2015

cma
2015
CMA
2015
CMA

Part 1
Financial
Reporting,
Planning,
Performance
and Control

Prepared by: Sameh.Y.El-lithy. CMA,CIA.

 Part 1 Financial Reporting, Planning, Performance and Control
(4 hours – 100 questions and 2 essay questions)
The Part 1 Exam has five sections included in the Learning Outcome Statements. The five sections and their
approximate weights on the exam are:

Sec.A. External Financial Reporting Decisions

15% Level C

Preparation of financial statements: balance sheet, income statement, statement of changes in equity,
statement of cash flows; valuation of assets and liabilities; operating and capital leases; impact of
equity transactions; revenue recognition; income measurement; major differences between U.S. GAAP
and IFRS.

Sec.B. Planning, Budgeting and Forecasting

30% Level C

Strategic planning process; budgeting concepts; annual profit plans and supporting schedules; types of
budgets, including activity-based budgeting, project budgeting, flexible budgeting; top-level planning and
analysis; and forecasting, including quantitative methods such as regression and learning curve analysis.

Sec.C. Performance Management

20% Level C

Factors to be analyzed for control and performance evaluation including revenues, costs, profits, and
investment in assets; variance analysis based on flexible budgets and standard costs; responsibility
accounting for revenue, cost, contribution and profit centers; key performance indicators; and balanced
scorecard.

Sec.D. Cost Management

20% Level C

Cost concepts, flows and terminology; alternative cost objectives; cost measurement concepts; cost
accumulation systems including job order costing, process costing, and activity-based costing; overhead
cost allocation; supply chain management and business process performance topics such as lean
manufacturing, ERP, theory of constraints, value chain analysis, ABM, continuous improvement and
efficient accounting processes.

Sec.E. Internal Controls

15% Level C

Corporate governance; internal control risk; internal control environment, procedures, and standards;
responsibility and authority for internal auditing; types of audits; assessing the adequacy of the accounting
information system controls; and business continuity planning.

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 1

Stakeholders & the
Enterprise Stakeholders
Individuals or groups with
an interest, claim, or stake
in the company, in what
it does, and in how well it
performs.

Internal stakeholders
Stockholders and
employees, including
executive officers, other
managers, and board
members.

External stakeholders
All other individuals and
groups that have some claim
on the company.

Stakeholders are in an exchange relationship with the company. They supply the organization with important resources (or contributions) and in exchange expect their
interests to be satisfied (by inducements). A company cannot always satisfy the claims of all stakeholders.

The goals of different groups may conflict. The company must identify the most important stakeholders and give highest priority to pursuing strategies that satisfy their
needs.

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 2

 A publicly-owned for-profit company must have maximizing shareholder value as its
ultimate goal. The shareholders are the owners. They have provided risk capital with the
Shareholders expectation that the managers will pursue strategies that will give them a good return on
their investment. Shareholders want to see profitable growth: high profitability and also
The owners sustainable profit growth.

(the Principal) Shareholder value is the returns that shareholders earn as a result of having purchased
shares in a company. (HK)

Shareholders’ returns come from both

Capital appreciation of their & from dividends received

shares’ value

Maximizing shareholder returns is accomplished through

High profitability & sustained profit

growth.

Common shareholders, elect the board of directors (V)

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 3
 Thus, the members of the board of directors represent the owners of the company. The board of
directors of a company is responsible for ensuring that the company is operated in the best
The Board of interest of the shareholders, who are the owners of the company. (HK)
Directors
The oversight of the company is ultimately their responsibility. The board, when operating
properly, is also an independent check on corporate management to ensure that management
acts in the shareholders’ best interests. The board of directors sets company-wide policy and
advises the CEO and other senior executives, who manage the company’s day-to-day activities.
In fact, one of the board’s most important tasks is hiring, firing, and setting of compensation for
the CEO. Boards review and approve strategy, significant investments, and acquisitions. The
board also oversees operating plans, capital budgets, and the company’s financial reports to
common shareholders. .(V)

The board’s responsibility is to provide governance, guidance and oversight to the management
of the company. The board of directors is responsible for overseeing the internal control system.

The board of directors is the critical link between

shareholders and managers (V)
The board of directors elects the officers of the company and the
board of directors is responsible for overseeing the activities of the
officers they elect.(HK)

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 4

 Management
Thus, managers have an obligation to invest company profits in such a way that shareholder value will be
(the agents of the maximized. (Charles)
Managers carry out three major activities— planning, directing and motivating, and controlling. (next pages
shareholders) discuss the roles of mangers). (G).

Corporate Governance
Corporate governance refers to>>>

The system by which corporations are managed and controlled. It encompasses the relationships among a company’s
shareholders, board of directors, and senior management. These relationships provide the framework within which corporate
objectives are set and performance is monitored.(V)

The system by which a company is directed and controlled. If properly implemented it should provide incentives for top
management to pursue objectives that are in the interests of the company and it should effectively monitor performance. (G)

Governance mechanisms are mechanisms that principals put in place to align incentives between principals and agents and to
monitor and control agents. The purpose of governance mechanisms is to reduce the scope and frequency of the agency
problem: to help ensure that agents (senior managers) act in a manner that is consistent with the best interests of their
principals (stockholders).(Charles)

Three categories of individuals are, thus, key to corporate governance success: first, the common shareholders, who elect
the board of directors; second, the company’s board of directors themselves; and, third, the top executive officers led by
the chief executive officer (CEO).(V)

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 5

The organization chart may give
you the false impression that a clear As the head of one of the three major functional areas of the
split exists between treasurer and firm, the vice president of finance, or chief financial officer
controller responsibilities. In a well- (CFO), generally reports directly to the president, or chief
functioning firm, information will executive officer (CEO)..(V)
flow easily back and forth between
both branches. In small firms the The chief financial officer (CFO)—also called the finance
treasurer and controller functions director in many countries—is the executive responsible for
may be combined into one position, overseeing the financial operations of an organization.(H)
with a resulting commingling of The chief financial officer is a member of the top management
activities. team who also occupies a staff position. The chief financial
officer (CFO) is responsible for providing timely and relevant
data to support planning and control activities and for preparing
financial statements for external users.(G)

The controller (also called the chief accounting officer) is

the financial executive primarily responsible for
management accounting and financial accounting.(H)
The controller’s responsibilities are primarily accounting in
nature.(V)
Note: Modern controllers do not do any controlling in
terms of line authority except over their own departments.
Yet the modern concept of controllership maintains that the
controller exercises control in a special sense. By reporting
and interpreting relevant data, the controller influences the
behavior of all employees and exerts a force that impels line
managers toward making better-informed decisions as they
implement their strategies.(H)

The treasurer’s responsibilities fall into the decision areas

most commonly associated with financial management:
investment (capital budgeting, pension management),
financing (commercial banking and investment banking
relationships, investor relations, dividend disbursement),
and asset management (cash management, credit
Prepared by: Sameh.Y.El-lithy. CMA,CIA. management).(V) 6
Management Accounting and the Role of Cost Management
Management accountants are the accounting and finance professionals who develop and use cost
management information to assist in implementing the organization’s strategy. (Blocher).

Management accounting is a profession that involves partnering in management decision making,

devising planning and performance management systems, and providing expertise in financial
reporting and control to assist management in the formulation and implementation of an organization’s
strategy(Blocher).

Reporting lines
In a typical organization (illustrated in below Exhibit) management accountants report to the controller, a
key accounting professional in the firm. The controller, assisted by management accountants, has a wide
range of responsibilities, including cost management, financial reporting, maintaining financial
information systems, and other reporting functions. The chief financial officer (CFO) has the overall
responsibility for the financial function; the treasurer manages investor and creditor relationships, and the
chief information officer (CIO) manages the firm’s use of information technology, including computer
systems and communications (Blocher).

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 7

 In contrast to the cost management function, the financial reporting function
involves preparing financial statements for external users such as investors and
Financial Reporting
Function
government regulators. These financial accounting reports require compliance
with certain external requirements. Cost management information is developed
for use within the firm to facilitate management and is not required to meet
those requirements.

The main focus of cost management The focus of financial reports must
information therefore must be be accuracy and compliance with
usefulness and timeliness reporting requirements

However, strict adherence to accuracy can compromise the usefulness and timeliness of
the information. The function of the financial systems department is to develop and
maintain the financial reporting system and related systems such as payroll, financial
security systems, and tax preparation. The challenge for the controller is to reconcile
these different and potentially conflicting roles. (Blocher).

Financial Accounting, Management Accounting, and Cost Accounting

Financial accounting. Measures and records business transactions and provides financial statements that
are based on generally accepted accounting principles (GAAP). It focuses on reporting to external parties
such as investors and banks. (Horngren)
The phase of accounting concerned with providing information to stockholders, creditors, and others
outside the organization. (Garrison,)

As you note in previous definition and as many of you have already seen in your financial accounting
class, accounting systems take economic events and transactions, such as sales and materials purchases,
and process the data into information helpful to managers, sales representatives, production supervisors,
and others. Processing any economic transaction means collecting, categorizing, summarizing, and
analyzing.
Accounting systems provide the information found in the income statement, the balance sheet, the
statement of cash flow, and in performance reports, such as the cost of serving customers or running an
advertising campaign.
Managers use accounting information to administer the activities, businesses, or functional areas they
oversee and to coordinate those activities, businesses, or functions within the framework of the
organization. Understanding this information is essential for managers to do their jobs. (Horngren)

Individual managers often require the information in an accounting system to be presented or reported
differently. (Horngren)
Many companies are building their own Enterprise Resource Planning (ERP) systems, single databases that
collect data and feed it into applications that support the company’s business activities, such as purchasing,
production, distribution, and sales.
Prepared by: Sameh.Y.El-lithy. CMA,CIA. 8
Financial accounting and management accounting have different goals.
Financial accounting focuses on reporting Management accounting measures,
to external parties such as investors, analyzes, and reports financial and
government agencies, banks, and suppliers. nonfinancial information that helps
It measures and records business managers make decisions to fulfill the
transactions and provides financial goals of an organization.
statements that are based on generally Managers use management accounting
accepted accounting principles (GAAP). information to develop, communicate, and
The most important way that financial implement strategy.
accounting information affects managers’ They also use management accounting
decisions and actions is through information to coordinate product design,
compensation, which is often, in part, production, and marketing decisions and to
based on numbers in financial statements. evaluate performance. (Horngren)
(Horngren)
Financial accounting is concerned with Managerial accounting is concerned with
providing information to stockholders, providing information to managers—that
creditors, and others who are outside the is, the people inside an organization who
organization. (Garrison,) direct and control its operations. (Garrison,)

Major Differences Between Management and Financial Accounting

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 9

 Role of Cost Accounting
Cost accounting provides information for management accounting and financial accounting.

Cost accounting measures, analyzes, and reports financial and nonfinancial information relating
to the costs of acquiring or using resources in an organization.
For example, calculating the cost of a product is a cost accounting function that answers financial
accounting’s inventory-valuation needs and management accounting’s decision-making needs
(such as deciding how to price products and choosing which products to promote). . (Horngren)

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 10

Cost Management
The ICMA replace the term “cost accounting” with the term “cost management”, but as Horngren say:
unfortunately, that term has no uniform definition. We use cost management to describe the
approaches and activities of managers to use resources to increase value to customers and to achieve
organizational goals.
On the other hand Blocher’s definitions are: Cost management information consists of financial
information about costs and revenues, and nonfinancial information about customer retention,
productivity, quality, and other key success factors for the organization. Cost management is the
development and use of cost management information.

• Cost management decisions include decisions such as whether to enter new markets,
implement new organizational processes, and change product designs.
• Information from accounting systems helps managers to manage costs, but the information and
the accounting systems themselves are not cost management.
• Cost management has a broad focus and is not only about reduction in costs.
• Cost management includes decisions to incur additional costs, for example to improve

The Four Functions of Management

Management accounting information plays a vital role in the basic management activities—but most
particularly in the planning and control functions.
Management accountants contribute to strategic decisions by providing information about the sources
of competitive advantage (H).

The management accountant develops cost management information for the CFO, other managers, and
employee teams to use to manage the firm and make the firm more competitive and successful. Cost
management information is provided for each of the four major management functions:

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 11

Strategic Management:
The most important function is strategic management, which
is the development and implementation of a sustainable
competitive position in which the firm’s competitive Covered in Section B. Part
advantage provides continued success. one.
A strategy is a set of goals and specific action plans that, if
achieved, provide the desired competitive advantage.
Strategic management involves identifying and implementing
these goals and action plans.

Planning & decision making

Next, management is responsible for planning and decision
making, which involve budgeting and profit planning, cash
flow management, and other decisions related to the firm’s Covered in Section B. Part
operations, such as deciding when to lease or buy a facility, one.& Section C Part two.
when to repair or replace a piece of equipment, when to
change a marketing plan, and when to begin development of
a new product. Management accounting
information plays a vital
role in these basic
management activities—
but most particularly in
Control the planning and control
The third area of responsibility, control, consists of two functions.
functions, operational control and management control.
Operational control takes place when mid-level managers
(e.g.,site managers, product managers, regional managers) Covered in Section C. Part
monitor the activities of operating-level managers and one.
employees (e.g., production supervisors and various
department heads).
In contrast, management control is the evaluation of mid-
level managers by upper-level managers (the controller or the
CFO).

In the fourth function, preparation of financial statements,

management complies with the reporting requirements of
relevant groups (such as the Financial Accounting Standards
Board) and relevant federal government authorities (for
example, the Internal Revenue Service and the Securities and
Exchange Commission). The financial statement preparation Covered in Section A. Part
role has recently received a renewed focus as countries one.
throughout the world have adopted International
Financial Reporting Standards (IFRS), and the United States is
expected to adopt these standards by 2014. The financial
statement information also serves the other three management
functions, because this information is often an important part
of planning and decision making, control, and strategic
management

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 12

The Work of Management and the Need for Managerial Accounting
Information
Every organization—large and small—has managers. Someone must be responsible for formulating
strategy, making plans, organizing resources, directing personnel, and controlling operations. (G)
planning, Managers everywhere, carry out three major activities, planning, directing and motivating,
and controlling.
Planning involves establishing a basic strategy, selecting a course of Management accountants
action, and specifying how the action will be implemented.(G) serve as business partners
in these planning activities
Planning comprises selecting organization goals and strategies, because of their
predicting results under various alternative ways of achieving those understanding of what
creates value and the key
goals, deciding how to attain the desired goals, and communicating success factors.(H)
the goals and how to achieve them to the entire organization.(H) Companys’ management
accountants will collect,
The most important planning tool when implementing strategy is a analyze, and summarize
budget. A budget is the quantitative expression of a proposed plan of these data in the form of
budgets.(G)
action by management and is an aid to coordinating what needs to be
done to execute that plan. (H)

Directing and motivating involves mobilizing people to carry out

plans and run routine operations.(G)

Controlling involves ensuring that the plan is actually carried out and is
appropriately modified as circumstances change.(G) The performance report in
would prompt the
Control comprises taking actions that implement the planning management accountant
to raise several questions
decisions, deciding how to evaluate performance, and providing directing the attention of
feedback and learning to help future decision making. (H) managers to problems and
opportunities.(H)
Measuring actual performance informs managers how well they and As we shall see in later
their subunits are doing. (H) chapters, one of the
central purposes of
managerial accounting is
A budget serves as much as a control tool as a planning tool. Why? to provide this kind of
Because a budget is a benchmark against which actual performance can feedback to managers.(G)
be compared.. (H)

The performance report spurs investigation and learning. Learning can

lead to changes in goals, changes in strategies, changes in the ways
decision alternatives are identified, changes in the range of information
collected when making predictions, and sometimes changes in
managers.

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 13

The Planning and Control Cycle
Below exhibit depicts the work of management in the form of the planning and control cycle. The
planning and control cycle involves the smooth flow of management activities from planning
through directing and motivating, controlling, and then back to planning again. All of these activities
involve decision making, which is the hub around which the other activities revolve.(G)

CMA Part One Section.B

covers Planning issues.

CMA Part One Section C CMA Part Two all about

covers controlling issues. decision making.

Changes in business environment affects cost management practices (B).

Primary changes are:
The increasing competitiveness of the global business
environment means that firms increasingly need cost
Increase in global management information to be competitive. Firms
competition need financial and nonfinancial information about
doing business and competing effectively in other
countries.

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 To remain competitive in the face of the increased
global competition, firms around the world
are adopting new manufacturing technologies.
• Just-in-time inventory methods
Lean manufacturing • use of quality teams and statistical quality
control.
• flexible manufacturing techniques developed to
reduce setup times and allow fast turnaround of
ICMA 2015 NEW Topic
customer orders.
covered in Section D.4.
Part One.

The increasing use of information technology, the

Internet, and performance management systems, have
fostered the growing strategic focus in cost
Advances in information management by reducing the time required for
technologies processing transactions and by expanding the
individual manager’s access to information within the
firm, the industry, and the business environment
around the world.

Producing value for the customer changes the

orientation of managers from low-cost production of
Greater focus on the large quantities to quality, service, timeliness of
customer delivery, and the ability to respond to the customer’s
desire for specific features. Today many of the critical
success factors (discussed in CMA Part one Sec.C)
are customer oriented. Cost management practices are
also changing; cost management reports now include
specific measures of customer.
preferences and customer satisfaction.

Because of the focus on customer satisfaction and

value, the emphasis has shifted from financial and
profit-based measures of performance to customer-
related, nonfinancial performance measures such as
quality, time to delivery, and service. (discussed in
CMA Part one Sec.C) , cost management practices are
New forms of management also changing to include reports that are useful to
organization cross-functional teams of managers; the reports reflect
the multifunctional roles of these teams and include a
variety of operating and financial information: product
quality, unit cost, customer satisfaction, and
production bottlenecks, (discussed in CMA Part one
Sec.C & D)

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 The competitive firm incorporates the
previous emerging and anticipated
changes in the contemporary
environment of business into its
business planning and practices.(B)

Guided by strategic thinking, the management accountant focuses on the factors that make the
company successful rather than relying only on costs and other financial measures. Cost management
focuses not on the measurement per se but on the identification of those measures that are critical to
the firm’s success. Covered on CMA Part one Sec.C (B)
This requires the identification of the firm’s critical success factors and the use of analytical, forward-
looking decision support. Critical success factors (CSFs) are measures of those aspects of the firm’s
performance essential to its competitive advantage and, therefore, to its success. Many of these critical
success factors are financial, but many are nonfinancial. The CSFs for any given firm depend on the
nature of the competition it faces.

Note: 2015 CMA LOS replace LOS m. define critical success factors and discuss the importance of
these factors in evaluating a firm, with new one l. define key performance indicators (KPIs) and discuss
the importance of these indicators in evaluating a firm

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 16

Contemporary Management Techniques: The Management Accountant’s
Response to the Contemporary Business Environment
Management accountants, guided by a strategic focus, have responded to the previous changes in the
contemporary business environment with 13 methods that are useful in implementing strategy in these
dynamic times.(B)

The first six methods focus directly on strategy The next seven methods help to achieve
implementation strategy implementation through a focus on
1. The balanced scorecard/strategy map process improvement
(CMA P1.Sec.C), 7. Benchmarking (CMA P1.Sec.D),
2. Value chain (CMA P1.Sec.D), 8. Business process improvement (CMA
3. Activity-based costing (CMA P1.Sec.D),
P1.Sec.D), 9. Total quality management ,
4. Business intelligence, 10. Lean accounting (CMA P1.Sec.D),
5. Target costing(CMA P2.Sec.C), and 11. The theory of constraints (CMA
6. Life-cycle costing (CMA P1.Sec.D). P1.Sec.D),
12. Enterprise sustainability, and
13. Enterprise risk management (CMA
P2.Sec.D).

Majority of the previous methods will be discussed in detail during our course but we can go through
Horngren, Blocher and Garrison’s definition to gain more insights in those topics.

The Balanced Scorecard (BSC) and Strategy Map

The balanced scorecard is an accounting report that includes the firm’s critical success factors in four
areas:
(1) financial performance,
(2) customer satisfaction,
(3) internal processes, and
(4) learning and growth.(B)

The balanced scorecard is a framework for implementing strategy that translates an organization’s
mission and strategy into a set of performance measures.(H)

A balanced scorecard consists of an integrated set of performance measures that are derived from and
support the company’s strategy. A strategy is essentially a theory about how to achieve the
organization’s goals.(G)

The strategy map is a method, based on the balanced scorecard, that links the four perspectives in a
cause-and-effect diagram.

The Value Chain

The value chain is an analysis tool organizations use to identify the specific steps required to provide a
competitive product or service to the customer. (B)
Value chain is the sequence of business functions in which customer usefulness is added to
products.(H)
Value chain: The major business functions that add value to a company’s products and services
such as research and development, product design, manufacturing, marketing, distribution, and
customer service

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Different Parts of the Value Chain

*Administrative function, which includes functions such as accounting and finance, human resource management, and
information technology, that support the six primary business functions.

Managers track the costs incurred in each Management accounting information helps
value-chain category. Their goal is to reduce managers make cost-benefit tradeoffs. For
costs and to improve efficiency. example, is it cheaper to buy products from
outside vendors or to do manufacturing in-
house? How does investing resources in
design and manufacturing reduce costs of
marketing and customer service?

Activity-Based Costing and Management

Many firms have found that they can improve planning, product costing, operational control, and
management control by using activity analysis to develop a detailed description of the specific
activities performed in the firm’s operations. The activity analysis provides the basis for activity-based
costing and activity-based management.(B)

Activity-based costing (ABC) is used to Activity-based management (ABM) uses

improve the accuracy of cost analysis by activity analysis and activity-based costing to
improving the tracing of costs to products or help managers improve the value of products
to individual customers. (B) and services, and to increase the
organization’s competitiveness.(B)
Activity-based costing (ABC). Approach to
costing that focuses on individual activities as Activity-based management (ABM). Method
the fundamental cost objects. It uses the costs of management decision-making that uses
of these activities as the basis for assigning activity-based costing information to improve
costs to other cost objects such as products or customer satisfaction and profitability.(H)
services.(H)
Activity-based management (ABM) A
Activity-based costing (ABC): A costing management approach that focuses on
method based on activities that is designed to managing activities as a way of eliminating
provide managers with cost information for waste and reducing delays and defects. (G)
strategic and other decisions that potentially
affect capacity and therefore fixed as well as
variable costs.(G)

ABC and ABM are key strategic tools for many firms, especially those with complex operations, or
diversity of products and services.
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Business Intelligence
Business intelligence (also called business analytics or predictive analytics) is an approach to strategy
implementation in which the management accountant uses data to understand and analyze business
performance.

Target Costing
Target costing is a method that has resulted directly from the intensely competitive markets in many
industries such as cameras and automobiles.(B)
Target costing determines the desired cost for a product on the basis of a given competitive price,
such that the product will earn a desired profit. Cost is thus determined by price. (B)

Target costing is the process of determining the maximum allowable cost for a new product and then
developing a prototype that can be profitably made for that maximum target cost figure.(G)

The firm using target costing must often adopt strict cost reduction measures or redesign the product
or manufacturing process to meet the market price and remain profitable.(B)

Target cost = Anticipated selling price - Desired profit

Life-Cycle Costing

Life-cycle costing is a method to identify and monitor the costs of a product throughout its life cycle.
The life cycle consists of all steps from product design and purchase of raw materials to delivery and
service of the finished product.(B)

Life-cycle costing: System that tracks and accumulates business function costs of the value chain
attributable to each product from initial R&D to final customer service and support.(H)

Cost management has

traditionally focused only on
costs incurred at the third step,
manufacturing.(B)

Thinking strategically, management accountants now manage the product’s full life cycle of costs,
including upstream and downstream costs as well as manufacturing costs. This expanded focus means
careful attention to product design, since design decisions lock in most subsequent life-cycle costs.(B)

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Benchmarking
Benchmarking is a process by which a firm: Benchmarking. The continuous process of comparing
the levels of performance in producing products and
services and executing activities against the best levels
Identifies its critical success factors, of performance in competing companies or in
companies having similar processes.(H)

Studies the best practices of other firms (or other business units
within a firm) for achieving these critical success factors, and then

Implements improvements in the firm’s processes to match or beat

the performance of those competitors.(B)

Benchmarking was first implemented by Xerox Corporation in the late 1970s. Today many firms use
benchmarking. Some firms are recognized as leaders, and therefore benchmarks, in selected areas—for example, Toyota in
manufacturing, Apple Computer in innovation, among others.

Business Process Improvement

Business process improvement (BPI) is a management method by which managers and workers
commit to a program of continuous improvement in quality and other critical success factors.
Continuous improvement is very often associated with benchmarking and total quality management as
firms seek to identify other firms as models to learn how to improve their critical success factors.

BPI Vs. BPR

While BPI is an incremental method, business process reengineering (BPR) is more radical. BPR is a
method for creating competitive advantage in which a firm reorganizes its operating and management
functions, often with the result that positions are modified, combined, or eliminated.

Total Quality Management

Total quality management (TQM) is a method by which management develops policies and practices
to ensure that the firm’s products and services exceed customers’ expectations. This approach
includes increased product functionality, reliability, durability, and serviceability.

Cost management is used to analyze the cost consequences of different design choices for TQM and to
measure and report the many aspects of quality including, for example, production breakdowns and
production defects, wasted labor or raw materials, the number of service calls, and the nature of
complaints, warranty costs, and product recalls.

Lean Accounting
Lean accounting uses value streams to measure the financial benefits of a firm’s progress in
implementing lean manufacturing. Lean accounting places the firm’s products and services into value
streams, each of which is a group of related products or services.(B)

Lean accounting. Costing method that supports creating value for the customer by costing the entire
value stream, not individual products or departments, thereby eliminating waste in the accounting
process.(H)

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For example, a company manufacturing consumer electronics might have two groups of products (and
two value streams)—digital cameras and video cameras—with several models in each group.
Accounting for value streams can help the firm to better understand the profitability of its process
improvements and product groups, which leads to better decision making.(B)

The Theory of Constraints

The theory of constraints (TOC) is used to help firms effectively improve a very important critical
success factor: cycle time, the rate at which raw materials are converted to finished products. The TOC
helps identify and eliminate bottlenecks—places where partially completed products tend to
accumulate as they wait to be processed in the production process.

Theory of constraints (TOC): Describes methods to maximize operating income when faced with
some bottleneck and some non bottleneck operations.(H)

In the competitive global marketplace common to most industries, the ability to be faster than
competitors is often a critical success factor. Many managers argue that the focus on speed in the TOC
approach is crucial.

Enterprise Risk Management

Enterprise risk management is a framework and process that organizations use to manage the risks
that could negatively or positively affect the company’s competitiveness and success.(B)

Enterprise risk management is a process used by a company to proactively identify and manage those
risks.(G)

Risk is considered broadly to include:

Hazards such as fire or

flood

Financial risks due to foreign

currency fluctuations, commodity
price fluctuations, and changes in
interest rates

Operating risk related to customers,

products, or employees

Strategic risk related to top

management decisions about the firm’s
strategy and implementation thereof

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 Strategic Management and the Strategic Emphasis in Cost Management
Effective strategic management is critical to the success of Strategy specifies how an
the firm or organization, The growing pressures of organization matches its own
economic recession, global competition, technological capabilities with the opportunities
innovation, and changes in business processes have made in the marketplace to accomplish
cost management much more critical and dynamic than its objectives. In other words,
ever before. Managers must think competitively; doing so strategy describes how an
requires a strategy (B). organization will compete and the
opportunities its managers should
seek and pursue (H).

Cost Management

Cost management information is used in Cost management information is used:

a wide variety of ways: Whatever the • to determine prices,
business, a firm must know • to change product or service offerings
•the cost of new products or services, to improve profitability,
•the cost of making improvements in • to update manufacturing facilities in a
existing products or services, and timely fashion, and
•the cost of finding a new way to produce • to determine new marketing methods or
the products or provide the services. (H). distribution channels. (H).

Toyota

For example, The design study includes analysis of By analyzing both manufacturing
manufacturers projected manufacturing costs as well and downstream costs, Toyota is
such as Toyota as costs to be incurred after the product able to determine whether product
study the cost is completed, which include service and enhancements might cause
implications of warranty costs. Service and warranty manufacturing and downstream
design options for costs are often called downstream costs costs to be out of line with expected
each new product. because they occur after manufacturing. increases in customer value and
revenue for that feature. (H).
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Key Management Accounting Guidelines
Three guidelines help management accountants provide the most value to their
companies in strategic and operational decision making:

Employ a cost-benefit Give full recognition to Use different costs for

approach. behavioral and technical different purposes
considerations.

Managers use alternative ways to compute costs in different decision-making situations, because there
are different costs for different purposes. A cost concept used for the external-reporting purpose of
accounting may not be an appropriate concept for internal, routine reporting to managers.

Consider the advertising costs associated with Microsoft Corporation’s launch of a major product
with a useful life of several years.

For external reporting to For internal purposes of evaluating management

shareholders, television advertising performance, however, the television advertising
costs for this product are fully costs could be capitalized and then amortized or
expensed in the income statement in written off as expenses over several years. Microsoft
the year they are incurred. GAAP could capitalize these advertising costs if it believes
requires this immediate expensing for doing so results in a more accurate and fairer measure
external reporting. of the performance of the managers that launched the
new product.

How a Firm Succeeds: The Competitive Strategy

Question
How a Firm Succeeds?

Answer A firm succeeds by implementing a strategy, that is, a plan for using resources
to achieve sustainable goals within a competitive environment.

Finding a strategy begins with determining the purpose and long-range

direction, and therefore the mission, of the company.

Below exhibit lists excerpts from the mission statements of several companies.

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 23

Ford Motor Company (ford.com) The mission is developed into
Provide personal mobility for people around the world.

IBM (ibm.com)
To lead in the creation, development, and manufacture of specific performance
the industry’s most advanced information technologies, objectives
and to translate these into value for our customers.

Google (google.com) which are then implemented by

To organize the world’s information and make it
universally accessible and useful.

Walt Disney (disney.com) specific corporate strategies

To make people happy.

Sara Lee (saralee.com)

that is, specific actions to
Simply delight you . . . every day. achieve the objectives that
will fulfill the mission.

Sara Lee Corporate Strategy Note that

The company is focused on building sustainable, profitable growth over the Sara Lee’s
long term by achieving share leadership in its core categories: broad
• innovating around its core products and product categories; mission
• expanding into high opportunity geographic markets and strategic joint statement is
venture/partnerships; explained in
• delivering superior quality and value to our customers; and terms of
• driving operating efficiencies. more
specific
• Focusing on innovation, execution and performance. As a branded objectives,
consumer goods company, we know successful new products are a key driver which are in
of Sara Lee’s success. turn
• Building big brands in big markets. Sara Lee has a strong portfolio of big operationali
and growing brands that compete in large consumer markets around the world. zed through
• Fostering a new culture. Living and breathing our values every day, our specific
people around the world work as teams, act with integrity, are inclusive, use corporate
the imagination and, most important of all, have the passion to excel. strategies.

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Cost management & the firm’s competitive strategy
Both large and small firms in all types of industries use cost management information. A firm’s degree of
reliance on cost management depends on the nature of its competitive strategy. Firms also are beginning to
use cost management to support their strategic goals. Cost management has shifted away from a focus on
the stewardship role, that is, product costing and financial reporting. The new focus is on a management-
facilitating role: developing cost and other information to support the management of the firm and the
achievement of its strategic goals.(B)

Businesses follow one of two broad strategies:

Cost leadership strategy Product differentiation strategy

Many firms compete on the basis of Other firms, such as cosmetics, fashion, and
being the low-cost provider of the pharmaceutical firms, compete on the basis of product
industry’s goods or services; for these leadership, in which the unusual or innovative features of
firms, cost management is critical.(B) the product make the firm successful. For these firms, the
critical management concern is maintaining product
Some companies, such as Southwest leadership through product development and
Airlines and Vanguard (the mutual marketing.(B)
fund company) follow a cost Companies such as Apple Inc.,the maker of iPods and
leadership strategy. They have been iPhones, and Johnson & Johnson, the pharmaceutical
profitable and have grown over the giant, follow a product differentiation strategy. They
years on the basis of providing quality generate their profits and growth on the basis of their
products or services at low prices by ability to offer differentiated or unique products or
judiciously managing their costs.(H) services that appeal to their customers
and are often priced higher than the less-popular products
or services of their competitors.

Deciding between these strategies is a critical part of what managers do.(H)

Role of cost management

The role of cost management is to support the firm’s strategy by providing the information managers
need to succeed in their product development and marketing efforts, such as the expected cost of
adding a new product feature, the defect rate of a new part, or the reliability of a new manufacturing
process.(B)
Management accountants work closely with managers in formulating strategy by providing
information about the sources of competitive advantage—for example, the cost, productivity, or
efficiency advantage of their company relative to competitors or the premium prices a company can
charge relative to the costs of adding features that make its products or services distinctive.
Strategic cost management describes cost management that specifically focuses on strategic issues.

Developing a Competitive Strategy

In developing a sustainable competitive position, each firm purposefully or as a result of market forces
arrives at one of the two competitive strategies: cost leadership or differentiation

Cost Leadership Cost leadership is a strategy in which a firm outperforms competitors in

producing products or services at the lowest cost.

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 25

 The cost leader

makes sustainable profits at lower prices, thereby normally has a relatively large market
limiting the growth of competition in the industry share and tends to avoid niche or
through its success at reducing price and undermining segment markets by using the price
the profitability of competitors, which must meet the advantage to attract a large portion of the
firm’s low price. broad market.

Cost advantages usually result from productivity in the manufacturing process, in distribution, or in
overall administration.
For example, technological innovation in the manufacturing process and labor savings from overseas
production are common routes to competitive productivity.

Firms known to be successful at cost leadership are typically very large manufacturers and retailers,
such as Wal-Mart, Texas Instruments, and Dell.

A potential weakness of the cost leadership strategy

is the tendency to cut costs in a way that undermines demand for the product or service, for
example, by deleting key features. The cost leader remains competitive only so long as the
consumer sees that the product or service
is (at least nearly) equivalent to competing products that cost somewhat more.

Differentiation The differentiation strategy is implemented by creating a product or service

that is unique in some important way, usually higher quality, customer service
product features, or innovation.

Sometimes a differentiation strategy is called product leadership to refer to the innovation and features
in the product. In other cases the strategy might be called a customer-focused or customer-solution
strategy, to indicate that the organization succeeds on some dimension(s) of customer service. This
perception allows the firm to charge higher prices and outperform the competition in profits without
reducing costs significantly.

Most industries, including, consumer electronics, and clothing, have differentiated firms. The appeal
of differentiation is especially strong for product lines for which the perception of quality and image is
important, as in cosmetics, jewelry, and automobiles. Tiffany, Bentley, Rolex, Maytag, and BMW are
good examples of firms that have a differentiation strategy.

A weakness of the differentiation strategy

Is the firm’s tendency to undermine its strength by attempting to lower costs or by ignoring the
necessity of having a continual and aggressive marketing plan to reinforce the differentiation. If the
consumer begins to believe that the difference is not significant, lower-cost rival products will
appear more attractive.is (at least nearly) equivalent to competing products that cost somewhat
more.

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Other Strategic Issues
A firm succeeds, then, by adopting and However, a firm following both strategies is
effectively implementing one of the strategies likely to succeed only if it achieves one of
explained earlier (and summarized in Exhibit them significantly. A firm that does not
1.9 ). achieve at least one strategy is not likely to be
Recognize that although one strategy is successful.
generally dominant, a firm is most likely to
work hard at process improvement throughout “getting stuck in the middle”
the firm, whether cost leader or differentiator,
and on occasion to employ both of the
strategies at the same time.

Note: This situation is what Michael Porter calls “getting stuck in the middle.” A
firm that is stuck in the middle is not able to sustain a competitive
advantage.

For example, giant retailer Kmart/Sears has been stuck in the middle between trying to compete with
Wal-Mart on cost and price, and with style-conscious Target on differentiation. Some have suggested
that Kmart/Sears might find success by abandoning the suburban locations where Target and Wal-
Mart are strong and instead focusing on their many urban locations where they offer convenience to
the urban shopper.

Distinctive Aspects of the Two Competitive Strategies

Developing a competitive strategy is the first step for a successful business.

The critical next step is to implement that strategy, and this is where the management
accountant comes in.

The management accountant works to implement strategy as a part of the management team,
by contributing the management accountant’s specific expertise (cost management methods).

Prepared by: Sameh.Y.El-lithy. CMA,CIA. 27