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4.1 Managment Accounting BUDGETING > Kaplan 9: Preparing Budgets - decision making phase > Flashcards

Kaplan 9: Preparing Budgets - decision making phase Flashcards

1
Q

Performance indicators may be categorised Financial or Physical measures.

A

.

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2
Q

Financial performance measures examples

A
  1. Average selling price
  2. Profit as percentage of Sales Revenue
  3. Material cost per unit of purchase
  4. Labour rate per hour
  5. Cost per unit of production.
  6. Sales & cost variances
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3
Q

Physical performance measure examples

Usually relate to
production outcomes,
productivity and
production efficiency

A
  1. Quality indicators
    (Reject rates)
  2. Efficiency indicators
    (no. of products made p/lab.h or idle time ratios)
  3. Capacity measures
    (Machine utilisation (or asset utilisation) ratios)
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4
Q

Ratio analysis is one of the main tools used in appraising the performance of a company, main advantage being the magnitude of the individual figures is eliminated, allowing the appraiser to focus on relative movements.

Generally used in 2 ways…

A
  1. Comparison of performance year to year

2. Comparison with other companies.

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5
Q

Main types of ratios:

A
  1. Profitability
  2. Liquidity
  3. Gearing
  4. Investment
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6
Q

ROCE

Expresses profit as a percentage of the assets in use.
(The capital employed in the business)

It can be further subdivided into Profit Margin and Asset Turnover (Use of assets)

A

Profit margin x Asset turnover = ROCE

Profit / Turnover) x (Turnover / Assets) = (Profit / Assets

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7
Q

ROCE

(Profit / Sales) x (Sales / Assets) = ROCE

What does the equation help demonstrate to managers how they can influence the Rate of Return on Capital Employed?

A
  1. Increase profit margins
    Increase sales prices
    Reduce costs
  2. Increase Asset turnover (capital employed)
    Increase sales
    Reduce assets
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8
Q

YE or average capital employed?

A

Ideally profits for YE 2020 should be related to assets in use throughout that year (The average capital employed)

In practice this ration is usually computed using the assets at YE (YE capital employed)

Bear in mind this can distort trends and inter-company comparison.
If new investment undertaken near YE and financed (for example) by the issue of new shares, the capital employed will have risen by the total finance raised whereas the profits will only have a month or two of the new investment’s contribution.

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9
Q

ROCE

A

Share Capital + all Equity Reserves + Long term debt*

*Debenture counts as a long term debt

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10
Q

Debenture

A

Basically a long term debt (loan) with a specified interest rate.

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11
Q

Asset turnover as a measure

A

‘Make the assets work’

May involve disposing of ‘underperforming’ assets which cannot be made to generate sales

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12
Q

Asset turnover - high is good or bad?

A

Good.

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13
Q 
Service sector:
Think about how to measure
Activity
Resource utilisation
Unit costs
Profitability
Quality of service
A

Eg.
Bus line no good assessing journies per day as contribution to profit would depend on how many passengers at each stage.
More appropriate activity measure ‘Passenger miles’
Resource use measure ‘Driver hours’

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14
Q

TQM
A continuous improvement in
quality, efficiency & effectiveness

A
  1. Aims towards environment of zero defects at minimum cost. (RIGHT FIRST TIME)
  2. Requires EMPLOYEE AWARENESS of quality requirements to meet spec.
  3. Aims at ELIMINATION of WASTE
  4. It must EMBRACE ALL ASPECTS of operations from pre-production to post production stages in the Business cycle
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15
Q

TQM - Quality circles

A

Every employee involved & heard.

Group should have diff levels of seniority & diff skills

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16
Q

TQM - The cost of quality

Types

A
  1. Failure costs
    Costs to evaluate, dispose of / rework or replace defects.
  2. Appraisal costs
    Costs of monitoring and inspecting products in terms of specific standards before release to customer.
  3. Prevention costs
    Investments in machinery, technology & education to reduce number of defects.
17
Q

TQM - Examples of

1. Failure costs

A

Internal (before delivery)

  1. Rework costs
  2. Net cost of scrap
  3. Disposal of defective products
  4. Downtime due to quality probs

External (after delivery)

  1. Complaint prcessing
  2. Warranty claims
  3. Cost of lost sales
  4. Product recalls
18
Q

TQM - Examples of

2. Appraisal costs

A
  1. Test & measurement equipment
  2. Inspections & Tests
  3. Process control monitoring
19
Q

TQM - Examples of

3. Prevention costs

A
  1. Customer surveys
  2. Field trials
  3. Quality education/ quality circles
  4. Investment in improved production equipment
20
Q

The balanced scorecard.

Recognises that performance shuld not be measured only financally.

Biz will only suceed long-term if it keeps cusomers happy.

Therefore combine financial measures with other measures:
Operational
Innovation
Customer satisfaction

A

Financial Perspective:

  • Profitaility
  • Revenue growth
  • Shareholder value

Business Process (Ops):

  • Time to market
  • Cycle time
  • Process yeild

Organisational learning:

  • % sales from new products
  • Continuous improvement programme sucess

Customer Perspective:

  • Defect level
  • On-time delivery
  • Level of satisfaction
21
Q

Cost reduction as opposed to cost control

A

Cost reduction is a process leading to achievement of real and permanent reductions in UNIT costs of goods manufactured or services rendered WITHOUT impairing their suitability for the use intended.

Cost control aims simply to achieve the target costs originally accepted

22
Q

Important aspects of cost reduction techniques

A

Target costing

Value Engineering
Save costs by eliminating costs which don’t add value to the customer. (eg. a more expensive dye used to colour disposable razors when customers don’t care about the colour and a cheaper different colour would be fine)

23
Q

Value enhancement

A

Goes with cost reduction.

Getting the best value from the resolurces that are used in the organisation.

24
Q

Benchmarking

A

One example.
Split company into divisions, all operating more or less same industry and performance indicators are calculated and compared. Eg Receivables better in one sets a benchmark for the other to aim for by tightening CC procedures

4.1 Managment Accounting BUDGETING (16 decks)

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