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MBA Intensive Seminars 2004

FMA Revision notes


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Definition
Accounting is the process of identifying, measuring and communicating financial information about an entity to permit informed judgments and decisions by users of the information.
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The Accounting Equation


Assets minus Liabilities equals Equity A L = E Assets equals Liabilities plus Equity A = L + E Equity Capital Ownership claim

Shareholders funds
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Power of Accounting
Accounting provides a very selective but powerful representation of the corporate identity.. The detailed language of assets, liabilities, costs, profits provide a range of corporate imagery and vocabulary . Accounting provides the categories through which organisational participants perceive both themselves and the organisation. Mike Powers
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Creative Accounting?
Things may exist independently of our accounts, but they have no human existence until they become accountable. They may not exist, but they take on human significance by becoming accountable.. Accounts define reality and at the same time they are that reality.

Accounts do not more or less accurately describe things. Instead they establish what is accountable in the setting in which they occur
Whether they are ACCURATE OR INACCURATE by some other standards, accounts define reality for a situation in the sense that people act on the basis of what is accountable in the situation of their action.

Ruth Hines

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You will discover


That accounting is subjective, partial and potentially misleading Accountants use language / numbers in a highly technical way

Accounts are a highly stylised story, representation, description of organisational events Differences between the Accounting World and the Organisational World
Problematic nature of accounting numbers
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And theres more.


The tribe of accountants takes many forms and lives within all organisations No such thing as a correct cost, value, profit..it all depends on context
The value of accounting in managing organisations
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Roles of Accounting
Improve problem solving / decision making Manage risks Trust, Assurance

Educational - learn about organisations


Language of business

Construct, define, measure success/failure

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Roles of Accountants
Assisting the internal management of organisations
Complying with external financial reporting, controls and with taxation regulations Expert consultants on financial and organisational performance

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Financial Accounting
Accounting concepts
Profit and Cash distinction Financial statements

Organisational impact
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Hierarchy of Accounting Qualities


Decision Makers and their characteristics Benefits > Costs

Understandability
Decision-Usefulness

Relevance
Predictive value Feedback Value

Reliability

Timeliness

Verifiability

Representational Faithfulness

Comparability & consistency


Materiality
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Neutrality

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Transactions
Buy materials on credit from suppliers Sell goods or services on credit to customers Pay suppliers Receive cash
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When is profit reported? When goods or services are sold

NOT when cash is paid or received

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Example: Antiques dealer

Buy 10 chairs for cash $200 each Sell 6 chairs on credit $300 each
Profit 6 x $100 each = $600 Cash flow = minus $2,000
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Profit, not cash


Matching Concept match revenues received with the costs incurred to generate them Goods received but not paid for Creditors (Payables) Goods or services supplied but no cash yet - Debtors (Receivables) Prudence concept providing for known / probable losses e.g. Doubtful debts, Depreciation of fixed assets
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Profit, not cash contd


Customers pay in advance for services extending beyond the accounting period Company agrees with supplier to buy materials at fixed price for 5 years Home currency euros, borrow in dollars Increase in valuation of fixed assets
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Change over a period start Assets - Liabilities = Equity


Profit/loss

During the period end

Assets - Liabilities = Equity

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Contents of annual report


Financial highlights Company overview Chairmans statement Chief Executives review Audit report Financial statements Notes to the accounts
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The main financial statements


Balance Sheet 1 AS AT
31 Dec Year 1

Balance Sheet 2 AS AT
31 Dec Year 2

Balance Sheet 3 AS AT
31 Dec Year 3

Profit and Loss Account For period Cash Flow Report

Profit and Loss Account For period Cash Flow Report

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Balance sheet horizontal


Fixed assets Liabilities

Current assets

Shareholders funds

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Balance sheet vertical


Fixed assets Current assets Less Current liabilities Less long term liabilities Equals Shareholders funds

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Profit and loss account


Revenue (sales) Less Expenses (costs) Equals Profit

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Cash flow statement


Operating cash flows
plus

Investing cash flows


plus

Financing cash flows Equals change in cash and bank loans


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Creative accounting
What do we want to create?
More profit? More assets? Less profit? Fewer assets?

More liabilities?

Fewer liabilities?
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Creative Accounting Practices


Income smoothing move profit from one year to another Changing accounting policies, particularly depreciation, asset valuations Overstating costs, particularly in regulated industries Making expenses into Assets - capitalisation
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Off-balance sheet financing , e.g leasing, Sale and buyback, special purpose vehicles Recognising profits that arent really there foreign exchange rates affecting values of assets and loans Corporate takeovers ACCOUNTING MINEFIELD adjusting policies, fair values, goodwill, brands, reorganisation costs...
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Corporate crime / fraud


Directors are responsible for preventing crime and fraud
They are required to have a system of internal controls Who controls executive directors for honesty/? Audit committees, Non-executive Directors, Supervisory Board
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Corporate crime/ fraud contd.


Creating fictitious contracts
Fictitious Assets, inaccurate valuations Omitting Liabilities, misleading valuations

Raid the employees pension fund

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Analysis and Interpretation of Financial Statements

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First Steps BC (before calculation)


Why are you analysing accounts? Who are you interpreting for? When are you interpreting? What are you intending to interpret? Limitations of Financial Accounts

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Always bear in mind


Preparers of accounts know how people will interpret their accounts Be cynical assume the accounts are the best possible picture Analysis only as good as original data Never just use accounts check from many different sources Accounting terms are different from general understandings
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However.
Accounts are main source of systematically produced regulated information Good as it gets Usually reliable 3rd party verified Follow the same basic rules Most of the information is there (in the small print) You can never eliminate the risk of fraud / criminal misrepresentation

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Analyse Accounts to determine


Is the company: Growing? Profitable?

Managing its assets effectively? Sufficiently liquid?

Financed properly? Able to meet its financial obligations?


Viewed favourably by financial markets?
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Financial ratios
Quick and simple check on financial health Small number of ratios gives a picture of the business. Easy to calculate, harder to interpret. Provide a starting point for further investigation.

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Key areas for analysis


Profitability Liquidity Asset management Debt management (financial structure) Market value

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Success in making profit


Return on capital employed profit sales Profit _____ x _______ = __________ sales total assets total assets profitability x efficiency = ROCE

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Managing liquidity
Can we pay the bills as they fall due? Can we pay the wages of employees? Buy stock (inventory) on credit Sell on credit = accounts receivable Pay suppliers = accounts payable Ideally, match cash flows in and out

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Asset management
Use fixed assets to earn sales revenue Manage working capital stocks (inventory) debtors (accounts receivable) creditors (accounts payable) working capital cycle

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Financial structure
Is it a good idea to borrow? Creates greater risk - interest payments and capital repayments Benefits to shareholders when profits are rising Risks to shareholders when profits are falling

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Advantages of ratios
Comparisons are relative to other figures Compare businesses of different size Gives picture of company strategy Financial and trading performance Compare with industry averages Simple summary of complex information

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Reasons for using ratios


Gives summary statistics Helps identify industry benchmarks Input to formal decision model Standardise for size

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Applications of analysis
Predictions of corporate earnings Construct projected financial statements Predict corporate failure Indicators of financial distress e.g. Altmans models, combination of ratios

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Problems with ratio analysis


No agreement on definitions or specific set of ratios Accounting estimation Data not available Timing of data does not match Differing accounting policies Negative numbers and small divisors
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Limitations of ratio analysis


Diverts attention from the underlying information May not give sufficient attention to the notes to the accounts Accounting policies may affect comparison Industry differences

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Creative accounting
Could involve: Inflating reported profits and EPS Accounting for losses via balance sheet reserves and all profits through P & L Reporting profits without generating equivalent cash Reporting lower borrowings

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Survival Tips for Accounting Jungle


Read the accounts backwards Read the accounting policies and compare Screen accounts using filters e.g. high profit low tax, changing depreciation policies Cash is King (or Queen) Assess risk: If in doubt, keep out (or get out)

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Return on Capital Employed


Profit before interest and taxation x 100 Shareholders funds plus long term debt
Often called Operating profit Assets minus Liabilities = Equity Total assets minus current liabilities equals Shareholders funds plus long term loans
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Return on Capital Employed


Top line questions What increases/ decreases profit? Sales? Operating Costs? Bottom line questions Recent increases in assets may not yet have created profit Is there any debt off balance sheet?
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Return on Shareholders Funds


(also called Return on Equity)

Net profit after taxes x 100 Shareholders funds

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Return on Shareholders Funds


Top line questions What increases/ decreases profit? Sales? Operating Costs? Interest charges? Taxes? Bottom line questions Is the company high/ low geared?

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Net Profit Percentage


Net profit after taxes x 100 Sales Often shown as Profit attributable to ordinary shareholders Sales also called turnover

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Net Profit Percentage


Top line questions Is gross profit high or low? What are the admin and selling costs? What are the effects of interest and taxation? Bottom line questions Is the measurement of sales explained?

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Gross Profit Percentage


Gross profit x 100 Sales
Gross profit = Sales minus cost of sales Cost of sales = making ready for sale

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Gross Profit Percentage


Top line questions Have sales volumes or prices changed? Have costs of sales changed? Are costs of sales mainly variable or fixed? Bottom line questions Is the measurement of sales explained?

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Current Ratio
Current Assets Current Liabilities
Solvency = Ability to meet obligations as they fall due Working capital = CA minus CL
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Current Ratio
Top line questions What affects levels of stocks, debtors, cash Bottom line questions What affects levels of bank borrowing, trade creditors, other short term creditors Overall - How does the company manage its working capital?
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Quick Ratio (Acid Test)


Current Assets less Stock Current Liabilities
Solvency = Ability to meet obligations as they fall due Cash flow: How does the company manage inflows and outflows of cash?
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Quick Ratio (Acid Test)


Top line questions How is the company managing debtors and cash?
Bottom line questions How is the company managing trade creditors and bank overdraft?

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Stock Holding Period (days)


Stock x 365 Cost of Sales
Change 365 to 12 for a calculation in months. Sales minus cost of sales equals gross profit

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Stock Holding Period (days)


Top line questions Year-end stock or average stock? Use year-end for ease of calculation but check there are no significant changes from start. Bottom line questions May have to make some approximations to get cost of sales
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Debtor Payment Period (days)


Trade Debtors x 365 Sales Debtors = Accounts receivable (customers who buy on credit terms) Use notes to the accounts to find trade debtors.

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Debtor Payment Period (days)


Top line questions

Average or year-end? Year-end is less trouble but check there are no major changes.
Bottom line questions Are all sales made for credit? Think about the nature of the business.
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Creditor Payment Period (days)


Trade Creditors x 365 Purchases or cost of sales Trade creditors = Accounts payable (suppliers who provide goods on credit terms) Use notes to the accounts for detail.

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Creditor Payment Period (days)


Top line questions

Average or year-end?
Bottom line questions Opening stock + purchases - closing stock = Cost of goods sold. Should be Purchases but Cost of goods sold is Ok if stocks are constant.
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Gearing
Long Term Debt Long Term Debt plus Equity Look carefully at balance sheet and use notes to accounts. Add Preference shares to Debt Omit Provisions
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Gearing
Top line question What are the sources of finance that create fixed commitments to pay interest and repay capital? Bottom line question What is the total long-term financing of the business, based on borrowings and equity?

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Interest Cover
Profit before interest and tax Interest expense
EBIT = Earnings Before Interest and Taxation Interest expense: either in profit and loss account or in detailed notes.
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Interest Cover
Top line questions What is the amount of profit available to cover interest payments? Is the company generating sufficient wealth to meet interest payments? Bottom line questions What is the cost of servicing borrowings?
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Concepts, Cost and Costing

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Management accounting
Integral part of management identify, present and interpret information for strategy, planning and control, for decision taking and use of resources for disclosure to employees to safeguard assets

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Management accounting (contd)


Internal use within organisation No regulation by law Projections for future Analysis of past Directing attention, planning and control Solving problems

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Measuring and analysing performance


Implementing plans Examining future environment Developing objectives

Action plans and budgets


Operating plans

Formulating strategy
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Importance of costing
Many organisational decisions rely on costings Costing is complex but essential An accountant knows the cost of everything but the value of nothing Oscar Wilde

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Describing costs
Direct (identified with a saleable unit) Indirect (spread across saleable units)
Indirect costs = Overheads How to find a fair way of spreading the overheads?

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Confusing terminology
Allocate = give all cost to one unit or centre Apportion = share across units or centres Absorb (Absorption) Soak up into the units of output See page 142 of text book

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Terminology (contd)
What are the direct costs? Allocate these to units of output What are the indirect costs? Allocate to cost centres if we know where they belong. Otherwise Apportion (share) across cost centres. Absorb costs from production centres into products.
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Absorption bases
Absorb as cost per unit cost per labour hour cost per of labour cost per kilo of material cost per machine hour Different bases give different answers
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Cost behaviour
Pairs of classifications Direct or indirect? Fixed or variable? Period or product?
Case: Bus company sends buses to 10 schools for taking children home each day. How does the company describe the costs?
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Direct or indirect?
Direct for each school: Drivers working time, fuel for bus, bridge tolls Indirect to spread across all journeys: Insurance, repairs, maintenance, licences, depreciation, drivers idle time, holiday pay

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Fixed or variable?
Variable change with activity level Fuel, repairs, bridge tolls
Fixed regardless of activity level Drivers wages, Insurance, Licences, Maintenance checks, Depreciation

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Period or product?
What is the product? A person-mile. Product costs Drivers time, fuel, bridge tolls Period costs Insurance, Licences, routine maintenance, depreciation
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Examples of decisions
Price setting, tendering for contracts Product profitability analysis Product design modifications R & D management Value Engineering General Cost Management Contracting out / Buying in Plant / Department Closure
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Short-term decisions
In the short term business can continue if the selling price covers variable costs and makes a contribution to fixed costs.
Contribution = Selling price - variable cost

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Contribution analysis
Break even point =
Fixed costs Contribution per unit Pay 1,000 rent for market stall. Buy toys for 6 each, sell for 8 each. What is breakeven volume? 1,000/2 = 500 toys
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Contribution analysis (contd)


Sell 500 at 8 = 4,000. Variable cost 500 x 6 = 3,000 Add fixed costs 1,000 Neither profit nor loss How many toys to sell for profit of 4,000? (1,000 + 4,000)/2 = 2,500 toys

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Scarce resources
Sell gardening services and house cleaning. Contribution per job 10 and 8. Gardening needs 2 hours per job, House cleaning needs 1 hour per job. Shortage of labour. Which has priority? House cleaning 8 per hour, Gardening 4 per hour. Contribution per unit of limiting factor
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Short term decisions


Make internally or buy externally Hire own staff or pay agency for outsourcing Keep a business activity going Take on a special order at lower price

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Other factors in decisions


Not just an accounting matter. Consider organisations objectives relationship with employees marketing corporate goodwill/ image customer reactions government policies
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Get the costs wrong and...


Set prices too high - lose sales; too low - sell products at loss Lose potentially profitable contracts, win loss making contracts Dont know where we are making / losing money Continue with loss making products, cut profit making products, sub-optimal product mix

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Get the costs wrong and...


R & D to create better product when none needed Product Design Modifications not done when needed Contracting out production that costs more than internal production Making products that could be cheaper to buy in Close profit-making Plant / Keep open loss making plant
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Different Costs for Different Purposes


Not a single, universal true cost. Appropriate cost is governed by: Needs of management Specific organisational situations Specific problem to be solved Available information - pragmatics
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Different Costs for Different Purposes


Activity Based Cost Average Cost Avoidable Cost Budgeted Cost Controllable Cost Current Cost Direct Cost Environmental Cost Engineered Cost Fixed Cost Failure Cost Full Cost Historic Cost Incremental Cost Indirect Cost Joint Cost Marginal Cost Opportunity Cost Overhead Cost Period Cost Planned Cost Product Cost Quality Cost Relevant Cost Step Cost Sunk Cost Standard Cost Total Cost Transfer Cost Variable Cost
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Costing Problem
In contemporary organisations the fixed/variable classification is not relevant Logical impossibility of attributing all costs to products Wrong approach to the problem Solution based in the accounting world not the organisational world

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Activity Solution
Costs dont drive activities, activities cause costs Organisations do things that consume resources and (should) create value Costing should start with what the firm does activities in organisational world

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Activity Based Costing


What are the activities of the organisation? What resources are used by each activity? How much does each resource cost? Collect cost in cost pools How does each product or service make use of each activity? Share cost from the cost pools.
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Money
cost

Resources
consume Collect Data

Activities
produce

Non-financial Performance Analysis

Outputs
creates

Value
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Benefits of ABC
Makes visible the activities that drive the costs Prevents misallocation of costs Links costs more closely to responsibility for causing costs BUT does not save money or generate profit. It only gives more accurate information

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Activity costing is...


Not based on accounting coding structures Not based on accounting time frames Not based on techniques designed to make the accountants life easier Not based on producing Financial Statements

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Short term planning

Budgets and Budgetary Control


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What is a budget?
Quantified format management plans and strategies for decision making communication medium

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Mission/ goals

Financial plans

Corporate objectives Long term strategy Long term plans


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Assessed market opportunities/ organisational capability

Assumptions on critical factors

Long term strategy


Market opportunities Long term planning Forecasting assumptions Short term strategy Organisational capability

Budget/ short term planning

Modify assumptions
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Budget process
Formalises planning and control Defines goals Goal congruence - brings goals together Authority and responsibility are clear Framework to judge performance

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operating
+

Master budget
+

financial

Sales budget

Capital budget Cash budget

Cost of goods sold budget


Development /design budget
+ +

Marketing budget
Distribution budget
+

Budgeted balance sheet Budgeted statement of cash flow


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Administration budget
Budgeted profit and loss account
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Budget preparation
Start with sales budget (demand driven) Then match with cost of sales Is this a production organisation? Plan: inventories of raw materials, finished goods purchases to cover sales and inventories

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Budget preparation (contd)


Is this a service organisation? Plan service programme, labour needs, materials needed Plan all other operating expenses Plan capital expenditure Bring together in cash budget, budgeted profit and loss account, balance sheet.
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Cash budget
Most important part of budget cycle Monthly, quarterly? Cash receipts from operations Cash payments for operations Other cash receipts (new finance, sale of fixed assets) Other cash payments (tax, dividends, interest)
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Fixed and flexible budgets


Fixed means that budget is not adjusted later if volumes start to vary Flexible budgets means that budget is adjusted to take account of change in volumes of activity over the period

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Fixed and flexible (contd)


Budget variable costs of 200,000 for 5,000 units of output
Actual variable costs are 195,000 for 4,500 units of output How has manager performed against budget?
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Fixed and flexible (contd)


Appears to have saved 5,000 But budgeted cost = 4 per unit So flexible budget for 4,500 is 180,000 Performance is 15,000 worse than flexible budget.

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Alternative approaches
Easy approach = Last year plus inflation
Zero-based budgeting Start with a clean sheet Justify every item Focus on goals and objectives

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Alternative approaches (contd)


Activity based budgeting Extension of activity based costing Focus on cost of each activity
Kaizen budgeting continuous improvement budget is achieved if improvements are met
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Not-for-profit organisations
Goals and objectives measured differently Need to be cost effective
Planning programming budget system Focus on outputs rather than inputs joined-up government

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Behavioural aspects
Budgets can motivate employees to achieve goals of the organisation. What helps? degree of difficulty top management participation perceived fairness feeling of ownership avoid discontent about preparation
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Not foolproof
Why might budgets fail? Fail to understand changing environment using unsuitable existing structures fail to understand business systems lack of senior management support fail to understand central role of budgeting

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Are budgets necessary?


What matters is PLANNING This does not have to use budgets. Essential: Set targets: to maximise long term value Strategy: Make development continous Growth and improvement: challenge staff Resource management: wealth creation

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Are budgets necessary?


Co-ordination: manage cause and effect Cost management: challenge all costs Forecasting: use rolling forecasts Measurement and control: key indicators Rewards: unit rewards not individuals Delegation: give managers freedom to act

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Performance Measurement

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Strategic planning
Five year plan, rolling forward. Profitability Growth of sales, profit Market share Customer satisfaction Rate of innovation How to measure achievement of strategy?
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Accounting-based performance measures


Profit? Could compare actual profit against budget, but companies dont give information An absolute measure, needs ratios for comparison. Affected by choice of accounting policies Measured differently in different countries
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Accounting-based performance measures (contd)


Profitability A relative measure, better for comparison. Calculate for subdivisions of an organisation. Methods Return on capital employed Residual income Economic value added
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Return on capital employed


Profit before interest and taxes Fixed assets plus current assets less current liabilities
Can be used for divisions of a company if assets and liabilities can be allocated.

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Return on shareholders funds


Net profit after interest and taxation Shareholders funds
Can only be calculated for the company as a whole, not subdivided for divisions of organisation.

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Residual income
Ask: What is the income (profit) remaining after deducting a notional interest charge for the use of capital? X Z 000s Operating profit (EBIT) 18 1,500 Capital employed 100 10,000 ROCE 18% 15%
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Residual income (contd)


Suppose cost of capital is 10% for both. X Z 000s Operating profit (EBIT) 18 1,500 Less interest charge (10) (1,000) Residual income 8 500
Company Z gives higher income to shareholders
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Economic Value Added (EVA)


Companies should deliver value that exceeds the cost of capital. X Z Profit after tax (before interest) 13 1,050 Interest charge (net of tax) (7) (700) EVA 6 350 Z gives higher EVA than does X
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Performance of a division
Divisions are created by decentralisation Gives greater responsiveness Allows faster decisions Motivates managers Uses specialist experience of managers But needs a measure of performance

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Performance of a division (contd)


Problems of decentralisation Focus on division, not on total organisation (Called dysfunctional decision making) More information is needed, cost involved Duplication of activities

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Performance of a division (contd)


Cost centre Manager is responsible for costs Discretionary cost centre Manager has some choices in cost budget Revenue centre Manager is responsible for generating planned sales
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Performance of a division (contd)


Profit centre Manager is responsible for revenues and costs Target profit is set Investment centre Manager is responsible for resources and profit, target return to be achieved

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Transfer pricing
What price is charged for transfers between divisions within an organisation? Variable cost? Variable cost plus a profit margin? Variable cost plus portion of fixed cost? Variable + fixed + profit margin? Negotiated price? Reflect market?
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Financial Performance Measurement


Success / Failure often determined by accounting numbers Growth in profit, ROCE, Sales Reduction in costs, headcount, errors, stock Financial Ratio Analysis

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Financial Performance Measurement (contd)


Achieving outcome at or under budget Adverse / Favourable variance analysis Project NPV cost overruns OBJECTIVE APPROACH TO Performance measurement

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Problem with financial measures


A Simple Scenario. Division in large company enjoyed major growth in profitability over two years ..manager promoted.
New manager .drop in profits. WHY ?
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Financial measures (contd)


Top line answer Divisions market share dropped Costs were reduced by reducing maintenance of cutting machine, reducing staff training build up of stocks (inventory) of unsold goods Bottom line answer Reduced investment in new technology Financial System did not pick up the BAD Events
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Problems with financial information


Complexity /mystery and the method of calculation Arbitrary treatment of some cost items Time lag between event and the financial ledger No direct observable relationship between activities and reported costs Irrelevant to managers
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Problems with financial information (contd)


Managers need to convert data into meaningful information. Implied assumption that control costs will control activities. Focus on cost minimisation, not on effectiveness or valueadding. Could be valid reasons for costs increasing. Simplification of organisational activities, by reducing everything into a single value.
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Value of Financial Performance Measurement


Managers accept importance of financial outcome of their function (especially if linked to pay / prospects). Managers will try to increase their profitability. Managers often devise their own budget 'systems.

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Value of Financial Performance Measurement (contd)


Need information on relationships between activities they control and financial outcome Ignore formal budget reports / spend time and effort proving official budget is wrong Do not assume that managers can "translate" s into actual activities

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Information Managers Use


US study concluded information used for daily operating control did not come from the budgeting system. Managers' information needs are affected by: the resources most significant to their process, in terms of cost, quality, availability the time frame in which this information is needed
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Indicators for managers


level of finished goods level of orders (demand) key production limiting factors simple counts of output per hour / shift / day, physical quantities of materials / labour used, down-time

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Indicators for managers (contd)


scrap quantities, rework rates. capacity utilisation physical production requirements (long - medium and short-term)

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Non-Financial Measures
Non-financial is any information not valued in s. It has the following advantages: Expressed in terms/language understandable to managers (non-accountants) Requires very little "translation" by managers

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Non-Financial Measures (contd)


Potentially quicker, relevant Relates to events, activities, actual observable performance Can be used to make sense of financial budgets Better reflects the "reality" of the situation, not confused by strange accounting rules/conventions

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Integrating Non- and measures


Activity Based Accounting Benchmarking Performance Scoring Balanced Scorecard Strategic Management Accounting Many other multiple criterion decision making, data envelopment analysis, etc
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Balanced Scorecard
Financial Perspective

Customer Perspective

Vision and Strategy

Internal Business Perspective

Learning & Growth Perspective

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Balanced Scorecard
systematic attempt to design performance measurement system that integrates organisational objectives, co-ordination of individual decision making need for organisational learning. create an environment that facilitates continual improvement

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Balanced Scorecard (contd)


reflect the organisations understanding of the causes of successful performance. monitoring performance and what managers believe are drivers of good performance performance measure system should measure the most critical aspects of organisational performance.
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Balanced Scorecard (contd)


BS performance measures should be clearly understood by all employees link manufacturing performance and financial performance be linked to ensure constancy of purpose.

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Balanced Scorecard (contd)


BS performance measures should be able to identify cause-effect relations to enable employees to deal with poor performance and continue good practices. be based on critical success factors identify trends and rate of change

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Not-for-profit organisations
Economy Cost at which resources are acquired Efficiency Compare inputs and outputs Effectiveness How resources are used Value for Money
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