Chapter # 1

A revision of Management Accounting Topics

Notes:
Purpose of Costing-
●Value inventory
●Record cost (for income statement)
●Price products
●Making decisions

Standard costing-
A standard cost for a product or service ia a predetermined unit cost set under
specific working conditions.

Purpose :
● Control- compare actual vs standard and investigate difference
●Planning- Budgeting
●Performance measurement
●Inventory valuation
●Accounting simplification

Suitable-
●Mass production of homogenous products
●Repitative assembly work

Example-

Direct material = 40 sm @ $5.3 per sm

Types of Standards
1. Attainable Standard
2. Basic Standard
3. Current standard
4. Ideal time
Idle Time and Waste
Idle Time - When employees are paid when they are not working
Waste- of material
Types of Budgeting
Fixed Budget
Prepared before the beginning
of a budget for single level of
●Based on Efficient (not perfect) Operating Condition.
●Normally Achievable Standard
●Machine breakdown; Fatigue; normal material losses
ect is allowed within this standard
●Employees are motivated to work as it is achievable
and not impossible
● Most frequently used standard
● Long term standard remains unchanged for a period of time
●Shows the trend over time
●Unable to highligh current Efficiency
● Demotivates the employee asthey would have
been used to this standard for a long time
●Based on Current working condition
●Used when the Current condition is abnormal and the
rest of the standard would give meaningless data
●As it is based on the current condition the employees
might not be motivated.
●These are based on perfect Operating condition
●No ideal time; Breakdown etc are allowed
●Used to pinpoint areas and the close examination results in
large cost saving (Japanese Company - for perfect quality)
●No motivation as these standards would be impossible
to attain the goal.
Flexed Budget
Flexible Budget Prepared at the end of the
Prepared before the beginning budget based on actual
activity of a budget for a number of level of output
activity

●Budgetary control compares actual results against expected results.

●The difference between the two is called is variance.

Controlability and performance measurement

● A cost is controllable if a manager is responsible for it being incurred or is able to

authorised the expenditure
● A manager should only be evaluated on the cost over which they have control

Traditional costing Method :

Absorbtion Costing and Marginal Costing

Absorbtion Costing

Total Cost

Production Costing Non-production Costing

●Selling & Distribution

-Advertising Cost
- Salary of sales personnal
Direct prime Cost Indirect Cost -Storage Cost
(Variable cost) (Over Heads) -Shipping Cost
● Direct Material ● Indirect Material - Customer care Cost
● Direct Labour ● Indirect Labour
● Direct Expense ● Indirect Expense ●Administrative Cost
-Salaries
- Accounting Expense
- R&D
- Legal cost
 ● The assumption underlying this method of absorbtion costing is that overhead expenditure
is connected to the volume produced.

OAR ( Overhead Absorbtion Rate)= Total production overhead cost

Activity Level

Production overheads can be absorbed into the units of the production into the following methods :
1. Direct Labor hour rate
2. Direct material cost rate
3. Prime cost percentage
4. Machine hour rate
5. Unit of Output rate

Praforma of Cost of the product using Abosrbtion

Cost
Direct Material $
Direct Labour xxx
Direct Expense xxx
Prime Cost xxx
Production Overhead xxx
Full Factory cost xxx
Administrative Cost xxx
Selling & Distribution Cost xxx
Cost of the product xxx
xxx

Under Abosrbed and Over Absorbed

Absorbed Cost < Actual Cost Under Abosrption

Absorbed Cost > Actual Cost Over Absorption

Over or Under Absorbed= Absorbed overhead - Actual Overhead

= (Absorbed rate x Actual units )- Actual Overheads

Absorbed Rate= Budgeted overhead

Budgeted Volume
Marginal Costing
It is the accounting system in which variable costs are charged to cost units and fixed costs are
written off against the aggregate contribution.

● The marginal cost is the extra cost arising as a result of making and selling one more unit
of product or service.

Marginal Cost Sheet

$
Sales Revenue ( units sold x sp per unit) xxx
Less: Total Variable cost (units sold x vc per unit ) (xxx)
Total Contribution xxx
Less: Fixed Cost (xxx)
Profit (xxx)

In another case if the machine capacity is 1000 and we have been receiving order
for 998, If we receive an additional order of 4, then the above scenario will differ as
the machine capacity is 1000 but we need to produc additional 2 products which will
increase the FC so the above example of VC will differ.

Fixed cost and variable cost

a.) The total fixed cost remains constant upto a particular level
Ex : The rent of a room which could occupy 40 students is 15000,
If there is a situatin where apart from 40 students,
3 more want to join, then the FC will be increased as we need to take another room and
We need to check here whether
the FC is coverd or not by accomodating 2 new students.
b.) Therefore the fixed cost per unit changes according to the volume.
c.) Variable cost per the unit remains constant but the Total variavle cost changes according
to the production levels.

Formula
1. Contribution = Sales - Variable cost
or Contribution = Fixed cost + profit

2. C/S Ratio = Contribution / Sales x 100

3. Required Sales = (Fixed Cost + Desired profit )
C/S Ratio

Advantages and Disadvantages of Absorbtion

and Marginal Costing
Abosrbtion Costing
Advantages
● It includes an element of fixed overheads in inventory values, in accordance with IAS 2.
● Analysing under/over absorbtion of overheads is a useful exercise in Controlling
cost of an organisation
● In small organisations, absorbting overheads into the cost of products is the best way
of estimating jobs costs and profits on jobs.
Disadvantages
● More complex than marginal costing

Marginal costing
Advantages
●Contribution per unit is constant unlike profit per unit which changes with sales volume.
●There is no under or over absorbtion of overheads ( and hence no adjustment in the
income statement)
●Fixed cost are period cost and are charged in full to the period under consideration
●Simple to operate
●Marginal costing is useful in the decision-making process.
Disadvantages
●Closing inventory is not valued in accordance with ISA2
●Fixed production cost not shared between output, written off in full instead.
Overhead Cost
It is the cost incurred in the course of making a product but which cannot be traced to the
product in full.

Steps for overhead calculation

1. Allocation
2. Apportionment
3.Absorption

1.Allocation- is the process by which whole cost item are charged direct to cost unit or cost centre
Example- Direct labour- Production cost centre
- Cost of warehouse- Warehouse cost centre

2. Apportionment- is a process whereby indirect cost are spread fairly b/w cost centres.
Service cost centres may be apportioned to production cost centres.

3. Overhead Absorbtion - is the process whereby overhead cost allocated and apportioned are
added to unit , job or batch cost.They are also called overhead recovery.

Budgeted Overhead
OAR Overhead Absorbtion Rate= Budgeted Activity Level (units/hours)

● Profit as per Absortion Costing - Profit as per Marginal costing =

(Closing Inventory- Opening Inventory) x Fixed OH recovery rate per unit
● Reported profit figures using marginal costing and absorbtion costing will differ if there is any
change in the level of inventory is the period.
● If Closing inventory is higher than Opening inventory, Absorbtion profit is high.
● If Closing inventory is lower than Opening inventory, Marginal profit is high.
● Under marginal costing, fixed cost is not included.
Topics Viner Hand ITC
Monotype Corsiva
rement
Abosrbtion Costing
orbtion
Chapter # 2
Infromation, Technologies and System for
Organisation Performance

Data
●Data are facts or figures in a raw, unprocessed format.
●It consists of numbers, letters, symbols, raw facts, events and transactions, which have
been recorded but not yet processed into a form that is suitable for making decisions.

To be usefull to a decision maker, data must be transformed into information.

Information
●Information is data that has been processed in such a way that it has a meaning to the
perosn who receives it. This person may then use this information to improve the quality
of decision- making.

Data processing
●It is the conversion of data into information, perhaps by classifying, sorting or producing
total figures. Data processing could be done by-
*bringing related pieces of data together
*summarising data
*basic processing of data
*tabular and diagrammatic techniques
*stastical analysis
*financial analysis

Management require information-

●To provide records, both current and historical
●To analyse what is happening within the business
●To provide the basis of decision making in the short term and long term
●To monitor the performance of the business by comparing actual results with plans and
forecasts
Characteristics of Good information ACCURATE
●Accurate – sufficiently accurate to be relied upon.

●Complete – managers should be given all the information they need, but information
should not be excessive.
●Cost effective – the value of information should exceed the cost of producing it.
●Understandable – information needs to be clearly presented and displayed in an
understandable form.
●Relevant – the information should be relevant to its purpose.
●Accessible – information should be accessible in an appropriate way, e.g. by email, verbally
or by written report.
●Timely – information should be provided in sufficient time for decisions to be
made based upon that information.
●Easy to use – the information should be clear and easy to use.

Sources of Management Information

Internal Information External Informantion

●Accounting records ●Competitor's information
●Personnel and payroll information ●Customer's information
●Timesheets ●Supplier's information
●Production information

●The internal and external information may be used in planning and controlling activities.
●Example- Sales volume may be used for variance analysis

Information Technology and Information System

Information Technology (IT) describes any equipment concerned with the capture, storage,
transmission or presentation of information. The IT is the supporting hardware that provides
the infrastructure to run the information system.

Information System (IS) refers to the provision and management of information to support
the running of the organisation. It helps in -
*linking the organisation to customers or suppliers
*creates effective integration in a value adding process
*enables the organisation to develop , produce, market, and deliver new products
*gives senior manager information to help develop and implement strategy.

There are 2 main roles of information system in organisation-

●Support operation through the processing and storing of transactions.
●Support managerial activities such as decision making, planning, performance
measurement and control.

Organisation requires information in order to -

●Record transaction
-evidence in case of disputes
-legal requirement
-assessment of profitability

●Make decisions
-to make informed decision
-classify as internal and external

●For panning purpose

-Planning requires knowledge of resources and time for implementation

●For performance measurement

-performance is measured that enables comparison against budget or plan
-this requires collection of information
-this collection and persentation of data is performed be IS

●For control
-once plan is implemented, its actual performance must be controlled
-information is required to assses whether there is any deviation from plan

Costs and benefits of Information System

The value of information

●Collecting and processing information for use by managers has a cost.

●The value of the information to the business must be greater than the cost. The benefits of
the new IS should be greater than its cost. If this is the case, the new IS is worth
implementing.

Cost-benefit analysis can be used to assess the expected costs and benefits of the IS.
The costs of a new system

Initial Costs Running cost

●Cost to design and develop system if
software is bespoke.
●Purchase price of software if it is not
bespoke
●Purchase price of new hardware
●Cost of testing and implementing of
the new system
●Training costs
●Cost of labour time to run the system
●Cost of materials, eg. Replacement
parts.
●Cost of service support eg. IT help
desk.

Cost classification

Cost of internal information Cost of external information

Direct data capture costs, eg- the cost of
barcode scanners in supermarket
Processing cost eg- salaries paid to
payroll processing staff
Indirect costs, eg- information collected
collected which is not needed.
Training costs
Direct costs eg- newspaper subscription
Indirect costs eg- wasted time finding
useful information
Management cost eg- the cost of
processing information
Infrastructure costs eg- of system
enabling internet searches.

Benefits of a new Information System

●Enhanced efficiency and capacity – e.g. resulting in labour savings.

●Better quality of information – information may be more ‘ACCURATE’.
●Better access to information – e.g. by means of an Intranet.
●Improved sharing of information – e.g. through the creation of a database.
●Improved communication – e.g. through the introduction of an email
system.
●Better decision making and customer service.

System architecture and data flows

A network is a system that facilitates the transfer of information between different parts of
the business.

An intranet is an internal network used to share information within an organisation.

The firewall surrounding an intranet fends off unauthorised access from outside the organis.

Benefits of intranet-
●Elemination of storage, printing and distribution of documents that are made available to
employees online.
●Documents online are often more widely used than those that are kept filed away. This
improves the effeciency and productivity.
●It is much easier to update information in electronic form.

An Extranet is a collaborative network which uses internet technology to join organisation,

eg- to link business with their suppliers.
This is a private, secure extension of an intranet, which allows the organisation to share
information with suppliers, customers, and other business partners,

Internet
●The Internet is a global system of interconnected networks carrying a vast array of
information and resources.

●By connecting the network to the internet (or intranet/extranet), communication with key
stakeholders will be improved and it may be possible to share data with organisation which
could assist in a benchmarking exercise.

●However, the opening of the organisation’s network to the internet will provide
additional opportunities for the spread of viruses and possibly open the network
to hackers.

Wireless and hand-held technology

●WiFi (wireless fidelity) facilitates the mobile use of laptop computers and hand-held
devices.
●Many consumers now use their phones and tablets to buy products and firms have
responded by developing apps to make purchase easier.
●Many organisations use tablets to access key informations.

Direct Data Capture

Desing of the data collection methods is an important part of desinging a computer system.
While choosing the system to collect data , users are concerned with-

●How to economise on the use of manpower

●How to prevent or detect errors in the source data
●How to achieve data capture at the lowest possible cost
●How to achieve input sufficiently quickly
●How data gets into the system.

Input devices are of 2 types

●Keyboard
●Direct input devices

Methods of data capture -

●Optical Character Recognition (OCR) - ie, image to text application. If a business wants to go
paperless by transferring all its printed documents to PDF files, using OCR makes the job
easier by eleminating manual input.

●Optical Mark Reconation (OMR)- Some applications of OMR are to mark multiple-choice
questions, to process student enrolment forms or to process questionnaires. It helps to
process large volumes of data faster.

●Magnetic Ink Character Recognition (MICR)- These applications are used mainly to clear
bank cheques.Its advantage are that data input is fast and humun errors are avoided.

●Bar Codes- they are used to check out items at supermarket tills, to track stocks in a
warehouse, to processing the borrowings and returns of books in a library.

●Magnetic strip cards- are used to withdraw money at ATMs and to pay goods by credit card.

●Voice recogniser- It is a software that undestand spoken commands.

Privacy and Security

IS are exposed to privacy and security issues.

Types of controls-

●General controls- ensures that the organisation has overall control over its information
system. Eg-
- Personnel controls- segregation of duties, policy on usage etc.
-Access controls- passwords and time lock outs
-Computer equipment controls- to protect equipments from theft or damage
-Business continuity planning- a risk assessment to decide which systems are critical to
the business continuing its activities.

●Application controls- Performed automatically by the system and include-

-Completeness checks to ensure all data is processed
-Validity checks to ensure only valid data is processed
-'identification and authorisation checks to ensure users are identified and authorised
-Problem management facilities to ensure problems are managed on a timely basis,.

Privacy and security threats

Potential threats Solutions

●Natural disasters -Fire procedures like fire alarms
-Location like basements are liable to
flood
-Physical environment like dust control
●Malfunction of computer -Back up procedures
hardware and software - Network desing to cope with high
volumes
●Viruses -Back up procedures
-Anti-virus software
●Hackers -Formal security policy and procedures
-Regular audit checks for unauthorised
softwares
-Firewall software to provide protection
from unauthorised access.
-Passwords and user names
-Formal security policy and procedures
-Data encryption to security
●Electronic eavesdropping- users -Data encryption to security
accessing private information not -Passwords and user names
intended for them.
●Human errors -Training how to operate
●Human resource risk - injury, headache, -Engonomic desing of workstation
tripping. -Antiglare screens reduce eye strain
-Cables should be in duct

Management Reports
Business data will often consist of information that is confidential and commertially
sensitive.
Controls will be required when generating and dirtributing information
Types of controls Explaination Example
Input Inputs should be complete, accurate and Passwords
authorised.
Processing Processing should be initiated by Audit trails
appropriate personnel and logs should
be kept of any processing.
Output The output should be available to Distribution lists
authorised persons and third parties
only.

Controls over input Controls over processing Control over output

●Input ●Password and audit ●Password system
●Range test trails ●Sensitive printed
●Format checks ●Programmes should output
●Check digitals not be altered without
●Sequence checks authorisation
●Matching
●Cotrol totals

Security of Confidential Information

Procedures-

●Personnel controls
●Logical access control including passwords
●Firewall is located in intranet to prevent access to confidential information.
●Data encryption
●Virus protection
m for
ACCURATE

ion System
Chapter # 2
Infromation System and Data analytics

Performance Management Information Systems

Levels of control Key characteristics Examples of accournting

information requirements
Strategic Planning ●Takes place at the top of the ●Long-term forecasts
organisation
●Concerned with setting a
future cource of action for the
organisation
Management ●Concerned with the effective ●Budgetary measures
control use of resources to achieve ●Productivity measures
targets set at strategic ●Labour statistics
planning. ●Capacity utilisation
Operational control ●Concerned with the day- ●Detailed short-term
today implementation of the transaction data.
plans of the organisaion.
Types of Information Systems

Information Systems at different business levels

Strategic information
It is mainly used by directors and senior managers to choose between alternative courses of
action, to plan the organisation's overall objectives and strategy and to measure whether
these are being achieved. For example:
•profitability of main business segments
•prospects for present and potential markets.

Tactical information
It is used by managers at all levels, but mainly at the middle level for tactical planning and
management control activities, such as pricing, purchasing, distribution and stocking.
For example:
•sales analysis
•stock levels
•productivity measures.

Operational information
It is used mainly by managers on the operational level such as foremen and section heads
who have to ensure that routine tasks are properly planned and controlled. For example:
•listings of debtors and creditors
•payroll details
•raw materials requirements and usage.

Information Systems to support decision making

Transaction Processing System (TPS)

●It is a system that represents the simple automation of manual systems.
●The TPS routinely captures, processes, and stores and output the low level transaction data.
●Example- TPS can be used to record sales of the bookstore]
●It is mainly used by operational managers to make basic decisions.
●Types of TPS system include- Sales/marketing system, Manufacturing production system
and Financial /accounting system.

Management Information System (MIS)

●It converts internal and external data into useful information which is then communicated
to managers at all levels and across all functions to enable them to make timely and
effective decisions for planning, directing and controlling activities.
●It will collaborate information from individual transactions recorded in the accounting
system to allow middle managers to control the business.

Examples-
●Management accounts can be produced by the system showing margins for different
products which will help in setting rewards for individuals/teams.
●Customer purchases can be summarised into reports to identify the products and customers
providing most revenue.

Features-
●Provide support decision making for all management levels.
●Provide on-line access to TPS to give summry on the performance of the organisation.
●Provides an internal rather than external focus.
●Provide more detail information about the organisation's information
●Produces relatively simple summary reports and comparison.
Types-
●Data base system- It process and store information, which becomes the organisation's
memory.
●Direct control system- It monitors and reports on activities such as output levels, sales
ledger and credit accounts in arrears.
●Enquiry systems- Which is based on databases, which provide specific information such as
performance of a department or an employee
●Support system- Provides computer-based methods and procedures for conducting analysis
forecasts and simulations.

Decision Support System (DSS)

●It is a computer based system which enable manager to confront ill-structured problems
by direct interaction with data and problem-solving programs.

Features-
●To provide support for decision making.
●To provide support for all within the decision making process.
●To provide support for decisions that are inter-dependent as well as independent.
●To provide a variety of decision making processes.
●To be user friendly.

Tools-
●Spreadsheet
●Expert system
●4th generation laguages
●Data bases
●Statistical programs
4 basic elements of DSS-
●Language sub system- Which does not require programming to use.
●Problem processing sub-system- Which includes spreadsheets, graphics, stastical analysis.
●Knowledge sub-system- Which includes datebase function
●Expert system- Hold specialised knowledge like tax ,law.
Uses:
●Part of the problem is undestood and hence can be automated.
●But part of the problem is not well undestood hence and managers will have to use
judgements to come to final decisions.
Decision Support System (DSS) will usually consists of :
●A large database of information usually drawn from both internal and external sources .
●Problem exploration facilities which allow users to explore different scenarios using
what-if and sensitivity analysis.
●Goal seeking and optimisation functions to allow users to determine the values of variables
required to achieve a pre-determined or optimal solution.
●Graphical tools to display statictical data .
●In-built statistical simulation and financial funcitions to allow users to develop relevant
models quickly .

Executive Information System (EIS)

●It provides strategic managers with flexible access to information from the entire business,
as well as relevant information from the external environment
●EIS enables senior management to easily model the entire business by turning data into
summarised reports.

Reason why EIS could be more expensive to opera

●Large amount of data is being accumulated
●Data needs to be easily accessible, on-line and upto date which requires large disk storage.
●Knock-on costs to handle large volumes of data.
●The larger the database, more processing power is required to conduct straight forward
operation.
●Required to invest in hardware as the orginal proves to be inadequate to handle large
volumes of data.
●Data is obtained from different external sources which may require extra disk storage.
●Information may change over time. This involves cost in making changes to the way in which
the system is set up.
●Maintainance and support cost.
●Another area where cost may increase is the network service.
●Potential cost involved in the capture of the data.

Expert System (ES)

●It can be used at all levels of management and hold specialist knowledge eg. Law, taxation.
bakning, medicine.

●It is a computer program that captures human expertise in a limiited domain of knowledge.

● Such software uses a knowledge base that consists of facts, concepts and the relationships
between them and uses pattern-matching techniques to solve problems.

●It has 2 components - Knowledge base and interface engine.

●Knowledge base stores knowledge and experience of experts.

●Interface engine - here we can ask questions. It uses a mixture of rule based logic and
fuzzy logic.

An Expert System is a software model of a knowledge, facts, and reasoning of an

acknowledged human expert. The expert system software usually represents knowledge
as a set of interconnected rules. These rules have usually been derived from discussion with
experts as well as from observing and recording their decision making behaviour.

An expert system usually consists of:

●A knowledge base where the rules and facts are stored
● An inference engine which stores problem solving procedures to perform the reasoning
●An knowledge acquisation facility to allow the expert to enter knowledge and facts.
●A knowledge presentation and explaination function to allow to interogate the expert
system and to have the expert systems decision explaied to them.

Enterprise Resource Planning System (ERPS)

●It integrate the data from all operations within the organisation, e.g. operations, sales and
marketing, human resources and purchasing, into one single system.

●It ensures that everyone is working off the same system and includes decision support
features to assist management with decision making.

●Software companies like SAP and Oracle have specialised in the provision of ERP systems
across many different industries.

This system offers-

● On - line/real time information throughtout all the functional areas of an organisation
●Standardisation of data across the entire organsiation.
●Common data files for all functons, thereby saving duplication
●Because they are enterprise-wide, ERP systems can be useful for
extracting performance data relating to cross-functional or multi-functional
activities, such as:
-supply chain management
-activity-based costing
-balanced scorecard performance reporting.
Customer Relationship Management (CRM)
●It is an approach to build and sustain long term business with customers.
●It consists of the processes a company uses to track and organise its contacts with its
current and prospective customers.

The main stages of developing and maintaining customer relationship are-

Phase 1 - Selection
Identify the customers to be targeted by segregation, targeting and positionIng. Also market
research should be done.

Phase 2 - Acquisation
To get new customers , companies must remember that first impression is last-so this stage
is critical -although cost of getting this customer needs to be minimised

Phase 3 - Retention
Retaining is the ultimate objective of CRM system since cost to get more customer is greater
than retain the existing one . This requires deep undestanding of the needs of the customers
so that the product can be tailored to meet their specific requirements.

Phase 4 - Extension
Retention results in generation of additional sales from the customers with whom the
organisaton has built a relationship.

Phase 5 - After sales Service

Using technology to provide answers to frequently asked questions, make and handle
complaints. This service help retain customers.

Big data
●It is referred to large volumes of data beyond the normal processing, storage and analysis
capacity of typical database application tools.

●One of the key challenges of dealing with Big Data is to identify repeatable business
patterns in this unstructured data, significant quantities of which is in text format. Managing
such data can lead to significant business benefits such as greater competitive advantage,
improved productivity and increasing levels of innovation.

The 3 V's that represents the character of Big data are-

●Velocity
Data is now streaming from sources such as social media sites at a virtually constant rate and
current processing servers are unable to cope with this flow and generate meaningful real-
time analysis.

●Volume
More sources of data and increase in data generation in the digital age combine to increase
the volume of data to a potentially unmanageable level.

●Variety
Traditionally data was structured and in similar and consistent formats such as Excel spread
sheets and data bases. Data can now be generated and collected in huge range of formats
like audio, rich text etc.

Uses of Big Data

●Social network traffic
●Web server logs
●Traffic flow monitoring
●Satellite imagery
●Streamed audio content
●Banking transactions
●Audio downloads
●Web pages content
●Government documentation
●GPS tracking
●Telemetry from consumer and commercially operated vehicles
●Financial market data

Big Data: Benefits

●Driving innovation by reducing time taken to answer key business questions and therefore
make decisions
●Gaining competitive advantage
●Improving productivity

Big Data: Risks

●Availability of skills to use Big data systems are not always easily available.
●Security of data is a major concern in the majoirity of organisations.
●Data protection issues as organisation collect a greater range of data from increasing
personal sources.

Big Data Management and analysis

●Big data management is the storage, adminstration and control of vast quantities of both
structured and unstructured data.

●The main aim of Big Data management is to ensure the data stored is high quality and
accessible.

●New technologies combine traditional data warehouses with Big Data systems in a logical
data warehousing architecture.

Big Data analytics

It is the process of scrutinising Big Data to identify patterns, correlations, relationships and
other insights. This information can have a wide reaching effect on the organisation's
competitive strategy and marketing campaigns and can therefore have a direct impact on
profitability.

Big Data sources

It may not fit into currently available data warehouses and Big
Data analytics may require more advanced software tools than those commonly
used in traditional data mining. Open source technologies such as Hadoop are
increasingly utilised to manage the constantly evolving data processing
requirements of Big Data.

●The Executive Information system and the Expert System are the example of
decision based software.

●Benefits of Big Data

-Customer relationship management can be improved resulting in better repeat
business and customer loyalty
-Business performance better tracked and analysed against a wider set of criteria

●The external Information is usually less reliable than internal information.

●External information can be generally vague, and may not really help an
organisation with decision making.

Summary of All the Systems

●Transaction Processing System serves the operational level of the organisation. The system
records all of the daily routine transactions that take place within the organisation, relating
to each particular aspects of operational activities.

●Data from the TPS is fed into a Management Information System (MIS). An MIS takes the
bulk of data from the TPS and develops it into something useful to management in support
of its decision-making responsibility. The MIS is usually computer-based, making use of
spreadsheets where 'what if ?' analysis can be carried out.

●An Enterprice Resource Planning (ERP) system is a sophisticated MIS system that covers the
whole range of the organisation's activities. It promises the 'seamless integration of all the
information flowing throughout the company'.

● A Strategic Enterprise Management (SEM) system assists management in making high level
strategic decisions . Tools such as activity - based management and balance score card are
applied to the data in the date warehouse to enable the stragegic goals of the organisation
to be worked towards.

●An Executive Information System (EIS) or Executive Support System (ESS) gives
management access to both internal and external data. Managers can access information
to monitor the operations of the organisation and to scan general business condition. The
data for an EIS in an online and updated in real time to ensure its integrity for decision
making at a senior management level.
on Systems
iness levels
sion making
sive to operate
m (ERPS)
(CRM)
Chapter # 4

Specialist cost and Management

Accounting Techniques
Summary of chapter

● ABC costing
●Throughput Accounting
●Target costing
●Lifecycle costing
●Environmental costing

ABC Activity Based Costing

●Production overheads are driven by the level of production
● Reason of using ABC
- Overheads are larger than direct cost because of the use of machines
- Change in the nature of manufacturing ie, diversity and complexity of
products has increased

Comparing ABC with Traditional method

●Traditional method- Calculated based on volume of units produced.

●Non volume related activities like material handling , material procurement
setups , production sheduling are not driven or is not directly propotional to
number of units produced.
●In Traditional method, all these costs are apportioned based in the units produced .
●In ABC costing, separate cost pools are establised for the above cost and OAR is
calculated by dividing cost pools by cost drivers.
●The use of cost drivers is the main idea behind ABC .

Steps for calculating production cost per unit using ABC

●Step 1: To identify the major activities with in each department which create cost .
Eg : Production Scheduling, Machining, Despatch of Orders, Inspections.
●Step 2 : Identify cost drivers for each activity ie, what causes the cost to be incurred.
●Step 3 : Calculate a cost driver rate for each activity ie, OAR.
●Step 4 : Absorb the cost into the product.
● Step 5 : Calculate the full production cost

Advantages and Disadvantages of ABC

Advantages:
●Provides accurate cost per unit
●Provides better insight of what drives cost
●ABC recognises OH cost not related to production or sales volume
●Applied to drive realistic cost in complex business
●Can be applied to all overheads
●Can be easily used in service costing
●Can be used to control cost by managing cost drivers
●Eliminate unnecessary activity (it is not a major activity, it just identifies
the inefficiencies not eliminates)
●Determine Cost incurred for each activity specifically
●Use of information at the planning stage can lead to better of resources
●Highlights opportunities to reduce or eliminate non value adding activities
●The product value analysis that will be a part of ABC will lead to improved product design
increased use of standard components, efficient use of labour thus leading to decreased
cost

Disadvantages:
●Time consuming & expensive
●Determining the Cost driver is quite tidious
●Not useful when overheads are drawn by units produced
●Impossible to allocate all overhead cost to specific activity
●More complex to explain to the shareholders

Reasons for introducing ABC in public Sector

●Public responsibility to control cost since resources provided by government is limited
●Public accountability to the taxpayers
●Resource allocation within organisation
●Helping managers to manage

Throughput Accounting - Background

1) TQM - Total Quality Management

It refers to continues improvement in quality , productivity and effectiveness through a

management approach focusing both the process and the product.
Fundamental features include:

•Prevention of errors before they occur

•Importance of total quality in the design of systems and products
•Real participation of all employees
•Commitment of senior management to the cause
•Recognition of the vital role of customers and suppliers
•Recognition of the need for continual improvement.

2) JIT -Just in Time

In this system, goods are only produced when they are needed eliminating large stocks
material and finished goods.

Features:

•High level of automation

•High level of OH and low level of direct labour
•Customised products produced in small batches
•Low stock
•Emphasise on high quality and continues improvement

Throughput Accounting
It aims to make the best use of a scarce resource (bottleneck ) in a JIT environment.

Formula :
Throughput = Sales revenue/unit- direct material cost/unit
Note - here material purchased is used

•Aim- To maximise profit while reducing operating expenses (inventory).

•Bottle neck means constrains like limited machine hours or labour hours.
•In short term, make best use of bottleneck eg. Machine hours
•In long term, bottle neck should be eliminated by employeeing more labours or
buying new machine

Assumptions-

•Purchase of raw material is the only short term variable cost.

•Direct labour cost is not variable cost in short term as it is mostly fixed.

Steps for Bottle Neck

1. Identify the system bottle neck

2. Decide how to exploite the bottle neck
3. Subbordinate everything else in the step 2
4. Elevate the system bottle neck
5. If in the previous step the bottle neck has been broken(elevated) go back to step 1

Example-
There are 3 machine
Machine 1 produces at a faster rate
Machine 2 produces at a slower rate
So Machine 3 will remain idle or affect it's production rate.

Formula

•Throughput (return) per factory hour = Throughput per unit

Product's time on the bottleneck resource

•Cost per Factory hour = Total factory cost 000000000000000000000

Total bottleneck resource time available

•Throughput Accounting Ratio (TPAR)= Return per factory hour or

Cost per factory hour

=Throughput
Total factory cost ie, Labour cost + OH
= Total thouughout
Total conversion cost(OH +L)

Note - factory cost is also referred as operating expense

For TPAR calculation , take only the cost related to production / factory
ie, marketing cost etc should not be included
Throuhput is mainly used for the performance measure which in turn aids in decision making
Generally labour cost are not variabel in short run because most of them would be
salaried and the price wade system, minimum wages are fixed.
Interpretation of TPAR
• TPAR > 1 would suggest that throughput exceeds operating costs so the product should
make a profit . Priority should be given to the products generating best ratios.
•TPAR<1 would suggest that throughput is insufficient to cover operating cost ,
resulting in a loss so reject the project.

Critisisms

• It concentrates on the short-term

• In longer term, ABC is more appropriate to control cost
• Difficult to apply in longer term when all cost are variable
•In competitive it is not possible to increase sp , so reduce the material cost

Interpretation of TPAR
If TPAR is less than 1 it indicates that the rate at which the product generates throughput
(selling price- material cost) is lesser than the rate at which it incurrs fixed cost.

Reason why not to stop production of bottle neck resource

• Negative impact on customer due to reduced choice
• Consider long term cash flow before ceasing the production
• Loss of related sales- if the bottleneck product is closed, company will loose customers
that brought product along with other product.
• Company could make use of excess capacity that is created.
• In calculating throughput, we consider all fixed cost, whereas some cost are unavoidable
and they are incurred whether or not the production ends.

Improving TPAR

• Increase selling price per unit to increase throughput

• Reduce material cost per unit
• Reduce total operating expense to reduce cost per factory hour
• Improve productivity of the bottleneck -reduce the time required to make each product.

Steps for TPAR multi product

Step 1 :Identify the bottleneck constraint.

Step 2 :Calculate the throughput per unit for each product.
Step 3 :calculate the throughput per unit of the bottleneck resource for each
product.
Step 4 :rank the products in order of the throughput per unit of the bottleneck
resource. If all products are made in the same factory, then the ranking can be
done on return/hour as the cost/hour will be the same; however if not the
ranking is done on TPAR.
Step 5 :Allocate resources using this ranking and answer the question
Target Costing
Target costing involves setting a target cost by subtracting a desired profit
from a competitive market price.

Selling Price - Desired Profit = Target Cost

Steps for Target costing

1. Set the selling price

2. Set the required profit
3. Calculate the targer cost (1-2)
4. Calculate the estimate current cost based on the product specification ( actual cost )
5. Calculate the targer cost gap

Closing the Target Cost Gap

Target cost gap = Estimated product cost - Target cost

Ways to reduce target cost gap

•By eliminating cost

•Use less expensive material for production
•By saving labour hours or using low skilled labour
•By improving productivity
•By increasing production volume
•By cost saving
•By reducing cost drivers
•Reconsider the dising to reduce the non value design
• Reduce the component or parts to standardardise
• Outsourse the elements of production

• Service industry cost cannot be standardised

Price cannot determine quality
Doctor 1 $ 10
Doctor 1 $ 100

• Mostly applicable for manufacuring industry

Types of Value
• Cost Value - Cost incurred by firm to product the product
• Exchange Value - The amount of money that the customers are willing to exchange
to get ownership of product
• Use Value- It relates to the ability of the product
• Esteem Value- It relates to the status related to the ownership of the product

Target costing Relating to Service Industry

Problems-
• Intangibility
• Inseparability
• Heterogeneity
• Perishibility
• No transfer of ownership

Life Cycle Costing

A system which tracks and accumulates the actual cost and the revenue attributabe to
each product from development to abondement.

Lifecycle cost of a product = Total cost of the product over its entire lifecycle
Total number of units of the product

•90% of the product's lifecycle cost are determined by the decisions taken
early in the cycle
 Product lifecycle graph

Life cycle costing

Cradle to grave
Example
200,000 units can be sold in the life time
R&D cost $1,000,000
Cost of manufacturing $1,000,000
Cost per unit $ 10

5 Stages of Life cycle costing Skimming price strategy

1. Development stage Increase the price
2. Introduction stage
3. Growth Penetration price strategy
4. Maturity Reduce the price
5. Decline

•In the modern manufacturing environment a high propotion will be

incurred at the early stages in the life cycle

•Life cycle costing is relevant to service industy that provide service

that requruire significant up front R & D
Example- software and bank

•Stagnation period - prices may be stable - try to maximise the profit

- short term profit oriented. - price may fall with demend.
Nish market- market where some companies are not interested.

Benefits of Lifecycle costing

•It provides a true financial cost of a product

•Expensive errors can be avoided that is potentially failing products can be avoided
•Lower cost can be achieved earlier by designing out cost
•Better selling price can be set

Comparison of Lifecycle costing with the traditional costing method

• Most traditional costing is based on the periodic accounts (12 months) , rather than
focusing on the accumulated revenue and expense of a particular product.
• Recognitation of the committement is needed over the entire lifecycle of a product will
generally lead to more effective resource allocation than the traditional annual budgeting
system.
• R&D, desing and production set-up cost are expensed as they incur and efforts are not
taken to recover in traditional costing. In lifecycle costing , it tries to compensate these costs
as in this method all the accumulated cost are known.

Stages Fixed Cost Variable cost

Development Product desing and Nil
Market design , R&D
Introduction Fixed production and Materials/ components /
marketing cost variable non production
overheads
Growth Decommissionning factories Servicing outsources
Maturity Marketing cost
Decline Replacement cost,/ Reduction in marketing cost
disposal of product

Methods to maximise a product's return over its lifecycle

•Tear down analysys - reverse analysis

See the competitor's prodoct
Example - Toy

•Value Engeenring
1. Things that affect the product
2. Eliminate the things that costomers do not value

•Minimise the time to market-

The company should launch its product as quickly as possible after the concept is developed

•Minimise the breakeven point

- Low price will increase sales but at the expense of low contribution
- High price will increase contribution but at the expense of low sales volume

•Maximise the length of lifecycle

Longer the lifecycle , greater the profit
To achieve this bring product to the market quickly
Also find other users of the product

Price an stages
Stages Price
Introduction High price to compensate R&D
Growth Reduce price as competition increases
Maturity Sales are slow and prices maintained
Decline Prices are reduced to maintain sales
Environmental Management Accounting

Important information from the Techincal Articles

Environmental accounting is a broader term that encompasses the provision of
environment-related information both externally and internally. It focuses on reports
required for shareholders and other stakeholders, as well of the provision of
management information

Environmental management accounting, on the other hand, is a subset of

environmental accounting.information it generates could also be used for
external reporting.It focuses on information required for decision making within the
organisation, although much of the information it generates could also be used for
external reporting.

Environmental management accounting is simply a specialised part of the management

accounts that focuses on things such as the cost of energy and water and the disposal of
waste and effluent. It is important to note at this point that the focus of environmental
management accounting is not all on purely financial costs. It includes consideration of
matters such as the costs vs benefits of buying from suppliers who are more
environmentally aware, or the effect on the public image of the company
from failure to comply with environmental regulations.

Environmental management accounting uses some standard accountancy techniques

to identify, analyse, manage and hopefully reduce environmental costs in a way that
provides mutual benefit to the company and the environment, although sometimes
it is only possible to provide benefit to one of these parties.

Ressons of environmental management accounting-

•Legal and regulatory requirement relating to environmental management

•Need to meet customers relating to environment
•Need to maintain good public image
•Need to manage the risk of environmental disasters
•Need to make cost saving by improved use of resources
•Need to recognise the importance of sustainable development
•Need to reduce the environment cost which constitutes a major portion of operating cost

Environmental Management and effect on fianacial performance

•Improving revenue
Producing products which will meet the environmental needs of customers will increase
sales
•Cost reductiton
Paying close attention to the use of resources can lead to reduction in cost .

•Increase in costs
Cost of complying with legal and regulatory requirement and additional cost to improve the
environmental image of the organisation

•Cost of failures
Cost of cleanups and fines

Identitfying and accounting for environmental cos

Internal cost

Has direct impact on SOPL

•Waste disposal cost
•Products take back cost
•Regulatory cost such as taxes
•Upfront cost such as permits
•Back end cost such as decommissioning

External cost

Borne by the socirty at large.

•Carbon ommission
•Usage of energy and water
•Forest degradation
•Health care cost
•Social walfare cost

Classifiacaitons of environment cost

(1) Hansen and Mendoza

•Environmental prevention cost- cost to prevent production of waste.

•Environmental detection cost- cost incurred to ensure that firm complys
regulations
•Environmental internal failure cost- cost incurred before discharging waste into
the environment
•Environmenatal external failure cost- Cost incurred on activities afer discharging
waste

(2) US environmental protection agency

•Convention cost- Raw material and energy cost

•Potentially hidden cost-cost recorded by accounting system but
loosing their identity as general overheads
•Contingent cost- cost to be incurred in future
•Image and relationship cost

(3) UNDSD

•Cost incurred to protect environment- Example : measures taken to prevent pollution

•Cost of wasted material, capital and labour- Due to inefficiencies of production process

Environmental Management Accounting Technique

(1) Input / output analysis

This techniques records material inflows and balances this with outflows on
the basis of what comes in must go out.
Example - if 100kg of materials have been bought and only 80kg of materials
have been produced, for example, then the 20kg difference must be accounted
for in some way. It may be, for example, that 10% of it has been sold as scrap and 90%
of it is waste

(2) Flow cost accounting

This technique is used for organisational structure.

It divides the material flows into three categories-
-material
-system
-delivery and disposal
Aim- to reduce the quantity of materials which will have a positive effect on
environment and cost

(3)Activity Based Costing

It allocates internal costs to cost centres and cost drivers on the basis of
the activities that give rise to the costs.
(4) Lifecycle costing

Cradle to grave costing

Environmental Management Accounting Advantag

& Disadvantages
Advantages
•Fairer product cost
•Improving pricing so as to reflect
environmental impact
•Better environmental cost control
•Convertion into strategic managemet
process
Disadvantages
•Time consuming
•Expensive to implement
•Determining cost drivers is difficult
•External cost is excluded by company
•Some environmental costs are intangible
ublic Sector
<>≥≤
unting

echincal Articles
nvironmental costs
unting Techniques
unting Advantages
 Chapter # 5

Cost volume profit analysis

•Breakeven is also known as cost volume profit analysis

Single Product break-even analysis

Formula

1. Breakeven sales (in units) = Fixed Cost

Contribution per unit

2. Breakeven sales (in $ ) = Fixed cost x Sales

Contribuation

= Fixed cost
C/s Ratio

= Breakeven point x selling price per unit

4. Margin of Safety = Actual sales- Breakeven Sales

5. Margin of Safety (in%) = Budgeted sales- Break even sales x 100

Budgeted sales

6. Require Sales = Required profit + Fixed cost

C/S ratio
Drawing a Basic Breakeven Chart

Fixed cost recovery point

The contribution Breakeven chart

The profit - volume chart

Multi Product Breakeven Analysis

Formula

Weighted Average C/S Ratio= Total Contribution

Total Revenue

Break even Revenue = Fixed cost

Weighted Average C/S ratio

Margin of Safety for multiple product

Steps

Step 1: Calculate contribution per unit

Step 2 : Calculate contribution per mix
Step 3 : Calculate breakeven point in terms of number of mixes
Step 4 : Calculate breakeven point in terms of the units of the product
Step 5 : Calculate the breakeven point in terms of revenue
Step 6 : Calculate margin of safety
Limitations of Breakeven Analysis
•The behaviour of total cost and total revenue has been reliably determined
and is linear over the relevant range.

• All costs can be divided into fixed and variable elements.

•Total fixed costs remain constant over the relevant volume range of the
CVP analysis.

• Total variable costs are directly proportional to volume over the relevant
range.

• Selling prices are to be unchanged.

• Prices of the factors of production are to be unchanged (for example,

material, prices, wage rates).

• Efficiency and productivity are to be unchanged.

•The analysis either covers a single product or assumes that a given sales
mix will be maintained as total volume changes

• Revenue and costs are being compared on a single activity basis (for
example, units produced and sold or sales value of production).

• Perhaps the most basic assumption of all is that volume is the only
relevant factor affecting cost. Of course, other factors
also affect costs and sales. Ordinary cost-volume-profit analysis
is a crude oversimplification
when these factors are unjustifiably ignored.

• The volume of production equals the volume of sales, or changes in

beginning and ending inventory levels are insignificant in amount.

• Break even assuumes that all units produced are sold, thus no inventory is taken into a/c.

• Breakeven ignores the effect of tax and inflation

 Chapter # 6

Planning with Limiting Factors

Types of Constrains Learning curve
80%
•Limited demand it means 80% yet to learn
•Limited skilled labour and
•Limited finance

Planning with one limiting factor

Step 1:Identify the scarce resource.
Step 2: Calculate the contribution per unit for each product.
Step 3:Calculate the contribution per unit of the scarce resource for each
product
Step 4:Rank the products in order of the contribution per unit of the scarce
resource.
Step 5: Allocate resources using this ranking and answer the question.

Planning with several limiting factors

Linear Programming Problems (LPP)
Step 1 Define the variables
Step 2 Define and formulate the objectives - objectives could be max. or min.
Step 3 Formulate the constrains
Step 4 Draw a graph identifying the feasable region
Step 5 Solve for the optimal production plan
Step 6 Answer the question

Step 1-3 : Formulating the problem

Step 4-6: Solving the problem
Assumptions of Limiting Factor Analysis
• There is a single quantifiable objective eg- maximise contribution. In reality there
may be multiple objectives such as maximising returns while simultaneously minimising
risk

•Each product always uses the same qantity of the scarce resources per unit.
In reality this may not be the case. For example, learning effects may be enjoyed.

•The contribution per unit is constant. In relaity, this may not be the case:
- Selling price may be lowered to to sell more
- There may be economies of scale, discounts of buying in bulk

•Products are independent. In reality -

- customers may expect to buy both products together
-the products may be manufactured jointly together.

•The senario is short term. This helps us to ignore fixed cost.

Shadow pricing and Slack

Slack
•Slack is the amout by which a resource is under utilised.
•Slack occurs when the maximum availability of the resource in not utilised.
•It occurs when the optimum point does not fall on a given resource line

Reason why slack occurs:

Implication of Slack

•If the amount of slack for a particular resource is low there is a danger that the resource
could become a binding constrain if the availability of other scarce resource increases.

•If the amount of slack ie, availibility of the resource exceeds the amount used by a
significant amount. It may be possible to us ethis resource elsewhere in the business or
sub contract it to another business.
Shadow pricing or dual pricing
•Shadow price or dual price of a limiting factor in the increase in contribution created
by the availabilbity of one additional unit of the limiting factor at the orginal factor.

•Shadow price of a resoruce can be found by calculating the increase in value (using extra
contribution) which would be created by having available one additional unit of a limiting
resource at its orginal cost.

•It therefore represents the maximum premium that the firm should be willing to pay for
one extra unit of each constrain.

•Non critical constrains ie, where the scarce resource is not fully utilised , will have zero
shadow price

Calcualting shadow price:

Step 1: Take the equation of the straight lines that intersects at the optimal point. Add
one unit to the constrain concerned, while leaving the other critical constrains
unchanged.

Step 2: Use simultaneous equations to derive a new optimal solution.

Step 3: Calculate the revised optimal contribution and compare to the orginal
contribution calculated. The increase is the shadow price.

Implications of Shadow price

•Management can use shadow price as a measue of the maximum premium that
they would be willing to pay for one more unit of the scarce resource .

•However, the shadow price should be considered carefully.

•In addition, if more of the critical constraint is obtained, the constrain line will move o
outwards altering the shape of the feasable reagion. After a certain point there will be
little point in buying more of the scarce reosurce since any non-critical constraits will
become critical.
Notes:
* Critical costrains will have no contraint
*Shadow price= premium a firm is williing to for extra resource
*Only critical contraints have non- zero shadow prices
*Relevant cost= normal cost + shadow price

Notes
•Shadow price is the amount over and above the normal cost that one would be prepared to
pay for an extra unit of scrarce material.

•Iso-contribution
Vertical axis - higher contribution
Horizontal axis - lower contribution

•Linear Programming is only suitable when there are two products

•Linear programming can be used when there is an experience curve, once the sterdy state
has been reached

•Only resources that meet at the optimal point will have a shadow price. The resource that
have a surplus do not have a shadow price.

•Learning effect of labour cannot be incorporated within limiting factor analysis.

•Linear programming cannot incorporate joint product into its analysis

Graph interpretation
•Line C is called 'iso-contribution line' . At any point along this line, the same total
contribution is obtained
•Area 0ABCDE is called the 'feasable reagion'. Any point within this reagion show a feasable
mix of production of the two products. However in order to maixmise the profit, the
production point mix should be the farthest point from the iso-contribution line.
•Slack could arise either due to the reason that the resources are fully not being utilised or
there is unfulfilled demand for the product.
Chapter # 7
Pricing
Different types of Market Structures
Perfect Competitive
Market
•Buyer & Seller are 'price taker'
•No participant influence price
•Zero entry/exit barriers
•Perfect Information
•Companies aim to maximise profit
MC=MR
•Homogeneous product
Imperfect Competitive
Market
•Monoply- One seller of a good.Sellers
dominate many buyers.Profit
maximisation. Example- Microsoft
•Oligopoly- Few companies dominate
the market and are inter-dependent.
Each player has major share in the
market. Exmple- Cement.
•Monopolistic Competition- Products
are similar but not identical. Many
selllers(price makers) and many buyers.
No business has total control over the
market. Example - Soaps
 Three Broad Approaches to Pricing

Demand -Based Cost- Based Marketing - Based

Approach Approach Approach

Demand Based Approach

•Relationship exist b/w selling price & demand
•Establish optimum price- price that will maximise profit
•Price is reduced
•Economist approach
•Chance from Hindu newspaper to TOI due to reduction in price of TOI

•There is an inverse relation b/w price and qty. demanded.

•"a" is the theoretical maximum possible price that could be charged before
demand fell to 0

•There are two methods of finding relationship b/w price & demand
*Algrebraic Approach
*Tabular Approach
Algrebraic Approach
The profit is maximum when MR=MC

Formulae

1. b= ΔP
ΔQ

2. P=a-bQ

3.MR= a-2bQ

4. b= is always negative

5. where ,
P is the price
a is the intercept It is the maximum theorital price at which the price will fall to zero
b is the gradient Because the price and demand is inversely related
Q is the quantity demanded

•Marginal is the additional revenue from selling one extra unit.

•MR=MC when there is maximum profit . This point is called optimum price

Steps to Form a line equation

Step 1: Find the gradient 'b'

Step 2: Calculate the intercept 'a' using the formula
Step 3: Form the straight line equation

Price Elasticity of Demand

•Price elasticity measures how responsive demand to a change in price.

Formula for Price Elasticity of Demand

Price Elasticity of demand = % change in Quantity Demanded

% change in Price
•The negative sign should be excluded while calculating PED

Interpretation of PED

•Elastic Demand if PED > 1 : It means % change in quantity is greater than % change in price.
Demand is very responsive to the changes in price
In this case, price cut is recommended, not price hike

•Inelastic Demand if PED<1 : It means % change in quntity is less than % change in price.
Demand is not very responsive to changes in price
In this case, Price increase in recommended and price cuts are
not recommended.

Tabular Form
Proforma

Price per unit Demand Revenue MR Total cost MC Profit

50 1 50 50 44 44 6
47 2 94 44 56 12 38
44 3 132 38 71 15 61
41 4 164 32 85 14 79
38 5 190 26 95 10 95
35 6 210 20 110 15 100
32 7 224 14 122 12 102
29 8 232 8 135 13 97
26 9 234 2 145 10 89

Here, the the optimum price occurs when the profit has reached its maximum of $102
If the price is further reduced to $29 it will lead to reduction of profit

Equation for Total Cost Function

Formula

y=a+bx
a stands for total fixed (intercept) y is the dependent variable
b stands for VC per unit (gradient) x is the independent variable
x stands for no. of units
y stands for total cost

Graph for Total Cost Function

Cost equation Including Volume Based Discounts

Suppliers offen offer discounts of bulk purchases.

So the total cost equation will be y=a+bx

where the value of b is calculate after deducting the discount

Increasing Sales and Production Levels

If there is an opportunity to increase sales and production, this opportunity should be a
accepted only if it leads to increase in contribution.
Cost based Approach to Pricing
Cost plus pricing

•Price=Cost per unit + chosen margin or mark-up

•Mark-up is % on cost
•Margin is % on sales

Which cost to use?

•Standard cost
It helps to set the price in advance .It helps marketing easier as the customer will know how
much to pay for the product.

•Acutual cost
This method helps to get guaranteed profit. But less incentive for supplier to control cost
as all inefficiencies are passed to customers

•Marginal cost
It is simple as there is no need for the absorbtion of fixed overheads. Difficult to decide
margin as this will need to ensure that it covers fixed cost. Usefull for short term decisions
and one-off contracts.

•Full cost
Ensures that all cost are included in the price of the product. Problem lies in deciding the
fixed cost per unit which inturn depends on estimated sales volume and price.This will
lead to fixing price which is greater than what the customers are willing to pay.

•Relevant cost
This method can be used to arrive at a minimum tender price for a one-off contract.
It is suitable only for one-off contract because-
*Fixed cost may become in long run
*There are problems in estimating incremental cash flows
*There is a conflict between accounting measures such as profit
Advantages and Disadvantages of cost-plus pricin

Advantages
•Widely used and accepted
•Simple to calculate if cost are known
•Selling price decision may be delegated
to junior management
•Justification for price increase
•May encourage price stability if all
competitors use similar cost structure
Disadvantages
•Ignores the economic relationship b/w
price and demand
•No attempt to establish optimum price
•Different absorbtion methods give rise
to different costs and hence different
selling price
•Does not guarantee profit- if sales
volume are low fixed cost may not be
recovered
•Must decide whether to use full cost,
manufacturing cost or marginal cost
•This method fails to recognise the
manager's need for flexibility in pricing
•Circular reasoning- for example a price
increase will reduce volume thus
increasing unit costs, resulting in pressure
to increase the price further

Customer based pricing- the marketer's approach

This approach has a regard to cost but reflects a belief that the greater undestanding you have
of your customer , the better you can price the product.

Comptitor based pricing-

It means setting a price based upon the price fo competing products.
It is classified as-
•Same type of products
•Substitute products

Different Pricing Strategy

•Cost-plus pricing
•Market skimming
•Penetration pricing
•Complementary product pricing
•Product-line pricing
•Volume discounting
•Price discrimination
•Relevant cost pricing

Market-skimming pricing strategy

It involves charging high prices when a product is first launched in order to maximise short-
term profitability. Initially prices are set high when the demand for the new product is
inelastic

Suitable conditions for this strategy-

•The product is new and different and has little direct competition.
•Product has a short life cycle and there is a need to cover development cost .
•The strength of demand and the sensitivity of demand to price are unknown
•A firm with liquidity problems may use market-skimming in order to generate high
cashflows

Penetration pricing strategy

It refers to charging low prices when the product is initially launched inorder to gain market
acceptence. Once market share is achieved, prices are increased. It is an alternative market
skimming

Suitable conditions for this strategy-

•The firm wishes to increase market share
•A firm wishes to discourage new entries in the market
•If economies of scale is achieved, then this strategy is suitable.
•If the demand is elastic

Complementary pricing strategy

A complementary product is one that is normally used with another product. Example- razor
and blade. It provides additional power over the consumer.

Product-line pricing strategy

A product line is a range of products that are related to one another.
Product line pricing occurs when setting the price steps between various products in a
product line, based on:
•Cost differences between the products
•Customer evaluations of different features
•Competitors prices.

In other words, product line pricing occurs when a company must decide the
price differences between the upgrades of a product or service

Volume discounting pricing strategy

It means offering customers a lower price per unit if they purchase a particular quantity of a
product
It has two forms-
•Quantity discounts- for customers that orders large quantities
•Cumulative quantity discounts- the discount increases as the cumulative total order
increases.

Benefits-
•Increase customer loyalty due to discounts
•Attract new customers due to discounts
•Lower sales processing cost
•Lower purchasing cost
•Discounts helps to sell items that are bought primarily on price
•Clearence of surplus stock or unpopular items
•Discounts can be geared to particular off-peaks periods.

Suitable conditions for this strategy-

•Sales margin is substantial allowing profits to be made even afer discounting
•The product is bought on price and it is difficult to distinguished it from competing products
•Products with a limited shelf life

Price-discrimination pricing strategy

It is a strategy where a company sells the same product or services at different prices in
different prices in different markets, for reasons not associated with cost

Conditions required for this strategy

•The seller must have some degree of monopoly price
•Customers can be segregated into different markets
•Customers cannot buy at the lower price in one market and sell at the higher price in the
other market
•There must be different price elasticities of demand for each market so that the price can be
raised in one and lowered in the other to increase revenue

Dangers of price-discrimination as a strategy

•A black market may be developed
•Competitors join the market and undercut the firm's prices
•Customers in the higher priced marker look for alternatives and demand becomes elastic
over time

•The three traditional C's for setting price are-

-Cost
-Competition
-Customer
Δ
<>≥≤
d Discounts
st-plus pricing

r's approach
Chapter # 8

Relevant Costing
Exmple - restautant
16 people employee cook to make food - cheap
4 people employee cook to make food can be costly , getting order in restaurant is cheaper

Short term decisions

1.Make or buy
2. Shut down decisions
3. One-off contracts Do a loss making contract to get experience
4.Further process decisions Extra feature that is not valued by the customer

Relavant Cash Flow

Relevant cash flow is a future increamental cash flow
1.Future : ●Only future cash flows are considered
●Sunk cost are ignoerd (past cost)

2.Incremental ●Only extra cashflows that occur as a result of the decision

should be considered,
●Fixed cost should be ignored unless it is incremental
fixed cost
●Committed cost should be ignored as it does not effect
the decision
●Opportunity cost should be included

3.Cahflow ●It includes both inflow and outflow

●Only cash items are included - Depreciation is excluded.

Sunk cost- Fees given for survey of the banking classes

Cost incurred in the past are ignored in relevant costing
Relevant cost- Rent cost ie, it is paid only when the project is started
Committed cost - Committed cost that are unavoidable in the future
Increamental cost-
Capacity 10000units Produced 10010
Total cost $100000
If fixed cost and variable cost is known then just calculate 10 units
variable cost to find total cost of 10010 units

Opportunity Cost
It is the value of the best alternative when a particular course of action is undertaken
Opportunity cost arise when a scarce resource , which has an alternative use in the
business , is used in a project

Example -
Orginal Purchase Price Not Relevant as it is sunk cost
Current Net book value Not relevant as it is sunk cost ( historical cost - dep)
Estimated current sales value Relevant
Example-
There is a raw material mistakenly bought
There are 2 options
Option 1 - Sell @ $6000
Option 2- Use it as a substitute which will lead to a cost saving of $8000
So the opportunity cost here will be $8000

Relevant cost of Material

●If there is a shortage of material, and other department also uses it then
Relevant cost = Normal material cost + Loss of contribution by other department

Relevant cost of Labour

Relevant cost of Non- current Asset

Items that are relevant-

●Purchase price of new machinery to be purchased
●If existing machine which was supposed to be sold, is used then opportunity cost will be
the scrap value of the machine
●Scrap proceeds of new machine bought
●If existing machine which was supposed to be used by other department, then
opportunity cost will be the loss of contribution by the other department

Items that are not relevant-

●Depreciation is not relevant as it is not a cashflow
●Profit and loss on disposal
●Orginal purchase price of machine is a sunk cost
●The NBV because it is a mixture of historical cost and depreciation
Make or Buy decisoions
Make or Buy decision with no limiting factors

●Calculate the cost of outsourcing and the cost of maunfacturing

●Find out which alternative is cheaper
●Make decision based on the cheaper alternative

Make or Buy decision with limiting factors

Steps -

Step1 - Calculate the saving cost per unit Savings= Purchase price - VC to make
Step 2- Divide this amount by the limiting factor to find savings per limiting factor
Step 3- Rank the product based on the highest savings per limiting factor
Step 4- The scarce resource will be allocated based on the rank given
Step 5- Any product which cannot be produced is purchased from outside

Make Vs Buy - Other decisions to consider

●Reliability of external supplier- In terms of quantity , quality , price and time to deliver
●Speacillist skills- Some skills may be not available in house
●Alternative use of resources- Outsourcing will free up resources which can be used
for other purpose
●Social - Outsourcing will reduce workforce. Consider redundency cost.
●Legal- Outsourcing will be affected by contractual obligation
●Confidentiality- Riks of loss of trade secrets
●Customer reaction - do customer attach importance to the product made in-house

Outsourcing Pros and Cons

Advantages Disadvantages
●Greater flexibility ●Possibility of choosing wrong supplier
●Low investment risk ●Loss of control over process
●Improved cashflow ●Possibility of increased lead time
●Concenterates on core competence
●Enables more advanced technologies
to be used without making investment

Shut down Decision

Recalculate the cost as per given in the question
And make decision

One-off Contracts
Here, consider the cost associated with the contract only

●The minimun contract price = The total relevant net cashflow associated with the contract
●The minimum contract price is the breakeven price, hence there is no profit
●If contract price is less than the cash outflow , then reject the project
●If contract price is more than the cash outflow , then accept the project
●The company will accept a loss making contract if it increases the chance of winning
subsequent project
●In one-off contract fixed cost will be ignored. But it is not always possible as it can lead.
●The minimum price will be lesser than the typical market price.

Further Processing Decisions

It is same as the joint product .

●It arises where the manufacture of one product results in the manufacture of other
product

●The specific point where individual products becomes identifiable is known as split-off
point.

●Cost incurred before the split-off point are called joint cost and is shared b/w joint
products

●After sepereation, products may be sold immediately or may be processed further.

Any further processing cost are allocated directly to the product on which they are incurred.

Basis of apportionment of joint costs:

●Sale value of production
●Production units
●Net realisable value.

Sales Value of production or the market value method

Step 1- First multiply the sales price with the quantity sold
Step 2 - Now use this sales value as a ratio for dividing the joint cost
Step 3- If all goods produced are not sold, then find Joint cost per unit for each product.
Step 4- Then make a tempelate of sales cost and profit for the units sold.

Production Units method

Step 1 - Find the joint cost per unit by dividing the total joint cost by total units produced.
Step 2- Then make a tempelate of sales cost and profit for the units sold.

Net Realisable Value method

NRV= Sales value- further cost to sell

Step 1 - Find the NRV.
Step 2 - Use NRV as ratio to divide the joint cost.
Step 3 - Make the tempelate for-
Note- here we cannot find profit for each single product.
Particulars
Sales
:joint cost
Less:closing inventory
Gross profit

Further processing decisions

When deciding whether to process a particular product further or sell after split-off, further
incremental cash flow should be considered:

●Difference in Revenue and extra cost

●Joint cost are sunk cost at this stage and not relevant to the decision.
●To find out wheter to process further or not, make this tempelate
●Additional sales after processing
Additional cost for reprocessing
Profit after reprocessing
Chapter # 9

Risk and Uncertainity

Risk
There are a number of possible outcomes and the probability of each outcome is known.

Uncertainity
The potential outcomes of a decision that are not known in advance. Clearly the associated
probability cannot be known.

There are several methods of dealing with risk in decision making_

1. Expected value
2.Value of perfect information
3. Decision Trees
4.Maximax
5.Maximin
6.Manimax regret
7. Sensitivity analysis
8.Decision tree
9.Simulation

The role of market research techniques

Market reasearch is an important means of assessing and reducing uncertainity.
●Focus Groups
●Desk research (secondary research)
●Field research
-motivational
-measurement

Focus groups
Focus groups are a common market research tool involving small groups selected from the
broader population. The group is interviewed in order to gather their opinions and reactions
to a particular subject.

Problems-
*Results are qualitative
*The small sample size means the results may not be representative
*Individuals may feel under pressure to agree with other's opinion

Desk research
●The information is collected form secondary sources.
●It obtains existing data by studying publised and other sources like articles.
●It can often eliminate the need for extensive field work.
●It may not be exactly what the researcher wants and may not be totally up to date .
●It is quicker and cheaper than field research.

Field Research

●Information is collected from primary sources by direct contact with a targeted group.
●Although it is more expensive and time consuming than desk research the results
are more accurate, relevant and up to date,

Motivational Research

●The objective is to undestand factors that influence why consumers do or do not buy
particular products.

Measurement Research

●The objective here is to build Techniques

Motivational Research
●Depth interview- Undertaken by trained
person who is able to appreciate conscious
and unconscious associations and
motivation and significance
●Group interview- Where 6-10 people are
asked to consider the relevant subject
under trained supervision
●Word association testing - On being given
a work by the interviewer, the first word
that comes into the mind of the person
being tested is noted.
Measurement Research
●Random sampling- Where each person
in the population has an equal chance of
being selected.
●Quotal sampling- Where samples are
designed to be representative with
respect to pre-selected criteria.
●Panelling- Where the sample is kept
for subsequent investigation, so trends
are easy to spot.
●Surveying by post- The mail shot
method.

●Traid testing- Where people are asked ●Observation- Use of cameras in super
out of three items what they prefer. markets to see the fashion taste of
It helps to know what features they like. customers.

Other methods of dealing with Risk and Uncertain

1. Expected value
2.Value of perfect information
3. Decision Trees
4.Maximax
5.Manimax regret
6. Sensitivity analysis
7.Decision tree
8.Simulation

Sensitivity analysis
Sensitivity analysis takes each uncertain factor in turn, and calculates the change that would
would be necessary in that factor before the orginal decision is reversed.
Typically it involves posing what -if questions.

Process-
●Best estimates for variables are made and a decision arrived at.
●Each of the variable is analysed in turn to see how much the orginal estimates can change
before the orginal decision is revised.
●Estimates to each variable can then be reconsidered to assess the likelyhood of the
estimate being wrong.
●The maximum possible change is often expressed as a percentage. But this can be used only
for cash flows not for sp,vc

Strengths-
●There is no complicated theory to undestand.
●Information will be presented to the management to decide the possible outcomes.
●It identifies areas which are crucial to the success of the project.

Weakness-
●It assumes that changes to variables can be made independently. But simulations allows
to change more than one variable at a time.
●It only identifies how far a variable needs to change, does not look at the probability of
such changes.
●It provides information on the the basis of which decisions can be made but does not direct
to correct decision.
Simulation
It is a techniques that allows more than one variable to change at the same time
It is always used in capital investment appraisal

Stages Specify the major variables

1 Specify the relationship between the variables
2 Attach probalility to each variables and assign random numbers to reflect the
3 distribution.
Simulate the environment by generating random number
4 Record the outcome of each outcome
5 Repeat each simulation many times to obtain a probability distribution of the
6 likely outcomes

Drawbacks-
●It is not a technique for making a decision, only for obtaining more information about the
possible outcome.
●Models can be extremely complex
●The time and cost involved in their construction can be more than is gained from the
improved decision.
●Probability distribution may be difficult to formulate.

Expected Values(Evs)
Formula
EV= Weighted Arithmetic mean of the possible outcomes

The expected value represents the average outcome that would be achieved if a decision
where to be repeated many times.

Advantages
1.Reduces the information to one number for each choice
2.The idea of an average is easily undestood
3. Calculations are relatively simple
4. Takes uncertainity into account

Disadvantages
1.Assigning the probalilities may be diffficult to estimate
2.The average may not correspond to any of the possible outcomes
3.The average gives no indication of the spread of possible results(ie,it ignores risk)
4.Unless the same decision has to be make many times, the average may not be achieved
therefore it is not suitable for decision making in one-off situation

Profit Table or Pay-off table

●It shows all the possible pay-offs which may result from a decision makers chosen strategy
e.g. NPV, contribution,profits

●Make a table with demand and supply . Then find the Evs for all the supplies.
●Select the supply with the highest profit.

Maximax Approach
●The maximax approach involves selecting the alternative that maximises the maximum pay
off acheivable.
●Select the option from demand supply table, which has the maximum profit.
●This apporach is suitable for optimistic investor ie, risk seeking investor.

Maximin Approach
●The maximin rule involves selecting the alternative that maximises the minimum pay-off
acheivable.
●Select the alternative with the highest return under the worst case senario.
●First select min. Then select max from min.

Minimax Regret Approach

●Select the alternative with the lowest maximum regret
●Regret is defined as an opportunity loss from having made the wrong decision
●Minimax regret is suitable for a risk adverse investors.
●First select maximum regret , then amont maximum choose minimum regret.
Supply
Probalility 40 50 60 70 SP 10
25 days 0.1 40 0 80 160 240 Cost 8
50 days 0.2 Demand 50 20 0 80 160 Profit 2
100 days 0.4 60 40 20 0 80 Calculate
75 days 0.3 70 60 40 20 0 the
Maximum Regret 60 80 160 240
Opportunity cost.
Minimum value of the maximum regrets 60

Supply is 40 salads

Decision Tree
A decision tree is a diagrammatic representation of a problem and on it we show
all possible courses of action that we can take in a particular situation and all possible
outcomes for each possible course of action. It is particularly useful where there are a series
of decisions to be made and/or several outcomes arising at each stage of the decision-
making process.

Steps-

Step 1 Draw the tree from left to right, showing appropriate decisions and events/
outcomes
Step 2 Evaluate the tree from right to left by-
(a) Calculate EV at each outcome
(b) Choose the best option at each decision point.
Step 3 Recommend a course of action to management.

The value of perfect information

Perfect information
The forecast of the future outcome is always a correct prediction. If a firm can obtain a 100%
accurate prediction they will always be able to undertake the most beneficial course of
action for that prediction

The value of imperfect information

The value of imperfect information is simply the difference between the expected value if
the market research is commissioned and the expected value if it is not.

Imperfect information refers to the information which may contain inaccurate prediction.

Expected value with market research $4.26

Expected value without market research $4.20
Value of imperfect information $0.06

Example-

Market State Profit from market Probability from market

share
X Y
Good 20000 17000 0.2
Fair 15000 16000 0.5
Poor 6000 7000 0.3

Imperfect information- Simply find the EV for each product

X - 13300
Y - 13500
So, we will choose Y

Perfect information - Choose the product in all the market that gives high profit.
From the green boxes find EV.
EV = 14100

So, the value of perfect information will be = 14100-13500=600

nd Uncertainity
Chapter # 10

Budgeting

Purpose of Budgets
•Planning-Budget forces business to look into the future
•Control- Actual results are compared against budgets and actions are taken
•Communication- It allows formal communication b/w juniors and seniors
•Co-ordination- Helps in the coordination of all departments towards corporate goal
•Evaluation- Helps to evaluate the performance of the manager
•Motivation- It can be used as a target for managers to aim for. Reward should be given
based on the performance
•Authorisation- It acts as a formal method of authorisation to managers for expenditure.
•Delegation- Managers may be involved in setting the budget. Extra responsibility may
motivate them

Budgets and performance management

Budget contributes to performance management by providing benchmarks against which to
compare actual results and develop corrective measures.

Steps for preparing budget-

1.Sales Budget
2.Production Budget
3.Material Budget
4.Labour Budget
5.Overhead Budget
6. Cash Budget
7.Financial Budget

•Budget gives manager preapproval for execution of spending plans

•Budget helps in avoiding disastrous outcomes by anticipating results
The performance hierarchy

Strategic Planning

Tactical Planning

Operational Planning

•Strategic Planning - It is long term, looks at the whole organisation and defines resources
requirement. Ex-developing new product

•Tactical Planning- It is medium term,looks at department/divisional level and specifies how

to use resources. Ex- Train staff to make new product

•Operationa Planning- It is short term, very detailed and is mainly concerned with control.
Most budgeing activities fall within this criteria.

•The acheivement of operational planning will impact on the eventual acheivement of

tactical and strategic planning.

Behavioural aspect of budgeting

•Individual reacts to the demand of budgeting and budgetary control in different ways and
their behaviour can damage the budgeting process.

•Behavioural problems are often linked to management styles, and include dysfunctional
behaviour and budget slack.
Management Styles (Hopwood)

Management Style Performance Evaluation Behavioural Aspect

(1) Budget •Mananger evaluated on •Job related pressure

constrained Style ability to achieve
budget in short term •May result in short-term
decision making at the
•Manager will be expense of long term goals.
criticised for poor result
Ex-Spending exceeds the •Can result in poor working
limit set relationships with colleagues

•Can result in manipulation

of data

(2)Profit conscious •Managers evaluated •Less job related pressure

style on the ability to reduct
costs and increase profit •Better working relations with
in the long term colleagues

•Ex-Manager will be prepared •Less manipulation of data

to exceed the budgetary limit
in the short term if this will
result in an increase in long
term profit

(3)Non- accouunting •Manager evaluated mainly •Similar to profit conscious

style on non- accounting performan style but less concern for
-ce indicators such as quality accounting information
and customer satisfaction
•Requires significant and
stringent monitoring of
performance against budget
Setting the difficulty level of a budget
•An expectations budget is a budget set at current acheivable levels. This is unlikely to
motivate managers to improve but may give more accurate forecasts for resource planning
control and performance evaluation

•An aspirational budget is a budget set at a level which exceeds the level currently achieved.
This may motivate employees but also results in adverse variance.

Approaches to Budgets
•Top down budget
•Bottom up budget
•Zero based budgeting
•Rolling budgets
•Activity-based budgeting
•Feed- forward control
•Each system will be reviewed in turn

●Top down budget or Imposed Budget

It is a budget where a budget allowance is set without permitting the ultimate budget holder
to have the opportunity to participate in the budgeting process

Advantages:

●Saves time if the senior manager imposes the budget rather than many managers preparing
budget which is time consuming

●Managers may not have skills or motivation to participate in the budgeting process

●Senior manager have the better overall view of the company and its resources and this
helps them to prepare budget in a way that makes best use of scarce resource.

●Senior manager are aware of the long term strategic objectives of the organisation, and
make budget to achieve the objectives.

●Managers may build budgetary slacks or bias in the budget inorder to make the budget
easily acheivable.

●Managers cannot use budgets to play games which disadvantages other budget holders

●If the budget is prepared by the senior manager, an outsider, fresh prespective may be
gained.

●If there is frequent change in budget by senior manager, it will demotivate employees.

●Bottom up budget or Participative Budget

It is a budgetary system in which all budget holders are given the opportunity to participate
in setting their own budgets.

Advantages of participative budgets:

●The morale of the management is improved as they feel that their opinion is listened to
or is valuable.

●The management will strive to achieve the targets better if it is set by them rather than
imposed.

●Low level management will have a more detailed knowledge of their department than
the senior manager by which they can make realistic budgets.

●Incremental Budget
An incremental budget starts with the previous period's budget or actual results and adds
or subtracts an incremental amount to cover inflation and other known charges.
It is suitable for stable business.

Advantages
●Quickest and easiest method.
●Suitable if the organisation is stable
and historical figures are acceptable
since only the incremental needs to be
justified.
Disadvantages
●Builds in previous problems and
inefficiencies.
●Uneconimic activities may continued.Eg
the firm may continue to make a
component in-house when it may be
cheaper to outsource.
 ●Managers may spend unnecessarily
to use up their budgeted expenditure
allowance.

●Zero-based Budget
A method of budgeting that requires each cost item to be specifically justified, as if the
budget is made for the first time.

Suitability:

●Allocating resources in areas where spending is discretionary like research & development.
●Public sector organisation

Stages of implementing ZBB

(1) Managers should specify their responsible centres, those activities that can be
individually evaluated.
(2)Each individual activities is then described in a dicision package.The decision package
should state the cost and revenues expected from the given activiy.
(3) Each decision package is evaluated and ranked usually using cost/befefit analysis.
(4) The resources are then allocated to the various packages.

Advantages Disadvantages
●Inefficient or obsolete operations can ●It emphasises short-term benefits to
be identified and discontinued. the detriment of long-term goals.

●ZBB leads to increased staff ●The budgeting process may become to

involvement at all levels since al lot rigid and the organisation may not able
more informantion and work is required to react to unforeseen opportunities or
to complete the budget. threats.

●It responds to changes in the business ●The management skills required may
environment. not be present.

●Knowledge and undestanding of the ●Management may feel demotivated

cost behaviour patterns of the due to the large amount of time spent
organisation will be enhanced. on the budgeting process.

●Resources will be allocated efficently ●Ranking can be difficult for different

and economically. types of activities or where the benefits
 are qualitative in nature.

Packages can be of two types-

●Mutually exclusive packages- containes different methods of obtaining the same

objectives
●Incremental packages- These divide the activity into a number of different levels of
activity. The base pakage describes the minimum effort and cost needed to carry out the
activities.The other packages describe the incremental costs and benefits when added to
the base.

●Rolling Budget
A budget kept continously up to date by adding another accounting period (monthly or
quarter) when the earliest accounting period has expired.

Suitablilty-

●Accurate forecasting cannot be made.Ex- fast moving environment.

●Any areas of business that needs tight control.

Advantages
●Planning and control will be based on
more accurate budget.
●Rolling budgets reduce the element of
uncertainity in budgeting since they
concentrare on the short-term where
the degree of uncertainity Is much
smaller.
●There is always a budget that extends
into the future.
●It forces management to reassess the
budget regularly and to product budgets ●Issues with version control, as each
which are more up to date.
Disadvantages
●Rolling budgets are more costly and
time consuming than incremental
budgets.
●May demotivate employees if they feel
that they spend a large portion of their
time budgeting or if they feel that the
budgetary targets are constantly
changing.
●An increase in budgeting work may
lead to less control of the actual results.
month the full year number will change.
 ●Confusion in meetings as to each
numbers the business is working
towards; this can distract from the key
issues as managers discuss which
numbers to achieve.

●Activity Based Budget

ABB is defined as a method of budgeting based on an framework and utilising cost driver
data in the budget-setting and variance feedback process

Advantages Disadvantages
●It draws attention to the cost of ●A considerable amount of time and
overhead activities' which can be a large effort might be needed to establish the
proportion of total operating cost. key activities and their cost drivers.

●It recognised that it is activities that it is ●It may be difficult to identify clear
activities that drive costs. If we control individual responsibilities for
the cost drivers,then cost can be better activities,
managed and controlled.
●It could be argued that in the short-
●It can provide useful information in a term many overhead costs are not
TQM environment, by relating the cost controllable and do not vary directly
of an activity to the level of service with changes in the volume of activity
provided. of the cost driver.

Feedback Control
Feedback control is defined as the measurement of difference between planned output
and actual output achieved, and the modification of subsequent action and plan to
achieve future required result.

Positive feedback is a feedback taken to reinforce a deviation from standard.The input or

processes would not be altered.

Negative feedback is feedback taken to reverse a deviation from standard.This could be by

amending the input or process, so that the system reverts to a sterdy state.Ex- Machine may
need to be resetover time to its orginal settings.

Single loop feedback is control which regulates the output of a system.Here, targets are not
changed.

Doubled loop feedback occurs when a business is able, having attempted to achieve target
to modify target.

Feedback and control

Feedforward Control
A feedforward control system operates by comparing budgeted results against a forecast.
Control action is triggered by difference between budgeted and forecaste results.

Feedforward control action is control based on forecast results.

Selecting a suitable budgetary system
The type of budgeting system depends on -

●Type and size of organisation

●Type of industry
●Type of product and product range
●Culture of organisation

Information for Budgeting

●Previous year's actual results

●Other internal sources which may include manager's knowledge like repair of fixed assets.
training needs of staff, requirements of customers.

●Estimates of costs of new products using methods such as work study techniques and
technical and technical estimates.

●Stastical techniques may be help to forecast sales.

●Models, such as EOQ model, may be used to forecast optimal inventory levels.

●External sources of information may include supplier's price lists,estimates of inflation and
exchange rate movements, strategic analysis of economic environment.

Change factors impacting budgeting

●Political change- A change in gov. policy like fiscal policy, may affect the demand of
an organisation's product , cost etc.

●Social change- Change in social responsibilities and people's attitude towards them affect
every organisation. These factors will impact the plan of the organisation.

●Economic change- When there is a change in the economic climate from boom through to
recession, demand for luxury goods will decrease .

●Technological change -As technology advances, the older method becomes inefficinet and
and this will require to update the operations. Revised plan must be drawn based on new
technology.

●Legal change- Changes to the legal framework can cause information that is used for
budgets become redundent.

●Other factors- PESTAL analysis can be useful to identify drivers of change in the industry,
it does not detect factors like competition and stakeholders.

Dealing with uncertainity in budgeting

●Social or political unrest could affect productivity.
●Machine may break down unexpectedly, and the business may fail to meet production plan.
●Customer may decide to buy more or less than forecast.
●If major customer goes into liquidation, it will have an adverse impact on the company.
●Workforce may not perform as expected . The performance will be either favourable and
adverse
●Competition may strengthen and may take the business away. Or the competiton will may
weaken leading to increase in business.
●Technological advances may lead to the products becoming outdated.
●Material price may increase.
●Increase in interest rates due to inflation

Types of budgets required to deal with uncertainities-

●Flexible budget
●Rolling budget
●Sinsitivity analysis
●Simulation

Spreadsheets
A spreadsheet is a computer package which stores data in a matrix format where the
intersection of each row and column is referred to as a cell. They are commonly used to
assist in the budgeting process

Advantages-

●Large enough to include a large volume of information.

●Formulae and look up tables can be used so that if any figure is amended, all the figures
will be immediately recalculated. This is very useful for carrying out sensitivity analysis.
●The results can be printed out or distributed to other users electronically quickly and easily.
●Most programs can also represent the results graphically e.g. balances can be shown in a
bar chart.

Disadvantages-

●Spreadsheets for a particular budgeting application will take time to develop. The benefit
of the spreadsheet must be greater than the cost of developing and maintaining it.
●Data can be accidentally changed (or deleted) without the user being aware of this
occuring.
●Errors in design, particularly in the use of formulae, can produce invalid output. Due to the
complexity of the model, these design errors may be difficult to locate.
●Data used will be subject to a high degree of uncertainty. This may be forgotten and the
data used to produce, what is considered to be, an 'accurate' report.
●Security issues, such as the risk unauthorised access (e.g. hacking) or a loss of data
(e.g. due to fire or theft).
●Version control issues can arise.
●Educating staff to use spreadsheets/models and which areas/cells to use as inputs can be
time consuming.

Beyond Budgeting
The whole concept of budgeting turns around the idea that the operation of an
organisation can be meaningfully planned for in some detail over an extended period into
the future.Further, that this plan can be used to guide, control and coordinate the activities
of numerous departments and individuals within the organisation.

Beyond Budgeting is defined in CIMA's Official Terminology as 'the idea that companies need
move beyond budgeting because of the inherent flaws in budgeting especially when used
to set incentive contracts. It is argued that a range of techniques, such as rolling forecasts
and market-related targets, can take the place of traditional budgets.'

Beyond Budgeting- 6 principles

(1) An organisation structure with clear principles and boundaries; a manager should have no
doubts over what he/she is responsible for and what he/she has authority over; the concept
of the internal market for business units may be relevant here.

(2) Managers should be given goals and targets which are based on relative success and
linked to shareholder value; such targets may be based on key performance indicators and
benchmarks following the balanced scorecard principle.

(3) Managers should be given a high degree of freedom to make decisions; this freedom is
consistent with the total quality management and business process reengineering concepts;
a BB organisation chart should be ‘flat’.

(4) Responsibility for decisions that generate value should be placed with 'front line teams':
again, this is consistent with TQM and BPR concepts.

(5) Front line teams should be made responsible for relationships with customers, associates
busenesses and suppliers; direct communication between all the parties involved should be
facilitated; this is consistent with the SCM concept.

(6) Information support systems should be transparent and ethical; an activity based
accounting system which reports on the activities for which managers and teams are
responsible is likely to be of use in this regard.

Benefits of Beyond Budgeting

●Faster response time- operating within a flexible organisational network and with strategy
as an ‘adaptive process’ allows managers to respond quickly to customer requests.

●Better innovation- managers working within an environment wherein performance is

judged on the basis of team and business unit results encourages the adoption of new
innovations. Relations with customers and suppliers through SCM may facilitate the
adoption of new working methods and technologies.

●Lower costs – in the context of BB managers are more likely to perceive cost as scarce
resources which have to be used effectively than as a budget ‘entitlement’ that has to be
used. BB is also likely to promote an awareness of the purposes for which costs are being
incurred and thereby the potential for reductions.

●Improved customer and supplier loyalty- the leading role of front line teams in dealing with
customers and suppliers is likely to deepen the relevant relationships.
Budget
Chapter # 11

Quantitative Analysis

Quantitarive Analysis

High/Low Analysis Learinig Curve Model

High/low analysis
A method of analysing a semi-variable cost into its fixed and variable elements based on an
analysis of historical information about costs at different activity levels.

Steps

Step 1 Select the highest and lowest activity levels, and their costs.

Step 2 Find Variable cost per unit.

Variable cost per unit = Cost at high level of activity - Cost at low level activity
High level activity - Low level activity

Step 3 Find the fixed cost, using either the high or low activity level
Fixed cost = Total cost at activity level - Total variable cost

Step 4 Use the variable and fixed cost to forecast the total cost for a specified level of
activity.

Advantages

●The high-low method has the advantage of simplicity

●It is easy to usdestand and use

Disadvantages

●It assumes that activity is the only factor affecting costs.

●It assumes that historical costs reliably predict future costs.
●It assumes only two values, highest and lowest, so the results may be distorted.

Learning Curves

It is a human phenomenon that occurs because of the fact that people get quicker
at performing repetitive tasks once they have been doing them for a while. The first time
a new process is performed, the workers are unfamiliar with it since the process is
untried. As the process is repeated, however, the workers become more familiar with it
and better at performing it. This means that it takes them less time to complete it
This leads to increase in labour effeciency and decrease in labour cost per unit.

Wright's Law
States that as cumulative output doubles, the cumulative time per unit falls to a fixed
percentage (th eaverage 'learning rate' ) of the previous average time.

Limitations of the Learning Curve Model

●The process is labour intensive.

Modern manufacturing environment may be very capital intensive and learning curve
cannot be applied on machines.

●The product is new.

In modern environment, products have short lives and new products are introduced on a
regular basis . So the introduction of new products will have learning effect.

●The product is complex.

The more complex the product the more likely that the learning curve will be significant,
and the longer it will take for the learning curve to reach a steady state.
●Production is repetitive and there are no breaks in production.
The learning effect requires that production is repetitive with no major breaks in which the
learning effect may be lost. But is not possible to have repetitive production in JIT
environment.

The tabular approach to learning curve

Cumilative Incrememtal
Units Average time/ unit Totaltime Units Total Time Average time/unit
1 100 100 1 100 100
2 80 160 1 60 60
4 64 256 2 96 48
8 51.2 409.6 4 153.6 38.4
16 40.96 655.36 8 245.76 30.72
32 32.768 1048.576 16 393.216 24.576
Note- The tabular approach can only be used if the units are getting squared 1,2,4,8,16…..

Steps

Step 1 Calculate the cumulative average time for the target production.
ie, time to make first unit x learning %.
Step 2 Calculate the total cumulative time.
ie, average time per unit x no. of units
Step 3 Time to make next 4 units= Time to make first 8 units- Time to make first 4 units

The algebriac approach to learning curve

y=a x( x ^b)
a= the time taken to product the first unit of output
x= cumilitave number of units
b=index of learning
=log(r)/log2
r= rate of learining in %
y=cumilitave average time per unit to produce x no. of units

No need to use this formula for square units of 1,2,4,8,16,32.

1-2 r
2-4 r^2
4-8 r^3
8-16 r^4

Learing rate= Cumulative average time for 2 units

Cumulative average time per unit for 1 unit

= squrare root of Cumulative average time per unit for 4 units

Cumulative average time per unit for 1 unit

= cube root of Cumulative average time per unit for 8 units

Cumulative average time per unit for 1 units

Applications of the learning effect

● Pricing decisions - prices will be set too high if based on the cost of making the first few
units.

●Work scheduling - less labour per unit will be required as more units are made. This may
have management implications, eg. Workers may be laid off

●Product viability - The viability of a product may change if a learning effect exists.

●Standard settings- If a prodct enjoys a learning effect but this effect is ignored, then the
standard cost will be too high. The presence of of a learning effect can also make standard
setting too difficult.

●Budgeting- The presence of a learning effect should be taken into account when setting
budgets.

Learning curve and steardy state

Steardy state is a state beyond which the time taken to produce the product remains
constant.
Once the steady state is reached the direct labour hours will not reduce any further and this
will become the basis on which the budget is produced.

Total time taken for any number of units

Formula = ax^(b+1)
Chapter # 12

Advanced Variances

Sales Variance

Sales price Vairance

Total Sales Variance

Sales Volume Variance

Sales price variance = AQ*(AR-SR)

AQ Actual quantity Tomato example - the quantity matters

AR Actual Rate
SR Standard Rate

Reasons for favourable sales price variance

●Demand for the product was better than exptected
●Major competitor could have left the market
●Change in the product design
●Improvement in the quality

Reasons for adverse sales price variance

●Demand was worse off
●Major competitor entered the market
●Change in product design
●Worsening of quality
●Substitute product is available in the market at cheaper price

Sales Volume Variance= SM * (AQ-BQ)

Reasons for favourable sales volume variance

● Market is in good condition
●Competitor leaves the market
●Improvement in quality
●Lower sales price
Reason for adverse sales volume variance

●Higher price
●Market is in recession
●Lower quality
●Increase in competitiors who offer better price
●Failure of marketing campaing

Material Variance
Material Price Variance

Material Variance
Material Usage Variance

Material Price Variance =AQ*(SR-AR) AQ - Actual Quantity

Material Volume Variance =SR * (SQ-AQ) SQ - Standard Quantity
AR - Actual Rate
SR - Stadard Rate

Reasons for Favourable Material Price Variance

●Poor quality
●Availing discounts because of bulk purchase
●Cheaper quality
●More supply of material
●Substitute material at a cheapter rate
●Budgeting can be wrong
●Cheaper Supplier

Reasons for adverse Material Price Varinace

●Incorrect Budgeting
●High quality material
●Decrease in supply of material in market
●Inflation in market
●Expensive supplier

Reasons for Favourable Material Usage Variance

●Higher qualtiy material
●More efficient use of material
●Change in the product specification
●Incorrect Budgeting
●Difference in Batch sizes
●Change in the mix

Reason for Adverse Material Usage Variance

●Poor quality market

●Less efficient use of materials
●Change in product specification
●Incorrect Budgeting
●Difference in Batch sizes
●Change in the mix

Labour Variance
Labour Rate Variance

Labour Variance
Labour Efficiency Variance

Labour rate variance = AH *(SR-AR)

Labour Efficeincy Variance = SR* (SH-AH)

AH Actual hours
AR Actual Rate
SR Standard Rate
SH Standard hours

Reasons for favourable Labour rate variance

●Lower skilled staff
●Cut the bonus/overtime
●More supply of labour

Reasons for adverse Labour rate Variance

●Higher skilled staff
●Increase in bonus
●Shortage of labour
●Government regulations
●Inflation factors

Reasons for favourable Labour Efficient Variance

●Incentives
●Efficient / highly skilled workers
●Incorrect Budgeting
●Improved staff motivation
●Training of employees
●Use of advanced technology

Reasons for adverse Labour Efficiency Variance

●Low skilled labour
●No Incentives
●Incorrect Budgeting
●Lack of motivation
●No training of employees

Variable Overhead Variance

VOH expenditure variance = AH *(SR-AR)
VOH Efficeincy Variance = SR* (SH-AH)

AH Actual hours
AR Actual Rate
SR Standard Rate
SH Standard hours

Reasons for favourable VOH expenditure variance

●More economic use of the services
●Unexpected savings in the cost of services
●Incorrect budgeting
●Incorrect split of semi variable and fixed cost

Reasons for adverse VOH expenditure variance

●Excessive service usage
●Less economic use of services
●Incorrect budgeting
●Incorrect budgeting
●Unexpected increase in the cost of services

Reasons for favourable VOH efficience variance

●Motivation
●Better equipments
●Learning efficiennt
●Better material / higher grade of material
●Higher pay
Reasons for adverse VOH efficience variance
●Less motivation
●Lower pay
●Poor equipments
●Poor materials
●Poor learining effect

Fixed Overhead Variance (Absorbtion Costing)

SR or FOAR =Budgeted fixed production OH
Budgeted units x standard time per unit

FOH Variance FOH Expenditure Variance

FOH Volume Variance FOH Capacity Variance

FOH Efficience Variance

FOH Expenditure Variance = (BH*SR)- Actual cost

FOH Volume variance = SR* (SH-BH)

FOH Capacity Variance = SR*(AH-BH)

FOH Efficience Variance = SR *(SH-AH)

Budgeted Hours = Actual units* hours per unit

Standard Hours = Standard Units * hours per unit

Fixed Overhead Variance (Marginal Costing)

There is only one formula for FOH expenditure = (BH*SR)- Actual cost

Operational Statement (AbsorbtionCosting)

Budgeted Profit X
Sales Volume Profit Variance X
Standard Profit on actual sales (flexed budget profit) X
Selling Price Variance X
Cost Varince -
Favourable X
Adverse (X)
Actual profit X

Operational Statement (Marginal Costing)

Budgeted Contribution X
Sales Volume Profit Variance X
Standard Con. on actual sales (flexed budget profit) X
Selling Price Variance X
Cost Varince -
Favourable Except for FOH X
Adverse (X)
Actual Contribution X

Budgeted FOH X
FOH expenditure Variace X
Actual Profit X

Material Mix and Yield

Material Usage variance is divided into mix and yield variace

A B C=B-A D C*D
Material AQAM AQSM Difference SD price Varince Input
Actual Quantity Actual Quantity
Actual Mix Standard Mix
A 14000 12500 -1500 1.1 $ (1,650) 600
B 5500 5000 -500 2.4 $ (1,200) 240
C 5500 7500 2000 1.5 $ 3,000 360
25000 25000 0
Material mix variance FAV $ 150

Intrepretation of material mix variance

●A favourable overall material mix variance means an actual mix is cheaper than the standard
●Cheaper materials have been substituted for costly ones
●While a cheapter mix saves money, it may imply poorer quality of the final product.
●This means a loss of customers in the longer run.

Reasons for varying the mix-

●The price of materials may change away from the standard, so one becomes relatively
more or less expensive
●Inaccurate measurement of inputs, due to carelessness or mistakes.
●Intentionally using a cheaper mix to get a favourable mix variance

Material Yield Variance

A B C=B-A D C*D
Material AQSM SQSM Difference SD price Varince Input
Actual Quantity Standard Quantity
Standard Mix Standard Mix
A 12500 12600 100 1.1 $ 110 600
B 5000 5040 40 2.4 $ 96 240
C 7500 7560 60 1.5 $ 90 360
25000 25200 200
Material yield variance FAV $ 296

Cross check

Input Output
600
240
360
1200 1000

Input / output ratio 1.2

Actual input 25000 Standard price

Actual output 21000 660
Standard output =25000/1.2 20833.3333 576
540
Difference 166.67 1776
Standard price 1.776
Material Yield Varianc 296

Sales Mix Profit Variance

 A B A-B
Product Standard Actual Quantity Actual Quantity Difference SC / unit Variance
Mix Units Actual Mix Standard Mix
S 8000 9500 8200 1300 5 6500
D 12000 11000 12300 -1300 6 -7800
20000 20500 20500 0 -1300
Since it is a sales , put actual first

Sales mix variance measures the impact on profit of a change in the sales mix of products sold
Sales quantity variance measures the impact of profit of a different total quantity of products
actually sold to be budgeted.

Sales Quantity Profit Variance

A B C=B-A D C*D
Product Budgeted Quantity Actual Quantity Difference SC / unit Variance
Standard Mix Standard Mix
S 8000 8200 200 5 1000
D 12000 12300 300 6 1800
20000 20500 500 2800

Short cut method

Budgeted Production 20000

Actual production 20500
Difference 500
Standard Average 5.6
Sales Quantity profit v 2800

Labour Idle Time and Material Waste

Labour efficiency variance can be sub divided into -
*Productivity Efficiency Variance
*Idle time Variance

Idle Time Variance = SR* (Actual hours paid - Actual hours worked)

Productive Efficiency Variance = SR* (Actual hours worked - Standard hours)

Controlling Idle Time

●Proper maintainance of tools and machinery
●Advanced production planning
●Timely procurement of stores
●Assurance of supply of power
●Advanced planning for machine usage

Controlling Material Waste

Causes-
●Evaporation
●Scrapping
●Testing

Controls-
●Ordering the right quantity and quality of materials at the most favourable price.
●Ensuring the material arrives at the right time in the production process
●Take active measurement against theft, deterioration, breakage and additional storage of costs

Planning and Operational Variance

Planning variance= (difference in the budgeted and revised sales volume)*standard margin
Market size

Operational variance (difference in the revised and actual sales volume)*standard margin
market share

It is mainly used for calculating - Sales, Material and Labour Variance.

Planning variance
●It' uncontrollable by the management
●They are not held accountable
●It's also known as budgeted revision variance

Operational Variance
●It's the difference b/w the actual and revised budget
●Management is responsible for this as they are fully under their control
Benefits of these variance
●These varainces are used when the market is volatile
●Revision of the orginal helps us to undestand the efficiency better
●Acts as a motivator by revising the standards
●Helps in future planning
●Provides information about current level of efficiency

Limitations of these variances

●There might be bais in deciding the standard price
●Time consuming in deciding the standards
●Transfer responsibility for inefficiencies to planning variance

When should a budget be revised

●A change in one of the main materials used to make a product or provide a service
●An unexpected increase in the price of material due to a rapid increase in world market prices.
●A change in working methods and procedures that alters the expected direct labour time for a
product or service
●An unexpected change in the rate of pay to the workforce

Advantages :
●Variances are more relevant, especially in a turbulent environment.
●The operational variances give a ‘fair’ reflection of the actual results achieved in the actual
conditions that existed.
●Managers are, theoretically, more likely to accept and be motivated by the variances reported
which provide a better measure of their performance.
●The analysis helps in the standard-setting learning process, which will hopefully result in more
useful standards in the future.

Disadvantages:
●The establishment of ex-post budgets is very difficult. Managers whose performance is reported
to be poor using such a budget are unlikely to accept them as performance measures because of
the subjectivity in setting such budgets.
●There is a considerable amount of administrative work involved first to analyse the traditional
variances and then to decide on which are controllable and which are uncontrollable.
●The analysis tends to exaggerate the interrelationship of variances, providing managers with a
‘pre-packed’ list of excuses for below standard performance. Poor performance is often excused
as being the fault of a badly set budget.
●Frequent demands for budget revisions may result in bias.

401-406 page
Variance Analysis in the modern manufacturing
environment
Reasons why variance analysis may not be appropriate-

●Non- Standard Products

●Standard Costs become outdated quickly
●Producton is highly automated
●Ideal Standards are used
●Emphasis on continues improvement
●Detailed Information is required
●Monitoring performance is important

Standard costs and Behavioural Issues

Aim of setting standards are :
●Setting a target for performance
●Motivating the managers responsible to achieve those targets
●Holding these managers accountable for actual performance
●Rewarding managers for good performance and criticising them for poor performance

Problems of Standard costing:

●It focuses on reducing cost hence ignoring quality and customer satisfaction.
●This system puts too much emphasis on direct labour cost
●It put too much emphasis on the control of short - term variable costs.
●It may be appropriate in a stable, standardised and repetitive environment.
●Achieving standards is acceptable in standard costing, when the modern business
environment insist more on continous improvement.
●It produces control statement weekly or monthly, but in a dynamic business environment
managers need prompt control information in order to deal with any changes.

The use of pay as a motivator

If standards are used as a way of encouraging employees to improve their performance
motivation could be provided in the form of higher pay if targets are reached or exceeded.

However, if employees are offered a bonus for achieving standard costs, this could increase
their incentive to set low standards of performance ie, slack in the standard cost.

Additional Notes
●Standard costing in a system of budgeting is defined as to actual cost being compared with
predetermined cost for the level of activity
●TQM (Total Quality Management ) will not work in a rapidly changing environment.
●Reducted quality material bought is not the reason for adverse material usage variance.
●Planning and operational variance is based on actual output
●Present market size x present market share = Actual Units
●The difference between the sales quantity and volume variance is that the standard mix is
considered in the former. The difference between standard and actual is ignored.
●The sales mix variance would not give useful information to the management if the products
are not the same.
●If the mix variance was calculated as a physical quantity, the answer would always be zero.
n Costing)

Costing)

osting)
sting)
nufacturing
Chapter # 13

Performance Measurement and Control

While writing the answer always try to write in steps -
●Goal
●Measurement
●Explaination

The explaination for the 4 perspectives are -

●Financial Perspective - This perspective is concerned with how a company looks to its
shareholders. How can it create value for them ? There are three core financial themes which
will drive the business strategy : revenue growth and mix, cost reduction and asset
utilisation.

●Customer Perspective - This considers how the organisation apprears to the customers. The
organisation should ask itself: to achieve how should we appear to our customers? The
customer perspective should identify the customer and market segment in which the
business will compete. There is a stong ling between the customer perspective and the
revenue objectives in the financial perspective. If customer perspective are achieved,
revenue objectives should be too.

●Internal perspective - This requires the organisation to ask itself : what we must excel at to
achieve our financial and customer perspective ? It must identify the internal business
processes which are critical to the implementation of the organisational's stategy. These
will include the innovation process, the operational process and the post sales process.

●Learning and growth process - This requires the organisation to ask itself whether it can
continue to improve and create value . The organisation must continue to invest in its
infrastructure - ie, people, system, orgational procedures - in order to improve the
capabliities which will help the other three perspectives to be achieved.
The standard block sets the target for the performance indicators chosen for each of the
dimensions. The target must meet three criteria - they must be acheivable, fair and
encourage employees to take ownership. If the target set do not meet these criteria, then
the performance of the organisation could suffer.

The reward block ensures that employees are motivated to achieve the standards. It also
considers the properties of good reward schemes which are that they should be clear,
motivating and based on controllable factors.

If standards and rewards are set appropriately, the staff will be engaged and motivated and
it is then more likely that the goals, ie, dimensions of the organisation will be achieved.
The six dimensions of Building Block are -
●Competitiveness
●Innovation
●Profitability
●Resource Utilisation
●Flexibility
●Quality

Performance Dimension ( Goals) Examples of standards (measures)

Competitive Performance ●Market share
●Sales growth
●Customer base
Financial Performance ●Profitability
●Liquidity
●Risk
Quality of service ●Reliability
●Responsiveness
●Competence
Flexibility ●Volume flexibility
●Delivery speed
Resource Utilisation ●Productivity
 ●Effeciency
Innovation ●Abliity to innovate
●Performance of the innovation
es are -
Chapter # 14

Divisional Performance Measurement and

Transfer Pricing

Divisional Performance Measurement

Type of division Description Measures to assess

Performance
Cost Centre ●It incurs cost but has no revenue ●Total cost and cost per unit
eg- IT and R&D ●Cost variance
●NPI like quality
Revenue Centre ●Responsible for ●Total revenue and revenue
per unit
generation of revenue only ●Sales Variance
Profit Centre ●Responsible for both cost and revenue ●Total sales and market share
●Does not have authority over the ●Profit
level of investment ●Sales Variance
●Working capital ratios
●NFPIs like quality
Investment ●Responsible for cost and profit ●ROI
Centres ●Have the authority to invest in ●RI
new assets and dispose assets

ROI (For assessing the manager)

= Controllable profit / capital employeed x 100

ROI (For assessing the division )

ROI = Tracable profit / capital employeed x 100
●Capital employeed is total assets less current liabliities or total equity plus long term debt

Controllable and Tracable profit

External sales XXX
Internal Sales XXX
Less: Variable cost (XXX)
Controllable by manager
Less: Fixed cost (XXX)
Controllable Profit XXX
Less: Divisonal cost outside manager's control (XXX)
Tracable Profit XXX
Less: Allocated head office cost (XXX)
Divisional net profit XXX

Advantages of ROI -
●It is a relative measure- easy to compare divisions
●Similar to ROCE and used by external analysist
●Focuses attention on scarce capital resource
●Encourages reduction in non-essential investment by

Disadvantages of ROI -
●Defination of capital employeed can be subjective
●leased assets or patents could be used
●Leads to dysfunctional decision making,
●ROI increases with the age of the asset and thus giving managers an incentive which they
don't deserve.
●Manipulation of profits and capital employeed figures to improve results
●Different accounting policies could make comparison difficult

Residual Income (RI)

RI - Residual Income = Pre Tax Profit - Imputed interest charge for capital invested

Imputed interest = capital employed * interest rate

The company’s cost of capital is always used as a basis for the interest rate.

Advantages of RI-
●Avoids dysfucntional behaviour as any investment would add to their RI
●Making specific charge for interest helps to make investment centre managers nore aware
of the cost of the assets under their control.
●Risk can be incorporated by the choice of interest rate used.

Disadvantages of RI-
●Does not facilitate comparisons between divisions since the RI is driven by the size of
divisions and their invesments
●Based on accounting measures of profit and capital employeed which may be subject to
manipulation.

Comparing Divisional Performance

●Variance analysis
●Ratio analysis
●Other management ratios
●Other information
●Acid test ratio is a key performance indicator.

Transfer Pricing
A transfer price is the price at which goods and services are transferred from one division to
another within the same organisation.

Objectives of Transfer Pricing -

●Goal Congruence - the decision made by each profit centre manager should be consistent
with the objectives of the organisation.

●Performance Measurement- The buying and selling divisions will be treated as profit
centres. The transfer price should allow the performance of each division to be assessed
fairly.

●Atonomy - the system used to set transfer price should seek to maintain the autonomy of
profit centre managers. If autonomy is maintained, managers tend to be more highly
motivated but sub-optimal decisions may be made.

●Recording the movement of goods and services- The most important function of tranfer
pricing is simply to assist in recording the movement of goods
Setting the transfer price
Market Based Approach

If an external market exists for the transferred goods then the transfer price could be set
at the external market price.

Advantages-
●The transfer price deemed to be fair by the managers of the buying and selling division.
The selling division will receive the same amount for any internal and external sales.
●The company's performance will not be impacted negatively by the transfer price because
the transfer price is the same as the external market

Disadvantages-
●There may not be an external market price.
●The external market price may not be stable.
●Savings may be made from transferring the goods internally. Eg- Savings on the devivery
cost. These savings should be deducted from the external market price before a transfer
price is set , givining an " adjustment market price"

Cost Based Approach

The trasferring division would supply the goods at cost plus a % a profit.
A standard cost should be used rather than the actual cost since:
●Actual costs do not encourage the selling division to control costs.
●If a standard cost is used, the buying division will know the cost in advance and can
therefore put plans in place.

There are a number of different standard costs that could be used:

●Full cost
●Marginal cost
●Opportunity

Rules of Transfer Price

TP = marginal cost + opportunity cost

In a perfect comptitive market,

TP = market price

If spare capacity exists,

TP= marginal cost
With production contrains,
TP= marginal cost + opportunity cost of not using those resources elsewhere.
t and
Chapter # 15

Performance Measurement in- a Not-

For- Profit Organisation

Problems of Non- quantifiable objectives

The Not-for-Profit sector incorporates a diverse range of oprations, including national
gov., local gov., charites, executive agencies, trusts and so on. The critical thing about such
operation is that they are not motivated by a desire to maximise profit.

Another problem is that these organisation often do not generate revenue but can simply
have a fixed budget for budgeting within which they have to keep . Value for Money is
often quoted as an objective here but it does not get round the problem of measuring value.

Performance measurement in not-for-profit

Organisation
Not-for-profit organisation may have some non-quantifiable objectives but that fact does
not exempt them from the need to plan and control their activities.

The Problems of multiple objectives

The primary objective in not-for-profit organisations is not to make, but to benefits
prescribe groups of problems. NFPs will use a mixture of financial and non-financial
objective.

Multiple stakeholders in non-for-profit organisation give rise to multiple objectives. As a

result, there is a need to prioritise objectives or to make compromises between objectives.
With NFPs the non-financial objectives are often more important and more complex,
because:
●Most key objectives are very difficult to quantify, espically in financial terms eg. Quality
of care given to patients in a hospital .
●Multiple and conflicting objectives are more common in NFPs, quality of patients care
versus the number of patients treated.
Not for profit organisation
●Do not have external sharehold providing risk capital for the business
●They do not distribute dividends so any profit generated is retained by the
business as a further source of capital

Value for Momy ( VFM)

●Economy - relates to an input measure
●Effeciency- relates to the max output from the input ie, input and output relationship.
●Effectiveness- is an output measure.

●Effectiveness - the extent to which the organisation acheives its objectives

●Economy- the ability of the organisation to optimise the use of its productive
resource
●Efficiency - the output of the organisation per unit of resource used
-profit
Formula Sheet
1. Variable cost = Total cost @ highest level actitity - Total Cost @ lowest level activity
Total units @ highest level activity - Total units @ lowest level activity

2. % change = New- Old x 100

Old

3. Efficiency Ratio = Standard hours

Actual hours

4. Capacity Ratio = Actual hours

Budgeted hours

5. Activity Ratio = Standard hours

Budgeted hours

6. Efficient Ratio x Capacity Ratio = Activity Ratio

7. OAR ( Overhead Absorbtion Rate)= Total production overhead cost

Activity Level

8. Absorbiton Costing

Cost $
Direct Material xxx
Direct Labour xxx
Direct Expense xxx
Prime Cost xxx
Production Overhead xxx
Full Factory cost xxx
Administrative Cost xxx
Selling & Distribution Cost xxx
Cost of the product xxx

9.Over or Under Absorbed= Absorbed overhead - Actual Overhead

= (Absorbed rate x Actual units )- Actual Overheads
10. Marginal Cost Sheet
$
Sales Revenue ( units sold x sp per unit) xxx
Less: Total Variable cost (units sold x vc per unit ) (xxx)
Total Contribution xxx
Less: Fixed Cost (xxx)
Profit (xxx)

11. Contribution = Sales - Variable cost

or Contribution = Fixed cost + profit

12. C/S Ratio = Contribution / Sales x 100

13. Required Sales = (Fixed Cost + Desired profit )

C/S Ratio

14. Flexed Budgeted revenue/cost= Budgeted revenue /cost (fixed)x Activity level actual
Activity level budgeted

15. Throughput = Sales revenue/unit- direct material cost/unit

16. Throughput (return) per factory hour = Throughput per unit

Product's time on the bottleneck resource

17. Cost per Factory hour = Total factory cost 000000000000000000000

Total bottleneck resource time available

18.Throughput Accounting Ratio (TPAR)= Return per factory hour

Cost per factory hour
or =Throughput
Total factory cost ie, Labour cost + OH
= Total thouughout
Total conversion cost
Note - factory cost is also referred as operating expense
For TPAR calculation , take only the cost related to production / factory
ie, marketing cost etc should not be included

19. Selling Price - Desired Profit = Target Cost

20.Target cost gap = Estimated product cost - Target cost

21.Lifecycle cost of a product = Total cost of the product over its entire lifecycle
 Total number of units of the product

For Single product

22. Breakeven sales (in units) = Fixed Cost

Contribution per unit

23. Breakeven sales (in $ ) = Fixed cost x Sales

Contribuation

= Fixed cost
C/s Ratio

= Breakeven point x selling price per unit

24. Margin of Safety = Actual sales- Breakeven Sales

25. Margin of Safety (in%) = Budgeted sales- Break even sales x 100
Budgeted sales

26. Require Sales = Required profit + Fixed cost

C/S ratio

For multi product

27.Weighted Average C/S Ratio= Total Contribution

Total Revenue

28.Break even Revenue = Fixed cost

Weighted Average C/S ratio

29. Variable cost per unit = Cost at high level of activity - Cost at low level activity
High level activity - Low level activity

30. Fixed cost = Total cost at activity level - Total variable cost

31. y=a x( x ^b) algrebriac approach to learning curve

a= the time taken to product the first unit of output
x= cumilitave number of units
b=index of learning
=log(r)/log2
r= rate of learining in %
y=cumilitave average time per unit to produce x no. of units

32. Learing rate= Cumulative average time for 2 units

Cumulative average time per unit for 1 unit

= squrare root of Cumulative average time per unit for 4 units

Cumulative average time per unit for 1 unit

= cube root of Cumulative average time per unit for 8 units

Cumulative average time per unit for 1 units

Total time taken for any number of units

Formula = ax^(b+1)

33.Expected Value= Weighted Arithmetic mean of the possible outcomes

34. Value of imperfect information = Expected Value with market research - Expected value without
market research.

Variance Formulas

Sales Variance

Sales Price Variance = AQ* (AR-SR)

Sales Volume Variance = SM* (AQ-BQ)

AQ Actual quantity
AR Actual Rate
SR Standard Rate
BQ Budgeted quantity

Material Variance

Material Price Variance = AQ*(SR-AR)

Material Volume Variance = SR*(SQ-AQ)
AQ Actual quntity
SQ Standard Quantity
AR Actual Rate
SR Standard Rate

Labour Variance

Labour rate variance = AH *(SR-AR)

Labour Efficeincy Variance = SR* (SH-AH)

AH Actual hours
AR Actual Rate
SR Standard Rate
SH Standard hours

Variable Overhead Varinace

VOH expenditure variance = AH *(SR-AR)

VOH Efficeincy Variance = SR* (SH-AH)

AH Actual hours
AR Actual Rate
SR Standard Rate
SH Standard hours

Fixed Overhead Variance (Absorbtion Costing)

FOAR =Budgeted fixed production OH

Budgeted units x standard time per unit

FOH Variance FOH Expenditure Variance

FOH Volume Variance FOH Capacity Variance

FOH Efficience Variance

FOH Expenditure Variance = (BH*SR)- Actual cost

FOH Volume variance = SR* (SH-BH)

FOH Capacity Variance = SR*(AH-BH)

FOH Efficience Variance = SR *(SH-AH)

Budgeted Hours = Actual units* hours per unit
Standard Hours = Standard Units * hours per unit

Operational Statement (AbsorbtionCosting)

Budgeted Profit X
Sales Volume Profit Variance X
Standard Profit on actual sales (flexed budget profit) X
Selling Price Variance X
Cost Varince -
Favourable X
Adverse (X)
Actual profit X

Operational Statement (Marginal Costing)

Budgeted Contribution X
Sales Volume Profit Variance X
Standard Con. on actual sales (flexed budget profit) X
Selling Price Variance X
Cost Varince -
Favourable Except for FOH X
Adverse (X)
Actual Contribution X

Budgeted FOH X
FOH expenditure Variace X
Actual Profit X

Material Mix Variance

A B C=B-A D C*D
AQAM AQSM Difference SD price Varince
Actual Quantity Actual Quantity
Actual Mix Standard Mix

Material Yield Variance

A B C=B-A D C*D
AQSM SQSM Difference SD price Varince
Actual Quantity Standard Quantity
Standard Mix Standard Mix
Either compare input- input or output-output

Sales Mix Profit Variance

A B C=A-B D D*C
Actual Quantity Actual Quantity Difference SC / unit Variance
Actual Mix Standard Mix

Sales Quantity Profit Variance

A B C = B-A D D*C
Budgeted Quantity Actual Quantity Difference SC / unit Variance
Standard Mix Standard Mix

Labour efficiency variance can be sub divided into -

*Productivity Efficiency Variance
*Idle time Variance

Idle Time Variance = SR* (Actual hours paid - Actual hours worked)

Productive Efficiency Variance = SR* (Actual hours worked - Standard hours)

Planning variance= (difference in the budgeted and revised sales volume)*standard margin
Market size

Operational variance = (difference in the revised and actual sales volume)*standard margin
market share

Financial Performance Ratios

1. Gross Margin = Gross Profit x 100
Sales

2.Net Profit Margin = Net Profit x100

 Sales

3. ROCE = PBIT x 100

Capital employeed

4. Asset Turnover Ration = Turnover

Capital employeed

Liquidity Ratio
1. Current Ratio= Current Asset
Current Liability

2. Quick Ratio = Current Assets - Inventory

Current Liability

3. Inventory Turnover Ratio = Inventory x100

Cost of Sales

4. Receivable collection period = Receivables x100

Sales

5. Payable collection period = Payable x100

Purchases

Measuring Risk Ratio

1. Financial Gearing Ratio = Debt x100 = Debt
Equity Debt + Equity

2. Interest cover = Operating Profit

Finance cost

3. Divident Cover = Net profit

Divident

ROI (For assessing the manager)

= Controllable profit / capital employeed x 100
ROI (For assessing the division )
ROI = Tracable profit / capital employeed x 100

Controllable and Tracable profit

External sales XXX
Internal Sales XXX
Less: Variable cost (XXX)
Controllable by manager
Less: Fixed cost (XXX)
Controllable Profit XXX
Less: Divisonal cost outside manager's control (XXX)
Tracable Profit XXX
Less: Allocated head office cost (XXX)
Divisional net profit XXX

Residual Income (RI)

RI - Residual Income = Pre Tax Profit - Imputed interest charge for capital invested

Imputed interest = capital employed * interest rate

Algrebraic Approach
The profit is maximum when MR=MC

Formulae

1. b= ΔP
ΔQ

2. P=a-bQ
3.MR= a-2bQ

4. b= is always negative

5. where ,
P is the price
a is the intercept It is the maximum theorital price at which the price will fall to zero
b is the gradient Because the price and demand is inversely related
Q is the quantity demanded

•Marginal is the additional revenue from selling one extra unit.

•MR=MC when there is maximum profit . This point is called optimum price
Chapter # 1 A Revision of Management Accounting Topics
Chapter # 2 Information, technologies and system for organisation performance
Chapter # 3 Information systems and Data Analytics
Chapter # 4 Speacialist cost and management accounting techniques
Chapter # 5 Cost volume profit analysis
Chapter# 6 Planning with limiting factors
Chapter # 7 Pricing
Chapter # 8 Relevant Costing
Chapter # 9 Risk and uncertainity
Chapter # 10 Budgeting
Chapter # 11 Quantitative Analysis
Chapter # 12 Advanced Variances
Chapter # 13 Performance measurement and control
Chapter # 14 Divisional performance measurement and transfer pricing
Chapter # 15 Performance Measurement in not-for-profit organisation
sting)
price will fall to zero
Question
RequirementActual Meaning
1. Advice To offer guidance or some relevant
expertise to a recipient, allowing them
to make a more informed decision
2. Analyse Break into separate parts and discuss,
examine, or interpret each part
3. Apply To put into action pertinently
and/or relevantly
4. Assess To judge the worth, importance,
evaluate or estimate the nature, quality,
ability, extent, or significance
5. CalculateTo ascertain by computation, to make
an estimate of; evaluate, to perform
a mathematical process
6. CommentTo remark or express an opinion
7. CompareExamine two or more things to identify
similarities and difference
8. Conclusi The result or outcome of an act or process or
event, final arrangement or settlement
Key Tips
Counsel, inform or notify
Give reasons for the current
situation or what has
happened
Properly apply the scenario
/case
Determine the strengths,
weaknesses, importance,
significance, ability to
contribute.
Provide description along with
numerical calculations
Your answer should include an
explaination, illustration or
critisism
Clearly explain the
resemblances or difference
End your answer wel, with a
clear decision
9. Criticise Present the weekness/problems; evaluate
comparatitive worth. Don’t explain the
situation. Instead explain it .
10. Define Give the meaning; usually a meaning specific
to the course or subject
11. Describ Give a detailed account or key features. List
charecteristics, qualities and parts.
12. Discuss Consider and debate/argue about the pros and
cons of an issue. Eximine in detail by using
arguments in favour or against.
13. Evaluate
Determine the senario in the light of the
argument for and against
14. Explain Make a clear idea. Show logically how a concept
is developed. Give the reason for an event
15. IllustratGive concrete examples. Explain clearly by using
comparisons or examples
16. InterpreComment on given examples, describe
relationships
17. List List several ideas, aspects, events, things,
qualities, reason, etc
18. Outline Describe main ideas, charecteristics, or events
Criticism often involves
analysis
Explain the exact meaning
because usually definations are
short
Mention a pictue with words;
Identification is not sufficient
Write about any conflcit,
compare and contrast
Make evidence, case, point,
issue to support evidence.
Don't just provide a list of
points, add in some
explaination of the points
you're discussing
Add in some description
Include explaination and
evaluation
Don't discuss, just make a list
Briefly explain the highlighted
 points

19.RecommAdvise the appropriate actions to pursue in Give advice or connsel

terms the recipient will undestand

20. Rebate Show the connections between ideas or events Relate to real time examples

21. State Explain precisely Focus on the exact point

22. SummarGive a brief, condensed account. Include Remenber to conclude your

conclusions. Avoid unnecessary details explaination
Mistakes Correction
●Services always takes place behind the closed doors, and so undestanding what is being
provided is more challenging. This makes setting a market price for target costing more
difficult - TRUE

●All services costs bases are domimated by fixed costs. Therefore, calculating actual costs as
part of the target costing calculation is too heavily volume -driven to be useful. - FALSE

●Target costing is still relevant to service based businesses as a large gap could indicate
inefficiency. - TRUE

●How to increase TPAR -

- Agreeing a less than expected annual pay rise for the factory staff. - FALSE
- Removing trade discounts being on the product. - TRUE
- Increasing the capacity of the business by working a longer day . - TRUE
This is because main focus of the TPAR is to not to reduce cost but to make best use of the
bottle neck resource.

●A business produces a monthly newsletter to explain the steps it is taking to further

improve its environmental management. This news letter is sent out to all staff and
customers of the business.-
- It is a relationship environmental cost

●Dual price is the shadow price.

●The optimal solution for a linear programming problem has been correctly calculated as
follows:
Product X : 2,200 units and Y: 3,100 units .
One of the non critical resources was found to be the material , where a unit of X used 1.25 kg
and a unit of Y used 1.75 kg .

If there was 8,520 kg of this non-critical material available, but it could be delivered in 40 kg
bags, how many bags could be cancelled without the material becoming critical ?

Solution :

At an optimal solution, we use:

(2,200 x 1.25) +(3,100 x 1.75) = 8,175 kgs of the material. This would need 8,175/40=204 bags
or 205 bags to have enough.

We currently have 8,520/40 kg = 213 bags available, so 8 bags could be cancelled.

●A new system has been developed to provide a check to see whether a patent that already
exists would be breached by any new filling. The system will highlight similarities and will
even suggest which areas need to be changed to gain a succesful filing. This quicker and
more accurate information should , it is through, lead to better decisions on future filing
applications.

Which type of system is this best described as ?

Expert System (ES)

●A private school has grouped together with other schools to be able to gain volume
discounts on books and other supplies, and also invest in floatin staff who teach part time
in a number of different schools. Grouping together has led to well-equiped classrooms
taught by good quality staff. The results have been encouraging too, with good attendence
and acamedic acheivement. The head master feels that the extra investmentin floating staff
members is worth the cost and has contributed to the above results.

Which of the following areas best describe 'value for money' in the context of the extra
investement in floating staff members?

- Efficiency and effectiveness

●ABC always makes a big difference to overhead allocation. - FALSE

●Identifying the drivers of cost does not change the fact that fixed costs cannot be controlled
so real savings cannot be made. - FALSE

●An important feature of throughput accounting is the assumption of just in time processing.
Which of the following statements about JIT are true ?
- It can be only workable if a business can predict demand patterns. TRUE
- It can often force suppliers to become surrogate stock holders. TRUE

●A government is trying to assess schools by using a range of financial and non-financial

factors. One of the chosen methods is the percentage of students passing 5 exams or more.
Which of the 3 Es in the value for money framework is being measured here ?
- Effectiveness

●When a budget is flexed, the sales variance will include only the sales price variance.

●Which of the following statements are true in relation to environmental internal failure
costs:
-They are borne exclusively by the organisation. TRUE
- The aim in incurring them is to determine whether adverse impacts are being created and
whether environmental standards and internal policies are being complied with. FALSE
●Which of the following statements are true in relation to incremental budgeting:
-It can be defined as a system of budgetary planning and controls that measures the
additional costs that are incurred when there are unplanned extra units of activity. FALSE
- Incremental budgeting review and , if necessary , revise the budget for the next quarter to
ensure that budgets remain relevant for the remainder of the accounting period. FALSE

Solution: Incremental budgeting uses the current period's results as a base and adjusts this
to allow for any known changes, including the cost increases caused by extra planned units
of activity. Statement (1) is therefore incorrect. Statement (2) is also incorrect and a poor
attemts at a defining a rolling budget system, where an extra quarter is added to the end fo
the budget when the most recent quarter has expired.

●The following are measures gathered in the context of a balanced scorecard approach to
the provision of management information:
1. Training days per employee
2. Percentage of revenue generated by new products and services
3. Labour turnover rate

Which of the following measures might be appropriate for monitoring the innovation and
learing perspective ?
- 1,2,3

●Throughput accounting considers that the only variable costs in the short run are materials
and components. TRUE

●In throughput accounting, priority should be given that earns the largest throughput per
unit. FALSE

●While drawing multi product chart, first product to be taken should be based on the highest
C/s ratio.

●Flexible budgeting is a reporting system where the planned level , of activity is adjusting to
the latest forecast level of activity.

●Its purpose is to break down the budget into variable per unit and fixed costs components,
so that at any level of activity, a budget may be created and then mapped against the
actuals at that level of activity so as to provide a 'like for like' comparison.

●ABB (Activity Based Budgeting) is espically useful when an orgainsation has a significant
level of overheads. TRUE

●ABB should only be used in a Total Quality Management environment .

●VFM is considered to be the best combination of services from the least amount of
resources taking into account the 3Es: Economy, Efficiency and Effiectiveness. TRUE.

●The key to effectiveness is in finding an optimum pattern of spending to achieve a given

objective. TRUE

●ABB would draw attention to the costs of overhead activies.

●ABB would recognise that it is activities which drive overhead costs.

●ABB would ensure that the budget is continously updated by adding a new budget period
once the most recent budget period has ended. FALSE.

●Flexible budgeting would recognise different cost behaviour patterns and so would take
into account the organisation's overall strategy during the budget process. FALSE

●ABC recognises that some overhead costs don’t depent directly on the volume of output.
FALSE.

●In shadow price, we trying to work out how much better off we should be as a result of
having one more unit of a particular scarce resource ( material or labour ). TRUE

●A shadow price analysis helps management in deciding whether a struggle to uplift a

constrain is worthwhile or not. TRUE

●With a shadow price analysis, improvement does not only mean an increase in revenue or
contribution , but can also mean a decrease in costs. TRUE

●Non-Critical constrains will have zero shadow prices as slack exists already.

●ABC is nost useful where production overheads are highly related to direct costs. TRUE

●ABC is espically useful where there is considerable diversity of overheads resource input
to products. TRUE

●Target costs are not well suited for service business where most of the costs are fixed. TRUE

●Target costing method that ensures that new product R&D costs are recovered in the target
price for the products. FALSE

●All labour variances should be investigated. FALSE

●Implementing JIT system will effect the labour efficiency variance . TRUE
●Reliability of figures is a factor to consider when deciding whether a variance should be
investigated. TRUE.

●In Flow Cost Accounting, output cost are allocated between positive and negative product
costs.

●If shadow price is $8, it means shadow contribution will increase by $8 for extra unit of
scarce resource obtained.

●Only resources that meet at the optimal point will have a shadow price.

●Simulation models the behaviour of a system.

●Simulation can be used to study alternative solution to a problem.

●A simulation model what should be done about about a problem.

●Budgets can be used in situation where where output cannot be measured, but standard
cannot be used in such a situation.

●When a linear programming problems includes a constrains for minimum sales demand
for a product, there may be a surplus for sales demand in the optimal solution.