MS

TOP LEVEL PLANNING (CONSIDERATIONS)

• Covers at least five years

• Embodied by company vision and mission

BUSINESS-LEVEL STRATEGY (CONSIDERATIONS)

• Focuses on how to attain and satisfy customers

• Focuses on increasing profits

CORPORATE-LEVEL STRATEGY (CONSIDERATIONS)

• Make business decision that affects the whole company

• Short-term decisions to achieve long-term goals

OBJECTIVES (CONSIDERATIONS)

[SMART]

Specific

Measurable

Attainable

Realistic

Time-bound

BASIC FUNCTIONS OF MANAGEMENT (CONSIDERATIONS)

[POSDC]

Planning: Plan course of action to achieve goals

Organizing: Bringing together the resources (physical, financial, and human)

Staffing: Manning the organization structure

Directing: Supervision, motivation, leadership, and communications

Controlling: measurement of achievement against standards

MANAGEMENT ADVISORY SERVICES VS. MANAGEMENT ACCOUNTING

MAS

Person: Management Consultant

Objective: Improve the company’s use of resources and capabilities

Scope: Broad

MA

Person: Employee

Objective: Provide reports to support decision-making

Scope: Financial planning, cost control, performance measurement, etc.

TOP LEVEL (LEVELS OF MANAGEMENT)

• Compose of Board of Directors and Chief Executives

• Corporate level strategy

• Overall scope and direction of the entire organization

MIDDLE LEVEL (LEVELS OF MANAGEMENT)

• Compose of Departmental Heads and Managers

• Business level strategy

• Concerned with market positioning, customer relations, and gaining a competitive advantage

LOWER LEVEL (LEVELS OF MANAGEMENT)

• Compose of Supervisors and Foreman

• Operational strategy

• Concerned with day-to-day activities and processes within specifically departments or units

FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING: OUTPUT

FA: Financial Statements

MA: Reports

FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING: USERS

FA: External Users (Primary)

MA: Internal Users (Only)

FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING: REPORTING GUIDELINE

FA: Must conform with reporting standards

MA: Does not conform with reporting standards

FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING: NECESSITY

FA: Mandatory

MA: Not Mandatory

FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING: CONTENT

FA: Summarizes past transactions

MA: Strong emphasis on the future

FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING: SOURCES

FA: Internal

MA: Internal and external

FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING: EMPHASIS

FA: Data should be objective and verifiable

MA: Data should be relevant

FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING: FOCUS

FA: Focuses on precision

MA: Focuses on timeliness of information

FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING: COVERAGE

FA: Reporting for company as a whole

MA: Focuses on segments of a company

ROLES OF CONTROLLER

Accounting-related function

Utilization of company resources

• Planning and control

• Reporting and interpreting

• Evaluating and consulting

• Tax administration

• Government reporting

• Protection of assets

• Economic appraisal

ROLES OF TREASURER

Financial management

Involves collection/disbursement of cash

• Provision of capital

• Investor relation

• Short-term financing

• Banking and custody

• Credit and collection

• Investments

• Insurance

STRATEGIC DECISIONS

• Clarify your vision (VM Statement)

• Gather and analyze information

• Formulate a strategy (look for competitive edge)

• Implement strategy

• Evaluate and control

VM STATEMENT

Mission: Define business, objectives, and approach to reach objectives

Vision: Desired future position

MICHAEL PORTER’S THREE GENETIC STRATEGIES

1. Cost leadership: Great quality and affordable

2. Differentiation: Innovative but less affordable

3a. Cost focus: Niche market and affordable

3b. Differentiation focus: Niche market and innovative

IDENTIFYING AND BUILDING RESOURCES AND CAPABILITIES

Strategic analysis: Achievement by SWOT Analysis

Balance sheet info about the following:

• Current resources

• Long-term productive assets

• Intangible assets

MICHAEL PORTER’S FIVE COMPETITIVE FORCES

• Competition in the industry

• Potential of new entrants into an industry

• Power of suppliers

• Power of customer

• Threat of substitutes

ROLES OF MANAGEMENT ACCOUNTANT IN IMPLEMENTING STRATEGIES: IMPLEMENTING STRATEGY

Planning

• Thinking process

• Communicate goals and how to attain them

Control

• Take actions to implement planning decisions

• Decide on performance evaluation

Feedback

• Link planning and control to help future decision-making

ROLES OF MANAGEMENT ACCOUNTANT IN IMPLEMENTING STRATEGIES: SUPPORT MANAGERS BY PROVIDING INFORMATION

Problem-solving

• Emphasize by strategy and planning

Scorekeeping & Attention-directing

• Emphasized by control

ROLES OF MANAGEMENT ACCOUNTANT IN IMPLEMENTING STRATEGIES: ENHANCE VALUE OF MANAGEMENT ACCOUNTING SYSTEMS

Customer Focus

Value Chain and Supply Chain Analysis

• Add value through:

  • Research and development

  • Design of products, service, and process

  • Production

  • Marketing

  • Distribution

  • Customer service

• Managers are customers of management accounting information

Key Success Factors

• Cost and efficiency

• Quality

• Time

• Innovation

Continuous Improvement and Benchmarking

MAIN BODIES THAT OFFER CMA CERTIFICATION

• Institute of Management Accountants USA

• Institute of CMA Australia

• CMA of Canada

• Charter Institute of Management Accountants of UK

IMA’S OVERARCHING ETHICAL PRINCIPLES

[HFOR]

Honesty

Fairness

Objectivity

Responsibility

STANDARDS

[CICC]

Competence

Confidentiality

Integrity

Credibility

STANDARDS: COMPETENCE

• Maintain appropriate level of professional expertise(CPD)

• Perform duties in accordance to laws, regulations and standard

• Decision support info must be accurate, clear, concise and timely

• Recognize limitations that would preclude responsible judgment

STANDARDS: CONFIDENTIALITY

• Keep information confidential, unless authorized or legally required

• Inform relevant part regarding appropriate use of confidential information

• Monitors subordinates’ activities to ensure compliance

• Refrain from using for unethical or illegal advantage

STANDARDS: INTEGRITY

• Mitigate actual conflicts of interest

• Refrain conduct that would prejudice carrying out duties ethically

• Abstain from activities that might discredit the profession

STANDARDS: CREDIBILITY

• Communicate information fairly and objectively

• Disclose all relevant information that could influence users understanding

• Disclose delays or deficiencies in information

RESOLUTION OF ETHICAL CONFLICT

1. Discuss issue with immediate supervisor unless supervisor is involved

2. Clarify ethical issues by initial confidential discussion with an IMA Ethics Counselor or other impartial advisor

3. Consult own attorney as the legal obligations and right

7 GLOBAL TRENDS IN MA

1. The shift to predictive accounting

2. Business analytics embedded in Enterprise Performance Management Method

3. Managing Information Technology and Shared Services as a Business

4. Expansion from product to channel and customer profitability analysis

5. Co-existing and improved management accounting methods

6. Management accounting’s expanding role with the Enterprise Performance Management (EPM)

7. The need for better skills and competency with behavioral change management

   
   

GLOBAL TRENDS IN MA: (2) BUSINESS ANALYTICS EMBEDDED IN ENTERPRISE PERFORMANCE MANAGEMENT METHOD

Primary methods of Business Analysis

• Descriptive

• Predictive

• Prescriptive

Benefits of Business Analytics

• More informed decision-making

• Greater revenue

• Improved operational efficiency

GLOBAL TRENDS IN MA: (4) EXPANSION FROM PRODUCT TO CHANNEL AND CUSTOMER PROFITABILITY ANALYSIS

Shift from product driven differentiation

Service driven differentiation

Differentiated customer microsegments

GLOBAL TRENDS IN MA: (5) CO-EXISTING AND IMPROVED MANAGEMENT ACCOUNTING METHODS

Stage 1 (prior to 1950): Cause determination and financial control

Stage 2 (by 1965): Provision of information for management planning and control

Stage 3 (by 1985): Reduction of waste in resources used in business processes

Stage 4 (by 1995): Generation or creation of value

GLOBAL TRENDS IN MA: (6) MANAGEMENT ACCOUNTING’S EXPANDING ROLE WITH THE ENTERPRISE PERFORMANCE MANAGEMENT (EPM)

Main themes of EPM

• Target setting

• Integrated business planning

• Performance Measurement and Reporting (PMR)

• Analytics

GLOBAL TRENDS IN MA: (7) THE NEED FOR BETTER SKILLS AND COMPETENCY WITH BEHAVIORAL CHANGE MANAGEMENT

Roles of Managers and Supervisors in times of change

• Communicator about the change

• Advocate for the change

• Coach for employees

• Liaison to the project team

• Resistance manager

STEPS IN DATA ANALYTICS

Step 1. Data: Raw and unorganized

Step 2. Information: Provide meaning and relevance on who, what, when, where

Step 3. Knowledge: Adding understanding and interpretation on why and how things happen

Step 4. Insight: Recognizing meaningful patterns, trends, correlations, anomalies, or opportunities

Step 5. Action: Translated into tangible outcomes, decisions, or interventions

WHAT IS ABSORPTION COSTING?

• Conventional format

• Used for external reporting

• Segregates cost according to function

WHAT IS VARIABLE COSTING?

• Contribution Margin format

• Useful for management accounting (internal)

• Segregate cost according to behavior

VARIABLE COSTING: FIXED OVERHEAD

-VC-

Period Cost

ABSORPTION COSTING: FIXED OVERHEAD

-AC-

Product Cost

WHAT IS THE ONLY DIFFERENCE BETWEEN ABSORPTION COSTING AND VARIABLE COSTING?

Fixed Overhead

AC: Product Cost

VC: Period Cost

IF VARIABLE SELLING & ADMIN EXPENSE IS GIVEN ON A PER UNIT BASIS, MULTIPLY IT BY _____

Units SOLD. Keyword is “SELLING”

IF ONLY VARIABLE ADMIN EXPENSE IS GIVEN ON A PER UNIT BASIS, MULTIPLY IT BY ____

Units PRODUCED

VIABLE COSTING IS ______ BECAUSE FOH IS EXPENSED OUTRIGHT

Always UNDERSTATED

WHICH COSTS ARE INVENTORIED AND WHICH COSTS ARE EXPENSED OUTRIGHT?

Product Costs are INVENTORIED

Period Costs are EXPENSED OUTRIGHT

WHEN PRODUCTION = SALES, HOW DOES AC NET INCOME COMPARE WITH VC?

AC net income = VC net income.

WHEN PRODUCTION = SALES, HOW DOES ENDING INVENTORY COMPARE WITH BEGINNING INVENTORY?

Ending Inventory = Beginning Inventory

WHEN PRODUCTION > SALES, HOW DOES AC NET INCOME COMPARE WITH VC?

AC net income > VC net income

WHEN PRODUCTION > SALES, HOW DOES ENDING INVENTORY COMPARE WITH BEGINNING INVENTORY?

Ending Inventory > Beginning Inventory

WHEN PRODUCTION < SALES, HOW DOES AC NET INCOME COMPARE WITH VC?

AC net income < VC net income

WHEN PRODUCTION < SALES, HOW DOES ENDING INVENTORY COMPARE WITH BEGINNING INVENTORY?

Ending Inventory < Beginning Inventory

THEORETICAL CAPACITY

100% efficiency on production

PRACTICAL CAPACITY

Allowance for downtime, rest, etc.

NORMAL CAPACITY

Allowance for a period of time (5 years)

MASTER-BUDGET CAPACITY

Number of units produced for the current year

ACTUAL COST SYSTEM

DM, DL, OH = APAQ

NORMAL COST SYSTEM

DM, DL = APAQ ; OH = SPAQ

EXTENDED NORMAL/FLEXIBLE BUDGET

DM, DL, OH = SPAQ

STANDARD SYSTEM/STATIC BUDGET

DM, DL, OH = SPSQ

RECONCILING NET INCOME BETWEEN VC AND AC: ACTUAL COSTING

Net Income – VC XX

Fixed cost in EI XX

Fixed cost in BI (XX)

Net Income – AC XX

RECONCILING NET INCOME BETWEEN VC AND AC: NORMAL COSTING

Net Income – VC XX

Fixed cost in EI XX

Fixed cost in BI (XX)

Overapplied OH XX

Underapplied OH (XX)

Net Income – AC XX

RECONCILING CONTRIBUTION MARGIN AND GROSS PROFIT

Contribution Margin XX

Variable S&A Expense XX

FO based on units sold (XX)

Gross Profit XX

COMPUTATION OF ENDING INVENTORY

Beginning inventory (units) XX

Production (units) XX

Sales (units) (XX)

Ending inventory (units) XX

REVENUE DRIVER: VARIABLE COSTING

Driven by unit level of sales

REVENUE DRIVER: ABSORPTION COSTING

Driven by unit level of sales;

Unit level of production; and

Chosen denominator level

PERFORMANCE ISSUES: ABSORPTION COSTING

Overproduction results in more capitalized fixed costs, resulting to increased profit

CHERRY PICKING

• A type of manipulation scheme

• Involves manufacturing products that absorb the highest amount of fixed cost

• Regardless of demand

MANAGEMENT COUNTERMEASURES FOR FIXED COST MANIPULATION SCHEMES

• Based managers, bonuses on profit calculated using variable costing

• Lengthen the period used to evaluate performance

• Careful budgeting and inventory planning

• Incorporate an internal carrying charge for inventory

• Include financial AND nonfinancial variables in performance evaluation

VARIABLE COST IN TOTAL

-VCT-

Increase/decrease in proportion to units produced or sold

VARIABLE COST PER UNIT

-VCPU-

Constant

FIXED COST IN TOTAL

-FCT-

Constant

FIXED COST PER UNIT

Change indirectly with number of units produced or sold

ASSUMPTIONS AND LIMITATIONS (CVP-BEP)

• All costs are classified as either FIXED or VARIABLE

• Fixed cost remains constant within the relevant range

• Total revenue and total cost is linear over the relevant range

• For a multiple product companies, the selling prices, costs, and sales mix does not change

• No significant change in inventory level during period under review

SENSITIVITY ANALYSIS: DEFINITION (CVP-BEP)

• A.k.a. What-if or Simulation

• A financial model

• Determine how output variables are affected by changes in input variables

• Focus is on the effect of the profit

SENSITIVITY ANALYSIS: HOW TO ANALYZE SENSITIVITY (CVP-BEP)

1. Define the base case of the model

2. Calculate the output variable for a new input variable, leaving all other assumptions unchanged

3. Calculate the sensitivity

SENSITIVITY ANALYSIS: HOW TO ANALYZE SENSITIVITY (CVP-BEP)

1. Define the base case of the model

2. Calculate the output variable for a new input variable, leaving all other assumptions unchanged

3. Calculate the sensitivity

SENSITIVITY ANALYSIS: FIXED COST (CVP-BEP)

Inverse effect to profit

Direct effect to breakeven

SENSITIVITY ANALYSIS: UNIT VARIABLE COST (CVP-BEP)

Inverse effect to profit

Direct effect to breakeven

SENSITIVITY ANALYSIS: SALES MIX DOES NOT CHANGE (CVP-BEP)

Depends

SENSITIVITY ANALYSIS: UNIT SELLING PRICE (CVP-BEP)

Direct effect profit

Inverse effect to breakeven

SENSITIVITY ANALYSIS: NUMBER OF UNITS SOLD (CVP-BEP)

Direct effect to profit

Inverse effect to breakeven

CLASSIFICATION OF COSTS: FUNCTIONAL

Manufacturing

Selling

Administrative

CLASSIFICATION OF COSTS: BEHAVIORAL

Variable

Fixed

Mixed

CLASSIFICATION OF COSTS: NATURE OF EXPENSE

Payroll

Utility cost

Sales commissions

License fees

Insurance

Repairs

Property taxes

Legal fees

Travel costs

Office supplies

Rent

Advertising and promotion

Accounting expenditures

METHODS OF COMPUTING BEP

TR = TC

Where:

TR = SPU (X)

TC = FC + VCU (X)

COST BEHAVIOR ASSUMPTIONS

Relevant Range Assumption: Band of activity within which costs behavior patterns are linear/valid

Time Assumption: Patterns are true only over a specified period of time

BEP (FORMULA)

= Fixed Cost / CM Ratio

= Sales – MOS

BEP IN UNITS (FORMULA)

= Fixed Cost / CM per unit

= Sales in unit – MOS in units

CM PER UNIT (FORMULA)

= SP per unit – VC per unit

= CM per unit / Sales in units

= Fixed Cost / BEP in units

= Profit / MOS in units

= Change in Fixed Cost / Change in BEP in units

CM RATIO (FORMULA)

= CM per unit / SP per unit

= CM / Sales

= Fixed Cost / BEP

= Profit / MOS

= Change in Fixed Cost / Change in BEP

= 1 – VC Ratio

= Net Profit Ration / MOS Ratio

FIXED COST (FORMULA)

= Total Cost – Variable Cost

= Total CM – Profit

= BEP in units x CM per unit

= BEP x CM Ratio

VARIABLE COST (FORMULA)

= VC per unit / SP per unit

= VC / Sale

= 1 – CM Ratio

MARGIN OF SAFETY (FORMULA)

= Sales – BEP

= Profit / CM Ratio