ATACF — U3

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.

1. sales mix % = QS_a / QS

2. Σ CM = (CM_a⋅sm%_a) + (CM_b⋅sm%_b) + …

3. 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

1. calculate CM per unit of each product.

2. divide CM per unit by labour/machine hours taken to produce.

3. 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

1. determine if the CM would be positive.

2. 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

1. determine whether the CM is positive or not.

2. 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.