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KNGX NOTES
ACCT2522

1. INTRODUCTION AND
UNDERSTANDING PROCESSES & VALUE
CREATION
1.1 WHAT IS MANAGEMENT ACCOUNTING

Management Accounting: the processes and techniques that focus on the effective and efficient use or
organizational resources to support managers in their tasks of enhancing both customer value and
shareholder value

MANAGEMENT ACCOUNTING VS FINANCIAL ACCOUNTING INFORMATION

Management accounting Financial Accounting

Users of Internal: Managers and employees at all External: shareholders, creditors, banks,
Information levels securities exchange, trade unions and
government agencies

Regulations No accounting standards or external Accounting standards and corporations law

rules are imposed. Information is regulate the content of financial reports
generated to satisfy managers
information need

Sources of data Both financial and non-financial data Financial data almost exclusively drawn
drawn from many sources – the core from the organization’s core transaction-
accounting system; physical and based accounting system
operational data from production
systems; and market, customer and
economic data from sources external to
the organization

Nature of the Past, current and future-oriented; Past; reliable; verifiable; not timely; not
Information subjective; relevant; timely; and supplied always relevant; and highly aggregated
at various levels of details to suit
managers’ specific needs

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MANAGEMENT ACCOUNTING SYSTEMS

A Management Accounting System is an information system that produces the information required by
managers to create value and manage resources. Can be used to provide:

- Information for planning and controlling operations

- Information for measuring performance
- Estimates of the costs of producing goods and services
- Information on an ad hoc basis, to satisfy short-term and long-term decision making needs of
management

USES OF MANAGEMENT ACCOUNTING INFORMATION

Management accounting information is relevant to managers from all levels of an organization:

- Senior managers need information that provide them with an overview of the entire organization
- Middle mangers require more detailed information about their areas of responsibility
- Operational managers will need information to help them manage their specific operations on a day
to day basis to help ensure their performance targets are met

- Strategy formulation & Implementation

o Corporate Strategies: decisions about the type of businesses in which to operate, which
businesses to acquire and divest and how best to structure and finance
o Business Strategies: how a business competes within its chosen market
- Improving competitive advantage
o Cost Leadership  costing and management techniques
o Differentiation
- Planning: formulating the direction for future operations
- Control: putting mechanisms in place to ensure operations proceed according to plan
- Performance evaluation (another form of quality control)
- Facilitates decision making

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1.2 UNDERSTANDING PROCESSES & VALUE CREATION

Management Accounting Definition:

“The processes and techniques that focus on the effective and efficient use of organizational resources, to
support managers in their tasks of enhancing both customer value and shareholder value”

1. Value: Identify and understand value

2. Resources: Identify resources required
3. Processes: Define and understand processes required
4. Activity-Based Management (ABM)
a. Process analysis
b. Process improvement

1. VALUE

- Customer value: the value that a customer places on particular features of a product/service
- Shareholder value: the value that shareholders, or owners, place on a business

Customer – elements of value

- Cost: resources consumed in a process to achieve an objective

- Quality: the degree to which a product/service meets expectations
- Time: duration vs. timeliness

Note: these value parameters are interrelated

2. RESOURCES

Resources: inputs into an organization’s production processes. They include financial and non-financial,
tangible and non-tangible inputs of an organization:

Note: assets are all resources, but not all resources are assets e.g. human resources is a resource but not an
asset

3. PROCESSES

“A series of activities that are linked together to achieve a specific objective”

“A group of logically related (interdependent) activities which, when performed utilize the resources of a
business to produce a definite result”

Activity: a unit of work performed in an organization; step in a process

Q. Why should we adopt a processual view of the organization?

- How should we improve processes?

- Consider interdependencies between activity

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- Consider interdependencies between activities/departments

- Facilitates process improvement
- Facilitates product innovation

1.3 ACTIVITY-BASED MANAGEMENT (ABM)

Activity Based Management: The process of using information of activity based costing to analyse
activities, cost driers and performance so that customer value and profitability are improved

Horizontal view – Activity management view

Vertical view – Costing view

4.1 PROCESS ANALYSIS

Objectives of process analysis (tools) Steps

- Understanding – Business process map 1. Identify the process of interest

- Monitoring – Statistical process chart 2. Chart the process
- Prioritising – Pareto diagram 3. Evaluate the process
- Problem Solving 4. Continuously improve (CI) or re-engineer
the process (BPR)

STEP 1: IDENTIFY THE PROCESS

- Value chain analysis/benchmarking

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STEP 2: CHART THE PROCESS

Drawing the business process:

Symbol Meaning

Start/end

Flow

Activity

Decision

STEP 3: EVALUATE THE PROCESS

Are the activities:

a) Value-adding or non-value adding?

b) Efficient, effective, both or neither?
c) Valuable in terms of time, cost or quality

A) VALUE ANALYSIS:

Value Analysis: a method that classifies activities as value-added or non-value added

Value-added (VA) activity: an activity that provides essential value to the customer, or is essential to the
functioning of the business.

- Is it Critical to remain in the business? (e.g. creating financial statements)

- Does it provide essential value to the customer? Consider:
o Customer’s willingness to pay – activity improves time/cost/quality?
o Removal will reduce service? – impact on time/cost/quality?
o Brings products/service closer to completion?
- Includes
o Basic production that contribute to the final product (note additional features may not be value
adding for the consumer)
o Essential administrative activities

Non-value adding (NVA) activity: an activity that does not add value to a product and therefore, can be
eliminated without detriment to either:

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- The customers’
- The business

Note: Be careful of potential grey areas

- Need to consider case context

- E.g. inspection – why do you need inspection?  Inspection for regulatory purposes is VA however,
inspection for defects is NVA (should have gotten it right in the first place)c

B) EFFICIENCY AND EFFECTIVENESS

Appraise the efficiency and effectiveness of existing processes and activities and consider trade-offs

Efficiency: Resource usage Effectiveness: Goal attainment

- “doing things well”
- Ability of activities to use the fewest possible
resources (analysed regardless of effectiveness)
- Numerically represented as a ratio: output to
input
- E.g. books printed per machine
- “doing the right things”
- Ability of activities to meet customer/business
needs (analysed regardless of efficiency)
- E.g. % defective prints (in March)
- Ratio: ineffective outcome to total outcomes

What makes a good measure?

- Comparable
- Specificity
- Understandabiity
- It must be a measure not an action!

C) EVALUATION OF VALUE PARAMETERS

Impact of activities/processes on

- Cost
- Quality
- Time

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USEFUL TOOLS:

- Root cause cost drivers: the underlying factors that cause activities to be performed and their cost
incurred -> continuously ask ‘why’ something else (e.g. if test is an NVA why test in the first place)
o For example having forklifts deliver crates around the factory floor may have the root cause of an
inefficient factory layout. Increasing the capacity addresses the symptom of the problem, not the
cause

- Cost driver analysis a method that identifies root cause cost drivers of NVA activities

- Fishbone diagrams
o Cause and Effect Diagrams
o Primary problem on fish “spine”
o Main potential causes on “ribs”
 Machinery
 Method
 Material
 Manpower(Labour)
o Causes of ribs on “Bones”

- Statistical Process Control

o Assess variations in processes
o Address the causes of large variations

- Pareto Diagrams
o Graphical representation…causes of a problem
according to the frequency of their occurrences
o Facilitates prioritization

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4.2 PROCESS IMPROVEMENT

Four ways of reducing activity costs:

1. Activity elimination
a. Choosing the activity that will be eliminated to save resources (possibly NVA?)
b. After elimination, this electivity is will not be performed at all
c. E.g. UNSW Buses: Not providing buses anymore and making students drive
2. Activity selection
a. Choosing an activity option with the lowest cost that matches the chosen strategy
b. E.g. UNSW Buses: Choosing to use trams instead of buses
3. Activity reduction
a. Reducing (but not eliminating) the performance of the activity such that the resources
consumed by the existing activity are reduced
b. UNSW Buses: Run less buses but of larger capacities
4. Activity sharing
a. Makes use of economies of scale by choosing or designing an activity that allows sharing
between different products

Business Process Re-Engineering (BPR) Continuous Improvement (CI)

Scale of change - Fundamental rethinking/ radical - Incremental improvements to individual

redesign of major business parts of a process
processes - Can be reversed
- Generally, cannot be reversed

Personnel - Initiated by top management - Initiated and implemented by

involvement - Implemented/managed by employees
dedicated cross-functional teams - All levels can be involved

Timing - Once-off - Ongoing

- BPR and CI are not mutually exclusive (there are some overlap)