- •Lecture Notes b.Devlin
- •Introduction
- •Management accounting
- •1 Financial accounting.
- •2 Management accounting
- •To provide information about product costing to be used in financial
- •To provide information for planning, controlling and organising.
- •To ascertain the cost of a product. This information is used to value stock which is required for external reporting .
- •To assist management in the decision-making process.
- •Marginal costing
- •Decision making
- •In the short-run all fixed costs remain unchanged and therefore treated as irrelevant.
- •Variable overhead
- •2 Shut-down decisions
- •3 Make or Buy
- •Variable overheads £2
- •Variable cost of production £7
- •Variable overhead £2
- •4 Limiting factor decisions
- •5 Profit Planning or cost profit volume analysis
- •Cost volume profit analysis
- •It is possible to ascertain these by using a break-even chart or by using formulae.
- •Budgeting
- •1. Sales Budget 19x0
- •Production budget 19x0
- •3. Materials Usage Budget 19x0 (Component usage)
- •4. The Material Purchase Budget 19x0
- •Cash summary December 19x0
- •Depreciation never appears in a cash budget as it is a non-cash expense.
- •In respect to credit transactions time lags have to be built into the cash budget
- •It is useful to have a memo column to record items which will appear in the balance sheet if required. Budgeted Profit and Loss Account for six months ending 30 June 19x1
- •Budgeted Balance Sheet as at 30 June 19x1
- •Investment appraisal methods
- •1 Payback
- •2 Accounting rate of return
- •Investment appraisal compares the cash outflows with the cash returns from the project and these cash flows take place over a lengthy period of time.
- •3 Net Present Value
- •6 Profitability Index
- •The costing
- •Overheads
- •Indirect materials used in Dept. B £35,000
- •Insurance of machinery £5,000
- •In the absorption stage an overhead recovery (absorption) rate (oar) is calculated. The formula used is:
- •30,000 Machine hrs.
- •35,000 Labour hrs.
- •In recent years there has been criticism of the traditional system of costing for overheads ( Kaplan & Cooper ). Traditional cost systems were designed when:
- •Information processing costs were high;
- •Inspection cost:
- •Standard costing
- •Variances represent the differences between standard costs and actual costs. The standard cost is what the cost is estimated to be and this is compared to what the cost is actually.
- •Variable Overhead Variance
- •Variable overhead efficiency variance
- •Responsibility accounting
- •It is a ‘ system of accounting that segregates revenues and costs into areas of personal responsibility in order to assess the performance attained by persons to whom authority has been assigned’.
- •Net Residual Income
1. Sales Budget 19x0
Product |
Units |
Price |
Total sales |
Dag |
20,000 |
£25 |
£500,000 |
Mag |
18,000 |
£20 |
360,000 |
Pag |
15,000 |
£22 |
330,000 |
|
-------- |
|
------------ |
|
53,000 |
|
£1,190,000 |
|
-------- |
|
------------ |
Comment: the sales budget is computed from the sales information stated, the budget shows the the individual product sales units,sales value and total sales value. The budgeted sales for 19x0 are 53,000 units with a total sales value of £1,190,000.
Production budget 19x0
|
Dag |
Mag |
Pag |
Sales units (from the sales budget) |
20,000 |
18,000 |
15,000 |
Add closing stock |
3,600 |
4,500 |
2,400 |
|
-------- |
-------- |
-------- |
|
23,000 |
22,500 |
17,400 |
Less opening stock |
3,000 |
3,000 |
3,000 |
|
------- |
-------- |
-------- |
Budgeted output |
20,600 |
19,500 |
15,400 |
|
-------- |
-------- |
-------- |
Comment: the production budget is the required production to meet sales budget requirements and changes in stocks, thus since closing stock requirements are greater than opening stocks then production must be increased to cope with required production for sales and increased closing stock requirements.
3. Materials Usage Budget 19x0 (Component usage)
Product |
Prod. units |
A |
B |
C |
D |
E |
Dag |
20,600 |
61,800 |
82,400 |
123,600 |
41,200 |
20,600 |
Mag |
19,500 |
39,000 |
58,500 |
78,000 |
39,000 |
19,500 |
Pag |
15,400 |
77,000 |
30,800 |
46,200 |
46,200 |
15,400 |
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
|
55,500 |
177,000 |
30,800 |
171,700 |
247,800 |
55,500 |
|
-------- |
--------- |
-------- |
--------- |
--------- |
-------- |
Comment: the material usage budget is the component usage. This is simply the production units from the production budget equated to the component specification in each production unit eg. material usage of compont A is the total usage of component A in Dag, Mag and Pag.
4. The Material Purchase Budget 19x0
Component |
A |
B |
C |
D |
E |
Material usage budget |
177,800 |
171,700 |
247,800 |
126,400 |
55,500 |
Closing stock |
32,000 |
40,000 |
48,000 |
32,000 |
8,000 |
|
---------- |
---------- |
--------- |
---------- |
---------- |
|
209,800 |
211,700 |
295,800 |
158,400 |
63,500 |
Opening stock |
40,000 |
50,000 |
60,000 |
40,000 |
10,000 |
|
--------- |
--------- |
--------- |
--------- |
--------- |
|
169,800 |
161,700 |
235,800 |
118,400 |
53,500 |
Price per component |
50p |
35p |
60p |
55p |
£1.00 |
|
£84,900 |
£56,595 |
£141,480 |
£65,120 |
£53,500 |
Comment: The material purchase budget gives the cost and quantity of each component that is needed to be purchased and the overall cost of all five components. This budget is based on the material usage budget adjusted for oppening and closing stocks.
Cash Budgets
The cash budget shows the forecasted cash inflows and outflows of a business and measure the estimated balance or deficit of cashfor a particular period.
The advantages of planning for cash resources is essential since a business cannot survive without cash.
Advantages:
The cash budget ensures adequate cash planning and control
Cash deficits are revealed and management can respond by taking appropriate action. Remedial action can be taken by injecting more capital into the business, by borrowing, by examining their credit policy or by deferring capital expenditure.
Cash surpluses are indicated and once recognised need to be managed. Management can invest cash in the short-term, or avail of trade discounts by bulk purchasing materials or finance capital projects.
Example
The London Toy Co. Ltd. commenced operations in December 19x0 with a capital of £600,000 which was raised through an issue of 600,000 ordinary shares of £1 each. The proceeds of the share issue were paid into the company bank account. During the course of December a number of transactions took place and these are summarized below.