Management accounting - Appunti

{chapter 15}

Management accounting : The nature of management accounting

MANAGEMENT VS. FINANCIAL

Financial accounting

- Focuses on preparation of financial statements required by GAAP.

Prepared for use by external users.

‣ is about external decisions

↪

• Banks (eligibility for loans : profitability of a company, balance between short and long term)

Provides summary of an entity’s financial condition and results of activities.

‣

Management accounting

- Assist managers in formulation and implementation of organization’s strategy

(product acquisition, supply chain location)

Management accounting is about internal needs

↪ (not external)

Applies to all organizations

‣ Use both quantitative and qualitative information.

‣ • Difficult to understand which informations are important

- Internal needs (manager needs) :

Decision-facilitating information : improve decisions

‣ Decision-influencing information : affects employees’ behaviours in positive ways

‣

- Manager :

Supply manager : choose the best supplier (reliable, convenient )

…

‣ Production management : which component should be bought

‣

Accounting jobs

Management accountant: Certified management Controller Treasurer

- - -

accountant (CMA)

Responsible for design Frequently highest Responsible for cash

‣ ‣ ‣

and operation of Professional level accountant. management.

‣

management designation of example : raising

Has both financial and ↪

‣

accounting system knowledge of cash when needed by

management

management borrowing or issuing

accounting

accounting principles stock and investing

responsibility

and techniques excess cash.

Reports to Chief

‣ Financial Officer (CFO)

Comparison Management accounting Financial accounting

Necessity

- Optional - Required

- Information’s value to management (internal) - Requirements of FASB, SEC, IRS …

Purpose

-

- Produce information for planning, implementing, - Produce information for outside users.

and control functions. Used after

-

Used before the act (used to plan)

- 1 - 4 {chapter 15}

Users

- Internal users. - External users

Managers. Shareholders.

‣ ‣

Individuals who assist in analysis. Creditors.

‣ ‣ Government agencies etc.

‣

Underlying structure

- Information to assist in decision making related to: - Accounting Equation :

Measurement. Assets = Liabilities + Shareholders’ Equity.

‣ ‣

Control.

‣ Alternative choices.

‣ Understand each part of the organization

- Source of principle

- Information usefulness for decision making - GAAP (according to where the company is listed)

Tailor made for each company (no general

‣ principles) Time orientation

- Primarily future oriented - Primarily past oriented

example forecasts, estimates, plans. - Reporting of financial history

↪

- Some historical information for predictive value.

Can be misleading especially after Covid

‣ • Covid : increase of cost of all raw material

due to transportation problems Information content

- Both monetary and non-monetary information - Primarily monetary events

accounting transactions

Ceasing cost (costi cessanti) ↪

‣ • Make or buy : need of both quantitative and

qualitative infos

- Varies on the situation : need to understand the

logic underlying Information precision

- Information frequently needed quickly. - Uses some approximations.

- Precision sometimes sacrificed for speed in - However, precision usually greater than in

reporting. Management Accounting.

Report frequency

- Can be monthly, weekly, daily, or even more - Annually with less detailed interim reports.

frequently.

May need real-time access to information.

‣ Report timeliness

- Quickly to be useful for decision making. - Usually, several weeks to months after fiscal close

of accounting period

Report Entity

2 - 4 {chapter 15}

- Usually relatively small parts of the organization - Primarily organization as a whole.

(e.g., departments, product lines, divisions,

subsidiaries, etc.) Liability Potential

- Little or none because reporting and supporting - Threat exists when there is misleading reporting to

documentation is internal. external parties.

Similarities

- Many of same consideration make sense for GAAP also male sense for internal decision making

- Accounting systems usually designed to provide information for both

- Reports from both are used in decision making by users

MANAGEMENT ACCOUNTING INFORMATION

-

Purpose and use

- Measurement purpose Control purpose Alternative courses of action

- - -

purpose

Measurement of revenues, Evaluate operations and (if

‣ ‣

costs and assets needed) assign corrective Analyze information and

‣

action to personal/organization choose best course of action

unit responsible

Characterisation of information

- Historical information Future estimates

- -

Score keeping Problem solving

‣ ‣

how are we doing? what is best way to deal with a problem?

↪ ↪

Attention directing Influencing impact

‣ ‣

what problems require looking into? influences actions of managers

↪ ↪

Measurement

-

- Full cost accounting

Measures resources used in performing some activity

‣ Full cost = direct costs + indirect costs

‣ • Direct costs : are costs directly traced to goods or services

• Indirect costs : are fair share of costs incurred jointly in producing goods or services

Control

-

- Use of responsibility centres

Costs, revenues, and/or assets are identified to and measured by responsibility center

‣ Actual results are compared to a budget or benchmark

‣ Corrective action taken by person(s) responsible

‣

Alternative choice decisions

-

- Differential costs of alternative possible actions are developed and analyzed.

- Focus on relevant costs.

Only considering direct costs for some short run decisions

↪

Databases

-

- Spreadsheets : two dimensional arrays of data

- Database systems

More powerful

‣ 3 - 4 {chapter 15}

Easily sorts data, links data, manipulates data, and quickly make reports available to help in decision

‣ making.

General observations

-

- Different numbers for different purposes

What cost are we talking about?

‣ Historical?, standard?, overhead?, variable?, differential?, marginal?, opportunity?, direct?, estimated?, full?, etc

↪

- Accounting numbers are approximations

Some numbers are more accurate than others

‣

- Working with incomplete data

Often must make decisions without all pertinent information

‣

- Accounting evidence is only partial evidence

Other more qualitative factors are also important in decision making

‣

- People, not numbers, get things done

How you use the numbers is as important as how the numbers are produced

‣ 4 - 4 {chapter 16}

Management accounting : The Behavior of Costs

COST

- Cost is an evaluation of a resource (not existing itself) that we use in a situation or company

Translation in monetary value of a resource

‣ It is not existing per-se : its an evaluation

‣

Examples of costs : Rent, direct labour, taxes, purchase of equipment/raw material, training, licensing, utilities (electricity, water,

↪

-

heating, waste collection depreciation (loss of an equipment due to usage)

…), …

- Depreciation : the value for using the good

Equipment has an historical cost or book value and service life [up to the company (how much you use it, how you

‣ use this equipment…)]

- There are three types of costs (are independent between each other)

1. Variable or Fixed

2. Direct or Indirect

3. Specialised or Common

- A cost can be classified by :

Nature (object) : associated with resources

‣ Destination : associated with products (object)

‣ COST-VOLUME RELATIONSHIPS

- Let’s focus on Variable vs. Fixed :

Applied only to costs classified by nature (origin of the cost) A product can not be

‣ [raw materials, electric power …]

Associated with volume or level of activity

‣

Cost-Volume Relationships

-

- Higher volume causes higher costs.

However, percentage increase in costs is usually less than increase in volume.

‣

- Depends on behaviour of costs

Variable costs

‣ Fixed costs

‣ Semi-variable costs : Part variable, part fixed

(semi-fixed costs or mixed costs)

‣

Variable costs Fixed costs Semivariable Costs

- In total, varies directly and In total, does not change with In total, varies less than

‣ ‣ ‣

proportionately with volume of volume of activity proportionately with volume of

(no connection

activity activity.

between change in volume and in cost)

However, are fixed for a range

Cost per unit of activity remains Example: Electricity cost in a factory

‣

‣ -

of activity and a limited period Variable component: Cost of powering

constant ‣ production equipment.

of time (short run level determined)

examples : Material costs varies with

↪

- Fixed component: Cost of lighting.

Cost per unit of activity ‣

units sold; Vehicle fuel costs varies with ‣ To effectively analyze, will need to

miles driven for transportation companies; decreases as the level of -

break down into variable and fixed

Salespersons’ commissions varies with activity increases.

sales dollars generated. components.

examples: Building rent; Property taxes;

↪

- Management salaries.

1 - 7 {chapter 16}

Fuel : can also be variable or semi-variable (it depends on the company; read carefully the instructions)

-

- Example : labour cost (component of the cost per employee)

Different components of labour cost : cannot be different (all components follow the same rule)

‣ Salary given each mont 1.200

↪ Pension (money when retired : increased month by month by the company which gives this money to a public organisation)

↪ Also called Social allowance / Social contribution / Social Benefit

·

Severance package (TFR) amount of money that the worker will receive only at the end of the working relationship

↪

• Cost of work = 1.200 + 200 + 50 = 1.450 €

Administrative staff dose not change the level of activity : fixed cost

‣ COST-VOLUME (C-V) DIAGRAM

The relationship between costs and volume can be displayed in a cost–volume (C-V) diagram

-

- Assumption Sales = Production volume simplification (it is not real)

if in an exercise they give me both volumes I need to understand which one I should use : it depends

‣ in the profit & loss statement is reported

↪

- Y or vertical axis reflects total cost. & X or horizontal axis reflects volume.

-

- y = mx + b general mathematical notation

Total cost = total variable cost + total fixed cost

↪ y is the total cost at a volume of x.

‣ m is the rate of cost change per unit of volume change, or the slope (i.e., variable costs).

‣ b is the vertical intercept, which represents the fixed cost component.

‣

- TC = TFC + (X UVC)

·

TC = total cost;

‣ TFC = total fixed cost (per time period),

‣ UVC = Unit variable cost (per unit of volume),

‣ X = volume.

‣

- Equations for :

Variable cost line : TC = (UVC X)

·

‣ Fixed cost line : TC = TFC

‣ • UVC is assumed to be constant

Semi-variable cost : TC = TFC + (UVC X)

·

‣

Unit costs total cost TC

=

Average cost per unit :

- volume X

Volume :

- Type of cost Total cost Cost per unit

Variable Increases Stays the same

-

Fixed Stays the same Decreases

Semivariable Increases Decreases

Relation of unit costs to volume shown in the graph

‣ 2 - 7 {chapter 16}

Inherent conditions of C-V analysis

-

- Every C-V diagram is based on certain inherent conditions

Relevant range Relev. time period “Sticky Costs” Environment Linear assumption

Amount of Many costs C-V analysis only C-V relationship

A straight line ‣ ‣ ‣ ‣

‣ variable costs considered shows how costs is often not

approximates depends on the variable actually vary with volume. linear.

cost behavior time period over fall less with

only within a Many other Some cost

‣ ‣

which behaviour decreases of

certain range of environmental functions are

is estimated. activity than they

volume. influences curved or occur

rise with

If the time period affecting cost. in steps

When volume (i.e.,

‣

‣ increases.

is short, few

approaches zero, curvilinear, step-

E.g. changes in wage

↪

- function).

Managers rates, fringe benefits,

costs are

management ↪ Solution?

material prices,

tend to increase

variable.

takes steps to ‣

technology. Segments of the

resources more

reduce fixed If the time period

‣ If any of these C-V relationship

‣

quickly than they

costs. is long, no costs changes is can be

decrease.

are fixed

When volume

‣ significant, then approximated by

exceeds relevant Examples :

Remain fixed also in - the C-V diagram a straight line,

Sales commissions

↪

one-year horizon :

range, fixed does not each with its own

with minimum

- Cadre of top managers

costs increase. properly

guarantees.

- Base levels items relevant range

estimate what

Managers slower to

(utilities, securities, ↪

- -

fire employees than to

maintenance…) costs will be in a

hire.

- Depreciation (sunk given period

cost)

Step-Function costs

-

- Incurred when costs are added in discrete chunks.

E.g., a supervisor is needed for every 10 workers

↪

- Adding the new step or “chunk” of costs increases capacity.

- Height of step (riser) indicates the cost of adding incremental capacity.

- Width of step (tread) shows how much additional volume of activity can be serviced by the new step up in

cost

If the steps are low and the tread narrow we assume it is linear (micro steps) : approximated by a variable

‣ cost line

If steps are wider, then relationship can be approximated by a fixed cost line (but only if activity is within

‣ relevant range and relevant time period)

Estimating the C-V relationship

- Judgment

Also called account-by-account method.

‣ Each account in cost structure is estimated and divided between fixed and variable costs

‣

- High-Low method

Estimate total costs for two volume levels, preferably one high level and one low level.

‣ To determine slope or variable cost per unit :

‣ change in total cost between the two points

• change in units of activity

To determine fixed costs :

‣ • total cost at either point - variable cost

i.e. variable cost per unit multiplied by units of activity

↪

- Scatter diagram 3 - 7 {chapter 16}

Plot actual costs and volume on C-V diagram.

‣ Visually draw a line of best fit.

‣ Read across on diagram to determine total cost for any level of activity.

‣

- Linear regression

A statistical method to determine line of best fit.

‣ Best to eliminate outliers or unusual observations

‣ e.g., a period during which there was a strike

↪

Potential problems with estimating the C-V relationship

-

- Use of past data to predict future

- Other factors (other than volume) may be affecting cost.

E.g., may be due to trend (or drift) of cost over time, not relationship of cost to volume.

↪

- Linear approximations can hide step function characteristics.

- Costs may appear to be fixed in short run, but are actually variable in long run (i.e., long-term variable costs).

Measures of volume

-

- Best measure is one that is the cause of the change in cost.

- Units produced?

Can be reliable when considering a single-product.

‣ Not as reliable when producing multiple products with different cost structures.

‣

- Common measures used:

Labor hours, labor dollars, machine hours, weight/volume measures (e.g., tons, barrels), sales value.

‣

Questions to Consider in Selecting a Volume Measure

when making assumptions be consistent

-

- Input measure or output measure?

Input measures : resources used.

‣ example : labor hours worked, labor cost, machine hours, kilowatt hours of electricity, pounds of material.

↪

• Commonly used in manufacturing settings.

Output measures : goods/services produced.

‣ example : units of product/service sold, revenue dollars.

↪

• Commonly used in retail/service settings.

- Monetary measure (e.g., labor dollars) or Non-monetary measure (e.g., labor hours)?

Non-monetary measure is unaffected by price changes.

‣ • However, if price changes affect all costs equally, use of dollars as an activity measure implicitly allows

for price changes (e.g., labor costs).

Selecting a Volume Measure: General Considerations

-

- Practicality : for instance the availability of data on volume measure.

- Causality : for instance the volume measure causes the cost to be incurred.

- Scope : for instance the more items of cost that are combined in the cost function the more difficult it is to

relate causality to a single measure.

- Appropriateness : for instance changes in conditions may change current usefulness of a measure.

4 - 7 {chapter 16}

PROFIT-GRAPH

-

Add revenue line to C-V diagram

-

- The C-V diagram can be expanded into another useful diagram, called the profit-graph.

relationship between total costs and revenue at various volumes

‣

- Assumes constant selling price

- TR = (UP X) Break-even point TR = TC

·

UP = unit selling price TR - TC = 0

‣ ‣

TR = total revenue X UP - [TCF + (UVC X)]

‣ · ·

- TC = TCF + (UVC X) sales volume unit price - [fixed cost + (unitary variable cost sales volume)]

↪

· · ·

Exercise :

Break-even Ana