Accounting & Financial Analysis 1 Lecture 7 Interpret financial information (2)

Apply financial information to management activities Identify financial information Review financial information and take action accordingly Share financial information with colleagues Apply financial information to management activities Identify financial information Review financial information and take action accordingly Share financial information with colleagues

Apply financial information to management activities All the financial information that is collected from the various sources is analysed and constructed in a manner that will provide key indicators for management to oversee the performance of the business.

2 Categories of Costs If management is expected to control costs it is necessary for them to analyse and classify costs into the following categories: Direct costs/expenses Direct costs/expenses Indirect costs/expenses Indirect costs/expenses If management is expected to control costs it is necessary for them to analyse and classify costs into the following categories: Direct costs/expenses Direct costs/expenses Indirect costs/expenses Indirect costs/expenses

Direct costs are the costs that are directly related to the item being sold or produced. If the item had not existed the cost would not have happened. are the costs that are directly related to the item being sold or produced. If the item had not existed the cost would not have happened.

Direct costs could be made up of 3 components Direct materials Direct labour Direct expenses Direct materials Direct labour Direct expenses Direct materialsdirect labour Variable costs Direct materials and direct labour are also known as Variable costs because they are directly related to the product being sold or produced.

Variable costs costs that increase/decrease according to the level of activity. (Sales, production) They relate to a PER UNIT COST costs that increase/decrease according to the level of activity. (Sales, production) They relate to a PER UNIT COST

Variable costs (2) E.G. If each meal cost $9 to purchase the ingredients. The cost of the meals will change depending on the number of meals produced. 10,000 = $90,000 and 15,000 = $135,000. If the kitchen staff are paid by the number of meals produced and sold: their wages would be variable costs otherwise they are (direct) fixed costs. E.G. If each meal cost $9 to purchase the ingredients. The cost of the meals will change depending on the number of meals produced. 10,000 = $90,000 and 15,000 = $135,000. If the kitchen staff are paid by the number of meals produced and sold: their wages would be variable costs otherwise they are (direct) fixed costs.

Semi-variable costs costs that change slightly as the level of production increases but not in proportion to the increase in production.

Semi-variable costs (2) A semi-variable cost has an element of fixed costs in it. E.G. Telephone account has a fixed service charge, only the call charge increases as the calls increase. Electricity/gas charges in a kitchen will not change too much as the number of meals increase. Semi-variable costs are not normally classified within small to medium sized industry. It is only the very large corporations that may apply semi-variable costs in management applications. Most companies consider semi-variable costs as part of the fixed costs. A semi-variable cost has an element of fixed costs in it. E.G. Telephone account has a fixed service charge, only the call charge increases as the calls increase. Electricity/gas charges in a kitchen will not change too much as the number of meals increase. Semi-variable costs are not normally classified within small to medium sized industry. It is only the very large corporations that may apply semi-variable costs in management applications. Most companies consider semi-variable costs as part of the fixed costs.

Fixed costs costs that remain the same irrespective of the level of sales or production. Fixed costs could be Direct or Indirect costs that remain the same irrespective of the level of sales or production. Fixed costs could be Direct or Indirect

Fixed costs E.g.s of direct fixed costs are: Wages for kitchen staff (if permanent and constant) depreciation of kitchen equipment repairs to kitchen equipment, and all other costs incurred solely to produce the item being costed. Depending on the circumstances costs may have to be allocated to different classifications. E.g.s of direct fixed costs are: Wages for kitchen staff (if permanent and constant) depreciation of kitchen equipment repairs to kitchen equipment, and all other costs incurred solely to produce the item being costed. Depending on the circumstances costs may have to be allocated to different classifications.

Indirect Costs costs that cannot be specifically identified with the cost of the finished product. Indirect costs are therefore all other costs that are not direct costs. overheads Indirect costs are also known as overheads. costs that cannot be specifically identified with the cost of the finished product. Indirect costs are therefore all other costs that are not direct costs. overheads Indirect costs are also known as overheads.

Indirect Costs (2) Examples of indirect fixed costs are: Occupancy costs – Rent / rates, electricity, telephone, Insurance). long-term finance costs, Depreciation Administration costs Marketing costs Examples of indirect fixed costs are: Occupancy costs – Rent / rates, electricity, telephone, Insurance). long-term finance costs, Depreciation Administration costs Marketing costs

Understanding your business Having an understanding of the difference between Variable and Fixed costs (and semi-variable somewhere in the middle but leaning towards Fixed costs) management can start to take control of the business activities. Variable costs Variable costs will change as production increases or decreases whilst Fixed costs the Fixed costs will remain the same Having an understanding of the difference between Variable and Fixed costs (and semi-variable somewhere in the middle but leaning towards Fixed costs) management can start to take control of the business activities. Variable costs Variable costs will change as production increases or decreases whilst Fixed costs the Fixed costs will remain the same

See Example in your notes Income Statement for the Silver Spoon Restaurant READ TRY TO CALCULATE THE PROFIT AND LOSS FOR 7 DAYS ON PAGE 2 Income Statement for the Silver Spoon Restaurant READ TRY TO CALCULATE THE PROFIT AND LOSS FOR 7 DAYS ON PAGE 2

How are problem solving skills applied Solving performance problems Identify the problem Identify the cause of the problem Develop options to correct the problem Select best option Implement corrective action Set review date to assess the result of action

Solving technical problems Spreadsheets can assist in making planning decisions. They may require information from other departments. Used primarily for: Spreadsheets can assist in making planning decisions. They may require information from other departments. Used primarily for: Budget preparation Sales forecasting Market research Financial planning Scheduling of maintenance, rosters, Strategic planning

Solving skills problems Develop work priorities Training: On-the-job learning Of-the-job learning Identifying new skills needs Professional development activities Recording the development of activities Develop work priorities Training: On-the-job learning Of-the-job learning Identifying new skills needs Professional development activities Recording the development of activities

How is use of technology applied ? Software applications for small business: “Off the shelf” accounting packages (single or multi-user) Entries into the system are done in real-time, which means that regardless of the number of individuals inputting data, you will always have a current view of the business operations Software applications for small business: “Off the shelf” accounting packages (single or multi-user) Entries into the system are done in real-time, which means that regardless of the number of individuals inputting data, you will always have a current view of the business operations

How is use of technology applied ? (2) Integrated packages: Integrated packages provide the tools to handle a variety of tasks required by small businesses. These generally include: A word processor for writing text A spreadsheet to make calculations and present data in a comprehensive manner A database which holds information and is capable to sort it into various desired formats. Diary and telephone index e.g. MS Office Integrated packages: Integrated packages provide the tools to handle a variety of tasks required by small businesses. These generally include: A word processor for writing text A spreadsheet to make calculations and present data in a comprehensive manner A database which holds information and is capable to sort it into various desired formats. Diary and telephone index e.g. MS Office

How is use of technology applied ? (3) Internet: The internet is a worldwide network of computers linked together and sharing information between them. It allows you to search for information on virtually any topic you require. You are able to receive and sent messages to your contacts and to organise chat lines for real-time discussions. It enables you to access information from other subscribers such as retail price lists, shopping catalogues etc. Internet: The internet is a worldwide network of computers linked together and sharing information between them. It allows you to search for information on virtually any topic you require. You are able to receive and sent messages to your contacts and to organise chat lines for real-time discussions. It enables you to access information from other subscribers such as retail price lists, shopping catalogues etc.

Share appropriate financial information with colleagues in a timely manner The Manager cannot do it all on his own no matter how committed he may be. He must have the ability to communicate and consult with his department managers and to motivate each of them to take ownership of the activities of their department. In order to succeed management should participate in problem solving whilst encouraging their staff to organise their resources to achieve the desired results. team building is a key to success In short, team building is a key to success and the use of interpersonal and negotiating skills is the main ingredient for developing an effective team The Manager cannot do it all on his own no matter how committed he may be. He must have the ability to communicate and consult with his department managers and to motivate each of them to take ownership of the activities of their department. In order to succeed management should participate in problem solving whilst encouraging their staff to organise their resources to achieve the desired results. team building is a key to success In short, team building is a key to success and the use of interpersonal and negotiating skills is the main ingredient for developing an effective team

Team work For the team to be effective there must be: For the team to be effective there must be: Open discussion Open discussion on all aspects of the business. Current financial reports Current financial reports discussed during regular management meetings. Problem solving Problem solving sessions were necessary to arrive at a suggested participative management solution. Implement corrective action Implement corrective action as soon as possible. Review Review the situation to see if the solution was effective. Inform Inform the team of positive results as well as the negative ones. Acknowledge Acknowledge individual achievements were appropriate For the team to be effective there must be: For the team to be effective there must be: Open discussion Open discussion on all aspects of the business. Current financial reports Current financial reports discussed during regular management meetings. Problem solving Problem solving sessions were necessary to arrive at a suggested participative management solution. Implement corrective action Implement corrective action as soon as possible. Review Review the situation to see if the solution was effective. Inform Inform the team of positive results as well as the negative ones. Acknowledge Acknowledge individual achievements were appropriate

Alternative view You can’t create visionary ideas by consensus You can’t create visionary ideas by consensus “The aim is to find the individualist with a sense of self-discipline rather than the man who is a good member of a team” “The aim is to find the individualist with a sense of self-discipline rather than the man who is a good member of a team” SAS Spokesman Sunday Times 30/3/03 p 41

Alternative view (2) Everybody dies when 2 people are in charge Everybody dies when 2 people are in charge (Air Force saying) I don’t believe in consensus – I consult widely, listen to everyone, then the guy at the top makes a decision and everyone gets on board I don’t believe in consensus – I consult widely, listen to everyone, then the guy at the top makes a decision and everyone gets on board. Everybody dies when 2 people are in charge Everybody dies when 2 people are in charge (Air Force saying) I don’t believe in consensus – I consult widely, listen to everyone, then the guy at the top makes a decision and everyone gets on board I don’t believe in consensus – I consult widely, listen to everyone, then the guy at the top makes a decision and everyone gets on board.

PRACTICE ACTIVITY! Continue with MYOB postings OR Do it manually! See questions at back of notes Continue with MYOB postings OR Do it manually! See questions at back of notes