Introduction to Management Accounting Pia Nylinder

Outlining of the course in management accounting Lecture 1; Introduction and economic relationships Chapter 1-3, 5, 11 Lecture 2; Variable and fixed costs, cost-volume-profit analysis Chapter 5, 6 Lecture 3; Product and service costing Chapter 3, 4 Lecture 4; Budgets and budgeting Chapter 8 Lecture 5; Capital investment decisions Chapter 7 Lecture 4; Performance measurement and accounting for control (including standard costs) Chapter 9, 10 Calculation exercises; 2 occations Excell excercise; 1 occation (mandatory)

Excel- and calculate exercises; division into groups Excel exercises are mandatory! 1st group ( ) 2nd group ( ) Last group ( ) Write your name on the time-list, depending on what time you want to attend!

Management Accounting Management Accounting = carried out within a business for its own internal uses, to assist management in controlling the business and in making business decisions. Management Accounting processes are concerned with the provision of information of use internally, within the organisation, for functions such as decision-making by managers, and the control of business activities.

The process of management accounting g

Different ways to view the goals with a business Profit maximization model Managerial theories of the firm Administrative Behavior, model of satisfaction The stakeholder theory

Profit maximization model Business goals: to maximate profit Input Output

Porter’s value chain Porter -85

Managerial theories of the firm Managers goal is about maximizing their own utility (status, power, bonus) By maximizing sales the owners can be satisfied. Theorists: William Baumol Oliver Williamson

Administrative Behavior, model of satisfaction Are developed from the “Behavioural theories of the firm”. A business strives for satisfaction, instead of maximizing profit. The profit has to be high enough to survive. Theorist: Herbert Simon

The stakeholder theory Firm Owner Lenders Customers Competitors Employees Supplier State

Economic terms & relationship

Profit planning Defined as a set of steps that are taken by firms to achieve the desired level of profit. Financial planning Revenue, costs, income, cash inflows and cash outflows

Revenues & Costs/Expenses Revenue – Increase in ownership generated from sale/delivery of goods or services – Also called sales or turnover Cost/Expenses – A sacrifice of resources for a particular purpose (produce goods and services) – Measured by monetary units that must be paid for goods and services Matching – Relating revenues and costs/expenses (cost of good sold) to a particular period for which a measurement of income is desired

Revenues & Costs/Expenses Revenue - Examples Sales = Price per unit x Units sold/produced Interest revenue Cost/Expenses - Examples Research & development Material (raw material, custom, transportation etc) Cost of goods sold Tools Employees (Salary and payroll tax) Machines and Equipment (depreciation, maintenance and repairs) Rent for premises Interest cost Marketing Insurance Distribution

Income/Result Income - An amount by which total assets increase in an accounting period. For income to be realized it must be related to actual business transactions (or contracted). Cost /expenditure - Decrease in ownership generated from delivery of goods or services or using up assets Income/Result = Revenue – Costs/Expenses If Revenues > Costs/Expenses = Profit/Gain If Costs/Expenses > Revenues = Loss/Deficit Operating income = Total revenues – Total costs Net income/profit = Operating profit + Interest revenue – Interest cost – Income taxes

Cash inflow & Cash outflow Cash inflow/Cash received – Money received by a firm as a result of its operating activities, investment activities and financing activities Cash outflow /Cash payment – Money paid by a firm as a result of its operating activities, investment activities and financing activities

Profitability Income/profit measures the outcome in absolute amounts Income/profit has some limits Useless indicator of how well a company is doing Income Profitability is a percentage: Return on investment = Invested capital Measure of income in relation to the investment required to obtain that income Profitability is therefore a better measure than income as an indicator of how well a company is doing

Effectiveness Degree to which a predetermined objective or target is meet The degree of effectiveness is high if a company reach its target/targets Value of output Effectiveness = Value of input Effectiveness is often measured in financial terms, e.g. profitability (return on equity): Profit Profitability = Capital

Efficiency A relative amount of inputs used to achieve a given level of output Often measured in physical terms, i.e. quantity Quantity output Efficiency = Quantity input Number of customers served per day Quantity material in kilograms per product unit

Budgeted income statement Cash budget Budgeted balance sheet

Financial status Budgeted balance sheet Plant assetsOwners equity PropertyCapital stock Equipment and fixturesBudgeted income Current assetsLong term debt InventoryBank loan Accounts receivableCurrent liabilities Cash Accounts payable Total assets Total equity and liabilities Assets = Debt + Equity Expected assets and liabilities at a specific point of time

Budgeted income statement Revenue and costs/expenditure Accrual basis (relating revenues and expenses to the time period when they occur) Revenue Sales revenue Operating expenses Cost of goods sold Gross income Wages and commissions Depreciation Rent Miscellaneous Operating income Interest revenue Interest cost Net income

Cash budget Future cash inflows and cash outflows Time period (quarter-by-quarter, month-by-month or week-by week) Cash receipts depends on the credit terms extended to customers Purchases depend on the credit terms extended by suppliers Cash balance, Beginning Cash inflows Sales (Collection from customers) Borrowings New issues of shares Total cash inflows Cash out flows Cost of goods sold Wages Equipment purchase Loan payments Interest Overhead Dividend Total cash outflows Cash balance, ending