1. Managerial Accounting (session 2) Management Control

2. The cash budget Self-assessment question 1.6 Create a cash budget from the following information: Opening balance is €150 overdrawn, credit receipts are €100 per month, cash receipts are €30 pm and other receipts are €70 in Feb. Purchases are €100 pm, wages €25 pm, expenses €35 pm and other payments are €15 in Jan.

3. The cash budget JanuaryFebruaryMarchQuarter Receipts Credit sales Cash sales Other Total 100 30 130 100 30 70 200 100 30 130 300 90 70 460 Payments Purchases of materials Wages Expenses Other Total 100 25 35 15 175 100 25 35 160 100 25 35 160 300 75 105 15 495 Net in/(out) flow Opening bank balance Closing bank balance -45 -150 -195 40 -195 -155 -30 -155 -185 -35 -150 -185

4. The high-low method Self-assessment question 1.7 June Sept. July

5. The high-low method Semi-variable costs Maintenance (hours) Total Cost (£) October1552013 September1221723 August1351902 July69280 June1572073 May1491937 June 157h.£ 2,073 Sept122h.£ 1,723 Var. cost35h.£ 350i.e. £ 10/h. Total VC for June = 157 x 10 = £ 1,570 Total estimated FC = 2,073 – 1,570 = £ 503 Estimated maintenance cost for Nov. = 503 + 180 x 10 = £ 2,303

6. Texas Rex Inc. 1. Sales Budget 1234Year Units1 0001 2001 5002 0005 700 Unit Selling Price 10,00 Budgeted Sales ($) 10 00012 00015 00020 00057 000

7. Texas Rex Inc. 2. Production Budget (in units) 1234Year1 Budgeted Sales 1 0001 2001 5002 0005 7001 000 Desired ending inventory 180240300400200 Total needs1 2401 5001 9002 2005 900 Less : beginning inventory -180-240-300-400-180 Units to be produced 1 0601 2601 6001 8005 720

8. Texas Rex Inc. 3. Direct Materials Purchases Budget ($) Plain t-shirts1234Year Units to be produced1 0601 2601 6001 8005 720 Direct materials per unit1111 Production needs1 0601 2601 6001 8005 720 Desired ending inventory126160180106 Total needs1 1861 4201 7801 9065 826 Less : beginning inventory -58-126-160-180-58

9. Texas Rex Inc. 4. Direct Labour Budget ($) 1234Year Units to be produced1 0601 2601 6001 8005 720 Direct labour time per unit 0,12 Total labour hours needed 127,2151,2192,0216,0686,4 Average wage per hour10 Total direct labour cost 1 2721 5121 9202 1606 864

10. Texas Rex Inc. 5. Overhead Budget ($) 1234Year Budgeted direct labour hours127,2151,2192,0216,0686,4 Variable overhead rate 5,00 Budgeted variable overhead636,0756,0960,01 080,03 432,0 Budgeted fixed overhead1 645 6 580,0 Total overhead2 2812 4012 6052 72510 012

11. Texas Rex Inc. 6. Closing Finished Goods Inventory Budget ($) Unit cost computation Direct material 4,00 Plain t-shirt 3,00 Ink 1,00 Direct Labour 1,20 Overhead 1,75 Variable 0,60 Fixed 1,15 Total unit cost 6,95 Finished goods : logo t-shirts 200 Unit cost 6,95 Ending FG inventory 1 390,07 Rate9,586

12. Comparison btw the contribution income statement and the traditional income statement Traditional approach to P&LContribution approach to P&L Sales €12,000 Cost of goods sold €6,000 Gross margin €6,000 Selling and administrative expenses: Selling €3,100 Administrative €1,900 €5,000 Operating income €1,000 Sales €12,000 Variable expenses: Variable production €2,000 Variable selling €600 Variable administrative €400 €3,000 Contribution margin €9,000 Fixed expenses: Fixed production €4,000 Fixed selling €2,500 Fixed administrative €1,500 €8,000 Operating income €1,000

13. A P&L analysis by industry IndustryCost of goods sold / Sales Selling and administrative expense / Sales Aerospace and defense Beverages Computer software and services Electrical equipment and components Healthcare services Oil and gas Pharmaceuticals Restaurants 79% 52% 34% 64% 82% 90% 31% 78% 9% 34% 38% 21% 6% 3% 41% 8% Why do you think the percentages in each column differ so dramatically? Source: Lori Calabro, « Controlling the flow », CFO, February 2005, p. 46-50 Texas Rex (T-shirt) 70% 15% Total 88% 86% 72% 85% 88% 93% 72% 86%

14. Purposes of budgets (summary)  Budgets are used : To convert strategic plans into actions To help coordinate the activities (manufacturing, sales…) To guarantee the coherence of action plans To favor the discussion of action plans and consider qualitative aspects To keep records of assumptions made To assign responsabilities to managers (influencing behaviors) To give autonomy to managers (allow them to spend money through grants of authority) To evaluate performance…

15. Organizational control, Management control and Managerial Accounting Informal control Formal control Management control Management Accounting

16. The management accounting tools –Cost Accounting; –Mgt Reporting and financial Reporting* –Budgets. Management Accounting * Financial Reporting focus on account consolidation and legal requirements (GAAP, past information,...) for external parties when management accounting focus on information regarding operations for managers within the organisation.

17. The management control tools –Cost Accounting; –Mgt Reporting and financial Reporting* –Budgets. –Performance Measurement Systems (tableau de bord) –Incentives, objectives… (also with HRM) Definitions of « management control » : « Management control is the process by which managers influence other members of the organization to implement the organization’s strategies » (ANTHONY, 1998). « Management control is the process of providing information about the performance of managers and operating units » (ATKINSON et al., 1997).

18. The management control tools What is a "tableau de bord" (dashboard)?  Set of short term performance indicators that help manage performance  Few indicators (KPI)  Made of tables and/or graphs  Link between strategy, Critical Factors of Success, and Budgets

19. Building the "tableau de bord" Strategy Objectives Critical factors Indicators standards of performance

20. Critical factors and indicators Increase Sales Sales Backlog Nb of new prospects visited Maximize contribution Contribution in € & in % of Sales Product mix in favour of top range products Satisfaction of customers Renewal rate of contracts Customer satisfaction indicator Stay in line with estimatesBudget variances Sell maintenance contractsNb of contrats sold / Nb of installations Adapted from Mendoza et al. (2002) Example of an elevator services company Critical factors Indicators

21. What is standard costing? A financial, cost control system that enables the deviations (variances) from the budget to be analyzed Suitable when output can be measured and input required can be specified

22. What is a standard cost? A predetermined cost per unit or per operation (activity)  If the target cost that should be incurred is set under efficient operating conditions = Attainable standards  If the target cost that should be incurred is set under ideal operating conditions = ideal standards

23. Purpose of standard costing Predicting future costs for decision-making Providing a challenging target for managers Assisting in setting budgets and evaluating managerial performance Acting as a control device of operations Simplifying profit measurement and inventory valuation

24. Management control: cybernetic model Control device Entity being controlled 1. Detector. Information about what is happening 3. Effector. Behavior alteration, if needed 2. Assessor. Comparison with standard Source: Anthony & Govindarajan (2007)

25. The management control process PlanningAction Evaluation Regulation loop Learning loop

26. Formal control tools –Cost Accounting; –Mgt Reporting and financial Reporting* –Budgets. –Performance Measurement Systems –Incentives Formal control Audit Financial markets (stock prices, analysts…)

27. Organizational control, Management control and Managerial Accounting Informal control formal control Management control Management Accounting Clan control,…Tableaux de bord,… Procedures,… Budgets,…

28. A control type for every kind of org.? Source: Ouchi (1979) INFORMAL FORMAL

29. The responsibility centers Budgets are organized by responsibility centers. There are 5 types of responsibility centers : - Production centers - Discretionary expense centers - Revenue centers - Profit centers - Investment centers. FC & VC FC Sales EBITDA… ROI…

30. Complaints about budgets Justify already taken decisions Prevent from adaptation to change (especially as the environment is evolving more rapidly) Useless if goals are imposed Increase rivalry between departments…

31. Are budgets commonplace? Source: Leahy, Business Finance, 2006