Professional Documents
Culture Documents
November 2011
Resource Person:
Sugeeth Patabendige
ACMA (UK), ACIM (UK), MEcon, BBA Sp (Hons),
PG Dip Finance, PG Dip M.
Lecturer
Wisdom Business Academy, CIMA quality partner
&
Department of Marketing Management,
University of Kelaniya,
Sri Lanka.
November 11
Unit 01
Cost Accounting System
November 11
Summary 01
Traditional OH Cost Accounting Systems
Old methods / the assumption of costs are volume driven
End Product/Service
Cost
DM/DL
Absorption Costing
Direct
Cost
Indirect
Cost
Cost
Centre
Allocation
&
Apportionment
Re-allocation
OAR
Marginal Costing
O/Hs divided in to Fixed and Variable
Only variable
O/H related
O/H = Production
November 11
Summary 02
Profit Calculation
Marginal Costing
Absorption Costing
DM/DL
1.
Production
/Stocks
2.
Under/Over
absorption Adj.
Variable
Production
O/H
Fixed
Production
O/H
1.
Production
/Stocks
2.
To calculate
contribution
Variable non
Production
3.
End period
November 11
Fixed non
Production
Sugeeth Patabendige @ Wisdom
3.
End period
4
Summary 03
Profit Reconciliation
Marginal Costing
Profit
Stock
x
OAR
Absorption Costing
Profit
Stock
Stock
No change in stock
(In Absorption)
More cost with closing stock
goes to next period
(In Absorption)
More cost comes to the
period via opening stock
stock value is
same
Absorption Profit
Marginal Profit
Absorption Profit
Marginal Profit
Profit = same
Summary 04
Budgeted
Absorption costing
Profit
Sales
@Actual
Op. Stock
@ Std (FPC)
Production
@ Actual (FPC)
Cl. Stock
@ Std (FPC)
Under/Over absorbed
N0
@ Actual
6
Summary 05
Budgeted
Marginal costing
Profit
Sales
@Actual
November 11
Op. Stock
@ Std (VPC)
Production
@ Actual (VPC)
Cl. Stock
@ Std (VPC)
@Actual
Fixed cost
@ Actual
Summary 06
O/H Cost
Accounting Systems
Most
Organizations
use
But two
new
problems
Absorption
Incorrect Valuation
Marginal
Actual Cost
Per unit
Absorption
Cost Per
unit
High Volume
Low Volume
Activities
End Products
Cost Pool
Cost Driver
O/H
So a new method is
developed
ABC
8
Summary 07
Output forecasted
ABB
Budgets
prepared
based on
resources allocated
ABC
ABM
Leads to:
1. Operational ABM (better operational planning and control)
2. Strategic ABM (better strategic planning)
November 11
Summary 08
Standard Costing
With any modern
organization no. of
problems:
-How to plan in a
dynamic Environment ?
-Need continues
improvement ?
-How to motivate
employees towards
stds?
-Analysis needed in
more detail?
-Std based on labour hrs
not appropriate?
November 11
1. Developing Standards
Manufacturing
Service
DRG
Used in healthcare
industry to develop standards
(Patients grouped on diagnosis
and std developed for each
diagnosis)
No. Advantages:
Calculability
Control
Efficiency
Sugeeth
Patabendige @ Wisdom
Predictability
Summary 09
Standard Costing
2. Compare standards
with actual (Variances)
Operating
Statement
A document that
shows the
reconciliation of
planed outcome
to actual outcome
through variances
November 11
Cont. Statement
(Marginal)
Cost Statement
11
Summary 10
When, Std price > WAP = buying less is Fav
= buying more is Adv
When, Std price < WAP = buying more is Fav
= buying less is Adv
Standard Costing
1. Std price
Mix Variance
Production
Yield Variance
(Std yield Actual yield) Std cost per
unit of output
Adds up to:
Material Usage / Labour Efficiency
November 11
12
Summary 11
Sales types separately taken
Sales Mix
(Std mix actual mix) std
profit/
cont.
Standard Costing
2. Variances
Advance
Variances
If there
is more
than
one
type of
sales
Production
November 11
13
Summary 12
Original
Std
Standard Costing
Planning
Variance
2. Variances
Advance
Variances
If the
standard is
wrong ?
Revised
Std
Point to Remember
T. Std Qty = S/B.R x A.U
T. Std Cost/Profit = S/B.R x A.U
T. Std Units = S/B.R x AU
Operating
Variance
Actual
November 11
14
Summary 13
Based on
bottlenecks and
non bottlenecks
1. Indentify bottlenecks
and non bottlenecks
2. Plan for bottlenecks
TOC
How to maximize
operating profit
Five steps of
Guidelines
November 11
Manage &
Optimize in
the short
term
Improve and
continuously
develop in
the long
term
15
Summary 14
1. Indentify bottlenecks
and non bottlenecks
Accounting
Techniques
1. Recourse
Utilization rate
2. Maximum
production units
Resource required
Resource available
Total resource
per product time
TOC
Accounting
Techniques
Throughput
Accounting
Similar to
contribution per
limiting factor
But assumes;
only true variable
cost is DM
16
Summary 15
Traditional/JIC
Goals:
Elimination of non value adding activities
Zero inventory/Breakdown/Defects
100% on time delivery
Batch size of one
Manufacturing
Modern/JIT
17
Summary 16
Traditional/JIC
Types of
Manufacturing
&
Relevant Accounting
Modern/JIT
Backflush Accounting
November 11
18
Summary 17
Quality
November 11
Everyone
Continual effort to improve
Customer satisfaction
19
Summary 18
CAD & CAM = designing & production through computer technology
FMS = producing range of products / Integrated computer system
EDI = customers & suppliers electronically linked
AMT = CAD/CAM/FMS/EDI +
Normally undertaken with JIT & TQM = AMT environment
Modern Other
Techniques
November 11
20
Summary 19
Modern Mgt
Accounting
Benchmarking
Main Classification
Alternative Classifications
November 11
21
Summary 20
collection, analysis and assessment
What ? corrective management action
external reporting
Tangible (current costs)
Intangible/contingent (possible costs)
Environment
Accounting
Types of Cost ?
Internal failure
External failure
For pricing
For regulatory requirements
For reputation
Why ?
For cost savings
Absorption costing = a flat rate used.
How ?
November 11
22
Unit 02
Budgeting
November 11
23
Summary 01
Why ?
Planning
Control & Performance Evaluation
Motivation
Communication and Coordination
Too many
purposes
Any conflicts ?
Budgeting
Mainly balancing the
challenging and
achievability
Top down / Imposed
How ?
Main approaches
Bottom up / Participatory
B. Committee
Oversees / Responsible for
budgeting
November 11
B. Manual
Budget holder
Set of docs giving
Party responsible
info.
Sugeeth
Patabendige @ Wisdomfor achieving
Budget Slack
Overestimation or
underestimation
24
Summary 02
Incremental / Traditional
Budgeting
Rolling
How ?
Alternative Methods
ZBB
Summary 03
Budgeting
How ?
The Actual Preparation
Graphically =
Scatter diagram
method
Identifying the relationship How to
between two variables and identify the
extending the relationship relationship
to get the forecast
Mathematically
Least square
regression
Y = a+bx
Regression
Forecasting
Time Series
T
S
Identify reasons for
past information & Reasons?
the reasons are used
C
to forecast
November 11
Additive = Y-T
Should add up to 0
Multiplicative = Y/T
Should add up to 4
Assumed as
negligible
26
Summary 04
Functional Budgets
Budgeting
Mainly
Production
department
budgets
How ?
The Actual Preparation
Cash Budget
For other
departments
any appropriate
format
Budgeted P&L
Budgeted
Balance sheet
Budgeted Cash
flow statement
27
Summary 05
Keeping things under control through
What?
continues comparison
Leading to management by exception
Budgeting
By comparing actual to plan
Control
&
Performance Evaluation
How?
When?
Feedback:
end of the period (Actual results to Budget )
Feed forward:
beginning of the period (Forecasted actual results to Budget)
November 11
28
Unit 03
Project Appraisal
November 11
29
Summary 01
Project Appraisal / Analysis & Acceptance
2. Analyze
3. Accept or reject
Pay back
Cash
taken
ARR
Main Difference
Only non cash
item assumed
is depreciation
Profit
taken
T. Cash - T. Dep.
No. of years
Average PBIT
Initial / Average investment
Summary 02
NPV
Project Appraisal
Working Capital
Cumulative/Annuity DCF
(Table 02)
&
2. Rate @ which NPV = 0
(Initial Investment = PV of Future cash flows)
How to calculate = Graphically / Formula
A + (B-A * a/a-b)
November 11
31
Summary 03
Gross PI =
PV of FCF
Initial Investment
Net PI =
NPV
Initial Investment
Project Appraisal
Profitability Index
Modern /
DCF methods
ratio of
PV / NPV to
Investment
Making NPV
a relative
measure
Discounted Payback
Method
November 11
32
Summary 04
Project Appraisal
Advance
with
NPV
Low Inflation
Inflation
Cash flows
Forecasting based on
now situation
High Inflation
DCF
Market determined
No
inflation
High inflation
component
Mismatch of information
Two options
1. Monetary/Nominal Concept
Cash flows x Inflation
DCF = (1+MR) = (1+RR)(1+IR)
2. Real Concept
Cash flows
DCF = (1+MR) = (1+RR)(1+IR)
33
Summary 05
Project Appraisal
Advance
with
NPV
Cash flow
Gets reduces
Tax
But how to
calculate tax
Excluding
Depreciation
Taxable profit
(Accounting profit
or NCF)
Less : Capital Allowance
Net Taxable profit x Tax%
= Tax
Excluding:
IC, WC, SV
Tax deduction =
Incentive given by
the Govt. to motivate
investors
Normally paid
this year next year
DCF
November 11
34
Summary 06
Project Appraisal
If no. options
are available
Advance
with
NPV
Asset
Replacement
Information
available is:
Cost or Cost
savings
35
Summary 07
Project Appraisal
Advance
with
NPV
Capital
Rationing
Divisible Projects
(we can break down
projects)
November 11
Identify possible
combinations
Identify the best fit to
capital available and
the best NPV giver
36
Summary 08
Project
Appraisal
Origination of proposal
Initial screening
Analysis & Acceptance
What ?
Content ?
A summary of the plan, the actual outcomes,
the deviations (Financial and nonfinancial)
And the lessons learned
(Types/Classifications) Why?
Continue ?
what's the new NPV
Vs
Discontinue ?
What's the NRV
If there are overspendings:
Continue or discontinue ?
37
Unit 04
Risk & Uncertainty
November 11
38
Summary 1
Uncertainty
&
Risk
November 11
Why ?
What ?
Uncertainty
No prior experience
No statistical evidence
In Theory
Risk
Prior experience
Statistical evidence
No. of options:
-Probabilities
-Probabilities / Decision Trees
How to tackle ?
-Data tables
-Alternative Criteria
Sugeeth Patabendige @ Wisdom
-Sensitivity analysis
39
Summary 2
Uncertainty
&
Risk
How to tackle ?
01.
Assigning
Probabilities
Possible
Outcomes
(Variables)
AV
x i /n
X
=
=
Return
EV
pi x i
November 11
SD = p (x ) 2
i
Sugeeth Patabendige @i Wisdom
Decision
making base on
Risk and Return
tradeoff
Risk
40
Summary 3
No. of items uncertain
&
some based on others
Uncertainty
&
Risk
How to tackle ?
Assigning
Probabilities
Need to identify
Decision points
&
Outcome points
Decision making is on EV
Two methods possible: Forward & Backward
November 11
Possible outcome:
with one variable changing
= One way data table
Possible outcome:
with two variable changing
= Two way data table
41
Summary 4
Uncertainty
&
Risk
How to tackle ?
Types
04.
Alternative Criteria
Maximin
Maximax
Minimax
Regret
November 11
Assumption
Decision
Worst will
Select the
happen
Best will
happen
out of best
out of maximum
regret possible
42
Summary 5
Uncertainty
&
Risk
How to tackle ?
No. of Options?
But
can we bring a
consultant to
takeout the risk and
uncertainty
November 11
Value of Information
Vs.
EV of the decision with
consultants perfect info.
43
Summary 6
Uncertainty
&
Risk
How to tackle ?
05.
Sensitivity
Analysis
November 11
How?
As for
NPV
How to interpret ?
Higher the % = unlikely to happen
Lower the % = more likely to happen
Control the more likely ones more
44
Unit 05
Working Capital Management
November 11
45
Summary 01
Internal view point = Capital needed for day to day operations
Working Capital
Management
1. Investment Function
2. Financing Function
November 11
46
Summary 02
General Information:
Large/Small,
Manufacturing/Services,
Retailers/Wholesalers,
Stable/Growth
Normal/Seasonal Demand
Manufacturing technology (JIC or JIT)
Credit policies / Operating efficiency
Working Capital
Management
1. Investment Function
How to identify ?
Shows Overcapitalized
Liquidity Ratio
or
= CR & QR
(Undercapitalized) overtrading
47
Summary 03
Aggressive
Permanent capital = LTS + STS
Temporary capital = STS
Working Capital
Management
2. Financing Function
Moderate
Permanent capital = LTS
Temporary capital = STS
Conservative
Permanent capital = LTS
Temporary capital = LTS+STS
November 11
48
Summary 04
Working Capital
Management
:Advance
Cash
Management
T Bills / Bonds
Bank deposits
Certificate of deposits
Numbered accounts
November 11
Commercial Paper/Corporate
Bonds
Short/Long term borrowing..By
blue-chip companies
49
Summary 05
Cash
Management
Deficit Mgt
= Borrower
Borrower
or Lender
@What Price?
@What Rate?
or
Surplus Mgt
= Lender
Interest
&
Redemption/Maturity value
FV (1 i t)
y
Interest Yield
Earnings
Current Mkt. value of the security
November 11
Yield to Maturity
What the security really
earns in the long term = IRR
Before IRR a rough calculation
is done to identify suitable
DCFs to getter a more correct
50
IRR
Summary 06
Receivables Management
&
Payable Management
Cash Discount to be
given or Taken ?
Age analysis ?
A = (FV/PV) y/t - 1
Considered as
A cost to the seller
A benefit to the buyer
&
Compared with alternative options
November 11
51
Summary 07
How to Manage ?
Two bin system
Reorder level system
Periodic review system
Mix system
JIT purchasing
Inventory
Management
Optimum Inventory ?
The EOQ formula
November 11
Vs.
52