Managerial accounting

Introduction

Fundamentally different to financial accounting and reporting

•       internal vs external focus

•       managers vs shareholders

•       future vs historical orientation

•       techniques vs formats

MA is much less prescriptive or normative

•       “thinking accounting”

Structure/evolution

Traditionally 3 components have been identified

•       cost accounting

•       management accounting

•       management control

During past 30 years a 4^th component

•       ‘the new management accounting’

Over time MA has become less about accounting, more management

Cost accounting

Provides the historical foundation for MA

Provision of cost information to managers

Simplest cost accounting technique  - job product costing

How much does it cost to make X units of a product

•       materials and labour costs

•       overhead costs – conventionally production overheads

Costs can be projected, then compared with actual costs

•       over/under absorption of overheads

Not all production is job based

Need to develop further techniques

•       contract costing – for large scale projects

•       process costing – for large quantity outputs

•       joint costing – more than one product produced

•       by product costing – incidental production of a product

In 1980s  a further technique was promoted

•       activity-based costing – high proportion of overheads

Management accounting

Budgeting recognised as the key MA topic

Complemented by standard costing and variance analysis

Standard costing – costing for control

•       unitised/unit level costs

•       expected cost of materials, labour, overheads, and much more

Variance analysis

•       formal comparison of standard and actual costs

identifying where projections might be improved

Additionally there are other constituents

Cost-volume-profit analysis – break even analysis

Relevant costing – short term decision making

•       make or buy decisions – cheaper elsewhere?

•       continuing operations of loss making business units

•       special order opportunities

Additionally capital budgeting decision making

•       investment appraisal techniques

Management control

Emerged as the third component in 1950s

The interface between accounting and organisational participants

Early interest was in how budgets impacted people and vice versa

Subsequently extended to inform other organisational challenges

•       transfer pricing

•       divisional performance measurement

•       managerial compensation

Provided much of the substance of behavioural accounting in 1970s

A discipline in decline

Thirty five years ago MA was widely regarded as dull

The poor relation of financial accounting and reporting

Limited development of new ideas since 1920s

Some activity around the edges was evident

•       management control

•       greater interest in quantitative techniques

•       early interdisciplinary excursions

New challenges

A 1983 paper by Kaplan identified new challenges/opportunities

Many linked with the emergence of competition from Japan

Similar self-exploration in other disciplines

Among the key concerns were

•       rising expectations about quality

•       timely availability of product

•        value for money

•       inefficient resource consumption

In retrospect the rise of the customer

The new management accounting

From the mid-1980s an avalanche of new techniques

Some had previously been identified but discarded

And some have subsequently been discarded

Activity-based costing probably the most successful

Target costing was a parallel Japanese development

Both sought to promote enhanced cost management

Also strategic cost management – value chain focus

A new topography

By mid-1990s possible to identify three generic approaches

•       activity accounting

•       operational accounting

•       strategic management accounting

With an option for further innovation – ‘people accounting’

Beyond this managerial philosophies

•       different configurations of the various elements of NMA

From measurement to reporting

In a short time all manner of new accounting information

Specifically intended to meet managements’ current needs

Much of it was beyond the cost and value calculus

•       traditional ‘hard’ number accounting – financial numbers

•       in their place ‘soft(er)’ numbers – non financial metrics

So how do they fit with the balance sheet, income statement, etc?

The need to develop new reporting approaches

balanced scorecard is the most famous innovation 

Accounting for strategic management

Strategic management as the successor to ‘strategy’

A more organic, inclusive process – no longer top down

Depends on the collapsing of functional (disciplinary) silos

The functions need to bring something to the challenge

Rather than provide traditional information

MA well positioned to make a major contribution

•       the business model concept