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Accounting for Decision Making

Week 1 Lecture

(2010)



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Module number: U50029Module title: Accounting for Decision Making

Contents

Week Lecture

1 Seminar 2 - Budgeting (revision)

2 Seminar 3 - Appraising the Long-term Plan (revision)

3 Seminar 4 - Cost Allocation

4 Seminar 5 - Unit cost & Pricing

5 Seminar 6 – Controlling the Plan (Variance Analysis)

6 Consolidation

7 Seminar 7 - Identifying Contribution & Break Even Analysis

8 Seminar 8 - Relevant Costs and Revenues Analysis

9 Seminar 9 - Balanced Scorecard & Performance Indicators10 Revision

11 Sample Exam Paper

12 Optional



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Costing System of a Merchandiser

MerchandiseInventory

Revenues

=

Profit

Cost of

Goods Sold(an expense)

Gross Profit

Marketing,

selling andadministrative

expenses

_

_

MerchandisePurchases

whensalesoccur

BALANCE SHEET INCOME STATEMENT

Marketing,

selling andadministrativeexpenses



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Costing System of a Service Company

Customer –

Service Costs

PayrollCosts

MarketingCosts

Administrative

Costs

OfficeCosts

Revenues

Operating

Expenses

Profit

_

INCOME STATEMENT



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The ProductThe Product

Direct

Materials

Direct

Materials

Direct

Labor

Direct

Labor

Production

Overhead

Production

Overhead

Manufacturing Costs

Costing System of a Manufacturer



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Sale of FinishedGoods(Cost of

Goods Sold)

Conversioninto Finished

GoodsInventory

Conversioninto Work-in-

ProcessInventory

Materials,Labor, andProductionOverhead

Costing System of a Manufacturer



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Budgeting

The Chartered Institute of ManagementAccountants defines a budget as ‘a financial

and/or quantified statement, prepared and

approved prior to a period, of the policy to be pursued during that period’.

From the Businessman's point-of-view it is a

financial plan of where the business wants tobe in the future and how it is to get there.



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Advantages of budgeting

• It is an aid to planning

• It identifies the existence of any limiting factor

which restricts the performance of a business

• It co-ordinates the activities of the business and encourages teamwork

• It communicates the plans formulated by the senior

management team to all employees

• It motivates managers to achieve goals• It facilitates the evaluation of actual performance by

establishing a ‘bench-mark’.



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+

Basic Equation for Inventory Accounts

+

BeginningMerchandise

InventoryPurchases

Cost of Goodssold

EndingMerchandise

Inventory

Goods availablefor

Sale



12

+


+Beginning

Merchandise

Inventory

PurchasesCost

of Goods

sold

EndingMerchandise

Inventory

=

+Beginning


PurchasesEnding


- =Cost

of Goodssold

+Beginning


PurchasesEnding


- =Cost

of Goodssold



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+

+

BeginningInventory

Additions(Materials Purchases)

(Goods Produced)

Withdrawals(Materials Usages)

(Cost of Goods Sold)

EndingInventory

Goods Available

Provisions(Loss/Damages)+



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Financial Statement

Cost of goods sold:

Beg. merchandise

inventory 14,200$

+ Purchases 234,150 Goods available

for sale

248,350$

- Ending

merchandise

inventory (12,100)

= Cost of goods

sold 236,250$



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SEMINAR QUESTION 1

The Crusader Mountain Bike Co. budgets to sell 40,800 cycles in 20X1. If theopening stock of cycles is 1,250 and the closing stock is budgeted to be 450,what is the budgeted production level (in units)?

If each cycle requires 12.5 kg of tubing at a cost of £3.80 per kg and theopening stock is 4,600 kgs and the closing stock is budgeted at 3,800 kgs, whatis the material purchase budget in value?



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Fixed vs Flexible Budget

Fixed Actual Flexed Variance

Activity

Variable costs (@$2)

Fixed costs

1,000

2,000

3,000

1,200

2,450

2,980

1,200

2,400

3,000

0

(50) U

20 F

Total 5,000 5,430 5,400 (30)U

U – Unfavorable F - Favorable



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• A fixed budget is prepared at the beginning of the budgeting period and is valid for only theplanned level of activity.

• A flexible budget calculates budgets revenuesand budgeted costs based on the actual output

level in the budget period . It is prepared at theend of a period after the actual output level is

known.



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Fixed Budgets

Used for planningpurposes.

Prepared at thebeginning of theperiod.

Based upon

projected level of activity.

Fixed Budgets

Used for planningpurposes.

Prepared at thebeginning of theperiod.

Based upon

projected level of activity.

Flexible Budgets

Used for controlpurposes.

Prepared at theend of the period.

“Flexed” toaccommodate

actual level of activity.

Flexible Budgets

Used for controlpurposes.

Prepared at theend of the period.

“Flexed” toaccommodate

actual level of activity.



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Cash Budget

CASH RECEIPTS

Cash SalesFrom debtors ( Beginning Debtors + Credit Sales - Ending Debtors)

CASH PAYMENTS

To creditors (Beginning Creditors + Credit Purchases - EndingCreditors)

Cash expenses

NET INFLOW/OUTFLOW OF CASH = Cash receipts – cash payments

CLOSING BALANCE = Beginning Balance + Net Inflow/Outflow of Cash



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• Managers responsible for costs in their own cost

centres to achieve their budgeted goals

• Gives high level of motivation, provided

favourable and unfavourable variances are

equally considered

Improving the ProcessResponsibility Accounting



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• Recognises the impact on the budget as soon as

a commitment is made – when an order is

placed

• Rather than waiting until goods are actually paid

for

Improving the ProcessCommitment Accounting



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• Building ‘slack’ into budgets

• Concealing expected advantages

• Avoiding risks in order to ‘escape’ criticism.

• Falsifying information e.g. charging expenditureto another expense heading, high spendingtowards the year-end to conceal any ‘slack’ in

the original budget• Resentment by managers put under pressure.

Dysfunctional Behaviour



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Source Short-term

(< 2 years)

long-term

(> 2 years)

Internal •Efficient working

capital management

•Retained profits

External •Bank overdrafts •Share capital•Long-term loans•Leasing of assets

Sources of Finance



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What are the general advantages /disadvantages of using the long-term sources offinance just mentioned?

Advantages Disadvantages

Retained profits •No cost •

Maintains control

•Limited supply

Share capital •Cost effective •Possible dilution of

control

Long-term loans •Encourages structured •Cost •Risk if obligations

Leasing of assets planning not met



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• Unstructured expansion

• Capital base too small for its expanded

levels of activity

• Profitable but insufficient funds to finance

working capital/fixed assets

Overtrading



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• Serious liquidity problems – cannot pay suppliers

• Diversion of management into dealing with

liquidity and not other business areas• Increased interest charges

• Inability to buy in bulk

• Cannot replace old fixed assets

Consequences of Overtrading



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Seminar 2: Questions 1 – 5

Students are required to hand in

solutions to the assigned exercises at

the beginning of the tutorial sessions.

Tutorial Exercise



End ofWeek 1

Lecture

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