Studied by 6 people
last updated: 13/03, 3.8 — 'budgeted income statement' (note: not included anything about the interpretation of variances in performance reports. may require further research to properly communicate.)
internal users of accounting
owners, managers/directors, employees
external users of accounting
shareholders, creditors, lenders, suppliers, government agencies, lobby groups
management accounting
the production of financial information and reports for the decision-making of internal users
financial accounting
the production of financial information and reports for the decision-making of external users
reports made in management accounting
costs, budgeted income statement, budgeted cash flow, and other operational budgets
reports made in financial accounting
income statement, balance sheet, cash flow statement, equity change statements
primary qualitative characteristics
relevance, faithful representation
enhancing qualitative characteristics
comparability, verifiability, timeliness, understandability
relevance
information has predictive and/or confirmatory value (materiality)
faithful representation
information is complete, neutral, and free from material error
comparability
information that has consistency in application of recognition and measurement methods over time to enable comparison
verifiability
information that different knowledgeable and independent observers could reach similar conclusions about
timeliness
information that is received in time to make a difference to the decision maker
understandability
information that is comprehensible within the decision context by a user (assumed reasonable knowledge of accounting & business and diligence willing to study information with)
reporting entity
an organisation with users of its reports who rely upon them as their sole or main source of information for decisions, and is thus required to comply with accounting standards, e.g. public companies, large proprietary companies, listed investment trusts
general purpose financial report (GPFR)
a report whose users rely upon them as it sole or main source of information for decisions
purpose of GPFRs
enables users to assess business performance, position, & liquidity, enables users to assess business financing & investment decisions, allows management to demonstrate compliance with statutory requirements
tasks of accountants in managing business operations
assess project risk, collect and process data into information and reports, record control and interpretation of statutory requirements, analyse and interpret financial information to provide reports for management, maintain internal controls
income statement
a statement of comprehensive income; details a company’s total comprehensive income comprising of all incomes and expenses
balance sheet
a statement of financial position; details a company’s assets, liabilities, and equity at a point in time
statement of changes in equity
an expansion on the balance sheet’s equity section; details changes in owner’s equity over a period, covering retained earnings, general reserves, asset reevaluation, and share capital
statement of cash flows
details cash flows to and from an entity in three sections; operating, investing, and financing
the purpose of external reporting
allows users to assess an entity’s performance, position, and liquidity
the purpose of internal reporting
assists in the management of assets, liabilities, income, and expenses, allows the business to reach goals and improve performance, sets standards and targets as through responsibility accounting
limits of external reporting
controlled by ASIC and ASX
limits of internal reporting
some businesses may not be able to afford the cost to carry out
regulations of financial reporting
conceptual framework (principles & rules), SAC 1 & 2 (statement of accounting concepts), legislations (e.g. corporations act 2001), independent auditor checks (required for select entities)
the role of accountants
to provide managers with the necessary information for them to maximise the entity’s financial performance
the functions of accountants
to select or design appropriate financial systems, record financial statements, produce and analyse both internal and external reports (e.g. CVP, capital investment, etc.), implement asset management strategies, and carry out cost accounting
equity finance
business finance contributed by owners
debt finance
business finance borrowed from external sources for a limited term
when choosing sources of business finance…
the term should align with the term of it’s use; avoid funding long-term assets with short-term finance, and don’t enter long-term obligations to handle short-term requirements
considerations when sourcing finance
cost (fees, interest, dividends), purpose (term), need to repay or not, effects of taxation (interest expense), effects on capital structure (leverage)
leverage, in finance sourcing terms, is…
the relationship between the two types of finance (debt and equity)
gearing (in finance sourcing)
to be lowly geared means to have a higher proportion of equity finance and to be highly geared means to have high borrowings. repayments must be made regardless of profitability, so a highly geared firm is financially risky.
overcapitalisation
equity is too high as funds are being used ineffectively. capital exceeds operating requirements, company pays more expenses than necessary. causes low returns to equity-holders (owners).
undercapitalisation
equity is too low, due to initially underestimation or rapid growth. poor working capital meaning the company cannot fund daily operations. causes liquidity issues, insufficient n-c assets (non-maximised profit), and low returns to equity-holders (owners).
what is investment?
a business’ management of cash surpluses to maximise profit
short-term finance options
bank overdraft, credit terms offered by suppliers, debt factoring, commercial bills
credit terms offered by suppliers
accounts payable
debt factoring
when entity A cannot meet debt repayments to entity B, they will factor their debt to entity C, who pays a proportion of the debt for them in exchange for A later repaying C in full plus fees.
commercial bills
also known as a bill of exchange, a type of non-bank loan—often from a company. a written promise of future payment.
long-term finance options
share capital, bank loans, lease finance, debentures, unsecured notes
share capital
capital which public companies earn by issuing shares
lease finance
companies rent out an item of plant & equipment for a fixed period. renters either have the option to purchase it (finance) or must return it (operating) at the end of the lease period.
debentures
fixed rate loans which are levied against collateral
unsecured notes
loans which are not secured by any collateral
short term investments
cash management trusts, the money market, term deposits
cash management trusts
raises money and then invests it into short-term securities, such as treasury notes, that accrue interest
the money market
the market in which financial institutions buy and sell debt instruments; promissory notes, bank bills, commercial bills, etc.
promissory notes
a type of bank loan. a written promise of future payment.
bank bills
a short-term bank loan, typically with a term of 30-180 days.
term deposit
an investment with a financial institution for a fixed period at a fixed rate.
long-term investments
ASX shares, debentures, unsecured notes, unit trusts, term deposits
ASX shares
shares listed to be bought and sold on the Australian Securities Exchange (ASX)
unit trusts
a trust that raises money that is invested in assets, such as fixed term bank deposits, land, and ASX shares.
what is the purpose of cost accounting?
estimate future job costs, establish realistic quotes and selling prices, develop budgets, compare estimated & actual costs, determine profitability of job, and manage inventory
cost classifications
relationship to cost object, behaviour, treatment to a product or accounting period, and time orientation
cost relationships
costs can either be easily traced back to the cost object (direct; direct materials & direct labour hours) or must be allocated on a predetermined overhead rate (indirect; overheads)
examples of indirect costs
managers’ wages, government rates, taxes, glue (shared indeterminably between jobs), insurance, depreciation, etc.
cost behaviours
costs are either constant (fixed), are dependant on the level of production (variable), or comprise of both fixed and variable elements (mixed)
examples of fixed costs
depreciation, full-time salaries, rent of premises, insurance, etc.
examples of variable costs
casual wages, raw materials, cost of sales, salesperson commission, etc.
examples of mixed costs
maintenance, electricity, water, etc.
cost treatments
costs can either be attributed to a product or job (product) or relate more broadly to a specific accounting period for which it brings no future economic benefit to the business (period)
cost time orientations
costs can either be accounted for in the past and have no impact on current economic decisions (sunk) or to be accounted for in the future and be relevant to economic decisions and costing considerations (relevant)
job order costing
a cost recording system that comprises of recording all the costs of a distinct product or service, used for small batches of identical products or for custom-made, unique products
process costing
a cost recording system that comprises of determining costs in parts for each step of a manufacturing process, used for large batches of identical products mass-produced over a prolonged time
standard costing
a cost recording system that comprises of determining the most efficient cost of manufacturing each individual product using predetermined standards, which are then later compared to actual costs (variance)
actual costing
costs are determined with exact, actual costs of each individual product. this cannot be done until the end of each accounting period, so is not often used
normal costing
costs are determined with the use of a predetermined overhead rate
predetermined overhead rate
(budgeted manufacturing overhead cost)/(budgeted allocation base)
determinants of price markups
desired rate of return on investment, marketplace competition, period costs which are still to be covered, and basic supply and demand relationships
determinants of standard costing estimates
analysis of the job or product, historical cost data, and what management considers acceptable or attainable
advantages of standard costing
allows for establishment of expected costs, acts as a target to aim for, allows for inefficient practices to be identified & eliminated, acts as a benchmark for comparison, and allows for cost minimisation
variances
the differences between actual and standard performance, considered either favourable (f) or unfavourable (uf)
types of variances
materials price variance, materials usage variance, labour rate variance, and labour efficiency variance
analysis of favourable materials price variance
unforeseen discount received, care taken in purchasing, change in material standard
analysis of unfavourable materials price variance
price increases, careless purchasing, and/or change in material standard
analysis of favourable materials usage variance
material quality above standard, effective use, and/or underestimation errors in material allocation to jobs
analysis of unfavourable materials usage variance
defective material, excessive waste, overestimation errors in material allocation to jobs, stricter quality control (more rejections), and/or theft
analysis of favourable labour rate variance
use of apprentices or workers who otherwise are paid below the standard pay rate
analysis of unfavourable labour rate variance
increases in wage rates
analysis of favourable labour efficiency variance
output produced faster than expected (high motivation, better equipment, etc.) and/or overestimation errors allocating time to jobs
analysis of unfavourable labour efficiency variance
output lower than standard expected for time period (lack of training, deliberate restriction, poor materials, etc.) and/or estimation errors allocating time to jobs
what is cost volume profit about?
the relationship between costs, volume of sales, and profit
the purpose of CVP analysis
helps establish selling prices, helps analyse the impact of sales volume on short-term profit, shows the impact of cost changes on profit, and helps analyse how the mix of products affect profits
profit =
(SP ⋅ QS) - [(VC ⋅ QS) + TF]
differential analysis
the analysis of differences in revenue and costs between alternate courses of action—finding the best allocation of scarce resources
break even point
the level of production at which total revenue is equal to total costs. (can also add target profit to TFC to determine the sales volume required to meet targets.)
BEP = TFC / CM
contribution margin
the contribution which is made by the sale of each unit towards covering fixed costs.
CM = SP – VC
margin of safety
the amount by which the value of expected or actual sales is greater than the break even point, illustrating risk.
MOS ($) = [actual or expected] sales / break even point (in sales revenue)
MOS (%) = MOS ($) / [actual or expected] sales
sales mix
when finding the break even point where multiple products are concerned, use a weighted average system.
sales mix % = QSa / QS
Σ CM = (CMa⋅sm%a) + (CMb⋅sm%b) + …
break even point = TFC / Σ CM
limitations of break even analysis
fixed costs are only fixed for a limited time, as all expenses will eventually increase; variable costs per unit may decrease as the business expands (economies of scale); a business may obtain discounts by bulk buying, thus reducing variable costs per unit
relevant information for differential analysis
relevant costs, differential costs, avoidable costs, opportunity costs, relevant income, and differential income
qualitative factors in the application of differential analysis
brand image, customers, employees, competitors, legal constraints
differential analysis for maximising profit where there are capacity constraints
calculate CM per unit of each product.
divide CM per unit by labour/machine hours taken to produce.
maximise production of the product(s) with the highest CM per hour first.
differential analysis for deciding whether or not to accept a special order
determine if the CM would be positive.
if there are capacity constraints, compare the total profits from accepting or rejecting the special order.
differential analysis for deciding to close down a product or department
determine whether the CM is positive or not.
compare the total profits from keeping or getting rid of the product/department—keep in mind that any fixed costs must be reallocated to other products/departments.
differential analysis for deciding to make or buy a component
compare the total cost per unit of making or buying it—make sure to include fixed costs.
