The two leading global Socially Responsible Investment (SRI) indexes are the Dow Jones Sustainability Index World (DJSI World) and the FTSE4Good Global.
These indexes are designed to measure the performance of companies that meet globally recognised corporate responsibility standards, and to facilitate investment in those companies. They include companies
1: The nature and purpose of management accounting 33 that meet the selection criteria, but exclude those in certain sectors such as tobacco, weapons and nuclear power.
Launched in February 2005, the Australian SAM Sustainability Index (AuSSI) tracks the performance of Australian companies that lead their industry in terms of corporate sustainability. It comprises companies from a range of industry sectors, including for example the National Australia Bank Ltd., David Jones Ltd, Foster’s Group Ltd, Macquarie Group Ltd, and Energy Resources of Australia Ltd.
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Key chapter points
• The role of management accounting as an information provider has developed with advances in technology. In order to measure an organisation’s performance effectively, clear understanding is needed of its objectives and activities, and appropriate measures developed based on these.
• Financial accounting systems ensure that the assets and liabilities of a business are properly accounted for, and provide information about profits and so on to shareholders and to other interested parties. Management accounting systems provide information specifically for the use of managers within the organisation.
• Cost accounting and management accounting are terms which are often incorrectly used
interchangeably. Cost accounting is part of management accounting. Cost accounting provides a bank of data for the management accountant to use.
• Information provided by management accountants is likely to be used for planning, control and decision making.
• Anthony (1972) divided management activities into strategic planning, management control and operational control.
• A management control system is a system which measures performance against a target or
benchmark, and indicates where control action may be required to make sure that the objectives of an organisation are being met and the plans devised to attain them are being carried out.
• Management accounting systems are management information systems. Information is data that has been processed in such a way as to be meaningful to the person who receives it. Information is anything that is communicated.
• Good information should be relevant, complete, accurate, clear, it should inspire confidence, it should be appropriately communicated, its volume should be manageable, it should be timely and its cost should be less than the benefits it provides.
• Information within an organisation can be analysed into the three levels assumed in Anthony's hierarchy: strategic; tactical; and operational.
• Information is often presented to management in the form of a report. The main features of a report are: TITLE; TO; FROM; DATE; SUBJECT/TITLE and SUB-SECTIONS/SUB-HEADINGS.
• Management accounting developed from cost accounting. It is used for scorekeeping, directing management attention and problem solving. It has since branched out into behavioural aspects.
• A management accounting system comprises people with accounting knowledge, technology, records, processes, mathematical techniques, reports and the users for whom those reports are prepared. The key components of the system are: inputs, processes and outputs. It is used for strategic decision making, performance measurement, operational control and costing.
• Management accountants have responded to developments such as JIT, TQM and lean management accounting by using techniques such as target costing, life cycle costing and Kaizen.
• Organisational behaviour is about the impact that individuals, groups and organisational structure have on behaviour within an organisation and on that organisation’s effectiveness or ability to create value.
• Management accounting is a value added process which guides management action, motivates behaviour and supports the cultural values required to achieve an organisation’s objectives
• For companies in many industries, sustainability involves developing strategies so that the organisation only uses resources at a rate that allows them to be replenished. At the same time emissions of waste are confined to levels that do not exceed the capacity of the environment to absorb them.
• The term ‘sustainability accounting' encompasses a range of new accounting and reporting tools and approaches which are part of a transition towards a different kind of organisational decision-making focused not just on economic rationality, but consistent with ecological and social sustainability.
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Quick revision questions
1 Which of the following is not an essential quality of good information?
A it should be timely
B it should be completely accurate C it should be relevant for its purposes
D it should be communicated to the right person
2 The sales manager has prepared a direct labour plan to ensure that sales targets for the year are achieved. This is an example of:
A tactical planning B strategic planning C corporate planning D operational planning
3 Which of the following statements is/are correct?
I A management control system is a term used to describe the hardware and software used to drive a database system which produces information outputs that are easily assimilated by management
II An objective is a course of action that an organisation might pursue in order to achieve its strategy
III Information is data that has been processed into a form meaningful to the recipient.
A I, II and III B III only C II and III D I and III
4 Monthly variance reports are an example of which one of the following types of management information?
A tactical B strategic C operational D all of the above
5 The three main types of accounting are management accounting, financial accounting and cost accounting. Which of the following sequences is correct?
A management accounting: immediate; financial accounting: quick; cost accounting: delayed B financial accounting: immediate; cost accounting: quick; management accounting: delayed C management accounting: immediate; cost accounting: quick; financial accounting: delayed D cost accounting: immediate; management accounting: quick; financial accounting: delayed 6 Match the term with the description.
Term:
• A just-in-time
• B target costing
• C total quality management Description:
• (i) sustaining a culture of continuous improvement
• (ii) aiming to produce goods when required by customer or for use
• (iii) developing a product concept and determining the price customers would be willing to pay for that concept
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7 Which of the following statements is not correct?
A financial accounting information can be used for internal reporting purposes
B routine information can be used to make decisions regarding both the long term and the short term
C management accounting provides information relevant to decision making, planning, control and evaluation of performances
D cost accounting can only be used to provide inventory valuations for internal reporting
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Answers to quick revision questions
1 B The reliability of information depends on its accuracy. Information should be sufficiently accurate for its purpose. Relevance and clarity are different qualities of good information, and information that is not provided in a timely way loses relevance.
2 A Tactical planning is used by middle management to decide how the resources of the business should be employed to achieve specific objectives in the most efficient and effective way.
Strategic planning (option B) is planning for the achievement of long-term objectives, and corporate planning (option C) is another name for this.
Operational planning (option D) is concerned with the very short term, day to day planning that is carried out by 'front line' managers such as supervisors and head clerks.
3 D An objective is a target for achievement, not a course of action.
4 A Variance reports are an example of tactical management information. They have the key features outlined in section3.9.2.
5 C Management accounting information is generally needed and provided immediately and responsively; cost accounting information is provided quickly and responsively, but not necessarily immediately. The provision of financial accounting information is usually delayed.
6 A(iii), B(i), C(ii). The concept of total quality management includes continuous improvement as a major element, although there are other aspects to this management concept.
7 D Cost accounting has a variety of uses.
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Answers to chapter questions
1 D Statement I is incorrect. Limited liability companies must, by law, prepare financial accounts. The format of published financial accounts is determined by law, but not the format of management accounts. Statement II is therefore incorrect.
Management accounting information is sometimes used as a planning tool, for example in budgeting. Therefore management accounts do serve as a future planning tool, but they are also useful as a historical record of performance – for example in monthly performance reports. Management accounting information is used for control and one-off decision-making purposes, as well as for planning purposes. Therefore, all three statements are incorrect and D is the correct answer.
2 C Management accounting information has identified that costs were 15% more than expected.
Where actual performance is compared against a target, the problem could be with the actual performance or the target may have been inappropriate Control information should lead to investigation of the reasons for differences or variances. . In this case the variance could suggest that there has been unnecessary overspending or that there are reasons for the overspending that is outside management’s control. Where appropriate, control action should be taken to reduce excess spending. Alternatively, if the overspend is caused by factors outside management control it may be necessary to revise forecasts about what will happen in the future.
3 D Management accounting information is used, even when its quality is poor. For example, organisations prepare budgets, even when there is a lack of confidence in the quality of the forecasts and other assumptions in the budget. Using external information is not a substitute for internal information. Financial statements are for external publication and are not
produced frequently enough for management purposes. This suggests that the correct answer must be answer D. The information will be used, even if there is a lack of confidence in it, but the quality of decision-making will be adversely affected.
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Chapter 2
Decision making and relevant costing
Topic list 1 Relevant costs
2 Choice of product (product mix) decisions 3 Make or buy decisions
4 Outsourcing
Learning objectives Reference
Decision making LO2
Apply relevant information guidelines for short-term alternative choice operating decisions
LO2.2 Explain the impact of cash flows and risks on project decision making LO2.5
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Introduction
Management at all levels within an organisation take decisions. The overriding requirement of the information that should be supplied by the cost/management accountant to aid decision making is that of relevance. This chapter therefore begins by looking at the costing technique required in decision-making situations, that of relevant costing, and explains how to decide which costs need taking into account when a decision is being made and which costs do not.
We then go on to see how to apply relevant costing to product mix decisions, and make or buy decisions.
Finally, the important area of outsourcing is considered.
Decision making and
relevant costing
Outsourcing Relevant
costs
Make or buy decisions Choice of product
(product mix) decisions
2: Decision making and relevant costing 41
Before you begin
If you have studied these topics before, you may wonder whether you need to study this chapter in full. If this is the case, please attempt the questions below, which cover some of the key subjects in the area.
If you answer all these questions successfully, you probably have a reasonably detailed knowledge of the subject matter, but you should still skim through the chapter to ensure that you are familiar with everything covered.
There are references in brackets indicating where in the chapter you can find the information, and you will also find a commentary at the back of the Study Manual.
1 What is a relevant cost? (Section 1.1)
2 What are avoidable costs? (Section 1.2)
3 Define differential and opportunity costs. (Section 1.3)
4 What is a sunk cost? (Section 1.5)
5 What is deprival value? (Section 1.9)
6 A limiting factor is anything which limits the activity of an entity. What are the (Section 2.1) possible limiting factors for an organisation?
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1 Relevant costs
Section overview
• Relevant costs are future cash flows arising as a direct consequence of a decision.
• Relevant costs are future costs.
• Relevant costs are cash flows.
• Relevant costs are incremental costs.