- •Lecture Notes b.Devlin
- •Introduction
- •Management accounting
- •1 Financial accounting.
- •2 Management accounting
- •To provide information about product costing to be used in financial
- •To provide information for planning, controlling and organising.
- •To ascertain the cost of a product. This information is used to value stock which is required for external reporting .
- •To assist management in the decision-making process.
- •Marginal costing
- •Decision making
- •In the short-run all fixed costs remain unchanged and therefore treated as irrelevant.
- •Variable overhead
- •2 Shut-down decisions
- •3 Make or Buy
- •Variable overheads £2
- •Variable cost of production £7
- •Variable overhead £2
- •4 Limiting factor decisions
- •5 Profit Planning or cost profit volume analysis
- •Cost volume profit analysis
- •It is possible to ascertain these by using a break-even chart or by using formulae.
- •Budgeting
- •1. Sales Budget 19x0
- •Production budget 19x0
- •3. Materials Usage Budget 19x0 (Component usage)
- •4. The Material Purchase Budget 19x0
- •Cash summary December 19x0
- •Depreciation never appears in a cash budget as it is a non-cash expense.
- •In respect to credit transactions time lags have to be built into the cash budget
- •It is useful to have a memo column to record items which will appear in the balance sheet if required. Budgeted Profit and Loss Account for six months ending 30 June 19x1
- •Budgeted Balance Sheet as at 30 June 19x1
- •Investment appraisal methods
- •1 Payback
- •2 Accounting rate of return
- •Investment appraisal compares the cash outflows with the cash returns from the project and these cash flows take place over a lengthy period of time.
- •3 Net Present Value
- •6 Profitability Index
- •The costing
- •Overheads
- •Indirect materials used in Dept. B £35,000
- •Insurance of machinery £5,000
- •In the absorption stage an overhead recovery (absorption) rate (oar) is calculated. The formula used is:
- •30,000 Machine hrs.
- •35,000 Labour hrs.
- •In recent years there has been criticism of the traditional system of costing for overheads ( Kaplan & Cooper ). Traditional cost systems were designed when:
- •Information processing costs were high;
- •Inspection cost:
- •Standard costing
- •Variances represent the differences between standard costs and actual costs. The standard cost is what the cost is estimated to be and this is compared to what the cost is actually.
- •Variable Overhead Variance
- •Variable overhead efficiency variance
- •Responsibility accounting
- •It is a ‘ system of accounting that segregates revenues and costs into areas of personal responsibility in order to assess the performance attained by persons to whom authority has been assigned’.
- •Net Residual Income
Investment appraisal methods
Lesson 4
Most of the decisions management have to deal with are tactical and short-run but on occasion they may have to consider a decision that relates to a long period of time. Once the decision is taken the business has to live with it and may find it difficult to disinvest or reverse so a great deal of care has to be taken in these decisions.. In the planning process the company may have decided to persue a growth strategy so there may have to be investment in capital projects to sustain the growth in sales and productive capacity. Capital expenditure on new buildings, plant and machinery may be needed from time to time. Again the company may decide rather than grow organically a strategy of merger or takeover is best. Whatever the stategy the various investment projects have to be properly appraised. Capital projects have to chosen and decisions as to the financing of them has to be determined.
Definition:
Capital investment appraisal is the process of evaluating the cost and benefits of a proposed investment in operating assets.
The appraisal process consists of measuring the inflows of cash against the outflows of cash which arise as a consequence of the decision.
There are five main appraisal techniques:
1 Payback
This technique considers the length of time it takes to recover the initial invesment outlay and the project starts to pay for itself. If a company invests £100,000 on a capital project the question is how long does it take to get back £100,000 cash from the project. Cash flow does not include any non-cash items such as depreciation. Therefore, if the investment returns are given in profit after depreciation terms the annual depreciation is added back. Net cash flow is the difference between cash received and cash paid during a defined period of time.
Example:
A company is considering investing in a new machine which costs £100,000.
The following information is available:
|
£ |
£ |
Initial outlay |
|
100,000 |
Net cash flow |
|
|
Year 1 |
20,000 |
|
Year 2 |
30,000 |
|
Year 3 |
40,000 |
|
Year 5 |
20,000 |
110,000 |
|
-------- |
-------- |
Net profitability |
|
10,000 |
|
|
------- |
Required:
What is the project’s payback period?
The project pays for itself after 41/2 years. At the end of that period the project produces net cash flows of £100,000 equal to the cost of the original investment.
The payback method has universal appeal because of its simplicity and the fact that it tends to favour less risky capital projects. Projects that take too long to pay for themselves are riskier and this method tends to reject these.