Fo management accounting

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  • 1. Strategy  Identify (if applicable):  Mission (implied)  Stakeholder preferences  Organizational Targets (Sales, ROI, GM, Net Income, etc)  Constraints (covenants, etc)  Key Success Factors and Key Risks  SWOT:  Strengths & Weaknesses (internal ONLY)  Opportunities & Threats (external ONLY)  No need to call it out as a SWOT analysis  Stick to relevant points
  • 2. Strategy  Financial Analysis  Recent financial performance (ratios, trends)  Financial Position (Liquidity, Solvency)  Analysis of Alternatives  Qualitative Analysis (Pros and Cons)   Link back to SWOT and targets/constraints Mitigate/avoid key risks and threats  Quantitative Analysis   Investment decision Product decision  Available financing
  • 3. Strategy  Recommendation  Make sure you have one and it’s clear  Again: Linkages  If you have a target/constraint, is it met?  Implementation  Don’t go crazy but it’s usually good to have a few points  Balanced Scorecard is always useful in gauging success  Forecast  If you have targets or constraints, always good to show forecast
  • 4. Investment Decision - NPV  NPV is used to evaluate investments  Very useful in cases where you have:  Large initial investment  Future cash inflows/outflows  Duration of several years  Less useful when:  Highly risky forecasts  Very short term (1-2 years)  Must use cash basis (exclude noncash items) and ignore financing costs (already considered in discount rate)
  • 5. Example: NPV Initial Year 1 Initial Investment Year 2 Year 3 Year 4 Year 5 Year 15 (7,600) Working Capital (400) (800) (1,150) Profit (Loss) Before Taxes (400) (800) (600) (386) (670) 615 1,975 2,920 6,580 540 540 Depreciation 540 540 540 540 Income Tax (excl CCA) 211 45 (400) (870) Finance Costs 640 640 640 640 640 650 (159) 155 595 1,485 2,303 4,921 Net Cash Flow Net Present Value Net Present Value: (7,600) 6,640 6,640 (1,197) (2,464)
  • 6. Balanced Scorecard  Performance management tool  Track execution of activities and monitor consequences  Strategy execution tool  Translate mission/vision into objectives  Measure performance vs. objectives  Can be used for incentive-based pay
  • 7. Balanced Scorecard  4 Perspectives  Financial   Financial performance (e.g. Gross Margin, Net Income, ROI, ROE) How can we show our strategy is succeeding financially?  Customer   Nonfinancial measures of customer satisfaction (retention, market share, customer surveys) How can we show we’re delivering to customers the value they expect?
  • 8. Balanced Scorecard  4 Perspectives  Internal Business Processes   Operating effectiveness & efficiency (including financial measures) such as variances, defects, on-time delivery What processes must we excel at to deliver value to our customers?  Learning and Growth   Measures of employee satisfaction, training and advancement What action must the company take to prepare the people and organization for the future?
  • 9. Balanced Scorecard  Components  Strategic objectives: Goals, KSF’s, Key Risks  Performance measures: Quantitative metrics to track success in achieving objectives  Baseline performance: Current level of performance  Target: New level of performance being sought  Initiatives: Enablers to help achieve targets
  • 10. Transfer Pricing  Price at which goods or services are charged between LOB’s/BU’s/Departments  Objective is to achieve goal congruency (i.e. consistent with organizational goals)  Market Value (best)  Standard Cost (cost center to profit center)  Negotiated Amount  Cost + profit  Actual cost
  • 11. Product Cost Flows Direct Materials Direct Labour Manufacturing OH Cost of Goods Manufactured Finished Goods Inventory
  • 12. Product Cost Flows Beginning WIP + Direct Materials + Direct Labour + Manufacturing OH (Ending WIP) Beginning Finished Goods + Cost of Goods Manufactured (Ending Finished Goods) Cost of Goods Manufactured Cost of Goods Sold Period Costs: Expenses in current period
  • 13. Cost Volume Profit (CVP) Single Product Unit Breakeven Total FC Unit CM $ Breakeven Total FC CM % Multiple Products Unit Breakeven Point Total FC (Total CM/Total Unit Sales) $ Breakeven Point Total FC (Total CM/Total $ Sales)
  • 14. Spoilage and Scrap  Normal spoilage  Added to cost of good units  Abnormal spoilage  Period cost  Proceeds from sale of scrap → Reduce Cost of Goods Sold →Additional Income →Reduce Overhead
  • 15. Job Costing  Costing system that tracks costs at a job level  Used when units are expensive and costs can be traced to individual job  DM, DL and MOH are tracked to a job via WIP  Charged to Finished Goods upon completion  Charged to COGS upon sale
  • 16. Process Costing  Inexpensive units for which individual costs cannot be identified  Average cost per equivalent unit produced during the period  Average cost used to transfer from WIP to FG & COGS
  • 17. Activity-Based Costing  Allocation of indirect costs based on causal activities  Attempts to identify direct link between cost and cost object (ie Cost Driver)  Results in better allocation using multiple activity rates  Reduces cross-subsidization
  • 18. Activity-Based Costing Costs Activities Products
  • 19. Overview of ABC  Identifies activities required to produce product or      service Direct costs can be directly allocated to products Indirect costs more difficult to assign Minimizes costs related to non-value adding activities Determines the costs of the activities Allocates cost to cost objects based on the objects consumption of activities
  • 20. Allocation of OH to Cost Pools Payroll taxes Machine maintenance 1,000 Direct Labour 500 Purchasing Dept labour 4,000 Fringe benefits 2,000 Purchasing dept supply 250 Equipment depreciation Machine Hours 750 Electricity 1,250 Unemployment Insurance 1,500 # of Purchase Orders
  • 21. Allocation of OH to Cost Pools Payroll taxes Machine maintenance 1,000 500 Purchasing Dept labour 4,000 Fringe benefits 2,000 Direct Labour $4,500 Purchasing dept supply 250 Equipment depreciation Machine Hours $2,500 750 Electricity 1,250 Unemployment Insurance 1,500 # of Purchase Orders $4,250
  • 22. Calculation of OH rates  Assuming:  1,000 Direct Labour hours  250 Machine hours  100 Purchase Orders  ABC Rates:  4,500/1000 = $4.50 per Direct Labour Hour  2,500/250 = $10 per Machine Hour  4,250/100 = $42.50 per Purchase Order
  • 23. Establishing an ABC system  Determine main activities performed  Determine best cost driver for each activity  Determine cost of each activity  Determine rate per unit of activity  Assign costs to products based on consumption of activity
  • 24. Standard Costs & Variance Analysis Material & Labour  Price Variance  (AP-SP) x AQ  Efficiency Variance  SP X (AQ – SQ)  Yield variance + Mix variance  Yield variance  (Total AQ – Total SQ) x BAPPU  Mix variance  (Actual Mix % - Std Mix %) x Total AQ x (Std PPU – BAPPU)
  • 25. Standard Costs & Variance Analysis Variable Overhead  Overhead Spending Variance  (SR – AR) x AU  AU  Actual units of allocation base  Overhead Efficiency Variance  (SH – AH) x SR
  • 26. Standard Costs & Variance Analysis Fixed Overhead  Overhead Spending Variance  Budgeted FOH - Actual FOH  Production Volume Variance  Applied FOH – Budgeted FOH
  • 27. Revenue Variances Snapshot
  • 28. Revenue  Sales Price Variance  AQ X (AP – SP)  Sales Volume Variance  (AQ – BQ) X Individual CPU  Sales Quantity Variance  (AQ – BQ) X BACPU  Sales Mix variance  (ASM% - BSM%) X Total AQ x (Budg Ind CPU – BACPU)
  • 29. Revenue Variances Snapshot
  • 30. Revenue  Sales Volume variance  Sales Quantity Variance + Sales Mix Variance  Market Size Variance  (Act Size – Budg Size) X Budg Share X BACPU  Market Share Variance  (Act Share – Budg Share) x Act Size - BACPU  Sales Mix variance  (ASM% - BSM%) X Total AQ x (Budg Ind CPU – BACPU)
  • 31. Short-term decision-making  Special Order  If idle capacity exists, taker order if  Incremental CM – Incremental FC > 0  If no idle capacity, take order if  Incremental CM – Incremental FC – Opp Cost > 0  Add or drop product   If incremental CM – Incremental FC > 0, add product If lost CM – FC savings < 0, drop product