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A number of individuals agree to set up business together draw up partnership agreement Partnership can start trading any given time Must distinguish between Need not make public its annual business and domestic expense results - makes annual tax returns Sole Trader In law has unlimited liability (can loose house if sued etc) Need not make public its annual results - makes annual tax Accounting is defined as a Avoids risks of unlimited liability series of processes, by limiting the amount of liability returns by shareholders to the amount of techniques and procedures equity paid into the company Types of Businesses used to identify, measure makes annual results public to and communicate protect creditors and others - economic information which must be audited by auditors Company users find helpful in making decisions Service Function A company's OE is termed share capital and is split into individual shares usually expressed in Economic Info small units - par value or nominal value Definition Accounting Identified then measured Statement of company's Assets Communication device and Liabilities on a given date Module 1 FA + NCA (CA-CL) = OE (Capital & profit) An Introduction Balance Sheet and the FA + NCA = net assets Accounting Equation Shows the company's Profit and loss account A = 0E + L The Accounting Equation Sales - COS = GP A - L = 0E GP - expenses = NP Income Statement Accounting Statements Sources of cash vs uses of cash Cash flow Retained profits of the company Definitions over its history Items that the company has to Portays only those economic pay sooner or later events of a business that affect OE = Fresh issue of shares throughout cash flows Liabilities the life of the Co (if any) Items of expenditure accounted Original share capital paid by the for via the B/S we call Capital Assets shareholder @ business start expenditure Businesses need these to do business with - cash or non cash An assessment of the Depreciation consumption of the value of an Itens of expenditure accounted asset throughout the year for via the IS we call Revenue expenditure
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Only products that have been sold are measured as sales SALES (Measure of accomplishment) Realization Convention Credit worthy client will still pay us but Accruals Convention now we count the salesbut we count as Substract the RM at the end of the E.g Materials, Labour etc Matching costs to customers invoiced year from the RM at (start of year + (sold) purchases throughout the year) LESS COS (Measure of Effort) Matching Convention MODULE 2 Use the price paid for products when Use of Raw material business aquired them PROFIT AND LOSS STATEMENT Cost Convention Determine from payslips (Cost - NRV) / years OR Use of Labour INCOME STATEMENT = GROSS PROFIT Task 1: Determine Consumption Straight Line Allocation Convention of production Larger amounts reported earlier on and reduced as asset gets Also annual lease payments & bad older LESS EXPENSES debt provision & profit or loss of Reduced balance sale of plant Depreciation of fixed assets = NET PROFIT BEFORE INTEREST Depreciation is an allocation of (Annual Hours / Total hours) x costs - it reduces profit, thereby Net cost (aquisition - NRV) AND TAX lowering tax & dividend payments Consumption method number of running hours per machine, the greater the hours, the LESS INTEREST & Conservatism convention greater the wear and tear TAX Recognise losses & reductions in Cost Convention value whever they occur = NET PROFIT AFTER INTEREST AND TAX Task 2: Determine valuation of Left with newest stock - Higher closing WIP & Inventories Inventory valuation reported profits than other LESS AMOUNT DUE FIFO methods (old prices go first) Raw Materials TO MINORITY Closing inventory is closest to current market prices INTERESTS WIP The higher the ending inventory Left with oldest stock (& cheapest) valuation - the higher the reported LIFO LESS PROFIT ON - lower profits reported- Valuation of WIP / FG profit Finished Goods ACTIVITIES Ave cost = Total purchases ATTRIBUTABLE TO (opening + purchased) / # of units The lower the ending inventory Average purchased (opening + purchased S/H Period costs = written off in P&L Product costs can be inventoried valuation -- the lower the reported & carried forward in the valuation stock #) without allocating them to unsold profit products (e.g financial interest of inventory in the B/S. The more = RETAINED PROFIT products costs, the higher the Opening inventory + Purchases - paid to lenders, marketing & units sold FOR THE FINANCIAL admin costs) inventory value in B/S & the higher the reported profit Closing inventory = YEAR Opening inventory + purchases - closing inventory number (after Closing cost of sales = FIFO or LIFO)
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Cost + legal fees + prep of land Capitilised Land Amount to be reduced or increased when re-evaluated) depreciated Buildings Straight Line depreciation Plant and Equipment Reduced balance depreciation FIXED ASSETS (FA) Consumption depreciation Property not owned (leased assets) must also be depreceiated - usually 20 years or less - not Also Goodwill (intangible asset) more than 40 years) Also Investments e.g shares in joint ventures + Also Brands (intangible assets) NCA (CURRENT ASSETS - CURRENT Inventory LIABILITIES) Debtors(less provisions) Module 3 Cash e.g when we have paid our rent (CURRENT ASSETS in advance The Balance Sheet Also Prepayments In P&L reflect what was paid Also ST investments until year end as sales - the rest reflect as referred revenue in If people have paid us in B/S CL advance we still have to deliver Deferred Revenue the service / goods) + leased obligations (future Creditors payments) - property not owned by us but will be once we pay it off Accurals if we owe money e.g electricity LESS LIABILITIES) bill Tax Payable Dividends Payable = NETT ASSETS OF Also Bank Overdraft COMPANY Also Short Term Loans Gearing = LT debt / Total = OE (CAPITAL INTRODUCED + PROFIT) assets + Long Term Debt (loans)
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Profit from Operations Capital Introduced Increase in Creditors SOURCES OF CASH Sale of fixed assets Loans Decrease in Inventories Decrease in debtors Loss from Operations Working capital = Changes in Creditors, Debtors & Inventory Capital Repayments = Profit + Depreciation - or + Net Cashflow from Operations loss or gain of sales of asset + Module 4 bad debt provision - or + working Decrease in Creditors The Cash Flow - capital Statement USES OF CASH Purchase of fixed assets Received from investments Paid out in dividends to non Repayment of loans Cashflow from Return on equity shareholders & minority investments & servicing of interest financing Interest on borrowed money Increase in Inventories Overdraft interest Increase in debtors Taxation Tax paid on profits of previous year 8 CATEGORIES OF CASH FLOW Capital Investment Sales / disposals / purchases of property, plant & equipment (FA's) Total balance must balance with Purchases + Sales of Cash in the bank + overdraft subsideries, co's & JV's (NB Aquisitions and disposals only final selling price Not book value) Equity dividends paid to CASH FLOW STATEMENT (NRTCAEMF) shareholders Dividends paid from year before N R T CA investments e.g Gvt bonds & aughty abbits ake securities (can sell if need C A E M Management of liquid resources arrots nd at uch money in ST) Fibre Issuing of shares (Ordinary share capital) Financing Repayment of loan stock & loans
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drawn up in accordance with accepted accounting principles using accurate figures & free from deliberate bias, manipulation or concealment "True and Fair view" Annual Auditor report Government legislation: Companies Act Info listed in notes The role of the auditor Stipulates what must be disclosed Audit methodology A set limit by the auditor, below Underpins disclosures in that which they will not examine in company must disclose its detail Internal Control The External Auditor accounting policies and reasons for changes / variations from it Level of Materiality Accounting Profession: Accounting Standards Unqualified (no issues) Disclosure Governance Justify switches The Audit report Qualified (issues) Annual report and accounts info Revenue is recognised when The Stock Exchange Listing Agreement Half annual profit report for shareholders made public shipped & invoiced even though The Going Concern Concept customer not yet paid. cost are Extends disclosure of companies incurred in fulfilling sales even act - doesn'y make any attempts to though haven't paid supplier yet prescribe accounting conventions. The Accruals Concept Work out the price off acquired The Consistency Concept The responsibility for publishing co's net assets 5 fundamental accounting concepts group accounts rests with the Conservative approach holding company The group Profit & loss accounts The Prudence Concept Acquisition cost comes off the Disclosure of seperate amounts of The group balance sheet e.g Net assets - reflect FA + NCA Nett Assets (FA+ NCA) The holding company must amounts instead of just the NA The Non Aggregation Concept publish: amount Its own balance sheet Goodwill is what the acquirer is Financial reporting The subsidery must continue to willing to pay for net assets Module 5 publish it's own financials in the which he believes possesses a usual way Its financials will show no sign of higher intrinsic value than that The Framework for Financial reporting the acquisition other than a note appearing on the balance sheet in the account notes See Page 5/7 for e.g & Q5.11 Dividends are profits paid to shareholders as return on their investment Minority interest = found in the iabilities side of the balance sheet - denotes those shares continuing to be held by shareholders in the subsidery Definitions company - i.e what's left behind not acquired calculate the remaining % off the Amortises = word used for acquired co's OE depreciating intangible assets e.g goodwill & brands Revaluation reserve = is created whan a fixed asset is revalued beyond its aquisition Share Premium = the cost, thereby giving rise to a difference between the nominal non- distributable revaluation share price and share issue reserve for the excess amount price oif the revaluation over the historic cost
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EPS = Profit on ordinary shares attributable to shareholders / Number of ordinary shares in issue Earnings Per Share (EPS) PE = Market price / EPS Profit on ordinary shares attributable to shareholders / Dividend Payout CR = CA / CL Price / Earnings Ratio (PE) Dividend Cover Dividend per share / (mkt value Current Ratio If CA exceeds CL by at least 2 x then OK per share x 100) 5) Stock Market Ratios Dividend Yield (x6) QR = CA - Inventory / CL Dividend / # of shares Dividend per share To work out # of shares = 1) Liquidity Ratios (x2) If QR okay but CR not =issue with Ordinary share capital / nominal Quick Ratio / Acid Test inventory value of shares IT = Cost of sales / Inventory Measures company's ability to meet short term obligations GPM = Operating profit / Sales Inventory Turnover Measures how effectively a Must earn significant GPM for sustainability company manages it's assets Gross Profit Margin Debtors / Sales per day Profit Margin PM = profit on ordinary shares before tax / Sales Average Collection Period 4) Efficiency Ratios (x3) ROTA = Profit on ordinary shares before tax / Total assets Return on Total Assets Sales / Fixed Assets Module 6 If low return then shed unproductive assets Interpretation of Financial statements Return on Specific Assets e.g RO inventory= Profit on ordinary shares before tax / Inventory Fixed Assets Turnover 2) Profitability Ratios (x6) If co is low on inventory - Return of several hundred % Measures managements overall RCE = Profit on ordinary shares before tax / Capital employed (OE + long term loans & provisions) a) examines the asset structure effectiveness: does the co Return on Capital Employed of the co control expenses and earn a = FA / CA Fixed to Current Asset resonable returns on funds Indication of funds tied up in Capital employed b) the extent to which the co relies on debt invested Asset structure of Co Profit before Tax is used in all Return on Owners Equity ROE = Profit on ordinary shares attributable to shareholders / OE G = Long term debt / Total Assets profitability formulas except for Gearing / Leverage ROE (profit attributable to 3) Capital Structure Shareholders) Increase in this is good sign - Low return then e.g share price will fall D R = Total Debt / Total Assets Ratios (x5) Extent earnings can decline without co being nable to meet annual interest costs Low geared co protects it's shareholders but less returns Times Interest Earned Debt Ratios High geared co puts shareholders at risk but high returns TIE = Profit on ordinary shares before tax + Interest charges / Interest charges Result of DR - e.g 40% for every R1 co has invested, 40 cents was contributed by persons other than shareholders (& 60cents by shareholders)
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Write off Research expenditure in International P & L Harmonising of Quasi Subsideries (FRS5 requires Accounting standards it to be included in B/S) (IASC) Research and Development Capitalize Development Expenditure return unsold goods incurring no penality Consignment inventories obligated to pay for goods whether A provision is a liability of Provisions and sold or not uncertain timing or amount Contingencies (Big Off Balance Sheet Transactions Bath - FRS12) Sale and repurchase agreements Net Realisable Value (NRV) is the value at which the asset can be disposed of, less selling cost Debt factoring Impairment of FA & NRV = Value to be disposed - Goodwill (FRS11) takeover where predator selling costs Module 7 (holding) company acquires more than 50% of the equity Value in Use (VIU) is the present Emerging Issues and sjhare capital of target value of the future cash flows Mangerial options in (subsidery) company for cash, obtained as a result of an Financial reports shares or both assets's continued use Environmental Reporting Acquisiton accounting Goodwill Operating review Acquisitions & Mergers based on the concept of Operating and Financial Review harmony & agreemnet. assumes Financial review agreement between both parties to pool their respective interests rather than one to hand over the assets to the other. Write off at the moment of acquisition No equity shareholders retain any material interest Capitalize the amount paid as Merger Accounting Accounted for by: Each partyreceives primary equity shares an asset and depreciate not Goodwill FR6 requires companies to longer than 40yrs adopt merger accounting when: Sizes of companies are not too disparate Historic cost Brands Goodwill is the excess over book Valuation of brands value that a company is Earnings method No party dominates prepared to pay for another Brands are the names of company's net assets. consumer products which, No party is acquirer / acquirer because they are so well known, can be seen as having value to companies which own them.
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Planning & Co-ordinating Role of a manager Directing and controlling Direct Costs vs Indirect costs Structure? Materials Prime cost = Rules? Direct material + Direct Labour Labour Costs Compulsory? Manufacturing overheads Differences between Mngt & Financial Accounting Money terms? Variable cost per unit = Module 8 - Intro to cost & Direct Material + Direct Labour + management accounting Time span? Variable overhead Total Variable Costs Whole or parts? Audit? Job costing = units of outputs are suficiently identifiable to pinpoint direct material and Labour applied to e.g civil engineering projects, each unit - individuals products are Process costing = No uniqueness is furniture, car manufacturing deemed to be seperate jobs which identifiable in the products produced e.g Chemical industry & brewery incure seperate costs and where the process is continous industry
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e,g Depreciation on saws, equipment, 1) all costs can be identified as variable rent for workshop, salaries of foreman or fixed 2) sales price per unit remains Assumptions Manufacturing overheads e.g Depreciation on office PC's, rent on unchanged offices, salaries of general staff 3) Sales mix will be maintained as budged Variable and Fixed Costs Nonmanufacturing overheads Semi-variable costs - both variable & 4) All production is sold fixed costs e.g telephone fixed rate & cost per unit To work out sales required of want to Direct costs = material & Labour make X amount of profit Direct and Indirect costs Indirect costs = Manufacturing overheads Sales required Traceable costs = traced into the cost Sales required = Fixed costs + Target item profit / Contribution margin Traceable and Common costs To measure impact of volume on profit Common costs = indirect costs (contribution) Products costs - attached to cost items P / V = Profit / Sales price OR costs = traced into the cost item Product costs and Period Costs Module 9 - Period costs = costs controlled in time P / V = (Sales Price-Variable costs) / Profit / Volume periods e.g selling, admin & financials Sales price Cost Characteristics cost And Behaviour If P/V =0.4 it means that for every $1 of sales, earn a contribution (profit) of $0.40 Refers to the person who can be held Controllable and Non-controllable costs accountable for the costs being P / V Ratio = (Contribution margin per measured unit) / Sales revenue Standard costs = budgeted cost for one Breakeven Point = Fixed costs / cost item Contribution Margin Standard and Actual costs Actual costs = measured period by Breakeven point = The diff between the BEP & actual level period of output if greater than BE is Discretionary costs = Costs that are in Margins of safety the control of managers and can be Sales = Fixed costs + variable costs + Engineered and Discretionary reduced relatively quickly profit The Breakeven Chart Costs Engineered costs = items of cost thare Equation method engineered as part of the product and Breakeven sales = Fixed costs + variable costs cannot be excluded to reduce overall costs The amount of "profit" earned by each unit of production given that fixed costs will be incurred anyway Contribution margin = Sales revenue - Contribution margin method variable costs Contribution per unit = Sales price - variable costs
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Easiest costs to trace Just in Time = reduced raw materials Material inventory to almost zero Rate of pay x hours worked e.g - screws. glue, lighting, depreceiation of equipment, production supervisor, Labour space costs for factory ABC causes the costs to become the principle goal & not be subservient to Where do Costs come from? Manufacturing e.g admin, selling, mngt salary, R&D, inventory evaluation depreciation of office equipment. Overheads Different activities have different cost Overhead costs must be gathered into drivers Non manufacturing cost centres (pockets of activity for which individual managers may be held responsible) ABC embraces all overhead costs such Activity Based Costing (ABC) as R&D, quality control etc & doesn't Share of overhead to be allocated per restrict itself to the overhead surrouding cost centre = budgeted overhead for Deals with shortcomings of traditional the production process accounting period / budgeted production costing because: units ABC reflects the complexity of production Believes that activities rather than and marketing products cause costs to be incurred and Empties out service department overhead products consume activities (and thereby costs ABC permits a strategic insight into the costs) business by providing accurate product Plantwide Versus Departmental The Direct Method NB workthrough Eg page 10/10 costs Rates / cost allocation Recognises interdependency among Actvity based costing focuses on cost departments drivers - those activities or factors which Module10 - generate cost. Allocating costs The Step Method When allocating any service department to costs always ignore its consumption of jobs and processes its own resources When work is concentrated on the NB Workthrough Eg page 10/11 production of one product but other An equivalent unit of production is an products are produced. e.g Dairy industry assessment of the degree of completion - Main product is beef - by products is of a unit undereach major component of poor cuts of beef, milk, cheese, hide cost. Process Costing and the Joint Products and By-Products Equivalent Unit True characteristic is that it must appear during the process involving producing the Actual costs = measured period by main product - if mngt have a choice of period not allowing the 2nd product to emerge from the process then the 2 propducts cannot be deemed joint. NB workthrough Eg page 10/20 Driving force is simplicity of operation Equal Shares Principle is that phyiscal characteristics e.g weight, volume cause certain costs to be incurred e.g heavier means more Physical Characteristics costs Considers products ability to bear joint Joint cost allocation Methods costs such as ability reflected in money generated Sales Value at Split off Recognises that the business may wish Ultimate Net Sales Value to process the two products further after the split off point in an effort to maximie profit.
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Each unit is asked to absorb its share of fixed production overhead Therefore in computations include full cost of variable + Fixed costs (exc non manufacturing such as selling) Accounts for fixed costs in a lump sum If produces more units than it sells, Reported profits will be higher than under Sales Revenue variable costing. Therefore in computations include only cost of variables (inc variable selling - COS (VC + FC exc non man fixed & overheads) and NOT Fixed costs and variable overheads/ selling) (exc non manufacturing such as selling) +/- Volume variance= Gross Profit (i.e diff between planned & actual Production) - use overhead allocation formula to Sales Revenue work this out Full or Absorption cost Variable or direct costing - COS (all VC (inc variable sales) - - Selling costs exc Fixed & non man fixed = Contribution Margin all VC (man & non) must be deducted - Admin overhead from sales revenue / price = Net Profit - Fixed Costs Manufacturing overheads & admin overheads = Net Profit Do example on page 11/21 Forecasted fixed Manufacturing overhead Should we process further? The Dilemma of the Denominator Planned Production Overhead Allocation Rate = Arises when sales does not equal Bottomline profit difference production Do example on page 11/19 Do example on page 11/7 The Special Sales Order Arises when actual production does not Denominator Volume variance equal planned production Are those a manager takes in the normal course of events. Do example on page 11/17 Closing Down a Unit e.g machine failure disruptions, labour Future costs problems, breakdown of supplies Real money / not depreciation & write Routine and Non-Routine Routine decisions offs Decisions Require less personal, direct negotiation Cash costs from the manager If unavoidable then not relevant for Management Decisions in Action Non Routine decisions deciding on options as it will be incurred e.g deciding whether to shut down a anyway Relevant costs are: department or product Avoidable costs Task 1 - Define the problem and list all Module11 - feasible alternatives Costs which differ among alternatives A relevant cost is one that changes as a Cost for Decision Making result of the decision being contemplated Developing an analytical = Costs which have been incurred and Sunk Costs Sometines a relevant cost is called a should be ignored when looking for framework Task 2 - Cost the alternatives differential cost because it is a cost that relevant costs differs when management changes the scheme of operations Task 3 - Assess the Qualitative factors It is essential that a companywide, not Task 4 - Make the Decision purely a departamental stance is Department versus Company adopted. a) These costs cannot be determined The danger of allocating fixed costs to from the accounting system individual units of production is that, once Accountants are uncomforatble with allocated, fixed costs assume the Opportunity costs because: appearance and characteristics of b) They are highly subjective and variable costs - the more volume is uncertain The pitfalls of full costing produced, the higer the costs. When making decions, it may be Opportunity Costs possible to Identify certain costs of not choosing an alternative NB - for this module rely on Assignment and workings to figure it out - module is not explicit enough
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Aspirations of sales can be realised by Co-ordination production A Budget is a numeric plan of action allows planning of resource requirements & forming a view on actual performance Planning Why Budget? Each person in department has target to Motivation work towards provides control benchmark on which to Control measure actual performance See own framework to work out Budgeted cash inflow & debtors Time taken attached to module lack of top management committment A form of punishment Why Budget gets a bad name Responsibilities are blurred Adopting a rigid view to original budget Opening Inventory - Planned Can be avoided by: closing = # finished - therefore Module12 - Moving goal posts kg's to manufacture minus Implement a rolling budget - monthly finished = how many to purchase Budgeting e.g How many kg's of raw material to Rewards Inefficiency purchase to meet maufactuting needs? Measurements of output Budget holders are not sure of the closing inventory + sales - corporate objectives and are therefore opening inventory Discretionary Expenditure and Discretionary costs are difficult to budget unsure of where their efforts should be Zero-Based Budgeting for because: placed Works out maufacturing / production requirements / answers how much Its not easy to control on an annual basis must be manufactured? Budgeted Output NB diff formula to Financial Inventory Start from scratch instead of a normal evaluation incremental approach to budget - such as a 3%reduction in costs Zerobase Budgeting NB - for this module rely on Assignment and workings to figure it out - 1). Involves considerable effort and cost module is not explicit enough on the part of the staff Drawbacks: 2) The definition of packages is left to the management of the function under review. Typical sequence of preparing a Sales Production Purchasing Budget
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Difference in contribution margin per unit x actual sales in units Contribution Variance = (actual sales - budgeted sales) x budgeted contribution margin per unit Volume variance = OR Sales quantity variance + sales mix variance 3). Sales Variances (Actual sales - budgeted sales) x budgeted weighted Sales Quantity variance= average contribution margin per unit Standard costs are budgeted Standard costs are com pared to (Standard cost of flexible actual costs and explanations are budget allowance for units cost per individuual cost item. sought for any differences between (Actual sales - budgeted A budget is built up of many the two produced - Standard cost of standard costs actual time taken for units sales) x budgeted contribution produced margin per unit - budgeted Sales mix variance = weighted average contribution Adverse variance is where actual is margin per unit) above standard Where: Standard Cost of flexible budget Variance = difference between allowance for units produced = Unit produced x allocation key x Std variance budgeted (or standard) cost and Favourable variance is where actual is rate actual cost below standard cost Where: Standard Cost of actual time Variable Overhead Efficiency Variance taken for units produced = actual time 1). Material & Labour take (allocation key) x std variance rate Moves up and down in volume in proportion to productive output as 2). Variable & fixed overheads 1) actual production used more or less therefore: (Units x Allocation key x Std measured by the allocation key used. material than planned variance rate) - (actual time taken (e.g direct LH, Direct LC or Machine Variances occur in: 3). Sales Hours) Material cost can be more or less than (allocation key) x std variance rate standard for 2 reasons: 2) The price to purchase the material was (SQ-AQ)xSP Module13 - more or less than planned. Typically electricity, indirect labour, Standard Costing repairs, maintenance, consumables & (Standard quantity - actual quantity) x (Standard cost of actual time suppliers standard price per unit price) taken for units produced - Material Efficiency Variance Reason for using SP after brackets - by Actual variable costs incurred 1) Material variances To address reason # 1 holding all prices as standard mngt can gain insight into the efficieny of production Where: Standard Cost of actual time an adverse material efficiency variance 2) Variable and Fixed overhead (SP-AP)xAQ may be caused by the use of inferior taken for units produced = Actual time Variable Overheads variance taken (allocation key) x std variance rate analysis quality materials which would be reflected Variable Overhead Spending Variance To address reason # 2 in a favourabnle material price variance (Standard Price per unit - actual Price per unit) x Actual quantity used Therefore: (Actual time taken x Std OH Variance analysis exams the Reason for using AQ after brackets - variance rate) - (actual variable costs difference between how much 1) The anatomy of variances: Material Price Variance SQ would not be realistic or actual incurred) Fixed overheads for the year / overhead was incurred & how much materials & labour status allocation key (e.g machine should have been incurred based on AQ - for production mng use actually hours , DLC or DLH) the allocation key used to spread produced - for purchasing mng use overhead actually purchased 1) actual production used more or less Fixed rate per hour Spending = Budgeted amount time than planned - actual amount Labour cost can be more or less than standard for 2 reasons: 2) The labour rates actually paid were more or less than planned. Denominator = budgeted Fixed Overheads Variance amount - Amount applied to (ST-AT)xSR units produced Typically depreciation of plant & To address reason # 1 equipment, supervisory salaries, Labour Efficiency Variance Fixed Overhead spending factory space costs 2) Labour variances (Standard Time allowed - actual Time Where: Amount applied to taken) x standard rate per hour) units produced = Acual produced x allocation key A favourable denominator valriance in (SR-AR)xAT fixed overheads may provoke the Do not vary with production levels production staff to aim for even higher within range of output levels (Standard Rate per hour - actual Rate per hour) x Actual Time taken) Labour Rate Variance To address reason # 2 a favourable labour rate variance may be caused by employing less skills operatives
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Organically - more sales of more products - cashflow & profits are used to invest in more production capacity The best method because it can be objectively tested by both parties to the deal. Divisionalisation = promoted Businesses grow in 2 ways: Acquisitions -financed either by own managerial independence and allows cash or issue of shares Market Prices discrete activities to be assessed as if Supplier price lists, quotes can be they are stand along businesses. used to determine the price Specialisation The selling division would calculate the transfer price using variable costs Transfer pricing arises because of Size plus a proportion of Fixed costs divisionalisation Motivation based on absorption rate where easily comparable market Advantages for divisions prices are not easily determined Why divisionalise? Sharper decisions But selling division may have poor Two prices are possible for transferring goods and services Career mobility control over costs so advisable that Full costs buyers accountant audit selling between divisions in the same (Once mngt team takes over HO looses company: Transfer Pricing division. Cost based prices Lack of control control) What to consider?: Disadvantages for divisions Cost Variable costs Internal rivalries Usually conflict driven Negotiated costs Held responsible for own incurrance cannot be adpoted for long otherwise motivation of both divisions and their Cost centres of costs - no generation of revenue confidence in the system will NB workthrough case study page Generation of revenue. Mangers deteriorate 14/12 measured on abilityn to generate Revenue centres revenue Costs andrevenue are matched - Step by step to use ROI of assets: divisional performnace is assesed on Types of divisions Profit centre bottonmine profit 1. work out what ROI is before investment The inputed rate of Interest does Profitability of division & also matter! Investment centre efficiency of managing assets BI ROI = Controllable Profits / Allow the performance of its investments in net assets Step by step to use RI of new management to be measured assets: Defining profits and Investments Aim of divisional accounting system Providing info relevant to managers 2. work out what ROI is after the Module14 - investment RI = New profits - (cost of capital % X for decision makingAll being equal an assets net book Accounting for Divisions new investment) value will fall year by year thereby AI ROI = Controllable Profits (current producing a rising trend in ROI + new) / investments in net assets For budgeted RI for each division (Current + new) after investments go through: = original purchase price - accumlated depreciation Ri = Revised profits - (cost of capital % x revised investment (current & Net Book value new)) For existing RI calculation: Asset Base Valuation RI = Controllable profits - (Cost of capital % x net assets) Current replacement costs Use suppliers catalogues and pricelist for replacement cost value of assets RI expressed in money terms How should assets be valued for ROI expressed as a percentage divisions? RI overcomes the dysfunctional Residual Income (RI) an elements of ROI by encouring managers to invest alternative to ROI 1. The imputed charge for capital must be determined Operating profit of a business less a charge for the use of assets Two problems must be overcome first employed to genertate the profit 2. The valuation of the asset base is before can use it: once again a significant factor in the calculation Residual Income = Economic value If outcome is positive then business Add (EVA) has created shareholder value if outcome is negative then eroded shareholder value
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Investment = One whose impact extends beyond the immediate All managers have a responsibility to operating period i.e business year search for worthwhile investment Inflation is NB when evaluating Search different cash flows over future Operating decision = Decision which Determine if is economically periods & should be incorporated into has an impact within the operating worthwhile the evaluation the same time as any year In judging the impact of investment other variable Investment Appraisal and Evaluation decion - most NB concept is present Inflation value The Investment Process Once investment made then controlled using the normal budgetary Control control procedures e.g debentures (bonds) = when we are dealing with an 1. Fixed Interest loans See example page 15/27 Opportunity Cost, Risk and the investment that extends over differnt e.g preference shares Cost of Capital time periods we discount the cash Cost of capital is regarded as the flows arising out of the investment 2. Fixed interest (dividend) shares down to present or equivalent value average cost of all the following sources: so that we can calculate the Discounted Cash Flow approach profitability and / or cost of it e.g new issue of ordinary shares 3. Residual equity shares Projected Average Cost of (1) Net Present Value (NPV) - 4. Retained Earnings (profits)_ Capital sometimes also called excess present value Two techniques: (2) Internal rate of return - Cash outflows & Inflows sometimes also called discounted cash flow rate of return or investment 1. Capital Investment cash flows emphasis is on cash because non Net cash flow of the investment = the value today for a sum cash expenses such as depreciation receivable or payable sometime in the have no part to play here 2. Operating cash flows future at a given interest rate Important factor affected cashflows is Takes all the cashflows associated taxation with a project and reduces (discounts) them to a common denominator (present value) by using an Physical The Key investment factors Module15 - appropriate interest rate ) called the Most assets have a finite life and will 3. Investment life Cost to Capital or cost to finance) eventually be scraped or disposed of Investment Decisions Technical - determinants of its life are: If NPV>0, then rate of return is Market greater than the cost of financing = Assesses profitability of a project & (1) Net Present Value ACCEPT enters calculatiobns for NPV and 4. Cost of Capital used as comparison with DCR Decisions: If NPV<0, then rate of return is less Involves change the value of a key than the cost of financing = REJECT varoable to assess the impact it has on the final result Consideration of probability of change Risk Analysis If NPV=0, then rate of return is equal e.g selling prices & sales quantities - 3. Sensitivity Analysis To calculate NPV we need to take all to the cost of financing = PROJECT key to a chocolate manufacturer is cashflows (revenue, capital, positive & BREAKSEVEN - CONSIDER the price of cocoa beans & sugar negative) which will be incurred if the project is undertaken and diiscount Payback = the time taken to recover them @ the cost of capital NPV tells us whether a project will be the original investment - tries to profitable & whether it will be above or answer the question "when will I get Approaches to problem of risk & Based on the ability to earn interest below the cost to capital my money back" Uncertainty or the need to pay interest on investments See page 15/15 for calculations of Risk and Uncertainty and If DCF> Cost of Capital = ACCEPT payback & Q15.18 Payoff or Payback period 2) Apply a high hurdle test Inflation (2) Discounted Cash Flow (DCF) If DCF< Cost of Capital = REJECT Rate of Return Decisons: Apply a higher rate of return the more 1) Is to do no further analysis If DCF= Cost of Capital = risker the project BREAKEVEN - CONSIDER Comparison of NPV & DCF Other headings Requires the same info as NPV (cash NPV is an absolute measure whereas flows data) but instead of discounting DCF is a relative measure the cost to capital - it finds the interest The DCF rate of return is a measure rate at which the project will of return or profitability Investment appraisal in Non- breakeven revenue & Not for profit Situations Then interpole: Lower rate% + [(NPV Calculation of DCF is trial & error! lowest / (NPV lowest+NPV highest)] x (higher rate% - lower rate% See review Q15.10 Try 10% first then 8% - aim is to get to 0%
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1. Mngt acc procedures are still driven by the requirements of fin accounting - inventory evaluation and 2. Direct remains a popular method of A Balanced scorecard included profit measurement overhead allocation financial measures that tell managers the results of actions which have 3. computerised production control alreaady been taken but adds rendered obsolete some assumptions operational measures on such critical about what costs are variable and contemporary concerns such as CS, what are fixed Process and workforce Management accounting shortcomings 4. Most businesses regard overhead as a burden to be squeezed out from Tend to fall into 4 categories: Time, the cost profile as far as possible quality, performance, service The Balanced Scorecard 6. global markets accentuate the product differences. a cost system Customers based on inventory valuation may not 5. complexity of business has be best for new perspective increased exponentially Internal Business Processes Kaplan and Norton Innovation and Learning Target costing has been developed to help companies manage their costs in circumstances when the selling price Financial is known e.g cars, PC's etc Read page 16/18 once the target price is known, the Costing for Competitive Edge desired profit margin can be deducted Target costing in order to determine the target cost beyond which the company would consider it uneconomic to produce TA concentrates on ensuring that and sell the product management maximises its rate of selling products Module16 - New developments in Standard cost are for products or services - and usually for material, Depreciation is merely the acc for a management accounting labour and overhead previously incurred cost on fixed target costs are usually lower than assets existing product costs are therefore Difference between target and the entity is faced with improving its standard cost: target costs start as global figures pocesses in order to meet this tough (target selling price - target profit Throughput concept 1 benchmark. This improvement is margin) and are set for entirely new known as value engineering model or process - also has a market value is created by a business when it focus sells products not when it makes them. Throughput concept 2 life cycle costing gathers all revenue and costs associated with a product Limiting factors and bottlenecks must or service over its whole lifespan so be taken into consideration in Throughput Accounting (TA) Life cycle costing that its ultimate profitability can be determining relative product Throughput concept 3 measured & management decisions profitability taken. life cycle costing is often used alongside target costing - particulary with products with a long life expectancy TA Ratio = Return per factory Cost per factory hour = (Total hour / cost per factory hour factory Cost) / total time available at the bottleneck Return per factory hour = (sales price less material cost) / time spent at the bottleneck Total factory cost =Total per product Manufacturing overhead + direct labour costs
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