Lesson 14 Managerial Accounting: Applications

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Lesson 14 Managerial AccountingApplications

• Task Team of
• FUNDAMENTAL ACCOUNTING
• School of Business, Sun yat-sen University

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Outline

• Segmented Reporting and Responsibility Accounting
  System
• Cost-Volume-Profit Analysis
• Budgeting and Budgetary Control
• Standard Costs and Variance Analysis
• Managerial Decision Making

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Introduction

• Lets look at the XYZ Company example.
• A manager at XYZ Company wants to replace an old
  machine with a new, more efficient machine.

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Introduction

• XYZs sales are 2000000 per year.
• Fixed expenses, other than amortization, are
  700000 per year.
• Should the manager purchase the new machine?

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Introduction

• The manager recommends that the company not
  purchase the new machine since disposal of the
  old machine would result in a loss

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Introduction

• Is it correct?
• Whats your comment to the managers decision?
• After learning this chapter, you will know how to
  employ the tools of managerial accounting and
  make decisions correctly.

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Segmented Reporting

• Organizations may break down their operations
  into various segments
• divisions, stores, services, or departments.
• Management needs reports on each segment for
• cost management
• performance evaluation

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Segmented Reporting

• Segments may be evaluated as
• a cost centre
• a profit centre
• Profit centre reports include information on a
  segments revenues and costs.
• an investment centre.
• Some costs are direct and some are indirect.
• Indirect costs may be allocated to various
  departments.

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Segmented Reporting

• Service department costs are shared indirect
  expenses of operation departments.
• They may be allocated using a variety of bases.

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Responsibility Accounting System

• Responsibility Accounting System
• An accounting system
• assigns managers the responsibility for costs and
  expenses under their control.

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Responsibility Accounting System

• Responsibility accounting budgets
• are prepared prior to each accounting period
• Responsibility accounting performance reports
• compare actual costs and expenses to budgeted
  amounts

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Cost-Volume-Profit Analysis (CVP)

• CVP analysis is used to answer
• How much must I sell to earn my desired income?
• How will income be affected if I reduce selling
  prices to increase sales volume?
• How will income be affected if I change the sales
  mix of my products?
• ?

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Assumptions of CVP Analysis

• CVP analysis assumes relations can be expressed
  as straight lines within the relevant range.
• Unit selling price remains constant.
• Unit variable costs remain constant.
• Total fixed cost remain constant.
• If the expected cost and revenue behaviour is
  different from the assumptions, then the results
  of CVP analysis are of limited use.

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Scatter Diagram
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High-Low Method
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Least-Squares Regression

• Least-squares regression
• is usually covered in advanced cost accounting
  courses.
• is commonly used with computer software because
  of the large number of calculations required.
• The objective of the cost analysis remains the
  same determination of total fixed cost and the
  variable unit cost.

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Break-Even Analysis

• The break-even point is the unique sales level at
  which a company neither earns a profit nor incurs
  a loss.

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Break-Even Analysis

• The break-even point may be expressed in units or
  in dollars of sales.

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Break-Even Analysis

• The break-even formula may also be expressed in
  sales dollars.

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Computing Income from Expected Sales

• What is the income given a predicted level of
  sales?

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Sales Volume Needed toEarn a Target Income

• Break-even formulas can be adjusted to show the
  sales volume needed to earn any amount of income.

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Margin of Safety

• Margin of safety
• How much sales can decrease before the company
  incurs a loss?

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Sensitivity Analysis

• The effects of changes in variables such as sales
  price, variable costs, and fixed costs.
• CVP analysis can be used to show the effects of
  such changes.

New break-even point in dollars
New fixed costs

New contribution margin ratio
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Budgets

• Budgets
• formal statements of a companys plans expressed
  in monetary terms
• attempt to capture the future activities of an
  organization
• are used by businesses, not-for-profit,
  government, educational, and other types of
  organizations.

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Importance of Budgeting
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Budget Committee

• Budget Committee
• Consists of managers from all departmentsof the
  organization
• Provides central guidance
• to insure that individual budgets submitted from
  all departments are realistic and coordinated.

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Budget Committee
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Budget Cycle

• Budget horizons are usually for one year
• but may extend for several years.

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Rolling Budgets
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Master Budget

• Master Budget
• A formal, comprehensive plan
• for the future of a company
• consists of several budgets linked together
• to form a coordinated plan for the organization

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Master Budget
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Sales Budget

• Sales budget
• the starting point in the budgeting process.
• Most of the other budgets are linked to the sales
  budget.
• Sales personnel are often involved in developing
  the sales budgets.

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Sales Budget
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Merchandise Purchases Budget

• Merchandise Purchases Budget
• Provides detailed information about the purchases
• necessary to fulfill the sales budget and provide
  adequate inventories.

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Merchandise Purchases Budget

• The quantity purchased is affected by
• Just-in-time inventory systems
• enable purchases of smaller, frequently delivered
  quantities.
• Safety stock inventory systems
• provide protection against lost sales caused by
  delays in supplier shipments.

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Selling Expense Budget

• Selling Expense Budget
• lists the types and amounts of selling expenses
• Predictions of expenses are based on the sales
  budget and past experience.

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General and Administrative Expense Budget

• General and Administrative Expense Budget
• lists the predicted operating expenses not listed
  in the sales budget
• Includes both cash and non-cash expenses
• Often prepared by the officemanager or person
  responsiblefor general administration

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Capital Expenditures Budget

• Capital Expenditures Budget
• lists the cash inflows or outflows pertaining to
  the disposal or acquisition of capital equipment.
• is usually affected by the organizations
  long-term plans.

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Cash Budget

• Cash Budget
• lists the expected cash inflows andoutflows for
  the period
• a tool used by management toavoid excess cash
  balances orcash shortages
• Information from other budgets is used in its
  preparation
• Information from the cash budget is used to
  prepare the budgeted income statement and balance
  sheet

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Production and Manufacturing Budgets

• Manufacturing companies need to prepare
  additional budgets that include
• Production budgets
• Direct materials purchase budgets
• Direct labour budgets
• Manufacturing overhead budgets

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Production and Manufacturing Budgets

• Production and Manufacturing Budgets
• Provides detailed information about the
  production necessary to fulfill the sales budget
  and provide adequate inventories.

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Production and Manufacturing Budgets

• Direct Materials Budget
• Provides detailed information about the purchases
  of raw materials necessary to fulfill the
  production budget and provide adequate
  inventories.

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Production and Manufacturing Budgets

• Direct Labour and Manufacturing Overhead Budgets
• Provides information about the labour and
  manufacturing overhead costs given the level of
  production for the period.

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Preparing Financial Budgets
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Budgetary Control
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Capital Budgeting

• Capital Budgeting
• Analyzing alternative long-term investments and
  deciding which assets to acquire or sell.
• These decisions require careful analysis since
• The outcome is uncertain.
• Large amounts of money are usually involved.
• Investment involves a long-term commitment.
• Any decision may be difficult or impossible to
  reverse.

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Zero-based Budgeting

• Zero-based Budgeting
• are prepared assuming no previousactivities for
  the activities beingplanned
• Managers must justify the amounts budgeted for
  each activity
• is popular among government and non-profit
  organizations.

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Fixed Budget

• Fixed budgets
• are prepared for a single, predicted level of
  activity
• Performance evaluation is difficult when actual
  activity differs from the predicted level of
  activity.
• Example How much of the unfavourable
  costvariance is due to higher activity, and how
  much is due to poor cost control?
• To answer these questions, we must flex the
  budget to the actual level of activity.

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Flexible (Variable) Budgets

• Flexible budgets
• are prepared after a periods activities are
  complete.
• Show revenues and expenses that should have
  occurred at the actual level of activity.
• Reveal cost variances due to good cost control or
  lack of cost control.
• Improve performance evaluation.

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Flexible (Variable) Budgets

• Flexible budgets
• To prepare a budget for different activity levels
• we must know how costs behave with changes in
  activity levels
• Total variable costs change indirect proportion
  tochanges in activity.
• Total fixed costs remainunchanged within
  therelevant range.

Variable
Fixed
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Standard Costs

• Standard Costs
• are preset costs for delivering a product or
  service under normal conditions.
• are established through personnel, engineering,
  and accounting studies using past experience.
• are benchmarks used in evaluating performance.
• are often used in setting budgets.

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Standard Costs

• Example A standard cost card

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Variance Analysis
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Variance Analysis

• Management By Exception
• Standard cost accounting provides management with
  information about costs that differ from budgeted
  amounts (variances).
• Management may choose to focus only on variances
  that are significant.
• This approach is referred to asManagement by
  Exception.

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Variance Analysis

• Material Variances

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Variance Analysis

• Labour Variances

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Variance Analysis

• Variable Overhead Variances

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Variance Analysis

• Fixed Overhead Variances

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Standard Costs

• Standard cost accounting systems
• record variances in the accounts
• simplify recordkeeping and help in the
  preparation of reports

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Discussions

• ABC Company has the following direct material
  standard to manufacture one unit product
• 3.0 kilograms per unit at 8.00 per kilogram
• Last week 6600 kilograms of material were
  purchased and used to make 2000 units. The
  material cost a total of 53000.

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Discussions

• What is the actual price per kilogrampaid for
  the material?
• a. 7.26 per kilogram.
• b. 8.13 per kilogram.
• c. 8.03 per kilogram.
• d. 8.00 per kilogram.

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Discussions

• What is the actual price per kilogrampaid for
  the material?
• a. 7.26 per kilogram.
• b. 8.13 per kilogram.
• c. 8.03 per kilogram.
• d. 8.00 per kilogram.

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Discussions

• ABCs material price variance (MPV)for the
  week was
• a. 198 favourable.
• b. 198 unfavourable.
• c. 189 favourable.
• d. 189 unfavourable.

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Discussions

• ABCs material price variance (MPV)for the
  week was
• a. 198 favourable.
• b. 198 unfavourable.
• c. 189 favourable.
• d. 189 unfavourable.

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Discussions

• The standard quantity of material thatshould
  have been used to produce2000 units is
• a. 6500 kilograms.
• b. 6000 kilograms.
• c. 7000 kilograms.
• d. 5000 kilograms.

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Discussions

• The standard quantity of material thatshould
  have been used to produce2000 units is
• a. 6500 kilograms.
• b. 6000 kilograms.
• c. 7000 kilograms.
• d. 5000 kilograms.

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Discussions

• ABCs material quantity variance (MQV)for the
  week was
• a. 4300 unfavourable.
• b. 4300 favourable.
• c. 4800 unfavourable.
• d. 4800 favourable.

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Discussions

• ABCs material quantity variance (MQV)for the
  week was
• a. 4300 unfavourable.
• b. 4300 favourable.
• c. 4800 unfavourable.
• d. 4800 favourable.

MQV SP(AQ - SQ) MQV 8.00(6600 kg - 6000
kg) MQV 4800 unfavourable
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Managerial Decision Making

• Managerial Decision Making
• Cost accounting information is often used by
  management for short-term decisions.
• Decision making involves five steps
• Define the problem.
• Identify alternatives.
• Collect relevant information on alternatives.
• Select the preferred alternative.
• Analyze decisions made.

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Managerial Decision Making

• Accepting additional business
• should be based on incremental costs and
  incremental revenues
• Incremental amounts are those that occur if the
  company decides to accept the new business

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Managerial Decision Making

• Make or Buy Decisions
• Incremental costs also are important in the
  decision to make a product or purchase it from a
  supplier
• The cost to produce an item mustinclude
• direct materials
• direct labour
• incremental overhead
• We should not use the predetermined overhead rate
  to determine product cost

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Managerial Decision Making

• Scrap or Rework Defects
• Costs incurred in manufacturing units of product
  that do not meet quality standards are sunk costs
  and cannot be recovered.
• As long as rework costs are recovered through
  sale of the product and rework does not interfere
  with normal production, we should rework rather
  than scrap.

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Managerial Decision Making

• Sell or Process Further
• sell partially completed products vs. process
  them to completion
• As a general rule, process further only if
  incremental revenues exceed incremental costs

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Managerial Decision Making

• Selecting Sales Mix
• When a company sells a variety of products,some
  are likely to be more profitable thanothers. To
  make an informed decision regarding sales mix,
  management must consider . . .
• The contribution margin of each product,
• The facilities required to produce eachproduct
  and any constraints on the facilities, and
• The demand for each product.

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Managerial Decision Making

• Eliminating a Segment
• A segment is a candidate for elimination if its
• revenues are less than its avoidable expenses

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Managerial Decision Making

• Qualitative factors in decisions
• Qualitative factors are involved in most all
  managerial decisions
• Quality
• Delivery schedule
• Supplier reputation
• Employee morale
• Customer opinions

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Summary

• Segments may be evaluated as a cost centre, a
  profit centre, and an investment centre.
• CVP Analysis break-even analysis, computing
  income from expected sales, sales volume needed
  to earn a target income, margin of safety, and
  sensitivity analysis.
• Importance of budgeting, master budget, and
  budgetary control
• Standard costs, variance analysis and standard
  cost accounting systems
• Managerial decision making accepting additional
  business, make or buy decisions, scrap or rework
  defects, sell or process further, selecting sales
  mix, eliminating a segment

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Discussions

• Consider the beginning XYZ case

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Discussions
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Discussions
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Case Study

• ABC Corporation, a merchandising company, has
  provided the following budget data

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Case Study

• Collections from customers are normally 75 in
  the month of sale, 15 in the month following the
  sale, and 8 in the second month following the
  sale. The balance is expected to be
  uncollectible. ABC pays for purchases in the
  month following the purchase. Cash disbursements
  for expenses other than merchandise purchases are
  expected to be 28,800 for September. ABC's cash
  balance on September 1 was 44,000.

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Case Study

• Required
• Compute the expected cash collections during
  September.
• Compute the expected cash balance on September
  30.

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The End of Lesson 14