A 14907 - Strategic Management Accoun6ng (2018-2019) Session 8 - PowerPoint PPT Presentation

A 14907 - Strategic Management Accoun6ng (2018-2019) Session 8 Budgets and Performance Management Paul G. Smith B.A., F.C.A

Course Objec6ves Students will learn to use a range of tools for cos2ng, decision making, planning and controlling and consider their applicability within the context of Strategic Management. They will also be able to read and understand a financial statement prepared according to Interna2onal accoun2ng Standards A 14907 Strategic Management Accoun6ng 3

Course Overview 1. Financial Vs Management Accoun4ng 10. Investment Decisions 2. Accoun4ng Principles and Valua4on Criteria – 11. Opera4onal Decisions PGS Current and Fixed Assets 3. Accoun4ng Principles and Valua4on Criteria – 12. Exam Current and Fixed Assets ..Cont’d PT 4. Financial Statement Analysis 13. Target Cos4ng and Life Cycle Cos4ng 5. Performance Measurement and Cost 14. Servi4za4on and Cost Management Accoun4ng 6. Exam 15. Performance Measurement, Sustainability and CSR LS 7. Strategic Management Accoun4ng 16. Voluntary Disclosure and Balanced Scorecard – Case Study 8. Budgets and Performance Management 17. Presenta4on and Discussion of Case Study PGS 9. Pricing Decisions 18. Exam A 14907 Strategic Management Accoun6ng 4

SESSION 8 OBJECTIVES A 14907 Strategic Management Accoun6ng 5

Objec6ves of Session 8 At the end of this session students will be able to: • Interpret a variance report and assess its implica2ons for management interven2on • Iden2fy behavioural aspects of budget management • Recommend strategies to prevent or remedy adverse behavioural aspects of budget management and harness posi2ve aspects • Evaluate alternate views of performance management. A 14907 Strategic Management Accoun6ng 6

RECAP PREVIOUS SESSION A 14907 Strategic Management Accoun6ng 7

Session 7 Recap • Introduc6ons and course objec6ves • Strategic Planning: Purpose, vision, mission, goals, objec6ves • Business Planning: Business Plans • Budge6ng: Budget process, flexible budge6ng, zero-based, ac6vity based • The role of Management Accoun6ng in suppor6ng: – Strategic choices/decisions – Monitoring and repor6ng A 14907 Strategic Management Accoun6ng 8

Session 7 Valida6on • What do we mean by strategic planning? • What is the difference between Statements of Purpose, Vision and Mission? • What are the differences between Strategic Plans, Business Plans and Budgets? • What is a SWOT analysis? • What is a PEST analysis? • Describe the budget se_ng process • How does Management Accoun6ng support the Strategic Management Process? A 14907 Strategic Management Accoun6ng 9

Session 8 Overview • Standard cos6ng and variance analysis. • Profit-related performance measures. • Performance measurement in not-for-profit organiza6ons. • Behavioural aspects of performance management: gaming; achievement mo6ve; crea6ve accoun6ng. • Alterna6ve views on performance management: ac6vity-based cos6ng; balanced scorecards; just- in-6me; and total quality management.

BUDGETS AND PERFORMANCE MEASUREMENT A 14907 Strategic Management Accoun6ng 11

Two principles of performance management • Responsibility – Responsibility for performance must be clearly allocated and delineated. • Controllability – Employees should be held accountable only for what they can control.

Types of responsibility centre • Cost centre • Revenue centre • Profit centre • Investment centre

Budget Example 6.1 A 14907 Strategic Management Accoun6ng 14

Fixed budget variance report (example 6.2)

Flexed budget variance report (example 6.3)

Flexible Budgets -example Capacity 0Hr 200hr 400hr 600hr 800hr 1000hr 1200hr 0% 20% 40% 60% 80% 100% 120% € € € € € € € Costs Supervision 600 600 600 1,050 1,050 1,050 1,500 Indirect Labour 300 600 900 1,200 1,500 1,800 2,100 Maintenance 100 120 140 160 180 200 220 Deprecia6on 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Supplies 37 50 62 75 87 100 112 Power 1,073 1,233 1,394 1,554 1,715 1,875 2,036 3,110* 3,603 4,096 5,039 5,532 6,025 6,968 * Stand-by cost A 14907 Strategic Management Accoun6ng 17 Source: An Insight into Management Accoun6ng – John Sizer

Standard cos4ng • Three types of standard: – Basic standard • Constant over 6me – Ideal standard • Perfec6on – Ajainable standard • Under normal but efficient levels of ac6vity

Variance analysis • A volume variance measures the efficiency with which resources are used by showing the difference between actual usage and standard usage. • A rate variance measures the difference between the actual price paid and the expected price.

Analysis of profit variance

BASIC COST ACCOUNTING A 14907 Strategic Management Accoun6ng 21

Cost Accoun6ng 1. The design and opera4on of cost systems and procedures 2. The determina4on of costs by departments, func6ons, responsibili6es, ac6vi6es, geographic areas, periods and other cost centres and cost units. The costs may be historical costs, actual costs or future or standard costs 3. The comparison of costs of differing periods, of actual costs with es6mated and standard costs, and cost of different alterna6ves 4. The presenta4on and interpreta4on of cos4ng informa4on as an aid to management in controlling the current and future opera6ons of the company. Communica6on device – Device for Mo6va6on – Appraisal device (before/amer) (standards, budgets/actual results) – A 14907 Strategic Management Accoun6ng 22

Classifica6on of costs • By Func4on : produc6on, marke6ng, sales, distribu6on, research and development, finance, administra6on – By Cost Centre : loca6on, person or item of equipment (or group thereof) for which costs may be ascertained for cost control • By Cost Unit : unit of product or service, or 6me (or combina6on of these) in rela6on to which costs may be ascertained or expressed. A job, a batch, contract, or product group depending on the nature of produc6on. A 14907 Strategic Management Accoun6ng 23

Cost elements • Within cost centres and cost units costs are further classified into cost elements – Material cost – Labour cost – Expenses (services, u4li4es, deprecia4on) • Cost elements are either – Direct or, (can be allocated as a whole) – Prime costs – Indirect (needs to be appor4oned or allocated) – Overhead costs A 14907 Strategic Management Accoun6ng 24

Overhead Costs • Fixed costs: Costs of 6me and accumulate irrespec6ve of produc6on or volume of output e.g. rent, insurance • Variable costs: Tends to vary with output • Semi-variable: Has characteris6cs of both A 14907 Strategic Management Accoun6ng 25

Overhead Alloca6on SM 1 Bang-Bang Manufacturing Ltd Worksheet How to allocate overhead expenses to product costs A 14907 Strategic Management Accoun6ng 26 Source: An Insight into Management Accoun6ng – John Sizer

Cos6ng Systems • Job Cos6ng • Process Cos6ng A 14907 Strategic Management Accoun6ng 27

Job Cos6ng: Bill of Materials - motorcycle example Part Quan4ty Supplier Unit Cost € Cost Frame 1 In-house 250 250 Front fork & suspension 1 A 500 500 Engine 1 In-house 1,000 1,000 Gearbox and Clutch 1 In-house 1,000 1,000 Wheels & Tyres 2 B 500 1,000 Brakes 2 C 250 500 Starter motor 1 D 75 75 Lights 1 D 100 100 Petrol tank 1 E 50 50 Saddle 1 F 125 125 Speedometer 1 D 50 50 Labour - Assembly 4 hours 40 per hour 160 Factory Overhead 10 per hour 40 Total Cost €4,800 A 14907 Strategic Management Accoun6ng 28

Process Cos6ng – Example XYZ Limited WIP Cost Completed Equivalent Total Per Unit € Units Units Units € Process 1 Costs Incurred Materials 4,000 800 200 1,000 4 (4,000/1,000) Labour 1,800 800 100 900 2 (1,800/900) Overhead 1,700 800 50 850 2 (1,700/850) 7,500 Average Unit Cost 8 Units Completed 800 Units in Work-in-Process (WIP) 200 Value Inventory WIP Value € 6,400 (800 x €8) Equivalent Finished Units Materials - 100% 200 @ 4 800 Labour - 50% 100 @2 200 Overhead - 25% 50 @2 100 1,100 A 14907 Strategic Management Accoun6ng 29 Source: An Insight into Management Accoun6ng – John Sizer

VARIANCE ANALYSIS A 14907 Strategic Management Accoun6ng 30

Variance Analysis • Materials Variances (Price/usage) • Labour Variances (Rate/ Efficiency) • Overhead Variances (Efficiency/ Volume/Cost) A 14907 Strategic Management Accoun6ng 31

Materials Variances Material cost variance = Actual cost (actual quan6ty x actual price) – Standard cost (standard quan6ty x standard price). Can be analysed into: Material price variance = (Actual quan6ty x Actual price) – (Actual quan6ty x Standard price) Material usage variance = (Actual quan6ty x Standard price) – (Standard quan6ty x Standard price) A 14907 Strategic Management Accoun6ng 32 Source: An Insight into Management Accoun6ng – John Sizer