W02_L2_managementAccounting2023(1)
Course Overview
Course: comp3219 Engineering Management and Law Management Accounting and Company Finances
Instructor: Dr. Sarah Hewitt (previously Vahid Yazdanpanah)
Based on slides by Andy Gravell
Date: October 2024
Objectives
Covers fundamental topics in accounting and finance, including:
The fundamental accounting equation
Differences between financial and management accounting
Financial report standards and expectations
Company planning, control, and budgeting
Costs, cost centres, variable and fixed costs
A practical cost accounting exercise
Perspectives on the balanced scorecard, ethics, and externalities
Aim: Provide understanding and vocabulary for discussions with accountants rather than training as an accountant.
Background Reading
Recommended Text: Atrill & McLaney (2018/9), Accounting and Finance for Non-Specialists (11th edition)
Available in printed and electronic formats at the library
Important chapters include:
Measuring and Reporting Financial Position
Relevance and Behaviour of Costs
Full Costing
Budgeting
Capital Investment Decisions
Introduction chapter for background information
Fundamental Accounting Equation
Equation: Assets = Liabilities + Equity
Example: Borrowing for a car increases both assets and liabilities.
Selling shares increases cash and shareholder equity.
Maintained by double entry bookkeeping:
Each transaction recorded as a credit and a debit.
Ensures balances satisfy the accounting equation.
Bookkeeping and Company Accounts
Importance of maintaining accurate accounts:
Manages cash flow, tracks assets, equities, and liabilities.
Poor bookkeeping leads to unpaid taxes, fines, and potential fraud.
Small firms may outsource data entry to specialists.
Popular packages for data entry: Intuit Quickbooks, Sage Accounting, Zoho Books, Freshbooks.
As companies grow, they typically hire in-house accounting staff responsible for:
Accounts payable/receivable
Payroll
Reporting & financial statements
Financial control, tax and compliance
Two Main Branches of Accounting
Financial Accounting:
Produces annual reports for public and shareholders.
Must be audited for correctness.
Used by investors for decision-making regarding shares.
Management Accounting:
Provides up-to-date and confidential data.
Supports performance monitoring and management decision-making.
Other types include tax accounting, forensic accounting, and accounting information systems.
Financial Reports
Balance Sheet: Displays assets, liabilities, and equity at a specific moment.
Profit and Loss Report: Shows income versus expenses over time.
Equity Statement: Reflects retained earnings.
Cash Flow Statement: Reports on operational costs and investments.
Reports generally assume "going concern" status of the company.
Red flags for insolvency include inability to pay debts on time.
Liquidated assets often sell for less if in a hurry.
International Financial Reporting Standard (IFRS)
Fundamental qualitative characteristics:
Relevance
Faithful representation
Enhancing qualitative characteristics:
Comparability
Verifiability
Timeliness
Understandability
IFRS standards adopted in over 140 jurisdictions, including the UK.
U.S. adheres to its own Generally Accepted Accounting Principles (GAAP).
Financial Analysis
Importance of analyzing financial data before investment or transactions.
Metrics to consider:
Market Capitalization (market cap)
Earnings Per Share (EPS)
Beta (volatility measure)
The University of Southampton does not operate as a typical company with shares.
Management Accounting
Focused on analyzing information for business strategy and success.
Forward-looking compared to financial accounting.
Relies on predictive models rather than historical data.
Financial data is increasingly available on-demand.
Planning and Control
Establishes objectives and can generate conflict between stakeholders.
Strategic Decisions: Long-term plans to achieve organizational goals.
Operating Decisions: Short-term budgets to implement strategies.
Requires constant monitoring and control to ensure objectives are met.
Budgeting Approaches
Top-down: Senior managers dictate expectations, emphasizing strategy.
Bottom-up: Lower levels provide input on capabilities and resources needed, emphasizing operations.
Participatory: Budget negotiated across levels, leading to potential compromises.
Benefits of Budgets
Authorizes spending and promotes forward-thinking.
Aids in controlling costs and motivating managers towards performance.
Coordinates the activities of different departments within the business.
Costs
Avoidable Costs: Can be eliminated by choosing one alternative over another.
Unavoidable Costs: Costs that cannot be changed regardless of managerial decisions.
Cost Centres
Defined parts of an organization where costs are tracked and aggregated.
Examples: Departments or specific activities like assembly or inspection.
Useful for accountability and cost allocation.
Classification of Costs
Costs vary with activity; categorize as:
Fixed: Constant costs regardless of activity level.
Variable: Costs that fluctuate with production levels.
Cost Accounting and Profit Model
Profit model: π = pq - (F + wq)
Where:
π = profit, p = sales price, q = quantity sold, F = fixed costs, w = variable cost per unit.
Break-even analysis helps in understanding pricing strategies.
Cost Accounting Exercises
Practical exercises proposed to apply cost accounting concepts.
Encouragement to present findings in a structured table format.
Balanced Scorecard
Emphasizes the importance of measuring broader performance metrics beyond financial aspects.
Traditional measures like ROI could mislead strategies.
Ethics and Externalities
Consideration of social, environmental, and ethical impacts of corporate decisions.
Requires transparency and accountability for external costs.
International Transfer Tax
Discussion on global tax implications of multinational corporations.
OECD proposals for fair taxation among nations.
Conclusion
Upcoming discussions on exercises and practical applications of cost accounting.