Accounting & Financial Analysis 1

Lecture 7

Interpret financial information (2)

Interpret financial information (2)

Interpret financial information (2)

Apply financial information to management activities

Identify financial information Review financial information and

take action accordingly Share financial information with

colleagues

Apply financial information to management activities

Identify financial information Review financial information and

take action accordingly Share financial information with

colleagues

Apply financial information to management activities

Apply financial information to management activities

All the financial information that is collected from the various sources is analysed and constructed in a manner that will provide key indicators for management to oversee the performance of the business.

All the financial information that is collected from the various sources is analysed and constructed in a manner that will provide key indicators for management to oversee the performance of the business.

2 Categories of Costs2 Categories of Costs

If management is expected to control costs it is necessary for them to analyse and classify costs into the following categories:

Direct costs/expensesDirect costs/expensesIndirect costs/expensesIndirect costs/expenses

If management is expected to control costs it is necessary for them to analyse and classify costs into the following categories:

Direct costs/expensesDirect costs/expensesIndirect costs/expensesIndirect costs/expenses

Direct costs Direct costs

are the costs that are directly related to the item being sold or produced.

If the item had not existed the cost would not have happened.

are the costs that are directly related to the item being sold or produced.

If the item had not existed the cost would not have happened.

Direct costs could be made up of 3 components

Direct costs could be made up of 3 components

Direct materials Direct labour Direct expenses

Direct materials Direct labour Direct expenses

Direct materialsDirect materials and direct labourdirect labour are also known as Variable costsVariable costs because they are directly related to the product being sold or produced.

Variable costsVariable costsVariable costsVariable costs

costs that increase/decrease according to the level of activity. (Sales, production)

They relate to a PER UNIT COST

costs that increase/decrease according to the level of activity. (Sales, production)

They relate to a PER UNIT COST

Variable costs (2)Variable costs (2)Variable costs (2)Variable costs (2)

E.G. If each meal cost $9 to purchase the ingredients.

The cost of the meals will change depending on the number of meals produced.

10,000 = $90,000 and 15,000 = $135,000. If the kitchen staff are paid by the number

of meals produced and sold: their wages would be variable costs otherwise they are (direct) fixed costs.

E.G. If each meal cost $9 to purchase the ingredients.

The cost of the meals will change depending on the number of meals produced.

10,000 = $90,000 and 15,000 = $135,000. If the kitchen staff are paid by the number

of meals produced and sold: their wages would be variable costs otherwise they are (direct) fixed costs.

Semi-variable costs Semi-variable costs

costs that change slightly as the level of production increases but not in proportion to the increase in production.

costs that change slightly as the level of production increases but not in proportion to the increase in production.

Semi-variable costs (2)Semi-variable costs (2)

A semi-variable cost has an element of fixed costs in it.

E.G. Telephone account has a fixed service charge, only the call charge increases as the calls increase.

Electricity/gas charges in a kitchen will not change too much as the number of meals increase.

Semi-variable costs are not normally classified within small to medium sized industry.

It is only the very large corporations that may apply semi-variable costs in management applications.

Most companies consider semi-variable costs as part of the fixed costs.

A semi-variable cost has an element of fixed costs in it.

E.G. Telephone account has a fixed service charge, only the call charge increases as the calls increase.

Electricity/gas charges in a kitchen will not change too much as the number of meals increase.

Semi-variable costs are not normally classified within small to medium sized industry.

It is only the very large corporations that may apply semi-variable costs in management applications.

Most companies consider semi-variable costs as part of the fixed costs.

Fixed costs Fixed costs

costs that remain the same irrespective of the level of sales or production.

Fixed costs could be Direct or Indirect

costs that remain the same irrespective of the level of sales or production.

Fixed costs could be Direct or Indirect

Fixed costsFixed costs

E.g.s of direct fixed costs are: Wages for kitchen staff (if permanent and constant)

depreciation of kitchen equipment repairs to kitchen equipment, and all other costs incurred solely to

produce the item being costed. Depending on the circumstances

costs may have to be allocated to different classifications.

E.g.s of direct fixed costs are: Wages for kitchen staff (if permanent and constant)

depreciation of kitchen equipment repairs to kitchen equipment, and all other costs incurred solely to

produce the item being costed. Depending on the circumstances

costs may have to be allocated to different classifications.

Indirect Costs Indirect Costs

costs that cannot be specifically identified with the cost of the finished product.

Indirect costs are therefore all other costs that are not direct costs.

Indirect costs are also known as overheadsoverheads.

costs that cannot be specifically identified with the cost of the finished product.

Indirect costs are therefore all other costs that are not direct costs.

Indirect costs are also known as overheadsoverheads.

Indirect Costs (2)Indirect Costs (2)

Examples of indirect fixed costs are: Occupancy costs –

Rent / rates, electricity, telephone, Insurance).

long-term finance costs, Depreciation

Administration costs Marketing costs

Examples of indirect fixed costs are: Occupancy costs –

Rent / rates, electricity, telephone, Insurance).

long-term finance costs, Depreciation

Administration costs Marketing costs

Understanding your businessUnderstanding your business

Having an understanding of the difference between Variable and Fixed costs (and semi-variable somewhere in the middle but leaning towards Fixed costs) management can start to take control of the business activities.

Variable costsVariable costs will change as production increases or decreases whilst

the Fixed costsFixed costs will remain the same

Having an understanding of the difference between Variable and Fixed costs (and semi-variable somewhere in the middle but leaning towards Fixed costs) management can start to take control of the business activities.

Variable costsVariable costs will change as production increases or decreases whilst

the Fixed costsFixed costs will remain the same

See Example in your notesSee Example in your notes

Income Statement for the Silver Spoon Restaurant

READ TRY TO CALCULATE THE PROFIT

AND LOSS FOR 7 DAYS ON PAGE 2

Income Statement for the Silver Spoon Restaurant

READ TRY TO CALCULATE THE PROFIT

AND LOSS FOR 7 DAYS ON PAGE 2

How are problem solving skills applied

How are problem solving skills applied

Solving performance problems Solving performance problems

Identify the problemIdentify the cause of the problem

Develop options to correct the problemSelect best option

Implement corrective actionSet review date to assess the result of action

Solving technical problems Solving technical problems

Spreadsheets can assist in making planning decisions.

They may require information from other departments.

Used primarily for:

Spreadsheets can assist in making planning decisions.

They may require information from other departments.

Used primarily for:

Budget preparationSales forecastingMarket research

Financial planningScheduling of maintenance, rosters,

Strategic planning

Solving skills problemsSolving skills problems

Develop work priorities Training: On-the-job learning Of-the-job learning Identifying new skills needs Professional development activities Recording the development of

activities

Develop work priorities Training: On-the-job learning Of-the-job learning Identifying new skills needs Professional development activities Recording the development of

activities

How is use of technology applied ?

How is use of technology applied ?

Software applications for small business: “Off the shelf” accounting packages (single or multi-user)

Entries into the system are done in real-time, which means that regardless of the number of individuals inputting data, you will always have a current view of the business operations

Software applications for small business: “Off the shelf” accounting packages (single or multi-user)

Entries into the system are done in real-time, which means that regardless of the number of individuals inputting data, you will always have a current view of the business operations

How is use of technology applied ? (2)

How is use of technology applied ? (2)

Integrated packages: Integrated packages provide the tools to handle a variety of tasks required by small businesses. These generally include:

A word processor for writing text A spreadsheet to make calculations and

present data in a comprehensive manner A database which holds information and

is capable to sort it into various desired formats.

Diary and telephone index e.g. MS Office

Integrated packages: Integrated packages provide the tools to handle a variety of tasks required by small businesses. These generally include:

A word processor for writing text A spreadsheet to make calculations and

present data in a comprehensive manner A database which holds information and

is capable to sort it into various desired formats.

Diary and telephone index e.g. MS Office

How is use of technology applied ? (3)

How is use of technology applied ? (3)

Internet: The internet is a worldwide network of computers linked together and sharing information between them.

It allows you to search for information on virtually any topic you require.

You are able to receive and sent messages to your contacts and to organise chat lines for real-time discussions.

It enables you to access information from other subscribers such as retail price lists, shopping catalogues etc.

Internet: The internet is a worldwide network of computers linked together and sharing information between them.

It allows you to search for information on virtually any topic you require.

You are able to receive and sent messages to your contacts and to organise chat lines for real-time discussions.

It enables you to access information from other subscribers such as retail price lists, shopping catalogues etc.

Share appropriate financial information

with colleagues in a timely manner Share appropriate financial information

with colleagues in a timely manner The Manager cannot do it all on his own no

matter how committed he may be. He must have the ability to communicate and

consult with his department managers and to motivate each of them to take ownership of the activities of their department.

In order to succeed management should participate in problem solving whilst encouraging their staff to organise their resources to achieve the desired results.

In short, team building is a key to team building is a key to successsuccess and the use of interpersonal and negotiating skills is the main ingredient for developing an effective team

The Manager cannot do it all on his own no matter how committed he may be.

He must have the ability to communicate and consult with his department managers and to motivate each of them to take ownership of the activities of their department.

In order to succeed management should participate in problem solving whilst encouraging their staff to organise their resources to achieve the desired results.

In short, team building is a key to team building is a key to successsuccess and the use of interpersonal and negotiating skills is the main ingredient for developing an effective team

Team work Team work For the team to be effective there must For the team to be effective there must

be:be: Open discussionOpen discussion on all aspects of the business. Current financial reportsCurrent financial reports discussed during

regular management meetings. Problem solvingProblem solving sessions were necessary to

arrive at a suggested participative management solution.

Implement corrective actionImplement corrective action as soon as possible.

ReviewReview the situation to see if the solution was effective.

InformInform the team of positive results as well as the negative ones.

AcknowledgeAcknowledge individual achievements were appropriate

For the team to be effective there must For the team to be effective there must be:be:

Open discussionOpen discussion on all aspects of the business. Current financial reportsCurrent financial reports discussed during

regular management meetings. Problem solvingProblem solving sessions were necessary to

arrive at a suggested participative management solution.

Implement corrective actionImplement corrective action as soon as possible.

ReviewReview the situation to see if the solution was effective.

InformInform the team of positive results as well as the negative ones.

AcknowledgeAcknowledge individual achievements were appropriate

Alternative viewAlternative view

You can’t create visionary ideas by You can’t create visionary ideas by consensusconsensus

You can’t create visionary ideas by You can’t create visionary ideas by consensusconsensus

““The aim is to find the individualist The aim is to find the individualist with a sense of self-discipline rather with a sense of self-discipline rather than the man who is a good member than the man who is a good member of a team”of a team” SAS Spokesman Sunday Times 30/3/03 p 41

Alternative view (2) Alternative view (2)

Everybody dies when 2 people are Everybody dies when 2 people are in chargein charge (Air Force saying)

I don’t believe in consensus – I I don’t believe in consensus – I consult widely, listen to everyone, consult widely, listen to everyone, then the guy at the top makes a then the guy at the top makes a decision and everyone gets on decision and everyone gets on boardboard.

Everybody dies when 2 people are Everybody dies when 2 people are in chargein charge (Air Force saying)

I don’t believe in consensus – I I don’t believe in consensus – I consult widely, listen to everyone, consult widely, listen to everyone, then the guy at the top makes a then the guy at the top makes a decision and everyone gets on decision and everyone gets on boardboard.

PRACTICE ACTIVITY!PRACTICE ACTIVITY!

Continue with MYOB postings OR Do it manually! See questions at back of notes

Continue with MYOB postings OR Do it manually! See questions at back of notes