ACCT 674 - Chapter 1 - The Accountant's Vital Role in Decision Making
What is the management information system (MIS)?
The MIS stores information in a way that allows sales, distribution, and production managers to access the information they need. Costs and data are part of MIS.
What is an enterprise resource planning (ERP)system?
Companies build their own comprehensive database- an ERP software that integrates data and provides managers with reports that highlight the interdependence of different business activities.
What is Cost Accounting?
Cost Accounting measures and reports financial and nonfinancial information related to the costs of acquiring and using resources. Reports show how costs accumulate as corporations use resources to produce and sell their product and services.
What is Cost Management?
Cost Management includes the activities of identifying, reporting, and analyzing all costs of operations.
What is Financial Accounting?
Financial Accounting focuses on reporting to external parties such as investors, government agencies, banks, and suppliers. The goal is to present fairly to external parties how the business activities during a specific time period affected the economic health of a company.
What is economic substance?
Economic substance is the financial outcome of all the different types of business transactions that happened.
What is Management Accounting?
Management Accounting measures, analyzes and reports financial and nonfinancial information to internal managers. The goal is to use past performance to predict the future. The internal reports inform managers of the financial results of actual operations. Reports should also show how activities can be changed to affect and improve what will happen in the future.
What do management accountants do?
Management accountants reorganize and analyze financial and non-financial data using rigorous methods. They support managers to decide on changes that will improve future financial success.
Management accountants help managers track and compare a company's performance on key success factors relative to their competitors, serving as a benchmark and alerts managers to the changes in the industry.
Define Strategy
Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace. There are two strategies: Cost Leadership (quality and low price) or Value Leadership (unique, innovative products/services) by means of product (service) differentiation.
Define Value Chain
Value Chain is the sequence of business functions in which customer usefulness is added to products or services. Value adding activities include research and development (R&D), design, production, marketing, distribution, and customer service.
Define the different value-adding activities
Research and Development - generating and experimenting with ideas related to new products, services, or processes.
Design - of products, services, or processes- detailed planning and engineering of products, services, or processes.
Production - acquiring, coordinating, and assembling resources to produce a product or deliver a service.
Marketing - promoting and selling products or services to customers or prospective customers.
Distribution - delivering products or services to customers.
Customer Service - providing after-sale support to customers.
Define Supply-Chain Analysis
Supply-Chain Analysis is one way companies can implement strategy, cut costs, and create value.
Supply chain describes the flow of goods, services, and information from their initial sources to the delivery of products and services to consumers, regardless of whether those activities occur in one or more organizations.
Define Customer Relationship Management (CRM)
CRM refers to a strategy that integrates people and technology across all business functions and enhances relationships with customers, suppliers, and other stakeholders.
Define Key Success Factors (KSF)
Key Success Factors are activities that are essential to successful corporate performance and include:
- cost and efficiency
- quality, Total Quality Management (TQM) directs attention toward simultaneously improving all operations throughout the value chain to deliver products and services that exceed customer expectations.TQM includes designing products or services to meet the needs and wants of customers, producing products with zero (or minimal) defects and waste and maintaining low inventories.
- time
- innovation
What is the Five-Step Decision-Making Process?
1. Identify the problem and uncertainties
2. Obtain information (benchmarking)
3. Make predictions about the future
4. Decide on one of the available alternatives
5. Implement the decision, evaluate performance, and learn - Management accountants collect information to follow through on how actual performance compares to planned or budgeted performance (also referred to as scorekeeping). The comparison of actual performance to budgeted performance is the control or post-decision role of information.
Define planning and budget.
Planning is a purposeful analysis of information to select and rank in importance the goals of an organization.
Budget is the quantitative expression of management's proposed plan of action; it is an aid to coordinating what must be done and when to implement a successful plan.
A budget serves as both a control and a planning tool since it is a comparison benchmark against actual performance.
Define control
When exercising control, managers compare actual and targeted nonfinancial measures as well as financial measures and take corrective actions.
How does accounting aid decision making, planning and control?
Step 1. Identify and achieve consensus on the problem and uncertainties -> BUDGETS: predicted ad pages sold, volume of lines sold, rates per page, and revenue
Step 4. Decide upon and implement one alternative -> SOURCE documents (invoices, payments), volumes sold, rates, RECORDING in general and subsidiary ledgers
Step 5. Obtain feedback on performance and adjust the decision or the implementation as needed ->PERFORMANCE REPORTS: compare actual to predicted (budgeted) ad pages sold, average rate per page, revenue
What are the 3 guidelines that help management accountants to provide the most value to companies in strategic and operational decision making?
1. Use a cost-benefit approach
2. Recognize both behavioural and technical considerations
3. Use different costs or different purposes
What is cost-benefit approach?
It is the risk/return, downside risk/upside potential that is used to make resource allocations such that the expected benefits exceed the expected costs. Eg. whether to purchase a new software package or hire a new employee.
What are the behavioural and technical considerations?
Behavioural considerations - motivate managers and other employees to try to achive the goals of the organization.
Technical considerations - help manageres make wise economic decisins. Technical data (costs in various value-chain categories) in an appropriate format (eg. actual results vs budgeted amounts) and at a preferred frequency (eg. weekly vs. monthly) improve the quality of information upon which managers make decisions.
Explain Different Costs for Different Purposes
One size does not fit all. A cost concept used for external reporting may not be appropriate for internal, routine reporting to managers.
Define line management
Line management is directly responsible or completing or attaining operating goals.
These are the core activities that produce the good or service ready for sale.
Eg. positions such as production engineers or software architects.
Define staff management
Staff management is indirectly responsible for achieving organization goals through activities that support the organization.
Eg. may include management accountants, HR managers, and Information Technology staff who provide advice and assistance to line management.
Define Chief Financial Officer (CFO)
Also called the finance director- is the senior officer empowered to oversee the financial operations of an organization.
Legally and personally responsible for the quality of financial information publicly reported.
What are the 6 responsibilities of CFO?
1. Controllership - includes providing legal assurance of a high-quality internal control system. Legally responsible for the design of the system to ensure that bribery, fraud, malfeasance, and misappropriation of assets are reasonably unlikely.
2. Audit - ensures internal and external audits are conducted as per the direction of the audit committee.
3. Treasury - includes short- and long-term financing and investments, banking, cash management, foreign exchange, and derivatives management.
4. Taxation - includes reporting and managing income taxes, sales taxes, and domestic and international tax planning.
5. Risk Management - includes analysis, evaluation, and minimization of external risks over which management has no control and internal risks over which management has control.
6. Investor Relations - includes responding to and interacting with shareholders.
What is the responsibility of the controller?
The quality of the information supplied from the accounting department. They produce reports and analyses of relevant data that influence and impel management toward improving each step of their decision making. Eg. financial planning and budgeting, inventory, management of the general ledger, managing accounts payable and receivable, and overseeing subsidiary reporting.
Define Corporate Governance
Comprises activities undertaken to ensure legal compliance and see that accountants fulfill their fiduciary responsibilities.
The Board of Directors (BOD) is responsible for holding the Chief Operating Officer (CEO), chief financial officer (CFO), and Chief Operating Officer (COO) accountable for the quality of financial information and organizational outcomes.
Define Corporate Social Responsibility (CSR)
The voluntary integration of social and environmental concerns into business decisions.
Eg. the proactive development of effective social programs that educate and improve the health, safety and security of workers.
--> the overall goal is sustainable management of increasingly scarce or degraded resources.
Define Tripple Bottom Line (TBL)
Consists of 3 P's: Profit, People, Planet
The purpose is to draw management's focus to financial prosperity and to areas of environmental stewardship and protection, as well as the contribution the organization makes to the communities in which it operates and society in general.
Define Sustainability Accounting.
Focuses on reporting both financial and nonfinancial information on activities that impact society, the environment, and the financial (or economic) aspects of an organization's performance to an organization's stakeholders.
->Important area for management and cost accounting, as its emphasis is on information and accounting used for internal decision making and strategy development.
What is the Global Reporting Initiative (GRI)?
A non-profit organization was established to develop guidelines so that "reporting on economic, environmental and social performance by all organizations is as routine and comparable as financial reporting".
What is Alternative Reporting?
Alternative forms of reporting based on an organization's goals and strategies.
Cooperatives - organized around fulfilling a particular need or around a community and are owned and managed by the people who use their services or those who work at the cooperative. Eg. Desjardins.
What are the Cooperative Principles?
1. Voluntary and open membership
2. Democratic member control
3. Members' economic participation
4. Autonomy and Independence
5. Education, Training and Information
6. Cooperation among cooperatives
7. Concern for community