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Notes FIA – MA2 Management Accounting – 2 For exams in 2014

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ExPress Notes FIA MA2 Management Accounting

Contents

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About ExPress Notes

3

1.

Management Information

7

2.

Cost Recording

14

3.

Costing Techniques

20

4.

Decision making

33

5.

Cash management

47

6.

Spreadsheets

50

Š 2014 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.


ExPress Notes FIA MA2 Management Accounting

START About ExPress Notes We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. It’s a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials:    

The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.

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The unique ExP & Me e-portal, which amongst other things allows “view again” of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database

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ExPress Notes FIA MA2 Management Accounting

Everybody in the World has free access to ACCA’s own database of past exam questions, answers, syllabus, study guide and examiner’s commentaries on past sittings. This can be an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.

How to get the most from these ExPress notes For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper. Your stage in study for each paper

These ExPress notes

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Skim through the ExPress notes to get a feel for what’s in the syllabus, the “size” of the paper and how much it appeals to you.

Don’t use yet

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Have a quick look at the two most recent real ACCA exam papers to get a feel for examiner’s style.

At the start of the learning phase

Work through each chapter of the ExPress notes in detail before you then work through your course notes.

Work through in detail. Review each chapter after class at least once.

Nobody passes an exam by what they have studied – we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this.

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Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.

Try to do at least one past exam question on the learning phase for each major chapter.

© 2014 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.


ExPress Notes FIA MA2 Management Accounting

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Your stage in study for each paper

These ExPress notes

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Practice phase

Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident you’ll remember without reviewing them.

Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if there’s something in an answer that you don’t understand.

This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Don’t be tempted to fall into “passive” revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time.

Download the two most recent real exam questions and answers.

The night before the real exam

Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.

Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still don’t understand. It’s too late now.

Don’t touch it!

Do a final review of the two most recent examiner’s reports for the paper you will be taking tomorrow.

At the door of the exam room before you go in.

Read quickly through the full set of ExPress notes, focusing on areas you’ve highlighted, key workings, approaches to exam questions, etc.

Avoid looking at them in detail, especially if the notes are very big. It will scare you.

Leave at home.

Leave at home.

© 2014 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

Read through the technical articles written by the examiner. Read through the two most recent examiner’s reports in detail. Read through some other older ones. Try to see if there are any recurring criticisms he or she makes. You must avoid these!


ExPress Notes FIA MA2 Management Accounting

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ExPress Notes FIA MA2 Management Accounting

Chapter 1

Management Information

KEY KNOWLEDGE Management Information Requirements

Purpose of Management Information Planning: has to do with the formulation of objectives within the organization, both in the short- and long-term (see below). Decision-making: refers to conclusions drawn once all relevant information has been analysed. Implementation of decisions taken (.e. the decision to take action) follows. Control: Post-implementation, actual results are analysed in order to determine whether planning and decisions taken need to be revised or to implement corrective actions. The control step acts as a feedback loop into the previous processes. Remember, look at theses systems dynamically: we learn from experience and need to take corrective steps and to improve processes continuously! The Features of useful management information

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ExPress Notes FIA MA2 Management Accounting

The qualities of good information can be summarized in the word “ACCURATE”:        

Accurate, Complete, Cost-beneficial, User-targeted, Relevant, Authoritative, Timely and Easy to use

Financial and Non-financial information for managers In addition to financial information which can be extracted from the financial accounting records, managers rely for their decision-making on a host of information that is derived from non-financial sources. These can range from industry data (overall size, market shares of different competitors) to customer opinions about the products and services offered. Internally, non-financial information can embrace a host of operational statistics which are relevant to managerial decision-making: examples include the rate of staff turnover; the time it takes to cook a hamburger (in a restaurant business); the rate of defects in a production process; the set-up time necessary between different production batch runs; or measurements of service/product quality. Planning at different levels of the organisation

Strategic: Covers the “big view” of the organization and its objectives. Long-term in nature.

Tactical: Planning over the short-term (usually one year), and typically in connection with budgeting processes.

Operational: Day-to-day decisions, implemented on-the-spot and directly involving all levels of the organization.

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ExPress Notes FIA MA2 Management Accounting

Management responsibilities Responsibilities correspond to specific areas and functions within an organisation. They are best understood in relation to the following diagram:

“Responsibility� centres

Cost Centres

Revenue Centres

Profit Centres

Investment Centres

Cost centres: Responsible for current expenses only Revenue centres: Responsible for revenues, but not current expenses other than marketing expenses Profit centres: Responsible for revenues and current expenses Investment centres: Responsible for revenues, current expenses and capital expenditure In order to competently manage his/her area of responsibility, a manager needs to have relevant information (and authority) pertaining to their job function. Relevant information not only supports decision-making, but also allows the performance of the respective responsibility centre to be monitored, both by the (direct) managers in charge as well as by the levels (above) to which they report.

The Role of Information technology Information technology has had a dramatic and far-reaching impact on the structure and conduct of business. IT has also been frequently poorly employed at great cost to companies. When implemented well, IT has made it possible for companies to exploit the benefits of increased accuracy of information and faster decision-making.

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ExPress Notes FIA MA2 Management Accounting

Suitable formats for the presentation of management information according to purpose Managerial accounting is a free-style form of accounting in which format and structure of information are not prescribed externally, but conform to the requirements of the users (management and staff).

KEY KNOWLEDGE Cost Accounting Systems

In order to understand the relationship between Management accounting and Financial Accounting systems, it is useful to summarize the differences between the two. Management accounting is:  Aimed at internal users (as opposed to financial accounting, which is aimed at external stakeholders)  Focused on present and future performance (as opposed to financial accounting, which reports past performance)  Not required by law and not regulated by accounting frameworks (as opposed to financial accounting, which is a legal requirement and is regulated by accounting frameworks)  Focused on specific areas or activities (as opposed to financial accounting, which provides a holistic view of company’s performance)  Employs non-financial indicators as well financial, while financial accounting uses only financial measures. Since the management accounting system is based on (or derived from) a company’s financial accounting system, the two are usually combined (or integrated) for reasons of cost and efficiency, i.e. to avoid duplications. Coding transactions Transactions in a business are more easily processed by use of a coding system. This involves assigning to a particular transation a code, i.e. a kind of symbolic label, which identifies the nature of the transaction in a systematic and unambiguous way. In doing so, this allows transactions to be grouped together in information systems, processed, added up and analyzed in a manner that permits checking and reconciliation (against original records).

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ExPress Notes FIA MA2 Management Accounting

The characteristics of a coding system shares some of the features of good information: it must be standardized, logical, objective, brief (i.e. capable of being summarized), verifiable, comprehensive and yet flexible (allowing development to cover all relevant situations in a relevant manner).

Cost units: The units are the discreet items to be measured, such as packs of nails (batches) or a student.

KEY KNOWLEDGE Cost Classification

There are a variety of ways in which one can classify costs:

Production vs. Non-Production Production costs: These are costs (both direct and indirect, also variable and fixed) which relate to the production of goods; this is also referred to as manufacturing or factory cost. It is these costs, accumulated, which provide the value at which goods are placed in inventory (prior to sale) and form the “cost of goods” value when sold.

Non-production costs: These are expenses that are incurred independent of production and include administrative, selling, distribution and finance costs. These costs can have the character of “period” costs, as they relate to the period of time in which they occur. Direct vs. Indirect Direct costs: are costs that can be directly attributable to a product. Indirect costs: these are costs that cannot be directly attributable to a product.

Fixed vs. variable

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ExPress Notes FIA MA2 Management Accounting

Fixed costs: are costs that remain constant regardless of the volume of production. A variety of indirect costs are fixed. Variable costs: vary in proportion with the volume produced. Direct costs are by their nature variable in behaviour.

Other types of costs Mixed costs: these are costs that contain a fixed and a variable element. Step costs: costs that remain fixed within a defined range of production, but at a certain level of output increase in a significant way to a new (fixed) level.

High/Low Method Analyze the following operating costs as a function of output: Output (units)

Costs ($)

1,000 1,200 1,400 1,600

250,000 295,000 325,000 370,000

Take the maximum and minimum levels of output (the independent variable) and the associated costs (dependent variable) and calculate the differences: Max Min Diff.

Output 1,600 1,000 600

Costs 370,000 250,000 120,000

The variable cost per unit is: 200 (120,000/600) Given the formula: Total cost = Fixed cost + (Variable cost per unit x No. of units) We can calculate the fixed cost Fixed cost = 50,000

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ExPress Notes FIA MA2 Management Accounting

The high-low method can also be applied to the following situations:

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When fixed costs change (“step”) along the output range; and

When the variable cost per unit changes

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ExPress Notes FIA MA2 Management Accounting

Chapter 2

Cost Recording

KEY KNOWLEDGE Accounting for materials Every company which buys, processes and sells materials will have established procedures for ordering, receiving and issuing (such materials) which are generically similar. Some may have highly automated systems in place, while others record the steps manually. The key documents one should be familiar with are: Purchase requisition form: This is an internal form that provides the authorization for materials to be ordered from a supplier (external). Purchase order (PO): The buyer issues a PO to the seller, indicating the   

Description Quantity Price

of the product ordered. The PO is a legal offer. Its acceptance by the seller creates a contractual commercial relationship for the intended transaction.

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ExPress Notes FIA MA2 Management Accounting

Goods Received Note (GRN): This is completed by the buyer upon delivery to verify whether the order has been properly fulfilled. It will contain:    

Order No. Description Quantity ordered Quantity delivered

Materials issuance (or requisition) form: This is the form necessary to authorize the release of materials from inventory into the production process at the company. Materials The ordering, receiving and issuing of materials from inventory must be controlled according to procedures and documented at all stages with forms appropriate to the purpose. The controls and procedures are designed to monitor inventory movements so as to minimise discrepancies and losses and theft. Accounting entries Materials Debit (Dr) entries =

Inventory Credit (Cr) entries =

Increase in inventory

Decrease in inventory

Economic Order Quantity Within a company, there is a natural temptation to accumulate buffer stocks (raw materials and semi-finished goods) so that production is never interrupted. Similarly, in order to avoid stock-outs, sales managers will insist on maintaining a plentiful level of finished goods. All of this costs money. The EOQ is a method which seeks to minimize the costs associated with holding inventory. To determine the total costs, the following data is required: Q = order quantity

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© 2014 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.


ExPress Notes FIA MA2 Management Accounting

D = quantity of product demanded annually P = purchase cost for one unit C = fixed cost per order (not incl. the purchase price) H = cost of holding one unit for one year The total cost function is: Total cost = Purchase cost + Ordering cost + Holding cost which can be expressed algebraically as follows: TC

= PxD

+ C x D/Q

+ H x Q/2

It is this total cost function which must be minimized. Recognizing that: 

PD does not vary;

 

Ordering costs rise the more frequently one places (during the year); and Holding costs rise the fewer times one places orders (due to larger quantities being ordered each time),

It follows that there is a trade-off between the Ordering and the Holding costs. The optimal order quantity (Q*) is found where the Ordering and Holding costs equal each other, i.e. C x D/Q = H x Q/2 Rearranging the above and solving for Q results in

EXAMPLE A trucking company uses disposable carburettor units with the following details:

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ExPress Notes FIA MA2 Management Accounting

Weekly demand

500 units

Purchase price

USD 15 / unit

Ordering cost

USD 40 / order

Holding cost

7% of the purchase price

Assume a 50 week year. What is the optimal order quantity? The EOQ = 1,380 units

KEY KNOWLEDGE Accounting for labour

Direct and Indirect Labour Direct labour refers to work which is directly involved in the manufacture of a product. Indirect labour (e.g. the supervisor’s salary, or that of a security guard) forms part of overhead costs. It is important to note that the basic pay portion of direct labour costs is included in the prime cost of a product. Overtime premiums, bonuses, employers’ contributions, sick pay and idle time costs relating to direct workers are all accounted for as overheads (indirect costs). One exception: Overtime performed as a result of a client request is recorded as a direct labour cost. Accounting for labour costs Labour account Debit (Dr) entries Credit (Cr) entries = = Labour costs incurred Transfer to P&L Note: The transfer to the P&L takes place via the Work-In-Progress (WIP) account for direct labour costs and the production overheads account in the case of indirect labour costs.

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ExPress Notes FIA MA2 Management Accounting

Remuneration methods There are two basic forms of remuneration: 

Time-based, and

Output–based (e.g. piecework)

Effective incentive schemes are designed to ensure that the interests and behaviour of individual employees and groups of employees are in-line (i.e. consistent) with the company’s objectives. Managerial metrics relating to labour The key ratios to learn are: Labour turnover =

No. of departing employees requiring replacement Average no. of employees

Labour efficiency =

Standard hours of output Actual hours worked

Labour capacity =

Actual hours worked Total budgeted hours

Labour production volume =

Standard hours of output Total budgeted hours

This last ratio is the result of multiplying the labour efficiency with the labour capacity ratio.

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ExPress Notes FIA MA2 Management Accounting

KEY KNOWLEDGE Accounting for other expenses

Direct and Indirect costs Traditionally, accountants maintain that costs have to be charged to whatever is being costed – the goal is ultimately to link costs to the units of product themselves: Direct costs are not a problem as they are directly attributable to the product. Indirect costs – in this context referred to as “overheads” -- are more difficult to link to products (e.g. a supervisor’s salary or a security guard).

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ExPress Notes FIA MA2 Management Accounting

Chapter 3

Costing Techniques

KEY KNOWLEDGE Absorption costing This is one method which seeks to make the link between overheads and (product) cost units. The diagram below provides a useful roadmap. Total Production Costs

Direct Costs

Indirect costs (overheads)

2. Allocate/Apportion to Cost Centres

Production A

Production B

Service C

1. Allocate 3. Reapportion from Service to Production Production A

Production B 4. Absorb

Cost Unit

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ExPress Notes FIA MA2 Management Accounting

The focus (above) is production. Overhead costs that are not incurred at the time of production do not find their way into inventory. It is useful to think of production costs as being those that end up as part of the inventory (valuation) while other (non-production) costs are incurred outside, and normally after the product leaves inventory. Allocation and Apportionment Allocate, Apportion and Re-apportion indirect production costs (shown on the right side of the diagram) to cost units. Our focus is on the first category (production); the other overhead costs are not incurred at the time of production and do not find their way into inventory. Always think of the costs going into inventory and those that occur after the product leaves inventory!

EXERCISE A company producing refrigerators and toasters has identified the following overhead costs relating to production: $ 8,000 1,500 3,000 2,500 15,000

Rent Indirect materials Power Equipment insurance

The company has 3 cost centres, 2 production workshops (A & B) and 1 warehouse (C, service centre). 1. Suggest the basis on which the costs shown above might be charged to the various cost centres. Rent Indirect materials Power Equipment

Page | 21

8,000 1,500 3,000 2,500

Basis sq.m. Specific kWh Book

A 4000 600 1500 1000

B 2500 700 1000 1400

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C 1500 200 500 100


ExPress Notes FIA MA2 Management Accounting

insurance

value 15,000 sq.m.

7100

5600

2300

As a manager with cost centre responsibility, what could be your concerns with respect to the bases selected above? 2. Re-apportion the service centre costs to the production workshops. Assumption: C is used by A (65%) and B (35%): A

B

Costs apportioned to A, B, C:

7,100

5,600

Costs re-apportioned from C:

1,500

800

Total overheads:

8,600

6,400

C 2,300 (2,300)

3. Absorb the overheads into the units produced. Assumption: The company absorbs overhead costs on the basis of direct labour hours Total labour Hrs Workshop A Workshop B

1,400 950

Overheads $

Overhead Absorption Rate (OAR) $

8,600 6,400

6.14 6.74

Each workshop uses its OAR to keep track of overhead costs as it produces. Alternatively, the company can use a “blanket” or company-wide OAR, calculated as: Total overhead costs Total labour hours

=

15,000 = 2,350

6.38

A company’s cost cards for two products (toasters and refrigerators) could look as follows: Refrigerator (cost per unit) Direct materials (15kg @ $2/kg) Direct labour (1.75hrs @ $15/hr) Variable OHs Fixed OHs (1.75hrs @ $6.38/hr) Total

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$ 30.00 26.25 5.00 11.17 72.42

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ExPress Notes FIA MA2 Management Accounting

Toaster (cost per unit) Direct materials (1kg @ $3/kg) Direct labour (0.30hrs @ $15/hr) Variable OHs Fixed OHs (0.30hrs @ $6.38/hr) Total

$ 3.00 4.50 2.00 1.91 11.41

Summary – Absorption costing 

Method of measuring the cost of products or services by including a fixed overhead “fair” share into the product manufacturing/service provision cost

Results in reporting higher ending inventories and higher operating profits (as fixed factory overheads are taken to inventory cost instead of being expensed as incurred)

It addresses the problem of allocating factory overheads per product lines 

Step 1: Identify total factory overheads to be absorbed

Step 2: Take the total quantity recorded for the absorption base o

The absorption base should be highly correlated with incurrence of overhead

o

Most common absorption bases selected: direct labour hours, machine hours, units of output

Step 3: Compute overhead absorption rate (OAR) as Step 1 / Step 2 ($/unit of absorption base)

Step 4: Obtain unit overhead cost per product line, by multiplying the OAR with the absorption base quantity recorded per unit

Step 5: For each product, multiply Step 4 by total output to determine factory overhead to absorb in the production cost.

Over- and under-absorbed factory overheads o

Page | 23

In practice, OARs are pre-determined on an annual basis, making assumptions on total activity levels for selected absorption bases. Such assumptions can be based on manufacturing technical capacity, normal capacity, or expected capacity.

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ExPress Notes FIA MA2 Management Accounting

When actual activity levels differ from those used in pre-determining absorption rates, this results in over- or under-absorption.

KEY KNOWLEDGE Marginal costing

Features of Marginal Costing A marginal approach to costing focuses on the variable (marginal) costs generated in a business and considers fixed costs as period costs. This allows the company to be able to quantify the amount by which its costs rise, if it produces/sells an additional unit of output. Marginal costing:  

 

Is an alternative costing method, with variable costs only being charged as a cost of sale (excludes fixed factory overheads from manufacturing costs) Results in reporting lower ending inventories and lower operating profits (as fixed factory overheads are fully expensed as incurred instead of being absorbed in inventory cost) Recognizes that fixed costs become irrelevant for short term production decision making based on product profitability (sunk costs) Avoids arbitrary bases for fixed overhead absorption into the production cost

Contribution Contribution is defined as the difference between Sales revenue and the marginal cost of sales, or Contribution = Sales – Variable costs (both production and non-production)

Example Below is data on a manufacturing company. Selling price (per unit): Cost card (per unit): Direct materials Direct labour

Page | 24

120

45 18

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ExPress Notes FIA MA2 Management Accounting

Variable production O/Hs Total variable costs

9 72

There is a variable selling cost of $2 per unit Year 1 (units)

Year 2 (units)

Budget (normal) production

1,100

1,100

Actual Production Actual Sales

1,000 950

1,100 1,150

Actual fixed production O/Hs $16,500 $16,500 Actual SGA costs $ 7,000 $ 7,000 Based on the above data, a profit and loss statement for the Years 1 and 2 is prepared. Assume that the beginning inventory is zero.

Profit/Loss (Marginal costing) Year 1 $ Sales (950/1,150 units)

Year 2 $

114,000

138,000

Less: Variable cost of sales Opening inventory

0

3,600

Production costs: o

Variable (1,000 x $72) (1,100 X $72)

Less: closing inventory (50 x $72)

Page | 25

72,000 79,200 (3,600)

(68,400)

0

(82,800)

Less: Variable selling costs (950 x $2) (1,150 x $2)

(1,900)

Contribution

43,700

52,900

Less: Fixed production O/Hs

(16,500)

(16,500)

(2,300)

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ExPress Notes FIA MA2 Management Accounting

Less: SGA costs

(7,000)

Profit

(7,000)

20,200

29,400

Inventory is valued at variable production costs.

Absorption Costing This method argues that focusing on marginal costs is potentially misleading in the longer run because fixed production costs have also to be covered. Accounting conventions require that fixed production costs be reflected in each unit produced. Revised cost card (Absorption costing) Cost card (per unit): Direct materials Direct labour Variable production O/Hs Fixed production O/Hs Total production costs

45 18 9 15 87 Year 1 $

Profit/Loss (Absorption costing) Sales (950/1,150 units)

Year 2 $

114,000

138,000

Less: Variable cost of sales Opening inventory

0

4,350

Production costs: o

o

Page | 26

Variable (1,000 x $72) (1,100 X $72)

72,000

Fixed (1,000 x $15) (1,100 X $15)

15,000

Less: closing inventory (50 x $87)

(4,350)

Over/(under) absorption

1,500

79,200

16,500 0 (84,150)

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0

(100,050)


ExPress Notes FIA MA2 Management Accounting

Gross Profit

29,850

Less: Variable selling costs (950 x $2) (1,150 x $2)

37,950

1,900

2,300

Less: SGA costs 7,000 (8,900) Profit 20,950 Inventory is valued at the full production costs.

7,000

(9,300) 28,650

Summary of Absorption costing and Marginal costing formats

Absorption Costing

Marginal Costing

Variable/Fixed production costs

Variable production/ non-production costs

Revenue Less: Cost of Sales

Gross profit

Contribution

Less: Expenses Variable/Fixed non-production costs

Fixed production/ non-production costs

Net Profit Reconciliation of the two methods The different profit figures calculated under Absorption costing and Marginal costing can be reconciled thus: The difference in profit = Net change in inventory (no. of units) X the fixed cost per unit It follows that: 

Page | 27

If the level of inventory increases in a given period, then profits (for that period) under the Absorption costing system will be greater than under Marginal costing; and

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ExPress Notes FIA MA2 Management Accounting



If the level of inventory decreases, then profits under the Absorption costing system will be smaller than under Marginal costing



If the inventory level does not change, then the profit calculated under both methods will be equal.

KEY KNOWLEDGE Job costing / Batch costing This refers to the calculation of costs associated with a specific job or customer order. This is appropriate in situations where each product or service is distinct, and possibly unique, in its delivery. Batch costing is similar to job costing; the distinction lies in the identification of costs with specific batches, which are numbered (separately identified) for this purpose.

KEY KNOWLEDGE Process costing Process costing is a technique that applies to the mass production of a large number of identical products, moving through a series of processing stages. The accumulated costs of production can be averaged over the number of items produced. Illustration 1

units Input units from Process A Additional: Materials Labour Overheads

1,000

1,000 Avg.cost/unit:

Page | 28

Process B $ 20,000

5,000 3,000 2,000 30,000

Output to Process C

units

$

1,000

30,000

1,000

30

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30,000


ExPress Notes FIA MA2 Management Accounting

The average cost is determined by the following formula: Average cost per unit =

Total cost of inputs – Scrap value of rejected units No. of units of input – Normal loss

The total cost of inputs refers to labour, materials and overhead costs of production. If losses occur along the way that necessitate the scrapping of defective units, then to the extent that these items fetch a scrap value, then that (scrap) value will reduce the total costs. Similarly, an accounting is made of the number of units introduced into a process with the expectation that a normal loss will be incurred. The number of good units emerging from a process will therefore be the number of units entering it, minus the expected number lost in processing. Illustration 2 Normal loss 10% of input 1,000 = Avg. cost / unit

900 + good

100 NL

33.3

Conclusion: Average cost per unit =

units Input units from Process A Additional: Materials Labour Overheads

1,000

1,000

Page | 29

Total cost of inputs No. of units of input – Normal loss

Process B $ 20,000

Output to Process C

5,000 Normal loss 3,000 2,000 30,000

units

$

900

30,000

100

1,000

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0

30,000


ExPress Notes FIA MA2 Management Accounting

Illustration 3 Scrap value scrap/unit Avg cost/unit

5 32.78

Conclusion: Average cost per unit =

Process B $

units Input units from Process A Additional: Materials Labour Overheads

1,000

Total cost of inputs – Scrap value of normal loss units No. of units of input – Normal loss

20,000

1,000

Output to Process C

5,000 Normal loss 3,000 2,000 30,000

units

$

900

29,500

100

500

1,000

30,000

Abnormal gains and losses are accounted for as an adjustment to the accounts using the same value as the “good” output (deducted in the case of loss and added in the case of gains). Illustration 4 Abnormal loss 1,000 =

850 + good

100 NL

50 AL

Conclusion: Average cost per unit =

Input units

Page | 30

units 1,000

Total cost of inputs – Scrap value of normal loss units No. of units of input – Normal loss

Process B $ Output to

units 850

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$


ExPress Notes FIA MA2 Management Accounting

20,000 from Process A Additional: Materials Labour Overheads

27,861 Process C

1,000

5,000 Normal loss 3,000 Abnormal loss 2,000 30,000

100 50

500 1,639

1,000

30,000

Joint products / By-products Joint products are two or more products that share a common processing path until the point of separation. Until they go their own (separate) ways, the costs of production during the joint processing cannot be physically distinguished. There are different methods used to apportion common costs to such products at the point of separation: 

Market value (based on expected sales price)

Number of units (litres, tons, or some other objective physical measurement)

Net realizable value = Final sales value – Incremental processing costs

By-products are goods which are incidental to the production process and which generate cash from sales, though the amount is modest in comparison to the overall revenues of the firm. The cash received for by-products can be viewed as a bonus that reduces production costs. Joint processing and further processing Decisions need to be taken as to the further processing of products after their point of separation. Care must be taken to focus on the incremental (relevant) values.

EXAMPLE

Page | 31

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ExPress Notes FIA MA2 Management Accounting

Determine which of the following products should be sold immediately (at the indicated price) or processed further (for later sale):

A B C

Cost at point of Separation

Immediate Price

25,000 30,000 40,000

27,000 28,000 45,000

Further (variable) processing cost 5,000 5,000 4,000

Post-processing Price 30,000 32,000 50,000

KEY KNOWLEDGE Service costing Services distinguish themselves from products in the following ways: Heterogeneity: The quality of the service is rarely exactly the same, due to the human “touch”; e.g. hair cuts; Intangibility: Services are not tangible; Perishability: One cannot place a service in inventory; Simultaneity: Services are produced and consumed at the same time (Think of “HIPS”) Cost units Finding an appropriate cost unit is a challenge in service costing. In many cases, a Composite cost unit is identified; e.g.  

Student – lunches, or Man-days

The cost per service unit is found by dividing the total cost of the service by the number of service units involved.

Page | 32

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ExPress Notes FIA MA2 Management Accounting

Chapter 4

Decision-making

KEY KNOWLEDGE Cost-Volume-Profit (CVP) Analysis The breakeven formula Total Costs = Fixed Costs + Unit Variable Cost x Number of Units Total Revenue = Sales Price x Number of Units If TC = Total Costs, FC = Fixed Costs, V = Unit Variable Cost, X = Number of Units, TR = Total Revenue, SP = Selling Price, C = SP – V = Unit Contribution and

Page | 33

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ExPress Notes FIA MA2 Management Accounting

CM%= C/SP = Contribution Margin,

Then the break-even point (the output level at which TR=TC) is:  

In units sold: X = FC/C In dollar sales: TR = FC/CM%

 

Safety Margin = Budgeted Sales – Break-even point (units/dollars) C is an important indicator, as it shows the contribution of each unit sold towards covering fixed costs. Therefore, in the short run, the firm may prefer to produce/sell below break-even in order to recover some of its fixed costs.

KEY KNOWLEDGE Break-Even Analysis Marginal costing is useful in calculating the “break-even” level of sales. The break-even point is the level where the company achieves zero profit (neither gain nor loss). It just manages to cover its fixed costs. Below is data on a manufacturing company.

Page | 34

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ExPress Notes FIA MA2 Management Accounting

Cost per unit (of product):

$

Direct materials Direct labour Variable production O/Hs Total variable production costs

45 18 9 72

Distribution & selling (variable)

2

Additional info: Selling price per unit

120

Fixed production costs Fixed Selling, General, Admin costs

16,500 7,000

EXAMPLE Based on the data in the previous example, calculate the break-even point of the company. Total fixed costs: Contribution per unit:

23,500 46

Break-even point: 23,500/46 = 511 units Contribution per sale – C/S ratio

This is understood as the amount of contribution generated by every dollar sold. In the previous example, the company’s C/S ratio is: $ 0.3833 (120/46) The break-even level of sales can be calculated as:

Fixed costs C/S ratio

Break-even point (sales) = $ 61,310

Page | 35

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ExPress Notes FIA MA2 Management Accounting

KEY KNOWLEDGE Short-term decision-making

Limiting factors When a single limiting factor is present in a production plan, then it is necessary to identify it and to plan production around it. Take the following example: Product Selling price Labour cost per unit ($) Material cost per unit ($)

X 30 10 5

Y 40 16 8

Z 50 20 10

Contribution

15

16

20

It appears that in the face of unlimited demand for all three products, Product Z would be given priority as it maximizes the contribution per unit. Now, assume that labour hours are limited to 500 and that labour costs $2 per hour (demand remains unlimited for all three products). In the above case, Product Labour cost per unit ($) No. of hours per unit Contribution per hour

X 10 5

Y 8 8

Z 20 10

3

2

2

Now it becomes clear that Product X is favoured for the full number of hours available (500). 100 units of X can be produced. If demand for X were limited to, say, 80 units (requiring 400 labour hours), then the remaining available hours (100) could be used to produce either Y or Z (in this case there is indifference between the two). The steps to be followed in working out the optimal production plan are: (1) Calculate the contribution per unit of product; (2) Calculate the contribution per unit of limited resource; (3) Rank the products according to Step 2;

Page | 36

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ExPress Notes FIA MA2 Management Accounting

(4) Produce according to the priority established in Step 3, up to the demand limit of each product or until the limited resource is exhausted Make-Buy A make-buy decision requires the determination of all relevant costs.

EXAMPLE An automotive components producer can supply itself externally with car heaters for USD 210 per unit. In considering whether to make these internally, the company calculates that an equivalent unit can be made in 2 labour hours using USD 100 worth of materials. Labour is currently at full capacity producing carburettors which generate contribution of USD 100. A carburettor takes 2.5 hours to produce. Labour costs USD 10 per hour. The carburettor also absorbs fixed overhead costs at the rate of USD 20 per labour hour. The relevant costs are ($): Materials: 100 Contribution lost (carburettors): 80 Labour (added-back): 20 200 It is cheaper to produce internally. Relevant costs One of management’s responsibilities involves making decisions affecting the firm in the

short-run based on relevant costs. What is relevance?

A relevant cost is a cash cost which is uniquely incurred (or avoided) as a consequence of taking a decision; cash, because it is the main determinant of value (unlike accounting profit); and unique in the sense that is not common to the alternative choices that are under consideration.

Page | 37

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ExPress Notes FIA MA2 Management Accounting

EXAMPLE A company seeking to determine whether to continue to transport its products by truck or to switch to the railroad discovers that insurance costs are identical in both choices; in that case, insurance costs are not relevant to the decision. If, however, there is a difference in the two insurance costs, then one can speak as the difference between the two choices as being “incremental”; this difference (referred to in some places as the “differential”) is relevant to the decision under consideration. Future Relevant costs refer to the future, i.e. they can be influenced prospectively by choice. It follows that: Sunk costs are not relevant: They have already taken place and cannot be reversed. Committed costs, if they cannot be avoided, are likewise not relevant, even if the timing of their occurrence is in the future. Their “unavoidability” has already been established in the past (making them effectively the equivalent of sunk costs). In keeping with the above logic, relevant costs therefore involve cash, are incremental and relate to the future.

Costing projects It is a standard management accounting practice to determine the relevant costs of a new project in order to come up with a price quotation. Setting a price without having an accurate understanding of costs can put a company at a competitive disadvantage, particularly if there is intense competition.

EXAMPLE A proposed project lasting 6 months requires the following inputs: 1) Labour

Page | 38

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ExPress Notes FIA MA2 Management Accounting

The following resources are needed: 

A specialist specifically qualified for this work needs to be hired at a cost of USD 10,000 per month;

The specialist will be assisted by two subordinates who are existing employees, each paid USD 40,000 p.a. One is not working on anything else for the foreseeable future, while the other is fully involved on another project and would need to be replaced for the duration of the proposed one at a cost of USD 5,000 per month;

A division manager has agreed to supervise the project and estimates that 5% of his time (equivalent to USD 6,500) be allocated for this purpose.

2) Materials The project calls for the use of 200 litres of Agent Q and 50 kg. of Compound P. Additional data: Agent Q

In stock

Historical price

Current price

Scrap value

150 litres

USD 7

USD 5

USD 1

USD 12

USD 15

USD 2

Compound P 100 kg. Agent Q is no longer in use.

Compound P is in regular use at the company.

3) R&D The project manager notices that R&D relevant to this project had been performed for another contract (later abandoned) at a cost of USD 15,000. He sees an opportunity to recover that cost now.

4) Equipment The company needs equipment for the project which would cost USD 15,000 to buy. Alternatively, it has some existing unused equipment that could be deployed. The used equipment is in good condition and could have been scrapped for USD 8,000 now or for USD 5,000 in 6 months. (Note: Ignore time adjustments of monetary values) Prepare the costs for the proposed project.

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ExPress Notes FIA MA2 Management Accounting

Relevant costs need to be identified with care, as they may include opportunity costs.

EXAMPLE A company considers building a storage facility on the site of a parking lot. If the parking lot had been generating parking fees which will now be lost, then this foregone revenue is an opportunity cost. Shut Down decisions Whether to close a plant making (accounting) losses depends on relevant costs:

Revenues (m)

40

Costs (m)

(44)

Profits (m)

(4)

If 25% of the costs are fixed costs allocated by H.O., then it appears that closing the plant will leave the company worse off, as 40m in revenues and only 33m in costs will be disappear. A careful examination of all costs needs to be made before arriving at a final decision.

KEY KNOWLEDGE Principles of discounted cash flow Simple vs. Compound interest Simple interest is the calculation of interest applied to the principal amount only. If $100 are lent at a simple interest of 5% p.a. then interest payments will be based only on the principal, as for example, an annual interest payment of 5% of $100, or $5 p.a. If interest is payble semi-annually on a compunded basis, then at the end of the first year, the interest will be $5.0625, calculated as:

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Š 2014 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.


ExPress Notes FIA MA2 Management Accounting

5% on $100 for the 1st half of the year, plus 5% on $102.50 for the 2nd half (i.e. the interest of $2.50 from the 1st half of the year is added to the principal amount and forms the basis for the interest calculation in the 2nd half). Nominal vs. Effective interest In the example above, 5% serves as the nominal interest rate, while the effective interest rate is 5.0625%; this is the total interest achieved on a compounded basis ($2.50 plus $2.5625). The preeminence of cash Cash, both its receipt and possession, lies at the basis of economic value. Cash is used to pay the bills and bonuses. It is a better indicator of wealth when compared with measures defined by accounting conventions, such as accounting profit. The relevance of cash flow to capital investment appraisal The appraisal process is predicated on the fact that capital expenditures are investments which will (hopefully) confer future benefits referred to as the payback. The payback may be a lengthy (and risky) one. Timing and value Tracking and measuring cash flows on a time-adjusted basis is critical: cash received quickly can be used to repay debt (avoiding interest costs) or invested (earning interest). Cash paid with a delay can reduce costs (as long as penalties are not incurred). It follows that the longer one waits for a receipt of cash, the less that cash is worth in today’s terms. Among other factors, its purchasing value may diminish due to the effects of inflation. Compounding Instead of receiving USD 100 today, assume it will be received after one year. To compensate for the delay, what should the value be after one year?

Present Value (PV) 100

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Future Value (FV) 100 x (1+r)

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ExPress Notes FIA MA2 Management Accounting

In the above example, if r = 5% p.a. then the FV after one year will be USD 105. This process can be repeated year after year. Discounting The above relationship between PV and FV:

PV x (1+r) = FV

can be re-arranged to:

PV = FV (1+r)

with r representing the discount rate. The above refers to “one-period” discounting, with r corresponding to the period. If discounting is done over more than one period, then the discounting effect will be: PV = FV (1+r)n where “n” refers to the number of periods. Thus, 100 received after two years, discounted at 10% p.a. will be PV = 100 = 82.6 (1.10)2 This reflects that the uncertainty of getting money back increases with time. This allows one to discount future values into present values and can be applied to a series of cash flows: Year: Future Values:

1

2

3

4

5

100

100

125

105

140

If discounted at r = 10%, then the above cash flows can be restated at their present values:

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FV discounted:

100 1.10

100 (1.10)2

125 (1.10)3

105 (1.10)4

140 (1.10)5

PV:

90.9

82.6

93.9

71.7

86.9

© 2014 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.


ExPress Notes FIA MA2 Management Accounting

Added together results in total PV = 426. Reducing future cash flows – of different timings and amounts – to one PV is a powerful tool. Note: If all the cash flows had been equal – say 100 – then the PV calculation would have been simplified: FV discounted:

100 1.10

100 (1.10)2

100 (1.10)3

100 (1.10)4

100 (1.10)5

PV:

90.9

82.6

75.1

68.3

62.1

The addition of the above is = 379 Net Present Value (NPV) To add meaning to the future cash flows, we can include the amount invested (which gives rise to the FVs): Year:

0

1

2

3

4

5

100

100

125

105

140

Investment: (200) FV: PV:

(200)

90.9

82.6

93.9

71.7

86.9

Year 0 amounts denote the present and are automatically = PV. The NPV of the above cash flows is therefore = 226.

Internal rate of Return (IRR) The internal rate of return (IRR) is defined as the discount rate (r) at which the net present value (NPV) of a stream of cash flows will be equal to zero. In other words, If, at a discount rate r, NPV = 0, then IRR = r

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© 2014 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.


ExPress Notes FIA MA2 Management Accounting

The IRR includes among its assumptions the following: any cash flows generated in the course of a project being evaluated are calculated as being reinvested at the IRR rate. This is illustrated thus: Time

Cash flows

0 1 2

(20,000) 5,000 30,000

The IRR of the above cash flows (using interpolation or calculator) is 35.61%. The above cash flows is equivalent to re-investing the 5,000 (Year 1) at the IRR rate (35.61%) to maturity (Year 2). Time

Cash flows (A)

0 1 2

(20,000) 5,000 30,000

Cash flows (B) (20,000) 0 36,780.5 (30,000 + 6,780.5*)

* 5,000 x 1.3561 = 6,780.5 The IRR of the cash flows shown in Column (B) is 35.61% -- exactly the same as in Column (A). Note: Column (B) cash flows resemble that of a zero-coupon bond, with investment at time 0 and no cash returns until the final year. This calculation confirms that interim cash flows are re-invested at the IRR rate. This assumption has been criticized for being unrealistic, since cash paid out of a project (returned to the investors, for example) is unlikely to obtain the same rate if invested elsewhere: they may be higher (i.e. interest rates may have risen in the meantime), or lower (placed in the bank to earn deposit interest).

Comparison of NPV and IRR methods The following decision rules apply to appraisal methods: NPV: Positive NPV projects are acceptable; the higher the better. IRR: An IRR in excess of a hurdle rate (set by the company) indicates acceptability; the higher (the IRR) the better.

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ExPress Notes FIA MA2 Management Accounting

EXAMPLE

Year

0

1

A

-5,000

6,000

B

-7,500

8,850

IRR

NPV:

10%

14%

20%

454

263

172

18%

545

263

129

Intuitively, IRR should be preferable, as it relates return to amount invested. Equal investment amounts do not necessarily remove the ambiguity.

EXAMPLE

Year

0

1

2

IRR

A

-500

B

-500

NPV (9%)

100

600

20%

97

500

155

25%

89

Payback method Initial Investment:

40,000 Cash flows (A)

Year 1 Year 2 Year 3 Year 4 Year 5 Total Payback

Page | 45

5,000 6,000 12,000 13,000 15,000 51,000 Year 5

Cashflows (B) 15,000 13,000 12,000 6,000 5,000 51,000 Year 3

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16%


ExPress Notes FIA MA2 Management Accounting

What are the advantages and disadvantages of this method?

Advantages It is easy to understand and to use. It focuses on the time needed to cover the investment (in money terms) and no more; it can be considered a minimalist’s approach (psychologically). If you invest in a Central American country where you expect a coup in the next 2 years, the payback method may be for you! But remember, the net (money) returns start only after that point!

Disadvantages It is a crude measure. It does not take opportunity costs or expected returns on money invested into account.

Discounted Payback We can apply the concept of discounting to the Payback method in order to capture the time value of money element. Year:

0

1

2

3

4

5

100

100

125

105

140

Investment: (200) FV: PV:

(200)

90.9

82.6

93.9

In the table above, the (simple) payback period is in Year 2; The Discounted Payback period is longer (Year 3).

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71.7

86.9


ExPress Notes FIA MA2 Management Accounting

Chapter 5

Cash Management

KEY KNOWLEDGE Cash and Cash Flow

Cash comprises both cash and bank deposits payable on demand and also cash equivalents which are defined as “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value”. The amount of cash held by a business at a point in time is found in the balance sheet under “current assets”. Cash flow refers to the movement of cash in and out of a business over a period of time. This information is found in a statement of cash flows, which is a primary financial statement. Such a statement is useful in that it is structured to show the extent to which a company is able to generate net cash from its operating activities and how such net cash is used in investing and/or financing activities.

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ExPress Notes FIA MA2 Management Accounting

Examples of cash receipts and payments include:     

Operating: cash flow from trading activities, e.g. cash received from customers, cash paid to suppliers and to employees; Financing: Cash paid on interest; Taxation: Actual cash paid during the year; Investing: Cash flows on purchase or sale of non-current assets; Financing: Cash flows on raising or redeeming long-term finance, such as shares or Debentures; dividends can also be included here.

Cash flow accounting The relationship between cash flow accounting and accounting for income and expenditure lies in the use of accruals and decisions as to the capitalisation of expenditures. Cash flow accounting dispenses with the “matching” principle in financial accounting. As the cash flow statement is derived from the income statement and the balance sheet, adjustments need to be made to remove the effects of accrual accounting so that the cash movements can be made more transparent. Importance of cash flow management Planning, tracking and collecting cash are all important because cash PAYS THE BILLS.  

The failure to pay bills puts a company in danger of bankruptcy. What begins as a condition of illiquidity can evolve into insolvency.

Cash flow is vital to going concern and commercial success, regardless of profitability. Having enough cash on hand is therefore critical in being able to settle obligations when they fall due (both planned and unforeseen); however, holding too much cash in a business is costly. There is a trade-off between liquidity and profitability. Determining the “optimal” amount of cash to hold becomes the challenge facing managers. Cash management functions are typically handled by treasury, and include:   

Page | 48

Collecting cash from customers (as soon as possible); Disbursing cash to suppliers (as late as practically possible); Investing short-term cash surpluses in low-risk interest-bearing investments (such as Treasury bills) in order to generate additional income for the company;

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ExPress Notes FIA MA2 Management Accounting

KEY KNOWLEDGE Cash budgets A cash budget is an estimate of the receipt and payments of cash in and out of the business for a defined future period based on existing conditions and operating assumptions. By understanding the nature and timing of cash receipts and expenditures, management is better able to influence them and plan/budget for the future. The purpose is to ensure that the company has sufficient cash on-hand to avoid missing disbursements when they fall due. There are statistical techniques which assist management in planning cash levels. Cash budget/forecast Businesses should develop their cash budget/forecast formats in a way which best reflects the type of business conducted and transactions generated. Such tools serve as a mechanism for monitoring and control. Investing and Financing Cash surpluses and deficits occur as a result in timing differences between the receipt of cash and the necessity to settle obligations punctually. If a deficit results, then the company should have overdraft faciltities in place with a bank. If deficits prove to be longer-term in nature, then the company should consider short-term borrowing, or possibly, longer-term forms of finance if the deficit is expected to persist. In the event of surpluses, these can be invested (e.g. T-bills mentioned earlier); other types of investments include:  Bank deposits  Money- market deposits  Certificates of deposit  Government bonds  Local authority stock

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ExPress Notes FIA MA2 Management Accounting

Chapter 6

Spreadsheets

KEY KNOWLEDGE Use of spreadsheets

The use of spreadsheets is a basic skill that all accountants and business analysts should possess. A spreadsheet is a computer program that is organised in a tabular format. The vertical and horizontal arrangement of cells allows the input and processing of large amounts of data in a systematic way. Spreadsheets contain sophisticated formulae which can be used to operate on the data. Instead of merely adding up columns of numbers, spreadsheet formulae can handle discounting (i.e. net present value) calculations as well as simple logical (IF) functions. Apart from processing a large volume of data quickly, spreadsheets permit analysis to be performed with great efficiency. Thus, if an assumption is modified, then the spreadsheet can automatically adjust all affected values (known as “what-if” analysis), meaning that the management acccountant can focus on interpeting the output.

Page | 50

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FIA MA2 Management Accounting - 2  

FIA MA2 Management Accounting - 2