Session 1 Organisational Context of Management Accounting By the end of today’s session(s), you should be able to: • Outline the role of management accounting in the achievement of organisational objectives • Distinguish profit making businesses and other types of organisations • Describe the operating environment of the management accountant; internal and external • Describe the management accounting system • Outline the role of management accounting in running the business • Outline possible ethical issues facing the management accountant • Explain basic cost classifications, revenue classifications and typical terms used by management for planning • Analyse cost by cost function and type • Explain cost behaviour patterns, to include fixed, variable and semi-variable costs • Explain how cost behaviour patterns vary on an activity basis and per unit basis • Distinguish between contribution and gross margin
Competency Wheel Strategic Thinking & Problem Solving Communication Managing Self & Others:Leadership IT Awareness Project Management & Change Awareness Stakeholder Management Financial Reporting Management Accounting & Finance Audit & Assurance Tax & Law Strategy Ethics & Professionalism Objectivity Perceptiveness of own knowledge, values and limitations
Mapping • This lecture maps specifically to 1.1 and 1.2 on the Competency Statement
Syllabus • Organisational Context • Budgetary Setting • Control • Cost Accounting and Cost Management • Decision making
Examination Process • Continuous assessment - 15% • Final Exam – 85% • Move from knowledge based to competency based exams
Role of Management Accountant Chapter Reference 1.1 and 1.2 (Pages 1 to 8)
Role of management accountant • Planner e.g. budgeting • Information provider e.g. operating statements • Controller e.g. budgetary control • Motivator e.g. providing budgets • Decision maker e.g. relevant costing
Planning • Establishing Objectives • Short or long Term
Levels of Planning Strategic Long Term Tactical Day to Day Operational CAP 1 Management Accounting Academic Year 2011 / 2012
Types of Organisations • Manufacturing • Service Companies • Not for Profit organisations
Decision Making Planning Phase • Set Objective • Identify ways to achieve objective • Make a decision about best way to achieve objectives Implement Decision Control Phase • Gather information about actual results • Compare actual to plan results • Revise original objectives if necessary
Types of Decisions • Product Mix • Sales Price • Credit Terms to offer to customers • Sources of Finance to use • Capital Expenditure • Setting Budgets for marketing spend
Responsibility Accounting Responsibility Centres • Cost Centre – A production, service or location, function, activity or item of equipment whose costs can be identified and recorded. • Profit Centre – Part of business for which both costs and revenues are identified. • Investment Centre – Part of business where managers responsible for investment decisions as well as costs and revenues. • Revenue Centre – Part of business where managers are only accountable for revenue
Financial Accounting • Record transaction and summarised in periodic financial statements for external users.
Duties of Financial Accountant: • Maintaining bookkeeping system of nominal ledger, • Accounts payable control, • Accounts receivable control, • Preparation of Statutory accounts • Information prepared by financial accountant is at too high a level for individual managers. Cost and management Accountant provides this more detailed information
Cost Accounting • Careful evaluation of resources used within the company, • Techniques employed are designed to provide financial information about the future performance. • Historical cost of product or service • Management Accounting • Forward Looking – Budgets and Forecasts • Provision of non financial information to managers • Provide advice based on information to management • Include involvement in planning, decision making and control
Ethical Issues Chapter Reference 1.5 (pages 16 to 20)
Ethical issues facing the management accountant • Corporate Social Responsibility Vs maximising shareholder wealth • Ethical investment • Short term opportunism Vs Long term sustainability • Decisions impacting adversely on stakeholder groups e.g. suppliers, employees etc.
Examples of Unethical Behaviour by Management Accountant • Not accruing for unpaid expenses, • Delaying maintenance expenditure in an effort to reduce costs, • Inflating closing inventory valuations in order to increase reported profits.
What motivates unethical behaviour? • Financial Incentives offered to management, • Promotion Opportunities • Avoiding Scrutiny
Code of Ethics Principles underlying the code of Ethics are: • Integrity, • Objectivity, • Professional Competence and • Confidentiality.
Resolution of Ethical Conflict Discuss with Superior Confidential Discussion with Independent Advisor Withdraw / Resign from assignment Inform Organisation / Regulatory Authorities
Management Accounting Today Chapter Reference 1.3 and 1.6 (Pages 8 to 11 and 20 to 21)
Internal Activities of an Entity • Production • Research & Development • Product Design • Marketing • Sales and Delivery • Customer Service • Human Resources
Users of Management Information Internal Users • Employees • Management External Users • Investors • Customers / Suppliers • Competitors • Government • General Public • Lenders
Changing Competitive Environment • Customers Expectations • Excellent Service • High quality products at low price, • Variety and range of products. • Shorter Product Life Cycles • Increased International Competition • Technological Advances and Improvements
Financial Accounting versus Management Accounting Management Accounting is concerned with the provision of information to internal management to hep direct and control the organisations operations. Primarily concerned with Planning, Decision Making and Control. Financial Accounting is concerned with the provision of information to shareholders, creditors and other users outside of the organisation to assist them in making financial decisions. Primarily concerned with stewardship.
Cost Classification Chapter Reference 2.2 (pages 30 to 40) CAP 1 Management Accounting Academic Year 2011 / 2012
Classification of Costs • Behaviour – Variable, Fixed, Semi Variable or Stepped • Element – Material, Labour and Expense • Nature – Direct or Indirect • Function – production or non-production costs, for example, Selling, distribution or administration costs
Fixed Costs • ATTssumed to remain constant over the relevant range • of activity - e.g. rent, insurance, depreciation • Unaffected by changes in level of activity / volume
Variable Costs Assumed to vary in direct proportion to changes in the level of activity / volume
Semi-Fixed / Stepped Costs • Costs are fixed until certain trigger points are breached e.g. number of supervisors • If one supervisor is required for 10 staff then the supervisor’s salary costs will remain fixed until more than 10 staff are employed when a second supervisor will be required
Semi-Variable Costs Contain fixed & variable elements, e.g. electricity bill for factory power – fixed standing charge & variable unit charges
Cost Separation -Semi-Variable Costs Cost separation is the process of separating the fixed and variable elements of a semi-variable cost Methods • High – Low Method • Scatter graph method
Example You have been provided with the following information regarding costs incurred over the past two months: June 3,000 units 7,500 July 2,000 units 6,000 Expected output in August is 4,000 units. What will the variable and fixed costs be?
High / Low Method Cost at high Volume - Cost at low volume High activity level – Low activity Level 7,500 – 6,000 = 1,500 3,000 – 2,000 1,000 = 1.50 Variable Cost per unit
High / Low Method Once you know the variable cost per unit you can calculate the fixed costs. You can select either activity level given in the question to calculate the fixed cost.
Activity Level of 3,000 units Total Cost 7,500 Variable Cost (3,000 X 1.50) (4,500) Fixed Cost 3,000
Activity Level of 2,000 units Total Cost 6,000 Variable Cost (2,000 X 1.50) (3,000) Fixed Cost 3,000
Costs at 4,000 units of output Fixed Cost 3,000 Variable Cost (4,000 X 1.50) 6,000 Total Cost 9,000
Question 1 Over the last two months the following production costs were incurred by Department XZ: Level of activity Production cost May 3,180 units €15,405 June 4,200 units €18,873 In July budgeted production was 5,000 units. What is the budgeted production cost for July?
18,873 – 15,405 = 3,468 = 3.40 p.u 4,200 – 3,180 1,020 Fixed Cost : Total Cost at 4,200 units 18,873 Variable Cost 4,200 X 3.40 (14,280) Fixed Cost 4,593
Total Costs at 5,000 units Fixed Costs 4,593 Variable Costs (5,000 X 3.40) 17,000 21,593 Alternatively Cost at 4,200 units 18,873 Additional Units(5,000 – 4,200) X 3.40 2,720 21,593
Analysing Costs between fixed and variable A company manufacturing a single product has the following costs at two different activity levels: Activity level (units) 30,000 50,000 Total costs (€) 189,000 303,000 Variable costs are constant at all activity levels, but fixed costs increase by €4,000 every 20,000 units. What is the total costs at an activity level of 35,000 units?
High / Low Method Cost at high Volume - Cost at low volume High activity level – Low activity Level We need to make an adjustment to the total costs before we put them into the formula. The reason for this is because each activity level has a different amount of fixed costs.
High / Low Method Total Costs at 50,000 units 303,000 Additional Fixed Costs ( 4,000) 299,000 Variable Cost per unit……. 299,000 – 189,000 = 110,000 = 5.50 50,000 – 30,000 20,000
Activity Level of 30,000 units Total Cost 189,000 Variable Cost (30,000 X 5.50) (165,000) Fixed Cost 24,000
Activity Level of 50,000 units Total Cost 303,000 Variable Cost (50,000 X 5.50) (275,000) Fixed Cost 28,000