MBA Update: Management Accounting

MBA management accounting girl bossThe first 8-week condensed MBA course was Management Accounting, and I thought I should write a bit about it before I have to return my textbook.

Management accounting is “the process of supplying the managers and employees in an organization with relevant information, both financial and non-financial, for making decisions, allocating resources, and monitoring, evaluating, and rewarding performance” (See book below).

Traditionally, I thought of accounting as only financial accounting, which I did have to take a few prep courses in before enrolling in this first MBA class. Interestingly, this class didn’t touch much on the balance statements, profit and loss, and other traditional accounting terms. Strategy is a key topic in management accounting. If you need to make decisions for your business, especially if it is a large company with many departments or employees, then management accounting can help you with pricing, product planning, budgeting, performance evaluations, contracting, deciding to outsource, and more.

A few things discussed in the class:

  • The plan-do-check-act cycle: Pretty much how it sounds! A circular system of planning a goal, doing the steps you planned to achieve that goal, checking if the goal was achieved or not, and acting on the information you found while checking (such as analytics) to see if you should either continue to pursue the goal with the same strategy as before or if you should return to the planning stage to improve results. A company’s mission statement was used as the goal or objective in the textbook examples.

 

  • The balanced scorecard: A strategy map that measures a company’s performance in a “scorecard” format of four connected areas:
    • Financial perspective – How is success measured by our shareholders?
    • Customer perspective – How do we create value for our customer?
    • Process perspective – In which processes do we need to excel to meet customer and shareholder expectations?
    • Learning and growth – What employee capabilities, information systems, and organizational capabilities do we need to continually improve our processes and customer relationships?
    One of our assignments was making a balanced scorecard for a city, given their mission statement and background information.

 

“A good strategy has two essential components:

1. a clear statement of the company’s advantage in the competitive marketplace, what it does or intends to do differently, better or uniquely compared to competitors.

2. The scope for the strategy, where the company intends to compete most aggressively, either for targeted customer segments, technologies employees, geographic locations served, or product line breadth” (Book, see below).

 

  • The sunk cost effect: A sunk cost results from a previous commitment and cannot be recovered (such as past insurance payments)…which should NOT be used in decision-making! But sunk costs often ARE used in decision-making, which is called the sunk cost effect.  A common example of a sunk cost is the Concorde plane, which was determined to be unprofitable to operate even before it was finished, but England and France kept investing money to finish it because they had already invested so much money into it. Sometimes the sunk cost effect is called the Concorde effect or fallacy.

 

  • Activity Based Costing (ABC): A big, complicated chapter! There were several chapters about costs, ABC deals with indirect costs like building electricity, costs that can’t easily be assigned directly to one unit of product or service. You can read about it here. More accurate costing systems can tell you more about profitability, especially for companies with a wide range of products, which helps in decisions like raising or lowering prices of certain products.

 

  • Measuring and managing customer relationships: There were a lot of good points in this chapter, such as how 80% of profit usually comes from 20% of customers. Good customers are ones who have big orders on a regular schedule with low hand-holding (customer service) involved. Bad or less profitable customers make lots of small, customized orders and require lots of customer service to be happy, two things which cost companies a lot of money. Non-financial information like customer satisfaction and loyalty were also described in this chapter.

 

  • Lean manufacturing or just-in-time manufacturing (JIT): Lean manufacturing eliminates any spending that does not create value for the customer, value being what a customer would pay for. JIT is making a product or service only when the department or customer needs it, in a continuous flow production layout, instead of making lots of items in advance (which need inventory space to store them) and making parts for one product in separate departments. Toyota popularized these methods, read more here.

 

  • Behavioral issues: In almost every chapter, behavioral issues of employees were discussed. Remember that people are naturally resistant to change, especially when changing systems (ways of doing tasks) they know about and have used for a long time. Ethical control systems were also discussed, to help all employees of a company easily make ethical decisions and report unethical behavior without penalty.

The book used for class was Management Accounting, 6th edition, by Atkinson, Kaplan, Matsumura and Young. Rent it on Amazon Textbook Rental around $20 for several months. I really wish Amazon textbook rental existed when I was in college the first time around! It was such a hassle to re-sell books for 10-20% of what they cost at the beginning of the semester. I try to keep things minimal in my apartment, so I don’t need to keep books I don’t love!

I started the online MBA program at Montclair State University in January 2017.

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