Introduction to Management Accounting

Pia Nylinder

E-mail: pia.nylinder@lnu.se

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 (10.15-12.00)

2nd group (13.15-15.00)

Last group (15.15-17-00)

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

CompetitorsEmployees

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/ExpensesIf Revenues > Costs/Expenses = Profit/GainIf Costs/Expenses > Revenues = Loss/Deficit

Operating income = Total revenues – Total costsNet 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 amountsIncome/profit has some limits Useless indicator of how well a company is doing

IncomeProfitability 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 meetThe degree of effectiveness is high if a company reach its

target/targets

Value of outputEffectiveness = ---------------------

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 outputOften measured in physical terms, i.e. quantity

Quantity output Efficiency = ----------------------- Quantity input

Number of customers served per dayQuantity material in kilograms per product unit

Budgeted income statement

Cash budget

Budgeted balance sheet

Financial status

Budgeted balance sheet

Plant assets Owners equityProperty Capital stockEquipment and fixtures Budgeted incomeCurrent assets Long term debtInventory Bank loan Accounts receivable Current liabilitiesCash Accounts payableTotal 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)

RevenueSales revenue

Operating expenses

Cost of goods sold

Gross incomeWages and commissions

Depreciation

Rent

Miscellaneous

Operating incomeInterest 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