The managerial accountant has a discursive role and responsibilities. Since there is no single accounting discourse, this means the information (numbers and commentary) has multiple meanings in the organization, particularly among different organization functions (e.g., sales and production). This meaning may be expressed in narrative and rhetoric. In effect, narratives will compete, but the best storyteller may not necessarily win given prior circumstances and power relations associated with the coordination arrangements. While the managerial accountant has an advantage, they too are subject to the same power relations. These may negate the discursive advantages of familiarity with the language of business, understanding the subtleties of concepts and classifications, appreciating the connections between managerial and financial accounting, and potential weaknesses or pitfalls in the information they supply. Moving from cost accounting to management of costs is both a semantic change and a work effort change. It requires the selection of methods and models that can improve cost efficiency, so the managerial accountant will use discourse to justify their approach of different and advanced methods and models. They also need discourse to describe the opportunities they find to improve costs. Their discourse overlaps but is different to the discourse non-accounting managers have with financial accountants. So, their role and responsibilities depend on formal and informal communication, and they use different discourse, while still falling within the language of business.
Since their role and responsibilities emphasize the future, misunderstandings and oversights can be catastrophic for the organization, as well as their career. The managerial accountant will be aware when using new or different to expected concepts, classifications, methods and models they need to
be delicate with their discourse: checking the judgments they make about the accounting understanding of the non-accounting managers and their intended use of accounting information. These conclusions impact the managerial accountant’s compass in two ways. Overall, the managerial accountant’s compass needs to be sufficiently general to allow discourse to construct and negotiate the detail in applying it. In addition, the managerial accountant’s compass needs to provide a context for discourse though suggesting openings and avenues for discussion. Using their understanding of narrative, rhetoric and reification in discourse, the managerial accountant can be sensitive when providing information to non-accounting managers. This may compensate for any lack of guidance on what is expected of them and reluctance of non-accounting managers to admit gaps in their understanding. The next chapter expands this to consider information needs, methods of analyzing information and drawing conclusions from it.
Notes
1. Chambers (1986, 2006) gave two examples of time being simultaneously treated as the present folding past and future into it (depreciating the past purchase price and future selling or scrap value), as well as time inversion for comparison (by using present value calculations to bring estimated future options to the present).
2. Any way of representing a series of events as a sequence that moves from a point of beginning to a finishing point.
3. Kolakowski (1989) gives three reasons for modern myths: (1) time is fleeting and meaningless, (2) values are contingent and ephemeral, and (3) they make the world is continuous even though it presents as discontinuities. Myths overcome the apparent indifference of the world, and then managerial accounting contributes to them through rejecting a true cost, objective benchmark or ideal process.
4. The Marxist claim that identity is multiple, subject to change and contingent (Hall, 1996) is accepted, but Covaleski, Dirsmith, Heian, and Samuel, (1998) and Cataldo and McInnes (2011) find for accounting it is bound up with intellectual heritage and accounting’s distinctive role in society rather than other personal behaviors.
5. In postmodern discourse simulacrum is the replacement of reality and meaning with symbols and signs, so human experience is more than an unsatisfactory imitation or substitute; it is artificial. The hallmark there is a lack of critical self-awareness. Hyperreality is used to emphasize that the representation lacks the original referent. Baudrillard (1994, 1998) argues that the process of social homogenization, alienation and exploitation constitutes a widely applicable process of reification, which includes commodities, technologies, as well as discourse.
6. Neoclassical economics examined imperfect competition (Chamberlin, 1933; Robinson, 1933). This dual parentage led to the structure–conduct–performance (SCP) theory attributed to Mason (1939) and Bain (1951). Market concentration was analyzed in relation to market power and the rate of profit (Bain, 1951). Barriers to entry determined industry performance (1956). These were developed from empirical studies in petroleum (Bain, 1944–1947) and manufacturing (Bain, 1954).
7. Overhead, sometimes abbreviated OH, are the costs required to run an organization, but which cannot be directly attributed to any specific business activity, product, or service. Overhead is also known as burden or indirect costs. Overhead is more accurately described by detailing its nature: manufacturing overhead (overhead costs incurred in the manufacturing process); selling overhead
(costs incurred by the sales function), administrative overhead (overhead costs incurred in the administration of the organization) or general overhead (depreciation, insurance, licenses and government fees). General and administrative expenses appear in the income statement below the cost of goods sold (cost of sales). Or they may be integrated with selling expenses (in which case they are clustered together as selling, general and administrative expenses). In Chapter 7 on decisions, the fully classified income (profit and loss) statement shows a more informative approach. Overhead is treated differently under activity-based costing (or time-based activity costing) as it is separated into a cost hierarchy to eliminate the dependence on volume. Drucker (1954: 37) describes overhead as “what the accountant lumps together … the very term reeks of moral disapproval – contains the most productive resource, the managers, planners, designers, innovators”. The managerial accountant should be aware of the perjorative discourse of accounting.
8. An expense a firm incurs as a whole that cannot be assigned directly to any particular product, organizational unit or segment of the business. Where costs are common to more than one cost objects (e.g., several products, processes, activities, organizational units, territories) but cannot be traced to them individually, it is not possible to separate the cost or contribution between the beneficiaries accurately. Joint costs arise where a product or service simultaneously benefits two or more cost objects up to the point where they become distinct.
9. My colleague Dr. Rodney Coyte suggested Activity-Based Costing and sticky costs should be added as recent and important expansions of the concepts and classifications of managerial accounting. To those I would add ‘cost management’. They are discussed in the following paragraphs.
10. There are many conjectures why costs became central to accounting. One is the amount of capital residing in fixed investments of plant, equipment and in-house transport facilities (Garner, 1954, Chatfield, 1971). Another is the need to recognize the declining value of the asset (depreciation). Johnson (1981: 513) sees it as an early form of information to make “short-run production decisions”.
However, it remains unclear why large firms began to allocate costs between products and periods.
11. Many reasons are suggested for cost accounting becoming managerial accounting. Johnson and Kaplan (1987) suggest costs lacked the information to plan production capacity. Miller and O’Leary (1987) suggest it was to monitor performance. The International Federation of Accountants (1998) suggests by 1965 planning and control information enabled decision analysis and this resulted in managerial accounting that focused on process analysis and cost management by 1985 and value creation by 1995.
12. C ost objects that are the purpose costs are accumulated and can be identified as a cost category (e.g., direct materials and direct Labor), or cost pool (when indirect), which have a cost driver.
13. In Germany, a form of ABC had already been used following World War 2 where it was designated flexible standard costing (Schilbach, 1997). In grezplankostenrechnung (GPK), only variable costs closely associated with the product are charged to the cost object in product costing. It supports short-term decisions (e.g., make versus buy, production planning, pricing of arms-length sales and internal transfers) and can guide long-term decision making. Different fixed costs are subtracted from contribution margin to produce a layered contribution margin analysis.
14. Broad average costing uniformly distributes costs across all products or services. It assumes that all products or services are alike in their consumption of resources with reference to the cost object. Provided there are only a few products or services and no variation in their consumption of overheads costs will be accurate otherwise overheads cost figures will be misleading.
15. Under ABC care is needed to ensure the activities chosen are representative of resources consumed. Usually, higher volume products will have lower variable costs, while smaller volume products will receive higher and more variable costs than conventional costing.
16. Instead of estimating the proportion of time spent on various activities, Time- Based ABC requires a manager to estimate (1) how long it takes to complete one unit of an activity and (2) the cost per time unit of the resource, (3) the unused capacity after multiplying the total number of units of activity by the unit activity cost per time unit (Kaplan & Anderson, 2007). An advantage of time-based ABC is that it encourages activities falling in the same classification to be examined to see if they are different. For example, the setup time for manufacturing may be short for certain products, but extensive for complex products requiring precision manufacturing.
17. The integrated framework is the basic accounting equation of assets = liabilities + owner’s equity is based around the economic effects of financial activities in a business, which is then expanded by showing the accounts that make up owner’s equity. The components in the expanded accounting equation differ between sole proprietorship and corporation. For a sole proprietorship: Assets
= Liabilities + Owner Capital + Incomes − Expenses − Withdrawals. For a corporation: Assets = Liabilities + Owner’s paid-in Capital + Revenues − Expenses − Dividends − Treasury Stock. Neither assets nor liabilities are expanded further. The expanded accounting equation makes visible (1) the impact on equity from net income (increased by revenues, decreased by expenses) and (2) the effect of transactions with owners (drawings, dividends, sale or purchase of ownership interest).
18. The two-row/column spanning top and left headings, and separate column and row headings distinguish it from a 2 × 2 matrix. In a 2
× 2 matrix, the axes are chosen so that the most desirable outcome is in the upper left quadrant and the least desirable outcome is in the lower right quadrant.
19. Mixed costs should always be decomposed into their component variable costs and fixed costs.
20. Capitalized costs include plant and equipment (formerly called fixed costs) but also materials and supplies, cost of work-in-process, and finished goods.
21. An invisible cost is a cost that is not incurred directly, as opposed to an explicit cost, which is incurred directly. It is also known as an implied cost.
22. The composition of total cost is described by identifying the contributing factors or cost items. Any increment is determined by the contribution of the cost factors, not necessarily by single units.
23. The increase or decrease in the total cost of a production run for the next unit or one additional unit of volume or output. The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale. When only one additional unit is being considered, the marginal cost may equal incremental cost. Cost-Volume Profit is an example of marginal costing.
24. Sunk costs are costs that have been incurred that cannot be recouped.
25. Cost of sales uses the same cost classifications of manufacturing: direct labor, direct materials, and overhead, but may add the cost of the sales commissions associated with a sale. Cost of sales is calculated either as (1) an adjustment the cost of the goods purchased or manufactured by the change in inventory during a given period, or (2) add the cost of goods purchased or manufactured to the inventory at the beginning of the period and subtract the inventory of goods at the end of the period commonly shown as beginning inventory + purchases − ending inventory.
26. It is the process of continual cost reduction that occurs after a product design has been completed and the product is now in production. It focuses on reducing the cost of raw materials, better procurement, effective waste management and continuous product improvement.
27. Expenditure can be classified as based on the proper or appropriate amount to spend, deemed a matter of judgment. In part, this depends upon whether there is unused capacity.
28. These are synthetic costs because they are constructed logically as expected costs from the components of each item using a specific method. For example, a time study is used to determine the expected labor time of a particular product, which is then converted to a cost.
29. A replacement cost is the actual cost to replace an item or asset. This may arise because an item or asset has been irreparably damaged or destroyed or has to be re-valued. The comparison is with a substantially identical new item or asset at its pre-loss condition. Replacement cost does not equate to the ‘market value’ of the item and is typically distinguished from the ‘actual cash value’ payment, which includes a deduction for depreciation. Market value is market value is its price at sale.
30. According to Koller, Dobbs and Huyett (2010), market value depends upon (1) whether the organization’s value is driven by growth or return on capital, (2) its generation of cash flows (not rearranging liabilities and risk), (3) the competence of the managers and the strategy, and (4) stock market expectations where the organization is traded (e.g., through public listing).
31. The minimum number of options for alternate choices is two, so one option should always be retaining the status quo.
32. Absorption or full costing refers to the full costs of producing a product or service being assigned to the product or service. It contrasts with variable costing (by measuring direct material, direct labor and manufacturing overhead) and shows the costs of maintaining capacity during the period as fixed overhead costs as expenses for the period.
33. The DuPont analysis is a common form of financial statement analysis that allows the dominant elements of profitability to be identified by usually comparing return across organizations in terms of three ratios: (1) profitability (measured by profit margin); (2) asset efficiency (measured by asset turnover) and (3) financial leverage (measured by equity multiplier), although adjustments to components can be made based on industry characteristics (Soliman, 2008). Two other relationships are equally popular. (1) Hayzen
& Reeve (2000) decompose change in profit into: profit (productivity variance, and price recovery variance); productivity (capital utilization variance, and efficiency variance); quantity (Percent change in product quality, and Percent change in resource quantity);
and Price (Percentage change in product price, and Percent change in resource price). (2) Percentage (e.g., materials, overhead, wages) of sales is also used. This analysis is secondary to the managerial accounting costing discussed above.
34. Historic cost emphasizes the distinction from original cost from its replacement cost, current cost, or inflation-adjusted cost.
35. Cost structures are the types and relative proportions of fixed and variable costs at the level of the organization, organizational subunit, geographic region, product or service group, customer or product or service line.
36. A predetermined or estimated cost is used as target cost and basis for comparison with the actual cost. It is derived from time and motion studies; historical data analysis or approximations.
37. These include suitable forms of activity-based management, business process re-engineering, life cycle management, value chain analysis and target costing.
38. A market is a place for buyers and sellers to transact. A market is successful where there is information symmetry, people are spending their own money, public goods are under provided, and quality is transparent. Ideally, the operation of markets should reallocate resources to achieve improved outcomes.
39. Access more detailed data at lower level. It is either at an intermediate aggregation (e.g., data for a geographical region) or the original transaction from a source document.
40. The balanced scorecard is one example of a performance report that combines lead and lag indicators. However, it is neither balanced nor a scorecard. It lacks a theoretical justification for its four categories and their measures. For example, an organization has many stakeholders, not just customers and in some industries, the ‘customer’ stakeholder does not exist; there are no
stakeholders for the financial and internal business process perspectives, and the innovation and learning perspective are internal business processes whose stakeholders exist across the organization.
4
Importance of Information and Communication to the Managerial Accountant’s Compass
The aim of establishing the importance of information1 to the work of the managerial accountant is to show its place in the managerial accountant’s compass. Information supports the four methods of managerial accountant’s compass discussed in Part 4. Previous chapters have taken the availability and understanding of information for granted. This chapter examines the responsibilities of the managerial accountant for selecting, compiling and providing information in a form that is customized to both the characteristics of the decision to be made and the knowledge and expertise of the decision maker(s). The managerial accountant routinely distinguishes between financial and non-financial information, understands its properties or attributes, and uses the source documents to validate information. More importantly, the managerial accountant remembers that non-accounting managers need accounting documents that can be readily understood and will often assist by explaining the document in a ‘walkthrough’ of the figures and their meaning for decisions.