A 14907 - Strategic Management Accoun6ng (2018-2019) Session 8 - - PowerPoint PPT Presentation

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A 14907 - Strategic Management Accoun6ng (2018-2019) Session 8 - - PowerPoint PPT Presentation

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A 14907 - Strategic Management Accoun6ng (2018-2019) Session 8 Budgets and Performance Management Paul G. Smith B.A., F.C.A Course Objec6ves Students will learn to use a range of tools for cos2ng, decision making, planning and controlling

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A 14907 - Strategic Management Accoun6ng (2018-2019)

Session 8 Budgets and Performance Management

Paul G. Smith B.A., F.C.A

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Course Objec6ves

A 14907 Strategic Management Accoun6ng

Students will learn to use a range of tools for cos2ng, decision making, planning and controlling and consider their applicability within the context of Strategic Management. They will also be able to read and understand a financial statement prepared according to Interna2onal accoun2ng Standards

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Course Overview

  • 1. Financial Vs Management Accoun4ng
  • 10. Investment Decisions
  • 2. Accoun4ng Principles and Valua4on Criteria –

Current and Fixed Assets

  • 11. Opera4onal Decisions
  • 3. Accoun4ng Principles and Valua4on Criteria –

Current and Fixed Assets ..Cont’d

  • 12. Exam
  • 4. Financial Statement Analysis
  • 13. Target Cos4ng and Life Cycle Cos4ng
  • 5. Performance Measurement and Cost

Accoun4ng

  • 14. Servi4za4on and Cost Management
  • 6. Exam
  • 15. Performance Measurement, Sustainability and CSR
  • 7. Strategic Management Accoun4ng
  • 16. Voluntary Disclosure and Balanced Scorecard – Case Study
  • 8. Budgets and Performance Management
  • 17. Presenta4on and Discussion of Case Study
  • 9. Pricing Decisions
  • 18. Exam

PT PGS LS PGS A 14907 Strategic Management Accoun6ng 4

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SESSION 8 OBJECTIVES

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Objec6ves of Session 8

At the end of this session students will be able to:

  • Interpret a variance report and assess its

implica2ons for management interven2on

  • Iden2fy behavioural aspects of budget

management

  • Recommend strategies to prevent or remedy

adverse behavioural aspects of budget management and harness posi2ve aspects

  • Evaluate alternate views of performance

management.

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RECAP PREVIOUS SESSION

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Session 7 Recap

  • Introduc6ons and course objec6ves
  • Strategic Planning: Purpose, vision, mission,

goals, objec6ves

  • Business Planning: Business Plans
  • Budge6ng: Budget process, flexible budge6ng,

zero-based, ac6vity based

  • The role of Management Accoun6ng in

suppor6ng:

– Strategic choices/decisions – Monitoring and repor6ng

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Session 7 Valida6on

  • What do we mean by strategic planning?
  • What is the difference between Statements of

Purpose, Vision and Mission?

  • What are the differences between Strategic

Plans, Business Plans and Budgets?

  • What is a SWOT analysis?
  • What is a PEST analysis?
  • Describe the budget se_ng process
  • How does Management Accoun6ng support the

Strategic Management Process?

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Session 8 Overview

  • Standard cos6ng and variance analysis.
  • Profit-related performance measures.
  • Performance measurement in not-for-profit
  • rganiza6ons.
  • Behavioural aspects of performance

management: gaming; achievement mo6ve; crea6ve accoun6ng.

  • Alterna6ve views on performance management:

ac6vity-based cos6ng; balanced scorecards; just- in-6me; and total quality management.

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BUDGETS AND PERFORMANCE MEASUREMENT

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Two principles of performance management

  • Responsibility

– Responsibility for performance must be clearly allocated and delineated.

  • Controllability

– Employees should be held accountable only for what they can control.

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Types of responsibility centre

  • Cost centre
  • Revenue centre
  • Profit centre
  • Investment centre
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Budget Example 6.1

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Fixed budget variance report (example 6.2)

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Flexed budget variance report (example 6.3)

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Flexible Budgets -example

Capacity 0Hr 200hr 400hr 600hr 800hr 1000hr 1200hr 0% 20% 40% 60% 80% 100% 120% € € € € € € €

Costs

Supervision 600 600 600 1,050 1,050 1,050 1,500 Indirect Labour 300 600 900 1,200 1,500 1,800 2,100 Maintenance 100 120 140 160 180 200 220 Deprecia6on 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Supplies 37 50 62 75 87 100 112 Power 1,073 1,233 1,394 1,554 1,715 1,875 2,036 3,110* 3,603 4,096 5,039 5,532 6,025 6,968 * Stand-by cost A 14907 Strategic Management Accoun6ng 17

Source: An Insight into Management Accoun6ng – John Sizer

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Standard cos4ng

  • Three types of standard:

– Basic standard

  • Constant over 6me

– Ideal standard

  • Perfec6on

– Ajainable standard

  • Under normal but efficient levels of ac6vity
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Variance analysis

  • A volume variance measures the efficiency

with which resources are used by showing the difference between actual usage and standard usage.

  • A rate variance measures the difference

between the actual price paid and the expected price.

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Analysis of profit variance

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BASIC COST ACCOUNTING

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Cost Accoun6ng

1. The design and opera4on of cost systems and procedures 2. The determina4on of costs by departments, func6ons, responsibili6es, ac6vi6es, geographic areas, periods and other cost centres and cost units. The costs may be historical costs, actual costs or future or standard costs 3. The comparison of costs of differing periods, of actual costs with es6mated and standard costs, and cost of different alterna6ves 4. The presenta4on and interpreta4on of cos4ng informa4on as an aid to management in controlling the current and future

  • pera6ons of the company.

– Communica6on device – Device for Mo6va6on – Appraisal device (before/amer) (standards, budgets/actual results)

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Classifica6on of costs

  • By Func4on: produc6on, marke6ng, sales,

distribu6on, research and development, finance, administra6on

– By Cost Centre: loca6on, person or item of equipment (or group thereof) for which costs may be ascertained for cost control

  • By Cost Unit: unit of product or service, or 6me (or

combina6on of these) in rela6on to which costs may be ascertained or expressed. A job, a batch, contract, or product group depending on the nature of produc6on.

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Cost elements

  • Within cost centres and cost units costs are

further classified into cost elements

– Material cost – Labour cost – Expenses (services, u4li4es, deprecia4on)

  • Cost elements are either

– Direct or, (can be allocated as a whole) – Prime costs – Indirect (needs to be appor4oned or allocated) – Overhead costs

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Overhead Costs

  • Fixed costs: Costs of 6me and accumulate

irrespec6ve of produc6on or volume of output e.g. rent, insurance

  • Variable costs: Tends to vary with output
  • Semi-variable: Has characteris6cs of both

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Overhead Alloca6on

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Worksheet

SM 1 Bang-Bang Manufacturing Ltd

Source: An Insight into Management Accoun6ng – John Sizer

How to allocate overhead expenses to product costs

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Cos6ng Systems

  • Job Cos6ng
  • Process Cos6ng

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Job Cos6ng: Bill of Materials - motorcycle example

Part Quan4ty Supplier Unit Cost € Cost Frame 1 In-house 250 250 Front fork & suspension 1 A 500 500 Engine 1 In-house 1,000 1,000 Gearbox and Clutch 1 In-house 1,000 1,000 Wheels & Tyres 2 B 500 1,000 Brakes 2 C 250 500 Starter motor 1 D 75 75 Lights 1 D 100 100 Petrol tank 1 E 50 50 Saddle 1 F 125 125 Speedometer 1 D 50 50 Labour - Assembly 4 hours 40 per hour 160 Factory Overhead 10 per hour 40 Total Cost €4,800

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Process Cos6ng – Example XYZ Limited

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WIP Cost Completed Equivalent Total Per Unit € Units Units Units € Process 1 Costs Incurred Materials 4,000 800 200 1,000 4 (4,000/1,000) Labour 1,800 800 100 900 2 (1,800/900) Overhead 1,700 800 50 850 2 (1,700/850) 7,500 Average Unit Cost 8 Units Completed 800 Units in Work-in-Process (WIP) 200 Value Inventory WIP Value € 6,400 (800 x €8) Equivalent Finished Units Materials - 100% 200 @ 4 800 Labour - 50% 100 @2 200 Overhead - 25% 50 @2 100 1,100

Source: An Insight into Management Accoun6ng – John Sizer

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VARIANCE ANALYSIS

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Variance Analysis

  • Materials Variances (Price/usage)
  • Labour Variances (Rate/

Efficiency)

  • Overhead Variances (Efficiency/

Volume/Cost)

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Materials Variances

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Material cost variance = Actual cost (actual quan6ty x actual price) – Standard cost (standard quan6ty x standard price). Can be analysed into: Material price variance = (Actual quan6ty x Actual price) – (Actual quan6ty x Standard price) Material usage variance = (Actual quan6ty x Standard price) – (Standard quan6ty x Standard price)

Source: An Insight into Management Accoun6ng – John Sizer

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Materials Variance - Example

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Standard Actual Variance Materials Quan6ty Price € Quan6ty Price € Total Price Usage Kgs Kgs (a) (b) (c) (d) (e) (f) A 3,000 3.00 9,000 2,900 3.25 9,425 B 1,250 12.00 15,000 1,300 13.00 16,900 C 1,250 6.00 7,500 1,350 5.50 7,425 D 250 30.00 7,500 260 24.00 6,240 39,000 39,990

Source: An Insight into Management Accoun6ng – John Sizer

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Materials Variance - Example

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Standard Actual Variance Materials Quan6ty Price € Quan6ty Price € Total Price Usage Kgs Kgs (a) (b) (c) (d) (e) (f) c-f d x (b-e) b x (a-d) A 3,000 3.00 9,000 2,900 3.25 9,425 (425) (725) 300 B 1,250 12.00 15,000 1,300 13.00 16,900 (1,900) (1,300) (600) C 1,250 6.00 7,500 1,350 5.50 7,425 75 675 (600) D 250 30.00 7,500 260 24.00 6,240 1,260 1,560 (300) 39,000 39,990 (990) 210 (1,200)

Source: An Insight into Management Accoun6ng – John Sizer

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Labour Variances

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Labour variance = Actual cost (actual hours x actual rate) – Standard cost (standard hours x standard rate). Can be analysed into: Wage rate variance = (Actual hours x Actual rate) – (Actual hours x Standard rate) Labour efficiency variance = (Actual hours x Standard rate) – (Standard hours x Standard rate)

Source: An Insight into Management Accoun6ng – John Sizer

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Labour Variances - Example

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Standards per unit of produc4on Labour variance Standard direct labour hours 20 Standard direct labour rate € 60 Monthly Produc4on Informa4on Produc6on 250 units Wage rate variance Direct labour hours 5,600 Direct labour cost € 360,000 Labour efficiency variance

Source: An Insight into Management Accoun6ng – John Sizer

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Labour Variances - Example

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Standards per unit of produc4on Labour variance Standard direct labour hours 20 Standard cost (250 x 20 x 60) 300,000 Standard direct labour rate € 60 Actual cost 360,000 (60,000) Monthly Produc4on Informa4on Produc6on 250 units Wage rate variance Direct labour hours 5,600 Standard cost of actual hours 5,600 x 60) 336,000 Direct labour cost € 360,000 Actual cost of actual hours 360,000 (24,000) Labour efficiency variance Standard hour for actual produc6on (250 x 20) 5,000 Actual hours for actual produc6on 5,600 (600) Times Standard rate per hour 60 (36,000)

Source: An Insight into Management Accoun6ng – John Sizer

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Overhead Variances

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Overhead variance = Standard overhead for actual produc6on – actual

  • verhead incurred. Can be analysed into:
  • Efficiency variance = Standard overhead for actual produc6on – standard cost
  • f actual hours
  • Volume variance = Standard costs of actual hours – flexible budget for actual

hours worked

  • Overhead cost variance = Flexible budget for actual hours worked – actual
  • verhead

Source: An Insight into Management Accoun6ng – John Sizer

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Overhead variances - Example

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Standard cost data € Cost variance Budgeted fixed overhead at normal capacity 2,025 Budgeted variable overhead at normal capacity 975 Volume variance Budgeted overhead at normal capacity 3,000 Standard allowed hours at normal at normal capacity 1,000 Efficiency variance Standard fixed overhead per hour 2.025 Standard variable overhead per hour 0.975 Overhead variance Standard overhead per hour 3.000 Period informa4on Standard allowed hours for actual produc6on 800 Actual hours worked 790 Actual overhead incurred € 2,870 Flexible overhead budget for actual hours (€2,025+(790x €0.975) € 2,795 Standard overhead for actual produc6on (800 x 3 ) € 2,400

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Overhead variances - Example

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Standard cost data € Cost variance Budgeted fixed overhead at normal capacity 2,025 Flexible budget for actual hours worked - actual overhead incurred (€2,795.25 - €2,870) (74.75) Budgeted variable overhead at normal capacity 975 Volume variance Budgeted overhead at normal capacity 3,000 Standard cost of actual hours - flexible budget for actual hours (790x €3) - €2,795.25 (425.25) Standard allowed hours at normal at normal capacity 1,000 Efficiency variance (Standard hours - actual hours) x standard rate (800-790 x €3 30.00 Standard fixed overhead per hour 2.025 Standard variable overhead per hour 0.975 Overhead variance Standard overhead for actual produc6on - actual overhead incurred (€2,400 - €2870) (470.00) Standard overhead per hour 3.000 Period informa4on Standard allowed hours for actual produc6on 800 Actual hours worked 790 Actual overhead incurred € 2,870 Flexible overhead budget for actual hours (€2,025+(790x €0.975) € 2,795 Standard overhead for actual produc6on (800 x 3 ) € 2,400

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Overhead variances

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Actual Overhead Incurred Flexible Budget for Actual Hours Standard Cost of Actual Hours Standard Cost of Standard Hours

Cost Variance Volume Variance Efficiency Variance

Overhead Variance

Source: An Insight into Management Accoun6ng – John Sizer

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PROFIT RELATED PERFORMANCE MEASURES

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Investment centre measures

Return on investment = Opera6ng income Total assets Capital turnover = Sales revenue Total assets Residual income = Opera6ng income − Cost of capital

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Economic Value Added (EVA)

EVA = Adjusted amer-tax opera6ng income − Cost of invested capital × Adjusted average invested capital

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Investment Centre Measures Example 6.1

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Investment Centre Informa4on Total assets of division $500,000 Return on investment (ROI) = Opera6ng income = $65,000 = 13% Sales Revenues of division $770,000 Total assests $500,000 Amer tax opera6ng income $65,000 Adjusted amer tax opera6ng income* $70,000 Capital turnover = Sales Revenue = $770,000 = 154% Adjusted total capital of division $560,000 Total assests $500,000 Cost of capital 12% Residual income = Opera6ng income - cost of capital charge = $65,000 - ($500,000 x 12%) = $2,800 Economic value added = Adjusted amer tax

  • pera6ng income -

Cost of invested capital = $70,000 x ($560,000 x 12%) = $2,000

* Adjusted to approximate cash flow

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NON FINANCIAL PERFORMANCE MEASURES

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The balanced scorecard

Complements financial measures

  • f past

performance with measures of the drivers of future performance

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The Balanced Scorecard

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Financial Perspec4ve

  • Profitability
  • ROCE
  • EVA
  • Growth
  • Cash flow

Customer Perspec4ve

  • Market segments and market share
  • Customer sa6sfac6on, reten6on,

profitability, account share

  • Key customer outcomes e.g on-6me

delivery Internal Business Processes Perspec4ve

  • Cri6cal internal processes to:
  • Deliver value to customers
  • Sa6sfy shareholder expecta6ons
  • Quality and 6me based metrics
  • Improvements in opera6ons /

Innova6on Learning and Growth Perspec4ve

  • Organiza6onal learning and growth
  • People
  • Systems
  • Procedures
  • Employee engagement/sa6sfac6on
  • Training
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Not-for-profit organiza4ons

  • Economy – achieving goals within given levels
  • f resource input.
  • Effec4veness – achieving of outcomes and

goals.

  • Efficiency – the amount of resources used to

achieve outputs.

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BEHAVIOURAL ASPECTS OF PERFORMANCE MANAGEMENT

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Performance Measurement

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Pressures of measurement

  • Increased tension
  • Frustra6on
  • Resentment
  • Suspicion
  • Fear
  • Mistrust

Decreases job sa6sfac6on Increases absenteeism What gets measured gets done Can lead to crea6ve accoun6ng to meet KPIs Vs.

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McKinsey Ar6cles

  • How to put your money where your strategy is:

– Organiza6onal iner6a – Resource re-allocators

  • How to overcome iner6a:

– Have a target corporate por{olio (Alice) – Use all available resource alloca6on tools

  • Seeding
  • Nurturing
  • Pruning
  • Harves6ng

– Adopt simple rules to break the status quo – Implement processes to mi6gate iner6a

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McKinsey Ar6cles

  • Eight shims that will take your strategy into high

gear (If you apply them all):

– Annual planning to a journey (rolling vs 1/3/5 plans) – Ge_ng to yes vs. deba6ng real alterna6ves (choices) – Peanut bujer to one-in-ten wins – Approving budgets to making big moves – Budget iner6a to liquid resources (execu6on) – Sandbagging to open risk por{olios (buffers) – You are your numbers to a holis6c view – Long-range planning to forcing the first step

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REQUIRED READING AND RESEARCH

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Required reading and research

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  • Reading -required
  • Accoun6ng and Finance for Managers – Chapter 6 Budgets and

Performance Management

  • Reading – op4onal
  • The Balances Scorecard – Transla6ng Strategy into ac6on. Robert S.

Kaplan & David P. Norton.

  • Exercises
  • Comprehension Ques6ons 1 -7
  • Exercises 6.1 – 6.4
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SESSION SUMMARY, VALIDATION AND OVERVIEW SESSION 9

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Summary of Session 8

  • Budgets and Performance Measures

– Responsibility centres – Standard cos6ng and variance analysis – Performance management in investment centres – Non-financial performance measures – Behavioural aspects and external influences

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Session 9 overview - Pricing

  • Cos6ng and pricing – different approaches to

cos6ng.

  • Consumer behaviour and pricing.
  • Compe6tor behaviour and pricing.
  • Pricing new products or services.
  • Product life cycle and pricing.
  • Special pricing strategies.

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Session 8 Valida6on

  • What are the two main types of cos6ng system?
  • What is standard cos6ng?
  • What types of variances can we analyse?
  • What is the key principle of performance

measurement?

  • What different types of responsibility centres are

there?

  • How can we measure Investment Centres?
  • What is a Balanced Scorecard?
  • What behavioural issues arise with respect to

budgetary control?

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