Accounting for Managers

Made with <3 by Ammar.

Huge thanks to Andrew Houghton for all of the work he put into this with me.

Also, make sure you download the NPV Tables if you're working through examples: http://d.pr/f/ITAC

If you spot any errors, shoot me a message and I'll fix it ASAP.

NB: This is no substitute for solid revision, I'm not responsible for failure / injury / death / the birth of demon babies caused by use of these slides, yada yada yada.

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CONTAINS THE FOLLOWING TOPICS:
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Cost-Volume-Profit Analysis.
Absorption Costing.
Yield Management.
Budgeting.
Investment Appraisal.
Decentralisation.
Strategic Management Accounting.
Strategic Cost Management.
Standard Costs.

Transcript

1. cvpanalysis
2. cvprelationships ‣ understanding contribution margin ‣ contribution margin ratio ‣ break-even analysis (equation and contribution method) ‣ margin of safety ‣ operating leverage ‣ assumptions
3. Pro Tip: When contribution margin is equal to fixed expenses, you are breaking even. contributionmargin Contribution Margin (CM) is the amount remaining from sales revenue after you have deducted variable expenses. Contribution Margin = Sales - Variable Expenses CM goes forward to cover fixed expenses.
4. contribution margin ratio A ratio of 20% means that if sales increase by £1.00, then total contribution margin increases by 20p.
5. breakevenanalysis EQUATION METHOD Profits = Sales - (Var + Fixed Expenses) If we’re selling something at £10, and each one costs £5 to make, and we have fixed costs of £50, our break even is: 0 = 10n - (5n + 50) n = 10
6. breakevenanalysis CONTRIBUTION MARGIN METHOD
7. marginofsafety How many extra sales did you make over your break even volume of sales? This can also be defined as the amount sales could drop before you make a loss. Margin of Safety = Total Sales - Break Even Sales
8. operatingleverage How sensitive your net profit is to changes in sales. High leverage is good. It means that a small increase in sales can produce a much larger percentage increase in net profit. Likewise, a low leverage is bad. As it means that a large increase in sales won’t yield a much greater profit.
9. cvpassumptions ‣ Selling price is constant. ‣ Costs are linear. ‣ In multi-product companies, sales mix is constant. ‣ Units produced = Units sold.
10. absorptioncosting 10
11. learningoutcomes ‣ understanding absorption costing. ‣ use the full-cost method to calculate full cost of a unit. ‣ evaluate costing in a multi-product environment. ‣ consider ways of improving costing
12. basicterminology Direct Costs Costs that can be directly applied to a unit of output. Indirect Costs (Overheads) Costs that can’t be directly applied to a unit of output. Fixed Costs Costs that must be paid regardless of unit output. Variable Costs Costs that vary depending on the output produced.
13. productionoverheads Production Overheads are the indirect costs that need to be allocated to each product. Manufacturing Business Overheads: ‣ Repair of Machinery ‣ Safety Procedures Service Business Overheads: ‣ Cost of transport to jobs ‣ Protective clothing
14. Allocation. Apportionment. Allocate means to assign a whole item of cost to a single cost unit. Apportion means to spread costs over multiple cost units. ‣ Fair to all parties. ‣ Understandable. ‣ Quick and easy to apply.
15. Text Service Cost Centre Apportionment Rent of Building Floor area of each cost centre Power for Machines Number of machines in cost centre Production Supervisors Salary Number of employees in cost centre Service Cost Centre Allocation Maintenance Department Number of machines in each cost centre Stores Department Total Value of requisitions from each cost centre Safety Inspectors Number of employees in cost centre
16. Text
17. Text Step 1
18. Text Step 2
19. Text POHR Dividing Unit Product Cost by Units Completed Step 3
20. Actual Overhead: POHR x Actual Activity POHRCalculations The Predetermined Overhead Rate helps you estimate the amount of overhead that needs to be accounted for when producing each unit of an item. It allows you to estimate the total job costs before the job is actually completed. At the end of the job, you will know the actual overheads.
21. disadvantagesofcosting Inaccurate in modern context of high tech manufacturing or service industries. Solutions: ‣ Activity based costing (ABC). ‣ Ignore costing for decision making / pricing. ‣ Focus on controlling overheads through outsourcing.
22. yieldmanagement
23. learningoutcomes ‣ Economists pricing model. ‣ Cost-plus pricing. ‣ Target costing. ‣ Yield Management.
24. economistspricingmodel Elasticity of Demand A measure of how the volume of sales is affected by the change in price. Inelastic means it doesn’t change. Eg: Designer goods Elastic means it changes. Eg: Supermarket Prices Elasticity of Demand can be used to calculate the profit maximizing price for a company.
25. economistsmodel disadvantages ‣ Difficult to estimate demand elasticity. ‣ Presume there are no changes in the company. ‣ Demand curve only works for single-product companies. ‣ Changes in income result in changes in spending / demand.
26. costpluspricing Used in regulated / monopoly situations. Markup is defined as the difference in the selling price and the cost. Selling Price = Cost + (Markup % x Cost)
27. costpluspricing CALCULATING MARKUP Using absorption costing we can decide on the markup of a particular product. The markup has to be large enough to cover SG&A expenses and provide an adequate ROI. The ROI is only met if the forecasted sales are actually met.
28. targetcosting Think of it like making a sandwich. First you decide how much to charge for your sandwich (Set a price) Then you decide how much profit you want to make. (Set expected markup target) Deduct the two, and you now know how much you can spend on ingredients. (Calculate unit cost) Target Cost = Sales Price - Target Profit
29. targetcosting PROBLEMS ‣ Time consuming. ‣ Too slow for electronics industries as prices change quickly. ‣ Still need to estimate costs.
30. Making adjustments in the price of a product in response to certain factors, such as demand, consumer need or competition. Yield Management works well with marketing. This is because it can be used to predict periods of low demand, and then target promotions and advertisements in order to increase sales. Taking an airline as an example: An airline knows that if a customer is booking on a short-notice, they are normally more restricted with dates (think lastminute.com). The customer is therefore made to pay more, as his need is greater than someone that had booked 2 months previously. Also, in months where people aren’t going on as many holidays, the airline could advertise short breaks at cheap prices to entice customers. yieldmanagement
31. budgetingframework
32. learningoutcomes ‣ Planning and Control ‣ Types of Budgets ‣ The Budget Hierarchy ‣ Critiquing Budgets
33. planning&control Planning Developing objectives and preparing budgets to achieve those budgets. Control The steps taken to make sure the objectives are met. Responsibility Accounting Managers should only be responsible for things they can actually control / influence.
34. budgettypes The Budget Period is the length of time over which the budget applies. Operating Budget This budget tends to be a yearly budget divided into monthly or quarterly budgets. Continuous Budget Usually a 12-month budget that rolls forward one month as the current month is completed. Participative Budget Unlike the other two, this has nothing to do with the budget period. A participative budget is one which the flow of data flows from the bottom of the company (each supervisor) upwards to the top (top management).
35. budgethierarchy All budgets stem from the sales budget! Master Budget Sales Budget Production Budget Materials Budget
36. budgeting thebad Allows the communication of plans Thinking about and planning for the future Smart allocation of resources Allows you to uncover potential bottlenecks Coordinate activities across the business budgeting thegood Budgets make an organisation inflexible It’s time consuming They’re too historically based It tends to be top down It encourages gaming and opportunism
37. investmentappraisal
38. learningoutcomes ‣ NPV ‣ Simple Rate of Return ‣ Internal Rate of Return ‣ Payback Period
39. netpresentvalue Present Inflow - Present Outflow If net present value is positive, this is good, as it means we’re getting more money back than we are investing. If it equals to 0, then it’s also acceptable, as we’re breaking even. When calculating the inflows, we must make sure to add back depreciation, as it’s not actually an expense.
40. Pro Tip: If you can’t find the exact value in the NPV table, use the closest value. internalror The internal rate of return is the point at which the net present value is equal to 0. Once you have got your result from the formula on the right, you look at the NPV table for annuity, matching up the time period, and the answer. This should give you a percentage discount rate as an answer.
41. simpleror Used as a quick n’ dirty first assessment. Net Present Value should always be used as a final decision maker. When calculating the Simple Rate of Return, make sure you add back depreciation to the Incremental Expenses (as it’s not actually an expense, duuh).
42. paybackperiod This tells us how quickly a company will make back the money they have invested. Unfortunately, it does 2 things badly: 1. It ignores the time value of money. 2. Ignores cash flows after the payback period.
43. extranotes Some of you keen eyed students may have noticed that the payback period and internal rate of return equation is the same. It’s not a mistake. Read the second paragraph on the internal rate of return to understand why you should end up with a different answer.
44. businessdecentralisation 44
45. learningoutcomes ‣ Decentralization basics. ‣ Segment Reporting. ‣ Return on Investment. ‣ Total Quality Management
46. decentralisationbasics What is it? Managers are responsible for making key decisions relating to the things they are managing. Advantages Disadvantages Top managers free to concentrate on important decisions Possible lack of coordination between managers at the same level Lower managers gain decision making experience Lower managers may not see the ‘bigger picture’ for decisions More decision making power leads to more job satisfaction Lower managers may have different objectives than top managers Allows managers to get recognised for good decisions May be difficult to spread innovative ideas within the company
47. segmentreporting What is a segment? Any part or activity about which a manager seeks costs, revenue or profit data. Here’s 3 types of Responsibility Centres: Cost Centre A manager only has control of costs. Profit Centre A manager has control of both profit and costs. Investment Centre A manager has control over profits, costs, and investments.
48. returnoninvestment ‣ Increase sales. ‣ Reduce expenses. ‣ Reduce your assets. Income before interest and tax Cash, debtors, stock, equipment, etc. How to increase ROI:
49. totalquality management TQM is a system of management based on the principle that every member of staff must be committed to maintaining high standards of work in every aspect of a company's operations. There are 3 areas you need to know. ‣ Plan-Do-Check-Act Cycle ‣ Benchmarking ‣ Just in Time Principle
50. Text
51. benchmarking This is where you research other companies in the same field that are doing better than you, and then figure out what you can do to do better. This can be done by internal and competitive analysis or building their own benchmarking team in the company. One disadvantage of this is that it can create a league table mentality, focusing on competition rather than innovation.
52. justintime This is where everything done by a company is done just in time. For example, materials needed for production will show up just in time to be processed. This mentality is adopted throughout the entire production process. This reduces the amount of stock that ends up wasted / in storage. Companies will attempt to produce products that are defect free. A major disadvantage of JIT is that if something goes wrong in any stage of the production process, there may not be enough time to fix the problem.
53. strategicmanagement accounting
54. learningoutcomes ‣ Strategy basics ‣ Boston Consulting Matrix ‣ Porter’s 5 Forces Model ‣ Value Chain Analysis ‣ Balanced Scorecard ‣ Levers of Control
55. strategybasics What is strategy? The long term direction for an organisation. Corporate Level Strategy Concerned with a total overview. For example, product mixes, geography. Business Level Strategy Competing in a particular target market. Operational Strategies How to deliver the above two strategies.
56. bostonconsulting matrix
57. porters five-force-model
58. porterexplained Porter argues for generic strategies. These strategies are shown in the diagram on the right. For example, if a company has a narrow target, and it’s different only through lower cost, it needs cost focus - focusing on keeping it’s cost low. Eg: EasyJet keeping costs low so it can pass savings onto customers. However, British Airways, has a broad target, and it differentiates itself on service, so it is a differentiator. Lower Cost Differentiation Wide Audience Cost Leadership Differentiation Niche Target Cost Focus Differentiation Focus Business Advantage
59. valuechain analysis A value chain consists of a businesses operations that add value to the company. Value Chain Analysis is about analysing your operations to find places where you could improve. These improvements must provide extra value to customers. For example, a business may find a way to improve it’s delivery operations so that it can provide shorter delivery times to customers.
60. balanced scorecard Management translates its strategy into measures that employees can understand an accept.
61. balancedscorecard perspectives Financial Typical targets include ROI, revenue, growth, cost reduction, and asset utilization. Customer Typical targets include market share, customer satisfaction, and customer loyalty. Learning and Growth Typical targets include employee capabilities, motivation, training frequency, and IT systems. Internal Business Typical measures include product innovations, how new products are performing in the market.
62. leversof control The levers of control is a framework that gives managers the ability to manage the tension between creating value, and managing value. In other words, it’s all about what can a manager do, so that the employees ethics, and output is aligned to the vision of the company. There are 4 levers: ‣ Belief Systems ‣ Boundary Systems ‣ Diagnostic Control Systems ‣ Interactive Control Systems
63. leversofcontrol thelevers Belief Systems This is all about aligning employees with the core beliefs and values of the company. Boundary Systems This is all about setting the rules and boundaries in which an employee works. Diagnostic Control Systems This is all about measuring the output of the company and making sure it’s up to standards. Interactive Control Systems This is all about changing the levers of the company to meet customer demand.
64. leversofcontrol tensions ‣ Unlimited Opportunity vs Limited Attention ‣ Intended vs Actual Strategy ‣ Top down vs Bottom Up Strategy ‣ Self interest vs Desire to Contribute
65. costmanagement
66. learningoutcomes ‣ Lifecycle Costing ‣ Supply Chain Management ‣ Strategic Cost Management Examples
67. lifecyclecosting Kaizen Costing Predicting cost movements during the manufacturing cycle of the product. Any decisions made during the R&D phase (such as what materials to use) affect the committed costs in a huge way.
68. Target Costing Kaizen Costing both work together to form lifecyclecosting
69. supplychain management Shared Service Centre Say a company has 3 departments, and each department has a HR team. The shared service centre model is about creating a HR Unit that can then do HR for every department in the company. Outsourcing Sometimes it’s simply not worth it to have certain types of work done by your employees. In this scenario you outsource the work - giving it to another company to do.
70. supplychain management advantages There are many advantages of both the shared service centre model and outsourcing. They both involve taking irrelevant work away from front-line workers and giving them to specialised teams, which in turn increases the quality, and lowers the cost per job.
71. costmanagement examples Hotel Example Budgets hotels might omit things such as breakfast to make it cheaper. Alternatively, the offer discounts for online bookings. Airline Examples Budget Airlines may omit things like in-flight meal. Again, booking online allows the company to offer bigger discounts.
72. standardcosting
73. learningoutcomes ‣ What are standard costs? ‣ Practical vs Ideal Standards ‣ Setting Standards ‣ Variance Analysis ‣ Critiquing Standard Costs
74. Pro Tip: Standards are expected costs for one unit. Budgets are expected costs for all the units. thelowdown standardcosts Standard Costs are the expected standards for a company - whether you’re talking about materials, performance or the quality of their products. When talking about Standard Costs, managers take an approach called Management by Exception. This is where management only cares about things that fall on the bad side of their standards (eg: Things costing too much)
75. practicalstandards Standards that are set at levels that are actually achievable and reasonable. idealstandards Standards based on perfection, they’re often unachievable & discouraging. vs
76. settingstandards The standards are a set of guidelines that a company will try to stick to whilst making their products. There are three big types of standards: ‣ Direct Material Standards ‣ Direct Labour Standards ‣ Variable Overhead Standards Direct Material Standards Dealing with the price of materials, and the quantity of materials needed for production. Direct Labour Standards Dealing with how much workers are paid, and how many hours the workers will work. Variable Overhead Standards Dealing with both the variable and activity based part of POHR
77. varianceanalysis The variance is the amount by which the actual costs differ from your standards (expected costs). Think about it. If you’re making lollipops, and each one costs 10p, but every now and then one costs 30p, that’s not good! That 20p difference is the variance. It points to possible problems in the manufacturing process, and allows us to find places to improve.
78. varianceanalysis cycle 1. Analyse any variances 2. Ask a questions about them 3. Explain the variance 4. Correct issues that caused the variance 5. Continue with production 6. Produce your standard cost report Repeat
79. varianceanalysis formula Price Variance Quantity Variance AQ x (AP - SP) SP x (AQ - SQ) AQ Actual Quantity AP Actual Price SQ Standard Quantity SP Standard Price
80. standardcosts thegood Emphasis on the bad may impact morale Standard cost reports may not be timely Good variance may be misinterpreted Emphasis on standards may exclude other important objectives standardcosts thebad Possible reductions in production costs Management by exception Better information for planning & decisions Improved cost control & performance evaluation
81. Waheyy! You’re done. Good luck