Unit 1: Organizational Profitability and Pricing
Required Reading, Chapters 1, 3, 5, 6, 10 and 11.
Unit 1 - Overview
This unit will provide an overview of the previously covered chapters 1, 3, 5, 6, 10 and 11. In this unit you will be asked to read these five chapters and review the concepts that are developed therein. This should be a quick overview as you have already covered this material in previous courses. It is, however, very important to understand these concepts and therefore we begin this course by reviewing them. This unit will then develop the case analysis model that will be used throughout the remainder of the course.
Unit 1 – Learning Outcomes
Unit 2: Strategy and Balanced Scorecard Perspectives
- Review material from previous courses that will be required knowledge
- Develop a framework for case analysis
Required Reading, Text Chapter 13
Unit 2 – Overview
Chapter 13 continues the expanded view of the role of cost accounting for an organization. To fully grasp the significance and vital role of management accounting, one needs to look to the whole of the organization. Accounting as an information and communication system provides the organization a means to implement a company-wide strategy and the tools by which to evaluate the success of that strategy.
Two generic strategies are defined and illustrated—cost leadership and product differentiation. The tool used for implementing either of these strategies is the balanced scorecard. The balanced scorecard serves to provide a broad perspective of critical factors: financial, customer, internal business process, and learning and growth.
To be deemed successful, any endeavor has to be evaluated by some meaningful measure(s). The balanced scorecard here, too, provides what is useful. Though all of the factors are incorporated in the evaluation, the one measure—operating income—serves a profit-seeking organization the best. With the analysis format presented in the chapter, using the three components of growth, price recovery, and productivity, operating income of the current year in comparison to the prior year, will yield specific information for judging the success of a cost leadership or product differentiation strategy. Operating income is, of course, the product of the accounting system and its use demands that the cost/management accountant understand its purpose in the specific situation as well as the broader context of strategy implementation and evaluation.
A helpful discussion of capacity needs comes at the end of the chapter. Strategic management that may include reengineering (an across-functions company-wide approach) will cause change within a company. One of those changes may be more effective and efficient use of existing capacity, thereby causing excess. Identifying and managing unused capacity are addressed
Unit 2 – Learning Outcomes
- Develop an understanding of the components of the Balanced Scorecard
- Understand the factors in implementing a Balanced Scorecard
Unit 3: Multinational Performance Measurement
Required Reading, Text Chapter 22
Unit 3 – Overview
Performance measurement is the underlying motivation for managers and is the focus that management accountants want to support their organization in preparing the balanced scorecard.
The result from optimizing the organizations decisions about what accounting system to use and the information that system yields will be revealed in these measures. These measures have a significant impact on the investor who in the end has to be satisfied.
One of the most pervasive accounting measures from an investor’s perspective is the return on investment as it embodies both the income statement and the balance sheet accounts. More importantly ROI can be expanded using the DuPont Method of Profitability Analysis to reveal the impact of the asset turnover ratio and the return on sales percentage in the overall calculation. Given these two insights into their impact on the ROI, managers can see where they can make operating improvements and what the change to the ROI will be. This in turn gives managers the opportunity to make detailed changes to their short-term operating plans and the implementation strategies to make a difference on a daily basis, “go to work tomorrow and do it”!
We look at other measures which emphasize the return to the investor. Residual income imputes a cost that is not part of the income statement, required rate of return on investment times the investment. This measure uses a hurdle rate that the investor demands for his investment and imputes it on the company’s investment base to determine whether the operating income is sufficient to achieve the desired return to the investor(s).
Next we examine a refinement of the investor measurements, namely, Economic Value Added (EVA). In this measurement we refine the residual income measurement by taking an income tax effect into consideration, using a required rate of return that matches the company’s debt and equity structure.
From this refinement the contribution to the shareholders (investors) can be more clearly seen. It is the ultimate test whether the cumulative results of all the decisions made by management have been effective.
Finally, the chapter examines the ways and means of creating employee and executive compensation programs with the necessary balance of controls in light of the recent history of companies that have “gone out of control” and are no longer in existence.
Unit 3 – Learning Outcomes
- Develop an understanding of the tools for performance measurement
- Be able to use measurement tools to assess business performance
Unit 4: Pricing and Profitability Decisions
Required Reading, Text Chapter 12
Unit 4 - Overview
Chapter 12 demonstrates the broader sphere of influence for cost accounting. Pricing decisions are influenced primarily by costs, customers, competitors, and specific market factors of demand and supply.
This chapter does not present another costing system for determining product cost for use in pricing but utilizes concepts necessary to manage those costs.
Concepts presented are those of relevant costs in relation to a time horizon (short run or long run), strategy of product positioning (market-based pricing or cost-based pricing), value engineering (relationship of product design and timing of cost incurrence), the lifecycle of a product (“cradle-to-grave”), and legal considerations in pricing decisions. Target pricing and target costing are an example of market-based pricing. Implementation of target prices and target costs is illustrated through a four-step process. Target costs are costs that the company aims to achieve. Costs are managed to reduce the cost of products and processes. Value engineering is used to reduce the nonvalue-added activities/costs and achieve greater efficiency in value-added activities. This type of cost management, lower costs, efficiency improvements, elimination of nonvalue-added activities, and more cost control, is used to develop cost leadership, a type of strategy used by some companies (described in Chapter 13).
Cost-plus pricing, also known as cost-based approach to pricing, is described as a starting point for pricing decisions. Though cost is a key factor in pricing a product or service, other factors must be considered. Some non-cost factors are considered for their impact on pricing decisions. An example of life-cycle pricing and costing is used to highlight the importance of full costs for pricing.
Unit 4 – Learning Outcomes
- Develop a greater understanding of pricing decisions and the methods to determine various pricing
- Case analysis: discussion and developing viable solutions for case reporting
Unit 5: Transfer Pricing
Required Reading, Text Chapter 21
Unit 5 – Overview
Chapter 21 examines management control systems of organizations with emphasis on the role of a subsystem, that of the accounting information system. In Chapter 6 the concept of management control systems was introduced through the budgeting process. The three key properties of a management control system are described in this chapter.
The goal of a management control system is improving the collective decisions within an organization in an economically feasible manner. Throughout the text the importance of providing relevant and reliable information to decision makers via the accounting information system has been emphasized. Again that purpose is illustrated using transfer pricing in a decentralized organization as a way that accountants provide information to improve managers’ decisions.
This chapter progresses from a notation of a key property of the management control system—“designed to fit the organization’s structure and the decision-making responsibility of individual managers”—to a closer look at organizational structure— centralized or decentralized—to a detailed study of the role of transfer prices for a decentralized organization. Included are multinational aspects and the impact of governmental levies, especially income taxes.
Unit 5 – Learning Outcomes
- Develop an in-depth understanding of transfer pricing
- Understand tax implications for international firms
Unit 6: Capital Expenditure Decisions
Required Reading, Text Chapters 20
Unit 6 – Overview
Chapter 20 examines the role of accounting data in the decision models for capital budgeting with emphasis on a life-cycle framework, not accrual accounting. Capital budgeting is defined and six stages in capital budgeting are identified. These stages are identification, search, information-acquisition, selection, financing, and implementation and control. Discounted cash flow [DCF] methods are explained.
The two primary DCF methods - net present value and internal rate of return are described, illustrated and compared. Sensitivity analysis is discussed as a method used to account for uncertainty in the expected values of cash flows.
The payback method is described and illustrated. The accrual accounting rate-of-return method is described and illustrated. The key difficulties with these methods as well as their benefits are described.
A section on breakeven time and capital budgeting for new products is included. Some of the complexities of capital investments are discussed. The conflicts between using DCF methods for the capital investment decision and using accrual accounting based measures for the evaluation of a manager’s performance are discussed.
The impact of income taxes on operating cash flows and the tax effects of investment expenditures in capital equipment are illustrated. Amortization expense and its relationship to Capital Cost Allowance (CCA) is discussed, with an illustration of CCA and the use of the tax shield formula (including the half-year adjustment). Illustrations differentiate between the total project and the differential approach in capital budgeting decisions.
The impact of inflation on capital budgeting is discussed with illustrations of the nominal and real approaches to incorporating inflation in capital budgeting models. The effects of risk on the required rate of return are discussed, recognizing alternative approaches to recognizing risk in capital budgeting.
The applicability of the models to nonprofit organizations is discussed. Capital rationing and the use of the excess present value index is discussed and illustrated. The chapter concludes with a discussion of the potential for conflict when using the internal rate-of-return and the net present value techniques in ranking mutually exclusive projects with unequal lives or investments.
Unit 6 – Learning Outcomes
- Understand the time value of money when making long term decisions
- Understand the CCA implications on capital budgeting
Unit 7: Planning and Controls in Non-Profit Organizations
This section will develop an understanding of how Non-Profit Organizations are categorized. This section will also look at the general characteristics of Non-Profit Organizations and the control mechanisms that are characteristically seen therein.
Unit 7 – Learning Outcomes
- After studying this unit, a student should be able to:
- Identify the different categories of Non-Profit Organizations
- Understand the basic characteristics of Non-Profit Organizations
- Understand the planning and design of budgeting priorities