Unit 1: the role and context of management accounting. Session 1-4

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1 Unit 1: the role and context of management accounting Session 1-4 * What is an organization?? Organization is a group of individuals working together to achieve one or more objectives. * Organization has common features: 1-composed of individuals and groups of individuals. 2- Oriented to achieving collective goals. 3- Consist of different functions. 4- Functions need to be coordinated. 5- Exist independently form it members. * Mintzberg s generic model (five component of an organization) :- 1- Strategic apex: ensure the organization follows its mission and managers, and it relationship with the environment (CEO/ long term organization objective). 2- Middle line: group of managers who are concerned with converting the objectives and broad plan of the strategic apex.(responsible of translating plans into actions/ monitor efficiency and effectiveness of activities). 3- Techno structure: group of people who are concerned with the best way of doing a job and ensure that personal have the required skills. 4- Support staff: other administrative function (mailroom, cafeteria). 5- Operating core: people who are doing basic work of producing product or making a delivery. - Mintzberg s generic structure is based on the separation of direction and management.

2 * Why organization exist :- 1- A group of people working together achieve more than sum of achievement. 2- Reduce transaction cost. * Type of organization :- Organization can be classified using different ways, most common is the purpose or objective:- 1- Profit entity. 2- Non-profit entity. Maximizing shareholder wealth and continue existence is were the primarily objective. * organisational structure :- - it refers to the relationship between the various functions and positions in an organization. - it determine the authority and responsibility for particular task in the organization. management accounting is important as it provide information to carry out the activities an insure that the organization achieve their objective. * principles of organization structure :- - specialization :- 1- work is divided into separate activities. 2- to increase efficiency and effectiveness. - coordination:- 1- coordinate with each other to work toward the same objective.

3 * tall vs. flat organization - reasons that helped in making the organization move to flat structure :- 1- information technology. 2- empowerment: lower level worker have been delegated authority. - advantages of delayering :- 1- reduction of cost. 2- motivation. 3- faster communication. - disadvantage of delaying :- 1- loss of control. 2- inability to understand goals of higher management. * forms of organization structure :- 1- functional structure. 2- product or service structure. 3- geographic structure. 4- matrix structure. 5- project team. 6- hyird structure. * centralization vs. decentralization :- 1- centralization :- is when decision making authority is held predominantly by a senior managers within an organization. 2- decentralization :- is when the authority of decision making is delegated to people at lower level in the organization. * advantage and disadvantage of decentralization :- - advantages :- 1- specialisation. 2- timeline. 3- motivation. 4- human resource development. 5- organizational segment performance. - disadvantages :- 1- dysfunctional decision making 2- loss of control. 3- increase cost of control. * responsibility centers :- 1- cost center. 2- revenue centers. 3- profit centers. 4- investment center. * What is management :-

4 - Management is often consisting of planning control and decision making. - Planning is essentially rational process, rational planning consist of :- establishing objectives and developing plans to achieve those objective. - Control is making sure that the organization in on track to achieve the objective, by taking corrective actions. - Decision making consist of choosing between different possible courses of action based on a careful weighting up of the relative costs and benefits of each. P.38. * Strategic management :- Is undertaken by senior managers and is concern with the implementation of formulation of strategy. * Strategy can be defined as:- The determination of basic long term goals and objective of the enterprise and the adoption course of action necessarily for carrying out those goals (example of strategy product or price differentiation). * strategy :- When developing strategy it is important to undertake SWOT analysis. -SOWT:- ( strengths, opportunities, weaknesses, threats ). - SWOT is an analysis for the external ( politics, economy, technology) and internal factors( capability and resources). * SWOT help manager in choosing the required strategy :- New product/ market - Reduce scope of operation - Sell off unprofitable part of business. * Company usually consist of :- 1- Head office. 2- Number of separate operating division. * There are three level of strategy :- 1- Cooperate strategy :- It is concerned with how the head office manage the portfolio of individual unit division (which to close/ invest in). 2- Business strategy :- It deals with how individual units compete in particular product market in order to achieve sustainable competitor advantage (by reducing cost of unit or producing product superior to competitor). 3- Functional strategy :- It is concern with the main individual function with the organization will have its own.( production strategy, marketing strategy, marketing strategy, financial strategy, HR strategy). * Porter 5 forces model :- Can help managers to understand the nature and intensity of competition in particular industry/ product/ market. And it indicate the industry attractiveness thus formulate strategy * The five forces are :- 1- Entry : new/ cross /potential. 2- Competition. 3- Supplies.

5 4- Buyers: distribution channel / customers. 5- substitutes. * Porter 5 forces model :- *Value chain :- It helps the organization develop competitive advantage by better understanding of the activities through which they create value. * Competitive advantage can be gained :- 1- Reducing cost (by knowing what drive the cost and reducing it). 2- Product differentiation (adding and performing activity, high customer service). * Value chain can be configured by :- 1- Outsourcing. 2- Vertical integration ( acquiring supplier and customers).

6 * Globalization :- Globalization is a major development in the competitive environment. - It have integrated national economics into international economics. - It has removed trade barriers between countries. * Globalization effect :- 1- Emergence of worldwide financial market. 2- Movement towards world government via institutes such as world bank. 3- Increase of competition. 4- Development of global communication infrastructure (internet). * Type of information required at each level :- 1- Strategic level( senior manager) :- -External information. - Market information. - Competitor information. - Used for long term planning. 2- Tactical level (middle manager) :- - Information more historical and internal oriented. - Budget. - Short term planning. 3- Operational level (front line managers) :- - Information regarding specific task. - Purchase order. - Inventory control. * Difference between financial accounting and management accounting :- Financial accounting Managerial accounting

7 Definition Chief purpose provide financial statement that report result of operation, financial position and cash flow both to manager and external stakeholder: owner and creditor. Production of summarized income statement and balance sheet by manager as formal report. Management accounting provide information to help the manager plan and control operation. Production of detailed and up to date information used by manager to plan activities and control them. Timing Depend on the type of the entity may prepared annually at end of accounting period or every three or six moths. Often prepared in monthly basis or weekly. Governed by Legal requirement and often mandatory accounting regulations. No legal requirement to produce anything so is no pre-determined format. Perspective Financial accounting reports reflect the performance and position for the past period. for example the balance sheet prepare for previous year. Comparative and up to date. While given month result are provided, these are usually accompanied by total for all months to date and comparative figures for a prior year Primary users External ( creditor and government ) Internal ( manager of the business

8 * Data, information knowledge and wisdom :- 1- Data :- is a set of discrete, objective fact about event. Organization store data in some sort of information system, and they are heavily depended on. 2- Information :- is data which have relative and purpose. * Adding value (meaning) to data will transform it in to information. It can be added by : A- Contextualization :- We know why the data is gathered. B- Categorization :- We know key component of the data. C- Calculation :- Data may be analysis mathematically. D- Correction :- Error have been removed from data. E- Condensation :- The data may be summarized in a more concise form. 3- Knowledge :- is a fluid mix of experience values contextual information and expert insight that provides a framework for evaluating and incorporating new experience and information. * Information is transformed to knowledge by :- A- Comparison :- How does information of this situation compared to situation we have known. B- Consequences :- What implication does information have on decision of action. C- Connections :- How does this relate to others. D- Conversation :- What people think about this information. 4- wisdom :- Wisdom comes from having correct understanding of the knowledge you have and being aware of limitation of that understanding. We drive knowledge from information as we drive information from data.

9 *Data collection method :- - Choosing among the data collection method will depend on :- 1- The nature of the task. 2- The relative efficiency and cost. - Some of the data collection methods :- 1- Magnetic inc character recognition. 2- Optical mark reading. 3- Scanners and optical recognition. 4- Bar coding. 5- Electronic fund transfer at the point of sale. 6- Smart cards. * Characteristic of good quality information :- 1- Relevant :- - Information is relevant when it helps user in the decision making. - It should be provided by a certain timeline. 2- Reliable :- - Information of free from material error and bias.

10 3- Comparability :- - It should be comparable with the information provided earlier. 4- Understandability :- - It should be express as clear as possible and made in a form that anticipated user can understand. * Critical success factors :- - To derive to the CSF in an organization :- 1- We start from the objective (what does we want to achieve). 2- Decides what it needs to be good at in order to achieve these objective. 3- Performance indicator to tell whether managers are going to achieve the objective. - Approaches used :- 1- Null approach. 2- By product approach. 3- The total study approach. 4- The key indicator approach. * Sources can inform the determination of CSF :- 1- The industry in which the business operates. 2-The firm itself and its position within the industry. 3- Organization wider economic and social environment. 4- Organization factors which are current managers concern (ex. High inventory level). * Characteristic of information :-

11 * Operational system (transaction process system) :- - Transaction process system has increased the speed and accuracy of the transaction. - It is inflexible for particular or specific transaction presented on ad hoc basis. - Transaction processing system use :- 1- Batch processing system :- Transaction are stored on batches and processed together on later date (large volume transaction, salaries). 2- Online processing :- The users update the system directly and the effect are direct (airline tickets). * Decision support systems (DSS) :- This system is used for any of the three levels :- 1- Operational level (ex. Inventory reordering). 2- Tactical level (buy or make decision). 3- Strategic level (capital investment appraisal). - They do complex mathematical modeling to stimulate the organization behavior at unexpected situations. - It is based on sensitivity analysis. * Executive information system (EIS) :- - It provide information to strategic level. - Managers need to view the organization and carrying out long term planning. - The information needed in this level is different that the tactical and operation level.

12 * The key features of EIS :- 1- Is organized around CSF. 2- Provide information at different level of details. 3- Include sophisticated user friendly graphical user interface. 4- Has fast time and accessible from many location. 5- Is designed for each manager style. 6- Shows trend and ratios. * Office automation system (OAS) :- Are networked computer system for local area networks (LANs) that support office work for handling and managing documents and facilitating communication. * Knowledge work system (KWS) :- Are computer applications that support knowledge workers nu helping in creating knowledge. * Source of information :- - Lower level management use internal information, while senior level management use external information. - Environmental scanning is often used to describe the process of gathering external information. * Electronic data interchange (EDI) :- - Is a form of computer to computer data interchange. - It is developed in industries where large volume of paper transaction is being sent between organization. - Organization are becoming aware of the supply chain and its relationship to the notion of a value chain. - It links the supplier to the purchaser which increase the efficiency of both purchasing and selling functions. - Ex. Online ordering. * Information management and information technology :- - Data base :- 1- Is a store of data. 2- Is a collection or file of data structured in such way that it may serve a number of software application without its structure being dictated by any one of those application. - Data based management system (DBMS). - Manages the interface between the data and the application programs such that the data can be made available to other users, in their own tailored way. * Data management system :-

13 * Otis :- * Enterprise resource planning :- - Computerized ERP systems facilitate the integration of all the various functions of an organization by interlinking information databases. - In the ERP system there is a central data based feeds data into modular application relating each function of the organization

14 * Advantage of data based system :- 1- Avoid unnecessary duplication of data. 2- Avoid data conflict, as data is stored only once. 3- Data stored are independent from the application. * Disadvantage of data based system relating security and control :- 1- There are possibility of access of unauthorized to the data. 2- As the data is only held once at one place the impact of system failure will be high. 3- Inaccurate of data, as data is only held at once. 4- Cost of setting data based is very high. * Information system security :- - Information is a precious recourse, it is important for data not only reliable and accurate but also secured. - Secured means protection of data form unauthorized change, user and destruction. - Types of measurement that the organization use in protecting the data :- 1- Security control :- Protect the data form unauthorized modification, disclosure or destruction and from unavailability of service to users. 2- Integrity controls :- Maintain the completeness and correctness of data. 3- Contingency control disaster recovery plan :- Deals with unscheduled interruption to information system processing. * Data warehouse and data mining :- Data warehoused :- 1- Used by large organization. 2- Contain high volume of data. 3- Utilize data from transaction system. 4- Are driven by information need. * Information markets and the internet :- - Information markets reflects the view that information is a commodity that can be bought, sold or exchange according to the terms and condition agreed by the buyer and the seller. - Information market have emerged with the growth of the internet. * internet :-

15 - Is a global information network that allows any computer with a telecommunication link send and receive information from any other suitable equipped computer. - The growth of the use of internet started with the time of development of graphical user interface and browser software. - Users tend to use the web site that is regularly updated. * Commercial use of the internet :- 1- Marketing. 2- Sales. 3- Distribution. * Internal communication :- intranets :- - An intranet is a network using internet technology within the organization to support its work that is accessible only within the organization. - Some of Intranet uses :- 1- PPM. 2- Daily company newspaper. 3- financials. * Knowledge work :- - Depends upon the knowledge possessed by the worker not on the ability to perform physical task. - Key attributes of knowledge work are that :- 1- Involve thinking processing information and formulation analysis recommendation and procedures. 2- It may use written or verbal input and output. - The level of knowledge needed depends on the level of work requirement. * Types of knowledge work :- 1- Diagnosis and problem finding. 2- Planning and decision making. 3- Monitoring and control. 4- Authoring and presentation. 5- communication. * Information preference :- - Manager prefer live information they :- 1- Prefer up to date information even if it is not thoroughly verified. 2- Tend to favor verbal communication. - Which will effect the decision making. * Technology and decision making :-

16 A- Programmed decision :- 1- Routine and structure procedure. B- Non- programmed decision :- 1- Non routine procedure. 2- Use of Decision support system (expert system knowledge based system ).