Performance Management and Control

Session 1 Introduction
By
Peter Wheale
Introduction to the module.
Modern cost accounting provides key information to managers
for their decision making process.
The study of modern cost accounting gives
an insight into both the managers role and
the accountants role in an organisation.
Different cost concepts and terms are often used in accounting
reports.
Managers who appreciate these concepts and terms are able:
to make best use of the information provided and
to avoid misuse of that information.
1 Differentiate management accounting from financial accounting and
cost
management
2 Recognise the growing role of strategy in management accounting
processes
3 Identify five broad purposes of accounting systems
4 Define and illustrate a cost object
5 Distinguish between direct costs and indirect costs
6 Explain cost drivers, variable costs and fixed costs
7 Explain relevant costs
8 Understand opportunity cost
1 Formulating overall strategies and long-range plans
internal non-routine reporting
2 Resource allocation decisions, e.g. product
and customer emphasis and pricing internal routine
reporting
3 Cost planning and cost control of operations and activities
internal routine reporting
4 Performance measurement and evaluation of people
internal non-routine reporting
5 Meeting external regulatory and legal reporting
requirements external reporting
Traditional MA activities include collecting,
classifying, processing, analysing and reporting
information to managers.
Purpose is to aid internal planning & control of
activities.
CIMA UK Definition: A form of management
Accounting in which emphasis is placed on
information which relates to factors external to the
firm, as well as non-financial information and
internally generated information per Official terminology (CIMA
2000).
SMA is oriented towards the future
Emphasis is on enterprises position relative to that
of its competitors (Per Horngren et al).
Bromwich sees SMA as going beyond collecting
data on business and their competitors, to consider
benefits products offer to customers and how these
contribute to building and sustaining competitive
advantage.
Focus is on addressing critical success factors
(CSF) needed for a business to obtain a
sustainable competitive advantage in its markets.
Competitor Accounting Sources:
Competitors financial statements
Press releases and trade journals
Discussions with suppliers & joint customers
Manufacturing processes (e.g. whether competitor runs a two-shift
system).
With this data obtain an idea of competitors costs relative your firms
costs.
Performance measures: for example, ROCE relates operating profit to
capital employed.
From SMA perspective, risk is the volatility in returns
from a product, customer or market segment relative
to that of its competitors used as a benchmark (Per
Management Quarterly journal of the ICAEW JAN 2001)
Example in mobile telecom sector key benchmark now is
Average revenue per user.
To improve it requires an understanding of the key drivers
(e.g. after-sale care) of volatility for products or market
segments.
Also check with competitors comparable knowledge to
determine value-enhancing strategies.
Product differentiation: An organisations ability to offer
products or services that are perceived by its customers to
be superior and unique relative to those of its competitors
(Per Horngren et al).
Examples: HP printers, Coca-cola, Rolex watches Can
charge high price leading to higher sales revenue &
ultimately +NPV.
Cost Leadership (Porter): Through efficiency
improvements, elimination of waste and tighter cost
control (e.g. Black & Decker tools, insurance products).
Porter (2001) has stated that only by integrating the
internet into overall strategy will it help achieve
competitive advantage.
The opportunity cost of holding stock is the profit forgone
from tying up money in stock and not investing it
elsewhere.
Economies of scale aids cost leadership
objective.
Learning curve costs decline with learning
(applies to labour intensive sectors).
Target cost review prices accepted by market.
Deduct return required from price to derive target
cost per unit.
Low business & financial risk lower overall risk
leading to lower cost of capital.
Per Simmonds (1988) Indicators for measuring
competitive position:
Sales revenue relative to total market (monitor changes)
Profit and return on sales (gross margins)
Volume & unit costs.
Information required:
Competitors costs/ policies
Market share by product
Taken from Wilson & Chua
Details Sales
Market
share %
Relative
market
share %
000S
Total market: Last year 5,200
This year 7,500
Firm A : Last year 1000 19.23%
This year 1200 16.00%
Close competitor: Last year 1200 23.08% 1.20
This year 2000 26.67% 1.67
Lead competitor: Last year 2200 42.31% 2.20
PMC enables business to devise performance
management systems that monitor progress against
internal and external benchmarks.
Helps to formulate business strategy.
Covering modern techniques, decision making, budgeting
and standard costing, and how a business should be
managed and controlled.
C.T. Horngren, Management and Cost Accounting (5
th
ed),
chps 1 & 2.
C.T. Horngren, Management and Cost Accounting, (5
th
ed), Pearson.
C. Dury, Management and Cost Accounting (8
th
ed), Thomson.
*R. Simons, (2000) Performance Measurement and Control Systems for Implementing
Strategy, Prentice-Hall.
*ASB (1993) Operating and Financial Review, Accounting Standards Board.
*M. Miller (2000) The History of Finance: An Eyewitness Account, Journal of
Applied Corporate Finance, Vol. 13, pp. 8-14.
P. Weetman, Management Accounting, (3
rd
ed) FT Prentice-Hall.