Module 1 :

Introduction to Advanced MA

Managing Resources, Activities, and People

An organization . . .
Directing

Acquires Resources

Organized set of activities

Decision Making

Controlling

Planning

Hires People

MAs Used
So, what are the tools to used in helping managers make decision making? Normally, they will be using information obtained from accounting department beside production & sales departments Accounting information = management accounting information MA aid in decision making

MAs Used
So, how should MA information be? MA information should be relevant, timely & needed by the organization MA information should be easily understandable by managers from other departments

Therefore, Managerial Accounting Adds Value to the Organization by

Providing information for decision making and planning. Assisting managers in directing and controlling activities. Motivating managers and other employees towards organizations goals. Measuring performance of activities, managers, and other employees. Assessing the organizations competitive position.

Why MA need to change?

To be relevant & needed in the company To provide relevant, timely & accurate information to company management To ensure the survival of the profession Continuous improvement of the profession

Evolution and Adaptation in Managerial Accounting

Service Vs. Manufacturing Firms
Emergence of New Industries Global Competition Focus on the Customer Cross-Functional Teams Continuous Improvement

Computer-Integrated Manufacturing
Information and Communication Technology Product Life Cycles Total Quality Management Time-Based Competition Just-in-Time Inventory

Change

Service vs. Manufacturing

service industries rapidly growing MA needs to change to suit the services sector requirements especially on product costing different with manufacturing;

Cant be inventoried Mix of labours Time factor

E-Business / E- Commerce
Introduction of E-Business B2B, B2C, C2C How does it affect MA? Cost Management aspect & Budgeting procedures Instantaneous information is needed;

Product pricing Inventory valuation Marketing aspect

Emergence of New Industries

Scientific discoveries opening up new industries Example; Biotechnology, Genetic Engineering Can MA provide relevant information to these industries? Example of information is needed;

Product pricing affordable to customers Inventory valuation Marketing aspect

Global Competition
Competition is very intense & globally not only limited to Malaysia How does it affect MA? Cost Management & Quality aspects as well as different countries rules & regulations Example; Can Proton survive after the introduction of AFTA (no more protection)

Focus on Customer
Customer always right always a true statement In order to survive focus should be to satisfy your customer Produce product that give value to customer What value?

Customer service High quality user friendly

Why do we need MA?

MA needed for Cost Management System (CMS) Previously, MA is used for recording historical data Now, we need proactive CMS. New CMS that can be used to make strategic decision making Strategic decision making creating competitive advantage (superiority over your competitor)

History of MA
Earliest MA to record the receipt & disbursement of cash & to provide an accounting of the current stock of wealth according valuables ores & foods. Evidence in early Babylon, Greece & during Roman Empire Medieval England Treasury role for MA remain the same 1400 to 1600 basic MA emerges At this period MA become more decision oriented such as managing costs & product pricing

History of MA
The emergence of large & integrated organizations such as General Motors, create demand for measuring the performance of different organizational units or departments 1970s American & European countries under intense pressure from Japanese automobile manufacturer (Honda) to develop MAS (basically to control costs)

Development of Management Accounting

Stage 1 Stage 2

Stages
Stage 3 Stage 4

Stage 1
Independent calculation system of MA was not established No distinction between MA & FA Predominantly FA dominate accounting for statutory reporting & financial ratios Financial accounting data used for business management Eg: Management used financial statement & ratios to make decisions Lagging indicators past information has no use

Stage 1
During this stage business was managed according to development of situation This stage is also called drifting management Example; Management want to increase profit just increase price nothing is being done to take care the customers welfare. Previously, this type of decision is acceptable as competition not so intense (monopoly). Continuous improvement was never discuss in management meeting

Stage 2
This stage is normally called traditional management accounting Formative period of MA Methods mainly budget control, standard costing & BEP analysis Budget control to mainly control production & business wholly standard cost / planned profit should be realized/ aim to achieve / ultimate goals Efficiency is being measured by achieving the standard Variance should be eliminated (abnormal)

Stage 3
At this stage, optimum profit was pursued in profitability management instead of break even point / profitability in traditional MA Management are done through probability, linear programming & EOQ Fundamental idea of the stage control planning process itself & forecast the future of the business precisely according to coy environment & conditions move towards current information instead of past information the correct information is vital/ fundamental in making accurate decision making

Stage 3
dependant upon two fundamental ideas of control concepts;

Feedback Feed forward

Feedback revised planned according to latest conditions/ environment proactive & preventive actions are taken instead of corrective actions normally, actual performances are exactly with the planned performances no deviations

Stage 3
Feed forward integration of MAS & organizational management There is a link between qualitative & quantitative performance measurements This is called Integrated Management System

Stage 4
At this stage, the events are anticipated before the events are happening The beginning of strategic cost management system To obtain Target Profit - High quality & low cost are the objectives to pursue In order to obtain these two objectives, the whole Product Value Chain (PVC) process are being evaluated

Stage 4
PVC starting from extracting/ buying materials to distributing the products to customers and after sales services Company realizing in order to stay profitable the whole value chain need to be analyzed as changes in one chain will affect the other chains

In which stage Malaysians Management Accounting falls?

CMS in Malaysia
Loo et al., (1998) conducted a survey on 420 manufacturing companies in Malaysia The survey found out that level of automation in Malaysia at that time was still low & hence the overhead costs constitute only a small portion in production costs. Most of the companies which stood at 31.5% of the respondents in the survey used single overhead rate to allocate their overhead costs to the company product. The most frequently used allocation bases are units of production (51%), standard labour hours (41%) & actual labour hours (31%).

CMS in Malaysia
Majority of the respondents are still using TCMS as their product costing such as standard or actual costing. The figures stood at 67% of the respondents for product costing while actual costing is 50%. Only 9 out of 92 respondents adopt ABC system as their product costing which are 9.8% & a very low percentage.

CMS in Malaysia
Abdul Rahman et al., (2002) conducted a survey on 250 SMI companies in Malaysia. The survey found out 70% of the respondents prefers to use Total Costs costing system for decision making. The traditional or conventional management accounting practices still the preferred choice of the CMS. Majority of the companies which stood at 38.2% of the respondents used single overhead rate as a basis of absorbing overhead costs where as 35.3% of the respondents separate overhead rates for each department within the manufacturing plant. On the ABC system, the survey found out that only 27.3% of the respondents currently using the system and 29.5% of the respondents plan to use the system.

Criticisms of MA
Information not for decision making

AIS designed solely for financial reporting purposes Product costing normally is calculated for inventory valuation (WIP & Finished goods) Absorption costing is used for this type of calculation actual cost of a product are not known Hence, strategic decision making such as new product pricing, product discontinuation and etc can not be made

Criticisms of MA
Increase in Fixed Overhead Cost

Investment in technology is increasing CAD/CAM & CIM. Why? The need for flexible manufacturing system increased so as to adapt to changes in customers preferences As a result of this, non-manufacturing overhead (fixed overhead) is increasing. These cost represent 40 to 50% of the product cost. Increase in these costs dont correlate with increase in production activities If these cost are allocated to product based on single allocation rate distortion in product cost, why?

Criticisms of MA
Standard Costing standard product only

The earlier standard costing is used & applicable if company continue to produce standard product Now, product changes rapidly in accordance to customers specifications Hence, standard product does not exist anymore. Standard costing can not be used in this situation. The relevance of standard costing & variance analysis can be questioned.

Criticisms of MA
Budget become s constraint to improve

Previously, budget is used for planning & control not to improve above the predetermined standard or to act creatively Managers are rewarded handsomely if cost are reduced (the only yardstick) Sometimes, cost are reduced indiscriminately & will affect the product quality (using inferior quality materials) & services given to customers What would happened if McD reduced the size of their burger or French fries?

Criticisms of MA
MA can not quantify qualitative information

Especially on technology related information Normally, investment in technology the benefits in term of monetary aspects are not apparent in the early years Benefits such as faster product delivery & hence, able to capture more market share can not be quantified accurately before investment is being made Other qualitative aspect such as quality & customer satisfaction can not be measured in monetary items & can not be quantified

New roles of MA Kaplans arguments

Become a part of their organizations value added team Participate in the formulation & implementation of strategy Translate strategic intent & capabilities into operational & managerial measures Move away from being score keepers of the past & to become the designers of the organizations critical management information systems

The survival of an organization now depends upon its abilities to develop the appropriate MAS & CMS to enhance Cost Efficiency throughout its entire value chain.

Professional Ethics
Competence

Confidentiality
Integrity

Objectivity
Resolution of Ethical Conflict