Management Accounting Flashcards
What is a definition for management accounting?
It is concerned with the provision of information to people within the organisation to help them make better decisions and improve the efficiency and effectiveness of existing operations.
What are functions of management accounting?
Cost allocation - cost of goods sold and stock/inventories, internal and external profit reporting.
Provision of relevant information: to make informed decisions, to plan, to control, to measure performance, to continue improvement.
What is the Decision Making Process (1)?
- Identify objectives of the organisation
maximise profits
market leader
high quality goods - Search for alternative courses of action
develop new products for sale in existing market
develop new products for new markets
develop new markets for existing products
What is the Decision Making Process (2)?
- Select appropriate course of action
potential growth rates of alternative activities
ability to establish a market share
projected profits for each activity- Implement the decisions
as part of budgeting and long term planning
future cash inflows and outflows
communicate to all in organisation
- Implement the decisions
What is the Decision Making Process (3)?
Control Process:
- Compare actual and planned outcomes
performance reports
feedback - Respond to divergences from plan
make any modifications
ensure firm’s objectives and plans achieved
What is the cycle of profit planning and control?
Measuring Performance -> Examining the Environment -> Developing objectives -> Formulating a strategy -> Translating into operating plans -> Implementing Plans ->
KEEPING THE SCORE
DIRECTING ATTENTION
SOLVING PROBLEMS
What are Management Reports (1)?
Decision Making
- Marginal Costing for decision making - Cost – Volume – Profit Analysis - Pricing - Capital Investment
What are Management Reports (2)?
Planning & Control
- Budgeting - Management control - Variance analysis
Who are users of Management Information?
Managers
- functional - strategic
Directors
In some cases - employees
What are the differences between Management and Financial Accounting?
Legal requirements Focus (individual parts or whole business) GAAP Time Frequency of Reports Users
What is the difference between Management and Financial Reports regarding FREQUENCY?
FR: usually produced annually.
MR: as frequently as necessary for management process
What is the difference between Management and Financial Reports regarding TIMLINESS?
FR: usually there is a significant time lag between the period covered by the report and the date of publication.
MR: can be produced with minimal delay, provided that appropriate systems are in place.
What is the difference between Management and Financial Reports regarding ORIENTATION TO FUTURE OR PAST?
FR: summarise transactions and events that have already taken place, they are not oriented towards the future.
MR: can be orientated towards the future or past, depending upon managers’ information requirements.
What is the difference between Management and Financial Reports regarding LEVELS OF DETAIL?
FR: the information is not detailed: transactions are summarised under a few headings.
MR: can be as detailed or as aggregated as necessary.
What are different types of costs?
Most commonly used costs are:
- Direct and Indirect costs
- Fixed and Variable costs
- Period and Product costs
- Cost Behaviour
- Relevant and Irrelevant costs
- Avoidable and Unavoidable costs
- Sunk costs
- Opportunity costs
- Incremental and Marginal costs
What is a Cost Object?
any activity for which a separate measurement of costs is required
examples:
- cost of a product - cost of a service - cost of operating a department (function)
What is a Cost Collection System?
Stage 1 cost accumulation by cost classification a. expense type eg. materials, labour, overheads or b. cost behaviour eg. fixed, variable
Stage 2 – assign costs to cost objects
What are Direct Costs?
can be specifically identified with a particular cost object
- Direct Materials
- Direct Labour
- Direct Expenses
What are Indirect Costs?
cannot be specifically identified with a particular cost object
- Indirect Labour Costs - Indirect Material Costs - Overheads
estimate of resources consumed using Cost Allocations
What is an example of Direct and Indirect Costs?
Producing a greetings card:
- A design is produced.
- The design is printed onto card in a run of an appropriate size – say 1000 cards per production run.
- The card is cut and folded.
- Other processes such as embossing, gilding and over-printing may be required, depending upon the design.
- The cards are matched with envelopes of suitable size.
- Each card and envelope is individually packaged in a cellophane wrapper.
How do you work out the total cost?
Direct Materials + DIRECT COSTS Direct Labour + DIRECT COSTS Direct Expenses = DIRECT COSTS Prime Cost + Production Overheads = INDIRECT COSTS Production Costs + INDIRECT COSTS Other Overheads = INDIRECT COSTS Total Costs
What are Period and Product Costs?
for profit measurement and stock valuation
Product Cost
identified with goods purchased / produced for sale (include direct & indirect production costs)
Period Cost
not included in the inventory valuation and are treated as expenses in the period in which they are incurred
What is Cost Behaviour?
how costs and revenues vary with different levels of activity / volume
used in decision-making
What are the Cost Classifications?
Variable Costs
Fixed Costs
Semi - Variable Costs
Step costs
Distinguish between variable costs and fixed costs.
A variable cost is one which varies directly with changes in the level of activity, over a defined period of time.
A fixed cost is one which is not affected by changes in the level of activity, over a defined period of time.
Semi-variable = fixed + variable.
Step cost = fixed cost increases by steps.
What are examples of variable costs?
materials used to manufacture a unit of output or to provide a type of service.
labour costs of manufacturing a unit of output or providing a type of service.
commission paid to a salesperson.
fuel used by a haulage company.
What are examples of fixed costs?
Salary paid to a supervisor.
Advertising in the trade journals.
Business rates paid to the local authority.
Depreciation of machinery calculated on the straight-line basis.
What are examples of semi-variable cost?
office salaries where there is a core of long-term secretarial staff plus employment of temporary staff when activity levels rise.
maintenance charges where there is a fixed basic charge per year plus a variable element depending on the number of call-outs per year.
What is an example of Step Cost?
A fixed cost that
increases in steps.
For example, rent storage space until full capacity reached, then expand
by renting second
storage space.
Year 1 £1,000;
Year 2 £1,100 etc.
Distinguish between relevant and irrelevant costs and revenues.
Relevant Costs / Revenues
future costs / revenues that will be changed by a decision
Irrelevant Costs / Revenues
will not be affected by a decision
Example: Going to Glasgow to watch the football and do some shopping.
Do I take my own car or go by train?
Relevant costs – fuel for car, car parking
Irrelevant costs – car tax, car insurance
Distinguish between avoidable and unavoidable costs.
Avoidable Costs
may be saved by adopting a given alternative
Unavoidable Costs
cannot be saved regardless of the alternative adopted
What are Sunk Costs?
Costs created by a decision made in the past and cannot be changed by any future decisions.
Sunk Costs are irrelevant costs
(not all irrelevant costs are sunk costs)
What are Opportunity Costs?
A cost that measures the opportunity that is lost or sacrificed when the choice of one course of action requires that an alternative course of action is given up.
Example:
Student due to graduate in summer would like to have a gap year to go travelling before starting work but gets offered a job upon completion of their studies.
If chooses to travel and have gap year: Opportunity Cost – lost salary
What are incremental and marginal costs?
difference between costs and revenues for the corresponding items under each alternative being considered
example:
What are the incremental costs of increasing output from 1,000 units to 1,100 units per week?
The additional costs of producing 100 units
What is marginal costing?
Also known as Variable Costing
A cost accumulation system
All variable costs are product costs
All fixed costs are period costs
Used as a basis for decision making
What is meant by contribution?
Amount that remains after deducting the variable costs from the sales revenue, which will contribute towards meeting the Fixed Costs of the business.
Contribution Analysis
shows which products contribute the most to the fixed running costs of the business
What are contribution analysis decisions?
short –term decision making
make or buy decisions
internal profit statements used as a basis for measuring managers performance
pricing
What is Cost-Volume Profit Analysis?
A systematic method of examining the relationship between changes in activity and changes in total sales revenue, expenses and net profit. (Usually a period of one year or less)
What is CVP Analysis in terms of decisions.
How many units must be sold to break-even?
What would be the effect on profits if we reduce our selling price and sell more units?
What sales volume is required to meet the additional fixed charges that may arise?
To achieve a target profit, how many units must we sell?
What is the Break-Even Point?
This is the point at which no profit and no loss is made
Using the formula from the contribution analysis:
Sales – Variable Costs = Fixed Costs + Profit
We remove the profit element as this is nil and get the following:
Sales – Variable Costs = Fixed Costs
Contribution = Fixed Costs
Break-even point in units = fixed costs Contribution per unit Break-even point in sales value: Break-even point in units x selling price per unit
What is the Target Profit?
once we have sufficient contribution to cover all the fixed costs of a business, the remaining amounts contribute to profit.
using the break-even formula we can look at how many units we would need to sell to achieve a target profit.
Target sales in units = Fixed Costs + Target Profit Contribution per unit
What is the margin of safety?
the excess of planned or actual sales above the break-even point
can be expressed as number of units, the sales value or as a percentage of the budgeted sales
Margin of Safety (units) = planned sales – break-even sales
Percentage Margin of Safety =
expected sales – break-even sales
expected sales
What is the relevant range?
Outside the relevant range the unit selling price and the variable costs are deemed no longer constant per unit
Example:
If ticket sales below 4000 then caterers cost will be higher per ticket sold
If ticket sales higher than 12000 then caterers cost will be lower per ticket sold
Relevant range – ticket sales of 4000 up to 12000
What are the assumptions of CVP?
Costs and revenue patterns are known and can be represented in a straight line.
A single product or constant sales mix
Total costs and total revenue are linear functions of output (volume)
Analysis applies only to relevant range
Analysis applies only to a short-term period
Assumes no build up of stocks
What is a budget?
“is a plan expressed in money. It is prepared and approved prior to the budget period and may show income, expenditure and the capital to be employed. May be drawn up showing incremental effects on former budgeted or actual figures, or be compiled by zero-based budgeting.”
Who prepares budgets?
profit making enterprises government schools health trusts charities individuals
Why do we produce budgets?
Planning
annual operations – long term plans
encourages managers to anticipate problems
Coordination
activities of various parts of organisation
managers to examine relationship between own operations and those of other departments
Why do we produce budgets? (2)
Communication plans & policies & constraints ensure appropriate individuals accountable top management – lower management during budget preparation Motivation can influence managerial behaviour participation assists managing departments provides a target
Why do we produce budgets? (3)
Control compare actual with budgets management by exception: investigating significant deviations identifying inefficiencies take appropriate action Performance Evaluation assess managers performance against targets
What is the budget period?
Usually one year 12 months or 13 x 4 week periods Continuous / Rolling budget continuous 12 months encourages regular planning Seasonal variations may be reflected
What is the budget process?
Communicate details of budget
Determine the functions that restricts output
Prepare the sales budget
Initial preparation of various budgets
Negotiate budgets with senior management
Co-ordinate & review of budgets
Final acceptance of budgets
Ongoing review of budgets
What is the master budget?
Shows the overall planned performance for the budget period, once all budgets have been prepared
Profit & Loss Account
Balance Sheet
Cash Budget
What is the cash budget?
One of the most important budgets
Objective – to ensure sufficient cash to meet the organisations needs
Rolling Budget
Cash Flow Management
to manage cash to achieve maximum interest and cash availability
plan for deficits
plan for cash surplus
Cash Budget (cont).
Receipts include: Cash sales, receipts from debtors, sale of assets, dividends received, interest received, new share issue etc.
Payments include: Payments to creditors for stock, and material purchases, wages, dividend payments, loan repayment
Some receipts/payments are not in Profit & Loss e.g. purchase of fixed assets, cash from new share issue
Some payments in P/L are not in cash budget – non-cash e.g. depreciation
What are criticisms of budgeting?
Demotivational budgets
Setting unrealistic targets
Budgetary Slack
Incremental approach – budget ratcheting
Use it or lose it – budget lapsing
Name, Blame & Shame
Time consuming
Unethical behaviour
A yearly rigid ritual
Cost
