Amaf Lr1 Slides.2011 Mw
Transcript of Amaf Lr1 Slides.2011 Mw
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Advanced Management
Accounting
Weeks 1 to 6
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Advanced Management Accounting
INTRODUCTION AND REVISION
INTRODUCTION
Welcome to Advanced Managerial Accounting and Finance
2011 Qualifying examination statistics
Relevance of this course
Nature of the course
Answering test and exam questions:
Point Form
Report formats where applicable
CONTEXTUALISATION!!!
MULTI DISCIPLINED integrated questions
Deeper level of thinking, surface issues are not sufficient to pass.
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Advanced Management Accounting
INTRODUCTION AND REVISION
INTRODUCTION For example, consider the following:
The following table indicates operating results for an exporter:
Are variable and fixed costs under control for the exporter??
What is the key driver of the results for the exporter??
ITEM 2010 2011 2012
VOLUME 10 000 11000 11 500
R/$ R7 R8 R10
SALES R70000 R88 000 R120000
VAR. COSTS R35 000 R44 000 R55 000
FIXED COSTS R50000 R56 500 R58 000
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Advanced Management Accounting
INTRODUCTION AND REVISION
REVISION
Chap 2 Cost terms and concepts
Direct & indirect
Period & product
Fixed & variable
Relevant & irrelevant
Avoidable & unavoidable
Sunk
Opportunity Incremental & marginal
Chap 3 Cost assignment
Allocation of costs to products, overhead apportionment
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Advanced Management Accounting
INTRODUCTION AND REVISION
REVISION
Chap 4 Job costing
Accounting entries to account for costs
Calculating the cost of the job
Chap 5 Process costing
Valuing WIP and Finished goods in a process costing
environment
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Advanced Management Accounting
WEEK 1: STRATEGIC MANAGEMENT ACCOUNTING
New section to advanced managerial accounting therefore
important.
What is it? Big picture view of a company relative to its
environment Differentiate between STRATEGY and TACTICS
TACTICS: Short to medium term actions designed to achieve
the objectives set out in a strategy. Usually internal, and the
work that you are familiar with in Managerial Accounting and
Finance: Setting capital budgets
Determining WACC
Relevant costing for repeat orders etc.
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Advanced Management Accounting
WEEK 1: STRATEGIC MANAGEMENT ACCOUNTING
STRATEGY: Long term objectives set up by a company withreference to its external environment given its internalcharacteristics. These items are similar to the vision andmission of a company:
We want to capture the largest market share in our industry We want to grow our share price by 5% every year for the next
generation
Your strategy determines your tactics. Your tactics shouldNEVER determine your strategy.
Given our discussion above, what is strategic managementaccounting?
It is management accounting concerned with how thecompany fits into and grows in relation to its externalenvironment
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Advanced Management Accounting
WEEK 1: STRATEGIC MANAGEMENT ACCOUNTING
Before a company can set objectives for growth and adaptation
to its environment, it needs to understand its environment and
itself:
ENVIRONMENT: PEST ANALYSIS
ITSELF: SWOT ANALYSIS
Now the company can set objectives for itself armed with the
understanding it obtained above:
GOALS MUST BE: S.M.A.R.T
GOALS MUST BE: Based and evaluated on BALANCEDSCORECARD principles (similar to King III triple bottom line
reporting).
Critical to environmental analysis are the principles developed
by Micheal Porter:
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Advanced Management Accounting
WEEK 1: STRATEGIC MANAGEMENT ACCOUNTING
External environment (beyond company control):
PORTERS FIVE FORCES used to determine how competitive an
industry is:
BARGAINING POWER OF SUPPLIERS
BARGAINING POWER OF CUSTOMERS
THREAT OF NEW COMPETITORS IN INDUSTRY
THREAT OF SUBSITUTE PRODUCTS
DEGREE OF COMPETITION IN INDUSTRY
Internal environment (can be controlled by company):
PORTERS THEORY ON COMPETITIVE ADVANTAGE
What is it?
How is it obtained?
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Advanced Management Accounting
WEEK 1: STRATEGIC MANAGEMENT ACCOUNTING
Internal environment (can be controlled by company): PORTERS VALUE CHAIN ANALYSIS
Used to see where a company creates value and where value
is destroyed.
Dont only focus on manufacturing, but also on other
activities in the business (HR, marketing, accounting etc)
Split the analysis into:
PRIMARY ACTIVITIES: MANUFACTURING/SERVICE
INPUT OR INBOUND LOGISTICS
PROCESSIN
G/SE
RVICE
DELI
VE
RY OUTPUT OR OUTBOUND LOGISTICS/SERVICE
DELIVERY
SUPPORT ACTIVITIES:
HR, MARKETING, ACCOUNTING, LEGAL,
INFRA
STR
UCTUR
E
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Advanced Management Accounting
WEEK 2: ABC AND JOINT/BY PRODUCTS
ACTIVITY BASED COSTING
Traditional vs. ABC systems (pg 223)
ABC is..an absorption costing system that provides more accurateproduct costs by allocating indirect costs (e.g. overheads) toproducts by means of a variety ofcause-effect cost drivers.
Stages in implementation of ABC (4 steps)
Need for ABC: The % indirect cost is significant and increasing. Highly complex environments Numerous product lines on a continuous basis. Resources are shared by many products.
D 10.24, 10.26; Discuss theory on tut Qs
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Advanced Management Accounting
WEEK 2: ABC AND JOINT/BY PRODUCTS
ACTIVITY BASED COSTING
ABC profitability analysis: ABC product costs are not directlysuitable for decision making, but more readily revealpotential unprofitable products. Three contribution levels
should be analysed:
unit level contribution for each product (i.e. sales minus cost ofunit level activities),
batch level contribution (i.e. unit level contribution minus batch
related costs),
product sustaining contribution (i.e. batch level contributionminus product sustaining costs).
Resource consumption model : PTO
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Advanced Management Accounting
WEEK 2: ABC AND JOINT/BY PRODUCTS
ACTIVITY BASED COSTING
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Advanced Management Accounting
WEEK 2: ABC AND JOINT/BY PRODUCTS
ACTIVITY BASED COSTING Resource consumption models:
ABC systems measure the cost ofusingresources and not the cost ofsupplying resources:Cost of resources = Cost of resources + Cost of unusedSupplied used capacity
Periodic financial statements measure the cost of resources supplied(i.e.15 000 orders at a cost of 300000 in Example 10.2 Pg 234).
ABC systems measure the cost of resources used (i.e. 13 000 orders at
a cost of20 per order in Example 10.2).
The difference between the cost of resources supplied and the cost ofresources used represents the cost of unused capacity (i.e. 2000orders at 20 per order=40000)
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Advanced Management Accounting
WEEK 2: ABC AND JOINT/BY PRODUCTS
Example 10.2 Pg 234
(1) Resources supplied
10 staff at 30000 per year = 300000 annual activity cost
Cost driver = Number of orders processed
Annual quantity of cost driver
supplied:(1 500 orders per employee) = 15 000 purchase orders
Estimated cost driver rate = 20 per purchase order
(300000/15 000 orders)
(2) Resources used
Estimated annual number of
orders to be processed = 13 000
Estimated cost of resources
used assigned to parts/
materials = 260000 (13 000*20)
(3) Cost of unused capacity
Resources supplied (15 000)
Resources used (13 000)
at 20 per order = 40000 (2000*20)
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Advanced Management Accounting
WEEK 2: ABC AND JOINT/BY PRODUCTS
ACTIVITY BASED COSTING Selecting the cost driver denominator level
The correct denominator activity level to use is the level of capacitysupplied (practical capacity)and not the anticipated usage.
Using anticipated usage in Example 10.2 would result in a cost driverrate of 23.08 (300000/13 000) so that the cost of unused capacitywill be hidden in the cost driver rate rather than being separatelyreported.
Using anticipated usage would result in high cost driver rates inperiods of low sales demand.
The ABC data base Ideally maintained at estimatedstandard costs and periodically
reviewed.
In addition a cost and profitability audit of a firms products, customersand sales outlets should be periodically undertaken.
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Advanced Management Accounting
WEEK 2: ABC AND JOINT/BY PRODUCTS
JOINT AND BY PRODUCTS Joint products two or more products produced through the
same process and separated in processing each having asufficiently high saleable value to merit recognition as a mainproduct.
By- product output of some value produced incidentallywhile manufacturing the main product.
Valuing joint products:
Common costs incurred up to the split off point.
These common costs need to be allocated between the jointproducts.
Four methods suggested
Physical measures method (Eg. 6.1)
Sales value at split off point method (Eg. 6.1)
Net realisable value method. (Eg. 6.2)
Constant gross profit method. (Eg. 6.2)
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Advanced Management Accounting
WEEK 2: ABC AND JOINT/BY PRODUCTS
JOINT AND BY PRODUCTS Joint costs are irrelevant for decision making. Further processing decision
illustrated in Eg. 6.3.
By-product valuation - Net realisable value deducted from the joint cost ofproduction of the main product\s. (Eg. 6.4)
Tut Q Alloc joint costs discuss (b.)
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Advanced Management Accounting
WEEK 3: ABSORPTION AND VARIABLE COSTING
Covered in 3rd year\intermediate
See learning objectives page 141
Understand the differences in net profits where sales volumesdiffer from production volumes
Understand the types of denominators that one could to absorboverheads:
Maximum
Practical
Normal
Budgeted Revise examples and ensure able to produce information in the
required formats, and reconcile profits.
Make sure that you can discuss the arguments for and against thedifferent types of costing systems.
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Advanced Management Accounting
WEEK 3: ABSORPTION AND VARIABLE COSTING
Arguments in support of variable costing
More useful incremental/relevant information for decision-making (e.g.buy or make).
Separates fixed and variable costs facilitating cost estimation at differentactivity levels.
Eliminates profit manipulation by means of increasedinventory/production levels (deferring fixed costs). This strategy can alsobe discouraged by fixed inventory or stock turnover level requirements.
Excludes capitalising fixed overheads in unsaleable/obsolete/surplusinventory.
Arguments in support of absorption costing
Considers fixed production costs as essential for production and inclusionin products/inventory costs.
Emphasises the recovery of fixed costs in sales revenue in the long run. Consistent with IAS2 used by financial markets to appraise an entitys
performance and share price. The same reporting standards should beused to evaluate/reward managerial performance internally.
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Advanced Management Accounting
WEEK 3: ABSORPTION AND VARIABLE COSTING
UKZN EXAMPLE
Assume UKZN Limited manufactures and sells 66 centimetre television sets. Actual data for20X8 was:
Opening stock 2000 units
Sales 24 000 units
Production 26 000 units
Selling price per unit R90
Variable costs per unit:
Direct materials R20
Direct labour R10
Direct overheads R6
Selling costs R4
Fixed costs for the year:
Production overhead Actual R324 000(Budgeted R300000)
Selling costs R110000
Administration costs R80000
The company determined its fixed production overhead rate on the basis of its budgetedproduction volume of25 000 units for the next year.
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Advanced Management Accounting
WEEK 3: ABSORPTION AND VARIABLE COSTING
ABSORPTION COSTING
Sales
Cost of sales
(24 000 x R90) 2160000
1152000
Opening stock
ProductionLess: closing stock
(2 000 x R48)
(26 000 xR48
)(4 000 x R48)
96 000
12
48000
(192 000)
Normal gross profit
Over/(under) absorption
1008 000
(12000)
Actual gross profit
Less: Selling /admin costs
996 000
286 000
Selling costs fixed
variable
Administration costs
(24 000 x R4)
110000
96 000
80000
Net profit 710 000
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Advanced Management Accounting
WEEK 3: ABSORPTION AND VARIABLE COSTING
VARIABLE COSTING
Sales
Less: variable cost of sales
(24 000 x R90) 2160000
864 000
Opening stockProduction
Less: closing stock
(2 000 xR36
)(26 000 x R36)
(4 000 x R36)
72 000
936 000
(144 000)
Variable selling costs
CONTRIBUTION
(24 000 x R4) 96 000
1200000
Less: fixed costsSelling costs
Administration costs
Production
51
4000
110000
80000
324 000
Net Profit 686 000
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Advanced Management Accounting
WEEK 3: COST VOLUME PROFIT ANALYSIS
Objective ofCVP
Long run or short run?
NP = (Unit sales x SPpu)-(Unit sales x VCpu) FCor
NP = Unit sales x (SPpu-VCpu) FC
Relevant range Basic formulas: examples pg 170 -173
Break even sales volume and value
Sales volume\value required to make a given level of profit.
Profit from a given level of sales
Selling price required to show a given profit on a given level of sales.
Profit volume ratio (contribution margin)
Margin of safety.
Cash break even Calculated using FC excluding depreciation.
Graphs Break even chart\ profit volume graph.
Assumptions?
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Advanced Management Accounting
WEEK 3: COST VOLUME PROFIT ANALYSIS
MULTI PRODUCT ANALYSISExample:
Assume two products (A and B) are sold in fixed proportions of 2A:3B,contribution per product is R15 (A) and R25 (B) and total fixed costsR787 500. The multi-product breakeven can be calculated as follows:
Total contribution per sales mix Total contribution for A (2x15 =R30) and B (3x25=R75) is R105
(R30+R75) and Breakeven is 787500/105 = 7500 sales mixes or 15 000 A (7500x2) and
22 500 B (7500x3) Note that the total contribution is R787 500 [(15 000A x R15)+(22500
x R25)
Weighted average contribution per sales mix Weighted average contribution: A R6 (2/5 x R15) plus B R15 (3/5 x
R25) = WA R21 (R6+R15) Breakeven is 787500/21 = 37500 units with 2/5ths or 15 000 of A and
3/5ths or 22 500 ofB Again, total contribution is R787 500 [(15 000A x R15)+(22500 x R25)
Work through See eg. 8.2 Pg 178
Tut Q 8.11 Drury students manual is a multi product example
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Advanced Management Accounting
WEEK 3: COST VOLUME PROFIT ANALYSIS
Use of computers and CVP: Sensitivity analysis
Scenario analysis
Monte Carlo Simulation
Semi variable costs Apply the high low analysis to split costs into fixed and variable
elements and work from there.
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Advanced Management Accounting
WEEK 3: LEARNING CURVES AND REGRESSION ANALYSIS
LEARNING CURVES The more often you do something the better you become at
it.
Learning rate and Learning tempo.
Doubling of production, the learning rate kicks in on an
average time per product basis. Average production time per unit is not the same as
cumulative production time.
Learning curve formula: Y=a b(to the power of r)
Example of 80% learning curve: If1 product requires 1 labour hour at R10/hour, how much will we
spend on labour if 4 products are made?
Production doubles twice, once at 2 units and then at 4 units.
Average labour time at 4 products produced per unit = R10 x .8 x. 8 =R6.40
Total expense = R6.40 x 4 = R25.60
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Advanced Management Accounting
WEEK 3: LEARNING CURVES AND REGRESSION ANALYSIS
REGRESSION ANALYSIS Mathematical means to determine the relationship between
costs and cost drivers in order to predict future cost levels.
Y= a +bx
Detailed regression calculations not required. However, you must understand what the following are and
what they represent:
Co-efficient of variation
Co-efficient of correlation
Graphing the cost relationships on scatter graphs.
Comparison of cost drivers.
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Advanced Management Accounting
WEEK 4: RELEVANT COSTING AND LINEAR PROGRAMMING
RELEVANT COSTING: BASICS Defined as future, incremental (differential) cash flows.
Differential additional costs resulting from the decision
Avoidable costs that would be avoided as a result of thedecision
Opportunity costs benefit foregone by choosing anopportunity over the next best alternative. (cost of the next
best alternative)
Non-relevant costs sunk costs, committed costs
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Advanced Management Accounting
WEEK 4: RELEVANT COSTING AND LINEAR PROGRAMMING
Materials current replacement cost unless alreadypurchased and would not be replaced. In this case use thehigher of resale value and\or opportunity cost.
Using machines repairs, hiring, fall in resale value
Testing any cost against the future differential rule shouldmake the above obvious.
Scarce resources where scarce resources are being divertedto the opportunity, there is an opportunity cost equal to thecontribution currently being earned per unit of the scarceresource.
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Advanced Management Accounting
WEEK 4: RELEVANT COSTING AND LINEAR PROGRAMMING
Special pricing (Eg. 9.1)
Product mix with limiting factors (Eg. 9.2)
Replacement of equipment (Eg. 9.3)
Outsourcing and make-or-buy (Eg. 9.4)
Discontinuation decisions (Eg. 9.5)
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Advanced Management Accounting
WEEK 4: RELEVANT COSTING AND LINEAR PROGRAMMING
RELEVANT COSTING: THEORY OF CONSTRAINTS Definition: .a set of concepts ..which aim to identify the
binding constraints in a production system and which strivefor evenness of production flow. . No inventories shouldbe held except prior to the binding constraint.
Managing constraints Glodratts 5 steps:
1. Identify the bottlenecks
2. Exploit (achieving higher throughput in the short term)
3. Subordinate (all operations subordinated to B\C)4. Elevate (i.e. take steps to inc. throughput from B\C)
5. Return to step 1. (Once bottleneck is eliminated attentionmoves to next B\C)
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Advanced Management Accounting
WEEK 4: RELEVANT COSTING AND LINEAR PROGRAMMING
RELEVANT COSTING: THROUGHPUT ACCOUNTING Key terms
Throughput contribution = sales revenue direct material cost
Other operational cost (Conversion cost) = all operating costexcept direct material
Investment cost = inventory, equipment, building cost
TA is an accounting system, based on TOC and JIT whichmeasures the throughput contribution per factory hour (timeperiod).
Similar to marginal costing, but used to make longer termdecisions. Main difference is that TA treats all labour as fixedin the short term.
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Advanced Management Accounting
WEEK 4: RELEVANT COSTING AND LINEAR PROGRAMMING
RELEVANT COSTING: THROUGHPUT ACCOUNTING TA ratio
Return (Throughput contribution) per time period/ cost pertime period
Based on throughput contribution of bottleneck resource. A
profitable product would have a ratio greater than 1
Return per factory hour (time period) (Sales price material costs) / time on key resource
Cost per factory hour (time period) Total factory cost / Total time available on key resource
See example 9A.1 page 211
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Advanced Management Accounting
WEEK 4: RELEVANT COSTING AND LINEAR PROGRAMMING
LINEAR PROGRAMMING
Used in relevant costing typically when there are multiple
resource constraints and/or multiple products.
Solved graphically and mathematically, although practical use
is limited due to Excel and other software packages.
Essentially you create linear equations for each resource
input you use and you create an objective function equation.
Consider the following:
Product A requires 5 labour hours, product B requires 3 labour
hours. Product A requires 10 kgs of materials and product B
requires 5 kgs of materials. Only 1000 labour hours are
available and only 1000 kgs of materials are available.
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Advanced Management Accounting
WEEK 4: RELEVANT COSTING AND LINEAR PROGRAMMING
LINEAR PROGRAMMING Consider the following:
Product A has a contribution of R20 per product and product B
has a contribution of R15 per product.
Determine the constraint equations and the objective functionequation:
Note: A and B represent number of products of A and B, and y
represents the maximum contribution given the constraints.
Labour constraint: 1000 = 5A + 3B
Material constraint: 1000 = 10A + 5B
Objective: y = 20A + 15B
The equations above would be plotted on a graph and a
maximum contribution subject to the constraints would be
derived.
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Advanced Management Accounting
WEEK 5: PRICING AND PROFITABILITY ANALYSIS
Cost plus pricing Price taker vs price setter Long-run vs. short-run price decisions
Whether price taker or price setter, in short-run decisions a
price should be set so that incremental revenue exceedsincremental cost.
Must meet the following conditions: Sufficient capacity must be available to meet the order. The bid price should not effect future selling prices and the
customer should not expect repeat business at short-termincremental cost. The order will utilize unused capacity for only a short period and
capacity will be released for use on more profitableopportunities.
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Advanced Management Accounting
WEEK 5: PRICING AND PROFITABILITY ANALYSIS
A price setting firm facing long-run pricing decisions
Three scenarios considered:
1. Pricing customized products using cost-plus pricing.
2. Pricing non-customized products using cost-plus pricing ordemand estimates. (see example 11.2 Pg 252)(next OH)
3. Pricing non-customized products using target costing.
In the long-term a firm can adjust the supply of resources that
are committed to it - therefore a product or service should bepriced to cover all of the resources that are committed to it.This is effectively a full-cost plus (excluding only facilitysustaining costs) pricing policy.
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Advanced Management Accounting
Non-customized products
PRICING DECISIONS AND PROFITABILITY ANALYSIS
Example 11.2(a)
Sales volume 100 120 140 160 180 200
Total cost 10000 10 800 11200 11 600 12 600 13 000
Required profit contribution 2000 2000 2000 2000 2000 2000
Required sales revenues 12000 12 800 13 200 13 600 14 600 15 000
Required SP to achievetarget profit contribution 120.00 106.67 94.29 85.00 81.11 75.00
Unit cost 100.00 90.00 80.00 72.50 70.00 65.00
Example 11.2(b)
Potential selling price 100 90 80 70 60
Estimated sales volume
at the potential selling price 120 140 180 190 200Estimated total sales revenue 12000 12 600 14 400 13 300 12000
Estimated total cost 10 800 11200 12 600 12 800 13 000
Estimated profit (loss)
contribution 1200 1 400 1 800 500 (1000)Management and Cost Accounting, 7th edition.
2008 Colin Drury
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Advanced Management Accounting
WEEK 5: PRICING AND PROFITABILITY ANALYSIS
A price taker firm facing long-run product-mix decisions
In the long-term a firm can adjust the supply of resources thatare committed to it Therefore the sales revenue from aproduct or service should be sufficient to cover all of the
resources that are committed to it.
Periodic profitability analysis is required to ensure that onlyprofitable products/services are marketed, that is that youproduct mix optimises your profits.
Profitability analysis should be used as an attention-directingmechanism.
Ideally ABC hierarchical profitability analysis should be used(see figure 11.1 page 255).
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Advanced Management Accounting
WEEK 5: PRICING AND PROFITABILITY ANALYSIS
Cost + pricing arguments for & against
Criticisms of cost-plus pricing:
Ignores demand
Does not necessarily ensure that total sales revenue will exceed totalcost.
Can lead to wrong decisions if budgeted activity is used to unitize costs. Circular reasoning Volume estimates are required to estimate unit
fixed costs and ultimately price.
Reasons for using cost-plus pricing:
May encourage price stability
Demand can be taken into account by adjusting the target mark-ups.
Simplicity
Difficulty in applying sophisticated procedures where a firm marketshundreds of products/services.
Used as a guidance to setting the price but other factors are also takeninto account.
Applied to only the relatively minor revenue items.
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Advanced Management Accounting
WEEK 6: RISK AND UNCERTAINTY
Very important concepts both in Managerial Accounting andin Managerial Finance
What elements in managerial accounting are subject to risk
and uncertainty?
Returns on projects (in the forms of cash flows) Costs to be incurred in projects (again cash flows)
Refer to the examples discussed on pages 271 and 272
Probability:
likelihood of an outcome Probability must be exhaustive.
Probability can be:
Mutually exclusive (shown in simple probability distributions)
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Advanced Management Accounting
WEEK 6: RISK AND UNCERTAINTY
Probability: Probability can be:
Conditional (decision trees)
Subjective (you input your experience and judgement into aprobability calculation)
Objective (you use historical data and research to form aprobability)
Which do you consider to be the better measure?
Probability distributions are tables that show you values foroutcomes of certain events together with the probabilities thatthese outcomes will occur.
Expected Value:
Expected value or the expected cost is simply the probability ofan event occurring multiplied by the events expectedoutcome.
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Advanced Management Accounting
WEEK 6: RISK AND UNCERTAINTY
Measures of risk: Standard deviation
What is it?
Historical versus Probabilistic
Problems?
Coefficient of variation
What is it?
Historical versus Probabilistic
Problems?
Remember the risk and return measures are on
measures based on average units. Up to this point we considered simple probability.
However this is not realistic since probabilities areconditional on the choices management makes.
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Advanced Management Accounting
WEEK 6: RISK AND UNCERTAINTY
Decision trees (see figure 12.1)Example
A company is considering whether to develop and market a new product.
Development costs are estimated to be 180 000, and there is a 0.75 probability
that the development effort will be successful and a 0.25 probability that the
development effort will be unsuccessful. If the development is successful, the
product will be marketed, and it is estimated that:
(i) If the product is very successful, profits will be 540000.
(ii) If the product is moderately successful, profits will be 100000.
(iii) If the product is a failure, there will be a loss of 400000.
Each of the above profit and loss calculations is after taking into account thedevelopment costs of 180000. The estimated probabilities of each of the
above events are as follows:
(i) Very successful 0.4
(ii) Moderately successful 0.3
(iii) Failure 0.3
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Advanced Management Accounting
WEEK 6: RISK AND UNCERTAINTY
Decision tree for example on previous slide
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Advanced Management Accounting
WEEK 6: RISK AND UNCERTAINTY
Expected Value of Perfect Information Enables one to calculate how much expected profits will be
increased by if information to remove uncertainty was available
Example:Low Demand High Demand EV
Machine A: R100000x .5 + R160000x .5 = R130000
Machine B: R10000 x .5 + R200000x .5 = R105 000
Equal probability of high and low demand.What is the expected value?
What is the value of perfect information?
Asks the question how much would EV increase by, if advanceinformation about demand was available?