ADVANCE MANAGERIAL

ACCOUNTING
DR. WEKESA
Topic 1

ChangingBusiness Environment on
Management Accounting
Introduction
 Managerial Accounting information is generally presented
in the form of management accounts, budgets, forecasts or
financial statements and is normally used by the
management and employees. MA assists the management
in making informed decisions, planning, directing
operational activities and controlling finances.
 It also enables the management to analyse the
organisation’s performance and position, and subsequently
take appropriate measures to improve the organisation’s
results. In addition, employees use MA to assess the
organisation’s profitability to ensure long term job security
and remuneration.
Cont’n
 The business environment has changed rapidly through the
decades. Customers’ demands and requirements have
changed and new technologies have encouraged new firms
to enter the market with better and affordable products,
and subsequently, created threats to existing firms.
 Growing markets and increased competition have resulted
in the need for management accountants to be flexible
and fast in responding to opportunities and threats. They
need to be equipped with knowledge of international
markets inherent risks and different cultural environments
to be aware of being involved in operating in multiple
economies.
Cont’n
 As the cost of raw materials and cost of doing business increase yearly, cost management is
pivotal in order to provide globally competitive products. Management accountants can enhance
the organisation’s competitiveness by increasing the level of efficiency and productivity, as well
as implementing cost-leadership.

 Management accountants must be able to delegate responsibilities,influence and improve

decision making at top levels. Increased visibility and control over internal operations is
essential and management accountants should communicate regularly with managers across
every function.

 While rapid growth markets present a unique opportunity to earn significant revenues, some
companies are exposing themselves to risks of fraud, bribery and corruption by overlooking the
importance of proactive measures and communicating top-down commitments. Thus,
management accountants play a role in guiding the matters of ethics and accountability, and
understanding the commercial rationale of things rather than just crunching numbers.
Cont’n
 Managerial accountants must develop and sustain a culture of innovation in

facing the ever-changing business environment.

 Technological advances can directly affect managerial accounting reports,

through estimates of overhead costs. Historically, overhead was typically

calculated on the basis of relatively straightforward relationships, such as

direct labor costs or direct labor hours. With the advancements through

automation, in many instances, direct labor costs are much lower and no

longer relevant in computing overhead costs.

Total quality management (TQM)
 Concentrates on quality improvement and applies this benchmark to all aspects of business

activities. In TQM, management and employees look to reveal waste and errors, streamline the

supply chain, improve customer relations, and confirm that employees are informed and

properly trained. The objective of TQM is continuous improvement by concentrating on

systematic problem-solving and customer service. Scientific methods are used to study what

succeeds and what does not, and then the best practices are implemented throughout the

organization.

 However, the pursuit of total quality will cost the company money. With the help of

management accountants, companies can track these costs and forecast whether or not the

improvements will eventually save the organization money down the road.
ACTIVITY BASED COSTING

 Traditional approach to cost accounting uses various bases arbitrarily chosen to allocate

overheads. The various bases that are used are machine hour rate, labour hour rate, direct

material cost percentage method etc.

 A limitation of the traditional method is that it’s only appropriate for valuing stock for

financial reporting purposes but is inappropriate for decision making purposes.

 ABC is a new development in cost accounting that attempts to allocate overhead costs based on

the activities that give rise to those overheads.

Cont’n

A cost pool is a term used to indicate the grouping of costs

incurred on a particular activity which drives them. Cost

drivers are the various activities which give rise to overhead

cost. Examples of cost drivers include, number of set ups

which may be used to as a cost driver for set up costs, labour

hours which may be the cost driver for assembly services etc.
Types of cost drivers

 Output based cost drivers- these are cost drivers that change
proportionately with a change in the output. Examples
include, labour hours and machine hours.
 Non-output based cost drivers- these are cost drivers that
have no direct relationship with each and every unit
produced.
LIFE CYCLE COSTING
 This is also called whole-life costing which is a structured approach that
estimates all the cost that are attributable to a product.
 Supposed to be incurred on a product in its entire life from introduction
to decline stage. Costs are analyzed and classified into one-off costs and
recurring costs, then an analysis is done which estimates the cost that
should be allocated to one unit. From this analysis, the organization is
therefore able to have an estimate of the likely profit that the product
will generate in its entire life.
 However the recurring costs are likely to change due to changing
circumstances, but life cycle costing is still a useful forecasting
technique.
Target Costing
 This is a pricing method used by firms to determine the target cost which is the
maximum amount of cost that can be incurred on a product when the firm wants to
earn a given profit margin from that product at a particular selling price.

 In the traditional cost-plus pricing method, materials, labour and overhead cost are
measured and a desired profit then added to determine the selling price.

 Target costing on the other hand involves setting a target cost by subtracting a desired
profit margin from a competitive market price.

 Target costing can therefore be used as a basis for improving the level of efficiency in
dealing with cost and is particularly applicable when firms cannot dictate market
prices and are price takers instead.
Cont’n
 Traditional Costing
Direct materials xxx
Direct labour xxx
Variable overhead xxx
Fixed overhead xxx
Total cost xxx
Add: profit mark-up xxx
Selling price xxx
Cont’n

 Target Costing

Selling price (market determined) xxx

Less: desired profit margin (xxx)

Target cost xxx

Just in Time (J.I.T)
 is an inventory system that companies use to increase efficiency and decrease
waste by receiving goods only as they are needed within the production
process, thereby reducing warehousing costs. This method requires accurate
forecasting. Managerial accountants work together with purchasing and
production schedulers in keeping the flow of materials accurate and efficient.

 This method was initiated by Toyota Motor Corporation, and it has expanded
to many other manufacturing organizations throughout the world. Toyota set
the example by controlling their inventory levels by relying on their supply
chain to deliver the raw materials it needed to build their cars. The parts
arrived just as they were needed, not before or after.
Cont’n
 One major advantage of JIT manufacturing is reducing costs by eradicating warehouse storage needs.

Organizations, in turn, tend to spend less money on raw materials because of a reduction in spoilage and

waste. Another advantage is that companies can easily move from the assembly of one product to the

assembly of another.

 Disadvantages of JIT manufacturing start with its complexity. In moving from a traditional manufacturing

approach to a JIT approach, management must reconfigure the entire flow of the production process, from

the initial use of the raw materials to the output of the final finished good. Another disadvantage of JIT

manufacturing is that it makes organizations more susceptible to disruptions in the supply chain. If a

supplier of raw materials has a labor strike, weather problems, a breakdown of machinery, or some other

catastrophe and cannot deliver the materials on time, that one supplier can shut down an entire

production process and delay delivery of finished goods.

Business Process Engineering

 Business process re-engineering(BPR) is the radical redesign of business processes to achieve

dramatic improvements in critical aspects like quality, output, cost, service, and speed. Business

process reengineering (BPR) aims at cutting down enterprise costs and process redundancies on

a very huge scale.

Cont’n
Before you decide to adopt BPR for functional reshuffling, ask yourself the following questions:
 Who are our customers? What values are we offering them?
 Are the current processes delivering expected values?
 Do the processes need to be redefined or redesigned?
 Are the processes in sync with our long-term mission and goals?
 How would we handle the existing processes if we were a new company?
END