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Management Accounting and Control. Tools and Concepts in a Central European Context

  • ID: 3798730
  • Book
  • October 2017
  • Region: Europe
  • 350 Pages
  • John Wiley and Sons Ltd
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Management accounting has been the basic toolbox in business administration for decades. Today it is an integral part of all curricula in business education and no student can afford not to be familiar with its basic concepts and instruments. At the same time, business in general, and management accounting in particular, is becoming more and more international. English clearly has evolved as the "lingua franca" of international business. Academics, students as well as practitioners exchange their views and ideas, discuss concepts and communicate with each other in English. This is certainly also true for management accounting and control.

Management Accounting is becoming more and more international. ?Management Accounting and Control? is a new textbook in English covering concepts and instruments of management accounting at an introductory level (primarily at the Bachelor level, but also suited for general management and MBA courses due to a strong focus on practical relevance). This textbook covers all topics that are relevant in management accounting in business organizations that are typically covered in German and Central European Bachelor courses on management accounting and control.

After a general introduction to the field of management accounting and control the book discusses cost management as an extension of cost accounting. Typical cost management instruments such as target costing, life cycle costing and process–based costing approaches are explained in detail. Differences between Anglo–American activity–based costing (ABC) and German process–based costing are highlighted. The book then turns to an extensive discussion of planning and budgeting tasks in management accounting with a strong focus on the practical application of the topic such as developing a budget in practice. Another chapter is dedicated to a comparison of traditional budgeting with modern /alternative budgeting approaches.

A major part of the book is dedicated to the broad area of performance management. The relevance of financial statement information for performance management purposes is discussed in detail. In addition, the most widely spread financial performance indicators are illustrated using real–world examples. The book also includes detailed content on value–based management control concepts. In a consecutive chapter, performance measurement is linked with strategy while extensively discussing the Balanced Scorecard as a key tool in strategic performance management.

The remaining parts of the book deal with management reporting as one of the main operative tasks in management accounting practice. The book closes with insight into new fields and developments that currently influence management accounting practices and research and promise to play an increasingly important role in the future.
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Preface xiii

CHAPTER 1 Introduction to Management Accounting and Control  1

The Concepts of Management, Accounting, and Control   2

A Definition of Management    2

A Definition of Accounting    3

A Definition of Control 4

Bringing it Together: Management Accounting and Management Control   5

Management Accounting   5

Management Control   6

The Role of a Controller in an Organization   9

Skill Set of a Controller    10

The Management Control Function in a Corporation    12

Management Accounting vs. Financial Accounting     14

Financial Accounting      14

Contrasting Management Accounting and Financial Accounting    15

Performance Measurement and Performance Reporting   17

An Example of Performance Reporting        17

Performance Measurement beyond Financials 19

Trends in Management Accounting and Control      20

Ethical Aspects of Management Accounting and Control 23

CHAPTER 2 Management Reporting      29

Information Needs in Business   30

What is Information ?  31

Information Supply vs. Information Demand  32

Management Reporting as a Key Information Tool  34

Scope and Definition of Management Reporting 35

The Management Reporting Process   36

Management Reporting Dimensions   38

What For? Management Reporting Purposes 40

  What? Content of Management Reports       42

Inductive Methods 42

Deductive Methods 43

Information Sources        44

How? Preparing and Communicating Management Reports       46

Amount of Information      46

Order and Structure        47

Relationships between Pieces of Information       49

Presentation and Visualization    50

When? Timing Issues in Management Reporting    50

Reporting Cycles      50

Duration of Report Preparation  51

Timeliness and Punctuality        52

Who? Parties Involved in the Management Reporting Process       53

Emerging Trends in Management Reporting       54

Reporting Factories        54

Self–Reporting      55

Cooperative Reporting      56

CHAPTER 3 Managing Cost   61

Cost Management        62

Cost Accounting vs   Cost Management  62

The Focus of Cost Management  63

Cost Management Tools      65

An Overview   65

Problems of Volume–Based Cost Allocation  65

Activity–Based Costing and Process–Based Costing    67

How Activity–Based Costing Works   67

How Process–Based Costing Works   70

Activity–Based Costing and Process–Based Costing a Comparison       71

Process– and Activity–Based Management Control    73

Cost Reduction and Process Efficiency Improvements       74

Pricing and Product Mix        74

Product and Service Design      74

Planning and Budgeting        75

Target Costing        75

Determining the Cost Gap in Target Costing    76

The Target Costing Process      77

Splitting Target Cost into its Sub–Values    79

Target Cost Index and Target Cost Diagram  81

A Critical Reflection: When is Target Costing Appropriate?       82

Life Cycle Costing        83

Cost and Revenue Elements Across the Product Life Cycle       85

Contribution Margin Method of Life Cycle Costing    86

Discounting Method of Life Cycle Costing  88

A Critical Reflection: What Life Cycle Costing Can and Cannot Do     91

CHAPTER 4 Budgeting  97

Planning in Management Control      98

The Budgeting Cycle      100

Uses of Budgets      101

The Master Budget        102

Preparing an Operating Budget      104

The Revenue Budget      105

The Production Budget      106

The Direct Materials Budget    107

The Direct Labor Budget      108

The Manufacturing Overhead Budget    108

The Manufacturing Costs Per Unit   109

The Cost of Goods Sold Budget    110

The Non–Manufacturing Costs Budgets    111

The Budgeted Income Statement   112

Discussing the Operating Budget      113

Preparing a Financial Budget      114

The Cash Budget      114

Preparation of the Cash Budget  115

The Budgeted Cash Flow Statement   118

Discussing the Cash Budget and the Budgeted Cash Flow Statement     119

Motivational Aspects of Budgeting  121

Motivation Versus Planning      122

Top–Down versus Bottom–Up Budgeting       123

Budget Manipulation      125

Strengths and Weaknesses of Traditional Budgeting       126

The Strengths of Budgets      126

The Weaknesses of Budgets      127

CHAPTER 5 Alternative Approaches to Budgeting       133

Budgeting Necessary Evil or Valuable Management Tool?       134

Overview of Alternative Budgeting Approaches       134

Approaches Complementing Traditional Budgeting    135

Incremental Budgeting      135

Setting Up a Zero–Based Budget  138

Zero–Based Budgeting Example  139

Activity–Based Budgeting      141

Activity–Based Budgeting Example   142

Improvement Approaches to Budgeting   144

Better Budgeting      144

Continuous Improvement ( Kaizen ) Budgeting  146

Abolishing Budgets The Beyond Budgeting Approach    147

CHAPTER 6 Performance Measurement Financial

Statements    153

The Importance of Performance Measurement    154

Measuring Financial Performance   156

Sources of Financial Information  156

The Balance Sheet      157

Five Major Elements of the Balance Sheet  158

Non–current Assets        159

Current Assets        162

Non–Current Liabilities      162

Current Liabilities    163

Owners Equity        163

Market Values Versus Book Values   163

Important Balance Sheet Concepts  164

Total Assets      164

Financial Debt      165

Identifying Financial Debt    166

Net Debt        167

Net Working Capital      170

Capital Employed    172

The Income Statement        173

The Multi–Step Profit Cascade        176

Earnings Before Taxes (EBT)      177

Earnings Before Interest and Taxes (EBIT)  178

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)     179

The Statement of Cash Flows      180

Preparing a Statement of Cash Flows   182

Sources and Uses of Cash      182

Determining Cash Flow with the Indirect Method       183

Cash Flows from Operating Activities    184

Cash Flows from Investing Activities   186

Cash Flows from Financing Activities   187

Analyzing the Statement of Cash Flows  189

Change in Net Working Capital    191

CHAPTER 7 Performance Measurement

Key Performance Indicators   199

Performance Indicators      200

A Note of Caution      202

Financial Ratios      203

Profitability Ratios        205

Profit Margin        205

EBIT Margin (Return on Sales)      207

Gross Profit Margin        207

Return on Investment Ratios    208

Return on Equity (ROE)      209

Return on Assets (ROA)        209

Return on Capital Employed (ROCE)   210

A Note on the Time Dimension      211

Asset Management Ratios      213

Total Asset Turnover      213

Fixed Asset Turnover      214

Inventory Turnover        215

Days Sales in Inventory (DSI)      215

Days Receivables Outstanding (DRO)    216

Days Payables Outstanding (DPO)   217

Cash Conversion Cycle        217

Days Working Capital (DWC)      218

A Comparison        220

Capital Structure and Financial Leverage Ratios       222

Total Debt Ratio      222

Debt–to–Equity Ratio      224

Equity Multiplier      224

Interest Coverage and EBITDA–to–interest Ratio    224

Net Debt–to–EBITDA      225

Financial Leverage        228

Calculating the Leverage Effect    230

Liquidity Ratios      231

Current Ratio        232

Quick Ratio        232

Cash Ratio   233

Systems of Performance Measures  233

The DuPont System        234

Non–Financial Performance Measures   237

Typical Performance Measures in Logistics    237

Delivery Reliability      237

Supply Chain Cycle Time        238

Replacement Time      238

Typical Performance Measures in Human Resource Management       238

Employee Satisfaction    239

Absenteeism Rate        239

Staff Fluctuation Rate    239

Typical Performance Measures in Manufacturing    240

Productivity      240

Capacity Utilization        240

Reject Rate        241

Throughput Time    241

Typical Performance Measures in Marketing  241

Customer Churn Rate    241

Click Through Rate (CTR)      242

Price Elasticity of Demand    242

Using Performance Measures in Business  243

Time Trend Analysis        243

Peer Group Analysis (Benchmarking)   244

A Benchmarking Example      245

Problems of Benchmarking        247

Major Criticism of Key Performance Indicators    247

CHAPTER 8 Value–Based Performance Measurement       257

The Goal of a Business Firm        258

Shareholder Value as the Overall Goal   260

A Justification of Shareholder Value   261

Shareholders vs   Stakeholders    263

Shortcomings of Traditional Performance Measures       264

Measuring the Creation of Shareholder Value  265

Residual Income      266

Economic Value Added (EVA)    267

The EVA Formulas        267

Net Operating Profit After Taxes (NOPAT)  269

Capital Employed (CE)        269

Return on Capital Employed (ROCE)   271

Weighted Average Cost of Capital (WACC)  271

Cost of Equity        272

A Numerical Example of Calculating EVA    274

EVA Adjustments        277

Using EVA as a Superior Performance Measure    278

Three Competing Metrics      278

The Underinvestment Problem of ROCE    279

Ways to Increase EVA The Value Driver Tree  282

Portfolio Management Decisions with EVA    286

Criticism of EVA      289

Alternative Value Concepts        290

Economic Profit        290

Cash Value Added        291

Market Value Added      293

Value–Based Management Systems  294

CHAPTER 9 Strategic Management Accounting

and the Balanced Scorecard   303

Strategic vs   Operating Management Accounting    304

Phases in the Strategic Management Process and the Role of the Controller   307

Finding and Formulating a Strategy   307

Implementing a Strategy        308

Corporate–Level Strategies vs   Business–Unit Level Strategies     309

Corporate–Level Strategies      310

Business–Unit Level Strategies    311

Selected Instruments of Strategic Management Accounting    312

External vs   Internal Factors      312

Environmental Analysis        313

Industry Analysis Porter s Five–Forces Model  315

Generic Strategies        317

Value Chain Analysis      318

Product Life Cycle Analysis        319

BCG s Portfolio Matrix        321

SWOT Analysis        323

The Balanced Scorecard      326

Genesis of the Balanced Scorecard   327

Key Characteristics of the Balanced Scorecard    328

Structure of a Balanced Scorecard   329

Financial Perspective      331

Customer Perspective        332

Internal Business Process Perspective  332

Learning and Growth Perspective (Innovation and Learning)       334

Cause–and–Effect Links      335

The Strategy Map    335

Features of a Balanced Scorecard   337

Developing a Balanced Scorecard    339

Step 1: Formulate the Strategy and Clarify the Strategic

Objectives Along the Perspectives  339

Step 2: Set up the Strategy Map    340

Step 3: Define Measures for the Strategic Objectives    341

Step 4: Define Initiatives and Responsibilities for Each Objective    341

Step 5: Feedback and Continuous Improvement  342

The Balanced Scorecard as a Strategic Management System    342

Application in Corporate Practice    345

Criticism of the Balanced Scorecard   347

CHAPTER 10 New Developments in Management

Accounting and Control  355

Hot Issues and Future Challenges in Management Accounting     356

Management Accounting in Networks and Supply Chains     357

Management Accounting for Quality Six Sigma  359

The Role of Management Control in Six Sigma  361

Six Sigma in Practice        362

Integrating Human Behavior into Management Accounting    363

Environmental Management Accounting    366

Integrated Reporting    368

Integrating Financial and Management Reporting       370

The Integrated Reporting (IR) Framework  371

Management Accounting and Control with Big Data       372

The Role of the Controller in Big Data   374

A Critical View on Big Data        375

Bibliography        381

Index     387

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Michel Charifzadeh
Andreas Taschner
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