MGT605 Official Handouts

Lecture 1

“Definition”: process of identifying, measuring and communicating economic information to permit informed judgments and decisions. Provide information to decision makers to make good decisions.

Users of Accounting Information

Managers – decision making and control Shareholders – value and income from investments Employees – ability to pay salaries and avoid redundancies Creditors – ability to meet financial obligations Government – statistical information, taxes Others – potential investors/ research Users …

Users can be divided into 2 categories: Internal users within the organization External users i.e. shareholders, creditors Management accounting is for internal users Financial accounting information is for external users

Decision-making process

P l a n n i n

c o n t r Identify objectives

Search alternative courses of action

Gather data about alternatives

Implement decision

Compare actual and planned outcomes

Respond to divergence from plans Identifying objectives

Economic theory : firms seek to maximize profits (too simplistic) Firm is a coalition of various groups: shareholders, employees, customers, suppliers Broadlyfirms seek to maximize future cash flows

Search for Alternatives

Possible courses of action to achieve objective Essential to identify potential opportunities and treats. i.e.

• Developing new products in existing markets
• Developing new products for new markets
• Developing new markets for existing products

Search for alternatives involves acquiring information concerning future opportunities

Gather data

When potential areas of activity are identified, management should assess:

• Potential growth rate
• Ability to establish adequate market share
• Cash flow for each alternative activity

Uncontrollable factors:

• Economic boom / recession
• Inflation
• Strength of competition

In practice decision making involves choosing between competing alternatives and selecting the one that best meets the organizations objectives. Assuming objective to be to maximize future net cash flows, alternative selected will be based on comparison of the different cash flows.

Implementation of Decisions

The budget is the financial plan for implementing management decisions. Expressed in terms of cash inflows and outflows, sales revenues and expenses. The master budget consists of a budgeted profit and loss account, balance sheet and a cashflow statement.

Comparing actual vs plan

The managerial function of control consists of measurement, reporting and subsequent correction of performance to ensure firms objectives are achieved. Performance reports of actual costs and revenues in comparison with budget, should be prepared at regular intervals. These reports highlight activities that do not conform to plan Responding to divergence

Effective control requires that corrective action is taken for diverging activities. This may require modification in plan if the plan (budget) is inappropriate and not attainable

Cost efficiency and quality

Keeping costs low and being cost efficient provides an organization with a strong competitive advantage. Accuracy and reliability in costing systems has gained importance. Companies are focusing on Total Quality Management (TQM) in response to customer demands for high quality. The goal of TQM is customer satisfaction.

Continuous improvement is a process that focuses on delivery of products or services of consistently high quality in a timely fashion. It is cheaper to produce items correctly the first time rather than to waste resources making substandard items that had to be detected, reworked, scrapped or returned by customers.

Cycle time

New management approaches · Customer · satisfaction · is top · priority · Continuous · improvement · Key success · factors: cost, · quality, time, · innovation · Total value chain · analysis · Employee · empowerment