LANGFIELD-SMITH THORNE SMITH HILTONMANAGEMENT f 13 Information for Creating and Managing Value @ KIM LANGFIELD-SMITH 1 HELEN THORNE @ DAVID SMITH @ RONALD HILTONws (eng ca (Copyright © 2015 McGraw-Hill Education Australia) Pty Ltd ‘Additional owners of copyright are acknowledged in on-page credits, ‘very effort has been made to trace and acknowledge copyrighted material. The authors and publishers tender their apologies should any infringement have occurred. 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Title: Management accounting: information for creating and managing value/Kim Langfield-Smith, Helen Thorne, ‘David Smith, Ronald Hilton,Chapter Chapter 2 % Chapter 3 SO Chapter 4 \p Chapters Chapter 6 Chapter 7 ¥ Chapter 8 chapter 9 Chapter 10 x Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 "Chapter: 19 Chapter 20 Chapter 21 INTRODUCTION TO MANAGEMENT ACCOUNTING Management accounting: information for creating value and managing resources Management accounting: cost terms and concepts COSTS AND COSTING SYSTEMS Cost behaviour, cost drivers and cost estimation Product costing systems Process costing and operation costing Service costing A closer look at overhead costs Activity-based costing INFORMATION FOR MANAGING RESOURCES Budgeting systems Standard costs for control: direct material and direct labour Standard costs for control: flexible budgets and manufacturing overhead Managing and reporting performance Financial performance measures and incentive schemes Strategic performance measurement systems Managing suppliers and customers Managing costs and quality, INFORMATION FOR CREATING VALUE — Sustainability and management accounting Cost volume profit analysis Information for decisions: relevant c Pricing and product mix decisionsContents in full Preface xv Text ata glance wai ‘About the authors xvi Acknowledgments xiv ‘About this edition xvii Connect digital resources wavi ‘About the digital resources wi fee Introduction to management accounting | Chapter 1 | Management accounting: information for creating value and managing resources 4 lian organisations in the twenty-first century 5 Some important considerations in the design of ee management accounting systems 9 industry 6 Management accou ing responses to the changing business environment a Learning objectives A 9 Summary 2 ea al era, 3 anagement accountants within organisations 10 References 23 i Appendic 24 Key terms (appendix) 7 Review questions 2, B Exercises 28 Problems 3 Cases 3 W ” e & 37 _REALLIFE Theres plenty of gold, but at what cost? "Cost flows ina manufacturing businessChapter 3 Cost behaviour, cost drivers and cost estimation What are cost behaviour, cost estimation and cost prediction? Cost drivers REAL LIFE Cost drivers at Holden Engine Company REAL LIFE Managing costs in challenging times REAL LIFE Cost behaviour and cost management at Qantas Cost behaviour patterns REAL LIFE Cost behaviour in Australian companies REAL LIFE The behaviour of labour costs in the ‘current business environment Using cost behaviour patterns to predict costs Chapter 4 Product costing systems Product costing REAL LIFE The cost of Australian wine REAL LIFE Costing defence contracts REAL LIFE Product costing in small business Flow of costs in manufacturing businesses Allocating overhead costs to products REAL LIFE Product costs at Coopers Brewery 13 a n a n 7” 7 87 124 125 126 128 128 Cost estimation Practical issues in cost estimation Effect of learning on cost behaviour Learning objectives Summary Key terms References Self-study Appendix Key terms (appendix) Review questions Exercises Problems Cases Leaning objectives Summary Key terms References Selfstudy Appendix Key term (appendix) Review questions Exercises Cases sessyuaz2e2 on Ras 122 ww 151 151REAL LIFE Which costing system for Australian wine? Other issues in process costing Learning objectives Summary Key terms References Chapter 6 Service costing What are service organisations? Cost classifications in service organisations REALLLIFE The costs of services provided by Australis’ hospitals Estimating service costs REAL LIFE Service costing in the NSW public sector jank. Costing services at Adela REALLIFE The bilng system at SimsPartners REAL LIFE The downside of using billable hours to charge for legal services = _ When should firms estimate their service costs? m 194 7 195 196 196 221 223, 206 27 232 236 240 243 Self study Appendix Key term (appendix) Review questions Exercises Problems Cases REAL LIFE The costs and benefits of service costs at Hyde and Partners Flow of costs in service firms Costing in retail and wholesale businesses Learning objectives Summary Key terms References Self study Review questions Exercises Problems Cases Allocating support department costs Learning objectives Summary Key terms References Selfstudy Appendix Key terms (appendix) Review questions Exercises Problems Cases 200 204 204 205 210 a7 220 245, 246 247 220 249 251 251 251 254 255 259 267 272 290 272 298 299 300 308 308 a3 320Chapter 8 Activity-based costing 324 Problems with conventional product costing REAL LIFE ABCin the New Zealand Blood Service 341 ves 328 REAL LIFE The adoption of ABC in Australia Product costing at Mason & Cox 328 and New Zealand 3al ‘Activity-based costing at Mason & Cox 330 Other activity-based costing issues 342 Initial decisions about ABC at Mason & Cox 331 Activity-based costing in service organisations 344 Stenrenet rentinie tee encts of te REAL LIFE Counting the cost of childhood ‘manufacturing overhead activities 332, Immunisation 345 Step two: assigning the costs of manufacturing Learning objectives 324 overhead activities to products 334) Simard) 345 Key terms 346 REAL LIFE Activity-based costing in the NSW. References 36 public sector 357 Selfstudy 3a7 ‘Activity-based versus traditional product costs Appendix 350 at Mason & Cox 358) pol Meu ferns (onrencay) as Review questions 359 REAL LIFE Costing hospital care 389 Exercises 360 Coats versus benefits of ABC at Mason & Cox 340 Problems = When should ABC be used? 340) Part 3 Information | Chapter 9 Budgeting systems 386 Strategic planning and budgeting systems 387 Behavioural consequences of budgeting 405 Purposes of budgeting REAL LIFE Budgeting practices in Austral 406 Responsibility accounting Zero-base budgeting ‘408 REAL LIFE ‘Beyond budgeting’ and other Program budgeting 409 budget adaptations Esai obiectites , The annual budget: a planning too! REAL LIFE Budgeting at the Australian Ballet School Budgeting at AVJennings Lid REAL LIFE Budgeting for major events: the Olympic Games Budgetadminstation a 8 3pter 10 dard costs for control: direct material and direct labour rolling costs 443. Standard costs for product costing ng standards 444 Learning objectives loping standards at .M. Williams aap, slating standard cost variances 449 ‘References “LIFE Cost pressures and variance analysis, el seedy a asa Appencln PI Key terms (appendix) tigating significant variances and taking Review questions sctive actions 454 Exercises control through assigning responsibility 459 a dard costing and behaviour 461 apter 11 dard costs for control: flexible budgets and manufacturing overhead ible budgets 487 _ Activity-based budgeting ible overhead budget: RM. Williams 490 Learning objectives head application in a standard costing aed em 492 ese References lating overhead cost variances 492 Self-study Appendix thead rma gene jead cost performance report oem rhe te Oharcis dard costs for product costing 499 Review questions ible budgets in service organisations so Exercises = Problems ppraisal of standard costing systems Sol) Cases 504 531 Responsibility centres More complex structures REAL LIFE Shared services to enhance customer value and manage costs Financial performance reporting Transfer pricing 442 461 442 464 464 465, 465 468 469 470 an 474 482 486 505 486 508 509 509 509 512 513 515 514 518, 526 530 534 536Chapter 13 Financial performance measures and incentive schemes Financial measures in investment centres Return on investment Residual income Measuring profit and invested capital Measures of shareholder value Incentive schemes REAL LIFE Senior executive pay in Australia REAL LIFE Employee share ownership is more than an incentive compensation scheme Chapter 14 Learning objectives Key terms References Self'study Review questions Problems Cases Strategic performance measurement systems The problems with using traditional financial performance measures in isolation The advantages of non-financial measures Selecting operational measures The limitations of non-financial performance measures The balanced scorecard REAL LIFE Managing performance at JAG REAL LIFE Messuring impact in charitable organisations Strategy maps REAL LIFE Customising the balanced scorecard Developing a balanced scorecard for the Cooktown Bus Company 5 oy or 620 621 623, 624 624 626 627 How successful are balanced scorecards? Does non-financial performance lead to. financial performance? Benchmarking Learning objectives Summary Key terms References Self-study Review questions Exercises Problems Cases 558 589, 562 7 578 578 597, 598 598 598. 601 602 604 610 614 629 630 32 64 635, 636 636 or 639 640 642 648chapters | Managing suppliers and customers Supply chain management REAL LIFE A product not a commodity ‘anew supply chain for Tesmarian wool REAL LIFE Driving supply chain improvements at Coles | Managing sup Managing inventory ‘Managing customers REAL LIFE Is JIT too risky? REAL LIFE Managing customers with social media Chapter 16 Managing costs and quality ‘Cost management Activity-based management REAL LIFE Lean thinking atthe city of 655 655 656 656 661 668 669) n 705 706 no 73 74 75 7 Managing time Learning objectives Summary Key terms References Selfstudy Appendix Key terms (appendix) Review questions Exercises Problems Cases Managing quality REAL LIFE Managing costs, throughput and quality for customer value: Flinders Medical Centre Learning objectives Summary Key terms References Self-study Review questions Exercises Problems Cases Sustainability and management counting Recognising and measuring economic, ‘environmental and socal impacts REAL LIFE The valuation of environmental limpect PUMA and beyond Environmental management accounting 652 os 652 680 680 682 685, 687 688 689 692 704 m mm 704 78 m8 n9 730 73) 732 736.Environmental costs Sustainability and supply chain management REAL LIFE Alife cycle analysis of carbon, REAL LIFE Environmental costing at GH Michell & Sons REAL LIFE A sustainability scorecard at Westpac Strategic performance measurement systems and sustainability Chapter 18 Cost volume profit analysis 74, 768 768 ™m ™ 75 CYP analysis at the Melbourne Theatre Company 797 The break-even point The break-even formula REAL LIFE The importance of the break-even point at Linneys REAL LIFE A sundae too far away Graphing cost volume profit relationships Target net profit Using CVP analysis for management decision making CYP analysis with multiple products REAL LIFE Salmon-a fishy success story Including income taxes in CVP analysis Chapter 19 Information for decision: The management accountant's role in decision making REAL LIFE What role do accountants play in decision making? Relevant information Identifying relevant costs and benefits Relevant information for some common 799, 799. 800 802 802 804 806 B10 an an 845 847 B49 850 854 Sustainability and capital expenditure analysis Learning objectives Summary Key terms References Self-study Review questions Exercises Problems Cases Practical issues in CVP analysis REAL LIFE Making the most of our coffee culture ‘An activity-based approach to CVP analysis Financial planning models Learning objectives Summary Key terms References Self-study Appendix Key terms (appendix) Review questions Exercises Problems Cases elevant costs and benefits REAL LIFE Outsourcing, you cen bank on it REAL LIFE Sustainable solutions for by-products Implications of activity-based cost analysis for decisions Incentives for decision makers Pitfalls to avoid when using accounting data_ for decisions 752 780 781 781 782 785 786 789 792 796 a3 as aS 8 796 Bat 822 822 822 825, 828 828 829 852 838 86) 867 §&Leaning objectives Summary Key terms References Selfstudy Appendix Chapter 20 Pricing and product mix decisions Major influences on pricing decisions REAL LIFE Battling for Australias skies Key terms (oppendix) 871 Review questions 9 872 Exercises 8 872 Problems 873 Cases m1 875 897 Product mix decisions 900 Leaning objectives Economie profit- maximising models go funny Pricing strategies 903 References Se err oducts, Self-study Strategic pricing of new product Gey ees Competitive bidding 9 Key terms (appendix) Legal restrictions on setting prices 2 we ee) REAL LIFE Proving predatory pricing: Problems 2 challenge for the ACCC 93 Cases REALLIFE The penalties of price fixing m4 Chapter 21 Information for capital expenditure decisions 942 Capital expenditure decisions 943 Post-completion audits of capital expenditure decisions Cash flows vas 1PM eo Justification of investments in advanced The capital expenditure approval process 944 technologies es ae peessiestthe REAL LIFE What drives investments in technology? 972 pecan vencalcentre Beier lirniations of tacitonel capital Discounted cash low analysis 947 expenditure analysis 9 ‘Comparing two alternative investment projects 952 Learning objectives 942 Summar. 975 REAL LIFE Fleet renews decisions at Qantas: aie ae the A380 and B787 985 References 77 Selfstudy m7 956 Appendix 980 Review questions 984 Exercises 985. 957 Problems 988 go Cases 995 962 996 Index 10HPreface One of the challenges we always face in writing new editions of this book is to capture current thinking and practicein management accounting, whichare ina continual state of change. Unlike the financial accountingarea, there are no accounting standards or legally enforceable practices in management accounting. Management accounting takes place within organisations and can be quite specific to each business, Also, to understand the nature of management accounting practice we need to understand the broader aspects of business practice across a range of areas including strategy, marketing, human resource management, operations management and organisational behaviour. Management accounting both draws on and contributes to these areas, ‘Our approach in presenting this subject to students and managersis to focus on cutting-edge management accounting as practised by leading organisations in Australia and overseas, while at the same time acknowledging that some firms are satisfied with more traditional approaches. Since the first edition of this book appeared in the early 1990s, there have been dramatic changes in thinking about the role of management accounting in organisations. Once it was sufficient to describe management accounting as being concerned with providing information for planning and control, and for decision making, However, the role of management accounting is now more complex. It is now concerned with the processes and technologies that enable the effective use of organisational resources to support managers in enhancing customer and shareholder value. Supply chain management approaches provide a framework for integrating contemporary cost management and performance measurement. The issue of sustainability is now increasingly important as businesses seek to understand and menage any adverse impact they have on the environment and society. The processes and technologies of management accounting that enhance shareholder and customer value are evolving over time and require an intimate knowledge of the nature of the business, its markets, its strategy and its people. Over the decades the practice of management accounting has developed to become more integrated with the process of management, and less a part of the practice of accounting, with management accountants playing a significant role as part of the management team. The book has been written primarily as a text for one- or two-semester undergraduate management accounting courses, The references at the end of each chapter provide guidance on additional readings. With its description of current practice and strong emphasis on the new developments in management and management accounting, this book also provides a sound foundation for a management accounting unit within an MBA course. While the origins of the text can be traced to the US text, Managerial Accounting, by Ronald Hilton, it hes always differed from its US counterpart. It has been developed using major cases based on real Australian businesses, and it includes numerous illustrations~‘Real lfes-of current management accounting practices cof organisations in Australia, New Zealand and the wider Asia-Pacific region. The Australian book takes a broad perspective in viewing management accounting as the efficient and effective use of resources, supporting managers in the improvement of customer and shareholder value. The rapidly changing business environment is seen as having implications for the development of new approaches to management accounting. We sincerely welcome any comments or suggestions from the lecturers and students who use this text. Kim Langfield-Smith Helen Thorne David SmithAbout the authors Kim Langfield-Smith Kim has a BEc from the University of Sydney, a MEc from Macquarie University and a PhD. from Monash University. She isa fellow of CPA Australia and the Institute of Chartered Accountants in Australia (ICAA), and a graduate of the Australian Institute of Company Directors. She is a Vice-provost at Monash University as well as Professor of Management ‘Accounting, Her prior appointments were at La Trobe University, the Universities of Melbourne and Tasmania, and the University of Technology, Sydney. Before entering academic life Kim worked as an accountant in several commercial organisations. Her research interests are in the area of management control systems, and her research has been published in many journals, including Accounting, Organizations and Society; Journal of Management Accounting Research; Management Accounting Research; Behavioral Research in Accounting; Journal of Accounting Literature; and Journal of Management Studies. Kim continues to play an active role in the accounting profession. She is chair of the Professional ‘Qualifications Advisory Committee of CPA Australia, and a former member of the International Accounting Education Standards Board (IAESB), representing the CAA and CPA Australia Helen Thorne Helen has a BEc and DipAcc from Flinders University, and @ PAD from the University of ‘Adelaide. She is an adjunct professor in the International Graduate School of Business at the University of South Australia, Helen has also held appointments in the Graduate School of Management and the Commerce Department at the University of Adelaide. Her research focuses on contemporary approaches to management accounting, including activty-based costing and strategic performance measurement systems, and she has published in journals, including Journal of Accounting Literature; Journal of Cost ‘Management; Advances in Management Accounting: and Australian Accounting Review. Before commencing her academic career, Helen worked as a management accountant jor international company. Since then she has maintained her interest in the ‘teal world’, She is 2 the Department of Accounting at Monash sity and has previously held appointments at the University of Melbourne and La s research is in the area of management control systems, with a particular focus 2 measurement, and his research has been published in journals including tions and Society; Management Accounting Research; Behavioral g; Journal of Accounting Literature; and Accounting, Auditing and David is also a member of the Chartered Australasia Research Panel.About this edition ze In response to requests from adopters, each chapter contains a number of changes. On average, more then 40 per cent of the end-of-chapter learning activities (review questions, exercises, problems and cases) are either completely new or include new data. Major changes to each chapter, including changes to the end-of- chapter mate are described in the table below. New to this edition Chapter?) Management accounting: information for creating value and managing resources + Extensive revisions simplify and modernise the material. + The Wendy's case that was the chapter focus in prior editions has been replaced with a range of more recent case examples The ‘Strategy and the management accountant’ material has been updated. New ‘Real lifes’ covering big data and the management accountant, and the accountant in the modern ‘environment have been added. Other ‘Real ifes have been updated. Seventeen of the 42 end-of-chapter questions are new or include new data. Management accounting is presented as supporting managers in their rle of enhancing customer and shareholder value through the efficient and effective use of organisational resources. The link between strategy and management accounting lays a foundation for the strategic focus that permeates this book, + This classic chapter, which lays the foundation by CMe nee eee ee ee introducing students to a range of commonly used cost concepts, has not required any significant updates, although 19 ofthe 42 end-of-chapter questions are new or include new data, updated, and linked to end-of-chapter questions. + Fifteen of the 43 end-of-chapter questions are new or include new data. Several questions allow students to respond by constructing an Excel® spreadsheet. This chapter introduces students to the terminology of management accounting before covering concepts in more detail later inthe book. Chapter 3 Cost behaviour, cost drivers and cost estim: + One new ‘Real life! has been added and another has been’ This chapter maintains the current approach to explaining cost behaviour, cost drivers and cost estimation. Cia nae een eeu + Seventeen of the 43 end-of-chapter questions are new or ‘One ‘Real life’ example has been updated. include new data. Twenty of the 45 end-of-chapter questions are new or include new data. Nineteen of the 48 include new date, Chapters 4 and 5 focus on traditional ‘approaches to product costing, focusing primarily on job costing systems. ‘Chapters 4 and 5 focus on treditional p ‘costing approaches of process cosStn nn + Twenty-two of the 45 end-of-chapter questions are new or include new data Cree + Three new Real if’ examples have been provided—one looking at costingin the UK's National Health Service, one ‘on the use of actvity-based costingin the New Zealand Blood Service, and one focusing on calculating the cost of childhood immunisations. + Eighteen ofthe 49 end-of chapter questions are new or inelude new data. et ee + Anew ‘Real lif on budgeting for major events has been added and the ‘Real lf’ on budgeting practices in ‘Australia has been updated. + Twenty-two ofthe 42 end-of chapter questions are new or include new data. CMa + The Real life on cost pressures and variance analysis in hospitals has been updated. + Material on standards and behaviour has been brought together in a single section. Twenty ofthe 46 end-of-chapter questions are new or lude new data, "Anew ‘Real life on adapting standard costs for modern - timesis included. seen ofthe 45 end-cfchapter questions are new or has been restructured; the sections the characteristics of performance ave moved here from Chapter 4. Chapter 7 helps students develop a de understanding of the processes for alloca overhead costs to products. It includes an 8 introduction to activity-based approaches to estimating overhead costs This chapter describes common problems with traditional product costing systems and outlines the steps used in ativity-based costing This chapter presents a step-by-step guide to the budgeting process and describes some of the behavioural issues associated with budgeting. Chapter 10 focuses on traditional approaches to-estimating and controling product costs through standard costing focusing on the material and labour components. This chapter explains flexible budgets and standard costing for overhead. It also outlines the criticisms and advantages of standard ‘Modern and traditional approaches to ‘measuring financial performance are integrated with responsibilty accounting performance reports. Includes real-time reporting, the impact of shared services and team-based structures. Transfer pricing scenarios clearly ilustrate issues of goal congruence and incentives.Cee ee + The chapter has a new title, to reflect the change in focus from ‘reward systems’ to the more modern term ‘incentive systems. + The Real life! examples have been updated and linked to end-of-chapter questions. + Sixteen of the 42 end-of-chapter questions are new or include new data. This chapter presents internal financial reports and traditional financial measures, and an expanded section on value-based management. Up-to-date material on incentive systems is also included. The chapter title and the learning objectives have been vised to reflect changes in coverage of some material in iee The section on strategic performance measurement ystems, including balanced scorecards and strategy maps, has been reorgenised. ~ A new Real life’ on measuring performance in charitable organisations has been added. renty-one of the 44 end-of-chapter questions are new or include new data, This chapter focuses on the design of strategic performance measurement systems—financial and non-financial performance measures, the design of strategic performance measurement systems, and benchmarking. es + The material has been updated throughout the chapter. + Two new ‘Real life’ examples have been added on supply chain management at Coles, and using social media to manage customers. Other ‘Real lifes’ have been updated + Twenty-one of the 46 end-of-chapter questions are new or include new data Supply chain managements covered, with «a focus on managing suppliers, inventory, customers and time. Actvity-based approaches to the analysis of supplier and customer costs and performance indicators are outlined. Eee ee + The materia has been revised throughout the chapter + The section on throughput accounting has been simplified. + Anew ‘Real life’ example on lean thinking has been added. Other ‘Real lifes have been updated. + Eighteen of the 50 end-of-chapter questions are new or include new data. i + Major revision and modernisation of the material throughout the chapter. + Modern sustainability frameworks of the GRI and integrated reporting are now included. + Anumber of new exhit have been added on corporate responsibilty around the globe, sustainability reporting, sustainability scorecards, ‘and the valuation of environmental impact, ifteen of the 41 end-of-chapter questions are new or include new data. eee cneneeeen a Cost management techniques include activty-based management, business process reengineering, life cycle costing, target costing ‘and managing throughput. Quality concepts and cost of quality reporting are explained, the implications for management accounting systems and techniques, including cost analysis and management, performance measurement , 's and four new ‘Real ife' examples systems, and capital expenditure analysis. .+ Two new Reallifes'on the use of CVP analysis the Tasmanian salmon farming industry end in the management of coffee shops. + Twenty-seven of the 46 end-ofchapter questions are new or include new date. Grea none ee eee * The section on costing by-products has been moved from the Appendix to the main chapter. + New ‘Real life’ examples on the role of accountants in management decision making and sustainable solutions for by-products have been added. + Nineteen of the 46 end-ofchapter questions are new or include new d Greece enn “+ Material on the legal constraints on pricing has been updated. + Twonnew ‘Real life’ examples on the airline industry and price fixing have been included. + Fourteen of the 44 end-of chapter questions are new or include new data. Creo oe en + Includes a new section on real-options pricing analysis. + The Real ifes have been updated teen ofthe 47 end-of-chapter questions are new or | reeoreen Cees cS Cost volume profit analysis is presented as 2 tool to model the profit impact of changes in selling prices, costs and product mix, and formula-besed and graphical approaches. Methods for incorporating activty-based concepts are also included. This chapter demonstrates how management ‘accounting information can be used for @ variety of tactical decisions: accept or reject @ special order; add or delete a product, service cr department; and sel a joint product process it further This chapter includes factors that influence pricing strategies, models of cost-based pricing, and the legal restrictions of pricing behaviours. Techniques for considering pproduet mix decisions are also covered. This chapter presents techniques for analysing data for long-term investment decisions. The limitations of using traditional techniques to justify investments in advanced technologies are covered.About the digital resources ‘Management Accounting 7e comes with McGraw-Hill Connect~a digital teaching and learning environment that responds to contemporary students’ needs. Connect brings every learning resource that accompanies. this text together in one place, and can also integrate and interact with your LMS. Connect provides access to interactive versions of selected end-of-chapter exercises and problems with E worksheet and graphing functionality to allow students to practise what they are learning. Quizzes have been prepared for each chapter to provide the opportunity to check knowledge and understanding of chapter concepts, Instructors also have access to an Instructor Manual including solutions to end-of-chapter activities, PowerPoint® presentations and the testbank. Gweneth Norris BCom, MCom, PhD, FCPA, CMA Gweneth prepared the Instructor Manual, Gweneth retired from Charles Darwin University as Professor of Management (Accounting), where she was responsible for the accounting program and accounting research, She also spent many years atthe University of South Australia and at Deakin University in Geelong, Victoria. She is a past vice-president of the Institute of Certified Management Accountants (ICMA), and worked on the Geelong Branch Council of CPA Australia for ‘years, serving terms as chair and deputy chair. Gweneth was also a presenter of the ICMA graduate course ‘Advanced Management Accounting’ in Asia, teaching in both Singapore and Hong Kong. Robyn Parry BBus (Acc), MEd, MComm, CPA, AFAANZ Robyn prepared the testbank, PowerPoint slides and online chapter quizzes. Robyn has been an academic for over 12 years. She has taught accounting for decision and management accounting, corporate accounting, accounting theory and auditing i postgraduate accounting programs. Robyn is part of the academic team at the Univer was previously with James Cook University (Brisbane) and CQ University (Brisbane Robyn's career has evolved through public practice, including in the mining, cc sectors, before moving to accounting education, She has keen interest ir education and promoting the professional accounting bodies to students.Text at a glance ‘Real life’ features Chapter introduction Theory is one thing-but what happens in reality? The chapter introduction is an overview of the These short case studies provide examples of material to be covered, including links to relevant management and management accounting in topics in previous chapters. action largely within Australian and New Zealand org Key terms/margin definitions Key terms are bolded in the text where they first appear, defined in the margin and listed at the end of the chapter. Use the end-of-chapter Key terms checklist to test yourself when you finish the chapter. The definitions are also repeated in a full {glossary at the end of the book. ee Exhibits "These visual overviews of concepts, flow charts, The chapter summary is presented in dot point form for easy reading and revision, and links back to the learning objectives. Chapter summary tenesSelf-study problems and solutions These problems provide the perfect opportunity to better understand and revise key topics and techniques covered in the chapter. Reve ene Rees ame ene a) cream ee Review questions Short-answer questions test your knowledge of key words, terms and concepts presented in the chapter. nificant amount of new and updated end-< Exercises ‘These exercises provide an opportunity to apply some: of the techniques and concepts relating to the chapter ReviewQuestions Exercises Pilea ate adacennt tater PT staan ene eh mane ann Problems Longer, more in-depth problems allow you to apply quantitative techniques as well as theoretical concepts to organisational g° Problems Sie iceman yeasty Appendices | To help you extend and build your knowledge, end-of-_| chapter appendices provide in-depth visnaeta Cases Cases provide more comprehensive scenarios that require you to demonstrate your skils in applying both quantitative techniques and theoretical issues. cases provide opportunities for higher-level and may requie you to integrate material rom mai than one chapter,Acknowledgments We would like to thank a number of people who have helped us with the development of this textbook, including the hundreds of management accounting students we have taught over many years and the numerous managers and management accountants with whom we have interacted. Their enthusiasm, comments, ‘questions and experience have assisted our understanding and appreciation of management accounting. We ‘also thank our academic colleagues from around Australia and New Zealand who have provided feedback or reviewed parts of the manuscript. They include the following: Kenneth Ke, Curtin University Seventh edition Sumit Lodhia, University of South Australia (including their afiation at that time) Kathy Michael, Victoria University Refiuddin Ahmed, James Cook University, Carly Moulang, Monash University Zahir Ahmed, Auckland University of Technology Greg Van Mourik, Monash University Ranjith Appuhami, Macquarie University Jayce Naidoo, Victoria University David Bedford, University of Technology, Sydney Nirmala Nath, Massey University ‘Mandy Cheng, University of New South Wales John Niven, ADEA Glenda Davis, University of Western Sydney Jean Rear, Swinburne University of Technology John Donald, Deakin University Vg Sridharan, Deakin University Yuan Yuan Hu, Massey University Natasja Steenkamp, Central Queensland David Huelsbeck, The University of Melbourne University Zubaidah Ismail, Edith Cowen University Nicole Sutton, University of Technology, Sydney for providing the technical check, Gweneth Norris for her assistance with the to We thank lan Langfield: solutions manual and Robyn Parry for her work on the accompanying digital resources. We would also Ii ‘express our gratitude to the people at McGraw-Hill Education who guided this book through the publication process. In particular, we thank Robert Ashworth, Rosemary Noble, Carolina Bodin, Cynthia Moral, Claire Linsdell and Marisa Rey Bulen. a s David Emsley, Macquarie University Previous editions fei Fan, University of Canberra (including their afliation at that time) ‘Aldonio Ferriera, Monash University Robyn Alcock, Central Queensland University Peter Foreman, Deakin University Virmala Amirthalingam, Curtin University Carolyn Fowler, Victoria University of Wellington zard, Macquarie University Geoff Frost, University of Sydney Macquarie University Lynn Gallagher, Queensland University of Technology er, Macquarie University Peter Graham, University of Canberra Vicki Gelsby, Flinders University Bruce Gurd, University of South Australia Eva Heidhues, Macquarie University Kerry Jacobs, La Trobe University Stephen Jones, Open Polytechnic Louise Kloot, Swinburne University of Technology Dawn Lamminmki, Griffith University Michele Leung, University of Western Austral Phil Lignier, Central Queensland University Noel Loganathan, Northern Territory University ‘Tony McMurtrie, The University of Adelaide ‘Suzie Maloney, University of Southern Queensland (Bemie Mis ThetGraeme Mitchell, University of Western Sydney Jodie Moll, The University of Manchester, Manchester Business School Reza Monem, The University of Queensland David Moore, University of Tasmania Shane Moriarty, The University of Auckland Carly Moulang, Monash University Greg Van Mourick , Monash University Nihal Mudalige, Monash University Rahat Munir, Macquarie University la Nath, Massey University Gweneth Norris, Deakin University ert Nyamori, Massey Ur cy, Queensland University of Technology The University of the South Pacific Purchas, University of Canterbury chards, Murdoch University 9, RMIT University ersity Peters Graeme Russel, Deakin University Suzanne Salmon, La Trobe University John Sands, Grifith University ‘Axel Schulz, The University of Melbourne Ywonne Shanahan, University of Canterbury Sharelle Sirmmons, The University of Queensland Ciorstan Smark, University of Western Sydney David Smith, The University of Melbourne Nava Subramaniam, Grifith University Mohammad Iqbal Tahi Grifith University Carol Tilt, Flinders University Ted Walts, University of Wellongong kim Watty, RMIT University Carly Webster, Monash University Robert Willams, University of Wollongong Maria Xydias-Lobo, Flinders University Prom Yappa, RMIT University, Mary Zajkowski, The Open Polytechnic of New ZealandStudents... m= Want to get better grades? 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Auto-graded assignments, quizzes and tests to save time Detailed visual reporting, where student and section results can be viewed and analysed ata glance Sophisticated online testing capabilities as A filtering and reporting function that allows easy assigning and reporting on materia thatarecoreated toaccreditation standards and learning outcomes 2gCHAPTER 1 Management accounting: information for creating value and managing resources The first part of this book introduces management ‘accounting, its purpose and basic concepts. In Chapter, management accounting is defined ‘as processes and techniques that are focused on the effective and efficient use of organisational resources to support menagers in their task of enhancing both customer value and shareholder value, We outline the recent changes in the business environment that have influenced the development ‘of management practices and management ‘accounting systems, and management accounting is distinguished from financial accounting, The processes and techniques of management accounting thet are used to enhance value include systems to support the formulation and implementation of strategy; process improvement and cost management techniques to help develop and manage a firm's competitive advantage; planning and control systems to help managers manage resources; and estimates of the cost of products (goods or services) to support strategic and operational decisions. In this first chapter we also consider factors that influence the design of a management CHAPTER 2 Management accounting: cost ter and concepts accounting system, including an awareness of the implications of accounting information, and the costs and benefits of designing, producing and using management accounting information. We also recognise that the design of management accounting systems can be influenced by a wide range of factors such as the organisation's competitive environment, strategies, size, and organisational culture, as well as by institutional forces that encourage the adoption of management accounting practices that are used by other organisations. Chapter 2 introduces some of the basic concepts and terminology used in management accounting. Management accounting often include costing, budgeting and performance measurement systems. Modern management accounting systems may also include cost management systems, which on the identification and elimination of wasteful activities. Much of this chapter focuses on the different ‘ways in which costs can be classified and reported to managers, These classifications include variable and fixed costs, direct and indirect costs, and behavioural management systems focuscontrollable and uncontrollable costs. We use the concept of the value chain to explore the various cost classifications, paying particular attention to the classification of manufacturing costs as direct materi | direct labour and manufacturing overhead costs, The key message in this chapter's that costs ‘can be classified in different ways to me different information needs of managers. theManagement accounting: information for creating value and managing resources w Learning objectives 1 Describe the changes that have taken place in the business environment in recent years, 1.2. Define management accounting in terms of value creation. 13 Describe the major differences between management accounting and financial accounting information. 1.4 Explain where management accountants are located in organisations. 145 Describe the major processes that management accounting systems use to create value and manage resources. 1.6 Explain the basic concepts of strategy and how management accounting systems can support strategies, 1:7 Recognise how various management accounting techniques have been developed to support a firm's competitive advantage. 4.8 Explain how planning and control mechanisms can be used to support resource management. 1.9 Explain how costing systems can provide information to support a range of operational and strategic decisions, 140. Describe the factors that may influence the design of management accounting systems, including behavioural issues, cost-benefit trade-offs and the implications of contingency and institutional theories. 1.11 Identify the organisational responses and management accounting responses to changes in the business environment 12 _ (After studying the appendix) describe how the focus of management accounting has evolved. 143, (After studying the appendix) discuss the professional qualifications that are relevant to becoming an accountant, and the ethical standards to which accountants must adhere.Introduction — \ De eeeec ee iaea Seis an Gye cre igsieerce AUSTRALIAN ORGANISATIONS IN THE TWENTY-FIRST CENTURY In the last 20 years, many Australian organisations have become exposed to global competition for the first time, Australian companies can no longer ignore the activities of companies operating in Asia, Europe and the United States (US), Import tariffs, quotas and, over time, subsidies have been gradually reduced or climinated. Many overseas companies are now direct competitors for Australian businesses, For example, 1 InNew Zealand, notfor profit organisations (NFPs) are known as public benefit organisations, reflecting the fat that they are generally organised for socially beneficial prposes,PARTONE INTRODUCTION TO MANAGEMENT ACCOUNTING the steadily decreasing tariffs affected Australian car manufacturers, such as Holden, Ford, Toyota and Mitsubishi, as well as their local suppliers. High-quality motor vehicles manufactured overseas were imported into the domestic markets at competitive prices, to compete directly with locally produced cars. ‘Australian automotive component suppliers were also competing directly with overseas suppliers, as Australian car manufacturers began to source their supplies globally. For example, in 2004 Mitsubishi announced that, as part of a major global restructure, its South Australian engine plant would be closed from October 2005, with engines required for its Australian operations being imported from Japan. In 2008 Mitsubishi ceased its Australian car manufacturing activities altogether. The survival of its Australian operations had depended on the new, locally designed and produced A380 model, but sales of the company’s imported Lancer exceeded A380 sales (Kelton & Henderson, 2008). Similarly, in 2013 General Motors Holden and Ford announced plans to cease manufacturing cars in Australia, Another ‘example of overseas competitors entering the Australian market to challenge Australian companies can be seen in the airline industry. In 2000, Virgin Blue, set up by the United Kingdom (UK) based Virgin Group, emerged to challenge the two dominant domestic airlines, Qantas and Ansett. By 2001, Ansett had failed and Virgin Blue flourished. In 2004 Qantas introduced its own low-cost provider, Jetstar, and in 2007 Singapore's Tiger Airways entered the Australian market. The ‘Real Life’ below describes the increasing competitive pressures being experienced by the airline industry. Changes in the regulatory environment have affected many industries. Deregulation of the telecommunications industry in the 1990s saw a variety of companies, such as Optus, enter the market ‘as direct competitors to Telstra, a business that once held a monopoly in the telecommunications market in Australia. In 2001 Optus was taken over by Singapore Telecommunications. During this period, many public utilities and government bodies were commercialised, or corporatised. These bodies also found themselves competing directly with private enterprise. The process of corporatisation and privatisation of the public sector has continued. For example, we have seen the privatisation of electricity bodies, jails, major roads and public transport. Many public hospitals and local government councils now operate as ‘commercial businesses. THE INCREASING COMPETITIVE PRESSt AUSTRALIA’S AIRLINE INDUSTRY all trying to gain market share, ... Historically, there have been limited carriers n, but now there's more flights and more capacity, its becoming a lot moreMANAGEMENT ACCOUNTING: INFORMATION FOR CREATING VALUE CHAPTER} Australian businesses, as with thelr overseas counterparts, operate in an environment subject to rapid and unpredictable change. Customers make demands on businesses for specific product requirements, The rise of e-commerce has challenged the traditional modes of business operation; rapid advances in technology have resulted in a competitive environment where innovation is critical to success. in many businesses; the increasing reliance on creating strategic alliances with other businesses has created more complicated relationships and business structures; the increase in outsourcing anda greater reliance on various forms of business networks have led to the emergence of virtual organisations; the increased global mobility of labour has added to the complexity of managing human resources; the spectacular collapses of major corporations followed by the global financial crisis have led to increased pressure for accountability, and now organisations are grappling with increasingly important sustainability issues, which require organisations to specifically address their impact on the environment: Over the past few decades mineral resources have played an increasingly important role in the Australian economy, driven by strong demand, particularly from the Asian region, although in terms of overall onomic activity Australia is now primarily a service-based economy. Growth areas in the service sector include tourism, education and knowledge-based’ industries, suchas software programming and consulting, ‘The changing business environment has provided both opportunities and threats for Australian anisations. Organisations have had to evolve and adapt to find better ways to compete, New sational structures, strategies and management philosophies have been adopted to enable organisations to be more responsive to customer needs and better able to make quick, informed decisions within global markets. In addition, management accounting techniques have had to keep pace with the information needs of contemporary organisations. In the appendix to this chapter there is a detailed, account of the changing focus of management accounting in recent decades. WHAT IS MANAGEMENT ACCOUNTING? Management accounting refers to the processes and techniques that focus on the effective and efficient: use of organisational resources to support managers in their tasks of enhancing both customer value and shareholder value? Let’ look more closely at this definition. Value creation is a central focus for managers and can refer to both customer value and shareholder value. Customers have always been a key concern for organisations. However, itis only in recent years that managers have come to recognise explicitly that understanding customer value—the value that a customer places on particular features of a product?—and satisfying customers are critical to achieving increased sales and market share, and therefore to achieving shareholder value. Sharcholder value is also a key focus for managers and involves improving the worth of the business from the shareholders’, or owners, perspective. So what is important to shareholders? Shareholders are usually interested in increased profitability, increased share price, and dividends, and management has lity for meeting these expectations. However, increasing customer value comes at a cost and, at times, managers may need to make trade- offs between undertaking actions that increase customer value, and actions that increase shareholder value, For example, more seating at ice-cream retailer Cold Rock Ice Creamery’s outlets may enhance ‘customer value, and by increasing sales also enhance shareholder value. On the other hand, the push towards bigger sites with seating comes at a cost—which may have a detrimental effect on the potential to grow shareholder value. Where there is a conflict between increasing customer value and increasing shareholder value, shareholder value is likely to be given priority as this is the key strategic objective for ‘most organisations. (Alternative objectives and priorities canbe: epecelinsobtorpiet aaa Resolving this conflict is not always straightforward. For , undertaking activit ‘customer value may decrease shareholder value in the oceans costs also increase, value may increase in the longer run as market share increases, ‘ 2 ‘ia omni ein ect 40 ED, ' Throughout this book, the term ‘produc indudes serves. «ected fie npn Le ‘owners. These other owners may also seek profits and capital growth, management accounting the roceses and techniques ‘that focus onthe effective andeffcentuseof organisational resources ee tasks ofenbancing ‘oth customer vale andPART ONE INTRODUCTION TO MANAGEMENT ACCOUNTING ‘To enhance customer value or shareholder value, managers need to understand what drives value. That {s, they need to understand and make decisions about the activities or aspects of their business that lead to improvements in customer value or shareholder value. To use our eatlier example, how important is seating: do most Cold Rock customers want to ‘eatin’ or ‘take away’ their ice-creams? Later in this book we willlearn about management accounting processes and techniques that may be used to assist managers to identify and manage those drivers, and to make decisions, Important decisions for managers include which products to produce, what prices should be set, what equipment should be purchased, and so on, The effective and efficient use of resources is essential to creating both customer and shareholder value, and management accounting provides information to assist managers to perform this role Effectiveness focuses managers on the successful achievement of an objective, whereas efficiency focuses ‘managers on achieving the objective with the least possible consumption of resources. Resources can be defined broadly to include not only the financial resources of the organisation, but also non-financial resources such as information, work processes, employees, committed customers and suppliers. Non financial resources determine the capabilities and competencies of the organisation, which allow it to survive and prosper in an increasingly turbulent global environment. We will see in later chapters that a variety of management accounting techniques and skills can be used to manage resources to achieve increased customer and shareholder value. MANAGEMENT ACCOUNTING SYSTEMS management A management accounting system is an information system that produces the information required by saeieneveenmat ™anagers to create value and manage resources, It forms part of an organisation's wider management educesthelnformation information systems. Management accounting information can be provided on a regular basis and can include cian inad estimates of the costs of producing goods and services, information for planning and controlling operations, irsoures and information for measuring performance. Management accounting systems also provide information on an ad hoc basis, to satisfy the short-term and long-term decision-making needs of management, The management accounting system may not be able to provide all of the information to satisfy managers’ decision-making needs; sometimes information also needs to be obtained from other sources, including those ‘outside the organisation. For example, manufacturing organisations may need information about the prices of competitors’ products in order to be able to determine a competitive price for their own product. MANAGEMENT ACCOUNTING INFORMATION ‘The focus of management accounting is on the needs of managers within the organisation. Because accounting standards apply only to external financial reports, there is great flexibility in deciding the type of information that should be generated for managers. As managers’ information needs vary, and as. the nature of the resources that they manage varies, the type of management accounting information required will also vary. Other factors that cause management accounting systems to differ include differences in production or service technologies, organisational structure and organisation size, the ‘external environment in which the organisation competes, and the levels of sophistication of computer systems, These aspects can affect managers’ needs for, and the supply of, information, and will be an important influence on the design of a management accounting system. Finally itshould be noted that management accounting information is relevant to managers from the that provides them with an overview of the entire organisation, cheEeinyble managers tore detailed information about thelr areas of responsiity, And operational managers will m to help them manage their specific operations on a day-to-day basis, to help ensure ‘targets are met. (Operational managers are managers who have responsibility for fing areas of manufacturing firms, or for the areas that directly provide technologies that capture large volumes of data, the emergence of what has the potential to transform the manner in which organisations do ene ar eT eal Lope desMANAGEMENT ACCOUNTING: INFORMATION FOR CREATING VALUE CHAPTER? “BIG DATA’ AND THE CHANGING ROLE OF THE ACCOUNTANT Big data refers tothe ‘vast amount of data continually collected through devices and technologies such as credit eards and customer loyalty card, the internat and social media and, increasingly WiFi zentors and electronic tags (ACCA & IMA, 2019 ‘While the idea that organisations ae increasingly dealing with lrger amounts of datas nt now, big date js ifferent because itincludes data that is much more likly to lack fermi resides outside tational databases. ts presence is accompanied by the continual development of advanced analytical tools that organisations ean ute to derive meaningful insight from the data with aspoed and level of accuracy not previously attainable : The implications for organisations of big data are huge. It has the potenti t allow organisations to scan their envionment more effectively than previously thought possible, so that they can better identify relevant trends, threats and opportunities. As such it ean impact the deeisions made inal parts of an organisation. spite the potential Benefits, big data comes ata cost. Nat only iit dificult and expensive to extract valve from big dat, but the data becomes less valuable overtime, Also, as mote and more orgprizaions use big data the compatitive advantage associated with gining access to big daa i kel to decrease. by the Association of Chartered Certified Accountants andthe Institute of Management Aecountants (ACCA & IMA, 2013) has ‘fied a number of implications thatthe emergence of bg data has forthe accounting profession. The report recommends that accountants velop new performance measures, Different data sets will need to be combined to enable the measurement of -ganisationsl performance. These will include unstructured data that does not reside in organisational databases, such as ks of new overseas markets, and data about climate changes and environmental risks. Such data will need to be collected, synthesised, analysed and built into performance measures and reports social media comments, on-line product reviews, information on credit and politic Learn new analytical skills. Accountants need to learn to interrogate the right databases to find the insights that managers. need, Analysis of performance trends will be deeper than was previously possible, involving diverse data that go well beyond financial data willbe crucial fr accountants to work closely wth IT staff and other organisational analysts to use analytical tools to best advantage. @ Be able to unravel the meaning of data and communicate this meaning effectively. With so much data available, the challenge for accountants will be to work out which information is the most important for managers and other decision makers in the organisation, and to communicate this critical information to these decision makers in a way that can be easily understood. Communication may be enhanced through the development of company dashboards with various forms of data visualisation. Sanco CREATOR a Questions See p. 28 DIFFERENCES BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL. ACCOUNTING INFORMATION It should be clear from the above discussions that the orientation of management accounting is quite different to the external reporting focus of financial accounting, Exhibit 1.1. contrasts management accounting and financial accounting information. \ Financial accounting is concerned with preparing and reporting accounting information for parties by Amcor and BHP Billiton to their shareholders are examples of the output from a financial account system, Users of financial accounting information include current and prospective shareholder, investment analysts, unions, consumer groups and government agencies. In contrast, man accounting focuses on satisfying the needs of internal users (Le. managers). Financial accounting reports are based on past information that emphPARTONE INTRODUCTION TO MANAGEMENT ACCOUNTING ener ee eee) Users of t= Internal: managers and employees at all levels 1 External: shareholders, creditors, ate banks, securities exchange, trade unions and government agencies Regulations = No accounting standards or external rules are 1 Accounting standards and imposed. Information is generated to satisfy corporations law regulate the managers information needs content of external financial reports Source ofdata = Both financial and non-financial data drawn from @ Financial data almost exclusively ‘many sources—the core accounting system; drawn from the organisation's core physical and operational data from production transaction-based accounting systems; and market, customer and econor system from sources external to the organisation Nature of the = Past, current and future-oriented; subjective; ‘= Past; reliable; verifiable; not information relevant; timely; and supplied at various levels of timely; not always relevant; and detail to suit managers’ specific needs highly aggregate by managers’ needs. The nature of management accounting information is current and future-oriented. Relevance and timeliness are considered more important than verifiability. There is clearly some overlap between management accounting information and financial accounting, information, because both draw data from an organisation's transaction-based accounting system. However, to manage the wider resources of the organisation, management accounting also draws on data from many other sources, both internal ahd external to the organisation. These may include data from operations (production) systems, personnel systems and customer information systems, as well as ‘market share data and competitor costs from industry bodies and customer feedback from social media sites. Also, the level of detail and the frequency of reporting of management accounting information is. greater than for financial accounting. ‘One part of a firm's accounting system that is common to both financial accounting and management ngsystem(ercost accounting is the costing system. The costing system (or cost accounting system) estimates the cost of Stattanete goods and services, as well as the cost of organisational units, such as departments, Managers may need ‘astofgoodsand information about product costs for a range of strategic and operational purposes including setting Stefurgeaoaioe Prices, controlling operations and making decisions about the continuation of a particular product. These ‘unlts,suchas are management accounting uses. However, product cost data are also used to value inventory in a manufacturer's balance sheet and cost of goods sold on the income statement, which are financial accounting uses. Management accounting is broader than just the preparation and reporting of financial information. Management accounting also includes analyses of non-financial resources, including manufacturing and sales performance data, and a range of techniques for managing costs and other organisational resources. Exhibit 1.2, which is drawn from a number of job advertisements, illustrates the diverse role of the ‘management accountant and highlights the broad range of information provided to managers. : MANAGEMENT ACCOUNTANTS WITHIN ORGANISATIONS = To appreciate the management accountant's role in an organisation, we need to understand how - ‘Organisations are structured and where the accounting staff may be located. However, the structures of i tions vary considerably and frequently change. Many large Australian businesses are structured ‘corporate head office and a series of operating divisions. These divisions may relate to different ca aye the company—for example, the South Australian State Emergency Service has Alternatively, they may focus on different product markets—Wesfarmers’ divisions sment and Office Supplies, and Insurance, Organisational structures oftenMANAGEMENT ACCOUNTING: INFORMATION FOR CREATING VALUE CHAPTER) focus on significant functions, especially at the corporate level, For example, the organisational structure of the Commonwealth Bank includes Wealth Management, Group Strategic Development and Retail Banking Services units, The units within divisions may also be structured in many ways. THE ACCOUNTING FUNCTION Most large Australian organisations have a ‘finance function’, which is the group of staff who undertake variety of accounting activities. Within the finance function, the senior accountant may have anumber of different titles, including chief financial officer (CFO), financial controller, finance manager, financial analyst, business analyst, general manager of accounting and group accountant. (Indeed, the ‘Real life’ on page 13 indicates more creative titles such as strategic resource manager and e-commerce strategist!) The CFO is usually responsible for both management accounting and financial accounting activities. As the organisation's most senior management accountant, the CFO acts as an advisor to managers, Moreover, most CFOs influence resource management decisions across all management levels and functional areas of the organisation, CFOs are usually important members of the senior management team. In recent years, former accountants have served as chief executives in companies such as BTR Nylex, Coca-Cola, Amatil and Foster's Jn some businesses, accounting staff may be found in each operating division, as well as at the corporate level. Accounting staff may be located close to the operations of the business. For example, some accountants may be located within the factory. This allows them to work more dosely with | ‘operations managers and other employees. In some organisations, accountants are clearly designated as either management accountants or financial accountants. In other businesses the distinction may be blrred, with many accountants being. responsible for both functions. However, itshould also be noted that the various processes and techniques: that we describe as ‘management accounting’ may be undertaken by managers in other areas of a business. For example, the design and operation of performance measurement systems, an important aspect of management accounting, may involve managers in the human resource management area. A new costing system may be designed, and initiated, by production engineers. Clearly, management accountants have an important role to play in coordinating many aspects of the management accounting system, and asa part of the management team. However, we should not necessarily assume that they are ‘ the sole custodians of management accounting systems or information actoss every organisation! In the ‘ appendix to this chapter you may read about the changes that have taken place in the positioning of ‘management accounting in organisations over the past few decades, ‘The ‘Real life’ below outlines some of the changing skills and roles of accountants in organisations. MANAGEMENT ACCOUNTING PROCESSES AND TECHNIQUES So far in this chapter we have explained that management accounting is focused on the effective and. efficient management of resources to support managers in their quest for improved customer value and. shareholder value, But what are the processes and techniques that management accounting uses to achieve this? ‘Management accounting: 18 supports the organisation’s formulation and implementation of strategy 1m contributes to improving the organisation's competitive advantage in terms of quality time, flexibility, innovation and cos, through moder processimprovement and techniques provides information to help manage resources, through systems for planning ( control (such as performance measures) 1 provides estimates ofthe costs ofthe organisation's output (goods ands the strategic and operational decision needs of managers. Let's look t examples ofeach of these areas.PARTONE INTRODUCTION TO MANAGEMENT ACCOUNTING Exhibit 1.2 ave phar Peccete tne Mepeag tes Bate tne oho ob oe Shige ede on commer por srl noah Taal ee teh on he een Oc ys Eo. eee [iy Robert Hal Plant Accountant Fo ry Hing Ranetein de vt son mace ip peal Monday dp sd ete od vec ome eek See emma Ses recy or Ses ene a El Seopee Sexe Doin Rtn Cortef Onion Sa nan ober i atria aml of Roba Hal stone ‘lec Menger Account Simpl Rprodied th pms fspee nenelapot nme aleMANAGEMENT ACCOUNTING: INFORMATION FOR CREATING VALUE CHAPTER. ‘THE ACCOUNTANT IN THE MODERN BUSINESS ENVIRONMENT ‘According to the International Federation of Accountants (2010, p15), professional accountants require a broad set of capabilities, including ‘knowledge. skills, professional values, ethics and attitudes. to demonstrate competence and! drive sustainable value creation in ther organisation, Those capabiltios will be shaped by the current and future business environment in particular by the three emerging ™egetrends’ globalisation, include intellectual, : siational and business management skis . complexity and technology. The sls required of a professional accountant extend beyond the technical and functional t personal interpersonal and communication, and on ‘82013 report by the International Federation of Accountants notos thatthe changes to the business environment that have occurred over the ast fow decades (as described inthis chapter) have led to a significant increase in the demands placed on CFOs. In the past, the CFO role was seen 95 one tha related to ensuring the financial health of an organisation. Today, however itis recognised thatthe CFO has a major role to play in identifying sources of value and driving the organisation towards achieving it strategic objectives. The report identifies five key principles that are Jesigned to guide the expectations ofa CFO, These are: 18 The CFO should be an effective leader and a key member of senior management. The CFO is required to provide adership and vision to an organisation and its stakeholders as a key member of an organisation’ senior management ‘cam, Accountability and transparency are important. The CFO needs to develop effective relat vembers of the senior management team, as well as developing and maintaining successful relationships with external cholders. 1 The CFO should balance the responsibilities of stewardship with those of business partnership, Stewardship refers to the cluding the use of appropriate internal controls and risk management systems, to support the organisation in achievingits objectives. On the other hand, the CFO is also required to help the organisation develop strategy, obtain rasources and achiave it strategic objectives 1a The CFO should act as the integrator and navigator forthe organisation. CFOs require a broad understanding of the corganisation-and of competitors, markets, technologies and innovations~to be able to navigate the organisation through the challonges of meeting its strategic objectives and responding to opportunities and threats as they arise. 18 The CFO should be an effective leader of the accounting/finance function. CFOs need to manage staff effectively to help their group achieve their goals as well as to manage external challenges. 18 The CFO should be a professional and bring professional qualities to the ole and the organisation. CFOs should act with integrity, objectivity and professional competence at all times. {fective safeguarding of organisational assets, Stewardship relies on effective governance, Sources interatonal Federation of Aeccunans (20) International Federation of Accountants (201) MANAGEMENT ACCOUNTING AND STRATEGY In many organisations in the twenty-first century, management accountants play an important strategic role by contributing to the organisation's formulation and implementation of strategy and by helping ‘managers improve the organisation's competitive advantage. ‘To make sense of this role we introduce some basic strategy concepts: 3 vision mission statement objectives strategies. Let's define each of these terms. Many organisations formulate a vision, which describes the desired future state or aspiration of the organisation. For example, the Royal Society for the Prevention of Cruelty to Animals (RSPCA), vision is “To be the leading authority in animal care and protection’ (RSPCA Australia, 2009).PARTONE INTRODUCTION TO MANAGEMENT ACCOUNTING m statement a mt that defines he purpose and undaries ofthe ‘organisation ives (or goals) estatements of ne organisation achieve, often and relating to period of time a sthe direction | is often used by senior management to focus the attention and energies of staff throughout the ‘organisation. ‘A mission statement defines the purpose and boundaries of the organisation. ission statements tend not to change very often. RSPCA Australia’s mission statement is “To prevent cruelty to animals by actively promoting their care and protection’ (RSPCA Australia, 2009). While not all organisations specify vision and mission statements, they all have objectives in some form. Objectives (or goals) are specific statements of what the organisation aims to achieve, often ‘quantified and relating to a specific period of time. Many organisations focus their objectives on some of the following: = profitability ® growth cost minimisation m product leadership = innovation m product quality m quality of service m= community service m= employee welfare m= environmental responsibility. ‘The objectives of RSPCA Australia (2009) are: m= Toprevent cruelty to animals by ensuring the enforcement of existing laws at federal and state levels. = Toprocure the passage of such amending or new legislation as is necessary for the protection of animals. m To develop and promote policies for the humane treatment of animals that reflect contemporary values and scientific knowledge. = To educate the community with regard to the humane treatment of animals. m To engage with relevant stakeholders to improve animal welfare. = To sustain an intelligent public opinion regarding animal welfare. m To operate facilities for the care and protection of animals. ‘As you can see, these objectives reiterate key themes that relate to the mission of RSPCA Australia. ORGANISATIONAL STRATEGIES The strategies of an organisation specify the direction that the organisation intends to take over the long term to achieve its mission and meet its objectives. The strategies will focus on ways to manage the = _ofganisation’s resources to create value for customers and shareholders. I w should we compete in that business? = What systems and structures should we have in place to support our strategies? Ives formulating corporate strategy. Corporate strategy involves making jusinesses in which the organisation as a whole will operate. This includes ‘divest or acquire, and how best to structure and finance the company.MANAGEMENT ACCOUNTING: INFORMATION FOR CREATING VALUE CHAPTER ‘The second type of decision involves business strategy. Business (or competitive) strategy is concerned with the way that a business competes within its chosen market. Once Jetstar was established, the Qantas group determined that Jetstar would seek to compete with Virgin Blue (now Virgin Australia) on the basis of low-cost flights, while Qantas would continue to bea higher quality full-service airline, fan organisation consists of several different business units, each with its own distinct market, then. there will be a competitive strategy developed for each unit ‘The third type of decision is concerned with strategy implementation, which involves planning and managing the implementation of strategies. This can include introducing new structures and systems, such as setting up new business units, implementing new production processes, implementing new software packages, developing new marketing approaches, and introducing innovative human resource management policies. Exhibit 1.3 includes examples from three Australian businesses of their approaches to formulating. strategy. While elements of vision, mission statements, objectives and strategies are present you will notice differences in how businesses approach strategy formulation. SER LOOK AT BUSINESS STRATEGY ‘create shareholder value a business must develop and manage its sources of competitive advantage, A well-known model for thinking about competitive advantage was developed by Michael Porter of Harvard University. Competitive advantage refers to advantages that a business may have over another, which are difficult to imitate. Porter suggests that a firm can gain a sustainable competitive advantage through adopting a business strategy of cost leadership or product differentiation. When a firm is a low-cost producer, this allows the business to sell its goods or services at a lower price than competitors (cost leadership). Alternatively, firms may derive competitive advantage by offering goods or services that have characteristics that are different from those offered by competitors (product differentiation). Forms of product differentiation include superior quality, customer service, delivery performance and product features such as innovation. Within the one industry there may be successfl cost leaders and successful differentiators. Many firms will develop a business strategy that emphasises both cost leadership and some form of differentiation. However, a firm may choose to place ‘greater emphasis on either type of competitive strategy. Businesses that choose to place a greater emphasis on cost leadership may achieve this in several ways, ‘such as through economies of scale in production, superior process technology, tight cost control and cost ‘minimisation in areas such as marketing, production, research and development, and customer service, In Australia, examples of businesses that compete primarily on the basis of cost include The Reject Shop, BLLO, Kmart and STA Travel. In these businesses some attention is also paid to aspects of differentiation, such as customer service and quality. However, itis the firm's cost performance that provides the basis for competitive advantage. When a differentiation strategy is followed, the emphasis is on creating some characteristic of the ‘good or service that is perceived by customers as superior to that of other companies. Successful differentiators are able to set selling prices that more than offset the cost of the added product features that are valued by customers, Differentiation may be on the basis of a number of characteristics such as high quality products (Mercedes-Benz), strong brand image (Coca-Cola and Rayban), superior customer service (Commonwealth Bank) and product innovation (Apple). Many firms pursue a combination of diferenation strategies (eg. the David Jones department stores focus on high quality and superior ‘customer service). their organisation's strategies. Strategic planning ‘Strategic planning is the term given to long-term planning, « normally with a three- to five-year timeframe. Strategic F