UNIT 14: ADVANCED MANAGEMENT ACCOUNTING Unit code:
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UNIT 14: ADVANCED MANAGEMENT ACCOUNTING Unit code: Y5080537 Credit value: 15 UNIT 14: ADVANCED MANAGEMENT ACCOUNTING Learning Outcome 2 : Evaluate the use of management accounting techniques to support organisational performance THE BASIC
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UNIT 14: ADVANCED MANAGEMENT ACCOUNTING Unit code: Y/508/0537
Credit value: 15<br>
Credit value: 15<br>
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UNIT 14: ADVANCED MANAGEMENT ACCOUNTING Learning Outcome 2 : Evaluate the use of management accounting techniques to support organisational performance<br>
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THE BASIC SYLLABUS 1 Analyse the purpose for developing and presenting financial information.
2 Evaluate the use of management accounting techniques to support organisational performance.
3 Analyse actual and standard costs to control and correct variances.
4 Evaluate how a changing business environment impacts on management accounting.<br>
2 Evaluate the use of management accounting techniques to support organisational performance.
3 Analyse actual and standard costs to control and correct variances.
4 Evaluate how a changing business environment impacts on management accounting.<br>
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LEARNING OUTCOMES LO 2:Evaluate the use of management accounting techniques to support organisational performance
P2: Evaluate the use of different accounting microeconomic techniques in application to supporting organizational performance .<br>
P2: Evaluate the use of different accounting microeconomic techniques in application to supporting organizational performance .<br>
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OVERVIEW Management accounting is the sourcing, analysis, communication and use of decision-relevant financial and non-financial information to generate and preserve value for organisations. Accounting information is relevant to managers, and it can be processed and analysed for effective managerial decision-making. By examining accounting information that is extensively used across three key managerial functions of planning, decision-making and controlling.<br>
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COST ANALYSIS Cost analysis (also called economic evaluation, cost allocation, efficiency assessment, cost-benefit analysis, or cost-effectiveness analysis by different authors). At the most basic level, cost allocation is simply part of good program budgeting and accounting practices, which allow managers to determine the true cost of providing a given unit of service (Kettner, Moroney, & Martin, 1990).<br>
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COST ANALYSIS Cost allocation, cost-effectiveness analysis, and cost-benefit analysis represent a continuum of types of cost analysis which can have a place in program evaluation. They range from fairly simple program-level methods to highly technical and specialized methods.<br>
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COST ANALYSIS Cost analysis is a comparison of costs. Costs used to prepare financial statements are not the same as those used to control operations. Costs may be controllable or non-controllable and are subject to time periods and constraints. For example, controllable costs are those the manager may authorize.<br>
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COST ANALYSIS WHAT COST ANALYSES CAN TELL YOU:
Cost analyses can provide estimates of what a program's costs and benefits are likely to be, before it is implemented. "Ex-ante" or "before the fact" cost analyses may have to be based on very rough estimates of costs and expected benefits. However, if a program is likely to be very expensive to implement, very difficult to "un-do" once it is in place, or very difficult to evaluate, even a rough estimate of efficiency may be quite valuable in the planning stages (Rossi & Freeman, 1993).<br>
Cost analyses can provide estimates of what a program's costs and benefits are likely to be, before it is implemented. "Ex-ante" or "before the fact" cost analyses may have to be based on very rough estimates of costs and expected benefits. However, if a program is likely to be very expensive to implement, very difficult to "un-do" once it is in place, or very difficult to evaluate, even a rough estimate of efficiency may be quite valuable in the planning stages (Rossi & Freeman, 1993).<br>
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COST ANALYSIS Cost analyses may improve understanding of program operation, and tell what levels of intervention are most cost-effective. A careful cost analysis within a program might tell you, for example, that it doesn't so much matter whether you have a half-day program or a full-day preschool program for children, but that the teacher-to-child ratio does matter (that is, children benefit more from low ratios than they do from longer days). This information might influence decisions about how many teachers you need to hire, or how many classrooms you need, or how many children you can serve effectively.<br>
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COST ANALYSIS Cost analyses may reveal unexpected costs. A speech therapy program might unexpectedly find that it costs more to use paraprofessionals to work with children than professionals, because the paraprofessionals need more training and supervision, or work with fewer children at a time (White, 1988). Or, cutting the number of home visits allowed by caseworkers serving a large rural area (in order to save on mileage reimbursements) might have the unplanned result of higher long-distance phone bills, because the workers still feel a need to stay in close touch with their clients.<br>
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COST ANALYSIS WHAT COST ANALYSES CANNOT TELL YOU:
Whether or not the program is having a significant net effect on the desired outcomes. Unless you know for sure that the program is producing a benefit, it doesn't make sense to talk about the cost of producing that benefit (Rossi & Freeman, 1993). Cost analysis may be considered an extension of an impact or outcome evaluation, but it cannot take the place of one.<br>
Whether or not the program is having a significant net effect on the desired outcomes. Unless you know for sure that the program is producing a benefit, it doesn't make sense to talk about the cost of producing that benefit (Rossi & Freeman, 1993). Cost analysis may be considered an extension of an impact or outcome evaluation, but it cannot take the place of one.<br>
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COST ANALYSIS WHAT COST ANALYSES CANNOT TELL YOU: Whether the least expensive alternative is always the best alternative. Often political or social values other than cost need to determine program and policy choices. When there are competing values or goals involved, cost analysis is often just one factor to be considered, and we need to have some other way of deciding which factors should take priority.<br>
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COST VOULUME PROFIT The application of cost-volume-profit analysis, which is based on the cost behaviour principles and marginal costing ideas, is sometimes necessary so that the appropriate decision-making information can be provided. Cost-volume-profit (CVP)/breakeven analysis is the study of the interrelationships between costs, volume and profit at various levels of activity. The management of an organisation usually wishes to know the profit likely to be made if the aimed-for production and sales for the year are achieved.<br>
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COST VOULUME PROFIT Management may also be interested to know the following.
(a) The breakeven point which is the activity level at which there is neither profit nor loss.
(b) The amount by which actual sales can fall below anticipated sales, without a loss being incurred.<br>
(a) The breakeven point which is the activity level at which there is neither profit nor loss.
(b) The amount by which actual sales can fall below anticipated sales, without a loss being incurred.<br>
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COST VOULUME PROFIT When considering output decisions (e.g. how many units to make and sell) in the short term, then decision making often focuses on contribution. Key decisions relate to the following:
How many units do we need to sell to break even?
What safety margin do we expect?
How many units need to be sold to achieve a target profit?<br>
How many units do we need to sell to break even?
What safety margin do we expect?
How many units need to be sold to achieve a target profit?<br>
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FLEXIBLE BUDGETING A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity. Flexible budgets are one way companies deal with different levels of activity. A flexible budget provides budgeted data for different levels of activity.<br>
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FLEXIBLE BUDGETING Two uses of flexible budgets
At the planning stage. For example, suppose that a company expects to sell 10,000 units of output during the next year. A master budget (the fixed budget) would be prepared on the basis of these expected volumes. However, if the company thinks that output and sales might be as low as 8,000 units or as high as 12,000 units, it may prepare contingency flexible budgets, at volumes of, say 8,000, 9,000, 11,000 and 12,000 units, and then assess the possible outcomes.
Retrospectively. At the end of each control period, flexible budgets can be used to compare actual results achieved with what results should have been under the circumstances.<br>
At the planning stage. For example, suppose that a company expects to sell 10,000 units of output during the next year. A master budget (the fixed budget) would be prepared on the basis of these expected volumes. However, if the company thinks that output and sales might be as low as 8,000 units or as high as 12,000 units, it may prepare contingency flexible budgets, at volumes of, say 8,000, 9,000, 11,000 and 12,000 units, and then assess the possible outcomes.
Retrospectively. At the end of each control period, flexible budgets can be used to compare actual results achieved with what results should have been under the circumstances.<br>
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FLEXIBLE BUDGETING Flexible budgets are an essential factor in budgetary control.
Management needs to know about how good or bad actual performance has been. To provide a measure of performance, there must be a yardstick (budget/ standard) against which actual performance can be measured.
Every business is dynamic, and actual volumes of output cannot be expected to conform exactly to the fixed budget. Comparing actual costs directly with the fixed budget costs is meaningless.
For useful control information, it is necessary to compare actual results at the actual level of activity achieved against the results that should have been expected at this level of activity, which are shown by the flexible budget.<br>
Management needs to know about how good or bad actual performance has been. To provide a measure of performance, there must be a yardstick (budget/ standard) against which actual performance can be measured.
Every business is dynamic, and actual volumes of output cannot be expected to conform exactly to the fixed budget. Comparing actual costs directly with the fixed budget costs is meaningless.
For useful control information, it is necessary to compare actual results at the actual level of activity achieved against the results that should have been expected at this level of activity, which are shown by the flexible budget.<br>
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COST VARIANCES ‘The evaluation of performance by means of variances, whose timely reporting should maximise the opportunity for managerial action.’
CIMA Official Terminology, 2005<br>
CIMA Official Terminology, 2005<br>
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COST VARIANCES Variance analysis involves breaking down the total variance to explain:
1. How much of it is caused by the usage of resources differing from the standard
2. How much is caused by cost of resources differing from the standard.<br>
1. How much of it is caused by the usage of resources differing from the standard
2. How much is caused by cost of resources differing from the standard.<br>
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COST VARIANCES Together, variances can help to reconcile the total cost difference by comparing actual and standard cost. The main purpose of variances is to provide reasons for off-standard performance. In this way, management can improve operations, correct errors and deploy resources more effectively to reduce costs.<br>
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COST VARIANCES For example, if a company had actual repairs expense of $950 for May but the budgeted amount was $800, the company had a cost variance of $150. Since the actual cost was more than the budgeted amount, the cost variance is said to be unfavourable. When an actual cost is less than the budgeted amount, the cost variance is said to be favourable.<br>
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REFERENCES Cimaglobal.com. (2018). CIMA - What is management accounting?. [online] Available at: https://www.cimaglobal.com/Starting-CIMA/Why-CIMA/what-is-management-accounting/ [Accessed 29 Jan. 2018].
edX. (2018). Management Accounting for Decision Making. [online] Available at: https://www.bing.com/cr?management-accounting-decision-making-iimbx- [Accessed 29 Jan. 2018].
UniversalClass.com. (2018). How to Perform a Cost Analysis. [online] Available at: https://www.universalclass.com/articles/business/basic-methods-and-calculations-of-financial-and-cost-analysis.htm [Accessed 29 Jan. 2018].<br>
edX. (2018). Management Accounting for Decision Making. [online] Available at: https://www.bing.com/cr?management-accounting-decision-making-iimbx- [Accessed 29 Jan. 2018].
UniversalClass.com. (2018). How to Perform a Cost Analysis. [online] Available at: https://www.universalclass.com/articles/business/basic-methods-and-calculations-of-financial-and-cost-analysis.htm [Accessed 29 Jan. 2018].<br>
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REFERENCES Kfknowledgebank.kaplan.co.uk. (2018). [online] Available at: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/CVP%20Analysis%20
(Single%20product).aspx [Accessed 29 Jan. 2018].
Media, B. (2009). ACCA Paper F2 - Management Accounting Study Text, 2009. London: BPP Learning Media.
Cals.arizona.edu. (2018). Cost Analysis in Evaluation. [online] Available at: https://cals.arizona.edu/sfcs/cyfernet/cyfar/Costben2.htm [Accessed 29 Jan. 2018].<br>
(Single%20product).aspx [Accessed 29 Jan. 2018].
Media, B. (2009). ACCA Paper F2 - Management Accounting Study Text, 2009. London: BPP Learning Media.
Cals.arizona.edu. (2018). Cost Analysis in Evaluation. [online] Available at: https://cals.arizona.edu/sfcs/cyfernet/cyfar/Costben2.htm [Accessed 29 Jan. 2018].<br>
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REFERENCES Cliffsnotes.com. (2018). Flexible Budgets. [online] Available at: https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/flexible-budgets-and-standard-costs/flexible-budgets [Accessed 29 Jan. 2018].
AccountingCoach.com. (2018). What is a flexible budget? | AccountingCoach. [online] Available at: https://www.accountingcoach.com/blog/flexible-budget [Accessed 29 Jan. 2018].
Cimaglobal.com. (2018). Cite a Website - Cite This For Me. [online] Available at: http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_standard_costing_and_variance_analysis_mar08.pdf.pdf [Accessed 29 Jan. 2018].<br>
AccountingCoach.com. (2018). What is a flexible budget? | AccountingCoach. [online] Available at: https://www.accountingcoach.com/blog/flexible-budget [Accessed 29 Jan. 2018].
Cimaglobal.com. (2018). Cite a Website - Cite This For Me. [online] Available at: http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_standard_costing_and_variance_analysis_mar08.pdf.pdf [Accessed 29 Jan. 2018].<br>