Management Accounting Notes

Management Accounting Notes

In many organizations the recording procedure for direct costs is computerized using bar coding and other forms of on-line information recording. Plant-wide (blanket) overhead rates The terms ‘blanket overhead rate’ or ‘plant-wide rate’ are used to describe a single overhead rate that is established for the organization as a whole. First, overheads are accumulated in one single plant-wide pool for a period. Second, a plant-wide rate is computed by dividing the total amount of overheads accumulated by the selected allocation base. The overhead costs are assigned to products by multiplying the plant-wide rate by the units of the selected allocation base used by each product.

Where some departments are more ‘overhead-intensive’ than others, products spending more time in the overhead-intensive departments should be assigned more overhead costs than those spending less time. Departmental rates capture these possible effects but plant-wide rates do not, because of the averaging process. We can include that a plant-wide rate will generally result in the reporting of inaccurate products costs. Chapter 8 Cost-Volume-profit Analysis Total revenue function Accountant assumes that selling price is constant over the relevant range of output, and therefore the total revenue line is a straight line. As it is not the intention Of firms to operate outside the relevant range, the accountant makes no attempt to produce accurate revenue functions outside this range.

A mathematical approach to cost-volume-profit analysis When developing a mathematical formula for producing CAP information, you would note that one is assuming that selling price and costs remain constant per unit of output. In the short run fixed costs are a constant total amount whereas unit cost changes with output levels. Profit per unit also changes with volume. E. G. Fixed costs E 10,000 output 10,000 units, fixed cost El per unit. OR output 5000, fixed cost E per unit. Profit per unit will not therefore be constant over varying output levels and it is incorrect to unite fixed costs for CAP decisions. Net profit = (units sold x unit selling price) – [ (units sold x unit variable cost) + total fixed costs] NP = net profit

X = units sold P = selling price b unit variable cost a = total fixed costs NP=pix- (a + box) a + PIX- NP Break-even point in units The profit-volume ratio NP (Sales revenue x IV ratio) – Fixed costs NP + Fixed costs = Sales revenue x IV ratio Margin of Safety The margin of safety indicates by how much sales may decrease before a loss occurs. Percentage margin of safety = expected sales – break-even sales Expected sales El 60,000 Constructing the break-even chart Fixed costs are plotted as a single horizontal line Constraints of the relevant range consisting of t-van. Or vertical lines are then deed to the graphs: beyond these lines we have little assurance that the CAP relationships are avail.

The total sales revenue line cuts the total cost line is the point where the concert makes neither a profit nor a loss. Cost-volume-profit analysis assumptions 1. All other variables remain constant 2. A single product or constant sales mix 3. Total costs and total revenue are linear functions of output 4. Profits are calculated on a variable costing basis 5. The analysis applies to the relevant range only 6. Costs can be accurately divided into their fixed and variable elements 7. The analysis applies only to a short-term horizon All other variables remain constant In other words, it is assumed that volume is the only factor that will cause costs and revenues to change.

Other variables – production efficiency, sales mix, price levels, production methods If significant changes in these other variables occur the CAP analysis presentation will be incorrect. A single product or constant sales mix Assumes that either a single product is sold or, if a range of products is sold, that sales will be in accordance with a predetermined sales mix. Predetermined sales mix is used, it can be depicted in the CAP analysis by assuring sales volume using standard batch sizes based on a planned sales mix. Total costs and total revenue are linear functions of output Assumes that unit variable cost and selling price are constant Only likely to be valid within the relevant range of production described earlier in this chapter.

Profits are Assumes that the fixed costs incurred during the period are charged as an expense for that period. Variable-costing profit calculations are assumed. If absorption-costing profit calculations are used, necessary to assume that production is equal to sales for the analysis to predict absorption costing refits. If… Does not occur, inventory levels will change, fixed overheads allocated for the period will be different from the amount actually incurred during the period. Only when production equals sales will the amount of fixed overhead incurred be equal to the amount of fixed overhead charged as an expense. The analysis applies only to a short-term time horizon Short-term being typically a period Of one year.

Short-term the costs of providing a firm’s operating capacity, such as property taxes and the salaries of senior managers, are likely to be fixed in relation to hinges in activity In the short term some costs will be fixed and unaffected by changes in volume whereas other (variable) costs will vary with changes in volume. In the short-run volume is the most important variable influencing total revenue, costs and profit. Cost-volume-profit analysis and computer applications The output from a CAP model is only as good as the input. Obviously, estimates regarding these variables will be subject to varying degrees of uncertainty. Sensitivity analysis focuses on how a result will be changed if the original estimates or the under-lying assumptions change CAP computerized models. Separation Of semi-variable costs Direct material is generally presumed to be a variable cost, whereas depreciation, which is related to time and not usage, is a fixed cost.

The cost of maintenance is a semi-variable cost consisting of planned maintenance which is undertaken whatever the level of activity, and a variable element which is directly related to activity. The high-low method consists of examining past costs and activity, selecting the highest and lowest activity levels and comparing the changes in costs which result from the two levels. Difference in cost = El 0,000 Difference in activity 5000 units E variable cost per unit of activity Chapter 9 Measuring relevant costs and revenues for decision-making The term ‘special studies’ is sometimes used to refer to decisions that are not routinely made at frequent intervals.

The term ‘decision-relevant approach’ is used to describe the specific costs and benefits that should be reported for special studies. The meaning of relevance The relevant costs and benefits required for decision-making are only those that will be affected by the decision. The relevant financial inputs for decision- making purposes are therefore future cash flows Only differential (or incremental) cash flows should be taken into account, and cash flows that will be the same for all alternatives are irrelevant. Then past costs (also known as sunk costs) are not relevant for decision-making Both depreciation and the allocation of common fixed costs are irrelevant for decision-making Depreciation represents the allocation of past costs to future periods.

Importance of qualitative factors Those factors that cannot be expressed in monetary terms are classified s qualitative factors. A decline in employee morale that results from redundancies arising from a closure decision is an example of a qualitative factor. It is essential that qualitative factors be brought to the attention of management during the decision-making process. If it is possible qualitative factors should be expressed in quantitative non-financial terms. E. G. The increase in percentage of on-time deliveries from a new production process Special pricing decisions Special pricing decisions . Typically they involve on-time only orders or orders at a price below the prevailing market price.

First, it is assumed that the future selling price will not be affected by selling some of the output at a price below the going market price. Competitors may engage in similar raciest of reducing. May lead to a fall in the market price . Lead to a fall in profits from future sales. Loss of future profits may be greater than the short-term gain Secondly, the decision to accept the order prevents the company from accepting other orders that may be obtained during the period at the going price. Thirdly, it is assumed that the company has unused resources that have no alternative uses that will yield a contribution to profits in excess of EWE,OHO per month. Finally, it is assumed that the fixed costs are unavoidable for the period under consideration.

The identification of relevant costs upends on the circumstances. In one situation a cost may be relevant, but in another the same cost may not be relevant. Evaluation of a longer-term order Capacity cannot easily be altered in the short term and therefore direct labor and fixed costs are likely to be irrelevant with respect to short-term decisions In the longer-term, however, it may be possible to reduce capacity and spending on fixed costs and direct labor. Where the choice of one course of action requires that an alternative course of action is given up, the financial benefits that are forgone or sacrificed are known as opportunity costs.

Therefore whether or not a cost is relevant often depends on the time horizon under consideration. Dangers of focusing excessively on a short-run time horizon Kaplan stresses that by utilizing the unused capacity to increase the range of products produced, . . The production process becomes more complex and consequently the fixed costs of managing the additional complexity will eventually increase. The effect of accepting a series of consecutive special orders over several periods constitutes a long-term decision. IF special orders are always evaluated as short-term decisions a situation can arise whereby he decision to reduce capacity is continually deferred.

Product-mix decisions when capacity constraints exist In the short term sales demand may be in excess of current productivity capacity. These scarce resources are known as limiting factors In this situation the company’s ability to increase its output and profits/net cash inflows is limited in the short term by the availability of machine capacity. In the longer term additional resources should be acquired if the contribution from the extra capacity exceeds the cost of acquisition. Replacement of equipment – the irrelevance of past costs Irrelevance Of the book value Of Old equipment in a replacement decision. Book values are not relevant costs because they are past or sunk costs and are therefore the same for all potential courses of action.

Outsourcing and make or buy decisions Outsourcing is the process of obtaining goods or services from outside suppliers instead of producing the same goods or providing the same services within the organization. Determining the relevant costs of direct materials Where materials are taken from existing stock do remember that the original purchase price represents a past or sunk cost and is therefore irrelevant for session-making. If the materials are to be replaced then using the materials for a particular activity will necessitate their replacement. Thus, the decision to use the materials on an activity will result in additional acquisition costs compared with the situation if the materials were not used on that particular activity. Future replacement cost represents the relevant cost of the materials.

Determining the relevant costs of direct labor The relevant labor cost per hour where full capacity exists is therefore the hourly labor rate plus an opportunity cost consisting of the contribution per our that is lost by accepting the order. Chapter 15 The budgeting process If they fail to do this, there is a danger that managers may each make decisions that they believe are in the best interests of the organization when, in fact, taken together they are not; for example, the marketing department may introduce a promotional campaign that is designed to increase sales demand to a level beyond that which the production department can handle.

Planning is the design of a desired future and of effective ways of bringing it about (Kickoff, 1981) Distinction between short-term planning (budgeting) and Eng-range planning, strategic or corporate planning. Stages in the planning process Stage 1: Establishing objectives Establishing objectives is an essential pre-requisite of the planning process. The attainment of objectives should be measurable in some way and ideally people should be motivated by them. The mission of an organization describes in very general terms the broad purpose and reason for an organization’s existence, the nature of the business(sees) it is in and the customers it seeks to serve and satisfy. Corporate objectives relate to the organization as a whole. Normally measurable and are expressed in financial arms. Nit objectives relate to the specific objectives of individual units within the organization, such as a division or one company within a holding company. Stage 2: Identify potential strategies Identify a range of possible courses of action (or strategies) that might enable the company’s objectives to be achieved. It is necessary to undertake a strategic analysis to become better informed about the organization’s present strategic situation understanding its strengths and weaknesses and its opportunities and risks. Porter (1985) three generic strategies Cost leadership… Lowest cost producer Differentiation. .. Unique dimension in its product/service that is valued by consumers, and which can command a premium price Focus…. Organization determines the way in which the strategy is focused at particular parts of the market. Segment. Aimed at narrow segments of the market to the exclusion of others also… Determine whether within the segment it will compete through cost leadership or differentiation. … Niche strategies….. Secure against competition from large organizations. Must select an appropriate generic strategy rather than attempting to be ‘all things to all people. ‘ Stage 3: Evaluation of strategic options Alternative strategies Us adaptability…. Does the strategy exploit the company strengths and environmental opportunities, avoid the weaknesses and counter the environmental threats? Feasibility. … Can the strategy be funded?

Can the necessary market position be achieved? Acceptability…. Will it be sufficiently profitable? Is the level of risk acceptable? Stage 4: Select course of action Long-term plans should be created to implement the strategies. For several years ahead the plans tend to be uncertain, general in nature, imprecise and subject to change. Stage 5: Implementation of the long-term plans Budgeting is concerned with the implementation of the long-term plan for the year ahead The budget is not something that originates ‘from nothing’ each year – it is developed within the context of ongoing business and is ruled by previous decisions that have been taken within the long-term planning process.

Proposals must be reviewed and revised in the light of more recent information Stages 6 and 7: Monitor actual outcomes and respond to divergences from planned outcomes Compare the actual and the planned outcomes, and to respond to any divergences from the plan. The multiple functions of budgets Purposes 1. Planning annual operations . Coordinating the activities of the various parts of the organizations 3. Communicating plans 4. Motivating managers 5. Controlling activities 6. Evaluating the performance of managers Planning Refinement of those plans, since managers must produce detailed plans for the implementation of the long-range plan Coordination Without any guidance, managers may each make their own decisions, believing that they are working in the best interests of the organization.

Please follow and like us:
Haven’t found the essay you want?