Summary
Summary Management Accounting - Cost & Budgeting
- Institution
- University Of South Africa (Unisa)
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Cost Classification (LU1)Cost behaviour cost assignment cost relevance cost function cost timing
Variable costs Direct costs Relevant cost Direct materials Product costs
Fixed costs Indirect costs Oppurtunity cost direct labour Period costs
Step costs Differential cost Man. O/H
Mixed costs
Cost Estimation (LU2)
High-low method least squares regression method
y = mx + c y = mx + c
y = total cost y = total cost
m = gradient (var. cost/unit of cost driver) m = gradient (var. cost/unit of cost driver)
x = cost driver level x = cost driver level
c = where the line intercepts the y-axis c = where the line intercepts the y-axis
(fixed cost) (fixed cost)
m = (high cost - low cost) Best fit line - line that reduces the sum of squares of
/ (high activity - low activity) the regression line.
c = y - mx Regression error - distance between the line and the
* use the x and y co- ordinate for the highest or point / observation.
lowest point m = n (sum (xy)) - (sumx)(sumy)
Major inherent flaws : / n(sumx squared) - (sumx)squared
* Only two points are selected (no coverage n = number of observations
of the pop.) c = (sumy) - m (sumx)
* The points are extremes and may not rep. the /n
pop, or may lie outside relevant range
Data Analysis
Correlation coefficient ( r ) Coefficient of determination (r squared)
* Explains how well the variables are correlated * indicates the extent to which the change in y is
* Ranges from -1 to 1 explained by the change in x.
* + /- r = + / - correlation * Ranges from -1 to 1
Budgets, Planning & Control (LU3)
BUDGET - financial plan for implementing management decisions
Budget characteristics: Objectives of a budget:
* Future orientated *Facilitates organisations strategic and tactical objectives
*Aims to achieve predetermined goal *Budgets compel planning (long term perspective)
*Expressed in quantifiable terms *Promote the co-ordination of activities
Principle budgeting factors: *Promotes communication in the org.
*Sales demand *Provides a framework for control & responsibility accounting
*Availability of raw materials *Framework of the authorisation of decisions in the org.
*Machine capacity *Basis for performance calculation
*Cash and sources of funding *Motivation for employees to improve their performance
Budget committee Strategic budgets - Used for long periods (3 - 15 years)
- responsible for budget process Tactical budgets - (1-3 years)
Operational budgets - Used for short periods (less than 1 year)
SEQUENCE IN BUDGET PREPARATION PRODUCTION BUDGET
1. Identify the principle budgeting Expected sales
factor. Add: units lost due to theft
2. Prepare the sales budget Add: desired closing inventory
3. Prepare the production budget Less: Opening inventory
KEY PERFORMANCE INDICATORS Production requires
*Profitability BUDGET FOR PRODUCTION RESOURCES
*Management effectiveness * Budget for production resources
*Liquidity *Raw materials purchases budget
*Solvency * General overhead costs budget
*Investor ratios for listed entities *Overhead absorption rates
*Administrative expenditure budget
*Cash budget
*Capital expenditure budget
*Master budget - Summary of the above
, Cash position predicted & appropriate management action
Short- term deficit Long -term deficit
* Arrange with suppliers to pay them later *Raise long term finance
*Encourage debtors to pay sooner by offering early *Sell unused assets
settlement discounts *Issue equity
*Arrange a bank overdraft Long - term surplus
*Postpone capital expenditure & dividend payments *Invest in capital equipment & increase
*Reduce inventory levels production capacity
Short- term surplus *Expand investment operations & increase
*Pay creditors early & receive discount earning potential
*Grant credit to customers & increase sales *Diversify into other business areas &
*Invest in interest bearing short-term securities increase earning potential & decrease risk
& earn interest
*Managers may resist the control process if they haven't set the budget themselves A46:I57
Incremental budgeting Zero - base budgeting
*Traditional approach to budgeting *Budget is performed from scratch or zero
*Previous periods results used as a basis *Each item in the budget is specifically
*Adjusted for inflationary increases justified.
ADVANTAGES : *The org's decision packages are identified &
*Results in less radical changes to operations thus a described ( discrete, stand-alone org. activity)
more stable org. environment. *Decision packages are evaluated & ranked
*Is less time consuming & requires less effort. in order of importance.
*Does not require extensive management skills. *Resources are allocated accordingly.
*Does not require extensive information systems ADVATAGES:
Rolling budgets *Challenges the current way of doing things.
*Prepared on a regular basis for the following year *Removes unnecessary activities & expenses
*The org. continuosly updates the existing budget *Compels employees to question wasteful exp.
*Greater staff involvement thus job satisfaction.
Budgeting & Probability theory *Provides in-depth insight into org. operations.
*The concept of expected values may be used *Forces staff to stay up-to-date with org.
where there is a great degree of uncertainty about developments.
future events. *Advantageous to service departments where
Units Probability output is difficult to quantify.
Preparing projections using historical data Projecting sales
Projections - important aspect of the budgeting process. *Obtain info on future sales from the org.
- 'an expected future trend pattern obtained by sales personnel.
extrapolation', which is based on the notion that past *Conduct market research
events can serve as an indication of what will happen *apply mathematical techniques
in the future. PARTICIPATIVE BUDGETING STYLE
*High- low method *Middle management is encouraged to be
*Linear - regression mathematical involved in setting the budget.
*Scatter diagrams techniques (opposite of imposed)
*Correlation
Impact of budgeting on the motivation of managers:
Managers may be negative towards the budget process for the following reasons :
*Lack of the neccesary numerical & technical skills
*It may be difficult to find time
*They may not understand the importance
*Budgetary slack - intentional overstatement of expense and understatement of income to reach targets
Performance related problems :
*Managers may do the bear minimum to reach target and carry over figures
*Wasteful expenditure as to not have the budget reduced in following years
*Managers may not be able to interpret control report or ignore the info.
*Managers may resist the control process if they haven't set the budget themselves
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