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Performance Management Accounting Lecture Notes

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CVP charts, worked examples and equations, activity-based costing, lifecycle costing etc.

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  • September 22, 2022
  • 45
  • 2021/2022
  • Lecture notes
  • Dr igbekele osinubi
  • All classes
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acmarinagabby
Performance Management Accounting
02/02/2022
Management Accounting and Business Environment

Management Accounting vs. Financial Accounting
Management accounting measures, analyses, and reports financial and nonfinancial information
that helps managers make decisions to fulfil organisational goals. Provides information for managers
of an organisation who direct and control its operations.
Financial accounting focuses on reporting financial information to external parties such as investors,
governmental agencies, banks, and suppliers, based on GAAP. Provides information to stockholders,
creditors and others who are outside the organisation.

Financial Accounting Management Accounting
Users External persons who make Managers who plan for and control
financial decisions an organisation
Time Focus Historical perspective Future emphasis
Data Emphasis on verifiability Emphasis on relevance for planning
Precision/ Emphasis on precision Emphasis on timeliness
Timeliness
Subject Focus is on the whole organisation Focus on segments of organisation
Requirements Must follow prescribed formats Need not follow prescribed format

Management Functions and Accountant’s Role
 Planning: express management plans formally in budgets
 Directing and Motivating: mobilising people to implement the plans and ensuring that the
plan is followed; identify critical success factors (CSF) and set performance targets on each
 Controlling: measuring performance and comparing actual to planned performance;
maintain databases and prepare reports of various types that provide feedback
 Decision Making: selecting a course of action; identify relevant costs and revenue and
applied various decision techniques to support management decisions

Planning Decision: Made for the future to achieve objectives – requires clear objectives and
identification of methods to achieve goals.
Control Decision: To verify something that occurred in the past – requires monitoring and
implementation of the organisational plan, take corrective measures where applicable




Decision-Making Process:
1. Identify the problem and uncertainties
2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing among alternatives

, 5. Implement the decision, evaluate performance and learn

Factors that Increase the Need for Management Accounting Information
- Increasing complexity and size of organisations
- World-wide competition and increased emphasis on quality
- Rapid development and implementation of technology

Other Issues Affecting the Role of Management Accountants
- Meeting world-class competition demands
- Managers must make decisions to plan, direct, and control a world-class organisation
- A more competitive environment emphasising global competition, new management tools,
new technology and, business process
- New management techniques such as ERP, Just-In-Time, Total Quality Management, and
Theory of Constraints
- Increased importance of service industry and non-tangible assets
- Service activities subject to reorganisation, increased use of outsourcing
- Government demand new measures of performance (NPM) in public sector

Other Issues: Value Management and Environmental Sustainability
- Awareness of shareholder value and customer value
- Understanding the cause and effect relationship
- Understanding environmental sustainability issues
- Understanding three motives of environmental sustainability as, compliance motive, eco-
efficiency motive, and strategic motive

Other Issues: Emphasis on Corporate Governance and Business Ethics
- Corporate governance and consequences of corporate governance failure
- Understanding technical competence and adherence to a code of ethics as the two parts of
professionalism
- Many companies and professional organisations, such as the CIMA, have written codes of
ethics which serve as guides for employees

Implications for the Roles of Management Accountants
- Emphasis on good corporate governance
- Increasing influence of stakeholders on definitions of corporate performance and strategic
implementation
- Familiarisation with regulatory requirements
- Increasing media attention on corporate activities
- Redefinition on corporate performance metrics
- Efficient deployment of enterprise resource management
- Emphasis on business process outsourcing and re-engineering
- Emphasis on quality services and customers relationship management

Questions
Q1. Gavin Adams
a. Adam decides to expand service offerings into adjacent market. Planning Decision
b. Adam calculates material costs of previous project. Control Decision
c. Adam weighs the purchase of new machine. Control Decision
d. Adam estimates weekly cost of providing maintenance next year. Planning Decision
e. Adam compares payroll cost of past quarter to budgeted cost. Control Decision

,Q2. “Management accounting should not fit the straitjacket of financial accounting.” Explain and
give an example.
Management accounting doesn’t have to follow GAAP, meaning it is more adaptable to a specific
organisation, manager, or a division when creating reports in a way that financial accounting is not.

Q3. Suppose all garages routinely followed the practice of attempting to sell customers
unnecessary parts and services by recommending unnecessary or expensive repairs.
a. How would this unethical behaviour affect customers?
This will affect the trust and faith of customers towards the company, and therefore, reduce
customer loyalty and commitment.

b. How might customers attempt to protect themselves against this unethical behaviour?
May decide to sell car. May write negative reviews for the garage to warn others.

c. How would this unethical behaviour probably affect profits and employment in the garage
industry?
Reduction in demand for service, decrease in sales and profits. Decrease in profits would therefore
lead to decrease in employment. In short-term they may make more profit, however, in the long-
term profits will significantly decrease.

, 09/02/2022
Cost-Volume-Profit (CVP) Analysis and Break-Even Charts

What is it?
CVP analysis is a vital tool in many business decisions because it helps managers understand the
interrelationship between cost, volume, and profit. Focuses on the interactions between the
following elements:
- Prices of products
- Volume or level of activity
- Per unit variable costs
- Total fixed costs
- Mix of products sold
Application
Management may request information towards solving a variety of problems which require
calculations and involving profit-volume ratios, for example:
- What is the company’s break-even point?
- What would be the profit in sales volume X?
- What volume of sales would be required to achieve a planned level of profit?
- What volume of sales would be required to maintain the present level of output, if selling
price were reduced by x%?

Assumptions
i. Selling price is constant throughout the entire relevant range. Price of a product or
service will not change as volume changes.
ii. Costs are linear throughout the entire relevant range and can be accurately divided into
variable and fixed elements. The variable element is constant per unit and the fixed
element is constant in total over the entire relevant range.
iii. In multiproduct companies, the sales mix is constant.
iv. In manufacturing companies, inventories do not change. The number of units produced
equals the number of units sold.

Break-Even Point
The break-even point is the level of sales at which the company’s profit is zero.
Therefore, breakeven point is the point where sales = total variable expenses + fixed expenses
Equation Method:
Profits = Sales – (Variable Expenses + Fixed Expenses)
Sales = Profits + Variable Expenses + Fixed Expenses

Contribution Margin Method:
Break-even point in units sold = fixed expenses/unit contribution margin
Where, unit contribution margin = unit selling price – unit variable cost

Break-even point in total sales = fixed expenses/CM Ratio
Where, CM ratio = (contribution margin/sales) * 100

Target Profit Analysis
CVP formulas can be used to determine sales volume needed to achieve a target profit.
Sales = Target Profits + Variable Expenses + Fixed Expenses

Unit sold to attain target profit = (fixed expenses + target profit)/ unit contribution target
Profit before tax = profit after tax/(1 – tax rate)

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