Management Accounting Control PDF

Module I: Introduction What is Management Accounting Control Management Accounting Control is the process of identintification, measurement, accumulation, analysis, preparation, interpretation and communication of financial and non-financial information that assists executives in fulfilling organiz...

Module I: Introduction What is Management Accounting Control Management Accounting Control is the process of identintification, measurement, accumulation, analysis, preparation, interpretation and communication of financial and non-financial information that assists executives in fulfilling organizational objectives. Management Accounting: management accouting uses financial and non- financial information. Its objective is to help Management in the decision- making processess. Management Accounting information is not disclosed to third parties, it is strategic information that remains internally and within the company. Cost Accounting: it has relevant importancy for companies. Companies cannot control precisely their revenues, but they can predict, control and forecast in an acurate an exact way the costs. It is a powerful tool for companies. It is the process of tracking, recording, and analyzing costs associated with the products or activities of an organization. It aims to provide management with the necessary data to make informed decisions that will enhance profitability and efficiency. As Management Accounting, cost accounting is also strategic information not disclosed to third parties. Cost accounting measures and reports financial and non-financial information related to the organization’s acquisition or consumption of resources. It provides information for both, management accounting and financial accounting. General (financial) accounting: Financial accounting gives users a picture of the firm's past performance and its current standing. It is publicity available information. Financial Accounting comprises financial statements, if we focus on IFRS, the financial statements are a set of 5 documents (balance sheet, profit and loss, changes on equity, cash-flow statement, and notes). Differences between Management and Financial Accounting - There are no legal requirements for Management Accounting, for Financial Accounting yes, depending on each country (publication of annual accounts, deposit..) - The Management accounting objective is to facilitate decision-making; the financial accounting provides a financial public overview of the company activity. - Management accounting does not necessarily follow accounting principles. - The frequency of Management accounting depends on the company needs, and there is no legal obligation, as from financial or general accounting, the annual closure of the accounts is a legal obligation. - Management accounting can be performed monthly, quarterly, yearly, depending on the company needs, whereas financial accounting timeline follows the financial year, and it is compulsory to be prepared on an annual basis. - The format of managerial and financial accounting it is not the same. 2 Differences between Management and Cost Accounting - There are no legal requirements for Management Accounting, neither for cost accounting. - The purpose for both, managerial and cost accounting is decision-making plus optimization of resources or processes. - Cost accounting is the starting point that will impact the cost structure of the financial statements from a company - There is no specific frequency for any of both - There is no specific timeline for any of both, cost accounting may be even on daily basis. - The format differs from one report to another. Historical Evolution of Management Accounting Control 3 Objectives and functions of Management Accounting Control 4 The decision-making, planning and control process 5 Module II: Cost Accounting Introduction to cost terms and concepts A cost is a resource sacrificed or forgone to achieve a specific objective. They are expressed in monetary amounts. Actual cost are costs incurred whereas budgetary costs are future costs. Cost accumulation is the collection of cost data in some organised way. Cost tracing encompasses both, tracing accumulated costs and allocating accumulated costs to objects. Cost objects can be products, services, projects, customers, activities, departments. Cost types: Direct costs are costs related to a particular cost object and can be traced in an economically feasible way. Cost of Goods Sold (COGS) measures the “direct cost” incurred in the production of any goods or services. It includes material cost, direct labor cost, and direct factory overheads, and is directly proportional to revenue. OH Overhead or indirect costs (OH) are business costs that are related to the day-to-day running of the business. Unlike operating expenses, overheads cannot be traced to a specific cost unit or business activity. Instead, they support the overall revenue-generating activities of the business. Fixed vs Variable costs: fixed does not experience a change with the quantity of product or service, and variable, they do. Relevant vs Irrelevant: relevant can be modified by a managerial decision and irrelevant cannot. Avoidable vs Unavoidable: avoidable are costs that can be eliminated and unavoidable are more fixed in nature and cannot be eliminated. Sunk vs Opportunity: sunks costs are costs incurred that cannot be recovered and opportunity the costs when choosing one alternative over another. Incremental vs Marginal: incremental are additional costs per unit produced taking into account all costs that vary in production, marginal are those increments taking into account only the variable costs. Cost tracing and cost allocation: Direct costs: costs that are DIRECTLY related and economically traceable to a particular cost object Indirect costs: related to a particular cost object but cannot be directly traceable economically. For those type of costs, a cost-allocation method is needed. Cost tracing is the assigning of direct costs to the cost object whereas cost allocation is the assigning of indirect costs to the cost object Example a racket: direct cost: the carbon fiber use to make the racket, indirect: the lightening from the factory 2 Manufacturing vs non-manufacturing companies Manufacturing companies purchase materials and convert them into products or finished goods. They have: -direct materials: stock used in the manufacturing process -WIP: goods partially worked but not yet completed or finished -finished goods: goods finished, but not yet sold Direct material costs: costs of materials that can be traced directly to the cost object Direct labour costs: compensation of the manufacturing labour that can be directly traced to the cost object Indirect manufacturing costs: cannot be traced to the cost object in an economical and feasible way 3 Job costing systems Cost allocation base is a common denominator to link indirect costs to a cost object Job-costing system: costs are assigned to a distinct unit batch or product. Example: manual ceramic industry Process-costing system: the cost object is masses of identical or similar units and the cost of a product is obtained by using broad averages to assign costs to masses of identical or similar units Example: pen or pencil, book notes.. Process costing systems Process-costing systems: - Separate costs into cost categories depending on when they were introduced into the process - You may have inventory (initial stock, wip, final stock) - Unit costs can be averaged by dividing total costs in a given accounting period by the total units produced in that period. Equivalent units: if all conversion costs in production were used to finish units, the company will be able to make XXXX units in one specific period. FIFO and Weighted average: methods in job costing systems to assign the costs of the equivalent units to the first units completed and transferred. 4 Cost allocation and cost systems A cost allocation is the process of assigning costs when the quantity of resources consumed by a particular cost object cannot be directly measured. Cost allocations involve the use of surrogate rather than direct measures. Costs are allocated via an allocation base or cost driver. A direct costing system (also known as a marginal or variable costing system) assigns only direct costs to cost objects whereas an absorption costing system assigns both direct and indirect costs to cost objectives. Absorption costing systems can be sub-divided into traditional costing systems and activity-based-costing (ABC) systems. For decision-making purposes, however, more accurate product costs are required so that we can distinguish between profitable and unprofitable products. By more accurately measuring the resources consumed by products, or other cost objects, a firm can identify its sources of profits and losses. If the cost system does not capture sufficiently accurately the consumption of resources by products, the reported product costs will be distorted, and there is a danger that managers may drop profitable products or continue production of unprofitable products. In the late 1980s ABC systems were promoted as a mechanism for more accurately assigning indirect costs to cost objects. Cost allocation methods - Direct allocation (tradional) method - ABC - Reciprocal method - Simultaneous equation - Sequential method 5 The break-even point The break-even point is the point at which total cost and total revenue are equal, meaning there is no loss or gain. BEP = FC/(PPU -VC) 6 Module III: Determining how costs behave Cost estimation approaches Cost estimation approaches are key for different important activities and processes from the companies such as budgeting, preparing performance reports, price calculations, or provisions of costs. The most common methods for cost estimation are: - Engeneering method - Inspection of accounts - Scattergraph method - High-low method - Least squares method  It is important for you to understand how these methods work, although you will not be asked to compute these values or estimations, as a software do so automatically. Important to know that predictions and statistical analysis can be done via Excel. Once the estimation is done, to check the reliability of the data obtained, a test of reliability can be run. It consists in checking the correlation of the results obtained. The greater the correlation between the activity and the cost, the better the prediction or cost estimation is. Cost drivers Cost drivers can be defined as a factor whose change cause a change in the total cost of an activity. The difficulty with cost drivers, is that they can be volume or non-volume based, thus, more than cost driver can be applied to each cost activity, they are not always visible, and not always counted. The implications of cost drivers are that each cost driver choice has different implications and will change the cost behavior and results. In the past, the most common cost drivers were based on volume or time, for example, labor hours or number of units produced. Nowadays companies are looking for different options of cost drivers, based on the complexity of the manufacturing process, industry of the company, etc.. it can be number of product runs, number of marketing campaigns, volume of revenues etc… 2 Activity-based costing system The Activity-Based Costing (ABC) model identifies the cost pools or activity centres within an organisation and assigns costs to cost drivers based on the number of each activity used. The implementation of the ABC system is comprised of the following steps: Step 1) Identification of activities, such as engineering, machining, inspection, and so forth. Step 2) Determination of activity costs. Step 3) Identification of cost drivers, such as machining hours, number of setups, engineering hours, and so forth. Step 4) Collection of activity data. Step 5) Computation of product cost. 3 Activity-based costing (ABC) represents a methodology within the field of accounting that assigns costs to activities, as opposed to products or services. This approach facilitates the more precise allocation of resources and overhead costs to the products and services that consume them. The traditional cost system employs a variety of methods for the allocation of costs, including direct labour, material costs, revenue, and other simplistic approaches. Consequently, traditional systems are prone to both over- and under-costing. The fundamental premise of conventional costing systems is that product costs are directly driven. In contrast, the activity-based costing (ABC) system allocates indirect and support expenses first to activities and processes and subsequently to products, services, and customers. This approach affords managers a more comprehensive understanding of the economic aspects of their operations and services. 4 Module IV: Planning, Budgeting and Forecasting Planning, Budgeting and Forecasting Plan is a statement of the preliminary targets and activities required by an organization to achieve its strategy. It estimates as well the ressources required and the revenues expected. Planning can be long or short term. When lon term it is named strategic planning. Budget: is the quantitative expression of the plan for a future preriod of time. Can cover both, financial and non-financial aspects to set it up. Forecast: the process of estimating and projecting future financial outcomes based on historical data, trends and assumptions. Planning Strategic planning begins with the specification of objectives towards which future operations should be directed. Strategic planning is a process of aligning a company's strengths with the opportunities available in its chosen business environment. While strategic planning is both a science and an art, it is generally believed that in order for the planning process to be effective on a consistent basis, managers must collect, screen and analyse information about the company's business environment, identify and evaluate the company's strengths and weaknesses, and develop a clear mission statement and a set of achievable goals and objectives. These then become the basis for tactical and operational plans. It is crucial for every company, regardless of its size or the 2 resources it has available, to engage in strategic planning. The business environment and relevant technologies are constantly evolving, and new risks and uncertainties emerge regularly. The planning cycle: 3 Budgeting The budget is a financial plan for implementing the decisions that management has made. The budgets for all of the various decisions a company takes are expressed in terms of cash inflows and outflows, and sales revenues and expenses. These budgets are merged together into a single unifying statement of the organization’s expectations for future periods. This statement is known as a master budget and consists of budgeted profit and cash flow statements. The budgeting process communicates to everyone in the organization the part that they are expected to play in implementing management’s decisions. Budgeting is concerned with the implementation of the long-term plan for the year ahead. Because of the shorter planning horizon, budgets are more precise and detailed. Budgets are a clear indication of what is expected to be achieved during the budget period, whereas long-term plans represent the broad directions that top management intend to follow. Continuous or rolling budgeting ensures that a 12-month budget is always available by adding a quarter in the future as the quarter just ended is dropped. Functions - Planning the annual operations - Coordinate activities among different parts of the organization - Communicate plans to managers - Motivate manager to strive to objectives - Controlling - Monitoring and evaluating the performance from managers Stages - Communicate the template and guidelines - Determine the factors that restrict performance - Prepare the sales budget and cost budgets - Negotiate consolidate and accept 4 Process Methods - Incremental:Incremental budgeting is the traditional budgeting method whereby the budget is prepared by taking the current period's budget or actual performance as a base, with incremental amounts then being added for the new budget period. These incremental amounts will include adjustments for things such as inflation, or planned increases in sales prices and costs. Incremental budget could be positive or negative. - Zero-based budgeting: zero-based budgeting, the budgeting process starts from a base of zero, with no reference being made to the prior period's budget or actual figures. The stages on zero-based budgeting are: analyse the cost activity, identify the cost need, look for alternatives, analyse kpi about the activity cost, assess the consequences of yes or not performing the activity or look for an alternative. - Activity-based budget: elaborate the budget per activity, to do so, cost drivers of the activities are indentified and the budget is build-up from there. ABB does not take historical data into account but focus its efforts on budget by analyzing the company activities. - Priority-based budget: Priority based budgeting prioritizes programs and services over departments, enabling a focused allocation of resources based on relative importance. The ressources should be allocated based on how productive are programmes, activities or strategies from the company. - Kaizen budget: focusing on continuous improvement from a service or product perspective. 5 A static budget is a budget that is based on one level of output; it is not adjusted or altered after it is set, regardless of ensuing changes in actual output (or actual revenue and cost drivers) A flexible budget is adjusted in accordance with ensuing changes in actual output (or actual revenue and cost drivers). A flexible budget is calculated at the end of the period when the actual output is known A favourable variance – denoted F – is a variance that increases operating income relative to the budgeted amount. An unfavourable variance – denoted U – is a variance that decreases operating income relative to the budgeted amount. Consolidate budgets in different currencies use FX budget rates: is the exchange rate used to convert projected costs or revenues in the master currency of the company Relevant costs: expected future costs that differ from alternative course of action Relevant revenue: expected future revenues that differ from alternative course of action For budgets in different currencies, the FX budget methods are: - Current spot - Currrent forward rate - Prior period average - Off market rate - Consensus forecast Forecasting Departments throughout the organization depend on forecasts to formulate and execute their plans. Finance needs forecasts to project cash flows and capital requirements. Human resources need forecasts to anticipate hiring needs. Production needs forecasts to plan production levels, workforce, material requirements, inventories, etc. 6 7 Module V: Management controls, performance measurements and analytics The control systems and performance measurements Control is the function that ensures that the work actually done fulfills the original intention. Controls are used to provide information that assists in determining the control action to be taken. Controls will indicate that costs exceed budgetary limits, which may be attributed to the purchase of inferior-quality materials that result in excessive wastage. Control is applied at various levels within an organization. Merchant and Van der Stede (2017) distinguish between strategic control and management control. Strategic control has an external focus and emphasizes how a firm, given its strengths, weaknesses, and limitations, can compete with other firms in the same industry. The terms ‘management accounting control systems’, ‘accounting control systems’ and ‘management control systems’ are often used interchangeably. The term "management accounting" and its related concept, "accounting control systems," collectively encompass a set of practices that are typically administered by the management accounting function. These practices include, but are not limited to, budgetary planning and control, standard costing, and periodic performance reporting. Management control systems, however, represent a broader term that encompasses management accounting/accounting control systems but also includes other controls such as action, personnel, and social controls. Types of controls 1 action (or behavioural) controls; 2 personnel, cultural and social controls; 3 results (or output) controls Feedback control entails the observation of actual outputs in relation to the desired outputs, and the implementation of corrective measures when a discrepancy is identified. In contrast to feedback control, feed-forward control entails the prediction of future outputs, rather than a comparison between actual and desired outputs. A responsibility center may be defined as a unit of a firm, such as a department or division, where an individual manager is held accountable for the unit's performance. There are three types of responsibility centers: (1) cost or expense centers, (2) revenue centers, (3) profit centers, Cost or expense centres are responsibility centres whose managers are normally accountable for only those costs that are under their control. We can distinguish between two types of cost centre – standard cost centres and discretionary cost 2 centres. The main features of standard cost centres are that output can be measured and the input required to produce each unit of output can be specified Revenue centres are responsibility centres where managers are mainly accountable for financial outputs in the form of generating sales revenues. Both cost and revenue centre managers have limited decision-making authority. Cost centre managers are accountable only for managing inputs (costs) of their centres. Revenue centres are accountable for selling the products or services, but they have no control over their manufacture. The objective of responsibility accounting is to accumulate costs and revenues for each individual responsibility centre so that the deviations from a performance target (typically the budget) can be attributed to the individual who is accountable for the responsibility centre. Responsibility accounting relating to cost and revenue centres at lower management levels is implemented by issuing performance reports at frequent intervals (normally monthly) that inform responsibility centre managers of the deviations from budgets for which they are accountable and are required to take action. Responsibility accounting involves: distinguishing between those items that managers can control and for which they should be held accountable and those items over which they have no control and for which they are not held accountable (i.e. applying the controllability principle); setting performance targets and determining how challenging the targets should be; 3  determining how much influence managers should have in the setting of targets. Responsibility accounting is based on the application of the controllability principle, which means that it is appropriate to assign only those costs to responsibility centres that can be significantly influenced by the manager of that responsibility centre. The controllability principle can be implemented by either eliminating the uncontrollable items from the areas for which managers are held accountable or calculating their effects so that the reports distinguish between controllable and uncontrollable items Variance analysis The difference between the actual cost and the standard cost is described as the variance. Variance analysis seeks to analyse the factors that cause the actual results to differ from predetermined budgeted targets. In particular, it helps to distinguish between controllable and uncontrollable items and identify those individuals who are accountable for the variances After the variances have been reported, management must decide which variances should be investigated. The optimal policy lies somewhere between these two extremes. In other words, the objective is to investigate only those variances that yield benefits in excess of the cost of investigation. Controllable variances: the company can identify and mitigate the variance: example, a mistake from the accountant, a non-productive factory worker 4 Uncontrollable variance: they don’t depend on internal factors controllable from the company, example, change of demand, a crisis, increase of economic trends Favourable: actual cost lower than budget cost / actual revenue greater than budget revenue Unfavourable: actual cost greater than budget cost / actual revenue lower than budget revenue KPI Profitability ROE = NET INCOME / SHAREHOLDERS EQUITY ROA = NET INCOME / TOTAL ASSETS ROCE = EBIT / TOTAL ASSETS - CURRENT LIABILITIES TOTAL ASSETS - CURRENT LIABILITIES = CAPITAL EMPLOYED GROSS MARGIN = TOTAL REVENUE - COGS / TOTAL REVENUE TOTAL REVENUE - COGS = GROSS PROFIT OPERATING PROFIT MARGIN = EBIT / TOTAL REVENUE NET PROFIT MARGIN = NET INCOME /TOTAL REVENUE Efficiency DSO = (RECEIVABLES / CREDIT SALES)*365 DPO = (PAYABLES / CREDIT PURCHASES)*365 DIO = (INVENTORY / COST OF SALES)*365 Leverage (solvency) DEBT TO EQUITY = ST AND LT DEBT + OTHER FIXED PAYMENTS / EQUITY EQUITY RATIO = EQUITY / TOTAL ASSETS DEBT RATIO = ST AND LT DEBT / TOTAL ASSETS 5 Liquidity CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES QUICK RATIO = CASH + ACCOUNTS RECEIVABLES + SECURITIES / CURRENT LIABILITIES CASH RATIO = CASH AND EQUIVALENTS / CURRENT LIABILITIES Valuation EV/ EBITDA = MARKET CAPITALIZATION + NET DEBT/ EBITDA EV/ EBIT = MARKET CAPITALIZATION + NET DEBT/ EBIT EV/ REVENUE = MARKET CAPITALIZATION + NET DEBT/ REVENUE 6  STRATEGIC DECISION MAKING PROCESS (MCQ at the exam) Example of business-related strategic decisions: - new markets - new products - investments - restructure - new locations -… Titel van presentatie 6 Titel van presentatie 8 STRATEGIC DECISION MAKING MODES ENTREPENEURIAL ADAPTIVE PLANNING LOGICAL Entrepreneurial mode: - A strategy is made by one important and powerful individual. The focus is on the opportunities in the environment. The problems expected to occur are secondary. Strategy is guided by the founders’ own vision of direction and is demonstrated by large and bold decisions to ensure dominant growth of the organization. ex: the CEO that decides what to do. Adaptive Mode: This strategy can also be referred to as "muddling through"; this decisionmaking mode is characterized by reactive solutions to existing problems rather than a proactive search for new opportunities. A lot of bargaining as it relates to the priorities of the organization's objectives and the strategy is fragmented and developed to move the organization forward incrementally. This mode is typical of most government agencies, universities, hospitals, and large organizations. Planning Mode: This mode involves the systematic gathering of information for situational analysis, the generation of alternative feasible strategies, and the rational selection of the most appropriate strategy. Decision-making in the planning mode includes both the proactive search for new opportunities and the reactive resolution of existing problems. Logical Incrementalism: is the synthesis of planning, adaptive, and entrepreneurial modes. In this mode, the top management has a clear idea of the organization's mission and objectives, but in its development of strategies, it chooses to use "an interactive process in which the organization probes the future, experiments and learns from a series of partial incremental commitments rather than through global formulations of total strategies  Titel van presentatie 13 STRATEGIC PLANNING PROCESS 8 stages EVALUATE REVIEW EXTERNAL INTERNAL ANALYZE CURRENT CORPORATE ENVIRONMENT CORPORATE STRATEGIC PERFORMANCE GOVERNANCE ENVIRONMENT FACTORS RESULTS the performance of (a) To point out the In terms of (a) To determine the To determine the the organization’s strategic factors that problem areas (b) returns on strategic factors that board of directors are the strengths- Review and revise investment, pose or many pose and top Core competencies the corporate profitability. (b) the any opportunities management.. and weaknesses of mission and current mission, and threats. the organization. objectives as objectives, strategies necessary.. and policies. ↳ KPI'S Titel van presentatie 14 STRATEGIC PLANNING PROCESS SELECT THE IMPLEMENT EVALUATE THE BEST THE BEST IMPLEMENTED ALTERNATIVE ALTERNATIVE STRATEGIES DECISION MAKING IMPROVEMENT improvement: - detached from the bias THE MARKET LEVEL OF DECISION MAKING Judo strategy is based on three elements—rapid movement, flexibility, and leverage—each of which translates into a competitive principle. THE MARKET LEVEL OF DECISION MAKING Nudge strategy: Theory is the ability for an individual to maintain freedom of choice and to feel in control of the decisions they make. MODULE VI: STRATEGIC PLANNING Prof. Dr. Lidón López November 2024 External and internal environment analysis External External and internal environment analysis Internal  DASHBOARDING AND BALANCESCORECARDS "Data is prolific but usually poorly digested, often irrelevant and some issues entirely lack the illumination of measurement." (Little 1970, p. B466)  DASHBOARDING The Corporate Dasbhboardings BI dataset (data model) and the required report visualizations is a common deployment data option. Dasbhboards are in general, collections of interconnected key performance metrics and underlying performance drivers that reflects both short and long-term interests to be viewed in common throughout the Organization. Dashboard objectives are: control, scalability, usability, and performance. BALANCESCORECARDS The balance score card (BSC) is a management system that maps an organization’s strategic objectives into performance with four perspectives such as financial, internal business perspectives, customers, and learning and growth which provide relevant feedback as to how well the strategic plan is executing so that adjustment can be made if necessary. The evolution of Data Reporting Conceptual Foundations of the Balanced Scorecard and Dashboarding During the 1970s and 1980s, innovations in quality and just-in-time production by Japanese companies challenged the Western leadership in many important industries. In the 1980’s executives’ pay and incentives to financial performance. In the 90s, there was a proliferation of BI tools and related technologies. (ERP launched by IBM) Beginning of 2000, USA Financial scandals 2002 Sabarnes Oxley Act (SOX): several control and reporting measures were implemented to avoid fraud. These measures were followed-up by European countries years later. Reporting and Controlling tools and procedures became more relevant  Balanced Scorecard (BSC) The BSC retains financial metrics as the ultimate outcome measures for company success, but supplements these with metrics from three additional perspectives – customer, internal process, and learning and growth – those are the drivers for creating long-term shareholder value. ORIGINAL OBJECTIVES Profitability (measured by residual income) Market share Productivity Product leadership Public responsibility (legal and ethical behavior, and responsibility to stakeholders including shareholders, vendors, dealers, distributors, and communities) Personnel development Employee attitudes Balance between short-range and long-range objectives BSC Example  ELEMENTS FOR DASHBOARDING SYNERGETIC MONITOR KPIS ACCURATE 03 RESPONSIVE INTERACTIVE AND TIMELY 05 TAILORED TO AUDIENCE  DASHBOARDING – BI SYSTEMS - Business intelligence (BI) is software that collects business data and presents it in a visual way using reports, dashboards, charts and graphs. BI tools enable to employ various types of data — historical and current, third-party and in-house, as well as semi- structured data and unstructured data. BI platforms traditionally rely on data warehouses for their baseline information. A data warehouse aggregates data from multiple data sources into one central system to support business analytics and reporting. DASHBOARDING – BI SYSTEMS - POWER BI DESKTOP  DASHBOARDING WITH EXCEL Exercise 1: How to create dashboards in Excel Moodle: Module VII – Financial Sample 1. Include a slider 2. Include 3 graphs 3. Include 1 table 4. Connect different visuals