Management accounting
2 questions ( that has red circles on them p4 and p5 )
p4 (theory)
p5 (theory + calculation)
total 1500 words including calculation
Unit code: H/508/0489
Unit 5 –
Assessor: Sujata suresh / kumutha krishnan
Professional Studies Department
Management Accounting
Module level: 4
Credit value: 15
Unit type: core
Professional Studies Department
Management Accounting
Learning outcome:
4
Learning outcome:
Compare ways in which organizations could use management accounting to respond to financial problems.
topic: identifying financial problems
Professional Studies Department
Management Accounting
| Pass |
Merit |
Distinction |
|||
| Compare ways in which organizations could use management accounting to respond to financial problems | |||||
| P5 Compare how organizations are adapting management accounting systems to respond to financial problems. |
M4 Analyse how, in responding to financial problems, management accounting can lead organisations to sustainable success.. | D3 Evaluate how planning tools for accounting respond appropriately to solving financial problems to lead organizations to sustainable success.. |
Learning outcomes and Assessment Criteria
Management Accounting
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Learning objectives
Upon completion of this Lecture, students should demonstrate an understanding of.
organizations could use management accounting to respond to financial problems by use of KPI
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Introduction
The purpose of management accounting in the organization is to support competitive decision making by collecting, processing, and communicating information that helps management plan, control, and evaluate business processes and company strategy.
Management accounting helps to forecast the future. Forecasting helps decision to be made and answers questions like: Should a company invest more in equipment or not ?
Helping in Make-or-buy Decisions.
Forecasting Cash Flows.
Helping Understand Performance Variances.
Analysing the Rate of Return etc.
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Benchmarking
The comparison of business outputs and systems with other like or different organizations.
Benchmarking is about finding ,adapting and using best practice.
Benchmarking can help organizations to :
Assess how well they are performing
Set realistic performance targets
Search out new ideas and practices
Stimulate creativity and performance innovation
Drive improvement through an organisation
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Using benchmarking
Benchmarking is the name given to the process of measuring the organization’s operations, products and services against those of competitors recognized as market leaders, in order to establish targets which will provide a competitive advantage.
The stages of benchmarking are:
1. Decide what are of activity to benchmark (e.g. customer services, business processes in particular departments, quality of employees, standard of training).
2. Select a competitor who is reputedly the best in the area of activity to be benchmarked. Major companies in one country may target an international competitor rather than domestic company. In some benchmarking situations the competitor may agree to an exchange of information because both parties believe they can benefit from the exchange.
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3. Decide on the appropriate measurements to be used in defining performance levels.
4. Determine the competitor’s strengths and compare these with the company’s own record.
5. Use the information collected and the basis for an action plan. To be effective, this action plan must involve all grades of employee working in the area of activity.
Management Accounting
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Key Performance Indicator
A key performance indicator (KPI) is a measure used to reflect organisational success or progress in relation to a specified goal.
The purpose of KPIs is to monitor progress towards accomplishing the strategic objectives that are typically communicated in a strategy map.
KPIs are typically included in a reporting scorecard or dashboard that enables top management, the board or other stakeholders to focus on the metrics deemed most critical to the success of an organisation.
Financial KPIs are generally based on income statement or balance sheet components and may also report changes in sales growth (by product families, channel, customer segments) or in expense categories. Non-financial KPIs are other measures used to assess the activities that an organisation sees as important to the achievement of its strategic objectives.
Key Performance Indicators ( KPI)
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Typical non-financial KPIs include measures that relate to customer relationships, employees, operations, quality, cycle-time, and the organisation’s supply chain or its pipeline. Some prefer to use the term ‘extra-financial’ rather than non-financial, suggesting that all measures that contribute to organisational success are ultimately financial.
In addition to financial and non-financial, other common categorizations of performance indicators are quantitative versus qualitative; leading or lagging; near-term or long-term; input, output or process indicators etc.
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Some key financial performance indicators and formulae for calculation
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Profitability ratios
| Ratio | Meaning | ||
| Return on capital employed Profit from operations _________________________x 100 Total equity + Non-current liabilities |
Return on capital employed (ROCE) is the best measure of profitability, indicating how successful a business is in utilising its assets. | ||
| Operating profit percentage(PROFIT MARGIN) Operating profit (PBIT) _________________x 100 Revenue |
A low net profit margin (NPM) indicates low selling prices or high costs. Comparative analysis will reveal the level of prices and costs in relation to competitors |
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Profitability ratios
| Gross profit percentage Gross profit _________________x 100 Revenue |
The gross profit margin considers the profitability of the actual production or trading element of the business. A low margin could indicate selling prices are too low or cost of sales too high. |
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Gross Profit margin as a KPI
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Net Profit Margin as a KPI
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Liquidity Ratios
Ratio Meaning
Current ratio
Current assets
_____________
Current liabilities
The current ratio should ideally fall between 1:1 and 2:1 It indicates the extent to which the claims of short-term creditors are covered by assets that are expected to be converted to cash in a period roughly corresponding to the maturity of the claims.
Acid test ratio (quick ratio)
Current assets – Inventories
______________________
Current liabilities This is calculated in the same way as the current ratio except that inventories are excluded from current assets.
This ratio is a much better test of the immediate solvency of a business because of the length of time necessary to convert inventories into cash.
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Current and Quick Ratios as KPIs
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Efficiency or working capital Ratios
Ratio Meaning
Trade receivables collection period
Trade receivables
_________________x 365 days
Revenue /credit sales A long average collection period probably indicates poor credit control, but it may be due to other factors such as overseas sales where the collection period will be much longer, or a deliberate decision to extend the credit period to attract new customers
Trade payables payment period
Trade payables
_________________x 365 days
Cost of sales/credit purchases
If the payments period is very low, then the business might not be making the best use of its cash by paying suppliers early. If the period is very long, then this is a free source of credit, but the business must be careful not to harm relations with suppliers.
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Efficiency or Working capital Ratios
Ratio Meaning
Inventory holding period in days
Inventories
_________________x 365 days
Cost of sales
This ratio indicates whether inventory levels are justified in relation to cost of sales. The LOWER the DAYS, the healthier the cash flow position
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The Accounts Payable Turnover KPI measures the rate at which your company pays off suppliers and other expenses. This ratio is important for understanding the amount of cash that your business spends on suppliers during any given period. It shows how many times over the course of the year your business is able to pay off its accounts payable.
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The Accounts Receivable Turnover KPI measures the rate at which you collect on outstanding accounts. The problem in maintaining a large bill for a customer is that you are essentially offering them an interest-free loan. Monitoring this metric is essential to ensure that accounts receivable is collecting on bills in a timely manner. This KPI is an essential piece of understanding your organization’s cash flow process.
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The Inventory Turnover KPI measures how often you are able to sell off your entire in-stock inventory each year. This KPI is closely related to your supply chain and indicates the ability of your organization to generate sales and increase revenue. As well, it’s important to move aging inventory since it the cost of carrying inventory increases at the same time the value of that inventory decreases.
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Debt and gearing /leverage ratio
Ratio Meaning
Gearing
Non current liabilities
__________________________x 100
Total equity + Non current liabilities Gearing gives an indication of long-term liquidity and the financial risk inherent within the business. Highly geared companies have to meet large interest commitments before paying dividends and may have problems raising further finance if expansion is necessary.
Management Accounting
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ACTIVITY 01
Management Accounting
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ACTIVITY 01
(OMR in ‘000’)
Sales 3000 1500
Cost of sales (1950) (1050)
Gross profit 1050 450
Distribution costs (390) (135)
Administration expenses (250) (190)
Operating profit 410 125
Interest (150) (90)
Profit before taxation 260 35
Taxation (75) (30)
Profit after taxation 185 5
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2019
OMR ‘000’ 2018
OMR ‘000’
Noncurrent assets 3975 3150
Current assets
Inventory 375 150
Receivable 450 300
Cash 450 150
Total Assets 5250 3750
Equity and Liabilities
Ordinary share capital (OMR 1 per share) 1800 1200
Share premium 900 0
Reserves 450 300
Noncurrent liabilities
10% Loan notes 1600 1000
Current liabilities
Loans and other borrowing 300 1050
Other payables 200 200
Total Equity and liabilities 5250 3750
Statements of financial position as at 31st December
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Ratio for financial year ended December 2017 Benchmark
Gross profit ratio 38%
Net profit ratio 29%
Return On Capital Employed (ROCE) 9%
Current ratio 1.8:1
Quick ratio 1:1
Inventory days 55 days
Receivables days 50 days
Payable days 65 days
Gearing ratio 40%
Other relevant information:
Benchmarks – Industry average
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You are required:
Using benchmarks, calculate key performance indicators (financial and non-financial) & address the key results .
Management Accounting
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References
DRURY, C. (2015) Management and Cost Accounting. 9th Ed. Cengage Learning.
EDMONDS, T. and OLDS, P. (2013) Fundamental Managerial Accounting Concepts. 7th Ed. Maidenhead: McGraw-Hill.
HORNGREN, C., SUNDEN, G., STRATTON, W., BURGSTALHER, D. and SCHATZBERG, J. (2013) Introduction to Management Accounting. Global Ed. Harlow: Pearson.
SEAL, W. et al (2014) Management Accounting. 5th Ed. Maidenhead: McGraw-Hill.
Hugh Coombs, David Hobbs, Ellis Jenkins, 2005,Principles and Applications: SAGE Publications Ltd .
The Institute of Management Accounting (1997-2015), http://www.imanet.org/resourcespublications/student-educators/students/what-is-management-accounting
Atrill, P and McLaney, E 2009, Management Accounting for Decision Makers, 6th edn, Prentice Hall Financial Times, Pearson Education
The Institute of Management Accounting (1997-2015), http://www.imanet.org/resources-publications/student-educators/students/what-ismanagement-accounting
rat Finance Institute, n.d. Qualittative characteristics of Accounting
Images credit– Google subject related pictures
Management Accounting
Professional Studies Department
Unit code: H/
08/0489
Unit 5 –
Management Accounting
Assessor: Sujata suresh / kumutha krishnan
Professional Studies Department
Management Accounting
Module level: 4
Credit value:
5
Unit type: core
Professional Studies Department
Management Accounting
Learning outcome:
1
Learning outcome:
Explain the use of planning tools used in Management Accounting
topic: Using budgets for planning & control
Professional Studies Department
Management Accounting
Learning objectives
Upon completion of this Learning Outcome, students should able to explain the use of planning tools used in Management Accounting
To realize the above objective the student should be able to:
Demonstrate an understanding on application of budgets and alternative methods of budgeting
Explain the different types of pricing strategies
Explain the common costing systems and how cost systems differ depending on the cost activity.
Explain the application of PESTEL, SWOT, balance scorecard and Porter’s five force analysis in strategic planning process.
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What is planning?
Planning forces management to think ahead systematically in both the short term and the long term. An organization should never be surprised by developments that occur gradually over an extended period of time because the organization should have implemented a planning process.
When expected changes are gradual, planning occurs in a fairly stable environment, and routine budget planning procedures may be used.
Planning Tools :
Budgets
Pricing and costing
Strategic planning
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Budget – A Planning Tool
Budgeting is an essential tool for management accounting for both planning and controlling future activity.
A budget is a “quantified plan of action for a forthcoming accounting period” that can be set from the top down or from the bottom up.
Its objectives are to:
Ensure that the organization achieves its objectives
Encourage planning for the short and long term
Communicate ideas and plans for the employee and the organisation
Coordinate activities that work towards the common goal
Provide a framework for responsibility accounting
Establish a system of control for measuring performance
Motivate employees to improve their performance
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Annual Budget
Management Accounting
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Functional Budgets
Master Budgets
Eg: Production budget
Sales budget
Raw material usage budget
Labour cost budget
Eg: Cash budget
Budgeted income statement
Budgeted balance sheet
Benefits of Budgets
To assist with the achievement of the organization’s objectives :The organization’s objectives are quantified and drawn up as targets to be achieved within the timescale of the budget.
To compel planning: Planning forces management to look ahead, to set out detailed plans for achieving targets for each department, operation and (ideally) each manager. It should also help to anticipate problems.
To communicate ideas and plans: A formal system is necessary to ensure that each person involved is aware of what he or she is to do. Communication may be one
way, where managers give instructions to staff, or there might be a two-way dialogue where the staffs feedback their suggestions to management which may be incorporated into the formal plan.
Management Accounting
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Benefits of Budgets
To motivate managers to strive to achieve the budget goals:
by focusing on participation
by providing a challenge/target
To control activities:
by comparison of actual with budget (attention directing/management by exception)
management by exception is a process where a manager’s attention and effort can be concentrated on investigating significant deviations from the expected results
To evaluate the performance of managers:
by providing a means of informing managers of how well they are performing in meeting targets they have previously set
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Disadvantages of Budgets
It is difficult, if not impossible, to estimate revenues and expenses in a
business enterprise realistically.
It is not realistic to write out and distribute a company’s goals, policies and guidelines to all the supervisors.
Budgeting places too great a demand of time on management, especially to revise budgets constantly. Too much paperwork is required for budgeting.
Budgeting takes away management flexibility.
The success of budgetary control depends upon the support of the top management. If there is lack of support from top management, then this will fail.
A budget cannot be used as a substitute for management. According to Welsch,
“A budget is not designed to reduce the managerial function to a formula. It is a managerial tool”.
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Budgeting Process
The complete budget preparation process is started with preparing sales forecast and then the following budgets:
Sales budget – Production budget (Material Budget – Labour Budget – Purchases budget – Overheads budgets) – Distribution and administration budget (R&D – Marketing & Selling costs …) – Financial budget (Cash budget – Budgeted Income Statement – Budgeted Balance sheet).
Functional budgets – examples include purchasing, marketing, material usage
Master budget – Cash budget, Budgeted Income Statement, Budgeted Balance Sheet
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Activity 01- BUDGETS -EXAMPLES
XYZ company produces three products X, Y and Z. For the coming accounting period budgets are to be prepared based on the following information.
Budgeted sales
,000 at RO100 each
4,000 at RO1
0 each
3,000 at RO150 each
Budgeted usage of raw material
| Opening Inventory (In units) | 500 | 800 | 700 | |
| Closing Inventory (in units) | 600 | 1000 |
Management Accounting
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Activity 01- BUDGETS -EXAMPLES
Budgeted usage of raw material
Raw materials inventory budget
Labour Hours & Rate
| RM11 | RM22 | RM33 | |
| Product X (in Kg) | |||
| Product Y (in Kg) | |||
| Product Z (in Kg) | |||
| Cost per unit of material | RO5 | RO3 | RO4 |
| Opening Inventory (in Kg) | 21000 | 10000 | 16000 |
| Closing Inventory (in Kg) | 18000 | 9000 | 12000 |
| Expected Labour hour | 4 hrs | 6 hrs | 8 hrs |
| Expected hourly rate | RO9 |
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Solution
Management Accounting
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Solution
Management Accounting
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Solution
Management Accounting
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Cash Budget
A cash budget is a statement in which estimated future cash receipts and payments are tabulated in such a way as to show the forecast cash balance of a business at defined intervals.
The usefulness of cash budgets is that they enable management to make any forward planning decisions that may be needed, such as advising their bank of estimated overdraft requirements or strengthening their credit control procedures to ensure that customers pay more quickly
Cash inflow – cash outflow + opening balance of cash = closing balance of cash
Remember:
closing cash balance at end of Month = opening cash balance at 1st day of next month
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Activity 2 – Cash Budget
Management Accounting
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Management Accounting
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Master Budgets
The master budget provides a consolidation of all the subsidiary budgets and normally consists of a budgeted income statement, budgeted statement of financial position, and a cash budget.
As well as wishing to forecast its cash position, a business might want to estimate its profitability and its financial position for a coming period. This would involve the preparation of a budgeted income statement and statement of financial position, both of which form a part of the master budget.
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Activity 3 – Master Budgets
ABC Ltd intends to start up in business on 1 July 2021. They have supplied you with the following information:
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Required:
Prepare a cash budget and budgeted income statement for the half-year to 31st Dec 2021, and a budgeted balance sheet, as at 31st Dec 2021.
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Activity 3 – Solution
ABC Ltd
Prepare a monthly cash budget, a budgeted profit and loss account (income statement) and a closing balance sheet
Management Accounting
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Management Accounting
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ABC Ltd – Budgeted Income Statement for 6 months to 31ST DEC 2020
Sales
Less, Cost of Sales
Purchases
Less, closing stock
Gross Profit
Expenses:
Rent
Salaries & Expenses
Depreciation
Net Loss
RO000
236
20
200
96
32
RO000
254
216
38
328
(290)
We include depreciation in P&L A/c but never in cash budget
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25
ABC Ltd – Budgeted Balance Sheet
as at 31ST DEC 2020
Non-current Assets:
Equipment at cost
Less, Depreciation
Current Assets
Stock
Debtors
Cash
TOTAL ASSETS
RO000
320
32
20
96
1,342
RO000
288
1,458
1,746
48+48
Management Accounting
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26
Management Accounting
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Management Accounting
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Reference List :
DRURY, C. (2015) Management and Cost Accounting. 9th Ed. Cengage Learning.
EDMONDS, T. and OLDS, P. (2013) Fundamental Managerial Accounting Concepts. 7th Ed. Maidenhead: McGraw-Hill.
HORNGREN, C., SUNDEN, G., STRATTON, W., BURGSTALHER, D. and SCHATZBERG, J. (2013) Introduction to Management Accounting. Global Ed. Harlow: Pearson.
SEAL, W. et al (2014) Management Accounting. 5th Ed. Maidenhead: McGraw-Hill.
Hugh Coombs, David Hobbs, Ellis Jenkins, 2005,Principles and Applications: SAGE Publications Ltd .
Atrill, P and McLaney, E 2009, Management Accounting for Decision Makers, 6
th edn, Prentice Hall
Management Accounting
Professional Studies Department
Professional Studies Department
Management Accounting
Professional Studies Department
Management Accounting