Levture 7 Flashcards
Agents have more knowledge or specific skills (information asymmetry) but own interests:
More more money > less money
Leisure > work
Principals need to buy work (effort) from ages
Information assymetry: moral hazard
Behaviour by one party considered inappropriate by the other party’s, after a contract has been made eg an increase in taking risks by a that b bears
Information assymetry: (adverse) selection
Agents might self select based on incentive contracts
Management accounting can also be about controlling / directing selection processes:
Risk preferences
High incentivised work contracts
Target setting
Information assymetry: classification
One side with more / better / superior information and the opportunity to exploit this advantage
Ex ante (before contract) hidden characteristics or intentions like job training adverse selection
Ex post (after contract) hidden action (moral hazard)c hidden info
Management accounting if often about understanding these problems and desfinying a control system to prevent negative effects of information assymetry
Information assymetry: counter meausres
Reduction of info asymmetry or negative consequences thereof
Signalling: costly signals attractive for good and unattractive for bad participants
Certificates, diplomas
Screening:
Health checks
Pay experts to check used cards
Monitoring:
Surveillance
Spot checks
Measures to deal with information asymmetry costly
Responsibility accounting
Responsibility accounting is evaluating the performance of managers based on activities under their supervision
4 centers:
Cost center - responsible only for costs
Revenue center - responsible only for revenues
Profit center - responsible for revenues, costs and profits
Investment center - responsible for revenues, costs, profits and investments
Definition of a budget
A budget is the quantitative expression of a company’s action plan
Master budget includes:
A master budget includes operating and financial planning
Operating planning is how to use (scarce) resources
Financial planning: how to get funds to acquire resources
Functions of budgeting
Planning and coordination
Motivation and performance meausremnt
Communication of gold and strategy
Decision facilaiting and decision influencing
Budgeting cycle
Planning the performance of the organisation > frame of references; a set of specific expectations against which actual results are compared > analysis of variances > correcting actions
Criticisms of budgeting practices
Budgets take too much time to prepare;
Budgets impede adaptability (how to deal with unforeseen opportunities or challenges)
Budgets as fixed performance contracts (should targets be subjectively adjusted ex post / at the end of the period)
Budgets are disconnected from firm strategy
Master budget: modern approaches
Computer based financial planning models: what if analyses
Kaizen budgeting - incorporating continuous improvement into the budget numbers during the budget period
Activity based budgeting - focuses on the budgeted cost of activities
Forecast production volume > activities > costs
Operating budget contains
Revenue budget Production budget in units Direct mat purchase budget Direct labour budget Cost of goods sold budget Supporting budget schedules Non manafacturing cost budget Budgeted pl statement
Financial budget
Capital budget: which long term projects to finance
(Identify investments / choose investment)
Cash budgets liquidity planning
(Available cash = beginning cash balances less minimal cash balances)
Budgeted balance sheet
Budgeted statement of cash flow
Capital budget > cash budget > budgeted balance sheet > budgeted statement of cash flow
Building an operating budget
Reveneu budget > production budget > non man costs budget > budgeted p&l
Building operating budget; reveneu budget
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion
Revenue budget:
Sales volume (units) 10,000
Sales price 240
Revenue 2,400,000
Building an operating budget: production budget - production volume
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion
Opening stock (-800)
Sales volume 10,000
Target closing stock 500
Production volume 9700
Building an operating budget: production budget - direct mat Usage
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion
Dm usage per unit, kg 3
Production volume units 9700
Dm total usage kg 29100
Building an operating budget - production budget - direct mat purchase
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion
Dm total usage 29,100
Price per kg of dm 20
Dm total purchase costs 582000
Dm costs per unit (9700) 60
Building an operating budget - production budget - direct labour
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion
Production volume (units) 9700 Dl hours per unit 1,2 Dl total hours 11640 Dl costs per hour 49 Dl total costs 465600 Dl costs per unit 48
Building an operating budget: production budget- manafacturing oh
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion
Production volume (units) 9700 Var oh per unit 30 Total var oh 291,000 Total fixed oh 500,000 Total fixed per unit 51.55
Building an operating budget - production budget - closing stock
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion
Dm per un it 60 Dl per unit 48 Var oh per unit 30 Fixed oh per unit 51.55 Total cost per unit 189.55 Target closing stock value 94775
Building an operating budget: production budget - cogs
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion
Assumption FIFO for finished goods
Opening stock units 800 Total costs per in our 180 Cogs op stock 144,000 Current production units 9200 Total cost per unit 189.55 Cogs (current production) 1,743,860 Cogs (value) 1,887,860
Building an operating budget- non man costs budget
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion
Sales volume (units) 10,000 Var non man oh per unit 0.25 Var non man oh total 2500 Fixed non man oh 300,0000 Totaal operating expenses 302500
Building an operated budget A budgeted p&l
Weiden corp applies standard processing costing (fifo). The company budgets 10,000 units to be sold in the next year. Selling price is 240 a unit. Opening stock is 800 units at 180 per unit. Target closing stock is 500 units. Each unit requires 3kg of material A and 1,2 hour of direct labour. Material a purchase price is forecasted at 20 per kg. One hour of direct labour costs 40. Variable man oh is budgeted at 30 per unit. Fixed man oh is 500,000 per year. Variable non man costs are expected to be 0.25 per unit sold. Fixed non man costs are 300,000 per year. No stock of dm is kept, no wip needs completion
Revenue 2,400,000
Cogs (-1887860)
Open (302500)
Op income 209640
Budgeting: getting info
Agency conflict: headquarters (principe) va local managers (agent)
Headquarters need to delegate and give up power In order to get local info
Headquarters expects managers to error honestly / theie true expectation
Local managers may have knowledge or info, but own interests:
More money > less money
Leisure > work (effort costs)
Budgeting and participation
Top down approach: centra determination of budgets based on data From strategic planning
Only fine tuning on lower, decenteralsied levels
Bottom up approach: composing of budgets on lower, decenteralised levels
Compiling on central headquarters level
Mixed approach: interaction and iterations between headquarters and decentral units
Honesty in reporting
Agents (ie lower level managers) with info advantage and Incentives not to report honesty : slums makes life easier
Eg managers asked about planned use of overhead resources
Consequences: wrong planning of oh resources
Dishonesty can lead to errors in the planning of resources and the reporting system and potentially inflated compensations costs
Honesty in reporting
Managers not often completely honest, but rarely lie to the extreme
Managers trade off ficnanal games with self image of being moral
Managers distort report to implement csr projects
Managers are rather willing to lie when another person profits
Motivational aspects of participation
Participation often considered as a good way to increase motivation (and performance) eg having a voice, involvement and identification
However participation can have negative effects on motivation (and performance)
Can be lengthy and frustrating to allow for different opinions
Possibility of open conflicts in negotiations
Low acceptance of budgets
Participants might feel that their input for unduly ignored
