Business Economics – semester 1 IBM
TABLE OF CONTENTS
Management:
1. Managerial Accounting, the Business Organisation, and Professional Ethics
2. Introduction to Cost Behaviour and Cost-Volume-Profit Relationships
3. Measurement of Cost Behaviour
4. Cost Management Systems and Activity-Based Costing
5. Relevant Information for Decision making with a Focus on Pricing Decisions
Financial:
8. Flexible Budgets and Variance Analysis
9. Management Control Systems and Responsibility Accounting (bonus question)
CHAPTER 1 – Managerial Accounting, the Business Organisation, and Professional Ethics
1. Users of accounting information.
MANAGEMENT ACCOUNTING: Process of identifying, measuring, accumulating, analysing, preparing,
interpreting, and communicating information used by à managers.
E
FINANCIAL ACCOUNTING: Develops information for external decision makers à stockholders,
suppliers, banks, government authorities.
WHY ACCOUNTING IS ESSENTIAL FOR DECISION MAKERS AND MANAGERS?
à Accounting information is used in decision making for planning and control:
- Planning describes how the organisation - Control is the process of implementing
will achieve its objectives. plans and evaluating if objectives are
achieved.
THE NATURE OF PLANNING AND CONTROLLING:
2. Budget and performance reports.
E BUDGET: Quantitative expression of a plan of action.
PERFORMANCE REPORTS:
à Compare actual results with budgeted
amounts.
à Provide feedback by comparing results with
plans.
à Highlight variances.
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, 3. Product life cycle.
E PRODUCT LIFE CYCLE refers to the various stages through which a product passes.
4. The value chain.
VALUE CHAIN: The set of business functions or activities
that add value to the products or services of an
organisation.
5. Controller and treasurer functions.
CHIEF FINANCIAL OFFICER (CFO): The top executive who deals with all finance and accounting
issues in the organisation. The CFO generally oversees the accounting function (controller and
treasurer functions).
CONTROLLER: The accounting officer of an
TREASURER: The executive who is concerned
E mainly with the company’s financial matters,
organisation who deals mainly with operating
matters, such as aiding management decision
such as raising and managing cash.
making.
a) Provision for control
a) Planning for control
b) Investor relations
b) Reporting and interpreting
c) Short-term
c) Evaluating and consulting
d) Banking and custody
d) Tax administration
e) Credits and collections
e) Government reporting
f) Investments
f) Protection of assets
g) Risk management
g) Economic appraisal
6. Major influences on management accounting.
ADVANCES IN TECHNOLOGY: BUSINESS PROCESS REEINGINEERING:
- E-commerce - Just-in-time (JIT)
- Enterprise resource planning (ERP) - Lean manufacturing
- B2B and B2C - Computer-integrated manufacturing
- Six sigma
7. Exercises.
1-32: Consider the following short descriptions. Indicate whether each of the following descriptions more
closely relates to a major feature of financial accounting or management accounting.
a) Field is less sharply defined à Management
b) Provides internal consulting advice to managers à Management
c) Has less flexibility à Financial
d) Is characterised by detailed reports à Management
e) Has a future orientation à Management
f) Is constrained by GAAP à Financial
g) Behavioural impact is secondary à Financial
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,CHAPTER 2 – Introduction to Cost Behaviour and Cost-Volume-Profit Relationships
1. Cost drivers and cost behaviour.
COST DRIVER: A measure of activities
that requires the use of recourses and
thereby cause costs.
COST BEHAVIOUR: How the activities
of an organisation affects it costs.
VALUE CHAIN FUNCTIONS, COSTS, AND COST DRIVERS:
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2. Variable and fixed cost behaviour.
FIXED COSTS: A fixed cost is not immediately
affected by changes in the cost-driver level.
E
VARIABLE COST: A variable cost changes in
direct proportion to changes in the cost-driver
level.
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, 2-A1: Maintaining a clean working environment is important to Napco, an industrial parts manufacturer.
Cleaning the plant is the responsibility of the maintenance department. The 50,000-square foot plant is
thoroughly cleaned from four to eight times a month depending on the level and stage of production. For
the most recent month, March the plant was cleaned four times. The production schedule for the next
quarter (April through June) indicates that the plant will need to be cleaned five, six, and eight times
respectively.
Two of the recourses needed to clean the plant are labour and cleaning supplies. The cost driver for
both recourses is number of times the plant is cleaned. Plant cleaning labourers are full-time employees
who are paid the same wages regardless the number of times the plant is cleaned. Cleaning supplies
is a variable cost. The march cost of labour was $21,000 and cleaning supplies used cost $8,000.
a) Prepare a table that shows how labour cost, cleaning supplies cost, total cost, and total cost per
cleaning changes in response to the number of times the plant is cleaned. What is the predicted
total cost of plant cleaning for the next quarter?
E
b) Suppose Napco can hire an outside cleaning company to clean the plant as needed. The charge
rate for cleaning is $5,700 per plant cleaning. If the outside cleaning company is hired, Napco
can lay off the workers who are now cleaning the plant and will spend nothing for cleaning
supplies. Will Napco save money with the outside cleaning company over the next quarter?
Prepare a schedule that supports your answer.
è If Napco expects average “times cleaned” to be 6 or more, it would save by
cleaning with its own employees.
è If Napco expects to average 5 or fewer cleanings per month, it would save by
outsourcing.
8. Relevant range.
RELEVANT RANGE: The limits of the
cost-driver level within which a specific
relationship between cost and the cost
driver is valid.
à Even within the relevant range, a fixed
cost remains fixed only over a given
period of time – usually the budget
period.
9. Cost-volume-profit (CVP) analysis.
E CVP: The study of the effects of output volume on revenue (sales), expenses (costs), and net income
(net profit).
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