management accounting training · 2019-05-06 · management accounting management accounting...
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Management Accounting Training
MANAGEMENT ACCOUNTING TRAINING FOR TRAINEES
2
Compiled by: Prof. Rashied Small, Prof. Jade Jansen,
Prof. Yaeesh Yasseen, Zuhayr Dollie & Lucinda Smidt
Management Accounting Training
Introduction
Management Accounting Training 3
Cost & Management Accounting
Management Accounting Training 4
Management Accounting
Management Accounting Training 5
Management or managerial accounting is the process of identifying,
analysing, recording and presenting financial information that is used
internally by management for planning, decision-making and control.
Cost Classification & Cost Behaviour
Management Accounting Training 6
Cost Classification - Content
▪ Overview of cost classification
▪ Defining the cost object
▪ Identifying direct and indirect costs
▪ Identifying variable and fixed costs
▪ Separate costs for mixed costs
Management Accounting Training 7
Cost Classification - Overview
Management Accounting Training 8
Cost Object
Management Accounting Training 9
Cost Object:
Any activity for which a separate measurement of cost is undertaken
Cost Centre:
A production or service location, function activity or item of equipment for
which a cost can be ascertained
Cost Unit:
A unit or product or service in relation to
which costs are ascertained
Cost & Expenses
Management Accounting Training 10
Cost & Expenses
Management Accounting Training 11
Direct & Indirect Costs
Management Accounting Training 12
Direct & Indirect Costs
Management Accounting Training 13
Direct & Indirect Costs
Management Accounting Training 14
Direct costs
Materials used in the manufacture of
products (bricks, sand & cement used in
construction)
Salaries & wages paid to the production
staff – actively involved in the
manufacturing process (construction
employees)
Indirect costs
Cost accountant who administers all the
products undertaken by the business
Salaries paid to the project manager
who supervisors a number of projects in
the construction industry
Cost Behaviour
Management Accounting Training 15
Cost Cost Behaviour
Material
cost
Material costs changes as the number
of units produce changes – direct
relation between materials used and
output
Factory
rent
Rental for the factory will not be
affected by the number of units
produced – floor space has not
relationship to output
Salaries
paid
Salaries is challenging when
determine cost behaviour as it is
affected by the basis of payment – if
the basis in not linked to output then it
does not change in relation to
changes in output
Variable Cost
Management Accounting Training 16
Testing for Variable Costs
Management Accounting Training 17
Fixed Costs
Management Accounting Training 18
Testing for Fixed Costs
Management Accounting Training 19
Profit Maximisation
Management Accounting Training 20
Profit Maximisation
Management Accounting Training 21
Profit Maximisation
Management Accounting Training 22
Mixed Cost
Management Accounting Training 23
Testing for Mixed Costs
Management Accounting Training 24
Units 5,000 10,000 20,000
Total cost 20,000 30,000 50,000
Average cost per unit 4.00 3.00 2.50
Based on the average cost per unit, the cost is not a variable cost as the
average cost per unit changes in relation to the level of output – variable
cost is fixed per unit
Change in output 100% 100%
Change in average cost 33% 20%
Based on the change in the output and change in average cost per unit, the
cost is not a fixed costs as there is not a direct relationship between the
change in output and change in cost – changes in fixed cost represent an
inverse proportionate change in output and cost
Mixed Cost – Separation of Costs
Management Accounting Training 25
Mixed Cost – High-Low Method
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Selecting information for the
higher & lowest periods
Determine the difference between
the outputs and costs
Calculating the average per unit
based on the differences
Highest Lowest Difference
Output 60,000 80,000 20,000
Total cost 580,000 640,000 60,000
Average cost per unit 3.00
Total variable cost 180,000 240,000
Total fixed cost 400,000 400,000
Total cost 580,000 640,000
Absorption & Marginal Costing
Management Accounting Training 27
Absorption & Marginal Costing -Content
▪ Job and process costing
▪ Allocation fixed costs
▪ Activity-based costing
▪ Absorption and marginal costing
▪ Under/over absorbed costs
▪ Reconciliation of profits
Management Accounting Training 28
Job and Process Costing
Job Costing
▪ One or more jobs/work in a
process account
▪ Costs are determine for each
job
▪ Job cost sheet is the primary
document
▪ Unit cost is computed by
accumulating the costs
incurred for the job
Process Costing
▪ Work-in-progress account for
each department
▪ Costs are determined by the
department
▪ Production cost report is the
primary document
▪ Unit cost is computed by
accumulating the department
costs
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Process Costing Systems
Management Accounting Training 30
Allocation of Production Costs
Management Accounting Training 31
Allocation of Production Costs
Management Accounting Training 32
Basis of Allocating Costs
Management Accounting Training 33
Basis of Allocating Costs
Management Accounting Training 34
Basis of Allocating Costs
Management Accounting Training 35
Labour Intensive Capital Intensive
Overhead costs 562,500 Overhead costs 562,500
Labour hours 90,000 Machine hours 100,000
Pre-determine overhead
rate 6.25
Pre-determine overhead
rate 5.62
Actual labour hours 50,000 Actual machine hours 50,000
Applied overhead costs 312,500 Applied overhead costs 281,250
Activity-based Costing (ABC)
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Traditional Costing & ABC
Management Accounting Training 37
Allocation of Service Department Costs
Management Accounting Training 38
Allocation of Costs –Direct Method
Management Accounting Training 39
Allocation of Costs –Step-Down Method
Management Accounting Training 40
Service 1 Service 2 Dept. A Dept. B
Total cost 120,000 200,000 250,000 390,000
Dept. A 30% 60%
Dept. B 50% 40%
Service 2 20%
Service 1 (120,000) 24,000 36,000 60,000
Subtotal 224,000
Service 2 (224,000) 134,400 89,600
Product cost nil nil 420,400 539,600
Product Costing
Management Accounting Training 41
Absorption & Marginal Costing
Management Accounting Training 42
Absorption & Marginal Costing
Management Accounting Training 43
Cost Absorption Marginal
Direct material costs 25.00 25.00
Direct labour costs 10.00 10.00
Variable overhead costs 3.00 3.00
Fixed overhead costs 5.00 -
Product cost 43.00 38.00
Absorption & Marginal Costing
Management Accounting Training 44
OAR – Using Normal Capacity
Basis of calculating the overhead absorption rate:
▪ OAR – represents the standard costing base of allocating
overhead costs for a specified period.
▪ Normal production capacity is used to reflect the rate that should
be allocated for the specified period – constant and consistent
rate must be applied.
▪ If the budgeted or actual capacity changes significantly from the
normal capacity then the normal capacity must be reviewed and
adjusted if necessary.
▪ However if the change is due to special circumstances, such as a
special order, then the normal capacity should not be adjusted.
Management Accounting Training 45
Under/Over Absorbed Costs
Management Accounting Training 46
Under/over absorbed costs
▪ Under absorption costing inventory is measured based on the
total cost – including the overhead absorption rate.
▪ Profit is calculated based on the actual overheads incurred for the
period.
▪ Variance between the applied costs (inventory valuation) and the
actual costs represents the under/over absorbed costs.
▪ Applied costs is calculated by applying the overhead absorption
rate to the actual output (flexible budget).
▪ Under/over absorbed costs can be treated as:
(a) set-off to the cost of goods sold
(b) Treated as an operating expense or income
Under/Over Absorbed Costs
Management Accounting Training 47
Under/Over Absorbed Costs
Management Accounting Training 48
Reasons of absorbed cost variances
▪ Errors in estimating the overhead
expenses
▪ Errors in estimating the normal
capacity/output
▪ Unforeseen changes in the production
capacity
▪ Seasonal fluctuation in the overhead
expenses
▪ Overhead rate may be applied to the
normal capacity which may be less
than the full operating capacity
Reconciliation of Profits
Management Accounting Training 49
Reconciliation of Profits
Management Accounting Training 50
The OAR was R5.00 and the variable production costs were R25.00. The actual
production was 100,000 units of which 20,000 were unsold; and the total fixed
production costs of R480,000.
Absorption Marginal
Sales (selling price of R 50,00) 4,000,000 4,000,000
Variable production costs 2,500,000 2,500,000
Fixed production costs (applied) 500,000 NIL
Inventory on hand (R30.00 & R25.00) (600,000) (500,000)
Gross profit 1,600,000 2,000,000
Manufacturing costs NIL 480,000
Over absorbed costs (500,000 – 480,000) 20,000 NIL
Profit 1,620,000 1,520,000
OAR including in inventory (20,000 x 5) 100,000
Reconciliation of Profits
Management Accounting Training 51
Production Wastages
Management Accounting Training 52
Production Wastages
Management Accounting Training 53
Operating Budgets
Management Accounting Training 54
Operating Budget - Content
▪ Introduction
▪ Using budgets to improve performance
▪ Risks and budget failures
▪ Budgeting methods
▪ Forecasting
▪ Operating budget
▪ Cash budget
Management Accounting Training 55
Introduction
▪ Budgeting is a planning tool used by management to quantify the
action plans of the organisation – financial plan.
▪ Budgeting is a is a tool used by management to allocate
resources to achieve the goals of the organisation in the most
effective and efficient manner.
▪ Reasons for Budgeting:
• Control – control the implementation of budget and activities
• Allocation of resource – facilitate the allocation of resources
as the budget is adjusted
• Monitoring – tracking the progress towards achieving goals
• Evaluation – evaluate performance of staff and departments
• Risk management – facilitate the mismanagement of
resources and wasteful expenses
Management Accounting Training 56
Introduction
▪ Purpose of Budgeting:
• Resource planning – allocation of resources to achieve goals
economically and efficiently.
• Financial planning – financial forecasting and activities.
• Financial control – control over the costs for the activities of
the business.
• Communication – facilitate the organisation wide
communication of the strategies & goals.
• Motivating staff – motivation for staff to achieve performance
levels (agreed KPI).
• Conflict resolution – facilitate resolving conflict between
departments and groups in the organisation.
Management Accounting Training 57
Budgeting – Improving Performance
Management Accounting Training 58
Risks Associated with Budgets
Management Accounting Training 59
Pressure from senior management – affected by budgetary process
Internal conflict – conflict between departments and management for budget approval
Lack of alignment with strategic goals – operational conflict and budget reductions
Over-budgeting – providing for wasteful expenses (inflate budgets) to absorbed possible reductions
Causes of Budget Failures
Reasons Budgets Fail
• Lack of clear purpose of budgets – performance measure vs
strategies planning.
• Unrealistic expectations – lack of detailed planning in setting
budgetary goals.
• Improper communication – lack of information about the
budgetary process and the budgets.
• Improper metrics – lack of proper monitoring and evaluation
processes.
• Top-down cost allocation – cost are allocated with negotiations or
agreement.
• Fixed budget – budgets are viewed as cast in stone and cannot
be changed (agility of budgets).
Management Accounting Training 60
Budgeting Process
Management Accounting Training 61
Effective Budgeting Process
Management Accounting Training 62
Structure: Strong organisational structure promotes authority, responsibility & accountability
Research: research and analysis of data and environment promotes goal driven operations
Approval: acceptance of budgets at all levels promotes commitment and motivation to implement
Monitoring: regular and continuous monitoring and evaluation ensures risks are identified and action taken
Budgeting Techniques
Management Accounting Training 63
Incremental Budgeting:Current budget is prepared by
making adjustments to the previous budget or actual
results by considering inflation and economic factors
Traditional Budgeting:Current budget is based on
previous budgets as a baseline, while adjustments are made for inflation rate,
market situation, demand, etc.
Activity-based Budgeting:A budgeting method where the
budget based on the cost drivers and requires an in
depth analysis of the business activities
Zero-based Budgeting:Current budget is prepared
from scratch without considering previous budget or
results
Budgeting Methods
Forecasting Techniques
Management Accounting Training 64
Master Budget
Management Accounting Training 65
Sales Budget
Production Budget
Direct labour
Budget
Direct materials
Budget
Manufacturing
overheads Budget
Selling & Administrative
expense Budget
Budgeted income
statement
Capital Expenditure
BudgetCash Budget Balance sheet
Budget
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Financial Budget
Sales Budget Process
Management Accounting Training 66
Market share & competition
Market trends & product life cycle
Price sensitivity & substitute products
Advertising & promotion strategy
Historical performance &
changes in technology
Production Budget
• Production budget is based on the
costs associated with the
manufacturing process (variable
and fixed costs)
• Production consists of a resource
requirements budget as well as a
cost budget
• Materials and labour cost budgets
must take into account the normal
wastages occurring in the
production process
Management Accounting Training 67
Production Budget - Inventory
• Inventory budgets should be based on the inventory management
strategy of the organisation
• Inventory budgets is driven by the sales strategy of the
organisation
• Inventory budget must account for the risk associated with the
warehouse management
Management Accounting Training 68
Units
Sales volume budget XXX
Add: Closing inventory plan XXX
Add: Inventory shrinkage/loss XXX
Subtotal XXX
Less: Opening inventory XXX
Inventory purchase/production requirement XXX
Cash Budgeting
Management Accounting Training 69
Statement of Cash Flow Cash Budget
Report on management of the past
cash flows
Planning of the cash flow for the
coming period
Report on the effective
management of cash flows in
strategic areas
Planning of cash flows for
operating & transactional activities
Used to review the cash flow
performance of the business
Used to plan cash flows and
utilisation of resources to achieve
the operating goals
Used to evaluate the performance
of management is controlling the
liquidity risk of the business
Used to monitor and evaluate
utilisation of cash to maintain the
liquidity status of the business
Cash Budgeting
• Conversion of operating and capital expenditure budgets to a
periodic cash flow plan.
• Excludes all non-cash transactions such as depreciation, bad
debts and accruals.
• Transactions are inclusive of VAT and the payment of VAT is
treated as a separate.
• Cash flows from customers and suppliers is based on the
payment terms.
Management Accounting Training 70
Break-even Analysis (Cost – Volume-Profit)
Management Accounting Training 71
Break-even Analysis - Content
▪ Introduction
▪ Difference between profit and contribution
▪ Calculation of break-even point
▪ Break-even points with targeted profit
▪ Break-even points for multiple products
▪ Break-even points with production constraints
▪ Preparation of a production plan
Management Accounting Training 72
Profit vs Contribution
Management Accounting Training 73
Break-even Analysis
Management Accounting Training 74
Beak-even Point
Management Accounting Training 75
Break-even with Target Profits
Total Target Profit:
▪ The total target profit is treated similar to the fixed costs when
calculating the break-even point
(Total fixed costs + Target profit)
Contribution per unit
Target Profit per Unit:
▪ The target profit per unit is treated similar to variable costs when
calculating the break-even point Total fixed costs
(Contribution per unit – target profit)
Management Accounting Training 76
Break-even – Multiple Products
▪ If the fixed costs are maintained separately for each product,
then the break-even point can be determined independently.
▪ If the fixed costs are not maintained separately for each product,
then the break-even point should be determined based on the
weighted average contribution per unit
▪ The basis of allocating weights to each product depends on
the product/sales mix, nature of operations, resources used,
etc.
Total fixed costs
Weighted average contribution
Management Accounting Training 77
Break-even with Constraints
Production without Constraints:
▪ Profit is maximised by producing and selling products with the highest contribution margin.
▪ Products are ranked based on their contribution – profitability ranking.
Production with Constraints:
▪ When there are production constraints then the planned production may not be achieved – scarce resources.
▪ Products are ranked based on their contribution per constraint (contribution per usage of the scarce resource).
Management Accounting Training 78
Break-even with Constraints
Resource Allocation:
▪ Under conditions of production constraints, the resources are
allocated to products based on their contribution per constraint
Contribution per Constraint:
▪ The contribution per constraint measures the profitability based on
the utilization of the scarce resource.
Contribution per unit
Usage per constraint
Management Accounting Training 79
Relevant Costing
Management Accounting Training 80
Relevant Costing - Content
▪ Introduction
▪ Types of relevant costs
▪ Applying relevant cost to make investment and operating
decisions
▪ Applying relevant costing methods for material costs
▪ Applying relevant costing methods for labour costs
Management Accounting Training 81
Introduction
▪ Relevant costing attempts to determine the objective cost of a
business decision. An objective measure of the cost of a
business decision is the extent of cash outflows that shall result
from its implementation. Relevant costing focuses on just that
and ignores other costs which do not affect the future cash flows.
▪ The principle of relevant costing is primarily applicable where
decisions have to be made - inclusion of irrelevant information
during the process, could lead to the incorrect decision being
made.
Management Accounting Training 82
Relevant Costs
Management Accounting Training 83
Decision-Making –Differential Costs
▪ Make or Buy decision
▪ Compare relevant costs for the alternatives
▪ Only recognise the differential costs
▪ Consider the opportunity and avoidable costs
▪ Discontinuing decisions
▪ Determine the opportunity and avoidable cost
▪ Identify the irrelevant costs
Management Accounting Training 84
Identifying Relevant Costs
▪ Any costs that is a future cost or cash flow
▪ Any cost that differ amongst alternatives and that will
influence the outcome/decision
▪ Future costs and revenue that differ amongst alternative
options
▪ Compare to indicate how they differ under each
alternative
▪ Sunk costs are never relevant costs
▪ Any cost that is avoidable
Management Accounting Training 85
Relevant Costing - Assumptions
▪ All variable costs are relevant costs
▪ All fixed costs are sunk costs
▪ Unit costs:
▪ Based on absorption costing and include irrelevant
costs
▪ Unit costs are fixed irrespective of the level of
production – economies of scale
Management Accounting Training 86
Relevant Costing - Material
Management Accounting Training 87
Relevant Costing - Materials
Management Accounting Training 88
Relevant Costing - Labour
Management Accounting Training 89
Questions?
Public Sector Financial Reports 90
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91Management Accounting Training