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2.2 - The financial information organization for management control

2.2.1 - Management Accounting

The cost accounting and management is aimed at providing information on expenditures, revenues and results, not in a comprehensive way as with financial accounting, but the more disaggregated level in order to satisfy the information needs of each manager . The information will be available on certain segments of the organization, such as products, markets, customers, business, affairs, responsibility centers, among others (Rodrigues e Simões, 2008).

The information system of accounting should be based on the information needs of managers, however, will also be responsible for the clearance of the expenses of the products produced (industrial), a task that will reflect the evaluation of inventories which will appear Balance in the organization.

According to Rodrigues, J.A. and Simões, A. (2008), the objectives of management accounting can be summarized as follows:
  • Determine the cost of production, according to valuation standards set externally and standardized;
  • Provide regular monitoring information to assist each manager to plan and manage effectively within their area of responsibility (for example, information for budgetary control or determination of localized results and performance evaluations);
  • Provide occasionally, as necessary, information for decision making "ad hoc" by focusing on concrete alternatives for action and related expenses and income differentials (for example, produce or subcontract to do maintenance of existing equipment or acquire new maintain or abandon certain business or product, etc.).

For these objectives can be achieved, the accounting information system of accounting, require several stages of preparation and execution:
  • Identification of segments for analysis (dimensions). Should be selected segments more suitable for describing and analyzing the reality of economic and financial functioning of the organization, considering the business and activities, the organization's structure and style of management;
  • Definition of methodologies used for the clearance of expenditures and results of these segments (costing systems absorption or direct costing systems; determination result of "accounting" or residual result);
  • Allocation to each of the multiple segments and valuables, according to the occurrence of events or transactions in property of:
    • Expenses resulting from the consumption and use of resources;
    • Income arising from the activity undertaken;
    • Values assets and liabilities directly related to those objects.
  • Preparation of periodic economic and financial reports for each subject.

2.2.2 - Valuable Objects - Segments

Traditionally, business, industrial, allocation of expenses had as main objective the establishment of cost of products. The cost objects were so focused on the allocation of costs (cost centers) to products, manufacturing processes and sections of production (Rodrigues e Simões, 2008).

Currently, objects of value left to focus on products or cost centers, going to be guided from the perspective of the market, a multidimensional approach, which allows to analyze the business from various perspectives simultaneously targeting: markets, distribution channels, customers , type of products or services in order to know their sources that may or destructive of value. This change follows the requirement of managers, to monitor the business in its multiple facets, identifying the factors leading to added value and transmit information to its multiple stakeholders (Rodrigues e Simões, 2008).

With the developments, valuables began to be called segments. The segments are defined as centers of value analysis, with relevance to continuous monitoring, economic and financial. According to Rodrigues, J.A. and Simões, A. (2008) according to their shape and definition, the segments can be considered:
  • External (market, distribution channel, customer, a source, a region, country, etc.);
  • Internal (product, product family, project, responsibility center, business unit, activity, task, program, among others).

"The segment can then be understood as any part of a company or group of companies, of which it considers relevant knowledge of economic and financial information, namely the identification of costs, results and capital that will require in its normal operation (economic activity). Examples of segments:
  • Business dimension: products, business services, projects, works, shops;
  • Market dimension: customers, markets, countries or regions, distribution channels;
  • Processes dimension: activities, processes or resources;
  • Organizational dimension: the centers of responsibility, teams or individuals. " (Rodrigues e Simões, 2008: 34)

To be able to meet the financial performance by segment, you need to guide the management accounts for this purpose. The profitability of customers, the value generated by a project for a distribution channel, or the contribution of a center of responsibility, must therefore be the key concerns of accounting, which will be required to define a more demanding and comprehensive in terms of collecting, processing and dissemination of information. Traditional models of management accounting have proven more oriented towards the establishment of spending, mainly in the internal logic and not on external logic of the market. Knowing the value generated by each segment of the organization, will certainly contribute to more efficient management by giving managers greater certainty in their decisions (Jordan et al., 2007).

The choice of segments to be adopted should reflect the company's strategic options (segmentation of customers, products, markets, organizational structure, among others), as well as the power of decision of the manager in influencing the course of operations of the segments (Jordan et al ., 2007).

2.2.3 - Results Finding Model

The models of allocation of expenses and results stemming from the options chosen on the distribution (or not) and indirect costs of integration (or not) the cost of equity in the results (Rodrigues e Simões, 2008).

Direct expenses are considered those who can easily and objectively be allocated to a particular object of value, identifying themselves with a high degree of accuracy the level of use or consumption of the resource base of the expense involved (Rodrigues e Simões, 2008).

Segundo Rodrigues e Simões (2008),There are two major models for the clearance of segment results:
  • Absorption Model -all expenses, including indirect ones are assigned to segments. The direct costs are allocated to segments that gave rise and indirect expenses are allocated to the segments through the use of criteria for sharing or matching keys.
  • Contribuition Model - only direct costs are recorded in the segments. Regarding indirect costs, are irrelevant, since, every expenditure is always assigned to an object or segment being in the latter case, the entity itself.

"If there are expenses, someone has to pay them" , is the logic underlying the absorption model, where the aim would be to incorporate all costs into the product. This vision would be somewhat adjusted in a production economy where the "producer tells", but with the market set the prices to be charged and a highly competitive price, no longer makes sense to accumulate the expenses in products, once that its pricing does not come from their expense, but market forces. The cost of the product is more a consequence of how each company is organized and works. The focus of economic and financial information is then on the market in order to know their true sources of value (Rodrigues e Simões, 2008).

The results obtained by the absorption model is more a consequence of the criteria used for allocation of expenses, than the true contribution of each segment. The segments that use more intensively the basis for charging will be used to hit with the largest amount of common expenses. We can consider the resulting information as information for indecision (Rodrigues e Simões, 2008).

The absorption model, as well as involve the absorption of total spending by segments, still tend to ignore the capital employed in segments. For a correct assessment of the profitability of the segments, you can not ignore the value of capital employed, ie the economic value of assets related to the segment. The more correct to do so will be enlisting the burden resulting from the application of capital in economic assets, as expenses of the segment. The costs of implementation of capital are valued by the cost of capital for the organization, obtained by calculating the weighted average cost of borrowed capital and cost of capital. Not being the cost of equity recognized by the financial accounting, the "results" of the segments calculated in this way will not be compatible with the accounting organization, but with the corresponding residual result (Rodrigues e Simões, 2008).

"The crossing of the options in relation to costing systems and the use (or not) the concept of" outcome "residual segment results in three large expenditures determination aproaches and thus the results:
  • Absorption approach (all expenses are allocated to segments);
  • Direct Margin approach (only direct costs are allocated but these do not include the financial costs of an economic asset);
  • Contribution approach (only direct costs are allocated including those relating to financial expense of an economic asset). "
    (Rodrigues e Simões, 2008: 40).

We conclude that among three approaches presented, the perspective of contribution will be more valid to present information to managers, focusing on the establishment of value generated by each segment, considering only the costs of its own, allowing an adequate view of economic performance of each segment.

"In summary, rather than determine the outcome for each segment, the organization of results about the determination of the contribution margins (per segment) aims to determine the levels of contribution of segments for shared expenses, ie those that have to be supported in pursuit of support for multiple segments (accounting, quality, human resources, etc.). without which would endanger the organizational goals and business continuity." (Rodrigues e Simões, 2008: 41).

The analysis by segment using the contribution approach, means that all factors related to the segment (eg, design, market, distribution channel, product range) is allocated economically and financially, regardless of function. Similarly, factors that do not relate to the segment will not be assigned, otherwise it would distort the true knowledge regarding its contribution to the results. It is assumed therefore that the segments (Jordan et al., 2007):
  • Generate value, as they provide income;
  • consume and use resources and as such owe them will be assigned to corresponding financial translation: spending;
  • Provide margins, ie the differential between income generated and expenses.

The organization of results about the clearance of their contribution margins, is to know the levels of contribution of each segment for the expenses they are common, particularly those relating to support activities that are used by multiple threads, interesting manage and control rather than distributing these costs (Jordan et al., 2007).

2.2.4 - The Capital Cost

The operation in a given segment involves making investments in non-current assets and current assets (extending credit to customers, provide a certain level of stocks, among others), which can be offset by credits obtained from suppliers (current liabilities). The net investment allocated to the segments is called the Assets or Economic Capital and brings the company to pay a capital cost, which applied to the investment allocated to the segment will allow the establishment of direct financial expense (Rodrigues e Simões, 2008).

To cover financial needs arising from the level of investment in economic assets, the entities have to rely on sources of financing in capital markets, which may be supported on the shareholders (equity) or other lenders (bank loans, bonds, among others) behaving, each of them a level of risk and expense. Investors have expectations of profitability for their capital in the face of alternative options (opportunity cost), while the creditors require a certain level of remuneration which is the interest (Rodrigues e Simões, 2008).

Factors that influence the rate of cost of capital (t%)

The calculation of the cost of capital should therefore be made using the Balance Economic forecast to be kept for that purpose. The formula to be applied shall be:

Where e% identifies the expected return rate to the shareholder and i% the rate to apply for external funding.
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