Managerial Accounting

College of Business and Economics

Dr Nazia Adeel
Conceptual Framework:
Key topics
Meaning of Managerial Accounting, Major differences between Management and Financial accounting, Decision
making process, Key Management Accounting Guidelines.

Budgeting:
Meaning, Advantages and Disadvantages of Budget, Budgeting cycle and Master Budget, Preparation of Flexible and
cash budgets.

Cost concepts in Management accounting

Part A: Cost Classification (Fixed, variable, direct, indirect, Period cost, Opportunity cost, Sunk cost, Differential
costs)
Part B: Numerical examples (Cost volume profit relationship, Break-Even Analysis CVP Graph, Analysis of Variances)

Balanced Scorecard:
Concept of Balance Score card, Time and the theory of constraints, just in time Inventory

Managerial accounting: Miscellaneous topics:

Job order costing, Process costing, Activity based costing, Performance measurement in decentralized organizations.

Ratio Analysis:
Introduction, Financial Ratios, Classification of Financial Ratios, Need for comparison, Calculation of various financial
ratios.
 Balance Score card
• What Is a Balanced Scorecard (BSC)?

The term balanced scorecard (BSC) refers to a strategic

management performance metric used to identify and improve various
internal business functions and their resulting external outcomes. Used
to measure and provide feedback to organizations, balanced scorecards
are common among companies in the United States, the United Kingdom,
Japan, and Europe. Data collection is crucial to providing quantitative
results as managers and executives gather and interpret the information.
Company personnel can use this information to make better decisions for
the future of their organizations.
 Balance score card
KEY TAKEAWAYS
• A balanced scorecard is a performance metric used to identify, improve,
and control a business's various functions and resulting outcomes.
• The concept of BSCs was first introduced in 1992 by David Norton and
Robert Kaplan, who took previous metric performance measures and
adapted them to include nonfinancial information.
• BSCs were originally developed for for-profit companies but were later
adapted for use by nonprofits and government agencies.
• The balanced scorecard involves measuring four main aspects of a
business: Learning and growth, business processes, customers, and
finance.
• BSCs allow companies to pool information in a single report, to provide
information into service and quality in addition to financial performance,
 Understanding Balanced Scorecards (BSCs)
Accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David
Norton first introduced the balanced scorecard. The Harvard Business Review first
published it in the 1992 article "The Balanced Scorecard—Measures That Drive
Performance." Both Kaplan and Norton worked on a year-long project involving 12 top-
performing companies. Their study took previous performance measures and adapted
them to include nonfinancial information.
• Companies can easily identify factors hindering business performance and outline
strategic changes tracked by future scorecards.
• BSCs were originally meant for for-profit companies but were later adapted
for nonprofit organizations and government agencies.
• It is meant to measure the intellectual capital of a company, such as training, skills,
knowledge, and any other proprietary information that gives it a competitive
advantage in the market.
• The balanced scorecard model reinforces good behavior in an organization by isolating
four separate areas that need to be analyzed.
 Understanding Balanced Scorecards (BSCs)
• Balance score card four areas of interest include the following:
• Learning and growth
• Business processes
• Customers
• Finance
• The BSC is used to gather important information, such as objectives, measurements, initiatives,
and goals, that result from these four primary functions of a business. Companies can easily
identify factors that hinder business performance and outline strategic changes tracked by
future scorecards.
• The scorecard can provide information about the firm as a whole when viewing company
objectives. An organization may use the balanced scorecard model to implement strategy
mapping to see where value is added within an organization. A company may also use a BSC to
develop strategic initiatives and strategic objectives. This can be done by assigning tasks and
projects to different areas of the company in order to boost financial and operational
efficiencies, thus improving the company's bottom line.
 Characteristics of the
Balanced Scorecard Model (BSC)
• Information is collected and analyzed from four aspects of a business:
1. Learning and growth are analyzed through the investigation of training and knowledge resources. This
first leg handles how well information is captured and how effectively employees use that information to
convert it to a competitive advantage within the industry.
2. Business processes are evaluated by investigating how well products are manufactured. Operational
management is analyzed to track any gaps, delays, bottlenecks, shortages, or waste.
3. Customer perspectives are collected to gauge customer satisfaction with the quality, price, and
availability of products or services. Customers provide feedback about their satisfaction with current
products.
4. Financial data, such as sales, expenditures, and income are used to understand financial performance.
These financial metrics may include dollar amounts, financial ratios, budget variances, or income targets.
• These four legs encompass the vision and strategy of an organization and require active management to
analyze the data collected.
Triple Bottom Line
Accounting
 Triple Bottom Line
Accounting
• The TBL is an accounting framework that incorporates three dimensions of performance:
social, environmental and financial.
• This differs from traditional reporting frameworks as it includes ecological (or
environmental) and social measures that can be difficult to assign appropriate means of
measurement.
• The TBL dimensions are also commonly called the three Ps: people, planet and profits. We
will refer to these as the 3Ps.

• Well before Elkington introduced the sustainability concept as a "triple bottom line,"
environmentalists wrestled with measures of, and frameworks for, sustainability.
• Academic disciplines organized around sustainability have multiplied over the last 30
years. People inside and outside academia who have studied and practised sustainability
would agree with the general definition of Andrew Savitz for TBL.
• The TBL "captures the essence of sustainability by measuring the impact of an
organization's activities on the world ... including both its profitability and shareholder
values and its social, human and environmental capital.
 What is the Theory of Constraints?

• The Theory of Constraints is a methodology for identifying the most

important limiting factor (i.e., constraint) that stands in the way of
achieving a goal and then systematically improving that constraint
until it is no longer the limiting factor. In manufacturing, the
constraint is often referred to as a bottleneck.
• The Theory of Constraints takes a scientific approach to
improvement. It hypothesizes that every complex system, including
manufacturing processes, consists of multiple linked activities, one
of which acts as a constraint upon the entire system (i.e., the
constraint activity is the “weakest link in the chain”).
 What is the Theory of Constraints?
• Dr. Eliyahu Goldratt conceived the Theory of Constraints (TOC), and introduced it to a wide
audience through his bestselling 1984 novel, “The Goal”. Since then, TOC has continued to
evolve and develop, and today it is a significant factor within the world of management best
practices.
• One of the appealing characteristics of the Theory of Constraints is that it inherently prioritizes
improvement activities. The top priority is always the current constraint. In environments
where there is an urgent need to improve, TOC offers a highly focused methodology for
creating rapid improvement.
A successful Theory of Constraints implementation will have the following benefits:
• Increased Profit: the primary goal of TOC for most companies
• Fast Improvement: a result of focusing all attention on one critical area – the system constraint
• Improved Capacity: optimizing the constraint enables more product to be manufactured
• Reduced Lead Times: optimizing the constraint results in smoother and faster product flow
• Reduced Inventory: eliminating bottlenecks means there will be less work-in-process
 What are Constraints?
• Constraints are anything that prevents the organization from making progress towards its goal. In manufacturing
processes, constraints are often referred to as bottlenecks. Interestingly, constraints can take many forms other
than equipment. There are differing opinions on how to best categorize constraints; a common approach is
shown in the following table.
 Just in Time Inventory (JIT)
How Does Just-in-Time Inventory Work?
The just-in-time (JIT) inventory system minimizes inventory and increases efficiency.
JIT production systems cut inventory costs because manufacturers receive materials
and parts as needed for production and do not have to pay storage costs.
Manufacturers are also not left with unwanted inventory if an order is canceled or
not fulfilled.
One example of a JIT inventory system is a car manufacturer that operates with low
inventory levels but heavily relies on its supply chain to deliver the parts it requires
to build cars on an as-needed basis. Consequently, the manufacturer orders the
parts required to assemble the vehicles only after an order is received.
For JIT manufacturing to succeed, companies must have steady production, high-
quality workmanship, glitch-free plant machinery, and reliable suppliers.
The JIT inventory system contrasts with just-in-case strategies, where producers hold
sufficient inventories to have enough products to absorb maximum market demand.
 What Exactly Do You Mean by Just-in-Time?
• A just-in-time (JIT) inventory system is a management strategy that has a company receive goods as
close as possible to when they are actually needed. So, if a car assembly plant needs to install airbags,
it does not keep a stock of airbags on its shelves but receives them as those cars come onto the
assembly line.
• Doesn't This Sound a Bit Risky? What If Things Don't Arrive in Time?
• A chief benefit of a JIT system is that it minimizes the need for a company to store large quantities of
inventory, which improves efficiency and provides substantial cost savings. However, if there is a
supply or demand shock, it can bring everything to a halt.
• For instance, at the beginning of the 2020's economic crisis, everything from ventilators to surgical
masks experienced disruption as inputs from overseas could not reach their destinations in time to
meet a surge in demand.
• What Types of Companies Use JIT?
• The JIT inventory system is popular with small businesses and major corporations alike because it
enhances cash flow and reduces the capital needed to run the business. Retailers, restaurants, on-
demand publishing, tech manufacturing, and automobile manufacturing are examples of industries
that have benefited from just-in-time inventory.
• Who Invented JIT Inventory Management?
• JIT is attributed to the Japanese automaker Toyota Motor Corporation. Executives at Toyota in the
1970s reasoned that the company could adapt more quickly and efficiently to changes in trends or