MANAGEMENT DEVELOPMENT PROGRAMME: FINANCIAL MANAGEMENT BY Navitha Sewpersadh CA (SA) UKZN INSPIRING GREATNESS UKZN INSPIRING GREATNESS
COST ACCOUNTING UKZN INSPIRING GREATNESS
Introduction The Constitution says: National, provincial and municipal budgets and budgetary processes must promote transparency, accountability and the effective financial management of the economy, debt and the public sector. (Section 215) • In South Africa the great recession has led to the need to tighten the management of the fiscus, including financial resources in the Public Service. • The rating downgrades that SA experienced will increase the cost of capital to government. • Government has a responsibility towards its citizens to expend public finances in an effective, efficient and economic manner. In order to do so, sound financial management practices are required in terms of legislation, thus placing a high burden of accountability on all civil servants. UKZN INSPIRING GREATNESS
ESSENTIAL CONCEPTS DEFINITION OF FINANCIAL MANAGEMENT: The planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization. Financial management refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized function directly associated with the top management. UKZN INSPIRING GREATNESS
Principles of financial management • Consistency: your financial policies and systems must remain consistent over time. • Accountability: you must be able to explain and demonstrate to all stakeholders how you have used your resources and what you have achieved. • Transparency: your organisation must be open about its work and its finances, making information available to all stakeholders. • Integrity: individuals in your organisation must operate with honesty and propriety. • Financial stewardship: your organisation must take good care of the financial resources it has been given and ensure that they are used for the purpose intended. • Accounting standards: your organisation's system for keeping financial records and documentation must observe accepted external accounting standards. UKZN INSPIRING GREATNESS
Principles of PFM reforms in SA • Comprehensiveness and integration • Political oversight and a focus on policy priorities • Using information strategically • Changing behaviour by changing incentives • Ensuring budget stability and predictability while facilitating change at the margin UKZN INSPIRING GREATNESS
Aims of the PFMA • To regulate financial management… • To ensure all revenue, expenditure, assets, and liabilities … are managed efficiently and effectively; • To provide for the responsibilities of persons entrusted with financial management; • Applicable to all public entities , however the following are excluded from schedule 3 the Reserve Bank, Auditor General, higher education institutions, and a constitutional institution (reference to S47(4), they have their own acts) UKZN INSPIRING GREATNESS
Cost Containment Measures – Good financial management and sound accounting practices can support cost containment measure such as developing a cash and investment policy for donations and other external investment structure. – PFMA section 38 together with Chapter 11 of Treasury Regulations, requires the accounting officer to take effective and appropriate steps to collect all money due to the Department, including as necessary: • Maintenance of proper accounts and records for all debtors, including part payments, and • Referral of matters to the state attorney, where economical, to consider legal demand and possible legal proceedings in court. • Writing off debts owed to the state. UKZN INSPIRING GREATNESS
Cost Containment Measures – Proper Debt Management could curtail losses entails, such as: • Preparing and reviewing the debtors age analysis on a monthly basis. • Part of risk management (in later slides) is the review of credit control measures and the implementing of early settlement incentives. • Generally debts that are outstanding for more than 90 days have a higher risk of being unrecoverable. Monitoring of the percentage of debt outstanding for more than 90 days is recommended. • Refer matters to state attorney if economical (cost benefit ratio) or consider writing off if deemed uneconomical. UKZN INSPIRING GREATNESS
Costing in Business Costing can be useful to management in: • Planning • Assessing alternatives and decision- making • Monitoring outcomes UKZN INSPIRING GREATNESS
Factors influencing productivity by Prof. Mudit Katyani UKZN INSPIRING GREATNESS
Financial Management Process Financial, social and environmental impacts Manage towards IMPACT achieving desired results What outcomes were achieved and how, forms inputs into our next financial year OUTCOMES End products, or service OUTPUTS Plan, budget deliverables implement and monitor Business/ operational processes ACTIVITIES to convert inputs into outputs Inputs – raw materials, INPUTS labour, overheads, etc UKZN INSPIRING GREATNESS
Product Costing – Summary UKZN INSPIRING GREATNESS
TERMS & CONCEPTS • Direct costs are physically traced to a cost object. • Indirect costs are allocated using a cost-allocation base. UKZN INSPIRING GREATNESS
TERMS & CONCEPTS Overheads: Include the following: • Indirect material – supplementary materials, eg. cleaning products, colouring matter, glue, screws, lubricants, waste products • Indirect labour – all wages and salaries not directly related to manufacturing process, eg. employer contributions (pension, medical, unemployment insurance, workmen’s compensation), wages of cleaning staff, casual labour, overtime, shift expenses, leave pay, bonuses, salary of factory foremen, wages of security personnel • Other overheads – all other manufacturing costs, eg. depreciation, leasing of equipment, insurance, property tax, electricity, water, telephone UKZN INSPIRING GREATNESS
ENTITIES Service entities: ➢ earn income mainly from the rendering of services ➢ trading inventory and cost of sales accounts are not necessary Trading entities: ➢ earn income mainly by purchasing finished goods/inventory and selling them at a profit ➢ cost of sales and inventory accounts are necessary Manufacturing entities: ➢ purchases raw material which it uses to manufacture products and then sells these products at a profit ➢ additional costs that serve as basis for calculation of manufacturing cost of finished goods or products (cost of sales) UKZN INSPIRING GREATNESS
MANUFACTURING ENTITIES • As manufacturing process takes place in steps, products will be at different stages of production at any given moment • These different stages of completion may be differentiated as follows : • unprocessed inventory - raw material • partially completed inventory - work-in-progress • completed inventory - finished products UKZN INSPIRING GREATNESS
Profit determination Comparison of : Service entity Income earned Expenses form services Profit incurred rendered Trading entity and Manufacturing entities Sales – Cost Expenses of sales = Profit incurred Gross profit UKZN INSPIRING GREATNESS
19 Manufacturing Companies INCOME STATEMENT BALANCE SHEET Inventoriable Product Costs Sales when sales - Finished occur Materials Goods Cost of Inventory Inventory Sales (Product cost) - Work in Operating Period Process Costs Expenses Inventory = Operating Income UKZN INSPIRING GREATNESS
Product Costs vs Period Costs Product costs are costs identified with goods produced or purchased for resale . These costs first become part of the inventory on hand, sometimes called inventorial costs. Inventorial costs become expenses in the form of cost of goods sold only when the inventory is sold. Period costs are deducted as expenses during the current period without going through an inventory stage. UKZN INSPIRING GREATNESS
Group Exercise Classify the following items as EITHER: Product cost, indicate whether it is direct material, direct labour or manufacturing overheads OR Period cost, indicate whether it is a marketing/selling or an administrative cost. 1. Raw materials used to manufacture products. 2. Wages of workers who handle material during the production process 3. Advertising costs 4. Depreciation of a vehicle used by the managing director 5. The production manager’s salary 6. Lease payments on manufacturing equipment 7. Lease payments on vehicles used by sales personnel 8. Depreciation on manufacturing equipment 9. Rent on factory building 10.Cleaning material used by production workers UKZN INSPIRING GREATNESS
Variable and Fixed Cost Behaviour UKZN INSPIRING GREATNESS
TERMS & CONCEPTS UKZN INSPIRING GREATNESS
Break-Even Point UKZN INSPIRING GREATNESS
CVP Scenario Cost-volume-profit (CVP) analysis is the study of the effects of output volume on revenue (sales), expenses (costs), and net income (net profit). Per Unit Percentage of Sales Selling price R1.50 100% Variable cost of each item 1.20 80 Selling price less variable costs R .30 20% Monthly fixed expenses: Rent R3,000 Wages R13,500 Other fixed expenses R1,500 Total fixed expenses per month R 18,000 UKZN INSPIRING GREATNESS
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