FUNDAMENTAL ACCOUNTING Lesson notes 14.docx
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FUNDAMENTAL ACCOUNTING Lesson notes 14.docx
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FUNDAMENTALACCOUNTINGLessonnotes14
LessonNotes
Lesson14ManagerialAccounting:
Applications
Learningobjectives
1.Describesegmentedreportingandresponsibilityaccountingsystem
2.ExplainthemainaspectsofCost-volume-profitanalysis
3.Analyzebudgetingandbudgetarycontrol
4.Describestandardcostsandvarianceanalysis
5.Explaintheuseofmanagerialaccountingindecisionmaking
Teachinghours
Studentsmajorinaccounting0hours
Otherstudents6hours
Teachingcontents
Introduction
Let’slookattheXYZCompanyexample.AmanageratXYZCompanywantstoreplaceanoldmachinewithanew,moreefficientmachine.
Newmachine:
Listprice
900000
Annualvariableexpenses
800000
Expectedlifeinyears
5
Oldmachine:
Originalcost
720000
Remainingbookvalue
600000
Disposalvaluenow
150000
Annualvariableexpenses
1000000
Remaininglifeinyears
5
XYZ’ssalesare$2000000peryear.Fixedexpenses,otherthanamortization,are$700000peryear.Shouldthemanagerpurchasethenewmachine?
Themanagerrecommendsthatthecompanynotpurchasethenewmachinesincedisposaloftheoldmachinewouldresultinaloss:
Remainingbookvalue
600000
Disposalvalue
-150000
Lossfromdisposal
450000
(1)Isitcorrect?
(2)What’syourcommenttothemanager’sdecision?
Afterlearningthischapter,youwillknowhowtoemploythetoolsofmanagerialaccountingandmakedecisionscorrectly.
SegmentedReportingandResponsibilityAccountingSystems
SegmentedReportingOrganizationsmaybreakdowntheiroperationsintovarioussegments,suchasdivisions,stores,services,ordepartments.Thus,managementneedsreportsoneachsegmentforcostmanagementandperformanceevaluation.
Segmentsmaybeevaluatedasacostcentre,aprofitcentre,whereprofitcentrereportsincludeinformationonasegment’srevenuesandcosts,andaninvestmentcentre.
Somecostsaredirectandsomeareindirect,andindirectcostsmaybeallocatedtovariousdepartments.Servicedepartmentcostsaresharedindirectexpensesofoperationdepartments.Theymaybeallocatedusingavarietyofbases.Pleaserefertothefollowingtable:
ServiceDepartment
CommonAllocationBases
GeneralOffice
Numberofemployees
Personnel
Numberofemployees
Payroll
Numberofemployees
Advertising
Sales
Purchasing
NumberofPurchaseOrders
Cleaning
Floorspaceoccupied
Maintenance
Floorspaceoccupied
ResponsibilityAccountingSystemResponsibilityaccountingsystemisanaccountingsystemwhichassignsmanagerstheresponsibilityforcostsandexpensesundertheircontrol.
Responsibilityaccountingbudgetsarepreparedpriortoeachaccountingperiod.Responsibilityaccountingperformancereportscompareactualcostsandexpensestobudgetedamounts
Cost-volume-profitAnalysis
CVPanalysisisusedtoanswerthequestionssuchas
(1)HowmuchmustIselltoearnmydesiredincome?
(2)HowwillincomebeaffectedifIreducesellingpricestoincreasesalesvolume?
(3)HowwillincomebeaffectedifIchangethesalesmixofmyproducts?
....
ThebasicassumptionsofCVPanalysisisthatCVPanalysisassumesrelationscanbeexpressedasstraightlineswithintherelevantrange,whichmeansthatunitsellingpriceremainsconstant,unitvariablecostsremainconstant,andtotalfixedcostremainconstant.Iftheexpectedcostandrevenuebehaviourisdifferentfromtheassumptions,thentheresultsofCVPanalysisareoflimiteduse.
Theobjectiveofthecostanalysisisdeterminationoftotalfixedcostandthevariableunitcost.Thebasicmethodstoestimatethetotalcostsequationinclude:
(1)scatterdiagram;
(2)high-lowmethod;and(3)least-squaresregression.Hereleast-squaresregressionisusuallycoveredinadvancedcostaccountingcourses.Itiscommonlyusedwithcomputersoftwarebecauseofthelargenumberofcalculationsrequired.
Break-evenAnalysisThebreak-evenpointistheuniquesaleslevelatwhichacompanyneitherearnsaprofitnorincursaloss.Thebreak-evenpointmaybeexpressedinunitsorindollarsofsales.
ComputingIncomefromExpectedSalesTheincomegivenapredictedlevelofsalescanbecomputedasfollows:
SalesVolumeNeededtoEarnaTargetIncomeBreak-evenformulascanbeadjustedtoshowthesalesvolumeneededtoearnanyamountofincome.
MarginofSafetyMarginofsafetyisusedtoestimatehowmuchsalescandecreasebeforethecompanyincursaloss?
SensitivityAnalysisSensitivityanalysisisusedtoestimatetheeffectsofchangesinvariablessuchassalesprice,variablecosts,andfixedcosts.CVPanalysiscanbeusedtoshowtheeffectsofsuchchanges.
BudgetingandBudgetaryControl
BudgetsBudgetsareformalstatementsofacompany’splansexpressedinmonetaryterms,whichattempttocapturethefutureactivitiesofanorganization.Theyareusedbybusinesses,not-for-profit,government,educational,andothertypesoforganizations.
Theimportanceofbudgetinginclude
(1)definesgoalsandobjectives;
(2)promotesanalysisandafocusonthefuture;(3)motivatesemployees;(4)providesabasisforevaluatingperformance;(5)coordinatesbusinessactivities;(6)communicatesplansandinstructions.
BudgetCommitteeconsistsofmanagersfromalldepartmentsoftheorganization.Itprovidescentralguidancetoinsurethatindividualbudgetssubmittedfromalldepartmentsarerealisticandcoordinated.Flowofbudgetdataisabottom-upprocess.
Budgethorizonsareusuallyforoneyear,butmayextendforseveralyears.Theannualoperatingbudgetmaybedividedintoquarterlyormonthlybudgets.
Rollingbudgetsmeanthatthebudgetmaybeatwelve-monthbudgetthatrollsforwardonemonthasthecurrentmonthiscompleted.
MasterBudgetMasterbudgetisaformal,comprehensiveplanforthefutureofacompany.Itconsistsofseveralbudgetslinkedtogethertoformacoordinatedplanfortheorganization.
SalesBudgetSalesbudgetisthestartingpointinthebudgetingprocess.Mostoftheotherbudgetsarelinkedtothesalesbudget.Salespersonnelareofteninvolvedindevelopingthesalesbudgets.
MerchandisePurchasesBudgetMerchandisepurchasesbudgetprovidesdetailedinformationaboutthepurchasesnecessarytofulfillthesalesbudgetandprovideadequateinventories.
Thequantitypurchasedisaffectedby:
(1)Just-in-timeinventorysystems,whichenablepurchasesofsmaller,frequentlydeliveredquantities;
(2)Safetystockinventorysystems,whichprovideprotectionagainstlostsalescausedbydelaysinsuppliershipments.
SellingExpenseBudgetSellingexpensebudgetliststhetypesandamountsofsellingexpenses.Predictionsofexpensesarebasedonthesalesbudgetandpastexperience.
GeneralandAdministrativeExpenseBudgetGeneralandadministrativeexpensebudgetliststhepredictedoperatingexpensesnotlistedinthesalesbudget.Itincludesbothcashandnon-cashexpensesandisoftenpreparedbytheofficemanagerorpersonresponsibleforgeneraladministration.
CapitalExpendituresBudgetCapitalexpendituresbudgetliststhecashinflowsoroutflowspertainingtothedisposaloracquisitionofcapitalequipment,anditisusuallyaffectedbytheorganization’slong-termplans.
CashBudgetCashBudgetliststheexpectedcashinflowsandoutflowsfortheperiod.Itisatoolusedbymanagementtoavoidexcesscashbalancesorcashshortages.Informationfromotherbudgetsisusedinitspreparation.Informationfromthecashbudgetisusedtopreparethebudgetedincomestatementandbalancesheet.
ProductionandManufacturingBudgetsManufacturingcompaniesneedtoprepareadditionalbudgetsthatinclude:
productionbudgets,directmaterialspurchasebudgets,directlabourbudgets,andmanufacturingoverheadbudgets.
Productionandmanufacturingbudgetsprovidesdetailedinformationabouttheproductionnecessarytofulfillthesalesbudgetandprovideadequateinventories.
Directmaterialsbudgetprovidesdetailedinformationaboutthepurchasesofrawmaterialsnecessarytofulfilltheproductionbudgetandprovideadequateinventories.
Directlabourandmanufacturingoverheadbudgetsprovidesinformationaboutthelabourandmanufacturingoverheadcostsgiventhelevelofproductionfortheperiod.
PreparingFinancialBudgets
BudgetaryControl
CapitalBudgetingCapitalbudgetinganalyzesalternativelong-terminvestmentsanddecidingwhichassetstoacquireorsell.Thesedecisionsrequirecarefulanalysissince:
(1)Theoutcomeisuncertain;
(2)Largeamountsofmoneyareusuallyinvolved;(3)Investmentinvolvesalong-termcommitment;(4)Anydecisionmaybedifficultorimpossibletoreverse.
Zero-basedBudgetingZero-basedbudgetingarepreparedassumingnopreviousactivitiesfortheactivitiesbeingplanned.Managersmustjustifytheamountsbudgetedforeachactivity.Itispopularamonggovernmentandnon-profitorganizations.
FixedBudgetFixedbudgetsarepreparedforasingle,predictedlevelofactivity.Performanceevaluationisdifficultwhenactualactivitydiffersfromthepredictedlevelofactivity.Forexample:
Howmuchoftheunfavourablecostvarianceisduetohigheractivity,andhowmuchisduetopoorcostcontrol?
Toanswerthesequestions,wemustflexthebudgettotheactuallevelofactivity
Flexible(Variable)BudgetsFlexiblebudgetsarepreparedafteraperiod’sactivitiesarecomplete.Theyshowrevenuesandexpensesthatshouldhaveoccurredattheactuallevelofactivity.Flexiblebudgetsrevealcostvariancesduetogoodcostcontrolorlackofcostcontrol,whichimproveperformanceevaluation.
Sinceflexiblebudgetsprepareabudgetfordifferentactivitylevels,wemustknowhowcostsbehavewi
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