Intermediate management Accounting
Lecture 1 – Organizations, Control problems, and MCSs
Two types of Accounting Information
1: Financial Accounting
Managers preparing and providing information to outsiders. For example, financial
statements for investors, so they will know in what kind of firm they will invest.
2: Management Accounting
Managers collecting and using information to make decisions. For example, for cost
deviation.
Role of Managers
Business owners make contribution to an organization, with resources (money) they will
provide an organization. They have managers to manage the organization and eventually the
owners will get the output.
Managers have 3 tasks:
- Planning: setting goals and objectives and determining how to achieve them.
- Directing and motivating: overseeing day-to-day operations and keeping the
organization functioning smoothly.
- Controlling: evaluating the results of operations against the plan, and adjustments
keep the organization pressing toward its goal.
What do we need to know before making
decisions? We need to look at the costs, the
suppliers (will they deliver), which product
consumers like, what are the competitors in the
market doing, etc.
We need to manage this information and use them to make decisions, this is crucial for the
organization’s success!
The controlling circle
We can control the performance with the
steps of this circle.
They need to follow these steps otherwise
the following problems could happen:
,Control problems
Any problems, issues, weaknesses, or vulnerabilities that are likely to cause negative
organization outcomes and hinder an organization from achieving its goals.
This could happen at manager level (fail to make decisions) or at employee level (fail
performance/behavior).
We can prevent/solve these problems:
When managers don’t have enough
information, they can take wrong/bad
decisions. When employees don’t know
what the organization is expecting from
them, they don’t know what to achieve
and how.
Management Control Systems (MCSs): is an integrated use of different mechanisms to
gather, and use the information about the organizational performance.
MCSs commonly used in organizations:
- Costing system
How the firm collect information about costs and how to allocate these. Then we can decide
which products we will keep or which price we should set.
- Planning and budgeting system
We plan and compare different suppliers/costumers/performance and this can help us to
make decisions
- Performance measurement and reward system (PMRS)
Collecting information about behavior of managers/employees. Should we punish them or
give them a bonus, who will we recruit?
Agency issue
Principal-agent relationship: agents are hired to act on the principal’s behalf, but…
They both want the best for
themselves. And often there is
information asymmetry.
Principal’s don’t know what the
agents are doing, so agents can
for example not work as hard as
they’re supposed to
, Example of the principal-
agent problem.
PMRS can help with the principal-agent problem
- Set rules and guidelines about what agents should do
- Collect information about agents’ behaviors
- Align agents’ and principals interest by (not) linking compensation to performance
Ability limitation
Invidual limitations: lack of intelligence, training, experience, knowledge, etc.
Job limitations: tasks are designed properly and are too difficult to most people.
Limitations relating to promotion mechanism:
If our promotion to new agent’s isn’t good, we don’t hire the right people.
Peter principle: employees are promoted based on their performance in their
current role. Rather than on the abilities relevant to the intended role → employees are not
competent after they are promoted to the intended role.
How can MCSs help with the principal-agent problem?
- Collect and analyze performance information
Which part of the organization has a limitation?
- Provide feedback to employees and managers
They can learn from it and make better choices in the future.
- Integrated use of MCSs can turn into corporate cultures that attract the right
employees and motivate the right behaviors.
Lecture 2 – Cost Pools and Allocation
Manufacturing costs: costs that are made because of production. So e.g. materials, labor,
utilities, rent for the factory, etc.
Non-manufacturing costs: these costs are made outside the production, but indeed for the
products. So e.g. marketing, cost of storage and delivery, rent paid for the office site, etc.
Direct costs: materials, labor, depreciation and utilities that can be directly traced to a cost
object.
Indirect costs: product costs that cannot be directly traced to a cost object.
The choice of a cost object can affect if a cost should be classified as direct or indirect.
, Allocate overhead costs
- When we have 1 product line
Allocation rate = overhead costs / number of products
- When we have different product lines
Allocation rate = overhead costs / variable costs or number of products
This method is very quick and easy, but is definitely not reliable. For example:
This method will allocate more overhead
costs to a product that has higher sales or
revenues. So, the better a product performs,
the more costs it’ll get and the performance
of the product will look very bad. But the
performance isn’t that bad. So that’s why it’s
not reliable.
Resources spending may be independent from volumes produced; e.g. a firm needs to pay
his rent regardless of the volume it sells. So when product volume decreases, a lot of
overhead costs are still incurred.
Resources consuming is usually directly related to production; e.g. the direct/indirect labor
and materials used.
That’s why resources spending resources consuming.
We need to reduce resources spending to reduce the costs and for the savings to take effect.
Death spiral
We need to consider which costs are avoidable and unavoidable costs in the product drop
decision. Otherwise we can deal with the dead spiral:
- When we drop product, production volume decreases
- Allocation rate increases (because = overhead costs / allocation base)
Allocation base decreases proportionally to volume
O/H costs does not decrease that much
So allocation base decrease more than overhead, and the allocation rate will rise.
- Due to the allocation rate increase, the costs of the remaining routes will increase
- More routes are dropped
- Cycle where eventually no routes are flown!
Overhead allocation rate = (overhead costs) / (allocation base)
Relevant costs for a service drop decision, should be avoidable costs.
Lecture 1 – Organizations, Control problems, and MCSs
Two types of Accounting Information
1: Financial Accounting
Managers preparing and providing information to outsiders. For example, financial
statements for investors, so they will know in what kind of firm they will invest.
2: Management Accounting
Managers collecting and using information to make decisions. For example, for cost
deviation.
Role of Managers
Business owners make contribution to an organization, with resources (money) they will
provide an organization. They have managers to manage the organization and eventually the
owners will get the output.
Managers have 3 tasks:
- Planning: setting goals and objectives and determining how to achieve them.
- Directing and motivating: overseeing day-to-day operations and keeping the
organization functioning smoothly.
- Controlling: evaluating the results of operations against the plan, and adjustments
keep the organization pressing toward its goal.
What do we need to know before making
decisions? We need to look at the costs, the
suppliers (will they deliver), which product
consumers like, what are the competitors in the
market doing, etc.
We need to manage this information and use them to make decisions, this is crucial for the
organization’s success!
The controlling circle
We can control the performance with the
steps of this circle.
They need to follow these steps otherwise
the following problems could happen:
,Control problems
Any problems, issues, weaknesses, or vulnerabilities that are likely to cause negative
organization outcomes and hinder an organization from achieving its goals.
This could happen at manager level (fail to make decisions) or at employee level (fail
performance/behavior).
We can prevent/solve these problems:
When managers don’t have enough
information, they can take wrong/bad
decisions. When employees don’t know
what the organization is expecting from
them, they don’t know what to achieve
and how.
Management Control Systems (MCSs): is an integrated use of different mechanisms to
gather, and use the information about the organizational performance.
MCSs commonly used in organizations:
- Costing system
How the firm collect information about costs and how to allocate these. Then we can decide
which products we will keep or which price we should set.
- Planning and budgeting system
We plan and compare different suppliers/costumers/performance and this can help us to
make decisions
- Performance measurement and reward system (PMRS)
Collecting information about behavior of managers/employees. Should we punish them or
give them a bonus, who will we recruit?
Agency issue
Principal-agent relationship: agents are hired to act on the principal’s behalf, but…
They both want the best for
themselves. And often there is
information asymmetry.
Principal’s don’t know what the
agents are doing, so agents can
for example not work as hard as
they’re supposed to
, Example of the principal-
agent problem.
PMRS can help with the principal-agent problem
- Set rules and guidelines about what agents should do
- Collect information about agents’ behaviors
- Align agents’ and principals interest by (not) linking compensation to performance
Ability limitation
Invidual limitations: lack of intelligence, training, experience, knowledge, etc.
Job limitations: tasks are designed properly and are too difficult to most people.
Limitations relating to promotion mechanism:
If our promotion to new agent’s isn’t good, we don’t hire the right people.
Peter principle: employees are promoted based on their performance in their
current role. Rather than on the abilities relevant to the intended role → employees are not
competent after they are promoted to the intended role.
How can MCSs help with the principal-agent problem?
- Collect and analyze performance information
Which part of the organization has a limitation?
- Provide feedback to employees and managers
They can learn from it and make better choices in the future.
- Integrated use of MCSs can turn into corporate cultures that attract the right
employees and motivate the right behaviors.
Lecture 2 – Cost Pools and Allocation
Manufacturing costs: costs that are made because of production. So e.g. materials, labor,
utilities, rent for the factory, etc.
Non-manufacturing costs: these costs are made outside the production, but indeed for the
products. So e.g. marketing, cost of storage and delivery, rent paid for the office site, etc.
Direct costs: materials, labor, depreciation and utilities that can be directly traced to a cost
object.
Indirect costs: product costs that cannot be directly traced to a cost object.
The choice of a cost object can affect if a cost should be classified as direct or indirect.
, Allocate overhead costs
- When we have 1 product line
Allocation rate = overhead costs / number of products
- When we have different product lines
Allocation rate = overhead costs / variable costs or number of products
This method is very quick and easy, but is definitely not reliable. For example:
This method will allocate more overhead
costs to a product that has higher sales or
revenues. So, the better a product performs,
the more costs it’ll get and the performance
of the product will look very bad. But the
performance isn’t that bad. So that’s why it’s
not reliable.
Resources spending may be independent from volumes produced; e.g. a firm needs to pay
his rent regardless of the volume it sells. So when product volume decreases, a lot of
overhead costs are still incurred.
Resources consuming is usually directly related to production; e.g. the direct/indirect labor
and materials used.
That’s why resources spending resources consuming.
We need to reduce resources spending to reduce the costs and for the savings to take effect.
Death spiral
We need to consider which costs are avoidable and unavoidable costs in the product drop
decision. Otherwise we can deal with the dead spiral:
- When we drop product, production volume decreases
- Allocation rate increases (because = overhead costs / allocation base)
Allocation base decreases proportionally to volume
O/H costs does not decrease that much
So allocation base decrease more than overhead, and the allocation rate will rise.
- Due to the allocation rate increase, the costs of the remaining routes will increase
- More routes are dropped
- Cycle where eventually no routes are flown!
Overhead allocation rate = (overhead costs) / (allocation base)
Relevant costs for a service drop decision, should be avoidable costs.
