Accounting for Operations Management

Accounting is basic knowledge for operations managers. Henry Towne, President, ASME and a CEO,  said so in 1886.

He wrote, "To insure the best results, the organization of productive labor must be directed and controlled by persons having not only good executive ability, and possessing the practical familiarity of a mechanic or engineer with the goods produced and the processes employed, but having also, and equally, a practical knowledge of how to observe, record, analyze and compare essential facts in relation to wages, supplies, expense accounts, and all else that enters into or affects the economy of production and the cost of the product."

in the paper, THE ENGINEER AS AN ECONOMIST. 1886, ASME Annual Meeting
https://nraoiekc.blogspot.com/2019/04/the-engineer-as-economist-industrial.html


F.W. Taylor is the pioneer engineering manager. He was present in the ASME meeting in which Henry Towne presented his paper in 1886. Taylor responded by actually implementing the suggestions and ideas of Henry Towne. Tyalor  managed engineering activities from management perspective. He performed all management functions - planning, organizing, staffing, directing and controlling in the sphere of production or manufacturing. His first publicly presented paper was on design aspects of transmission belts (1893). This design or redesign was proposed by him based on nine years of cost data collection. The best design proposed by him would give expected minimum cost of belting system on a life cycle basis. Thus Taylor brought to light force the utility of accounting data to operations managers, production managers, and manufacturing managers

Accounting is the information system that measures business activity, processes the data into reports, 

and communicates the results to decision makers. Accounting is “the language of business.” The better you understand the language of business, the better you can manage the business. Accounting can also be described as a language of managers. Every manager has to understand the activities under his control in accounting terms and present the accounts of his responsibility center to higher level decision makers. For the company as a whole, CEO has to present accounts of the company to Board of Directors and Board of Directors have to present it to Shareholders.

Accounting -  Role in Operations Management

Operations managers to have to present accounts of the operation activities under their supervision or management. While accounts are measurements of actual activities, budget is the plan of the department or responsibility center in accounting terms. Planning the basic function of management. Therefore, we can say budgeting, a part of planning is a basic function or activity of management.

Operations managers have to learn the basic process of accounting in the academic programs and keep updating their knowledge in the career. No doubt actual accounting activities are carried out by specialists but operations managers must have the capability to verify the accounts of their department presented or reported to them by accountants and accept them or suggest if any short comings are suspected. They must be able to answer any queries of senior managers regarding the figures in statements and the reason for achieving those figures. 

Budgeting and Budgetary Control

Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as:

"The establishment of budgets relating the responsibilities of executives to the requirements of a policy (objectives), and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision".

Budget

A budget is a formal quantitative expression of management plans.

Budgets can be made by managers at any level including a single person managing a machine or operating a machine. In the context of business, budget may have revenue, expenses and profits, all in a single statement. But one can think of a budget for revenues alone, budget for expenses alone.

Master Budget

Master budget for a big organization summarizes the goals of all subunits of an organization - either business divisions if the company is organized along divisional lines or managerial functions if the company is organized along functional lines.

The master budget consists of expected or projected income statement, balance sheet, and a cash flow statement, along with supporting schedules.

Benefits of Budgeting or Imperative for Budgeting

The advocates of budgeting state that the process of preparing budget forces executives to become better managers. Budgeting schedule of a company puts planning where it belongs - in the forefront of every manager's mind. It also forces him to review his performance in the last period and identify good practices that enhanced performance and issues that contributed negatively to performance.

The formal budgeting system has the following major benefits.

1. Budgeting due to its formal time table or schedule compels managers to think ahead apart from taking care of their current activities.

2. Budgeting, due to its approval and authorization  by the superiors, provides definite expectations that are the best framework for judging subsequent performance.

3. Budgeting helps in coordinating the various departments of the organization. The budget harmonizes the goals (objectives) of the individual departments into the organization wide goals (objectives).

Budgetary control at department level is encouraging department level personnel to plan their operations for the forth coming period. Both outputs and inputs are to be planned. If possible outputs and inputs are converted into revenues and costs.

The accounting system of the company will prepare the actual revenues and costs generated at the end of the period as well as during the period. The department managers have to responsibility to carry out the day to day activities to achieve the best possible results with their plan/budget as the guiding document.

Budgets can be made flexible so that cost estimates are in relation to the output produced.

Variance analysis can be done to pin point the variables that changed during the period and their effect on actual results.

Budgetary control system facilitates participation of department managers as well as senior level managers in explicitly planning for the future. The plan can be optimized with various optimization techniques.

These techniques include linear programming (for product mix problems), transportation (for planning transport of finished goods) and assignment (assigning machines for jobs or operators for jobs) and other operations research techniques. A formal budgeting system can question the department managers on whether they have applied the optimization techniques or not and where necessary advise them to use those techniques and provide specialist support in cases where necessary.

References

Horngren, Charles, T., Gary L. Sundem, and William O. Stratton, Introduction to Management Accounting, 13th Ed., Prentice Hall, 1999.

Accounting

Accounting is the information system that measures business activity, processes the data into reports,
and communicates the results to decision makers. Accounting is “the language of business.” The better you understand the language of business, the better you can manage your own business.

A key product of accounting is a set of reports called financial statements. Financial statements report on a business or a department  in monetary terms.

We can divide accounting into two fields—financial accounting and managerial accounting.
Financial accounting provides information for external decision makers, such as outside investors and lenders in standard well regulated formats. Financial accounting's major focus is on  providing  data for outsiders.

Managerial accounting focuses on information for internal decision makers, such as the company’s managers. The basic data used by financial accounting and management accounting are same. But managerial accounting provides data for insiders to assess performance of various managers and departments and also to support managers in decision making.


Basics of Financial Accounting

A business can be organized as one of the following:

● Proprietorship
● Partnership
● Corporation
● Limited-liability partnership (LLP) and limited-liability company (LLC)
● Not-for-profit

Accounts are maintained for each of them on in others words for a business firm organized in any permissible mannger..

Accounting Concepts and Principles

The Entity Concept
The Faithful Representation Principle
The Cost Principle
The Going-Concern Concept
The Stable Monetary Unit Concept

The Accounting Equation

The basic tool of accounting is the accounting equation. It measures the resources of
a business and the claims to those resources. The equation is that resources of an organization are equal to the claims on the company by capital providers (including owners that is shareholders)

Assets (Resources) of the Company = Liabilities (Claims of Capital Providers)

Definition of  Accounting

Accounting is the process of analyzing, recording, classifying, summarizing and communicating the results of the economic events of an organization.  The economic events must be measurable in dollars, and are called transactions.

Transaction is an economic event that is a measured in dollars. Accounting is based on actual transactions, not opinions or desires. A transaction is any event that affects the financial position of the business and can be measured reliably. Transactions affect what the company owns, owes, or its net worth.

The Accounting Cycle

1.  Analyze each transaction (Decide which account is to debited and which account is to be credited)
2.  Record each transaction in a journal (ordered by date).
3.  Transfer each transaction to the accounts affected in the ledger.
     (The ledger is a set of accounts ordered by account number.)
4.  Summarize the transactions in the form of statements to help in taking decisions.

5. The overall performance of the organization is summarized in financial statements of the organization in financial accounting for reporting to outsiders.

     a.  Income Statement:  Shows the net income (profit) of the company.
     b.  Owner's Equity Statement:  Shows the owner's claim in the business.
     c.  Balance Sheet:  Shows the financial position of the company.
     d.  Cash Flow Statement:  Shows where cash came from and where it went during the period.

Similar statements can be prepared for various profit centers of the organization also.

The first step in accounting

Journalising a Business Transaction