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Management Accounting

• Management Accounting helps managers make decisions.
• Management accounting includes the topics of Cost Concepts and Behavior, Cost-Volume-Profit Analysis, Standard Costing & Variance Analysis, Variable Costing vs. Absorption Costing, Financial Planning & Budgets, Responsibility Accounting & Transfer Pricing, and Relevant Costing & Differential Analysis.
• Decision-making is the central focus, incorporating planning, organizing (staffing and directing), and controlling.
• Management accounting helps managers make decisions by providing support via assistance and advice
• Lines (Sales, Production, Delivery) are directly involved in operations
• Staff provide support via assistance and advice.

Financial Management

• Financial Management aims to maximize shareholder's wealth.
• It includes Financial Statement Analysis, Working Capital Management, Capital Budgeting, Risks & Leverage, Capital Structure & Long-Term Financing Decision, and Financial Markets.

Economics

• Includes the study of Macroeconomics and Microeconomics.

Competitive Advantage

• Michael Porter's three Generic Strategies explain Sources of Competitive Advantage.
• Cost Leadership Strategy: Increase profits by reducing costs.
• Differentiation Strategy: Offer unique, more attractive products or services.
• Focus Strategy.

Financial vs Management Accounting

• Financial accounting is primarily for external users; management accounting is exclusively for internal users.
• Financial accounting uses internal data; management accounting uses both internal and external data.
• The purpose of financial accounting is financial reporting and compliance; management accounting focuses on decision-making.
• Financial accounting adheres to accounting standards (e.g., PFRS); management accounting aligns with management wants and needs.
• Financial accounting is primarily monetary; management accounting includes monetary and non-monetary information.
• Financial accounting is historical, while management accounting is future-oriented using past data.
• Emphasis in financial accounting is reliability (precision, verifiability); in management accounting, it's relevance (timeliness).
• Financial accounting reports aggregate, simplified data; management accounting provides detailed, extensive information.
• Financial accounting focuses on the business as a whole; management accounting focuses on various segments.
• Financial accounting reports periodically (annually, quarterly); management accounting reports whenever needed.
• Financial accounting is mandatory for public entities with the model: Assets = Liabilities + Equity.
• Management Accounting optional, with no unifying model or equation

Cost-Volume-Profit (CVP) and Break-Even Analysis

• CVP Analysis is a profit planning tool.
• CVP Analysis examines: Cost affecting Cost Driver, affecting Profit.
• Sales (SP x Unit Sold), less Variable Cost (VC/u x Unit Sold), equals Contribution Margin (CM/u x Unit Sold), less Fixed Cost (Total Fixed Cost), to yield Profit

Variable Cost Behavior

• Total Variable Costs: Change as volume or activity level changes, representing a Direct Relationship.
• Unit Variable Costs: Remain the same cost per unit at any activity level.

Fixed Cost Behavior

• Total Fixed Costs: Remain the same cost at any activity level.
• Unit Fixed Costs: Change inversely with volume or activity levels.

Mixed Costs

• Mixed Cost Formula: Mixed Cost = Total Fixed Costs (TFC) + Total Variable Costs (TVC).
• Total Cost = TFC + (Variable Cost per unit × Units).

Estimation Methods

• High-Low Method is a way of splitting costs
  • Variable Cost per Unit = (Highest Activity Cost - Lowest Activity Cost) / (Highest Activity Units - Lowest Activity Units)
  • Fixed Cost = Highest Activity Cost - (Variable Cost per unit × Highest Activity Units)
  • or Fixed Cost = Lowest Activity Cost - (Variable Cost per unit × Lowest Activity Units)
• Scattergraph Method: Involves plotting data points on a graph to visually estimate the cost equation, resulting in the Regression formula.
• Least Squares Regression Method results in the formula y = na + b∑x, and the second formula ∑xy = a∑x + b∑x^2

CVP Analysis & Contribution Margin

• CVP Analysis is a profit planning tool.
• It examines how Costs affect Cost drivers impacting profit.
• Sales SP multiplied by Unit Sold.
• Less Variable Cost VC per unit multiplied by Unit Sold.
• Results in Contribution Margin CM per unit multiplied by Unit Sold.
• Contribution Margin less Fixed Cost equals profit.
• For elements, SP upward arrow is for a sale - Direct.
• VC per unit upward arrow is a cost - Inverse.
• FC upward arrow affecting profit is a cost - Inverse.
• Assumptions include Classified Variable and Fixed costs.
• An Unchanged Condition (Constant) both Internal regarding Technology & Effective production, and External including Market Competitive & Stable Selling Price.
• Requires Time Value of Money.
• Production must equal Sales.
• Stays constant with TFC, VC/u, SP, and CMR.
• Exhibits Predictable and linear relation to Costs and Sales.

Break-Even Point

• The break-even point is where total cost and total sales meet, sales are always in ZERO profit.
• BEP (Quantity) = (Total Fixed Expense) / (Sales Price Per Unit - Variable Cost Per Unit)
• BEP (Dollar) = (Total Fixed Expense) / (Contribution Margin Ratio).
• Contribution Margin Per Unit = Sales Price Per Unit - Variable Cost Per Unit.
• Total Contribution Margin = Total Value of Sales - Total Variable Cost. Contribution Margin = FC + Profit, covering FC and contributing to Profit.

Target Profit

• Target profit formulas are
  • FC + TP divided by Unit sales. -FC + TP divided by weighted average contribution margin.

Margin of Safety (MOS)

• The amount sales can drop before a company incurs a loss.
• Margin of Safety = Sales - Break-Even Point (BEP). This represents the amount sales can decrease before negative profit arises.

Degree of Operating Leverage (DOL)

• Measures how much a company's operating income changes in response to a change in sales.
• High DOL means High Fixed Cost, Lower Variable Cost, and High Contribution Margin.
• Low DOL means Low Fixed Cost, Higher Variable Cost, and Low Contribution Margin.
• The higher the DOL, the more sensitive the operating income is to changes in sales.

CVP Analysis Formulas

- CM=Sales - Variable Costs
- Unit CM = Unit Selling Price - Unit Variable costs
- CM Ratio CM divided by Sales equals Unit CM divided by Unit Selling Price, equals the change in CM divided by the change in Sales
- BEP in units equals Fixed Costs divided by Unit CM
- BEP in Sales  equals Fixed Costs divided by CM Ratio
- BEP Ratio = BEP divided by Sales
- Sales units + Profit = Fixed Costs + Target Profit, all divided Unit CM
- Sales + Profit equals Fixed Costs + Target Profit, all divided CM Ratio
- Sales + Profit Ratio equals Fixed Costs divided by CM Ratio - Profit Ratio
- MS (Margin of Safety) = Sales - Break Even Sales = Profit divided by CM Ratio
- MS Ratio = MS divided by Sales = Profit Ratio divided by CM Ratio

Indifference Point

• Indifference Point based on Cost equals Fixed Costs + (unit VC x quantity)
• Indifference Point based on Profit equals unit CMx quantity - Fixed Costs

Sales Mix

• Sales mix is the proportion of different products that comprise a company's total sales.
• Calculation of Overall Break Even Point in units equals Fixed cost divided by Weighted Average Unit CM
• Overall BEP in Sales equals Fixed costs divided Weighted Average CM Ratio
• Sales mix involves calculating Composite Units with CM per unit multiplied by composite Ration, calculating Unit Sales mix with CM/u multiplied by Unit Sales Mix, and using that data to get weighted average contribition margin

Absorption and Variable Costing

• Key differences:
• Direct Materials and Direct labor are always PRODUCT COSTS
• Absorption Costing, Fixed FOH are PRODUCT COSTS, Variable S&A and Fixed S&A are PERIOD COSTS
• With Variable costing, Variable FOH is a PRODUCT COST, Fixed FOH, Variable S&A and Fixed S&A are all PERIOD COSTS.
• EI > BI ; P > S ; Ay > Vy ; FFOH AC < FFOH VC

Financial Analysis

• Financial analysis includes evaluating the past, determining the present condition, and assessing future potential.
• The primary objective is to evaluate and forecast financial statements.
• Other objectives include assessing profitability (effectiveness of operations), ability to meet obligations (short-term/long-term), investment safety (returns), management effectiveness (asset utilization), and marketability (salability).

Vertical Analysis

• Vertical Analysis expresses financial statement items as percentages of a base amount within the same period.
• It's a point-in-time analysis using 100% scale.
• The base for the Statement of Financial Position is net assets.
• The base for the Statement of Comprehensive Income is net sales.
• Common-size statements present all items in percentage form.

Horizontal Analysis

• Multi-period comparison.
• Base must be determined using PRIOR PERIOD.
• Formula: Amount of Change / Prior year

Financial Ratios - Liquidity

• Working Capital
  • Formula: Current Assets - Current Liabilities.
  • Positive amount -> Can pay CL w CA.
  • Negative amount -> CA isn't enough to pay CL. Current Ratio
  • Formula: Current Assets / Current Liabilities.

  • 1 is good, higher number means each monetary unit of debt has more liquid assets backing it.

• Quick Ratio
  • Formula: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities or (Current Assets - Inventory) / Current Liabilities.

  • 1 is good, higher number means each monetary unit of debt has more liquid assets backing it.

• Cash Ratio
  • Formula: (Cash + Marketable Securities) / Current Liabilities.

  • 1 is good, higher number means each monetary unit of debt has more liquid assets backing it.

• Regarding liquidity, CA has a direct relationship with liquidity, while CL has an inverse relationship.
• All ratios are >1 if good.

Financial Ratios - Turnover

• Inventory Turnover Formula: COGS / Average Inventory
• Average Age of Inventory Formula: 365 Days / Inventory Turnover
• Accounts Receivable Turnover Formula: Net Credit Sales / Average Accounts Receivable
• Average Collection Period Formula: 365 Days / Accounts Receivable Turnover
• Accounts Payable Turnover Formula: Net Credit Purchases / Average Accounts Payable
• Average Payment Period Formulation: 365 Days / Accounts Pay Turnover

Solvency Ratio

• Analyzes the ability to survive.
• Debt Ratio/Debt to Asset Ratio = Total Liabilities/Total Assets
• Equity Ratio/Equity to Asset Ratio = Total Shareholder's Equity / Total Assets
• Debt to Equity Ratio = Total Liabilities / Total Shareholder's Equity = EBIT / Interest Expense

Profitability Ratio

• Analyzes the ability to make profit.
• Gross Profit = Sales - COGS
• GP Margin = Gross Profit/Sales
• OP Margin = EBIT/Sales
• Net Income = Net Profit / Sales

Return Ratio

• Return on Assets (ROA) measures a company's profitability relative to its total assets.
• Return on Investment (ROI) measures the profit or loss generated on an investment relative to the amount of money invested.
• Return on Equity (ROE) is a measure of a corporation's profitability relative to stockholders' equity.

Cash Flow Analysis

• Cash flow are the movement of money both into and out of a company,
• Includes Operating, Investment, and Financing cash flow streams. The equation for this calculation is Free Cash Flow = Operating Cash Flow – Investing Activities
• Financing Activities pay Creditors and Investors
• Includes interest expense and effects of tax shield

Gross Profit Variance, Standard Costing and Variance Analysis

• Includes the formulas: ACTUAL GP - BUDGETED GP = PF + V/F +- CF
  • SALES QUANTITY VARIANCE (SQV)= (AQ-BQ) BSP Alternative formulation AQ x BSP
  • SALES PRICE VARIANCE (SPV) AQ (ASP-BSP) = Alterntaive formulation AXB x DSP
  • COST QUANTITY Variance (CQV)= (AQ-BQ) BCP Alternative aQ x BCP
  • COST PRICE VARIANCE(CCPV) = AQ (ACP-BCP) All calcs are based on comparing actual to a base

Budgeting

• Budgeting aids in planning for the future.
• Involves corrective action through a Plan, building a standard budget through build, and an evaluate step.

Budgeting Steps

• Establish Capital Project, Long Term Investment, and strategic planning.
• Enumerate short Term Operations, and Operating Objectives.
• Prepare Sales Budget, Production Budget (DM, DL, OH), and S&A Budget.
• Prepare Financial Budget, Cash/Capital budget, and Statements for Costsheet, Income Statement, and Proforma Statement of Cash flow

Financial Budget, Master Budget

• Static budgeting involves a short-term or long-term plan, where adjustments to the activity level does not happen before an action is taken
• Flexible budgeting adjustments to the activity level DO take place after or during
• Zero based budgeting requires justifiable amounts on a long term scale, whereas continuous budgeting occurs regularly
• Flexible budgeting helps create CM statements in format of listing budget then Actual, Flexible, and Standard variances

Static Budgeting

• Static budgets remains unchanged regardless of volume
• Continuous budgeting is regularly updated

Rolling Budgeting

• Cash sales helps formulate a correct cash budget.
• Credit Sales formulate an AR collection
• AR. Beginning position - AR Ending balance

Budget Analysis

Budget analysis using cost proforma involves listing the line items and then taking beginning amount, and adding transactions

• Sales Less: COGS is a popular formulation. The Add line will be WIP, and substracting line is FGI at end of the period

Standard Costing

• Establishes ideal standards and performance levels, it is an important tool that is used when considering costs.
• Has to be acceptable
• Standards involve WHY the benchmark is used for, WHERE it is used (planning, control, evaluate) WHEN to use is before operations, HOW to adjust using ideal or practical adjustments

Ideal vs Practical Standards

• Ideal Standards - Optimum Level, Perfect, TOP-DOWN (Authoritative)
• Practical Standard - Efficient level, Expected, BOTTOM-UP (Participative

Variance Analysis

• Begins with Variance Signals → Requires analysis based on what is Favorable or Unfavorable relating to a Material that affects efficiency
• Variance analysis includes examining static budget variances, flexible budget variances, and mix variances then taking action Direct Material is based on cost of goods sold at a given rate, Direct labor at a given wage and overlead at an expected level of Activity Direct labor requires a production time over allowance of normal losses Overheat the activity can be examined against its actual value These are just guides

Direct Material Variance = (AQ × AP) – (SQ × SP)

• Material Quantity Variance (MQV) = (AQ – SQ) SP
• Material Price Variance (MPV) = AQ (AP – SP) and uses formulations of AQ x AP
• Mix variance utilizes sum of MQV Yielded variance analyzes the selling price

Direct Labor Variance = (AH × AR) – (SH × SR)

• Labor Efficiency Variance (LEV) = (AH – SH) SR
• Labor Rate Variance (LRV) = AH (AR – SR) and can also look for idle time that is based on standards Factory Overhead Cost utilizes FC + VC divided by number of hours, while analyzing all overhead

One way analysis, Two way analysis

One way analyzes FOH variance. Budget Two way involves variable and budgeted products for controllability

• FOH needs budgeting

Responsibility Accounting

• Cost and revenue are grouped together based on who is best able to control them
• Includes the following types:
  • Cost Center: √ Cost, X Revenue, X Asset Investment,
  • Revenue Center: X Cost, √ Revenue, X Asset Investment,
  • Profit Center:, √ Cost, √ Revenue, Cost,X Asset Investment,
  • Investment Center √ Cost, √ Revenue, Asset Investment,
• Requires Authority to control costs, Managers being interested, Management being objective, and optimization

Performance evaluations include identifying organizational goals

• Include: Authority to control costs, Managers being interested, Management being objective, and suboptimization
• Sales come from manufacturing and need to lessend by allocate costs to reach net income Death Spiral → Continue cutting segments that are profitable

CENTERS.

The centers are: Cost, Revenue, Profit, and Investment.

Return on Investment (ROI)

• Requires dividing total assets by sales = Asset Efficiency
• Profit Margin ROI measures how well assets were utilized to generate income. Sales = Profit divided by total assets Actual Income can be measured by evaluating return on investment, desired income by the rate and residual income, with financing coming by rates and loans Specific return involves earnings before taxes and calculating if they are above average

Transfer Pricing / Intersegment Pricing

• Involves one segment charging another and requires rules of best transfer It requires cost base and mark up to avoid one department suffering. These costs are usually only variable

Market Price

• Market Base fair value, negotiated between maximum and minimum values
• Ceiling and support prices and whether capacity is required (supply vs demand)

Balance Scorecard

Requires knowing and acting strategically and accounting Involves financials with good Rev: - Down Cost; - INs A well balanced and strategic plan

Process quality

• R&D
• Prod and Dev
• Post-service/Support sale

Areas of Focus

• Employee Satisfaction
• Structure
• Sustains Change

Non Financial Performance Measures

Based on factors such as : Delivery quality, processing times, and manufactoring