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Managerial Accounting(session 2)
Management Control
The cash budget
Self-assessment question 1.6
Create a cash budget from the following information:
Opening balance is €150 overdrawn, credit receipts are €100 per month, cash receipts are €30 pm and other receipts are €70 in Feb.
Purchases are €100 pm, wages €25 pm, expenses €35 pm and other payments are €15 in Jan.
The cash budget
January February March Quarter
Receipts Credit sales Cash sales Other Total
10030
130
1003070200
10030
130
3009070
460
Payments Purchases of materials Wages Expenses Other Total
100253515
175
1002535
160
1002535
160
30075
10515
495
Net in/(out) flowOpening bank balanceClosing bank balance
-45-150-195
40-195-155
-30-155-185
-35-150-185
The high-low method
Total Cost (€)
0
500
1000
1500
2000
2500
0 20 40 60 80 100 120 140 160 180
Maintenance (hours)
To
tal
Co
st (
k€)
Total Cost (€)
Self-assessment question 1.7
June
Sept.
July
The high-low method
Semi-variable costsMaintenance (hours)
Total Cost (£)
October 155 2013
September 122 1723
August 135 1902
July 69 280
June 157 2073
May 149 1937
June 157h. £ 2,073
Sept 122h. £ 1,723
Var. cost 35h. £ 350 i.e. £ 10/h.
Total VC for June = 157 x 10 = £ 1,570
Total estimated FC = 2,073 – 1,570 = £ 503
Estimated maintenance cost for Nov. = 503 + 180 x 10
= £ 2,303
Texas Rex Inc.
1. Sales Budget
1 2 3 4 Year
Units 1 000 1 200 1 500 2 000 5 700
Unit Selling Price
10,00 10,00 10,00 10,00 10,00
Budgeted Sales ($)
10 000 12 000 15 000 20 000 57 000
Texas Rex Inc.
2. Production Budget (in units)
1 2 3 4 Year 1
Budgeted Sales
1 000 1 200 1 500 2 000 5 700 1 000
Desired ending inventory
180 240 300 400 200 200
Total needs 1 240 1 500 1 900 2 200 5 900
Less : beginning inventory
-180 -240 -300 -400 -180
Units to be produced
1 060 1 260 1 600 1 800 5 720
Texas Rex Inc.
3. Direct Materials Purchases Budget ($)
Plain t-shirts 1 2 3 4 Year
Units to be produced 1 060 1 260 1 600 1 800 5 720
Direct materials per unit 1 1 1 1
Production needs 1 060 1 260 1 600 1 800 5 720
Desired ending inventory 126 160 180 106 106
Total needs 1 186 1 420 1 780 1 906 5 826
Less : beginning inventory
-58 -126 -160 -180 -58
Texas Rex Inc.
4. Direct Labour Budget ($)
1 2 3 4 Year
Units to be produced 1 060 1 260 1 600 1 800 5 720
Direct labour time per unit
0,12 0,12 0,12 0,12
Total labour hours needed
127,2 151,2 192,0 216,0 686,4
Average wage per hour 10 10 10 10
Total direct labour cost
1 272 1 512 1 920 2 160 6 864
Texas Rex Inc.
5. Overhead Budget ($)1 2 3 4 Year
Budgeted direct labour hours 127,2 151,2 192,0 216,0 686,4
Variable overhead rate 5,00 5,00 5,00 5,00
Budgeted variable overhead 636,0 756,0 960,0 1 080,0 3 432,0
Budgeted fixed overhead 1 645 1 645 1 645 1 645 6 580,0
Total overhead 2 281 2 401 2 605 2 725 10 012
Texas Rex Inc.
6. Closing Finished Goods Inventory Budget ($)
Unit cost computation
Direct material 4,00 Plain t-shirt 3,00 Ink 1,00
Direct Labour 1,20
Overhead 1,75 Variable 0,60 Fixed 1,15
Total unit cost 6,95
Finished goods : logo t-shirts 200 Unit cost 6,95 Ending FG inventory 1 390,07
Rate 9,586
Comparison btw the contribution income statement and the traditional income
statement
Traditional approach to P&L Contribution approach to P&L
Sales €12,000
Cost of goods sold €6,000
Gross margin €6,000
Selling and administrative expenses:
Selling €3,100
Administrative €1,900 €5,000
Operating income €1,000
Sales €12,000
Variable expenses:
Variable production €2,000
Variable selling €600
Variable administrative €400 €3,000
Contribution margin €9,000
Fixed expenses:
Fixed production €4,000
Fixed selling €2,500
Fixed administrative €1,500 €8,000
Operating income €1,000
A P&L analysis by industry
Industry Cost of goods sold / Sales
Selling and administrative expense /
Sales
Aerospace and defenseBeveragesComputer software and servicesElectrical equipment and componentsHealthcare servicesOil and gasPharmaceuticalsRestaurants
79%52%34%
64%
82%90%31%78%
9%34%38%
21%
6%3%
41%8%
Why do you think the percentages in each column differ so dramatically?
Source: Lori Calabro, « Controlling the flow », CFO, February 2005, p. 46-50
Texas Rex (T-shirt) 70% 15%
Total
88%
86%
72%
85%
88%
93%
72%
86%
Purposes of budgets (summary)
Budgets are used : To convert strategic plans into actions
To help coordinate the activities (manufacturing, sales…)
To guarantee the coherence of action plans
To favor the discussion of action plans and consider qualitative
aspects
To keep records of assumptions made
To assign responsabilities to managers (influencing behaviors)
To give autonomy to managers (allow them to spend money through grants of authority)
To evaluate performance…
Organizational control, Management control and Managerial Accounting
Informalcontrol
Formalcontrol
Management control
Management
Accounting
The management accounting tools
– Cost Accounting;
– Mgt Reporting and financial Reporting*
– Budgets.
Management Accounting* Financial Reporting focus on account consolidation and legal requirements (GAAP, past information,...) for external parties when management accounting focus on information regarding operations for managers within the organisation.
The management control tools
– Cost Accounting;
– Mgt Reporting and financial Reporting*
– Budgets.
– Performance Measurement Systems (tableau de bord)
– Incentives, objectives… (also with HRM)
Definitions of « management control »:
« Management control is the process by which managers influence other members of the organization to implement the organization’s strategies » (ANTHONY, 1998).
« Management control is the process of providing information about the performance of managers and operating units » (ATKINSON et al., 1997).
The management control tools
• What is a "tableau de bord" (dashboard)?
Set of short term performance indicators that help manage performance
Few indicators (KPI)
Made of tables and/or graphs
Link between strategy, Critical Factors of Success, and Budgets
Building the "tableau de bord"
Strategy
Objectives
Critical factors
Indicators
standards of performance
Critical factors and indicators
Increase SalesSalesBacklogNb of new prospects visited
Maximize contributionContribution in € & in % of SalesProduct mix in favour of top range products
Satisfaction of customersRenewal rate of contractsCustomer satisfaction indicator
Stay in line with estimates Budget variances
Sell maintenance contracts Nb of contrats sold / Nb of installations
Adapted from Mendoza et al. (2002)
Example of an elevator services company
Critical factors Indicators
What is standard costing?
• A financial, cost control system that enables the
deviations (variances) from the budget to be
analyzed
• Suitable when output can be measured and
input required can be specified
What is a standard cost?
• A predetermined cost per unit or per operation
(activity)
If the target cost that should be incurred is set under
efficient operating conditions = Attainable standards
If the target cost that should be incurred is set under
ideal operating conditions = ideal standards
Purpose of standard costing
• Predicting future costs for decision-making
• Providing a challenging target for managers
• Assisting in setting budgets and evaluating
managerial performance
• Acting as a control device of operations
• Simplifying profit measurement and inventory
valuation
Management control: cybernetic model
Control device
Entity being controlled
1. Detector. Information about what is happening
3. Effector. Behavior alteration, if needed
2. Assessor. Comparison with standard
Source: Anthony & Govindarajan (2007)
The management control processThe management control process
Planning Action Evaluation
Regulation loop
Learning loop
Formal control tools
– Cost Accounting;
– Mgt Reporting and financial Reporting*
– Budgets.
– Performance Measurement Systems
– Incentives
Formal control• Audit
• Financial markets (stock prices, analysts…)
Organizational control, Management control and Managerial Accounting
Informalcontrol
formalcontrol
Management control
Management
Accounting
Clan control,…Tableaux de bord,…Procedures,… Budgets,…
A control type for every kind of org.?
Source: Ouchi (1979)
INFORMAL
FORMAL
The responsibility centers
• Budgets are organized by responsibility centers.
There are 5 types of responsibility centers :
- Production centers- Discretionary expense centers- Revenue centers- Profit centers- Investment centers.
FC & VC
FC
Sales
EBITDA…
ROI…
Complaints about budgets
• Justify already taken decisions
• Prevent from adaptation to change (especially
as the environment is evolving more rapidly)
• Useless if goals are imposed
• Increase rivalry between departments…
Are budgets commonplace?
Source: Leahy, Business Finance, 2006