Accounting

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Accounting Financial Analysis 1 Lecture
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Interpret financial information (2)
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Interpret financial information (2)

• Apply financial information to management
  activities
• Identify financial information
• Review financial information and take action
  accordingly
• Share financial information with colleagues

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Apply financial information to management
activities

• All the financial information that is collected
  from the various sources is analysed and
  constructed in a manner that will provide key
  indicators for management to oversee the
  performance of the business.

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2 Categories of Costs

• If management is expected to control costs it is
  necessary for them to analyse and classify costs
  into the following categories
• Direct costs/expenses
• Indirect costs/expenses

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Direct costs

• are the costs that are directly related to the
  item being sold or produced.
• If the item had not existed the cost would not
  have happened.

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Direct costs could be made up of 3 components

• Direct materials
• Direct labour
• Direct expenses

Direct materials and direct labour are also known
as Variable costs because they are directly
related to the product being sold or produced.
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Variable costs

• costs that increase/decrease according to the
  level of activity. (Sales, production)
• They relate to a PER UNIT COST

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Variable costs (2)

• E.G. If each meal cost 9 to purchase the
  ingredients.
• The cost of the meals will change depending on
  the number of meals produced.
• 10,000 90,000 and
• 15,000 135,000.
• If the kitchen staff are paid by the number of
  meals produced and sold
• their wages would be variable costs
• otherwise they are (direct) fixed costs.

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Semi-variable costs

• costs that change slightly as the level of
  production increases but not in proportion to the
  increase in production.

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Semi-variable costs (2)

• A semi-variable cost has an element of fixed
  costs in it.
• E.G. Telephone account has a fixed service
  charge, only the call charge increases as the
  calls increase.
• Electricity/gas charges in a kitchen will not
  change too much as the number of meals increase.
• Semi-variable costs are not normally classified
  within small to medium sized industry.
• It is only the very large corporations that may
  apply semi-variable costs in management
  applications.
• Most companies consider semi-variable costs as
  part of the fixed costs.

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Fixed costs

• costs that remain the same irrespective of the
  level of sales or production.
• Fixed costs could be
• Direct or Indirect

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Fixed costs

• E.g.s of direct fixed costs are Wages for
  kitchen staff (if permanent and constant)
• depreciation of kitchen equipment
• repairs to kitchen equipment, and
• all other costs incurred solely to produce the
  item being costed.
• Depending on the circumstances costs may have to
  be allocated to different classifications.

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Indirect Costs

• costs that cannot be specifically identified with
  the cost of the finished product.
• Indirect costs are therefore all other costs that
  are not direct costs.
• Indirect costs are also known as overheads.

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Indirect Costs (2)

• Examples of indirect fixed costs are
• Occupancy costs
• Rent / rates, electricity, telephone, Insurance).
• long-term finance costs, Depreciation
• Administration costs
• Marketing costs

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Understanding your business

• Having an understanding of the difference between
  Variable and Fixed costs (and semi-variable
  somewhere in the middle but leaning towards Fixed
  costs) management can start to take control of
  the business activities.
• Variable costs will change as production
  increases or decreases whilst
• the Fixed costs will remain the same

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See Example in your notes

• Income Statement for the Silver Spoon Restaurant
• READ
• TRY TO CALCULATE THE PROFIT AND LOSS FOR 7 DAYS
  ON PAGE 2

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How are problem solving skills applied

• Solving performance problems

Identify the problem Identify the cause of the
problem Develop options to correct the
problem Select best option Implement corrective
action Set review date to assess the result of
action
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Solving technical problems

• Spreadsheets can assist in making planning
  decisions.
• They may require information from other
  departments.
• Used primarily for

Budget preparation Sales forecasting Market
research Financial planning Scheduling of
maintenance, rosters, Strategic planning
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Solving skills problems

• Develop work priorities
• Training
• On-the-job learning
• Of-the-job learning
• Identifying new skills needs
• Professional development activities
• Recording the development of activities

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How is use of technology applied ?

• Software applications for small business Off
  the shelf accounting packages (single or
  multi-user)
• Entries into the system are done in real-time,
  which means that regardless of the number of
  individuals inputting data, you will always have
  a current view of the business operations

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How is use of technology applied ? (2)

• Integrated packages Integrated packages provide
  the tools to handle a variety of tasks required
  by small businesses. These generally include
• A word processor for writing text
• A spreadsheet to make calculations and present
  data in a comprehensive manner
• A database which holds information and is capable
  to sort it into various desired formats.
• Diary and telephone index e.g. MS Office

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How is use of technology applied ? (3)

• Internet The internet is a worldwide network of
  computers linked together and sharing information
  between them.
• It allows you to search for information on
  virtually any topic you require.
• You are able to receive and sent messages to your
  contacts and to organise chat lines for real-time
  discussions.
• It enables you to access information from other
  subscribers such as retail price lists, shopping
  catalogues etc.

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Share appropriate financial information with
colleagues in a timely manner

• The Manager cannot do it all on his own no matter
  how committed he may be.
• He must have the ability to communicate and
  consult with his department managers and to
  motivate each of them to take ownership of the
  activities of their department.
• In order to succeed management should participate
  in problem solving whilst encouraging their staff
  to organise their resources to achieve the
  desired results.
• In short, team building is a key to success and
  the use of interpersonal and negotiating skills
  is the main ingredient for developing an
  effective team

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Team work

• For the team to be effective there must be
• Open discussion on all aspects of the business.
• Current financial reports discussed during
  regular management meetings.
• Problem solving sessions were necessary to arrive
  at a suggested participative management solution.
• Implement corrective action as soon as possible.
• Review the situation to see if the solution was
  effective.
• Inform the team of positive results as well as
  the negative ones.
• Acknowledge individual achievements were
  appropriate

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Alternative view

• You cant create visionary ideas by consensus

The aim is to find the individualist with a
sense of self-discipline rather than the man who
is a good member of a team SAS Spokesman Sunday
Times 30/3/03 p 41
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Alternative view (2)

• Everybody dies when 2 people are in charge (Air
  Force saying)
• I dont believe in consensus I consult widely,
  listen to everyone, then the guy at the top makes
  a decision and everyone gets on board.

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PRACTICE ACTIVITY!

• Continue with MYOB postings
• OR Do it manually!
• See questions at back of notes