Management Accounting and Control Systems Heba El-Sayed Open School of Management