Management Accounting - More Budgeting

More budgeting

Moving on from the last post, let's talk more about how budgets work and what they're made of.

Standard costs and variances

Standard costs are the planned cost (per unit) of products or services produced. You can also have standard revenues that work the same way.

Management Accounting - Budgeting

Budgeting

Preparing budgets is what happens right after making long term strategic plans. Budget adjustment sometimes occurs after variances are observed.

A budget is pretty much three smaller budgets that combine to make a 'superbudget' of sorts:

Master budget

=

Budgeted balance sheet

AND

Budgeted income statement

AND

Budgeted cash flow statement

Budgets have 5 main benefits:

1. Promote forward thinking


2. Co-ordinate various business areas


3. Provide an authorisation system


4. Provides a system of control


5. Motivates managers to perform better

We'll talk now about how a budget is made and then go through an example or two.

Management Accounting - Pricing

Pricing

If you have a business you want to make sure that you price your products and services appropriately. Your prices should be consistent with the business strategy and also linked to the cost of producing the product or service.

Two pieces or terminology to remember:

• Price makers: Set their own price


• Price takers: Have to accept what the market dictates (this can be either a competitor or a customer)

You've probably heard of supply and demand before. The basic premise here with supply and demand is that if you sell lots of a product you can afford to reduce the price per unit, and conversely if your sales are low you'll have to increase the price.

Management Accounting - ABC

ABC

(It's as easy as 123)

ABC stands for Activity Based Costing. It has a few benefits, such as:

• It provides more accurate costs for each unit of a product (or service)


• It gives a better understanding of the business to managers

It's fairly simple to the more traditional costing methods we've looked at already, but with a key difference: ABC looks at activities as a way of accumulating costs, instead of the old method of using cost centres. So with ABC the costs will be driven by:

Management Accounting - Costs On A Departmental Basis

Dealing with overhead costs on a departmental basis

In previous posts we've addressed what full costing is and how overheads can be applied in different ways. Now it's time to talk about how the overheads can be sorted into departments.

Think about a medium to large sized business. They are often separated into departments, for example, sales, customer service, manufacturing etc. So what if, when a product's cost is calculated, the overheads were allocated depending on how long the product spends in a certain department?

Instead of departments, we'll refer to the different business areas as cost centres. There can be two types of these:

Globalisation - Skepticism

Skepticism

There are plenty of people who doubt that we live in a globalised society. There are 9 main points to their arguments. This post will outline each of the points in turn.

Globalisation isn't a new thing

The most famous text to give this argument is 'Globalization in Question' by Hirst and Thompson. One of their main points is that international trade has been around in history for a while and isn't new. You might they say have a point. Spices and fabrics and things of that nature have been shipped all over the world for centuries. The banana was first brought to Britain in the 1800s.

Management Accounting - Full Costing

Full Costing

In our list of ways to define cost, we're onto number 3:

• Differential future cash flows (DFC)


• Cost behaviour in relation to output


• Assignment to cost object


• Financial statement perspective


• Business function

Management Accounting - Operating Gearing, Marginal Analysis

Operating Gearing and Marginal Analysis

If you have an activity, and it has high fixed costs compared to it's variable costs, then that activity has high operating gearing.

When operating gearing (OG) is high, a small change in sales will have a much bigger effect on profit, so you can say that profits are more sensitive to activity volume when OG is high.

Management Accounting - Fixed and Variable Costs

Fixed and Variable Costs

You'll remember from the previous post that there's more than one way to define cost. The methods were:

• Differential future cash flows (DFC)


• Cost behaviour in relation to output


• Assignment to cost object


• Financial statement perspective


• Business function

The previous post focused on DFC, and this post is about cost behaviour in relation to output. What's that in english? We're on about fixed and variable costs.

Management Accounting - Relevant Costs

Relevant Costs

Right, onto the proper lecture material!

What is cost?

Basically there isn't a single way to define cost, which is quite inconvenient for us. What you're going to use the cost to figure out should tell you how to calculate it however.

Management Accounting - Introduction

Management Accounting - An Introduction

Like most of the intro lectures, this is going to be quite brief, the real 'meat' is in the next lectures!

What is accounting?

Seems like an easy question...but it's something you need to learn! My answer at first was "erm it's you know money and stuff and balance sheets". This is not a model answer!

Financial Reporting - Corporate Governance

Corporate Governance

Let’s start with some more recapping from last time:

• The gearing ratio measures what proportion of a business is funded by borrowing


• Depreciation does not count as a cash expense


• Current assets are usually only held during one operating cycle, so they are expected to be sold within a year

Financial Reporting - (More) Financial Statement Analysis

More Financial Statement Analysis

Let's start with some recapping from the last section.

• Let's say that a company's average debtor payback time in 2008 was 62 days, and in 2009 was 31 days. A possible reason for this is that the company has improved their credit control procedures, meaning they now collect their debts more quickly.

Financial Reporting - Financial Statement Analysis

Financial Statement Analysis

Who is interested in analysing a financial statement?

Financial Reporting - Market/Book Values

Market/Book Values

Quick example

Some things that are identical have different values.

An empty tin of dog food is worth about $0.10. An empty tin of Paris Hilton's dog food went on ebay for $305.

I think the message here is that most people are crazy, but there is probably some sort of deeper meaning too. If you manage to work out what it is, please let me know.

Financial Reporting - Income Statement Part 2

Income Statement Part 2

Measuring profit in the income statement

• The income statement measures the profit generated by the business over a period


• The previous section showed that it isn't always easy as we have to apply our own judgement a lot, like what method of depreciation to use

Financial Reporting - Income Statements Part 1

Income Statements Part 1

Some quick concepts / refreshers

• Trade receivables are an asset. A trade receivable is money owed to the company for goods that have been bought from them on credit.


• Capital is a claim on the business, as it represents the investment the owner had made in it.

Financial Reporting - Balance Sheet Part 2

Balance Sheets Part 2

Note: This post follows Balance Sheets 1 so read that if you haven't already.

Some quick concepts / refreshers

• The balance sheet is a statement of financial position at the time it is made


• The cash flow statement measures movement of cash over time

Financial Reporting - Balance Sheets Part 1

Balance Sheets Part 1

The major types of financial statement

3 types:

• Cash flow statement


• Income statement


• Balance sheet

Financial Reporting - Intro and Business Types

Fundamentals of Financial Reporting

Introduction to Accounting

The main users of financial information relating to a business

• Owners


• Customers


• Competitors


• Employees (and unions)


• Government


• Community reps


• Investment analysts


• Suppliers


• Lenders (Banks)


• Managers