Man Acc

why it's important to calculate additional variances

it isolates the effects of differences in mix and yield in the manufacturing process

why it's important to plan variances

it identifies the ways the environment has changed and operational variances are those specifically due to a manager’s decisions

planning variance

measures the extent of change in the business's performance. they can be added or deducted from the original variance

what does the cost effective mix consist of

used and the expected yield and it will be calculated and set as a standard

why are variances calculated

it’s useful to know the financial impact of changes from the budgeted standard. This can help with decision making

mix formula

(actual quantity in standard mix proportions – actual quantity used) × standard price

yield formula

(actual yield – standard yield from actual input of material) × standard cost per unit of output

material usage formula

(standard quantity at standard prices) – (actual quantity at standard prices)

what happens to the price and usage variance in a mix situation

the price variance for the whole mix is calculated and the usage variance is then split into a mix variance and a yield variance, which together equal the total usage variance

difference between the sales and flexed budget

the sales budget reflects a certain volume and mix of sales and other budgets based on demand while flexed budget reflects a mix of products that's different to the original budget

sales contribution mix variance formula

(actual sales quantity – actual sales quantity in budget proportions) × standard contribution

sales volume variance formula

(actual sales quantity in budgeted proportions – budgeted sales quantity) × standard contribution

planning variance

measures the extent of change in the business's performance. they can be added or deducted from the original variance

ex ante standard

the original standard

ex post standard

price observed in the market

how are variances used by managers

to assess how the center is working compared to the budget and if adjustments are needed. they consider factors such as permanent environmental changes or uncontrollable factors regarding its prominence

difference between price and efficiency variances

price variance measures differences in input costs, while efficiency variance measures usage deviation

difference between mix and yield variances

they are sub variances of the efficiency variance. mix measures the cost difference between the actual and standard proportions of inputs used while yield measures the financial impact of the difference between the actual and standard output produced

periodic reporting

allows managers to compare their actual performance with the budget that they've prepared and agreed to

flexible budget

used to measure the impact of each decision maker’s actions on the organization’s overall performance. it helps to disentangle the individual effects of the various decisions as it’s based on actual activity levels

variance

the difference between the budget and the actual performance in each area

what can variance analysis provide

informed and constructive conversation about an employee’s performance and how to improve their ability to make decisions and predict effects on the future

output controls

simple, specified defined tasks carried out in the process

result controls

more complex tasks that can obtain results through different skills and judgement. e.g making a profit or being a head of a department

why is organizational structure is important regarding responsible decision making

the process also has to incorporate an organizational structure in which decision makers have the authority to commit the resources they need to implement the decisions for which they are responsible

6 examples of responsibility centers

•       profit centres

•       investment centers

•       cost centers

•       standards

•       discretionary (‘expense’)

•       revenue centres.

two aspects of a manager's actions that should be evaluated

the use of resources and the outcome

profit center

the centre’s costs are deducted from its revenues to calculate the centre’s profit

investment center

the investments’ target is calculated as a return on the capital invested

difference between standard and discretionary cost centers

standard perform specific work that can be measured while discretionary doesn't have a specific output related to the work

American Accounting Association in 1957 view on managers controlling costs and revenue

1.     they are responsible for all the expenditure incurred if they can control the quantity and price

2.     if they can only control the quantity but not the price paid then they are only responsible for the difference between actual and budgeted expenditure that is due to usage

3.     If they can’t control either the quantity or the price paid for the service, then they aren’t responsible

how to find the standard cost

it first must be calculated using the amount of resources and the expected time taken. this gives the estimated prices with regard to the level of output required by the budgeted sales

full absorption costing

an accounting method that assigns all manufacturing costs such as direct materials, direct labor, variable overhead, and fixed overhead to each unit produced

marginal costing approach

charges only variable costs (direct materials, labor, and variable overheads) to products, treating fixed production costs as period costs

sales margin volume variance formula

(actual quantity units - budgeted quantity units) x profit/contribution margin

direct materials price variance formula

(standard price - actual price) x actual quantity (kg,l etc)

direct labor rate variance formula

(standard price - actual price) x actual quantity hours

variable overhead price variance formula

(actual quantity hours x standard overhead rate) - actual spending

fixed overhead spending variance formula

standard spending - actual spending

fixed overhead capacity variance formula

(actual quantity hours - budget quantity hours) x standard overhead rate

sales margin price variance formula

(actual price - selling price) x actual quantity units

direct materials quantity variance formula

(standard quantity - actual quantity) x standard price

direct labor efficiency variance formula

(standard quantity hours - actual quantity hours) x standard price

variable overhead efficiency variance formula

(standard quantity hours - actual quantity hours) x standard overhead rate

fixed overhead efficiency variance formula

(standard quantity hours - actual quantity hours) x standard overhead rate

how are variances good for improving businesses

they highlight deviations from the budgeted (expected) performance, help improve areas that need it and emphasize opportunities to improve

why is analysis of the added value of each activity important

enables continuous improvements in quality and efficiency, which should be reflected in the firm’s budgets. gathering as much info as possible is important for improvements

kaizen budgeting

is when incentives are given to encourage everyone to provide suggestions and recommendations about how to improve the firm’s operations at any level. when improvements are reflected in the budget, there tends to be lower standard costs and higher efficiency

budget

a financial plan that goes into detail about the forthcoming year and how it'll make progress regarding the firm's vision and goals. it can be a control mechanism, a reference and a motivator

strategy

set of long-term goals that the firm aims towards which the organization devotes its resources to

strategic plan

forecasts the plan to progress towards the vision for the next few years. each year’s plan affects the budget and in turn the next year of the plan

top up and bottom up

dialogue between senior and lower-level management (often called participation) that enables top management to understand and consider the issues encountered by lower management and gives lower management a better understanding of the strategic plans of the company

managerial control

aims to guide people’s behavior within the firm. can be used to indicate the financial goals a firm’s people should aim for, and the financial boundaries within which they can act.

action and output controls

used to control tasks which are easy to define and for which outputs are easy to measure

results controls

when the measure of success will often be the results achieved by that department or person during a certain period of time

how results controls are assessed

through monetary performance as well as non financial measures such as staff morale, output efficiency and response to external changes

what does the cost represent

the quantity and quality of a certain direct material

what would the adopted business model do

1 - consider the level of automation needed for the production department the image of the product among its customers

2- consider the relationship management policies to be adopted to focus the supplier choice quality and price of direct materials and influence the choice of direct materials

3 - figure the firm’s human resource policy which would influence the direct labor choices and its efficiency

4 - consider the cost of direct material in the budget to reflect decisions of strategic relevance

what would documents include the budgets of

•       sales

•       production and inventories

•       direct labour, direct materials and other direct costs

•       machine hours

•       capital expenditure

•       cash

•       financing activities

•       financial investments

the 3 main budget documents

master budget, capital budget and cash flow budget. they mirror the IS, SoFP and CS

annual budget

represent the next year of a longer-term plan for configuring activities such as developing new products, expanding into new areas

master budget

includes budgets of direct labour, direct materials and other direct costs and capex aimed at maintaining or renewing tech. funds will partly come from sales and partly from borrowing and so the revenue budget line should align with the strategy

capital budget

a document that resembles the envisaged statement of financial position for the next year

what should the firm’s strategy result in

a master budget that meets the expectations of and satisfies the firm’s management

rolling budget

budgets prepared for periods shorter than a year. meant for firms that operate in more uncertain environments. e.g retail companies (consumer trends) and startups

how are struggles with estimating future cost for plans handled

costs are adjusted for the expected difference in the department’s work in the year ahead

pros and cons of adjusting costs for the expected differences in work a year ahead

pro: it’s cost effective con: it may contain inefficiencies which could get passed on to the next year

strategic standard costs

reflects the firm’s strategy so that when decision makers follow the budgets their actions will be consistent with it

managerial standard costs

should be accepted and agreed by those whose actions and performance will be measured against them, so that the decision makers will feel motivated to follow the budget guidelines

benefits of using ABC in the process of devising standard costs

more comprehensive and strategic approach to costing, explicit about each decision maker’s responsibility, info on the time taken and cost of different activities can be used to estimate the demand for services required in the budget period

zero based budget

•       identify and discontinue obsolete activities

•       increase staff involvement and understanding of how costs arise

•       identify changes in the business environment

•       allocate resources more effectively

limitation of the budgetary process

not focusing enough on strategy, being rigid and timeconsuming, creating an annual focus, encouraging staff to meet only the lowest targets and stifling initiative

incremental budgeting

prepare the budget by using the previous period’s budget and changing the value by a standard amount

activity based budgeting

inform the budgeted cost of service department level by using an indicator of use by different products or actions

annual budgets

represent the short-term implementation of a strategy, but managers should not lose sight of the long-term decisions necessary to implement that strategy

how long term decisions affect the company

by affecting the fixed costs, expanding or reducing the company’s capacity, modifying its market position, and introducing or removing new product/service lines

what can considering tvm for long term decisions do

enables us to compare present cash flows with cash flows in the near and distant future

capital budget

includes the budget of assets, liabilities and equity. it represents the amount and type of assets needed to implement the strategic design of the firm. it contributes with the master budget to the cash flow budget, indicating if additional financial capital is required for it

3 things that should be considered when making a long term decision about the capital budget

whether it's financial worthwhile, if there are any other comparable investments and the what the true value of the investment is

true value of investment

derived from the quality and quantity of its expected relevant cash flows over its expected operational life. the lower the quality, the less valuable. the farther away in time the expected cash flows are, the less valuable.

why is there a discount factor

cus the tvm’s effect of time and risk on the value of future cash flows causes a discount, which should be applied to future cash flows through a discounting factor to find a more accurate value

capital investment decision

require the forecasting of costs and revenues (or cost savings) for the life of the project under consideration

4 methods of measuring viability of projects

accounting rate of return (ARR), payback, internal rate of return (IRR) and net present value (NPV)

similarities and difference between IRR and NPV

• both use the time value of money, but make different assumptions concerning the reinvestment of the cash inflows which occur throughout a project’s life.

• IRR assumes that the reinvestment will be at the project’s IRR, whereas NPV assumes that the reinvestment will be at the cost of capital used to calculate NPV.

• In order to be accepted the IRR must be above the cost of capital, which means that the IRR method will always look better than the NPV of the same cash flows

why NPV may be better than IRR

the IRR can only be accepted if it’s above the cost of capital which makes it look better than the NPV but also less reliable as the cost of capital will become the benchmark for reinvestment rather than the IRR for the cash generated which is rather unrealistic

when is IRR useful

when there are two rates of return which can occur when the cash inflows are inconsistent through the years

payback strengths

useful if it is difficult to estimate inflows far into the future as it’s a risk-averse indicator that shows how quickly the money will come back into the business to cover the initial outflow. good for uncertain business environments

payback limitations

• doesn’t evaluate cash flows that occur after the payback period as it doesn’t consider if the return can be achieved by the investment.

• doesn’t recognize tvm and coincides with the accrual accounting method of dealing with fixed assets and calculation of net income.

• least theoretically correct method and can lead to incorrect decisions, especially if the largest cash flows occur near the end of a project’s life

why the capital investment results and individual yearly performance can’t provide good info together

the capital investment results won't relate to the individual yearly performance results as they don't deal with the annual write down of assets and depreciation charges, which would make managers not want to accept investments that don't have a high cashflow in the first year

how income tax can affect the net income

as net income increases so does the tax but the gov may provide reductions if certain requirements are met such as addressing pollution or global warming. tax isn't paid till after the trading period so is will be considered under the next period

lifecycle budgeting and costing

focuses on a particular product and explores whether that product is likely to be financially successful over its lifetime

6 aspects of product lifecycle

R&D, introduction, growth, maturity, decline and possibly costs of dismantling or disposing infrastructure

usual pattern of sales and price for R&D

no sales while the product is being developed. while it’ll be written off against profits, it is important for the long-term success of the business that R&D costs are covered by subsequent product contributions

usual pattern of sales and price for introduction

product appeals to early adopters who are willing to pay a high price, but the quantity of sales will be relatively low in this phase

usual pattern of sales and price for growth

hoped to be the most successful time and perhaps the longest. reputation has been established at the introductory stage, so prices are set lower to capture the growing interest in the product and enable it to compete with other suppliers. advertising maintains interest in the product

usual pattern of sales and price for maturity

product is well-established and prices are comparative with similar products. Sales are good and profits steady

usual pattern of sales and price for decline

occurs when the product has been overtaken by other subs which are perceived to be better (supplied by the same company or by competitors). price may be reduced further and sales will dip. possible to refresh the product but eventually it is likely to be withdrawn

usual pattern of sales and price for dismantling

Costs associated with this stage will usually arise after the life of the product is finished. A successful product should have earned enough to cover these costs

purpose of the lifecycle budgeting exercise

ensure that strategies are in place to make a viable product succeed as the market largely dictates the price. overall there should be a difference between the total price and total cost to make good profits across the product lifecycle

lifecycle costing

planning tool which is used from the design stage onwards to decide the strategic role of the product and how it is expected to perform over its life. enables the total return to be estimated but informs budgets and for managers to review and alter strategic plans when needed