ABC Essentials Become Familiar with Terminology Emphasize Basic Concepts Behind...
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ABC Essentials Become Familiar with Terminology Emphasize Basic Concepts Behind Activity-Based Cost and ABM Apply concepts thru Class Exercises 2 Managerial Accounting Essentials This introductory course in Managerial Accounting with an emphasis on Activity-Based Cost and Management is based on the textbook, Management Accounting, 2 ed., written by Anthony A. Atkinson, Rajiv D. Banker, Robert S. Kaplan, and S. Mark Young. Concepts and terms from Chapters 1 through 5 plus 9 and 10 will be highlighted for this course. Conventions used throughout the course: - indicates a definition - indicates a key concept or equation 3 Management Accounting Goals Improve the quality of operations Lower the cost of operations Increase the responsiveness of operations for customer needs #1 - Management Accounting Information that Creates Value Differences between financial and management accounting The informational needs of management accounting Activities as the primary focus for measuring and managing performance 5 Basic Features of Accounting 6 Management Accounting System Operational and Financial Data Management Accounting Information INPUTS PROCESSING OUTPUTS 7 Management Accounting The process of identifying, measuring, reporting and analyzing financial as well as operating information for the internal users regarding the economic condition of an organization. 8 Comparisons of the Systems Managerial Accounting Internal constituencies Feedback and control Current, future oriented Process driven Financial, operational, physical measures More subjective More drill-down Financial Accounting External constituencies Past performance Historically oriented Rules driven Only financial measures Objective Highly aggregate 9 The Various Levels for Reporting Senior Executives Upper/ Middle Management Upper/ Middle Management Operationa l 10 Operational Level Level of detail Disaggregate Types Inputs used Outputs produced Quality of service or production process Very current Frequency V ery Frequent 11 Middle/Upper Management Level of detail More aggregate Types Resources used Efficiency Quality of work performed Profitability Current and future Frequency Frequent 12 Senior Executives Level of detail Highly aggregate Types Profitability Market opportunities and threats Customer loyalty and satisfaction Technological innovations Current and future Frequency Less Frequent 13 Functions of ABC Customer Costing Operational Control Product Costing Management Control 14 Functions of ABC 15 Foundation of ABC DuPont Corporation Operating budget Capital budget Return on investment ROI = Operating Income/Investment DuPont Corporation Operating budget Capital budget Return on investment ROI = Operating Income/Investment General Motors Decentralized responsibility Centralized control Flexible budget General Motors Decentralized responsibility Centralized control Flexible budget Circa 1920 After 1925, Modern Day Accounting Reporting Standards were established by the Securities Exchange Commission. 16 Flexible Budget A forecast of what expenses should have been, given the actual volume and mix of production and sales. Flexible budgets recast cost targets in the planned or master budget to reflect the actual level of production. This allows comparisons of actual results to targets based on the achieved level of production. 17 Flexible Budgets Time Dollars Budget Timephased Flexible (Time ) Flexible Budget Unfavorable Cost Variance Favorable Cost Variance Look Familiar? (Circa 1925) 18 Cost Performance Comparison of: Actuals Budget ETC EV Modern Flexible Budgeting 19 Cost Performance Terms Data Elements: Total Budget = Budget at Completion Budget = Budget to Date Performance = Performance to Date (EV) Expenses = Actual Cost to Date ETC = Estimate to Complete EAC = Estimate at Completion 20 Cost Performance Terms Analysis: CV = Cost Variance SV = Schedule Variance VAC = Variance at Completion SPI = Schedule Performance Index CPI = Cost Performance Index IEAC = Independent Estimate At Complete These calculations are used to analyze the performance of the operation. 21 Cost Performance Calculations 22 Cost Performance Example A fan manufacturer implements cost performance techniques to analyze the progress of the operation. The Initial Plan for production: Make 1,000 Fans over 50 days Steady rate of 20 fans per day Budgeted cost per fan is $50 Total project budget is $50,000 23 Cost Performance Example Status of fans after 10 days: Budget to Date: $10,000 Performance to Date: $7,500 Actual Cost to Date: $9,000 ETC $2,500 EAC $11,500 VAC $1,500 Schedule Variance: ($2,500) Cost Variance ($1,500) SPI.75 (less than one) CPI.833 This effort is behind schedule and over budget as indicated by the SV and CV 24 Projecting Revenue and Expenses Time Dollars Budget Timephased Flexible (Time ) Flexible Budget } Unfavorable Cost Variance } Favorable Cost Variance ROI Sales/Revenue Look Familiar? (Circa 1925) 25 Actual Cost Data Elements in ABC Expenses BCWS - Budgeted Cost of Work Scheduled BCWP - Budgeted Cost of Work Performed ACWP - Actual Cost of Work Performed ETC - Estimate to Complete EAC - Est. at Complete Revenues RAC - Revenue at Complete RP - Revenue Planned RBTD - Revenue Billed to Date RCTD - Rev.e Collected to Date CV - Cost Variance (BCWP-ACWP) SV - Schedule Var. (BCWP-BCWS) Profit - RCTD - ACWP Expenses Cost vs. Revenue 26 Service Industries and Companies 27 Activities Represent the verbs of a company Are Product-Oriented Work output will have a discrete unit of measurement These verbs consume an organizations resources and employees 28 Activity-Based Costing A procedure that measures the costs of objects, such as products, services and customers. Activity-based costing (ABC) first assigns resource costs to the activities performed by the organization. Then activity costs are assigned to the products, customers, and services that benefit from or are creating the demand for the activities. 29 Activity-Based Management The management processes that use the information provided by an activity-based cost analysis to improve organizational profitability. Activity-based management (ABM) includes performing activities more efficiently, eliminating the need to perform certain activities that do not add value for the customers, improving the design of products, and developing better relationships with customers and suppliers. The goal of ABM is to enable customer needs to be satisfied while making fewer demands on organizational resources. 30 Produce a product Indirect contact with customers Have inventory Quality to build into production process Provide a service, generally no product More direct contact with customers No inventory, per se Quality hard to control in advance Manufacturing vs Service Function Service Organization Manufacturing Organization 31 Continuous Improvement Empowering employees to continually problem-solve and search for ways to improve organizational processes. 32 Employee Empowerment Managers give employees who are closest to operating processes, customers, and suppliers the rights to make decisions. Employees are encouraged to solve problems and devise creative new approaches for performing work and satisfying customers. 33 Employee Empowerment Enables Sharing pertinent financial information with operators allows them to do the following: Identify the opportunities for significant cost reduction Set priorities for improvement projects Make tradeoffs among alternative ways to improve operations Evaluate proposed investments to improve operations Assess the consequences of their improvement activities 34 Total Quality Management A philosophy that attempts to eliminate all defects, waste, and activities that do not add value to customers. 35 Balanced Scorecard A multi-dimensional measurement system that translates an organizations mission and strategy into performance measures. 36 Balanced Business Scorecard Financial Perspective How do we look to our shareholders? Business Process What business processes are the value drivers? Organization Learning Are we able to sustain innovations, change and improvement? Vision & Strategy Customer Perspective How do we look to our customers? 37 The Internal Business Process Identify the Market Create the product/ service offering Build the product/ service Deliver the product/ service Service the Customer Customer Need Identified Customer Need Satisfied Innovation Process Operations Process Post-Sale Service Process 38 Behavioral Implications Information is never neutral People react to measurements People familiar with old systems often resist new systems Unexpected actions may result as employees respond to new performance measures Behavioral Implications of Management Accounting Information: 39 Applying the Concepts Difference between Financial & Managerial Accounting Exercise #1 What are the advantages and disadvantages of having separate departments for financial accounting and management accounting? 40 Applying the Concepts Difference between Financial & Managerial Accounting Exercise #1 What are the advantages and disadvantages of having separate departments for financial accounting and management accounting? The principal advantage is that these quite different functions can be performed by employees who are dedicated to their particular tasks. A particular advantage for managerial accountants is not having to follow GAAP. Separate departments may result in information prepared for internal use that may not immediately compatible with external reporting requirements. 41 Applying the Concepts Difference between Financial & Managerial Accounting Exercise #1 (continued) Many German companies have their management accounting department as part of the manufacturing operations group rather than as part of the corporate finance department. These German companies operate two separate accounti