Handout 1 Planning, Control and Decision-making Management accounting is concerned with the collection of data, analysis and processing

information, and the interpretation and communication of that information so as to assist management with planning ,control and decision making The CIMA official Terminology also describes the core activities of management accounting as 1.Participation in the planning process . This involves the establishment of policies and the formulation of plans and budgets which will subsequently be expressed in financial terms. 2. provision of guidance for management decisions. This involves the generation , analysis presentation and interpretation of appropriate relevant information. 3. Contributing to the monitoring and control performance through the provision of reports on organizational performance, including comparison of actual with planned or budgeted performance, and their analysis. Along with planning, control and decision making, analysis can also be described as one of the key process of management accounting Strategic Management Accounting Management Accounting was developed from cost accounting and has its roots in manufacturing. Traditionally it emphasize on calculation and determination of material, labour and manufacturing overhead. In other words we can say primarily it intended to serve production management purposes. The internal information used by management accountants tended to be sourced from accounting systems, which were directed towards financial reporting, which was irrelevant for decision-making. For decision making purpose forward-looking process is important.
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In the last century manufacturing operated in an environment where supplier was important and competition was largely local and speed of technical development was slower than now. So traditional management accounting was serving the purpose. But in the later part of 20th century and in start of 21st century things have changed dramatically and now Customer has become the king. Environment has become much more competitive and technology is changing rapidly. To meet the challenges the organizations should be flexible enough to meet the changing requirements of their customers. This thing needs forward looking approach with focus on external information. Strategic management accounting took birth from the above arguments. Where Management accountant or accounting system should provide information that is strategically important for planning, decision-making and control. What is Strategic management accounting? A form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non financial information and internally generated information. SMA has a positive role of: External Orientation: The important fact, which distinguishes strategic management accounting from other management accounting activities, is its external orientation towards customers, competitors, suppliers and perhaps other stakeholders. Improved planning and decision making:

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SMA aims to support the forward-looking and outward looking processes of planning and decision making. For example SMA provide all relevant information about external factors and interest groups which could have an impact on the organisations future development. Goal congruence Business strategy involves the activities of many different functions, including marketing, production and human resource management. The SMA system will require the inputs of many areas of the business: It relates business operations to financial performance and therefore helps ensure that business activities are focused on shareholders needs for profit. Strategic management involves: Analysis Implementation Control

This simple example will help you to understand the above concepts easily. Mr and Mrs Ahmad go to Sultan centre to buy food and other household items. They make a list beforehand, which sets out all the things they need. As they go around the store they tick off the items on the list. If any particular item is not available they choose an alternative from the range on the shelves. They also buy a bottle of juice and two bars of chocolates which were originally not on their list of shopping. a) What part or parts of this activity would you describe as planning? b) There are several examples of decision making in this story. Identify three of them. c) What part of this activity would you describe as control?

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What information could strategic management accounting provide? Keeping in mind the need for goal congruence, External orientation and future orientation, some example of SMA are provided below: 1) Competitors Costs What are they? How do they compare with ours? Can we beat them? Are competitors vulnerable because of their cost structure? 2) Product profitability A firm should want to know not just what profits or losses are being made by each of its products, but why one product should be making good profits where as another equally good product might be making a loss 3) Customer profitability 4) Pricing decisions Some customers or group of customers are worth more than others. Accounting information can help to analyse how profits and cash flows will vary according price and prospective demand 5) The value of market A firm ought to aware of what it is worth to increase the market share 6) Capacity expansion share of one of its products. Should the firm expand its capacity, and if so by how much? Should the firm diversify into a new area of operations or a new market? 7) Brand value 8) Decisions to enter or leave a business area 9) Introduction technology of new How much is it worth investing in a brand which customers will choose over competitors brands?

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Robert Antony, a leading writer on organizational control classifies the information used at different management levels for planning control and decision making into three tiers: Strategic planning, management control and operational control. Strategic planning. The process of deciding on objectives of the organization, on changes in these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use and disposition of these resources. It includes such matters as the selection of products to make and markets to sell them, the required level of company profitability, the purchase and disposal of subsidiary companies or major fixed assets, and so on. Characteristics of Strategic Planning a) Generally formulated in writing b) Circulated to all interested parties within the organization Strategic Information a) It is used to plan objectives of the organization and to assess whether they are being met b) Generally externally sourced c) About competitors, customers, suppliers, new technology, the state of markets and the economy, government legislation and political situation and so on d) It includes; Overall profitability Profitability of different business segments Availability and cost of raising new funds Human capital needed
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Management Control. The process of deciding by which managers assure that the resources are obtained and used effectively and efficiently in the accomplishment of the organizations objectives. It is sometimes called tactics or tactical planning Management Control is concerned with decision making about the efficient and effective use of an organizations resources to achieve these objectives or targets. Management control activities are short term non strategic activities. Examples of management control activities 1.Preparing budgets for the next year for sales production and stock levels 2, Developing a product for launching in the market 3. Planning advertising and marketing campaigns Establishing a line of authority structure for the organization. Information requirements Primarily generated internal Embraces the entire organization Summarised at a relatively low level Often Quantitative( labour hours, volumes of sales and production) Commonly expressed in money terms Types of information Budgetary control or variance analysis reports Cash flow forecasts Labour turnover statistics within a department Short term purchasing requirements
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Operational Control The third lowest tier in hierarchy of decision making consists of operational control decisions operational control The process of assuring that specific tasks are carried out effectively and efficiently. Operational control activities This level of decision making occurs in all aspects of an organization activities, even when the activities cannot be sxcheduled nor properly estimated because they are non- standard activities(such as repair work, answering customer complaints) The scheduling of unexpected work must be done at short notice, which is a feature of much operational decision making. In the repairs department, for example, routine preventive maintenance can be scheduled, but breakdowns occur unexpectedly and repair works must be controlled on the spot by a repairs department supervisor. Operational control activities can also be described as short term non strategic activities. Information requirement Operational information is information which is needed for the conduct of day to day implementation of plans It will include much transaction data such as data about customer orders, purchase orders ,cash receipts and payments Operating information must usually be consolidated into totals in management reports

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DECISION MAKING Decisions are taken at all levels in the organization Strategic level Tactical level Operational level THE DECISION MAKING PROCESS Although termed the decision making process, the steps set out below actually incorporate planning and control Step1 Identify objectives The organisations goals or objectives must be defined to ensure that managers are able to assess which of the course of action available is the most appropriate for the organisation Step 2 Search for alternative course of action The next step is to find a number of possible course of action that enable objectives to be achieved Step 3 Collect data about the alternative course of action The type of data that needs collecting will depend on the type of decision Step 4 Select the appropriate course of action The course of action which best satisfies the organisations objectives should be selected Step 5 Implement the decision The decision chosen must be implemented Step 6 Compare actual and planned outcomes and take any necessary corrective action if the planned results have not been achieved
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