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:

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!