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Summary Accounting for EBI
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Chapter 8: Planning for the futureFinancial plans are also called budgets, they express the future development of a company
financially. Financial plans force the company to look ahead and decide on variables. It also helps the
company control and motivate. the plans also help evaluate the business unit and its management,
this coordinates and gets communicated via the financial plans. Last but not least it educates
employees in the business to understand future development plans.
Profit planning - revenues: this is a plan that looks at future profits. It has the same structure as the
income statement but in this case it is a forecast. A profit plan is formed by making a revenue plan
this consist of forecasting the selling price and the volume.
Market size: the size of set market you are selling in.
Market share: the size of the market you are selling to, you can increase this by various ways
such as better products/price.j
New markets: selling into new markets, this is another way to increase profits.
Profit planning – expenses: next to planning the revenues you need to calculate your predicted
expenses such as manufacturing, labour and COGS.
Committed costs are known so easy to calculate,
Engineered costs are based on assumptions in the profit plan (like volume and efficiency).
Discretionary costs: these are costs which are hard to plan. Some companies will change
their discretionary expenses throughout the year which makes it hard to predict, think of
costs such as advertisement and R&D.
Planning investments: to fully evaluate future plans, investment plans should be made. In these
plans you can look at ROI made and residual income made. Strategy can be estimated by:
Formula: planned residual income = planned profit – (planned investment * cost of capital)
Planning cash flow (cash cycle): this describes the future movements of cash. Cash flow movements
need to be made for every month, one reason is because as a company you might receive cash a lot
later, and you spend it much earlier. The goal of this plan is to make sure there is cash in the
company at all times. Operating cash cycle shows us the time between the cash inflow and outflow,
longer cashflows could be better for customers but it does require more financial assets.
, Chapter 9: exceeding expectations
Sale-adjusted profit plan: the difference between the profit plan (expectations) and the income
statement (reality) in called the performance variance. This shows how the company has done in set
period. A sales-adjusted profit plan separates the two, it uses the original (static profit-plan) but it
uses the realised volume. The only difference in the adjusted profit plan are the variable costs
because they depend on the realised volume.
Competitive variances = profit form sales-adjusted profit plan – profit from original profit plan
Possible factors:
1. Market size
2. Market share
3. Product mix (different products sold as expected)
4. Product price
Volume variance: this is the difference in actual volume sold causes by market size, share and
product mix (market size/share could be separated into pure volume variance).
Planed sales: (planned) market size * market share * product mix * product price
1. We can calculate the impact of the market size on the planned sales by looking at the
market. If the market has grown and the sales have increased we can adjust this in the
original profit plan into the profit adjusted for changes in market size (variance).
2. To evaluate the impact of change in market share we can do the same. Do note that further
changes should be added in the adjusted profit plan to get a good estimate of the market
size and market share variance.
3. Changing the product mix will not affect the volume but it will affect the average price.
4. Selling price is the last variable, we can use the actual selling price and implement this again
in the profit plan.
At this point we have changes all revenues drivers, the latest profit plan has the actual revenues, but
all the costs at the planned level (except volume). This is our sales-adjusted profit plan.
Operational variances – direct costs: the analysis of operational variances explain the difference
between profit in the sales-adjusted profit plan and the actual profit. These variances are associated
with direct and indirect costs. For direct costs we have efficiency variance and spending variance.
Efficiency variance: in the sales-adjusted profit plan we still use the planned efficiency and not the
actual efficiency. To estimate the impact of changes in production efficiency a new profit plan is
made. Efficiency is calculated by the actual input/output ratio in production. Efficiency variance is
calculated by multiplying the actual difference per product * volume.
After this we calculate the spending variance, this consists of changing the planned pricing to actual
pricing.
Direct fixed costs are easier to calculate because there is no efficiency variance. Changes in planned
and actual costs are easy to calculate since these numbers are often absolute.
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