Revision Management Account Topics: Cost Per Unit

REVISION MANAGEMENT ACCOUNT TOPICS
Cost per unit FUNCTIONS :

value inventory
record cost
set the price products
make decisions
Standard cost predetermined cost per unit

suits for : mass production of homogeneous items
repetitive assembly work
MAIN PURPOSES :
control - compare standard and actual. investigate the differences
planning - help in budgeting
performance measurement - assess performance of cost centres
valuing inventory - alternative for LIFO & FIFO
simplify - one cost only
Types of standards Efficient but not perfect operating condition

Include allowances (material loss, machine breakdown)
Attainable
Motivate to work harder
Realistic but challenging
Remain unchanged for years
Show trends over time
Basic Cannot highlight current efficiency
Demotivate
Too easy to achieve, unchallanged
Current working condition -useful if abnormal
Current Not motivate workers to improve
Unchallenged
Perfect operating condition
No wastage/scrap
Ideal
Close examnation - large cost savings
Demotivate - impossible to achieve
Flexible budgeting Fixed - before preparing budget. single level of activity

Flexible - before preparing budget. few levels of activity.
Flexed - at the end of budget. based on actual output.
Controllability Cost controllable if : manager responsible for it being incurred

manager able to authorise the expenses
EXAMPLE (TYU 5) :
Material purchasing manager :-
total material expenditure - partly by purchasing manager, partly by production
department. may purchase cheap material for performance appraisal.
cost of standard & quality of materials - may be imposed. make sure the
implementations meet the budget.
rental of material storage - outside of control.
DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

REVISION MANAGEMENT ACCOUNT TOPICS
ABSORPTION COSTING MARGINAL COSTING

OH expenditure connected to volume produced cash flow and profit affected by sales volume
SKY MOON SUN Units 2500 5000 7500

Units 500000 150000 250000 Revenue 50000 100000 150000
DL hrs 0.001 0.01 0.005 (-) V Cost 30000 60000 90000
DM hrs 0.01 0.04 0.02 Contribution 20000 40000 60000
POH, $ 80000 (-) Fixed cost 25000 25000 25000
OHAR, $ 5 Profit -5000 15000 35000
DM 0.07 0.14 0.12 Cont/unit 8 8 8

DL 0.17 0.19 0.16 Profit/unit -2 3 4.67
POH 0.05 0.2 0.1
T COST 0.29 0.53 0.38
SP 0.5 0.45 0.43
Profit 0.21 -0.08 0.05
OHAR = budgeted OH cost / budgeted activity

OH absorbed = OHAR * actual activity
actual OH - OH absorbed = under/(over) absorbed
adjustments : over (credit SOPL), under (debit SOPL)
ADVANTAGES DISADVANTAGES ADVANTAGES DISADVANTAGES

inc FOH in inventory value - cont/unit is constant
accordance IAS2 more complex no over/under absorbed - closing inventory not
analyse over/under absorb - no adjustment required accordance to IAS2
control cost FC are period cost
no useful info for
small organistations - estimates useful in decision making FPOH not shared out
decision making
job cost & profit on jobs simple to operate

INFORMATION, TECHNOLOGIES SYSTEMS
Data fact / figures in raw, unprocessed format
Information data that has been processed, has useful meaning
users : managers provide records (history & current)

shareholder analyse business
customer decision making basis
supplier monitor performances
government
good information :
A Accurate suffiently accurate to rely on
C Complete all info needed but not excessive
C Cost effective benefits > cost
U Understandable clearly presented
R Relevant relevant to its purposes
A Accessible appropriate channels - email, verbally, report
T Timely sufficient to make decision
E Easy to use clear and easy to use
data processing (data to information) :

1 bring related data together
2 summarise data
3 basic processing
4 tabulation / diagram techniques
5 analysis
sources :
INTERNAL EXTERNAL
sales ledger system suppliers
value of invoice product price
volume of sales product specifications
purchase ledger system newpapers / journal
value of invoice share price
value of purchases market survey
payroll system government
number of employees taxation policy
hours worked inflation rates
fixed asset system customers
depreciation method & rate product requirement
initial cost price sensitivity
production internet
machine breakdown discussion group
number of rejected unit public & private data
sales & marketing bank
type of customer potential customers
market research national market

Information capture / storage / transmission / present of information

Tecnology (IT) supporting hardware - provide infrastructure to run IS
Information System provision & management of information

(IS) gain competetive advantage
link company with customers or suppliers
enable company to develop new products based on information
benefits :
enhance efficiency support operation - process, strore transaction MAIN
& capacity support managerial act - decision making, planning ROLES
better quality
information uses :
better access of used as evidence in case of dispute
record transaction
information legal requuirements - account / audit
improved decision making make informed decision
communication planning require knowledge & time to implement
better decision performance comparison of budget & plan
making measurement
*give competitive control plan implemented must be controlled
advantage assess - proceed as expected / deviate from plan
costs :
INITIAL RUNNING
design & develop labour - run system
software price material - replace
test & implement service support - IT
training cost helpdesk
INTERNAL EXTERNAL
capture data direct cost
barcode, scanners newspaper subscription
processing indirect cost
salaries of processing staff wasted time to find useful info
indirect cost infrastructure
duplicate / not needed information system enabling internet
*most expensive cost - labour cost management
when new people hired, system changed - cost to record, process & circulate info
incur training cost time theft
lost & wasted time
indirect cost :
loss of staff morale low quality of information
delays of project poor decision making
incompatible of system too many areas to focus
upsetting customers tend to focus on wrong thing

Networks LANs link devices between buildings

printers
WANs link devices from different locations
mobile broadband
Intranet internal network - share private information
protected by firewall
save money (storage, printing)
widely use
easy to update
Extranet collabroative network - company & 3rd party
private & secure
Internet global system network
improved communication
exposed to virus & hacker
WiFi facilitate mobile use of device
cheap & fast broadband
access to information
Data capture data input into computer through a reader
OCR image to text applications

scan financial data to spreadsheet
scan volumes of data fast
cheap to use
not recognise handwriting properly
dirt, fold, marks will affect scan
OMR mark multiple coice questions
cheap to use
must be filled carefully with pencils
MICR mainly use to clear bank cheques
fast inputs
avoid human error
equipment is expensive
Bar code check out items
avoid human error
equipment is expensive
Magnetic withdraw money at ATM
strip card
Voice to understand spoke commands
text

Privacy & security General control overall control over IS

segregation of duty
personnel control policy on usage
hierarchy of access
passwords
access control
time lock outs
protect from damage / theft
computer control
risk assessment -decide which system are
business continuity
critical
Application / perform automatically by system
program control completeness checks - all data processed
validity checks - only valid data input
identify & verify - authorised users only
problem management facility - problems are timely recorded
potential threats :
Natural disaster fire procedure - alarm, training, insurance
fire, flood physical environment - air condtioning, dust control
back up - back up on regular basis
Malfunction network design - cope with high volume
computer hard / back up - back up on regular basis
software
Viruses anti virus software - run & update regularly
security policy - download from trusted source only
regular audit - cheack unauthorise software
Hackers firewall - protect from unauthorise access
password - limit access
awareness training of possible risk
Electronic data encryption - scrambled before transmit,
eavesdropping recovered after complete
password - limit access
user access private
info not for them
Human error provide adequate training for staff
unintentional
HR risk ergonomic design workstation
repetitive strain anti glare screen
injury cable should be in duct
headache
eye strain

Management INPUT Password & audit trail software - ensure data authorised, track
reports process carried out
should be complete,
Range test - ensure data accurate & in range
accurate, authorised
Format check - ensure data accurate
Check digits - ensure data accurate, comply with mathematical
test
Sequence check - ensure data complete
Matching - ensure data complete
Control total - ensure accuracy, complete, authorisation
PROCESS Password & audit trail software - ensure data authorised, track
should be initiate process carried out
by appropriate
Program should not be altered without authorisation & testing
personnel
OUTPUT Password - password allocated suitable to access rights
should be available
to auhtorised person Sensitive printed output - physically safeguarded
only
Confidential Personnel control recruit, train, supervise - ensure competence for programming &
information data entry
Logical access password - identify authorised person
control
Firewalls combine intranet & internet - allow public access to some, and
restrict some
Data encryption disguise info - preserve confidentiality
Virus protection control the use of external software

antivirus software - regularly update
educate employees about virus


INFORMATION SYSTEM AND DATA ANALYTICS
Level of control STRATEGIC

PLAN
TACTICAL
OPERATIONAL
CONTROL
STRATEGIC TACTICAL OPERATIONAL
characteristics 1. top of organisation 1. effective & efficient 1. control day to day operation
2. set future action use of resources 2. short term decision
examples 1. long term forecast 1. budget 1. short term transaction
2. plan objective & strategy 2. implement decision 2. record account
time horizon long term weekly/monthly immediate
level of detail aggregated/summarised summarised highly detailed
source mainly external, but both mainly internal internal
degree of certainty uncertain mainly certain certain
frequency infrequent frequent frequent
personnel directors & senior manager middle manager section heads
Executive Information System Transaction Processing System
(EIS) (TPS)
1. provide flexible access to 1. records daily transactions &
internal & external information summarise it
2. enable manager to model 2. usually in large volume
the entire business records sales & summarise -
3. combine many types of data decide which item need to order
into summarised reports from supplier
Management Information System (MIS)
types :
convert internal & external data into useful 1. Batch transaction process
information - used by managers at all levels credit card company process
1. provide support for decision making at all billing
management levels 2. Real time transaction
2. provide online access to TPS - summary on reservation systems for flights
performance
3. provide internal rather than external focus
4. provide more detailed information - drill down
facility
5. produce simple summary report & comparison
compared to DSS
types :
process & store information
Database
(memory)
monitor & report on activities -
Direct control
output levels
provide specific information -
Enquiry
performance of department
provide computer based method
Support
& procedure - forecast,
simulation

Decision Support confront ill-structured problems by direct interaction with data and problem solving
System (DSS) programs
can be used at all characteristics :

level of 1. provide support for decision making
management 2. provide support at all stages within decision making process
3. provide support for interdependent & independent decision
4. support variety decision making process
5. user friendly
basic elements :
language non procedural - not require programming ability to use
problem processing spreadsheet, graphic, statistical analysis
knowledge database function
expert system hold specialist knowledge - law, taxation
phases of decision making :
1 gather information, identify situation
2 design possible solutions what if analysis
3 choice of solution
Expert System (ES) hold specialist knowledge to advice and recommend decisions
taxation - calculate client's personal tax
can be used at all
level of components :
management knowledge base structured database
store knowledge & experience of experts
inference engine draw on knowledge base in organised way
mimics expert's reasoning within limited context
uses :
non experts - draw expert conclusions from information input in the system
experts - confirm their own opinion against those offered in the system
Enterprise Resource integrate data from all operation within organisation into one system
Planning System 1. ensure everyone working off one single system
(ERPS) 2. include decision support features - decision making
offers : useful for :

online / real time information of all areas supply chain management
standardise data across the organisation activity based costing
common data file - save duplication balance scorecard
Customer build and sustain long term development process :

Relationship business with customers Selection identify targeted customer
Management (CRM) Acquisition give good first impression, minimise cost
track and organise its contact Retention understand customer's need - loyalty card
with current and prospect Extension reselling, cross-selling, upselling
customers After sales answer FAQs, handle complaint

Big data large volume of data beyond normal processing, storage, analysis capacity
3Vs :
Velocity data streaming virtually at constant rate
current processing server unable to cope with this flow - cannot generate real time
analysis
Volume many sources & increase in data generation
increase in volume of data is unmanageable
Variety data can be generated in many formats - rich text, audio, GPS
Veracity many different sources - difficult verify trustworthiness of information
uses : Big data store, admin and control quantities of structured &
social network traffic manage- unstructed data
traffic flow monitoring ment ensure data is high quality & accessible
satellite imagery process of scrutinise data to identify pattern
Big data
GPS tracking help in plan strategy & marketing campaign
analytic
banking transaction require more advanced software tools - Hadoop
BENEFITS RISKS
reduce time taken to answer key business availability need to combine data analysis skills with
question - make decision of skills deep understanding of industry
security of lack of resources to manage data - increase
gain competitive advantage
data risk of leaks & losses
data collect greater range of data from personal
improve productivity
protection sources

SPECIALIST COST AND TECHNIQUES
Activity Based TRADITIONAL MANUFACTURE MODERN MANUFACTURE

Costing overheads just a small portion overheads now larger portion
more labour intensive more machine intensive
non variety and simple product variety and complex product
TRADITIONAL METHOD ABC METHOD

service - production - products service - cost pools - products
absorption : labour/machine hours absorption : cost drivers
more arbitrary - less accurate highlight what causes costs to increase
Steps :
1 Group production overhead into activities (cost pool)
2 Identify cost driver for each activity
3 Calculate cost per unit of cost driver
4 Absorb activity cost into product
Comments :
1 compare which method is more profitable
2 give few examples on which cost causes the difference
3 explain the advantages - more accurate, decision making
4 suggest action for manager - increase selling price, discontinue product
ADVANTAGES DISADVANTAGES
More accurate If overhead small portion, less benefit
Better insights on cost driver Impossible allocate all overhead
Better control of cost Difficult to determine cost driver
Can be used in complex business Timely & expensive
Suitable for service Benefit not justify cost
ABC in PUBLIC SECTOR :

Public responsibility tight control of running cost due to limited resource
Public accountability spend taxpayer money wisely & need to demostrate
Resource allocation fair distribution of scarce resource
Help managers better awareness of cost activity to cut cost
More equitable distribution of cost Many public sector resist ABC
Meaningful PM information Timesheets need to be used - challenging
Cost efficiency assurance Need to change the working culture
Identify & advice to avoid inefficiencies
Essential information to other agencies

Throughput Total Quality Management (TQM) Just In Time (JIT)

Accounting continuous improvement in quality, pulling work through the system in response
productivity and effectiveness to customer demand
Fundamental features : Key characteristics :

prevent errors before occur rapid throughput to meet customer needs
importance of total quality computer aided technology will assist
real participation of all employee small batch sizes & automated technique
commitment of seniior manager low cost - no large stock of material and
recognise vital role of cutomer & supplier finished goods
recognise need of continual improvement
Key features of company that operate both :

high level of automation
high level of overhead and low levels of direct labour cost
customised product in small batches
low stocks
high quality and continuous improvement
throughput = sales revenue - direct material cost
TP aims : make best use of scarce resource (bottleneck) in JIT environment

maximise measure in profitability (reduce operating expenses & inventory)
short term - make best use of bottleneck. may result some idle time in non
bottleneck & small inventory to be held.
long term - bottleneck should not be eliminated. buy new more efficient
machine but still result in another bottleneck.
theory of constraint (TOC) :

one product : multi products :
1 identify bottleneck 1 identify binding constraint
2 decide how to exploit 2 throughput / bottleneck
3 subordinate everything 3 rank (high to low return)
4 elevate the bottleneck 4 calculate TPAR
5 once broken, back to Step 1
TPAR : improving TPAR :

1 TP per unit / bottleneck time increase sales price
2 TFC / total bottleneck time reduce material cost
3 Step 1 / Step 2 reduce operating expenses
>1, profitable improve productivity of bottleneck
<1, incur loss
criticisms :
concentrate on short term only - large fixed expenses
difficult to apply in long term - ABC is more appropriate

Target Costing setting a target cost by substracting a desired profit from a competetive market price
steps :
1 Set target competetive market price
2 Calculate target operating profit
3 Target price - target profit = target cost
4 Calculate cost gap
5 Try to close cost gap
6 Negotiate with customer
close gap :
substitute material with different supplier
cheaper labour
training & motivation
eliminate non value activity
redesign/value analysis
value analysis : a critical and systematic examination by a group of specialists on a

product (own company/competitor)
aim : maintain esteem value of product but at lower cost
types of value :
cost value cost incurred by firm in production
exchange value amount of money consumer willing to exchange with product
use value entire function of product (ability to perform for its purpose)
esteem value status related to product (high esteem value = premium)
problems of service organisation :

S Simultaneity exist with the presence of customer
H Hetereogeneity vary quality / consistency - no standard
I Intangibality difficult to define service & attribute cost
P Perishability if unused cannot be stored for future
N No transfer of ownership not a transfer of property

Lifecycle Costing Tracks and accumulates costs and revenues attribuatable to each product over its entire
product lifecycle
Total cost of products over its entire life

Lifecycle costing =
Total number of product units
disadvantages :
product's cost not evenly spread
90% of lifecyle cost incurred during early process
Pre production Launch Growth

High setup cost Awareness & trial Marketing & promotion cont
Research and development Marketing Low cpu - fixed cost recovered
Product design Promotion - high volume
Build production facilities High cpu-low volume
Set high selling price : Reduce selling price :

cover development cost remain competitive
high return before rival enter
Maturity Decline
Profit continue increase Cut marketing cost
More marketing cost Sales fall
Low vcpu- economies of scale Add development cost
- learning effects - extend lifecycle
Profit will erode - competition New product - pre
& product differentiation production start incur
Maintain selling price : Cut price

sales start to slow down maintain sales
upgrade product
maximise product's return :

design team should be part of cross-functional team
minimise time for product to enter market
minimise time to achieve breakeven
maximise length of lifecycle

Environmental MARTIN BENNETT & PETER JAMES

Management EMA impact on organisation :
Accounting short term savings waste minimisation & energy efficiency
increase cost capital investors & lenders demand high risk premium
pressure group campaign damage reputation, additional cost
processing input cost 5-10% of revenue
energy & environmental taxes
6 ways to achieve business & environmental benefits :

1 integrate environment into capital expenditure decisions
consider environmental opposition to projects
2 understand and manage environmental cost
allocated to the relevant budgets
3 introducing waste minimisation scheme
4 understand and manage lifecycle cost
identify environmental reduction cost oppoturnity
5 measuring environmental performance
6 involve management accounting in strategic approach
analyse policy, regulation, market condition, social attitudes
EMA effect on financial performance :

improving revenue producing products that meet environmental needs
can be sold at premium price
improve reputation = improve sales
cost reductions close attention to the use of resources
increases in cost cost to comply legal & regulations
cost to improve image
cost of failure cost of clean up and fines - poor management
Internal cost External cost

directly impact the income statement imposed on society, not borne by company
improved system to avoid penalty carbon emission
waste disposal cost usage of water and energy
product take back cost - return to recycle forest degradation
regulatory cost - tax health care cost
back end cost - decomissioning social welfare cost
HANSEN & MENDOZA :

Prevention cost prevent production waste
training employees
Detection cost comply with regulation & standard
inspecting product
Internal failure cost acitivities produce waste, not discharged
recycling scrap
External failure cost activities perform after discharge waste
cleaning up oil spills

US Environmental Protection Agency :

Conventional cost material & energy cost having environmental relevance
Hidden cost captured by accounting system, lose identity in general OH
Contingent cost incurred at future date
Image & r/ship cost intangible cost (by nature)
EMA techniques :
1 input/output analysis
Records material inflows and balances this with outflows on the basis that - what
comes in, must go out
business are forced

to focus on
100kg input 80kg finished goods
environmental cost
18kg sold as scrap
2kg waste
2 flow cost
It makes material flows transparent by looking at the physical quantities
involved, their costs and their value.
DELIVERY &
MATERIAL SYSTEM
DISPOSAL
value and cost of in house handling cost cost of leaving comp
materials personnel cost, depreciation transport cost
3 ABC
It distinguishes between environment-related costs, which can be attributed
to joint cost centres, and which tend to be hidden on general overheads
4 lifecycle
It requires the full environmental consequences - costs arising from
production of a product to be taken account across its whole lifecycle
better product cost time consuming
improved pricing expensive
better environmental cost control difficult to determine accurate cost
cost saving with the image of external cost may still be ignored
"environment-friendly" intangible internal cost may be ignored
reduce potential of environmental
damaging product

CVP ANALYSIS
SINGLE PRODUCT MULTI PRODUCT

BE fixed cost Weighted total contribution
(unit) contribution/unit average CS total revenue
cont = SP - VC/PROFIT + FC ratio
BE with fixed cost + target profit improve c/s ratio :
target contribution/unit 1 change product mix. Increase
profit production of most profit
making product
contribution/unit 2 increase sales revenue
CS ratio x100
selling price/unit 3 delete loss making product
BE fixed cost BE fixed cost

/ BE unit x SP per unit
(revenue) CS ratio (revenue) weighted average CS ratio
BE with fixed cost + target profit BE with fixed cost + target profit
target CS ratio target weighted average CS ratio
profit profit
Margin of Budgeted sales - BE sales Margin of 1. Contribution per unit

x100
safety Budgeted sales safety 2. Contribution per mix
3. BEP - no of mixes
4. Margin of safety
assumption that will limit the precision and reliability of CVP analysis :
1 total cost and total revenue linear over RELEVANT RANGE
2 all cost can be divided into FC & VC
3 total FC remain constant over RELEVANT RANGE
4 total VC directly propotional over RELEVANT RANGE
5 selling price remain constant
6 efficiency & productivity remain constant
7 other factors that may affect cost are unjustifiably ignored
8 volume sales = volume production
DO NOT forget unit, $ - can lost mark

CVP ANALYSIS
BEP chart
Sales revenue line : gradinet = SP per unit

Total cost line : gradient = VC per unit
Sales revenue - Total cost = Profit
Intersection = BEP
Max point - BEP = Margin of safety
contribution BE chart
*same as above
Sales revenue - Variable cost = Contribution
Total cost - Variable cost - Fixed cost
profit - volume chart
Lowest point = Fixed cost

Intersect = BEP
multi product profit - volume chart
Bow line = Individual profit*cumulative

Straight line = Avg profitability of all product
Intersect straight & axis x = BEP
benefits :
improve overall profit
decide to continue or abandon
manager focus on price - raise or not
clarify that SP changing will affect BEP

LIMITTING FACTORS
1 Limitting Factor objective : MAXIMISE profit
key factor analysis :

1 Identify scarce resource
2 Calculate contribution/unit
3 Calculate contribution/unit of scarce source
4 Rank based on step 3
5 Allocate resource
> 1 Limitting Factors objective : MAXIMISE contributioon

: MINIMISE cost
linear programming :
1 Define the variables
x : number of product A to produce
y : number of product B to produce
2 Formulate the objective function
C = $x + $y
$ : contribution to maximised / cost to minimised
3 Formulate constraint
Department A : 8x + 10y ≤ 11000 hours : constraint 1
y ≤ 600 unit : constraint 2
4 Draw graph & identify feasible region
if x = 0, y = 0
plot the coordinates in graph
shade the region based on ≥ / ≤ - feasible region
5 Solve optimal production plan
draw iso contribution line (C = $x + $y) where C = any number
if x = 0, y = 0 - plot the coordinates in graph
pick the optimum point, get the coordinate (x,y)
substitute x,y into C = $x + $y to get maximum contribution
simulateneous equations :
1 determine equation for two contraints
8x + 10y ≤ 11000 hours :a
y ≤ 600 unit :b
2 equate the equation (limitation / substitution method)
3 determine x and y
4 substitute x,y into C = $x + $y to get maximum contribution
assumptions :
1. Only single quantifiable objective - reality : multiple objectives
2. Only use same quantity of scarce resource per unit
learning effect may occur
3. Contribution per unit is constant
SP may be lowered, discount if buy in bulk
4. Products are independent (only buy one product)
customer may buy >1 products, products may be manufactured together
5. Scenario short term - ignore fixed cost

LIMITTING FACTORS
SHADOW SLACK SHADOW (DUAL) PRICES

amount of under-utilised resource increase in contribution by one additional
unit of limitting factor
optimal solution = two constraint lines cross, 0 slack
slack = other constraint lines that not cross
critical gain additional units of scarce resource

constraint improve optimal solution
(optimal) higher contribution earned
non gain/loss small number of units non critical constraint = 0 shadow price
critical no impact on optimal solution because slack exists
constraint
steps : steps :
1 determine x and y of optimal point 1 add one unit to constraint eq
2 subtitute into non critical constraint eq 2 use simultaneous eq
3 available resource - resource used (S2) 3 calculate revised optimal
difference is the SLACK contribution
4 revised - original
increase is the SHADOW
implications :
1. manager can measure maximum
premium firm willing to pay for 1 extra unit
2. must be consider carefully - can negotiate
for lower price
3. if more critical constraint obtained - little
point to buy more scarce resource - any non
critical constraint can be critical

PRICING
MARKET STRUCTURES
PERFECT COMPETITION IMPERFECT COMPETITION
1. every buyer or seller is a "price taker" 1. refer to market that not meets condition of perfect
2. price will not be influenced by anyone competition
zero entry / exit Monopoly only one seller that dominates buyer
easy to enter or exit business
barrier profit-maximising price
prices & quality known to Microsoft
perfect information
consumers and producers Oligopoly few companies dominate market
aim to sell where marginal cost take into account - rivals, price changes
aim maximum profit
meet marginal revenue non-price competition
homogenous goods and services not vary Tesco
products across suplliers Mono- products are similar, but not identical
polistic many producer, many consumer
skincare brands
Price Elasticity of how responsive demand is to a change in price

Demand
changes in quantity demanded, %
PED = *always ignore negative
changes in price, %
example :
Monday Tuesday changes %
products sold 200 120 -80 -40 PED -0.8
sales price 0.40 0.60 0.2 50 0.8
ELASTIC DEMAND INELASTIC DEMAND

PED >1 PED <1
1. very responsive 1. not very responsive
2. PRICE reduce, REVENUE increase 2. PRICE reduce, REVENUE decrease
3. PRICE increase, REVENUE decrease 3. PRICE increase, REVENUE increase
4. price cuts recommended 4. price increase recommended
competitive advantage : Price, Product, Place, Promotion

PRICING
APPROACHES TO PRICING
Demand based selling price (P) depends on demand (Q)
approach inverse linear relationship
methods :
ALGEBRAIC APPROACH
monopolist maximise profit when : steps :
Marginal Cost = Marginal Revenue 1. establish the equation [P = a - bQ]
price when demand is 0
a : intercept, b : gradient
MR : additional rev for selling 1 extra unit b always negative : inverse relationship
MR = MC : optimum point 2. double the gradient [MR = a - 2bQ]
3. establish MC [MC = Variable Cost]
4. equate and find Q [MC = MR]
5. substitute Q to find optimum price [P]
6. calculate maximum profit
TABULAR APPROACH
SP/unit Demand Total rev. MR Total cost MC Acc profit
50 1 50 50 44 44 6
47 2 94 44 56 12 38
44 3 132 38 71 15 61
41 4 164 32 85 14 79
38 5 190 26 95 10 95
35 6 210 20 110 15 100
32 7 224 14 122 12 102
29 8 232 8 135 13 97
26 9 234 2 145 10 89
profit maximised at 7 units of output with selling price, $32

MR nearly equal to MC

PRICING
Cost based cost equations are derived from historical data

approach cost function is linear
total cost function : y = a + bx

a: y-intercept (FC) x : activity level
b : gradient (VC/unit) y : total cost (FC+VC)
volume-based discounts : 1. y = 250000 + 6x for x ≤ 1000

2. y = 250000 + 5.4x for x > 1000
increase sales & production : consider whether extra contribution > additional FC
cost plus pricing : SP = cost / unit + margin OR mark up

margin on sales
mark up on cost
1. widely used & accepted 1. ignore price-demand
2. simple to calculate relationship
3. decision delegated to junior 2. ignore optimum price
4. better justification 3. no guarantee profit
5. encourage price stability 4. fail to recognise manager's
need in pricing flexibility
5. need to decide which cost to
use - full cost, marginal cost
types of costs :
ACTUAL profit guaranted less incentive for supplier to
control cost
STANDARD SP can be set in advance significant variance
attract customer - know how price may be set too low
much need to pay
MARGINAL simple to use difficult to set margin/markup
more consistent - contribution price may be set too low
useful in short term / one off
contract
FULL COST profit guaranted difficult to absorb OH
target volume achieved SP may not be realistic with
customer's will
RELEVANT COST suitable for one off decision difficult estimate incremental
cash flow
conflict in account measures

PRICING
Marketing based Customer based : price will be set to reflect the benefits that customer will enjoy
approach greater understanding on customer, better place to set price
Competition based : setting price based on competitors' price

example :
1 same type of product that cannot be distinguised - petrol
price changes of competitors will have material impact
2 substitute product, different but fulfil same need

impact of price changes will depend on relative price
PRICING STRATEGIES
Market skimming high prices during first launch to maximise short term profit
[apple] have novelty appeal - demand initially inelastic
once market saturated, lower the price to attract another market
conditions :
1 new & different - little competition
2 short life cycle
3 strength & sensitivity of demand to price are unknown
easier to lower price than to increase
4 firm with liquidity problem
5 have one or more entry barrier to deter potential competitor
strong brand loyalty, patent protection
Penetration low prices during first launch to gain rapid acceptance of product
[anti virus product] once market share achieved, price increase
conditions :
1 firm wishes to increase market share
2 form wishes to discourage new entrants
3 significant economies of scale to achieve from high volume of output
4 demand highly elastic - respond well to low price
Complementary must be used with another product

[razor & blade]
major product has low price : encourage subsequent purchase of high price
printer & ink catridges
major product has high price : create barrier of entry/exit for customer
cust locked into subsequent purchase of low price
golf membership & court fees
Product line products that related to one another

[skincare range] customer willing to pay high for complete match set
set price depends on : cost differences between products
customer evaluation of different features
competitors prices

PRICING
Volume discounting low price if purchase more

[fashion items]
quantity discount : order large quantities
cum quantity disc : cumulative quantity increase, discount given increase
benefits : increase customer loyalty

attract new customer
lower sales processing cost
lower purchasing cost from supplier
clearance of surplus stock
conditions :
1 sales margin is substantial - guarantee profit even after discount
2 limited shelf life
3 difficult to distiguish from competing product
Price discrimination sell same product at different prices

[concession card] depends on target market
conditions :
1 seller have some degree of monopoly power
2 customer can be segregate into certain market
3 customer cannot resell at higher price
4 effective for services
5 must be different price elasticity in each market
dangers : black market may be developed - reseller

competitors join market & cut price
customer at higher price find another alternative

RELEVANT COSTING
Relevant Cost & Future any future cash flow that occur as a result of decision
Revenues ignore SUNK COST
Incremental extra cash flow that occur as a result of decision
ignore FIXED COST unless incremental
Cash flows only cash item is relevant
ignore NON CASH - depreciation
Opportunity value of benefits forgone
Materials in stock regular : current price

not other use : scrap value / lost contribution [WIH]
no : scrap value
out of stock : current price
Labour spare capacity : NIL
full capacity hire more : extra cost

not hire : lost contribution & extra cost
Non Current Asset purchase new machine : purchase price

existing machine : scrap value
machine other department : lost contribution
SHORT TERM DECISION

Make or buy NO LIMITTING FACTOR WITH LIMITTING FACTOR
bought in marginal cost only 1. calculate saving per unit [PP-VC]
vs WIL 2. divide by limiting factor
make DM + DL + VOH 3. rank the product
4. allocate the resource
5. buy unsatisfied product from external
consider :
reliability of external supplier
specialist skills may be required
alternative use of resource
redundancy cost
legal effect / obligation
risk of loss confidentiality
customer reaction
greater flexibility may choose wrong supplier
lower investment risk loss control over process
improved cash flow possibly increase lead time
concentrate on core competence
use more advance technology

RELEVANT COSTING
Shut Down Decision Quantifiable Non quantifiable

lost contribution from close area uncertain costs (penalty / compensation /
saving in specific fixed cost for closure additional contribution)
reorganisation of cost knock on impact - stop selling something
contribution for alternative use resource then cause big impact as a whole
One Off Contract minimum contract price = net relevant cash flow of contract
if contract price not cover cash flow - REJECT
if contract price higher than cah flow - ACCEPT
consider :
minimum price may be lower than market price - other customer may offer low price
company may accept if loss - win subsequent contracts
Further Process joint product multiple product generated by single process

Decision split off point point where joint product generated
cost before point APPORTION between joint products
cost after point allocated to product that was incurred
APPORTION : sales value = market value

production unit
net realisable value
further process vs sell : difference in revenue and extra cost incurred

RISK AND UNCERTAINTY
Introduction risk : no of possible outcome & probability each outcome is known

based on past experience
uncertainty : no of possible outcome & probability each outcome is NOT known
no past experience
METHODS TO DEAL WITH RISK & UNCERTAINTY

Market Research assess and reduce uncertainty : customer review, advertisement & price changes
Techniques
FOCUS GROUP
1. involving small groups [8 - 10 people]
2. group is interviewed informally - led by facilitator
3. gather opinion & reactions about a subject [new product]
problems :
1 results are qualitative
2 may not representative - small sample size
3 individual pressured to agree with other
4 has cost and complexity barrier - online can overcome this
DESK RESEARCH
1. info collected from secondary resource
2. studying published information [articles, published accounts]
3. eliminate need for extensive field work
4. quick & cheaper
problems :
1 may not meet researcher needs
2 not up to date & accurate
type of information :
Economic relate to economic environment
Intelligence concern with some factors [GNP, investment, productivity]
picture past & future trends in environment
information freely available & from reliable sources
Market Intelligence company present & possible future market
commercial & technical information [competitor's sales
level/best oversea market]
Internal Company produce reams of data for no reason
Data mostly used by blue chips & public services
information collected in a form - ready use

FIELD RESEARCH
1. information collected from primary source [direct contact]
2. more expensive & time consuming
3. result should be more accurate & up to date
types of research :
Motivational objective : understand factors that influence consumer's
Research purchase decision [buy or not]
Depth Interview - done by trained person

Group Interview - group of people asked about a subject under
trained supervision [6 - 10 people]
Word Association Testing - a word given by interviewer, take
note first word came out from the person
Triad Testing - give three option, replies will determine which is
best deal
Measurement objective : build on the motivation research by trying to quantify

Research the issues involved
sample surveys : how many people buy/quantity of purchase
Random Sampling - each person has equal chance.

representative, more reliable. inconvenient to practice
Quota Sampling - representative of pre selected criteria.
may be biased for non selected criteria
Panelling - sample kept for subsequent investigation.
trends are easier to spot
Surveying by Post - mail shot method.
may become self selecting & bias
Observation - observe thorugh camera
Sensitivity Analysis analyse uncertainty in a situation

how much costs and revenues would need to change before decision is changed
example : made in house outsource

contribution, $ 5 6
outsource is better. but if outsource cost increase by $1 (1/6*100=17%),
contribution will change to $5. management may change decision.
easy to understand assume changes to variable can be made
facilitate subjective judgement independently
identify crucial area to monitor not assess probability of changes
does not offert clear decision rule

Simulation show the effect of >1 variable changing at the same time
[Monte Carlo] use random number & probability statistics
computer models can be built to simulate real life scenarios - predict what range of
returns an investor could expect without having risked any actual cash
DISADVANTAGES
not decision making technique - only obtain information
can become extremely complex
time and cost > gained from improved decision
difficult to formulate
Expected Values weighted average of all possible outcome

(risk neutral) calculate average return if decision repeated again & again
formula : p : probability
EV = ∑PX
x : outcomes
take uncertanty into account probability is subjective
information reduced to a single number - little meaning for one off project
easier decision no indication on disturbance of outcome
calculation is simple not correspond any actual outcome
Pay-off Tables DAILY SUPPLY

prob. 40 50 60 70
40 0.1 80 0 -80 -160
DAILY 50 0.2 80 100 20 -60
DEMAND 60 0.4 80 100 120 40
70 0.3 80 100 120 140
MAXIMAX :
[optimist, risk seeking]
maximise the maximum pay
off (profit) 80 100 120 140
answer : supply 70 salads a day
MAXIMIN :
[pessimist, risk averse]
maximise the minimum pay
off (profit) 80 0 -80 -160
answer : supply 40 salads a day

MINIMAX REGRET [sore loser, risk averse] :

minimise the maximum regret
1. make a regret table (best pay off - pay off received)

DAILY SUPPLY
prob. 40 50 60 70
40 0.1 0 80 160 240
DAILY 50 0.2 20 0 80 160
DEMAND 60 0.4 40 20 0 80
70 0.3 60 40 20 0
2. maximum regret 60 80 160 240

3. minimum 60 answer : supply 40 salads a day
Decision Trees diagram that looks at alternative courses of action and their possible outcomes
steps :
1 draw tree from left to right - outcomes & probabilities
square : decision, circle : outcome
2 calculate EV and choose best option for each point
3 recommend action to management
Perfect Information forecast outcome is ALWAYS correct

can obtain 100% accurate prediction
able to take most benificial course of action
rarely accessible
Imperfect forecast USUALLY correct, but can be incorrect

Information not as valuable as perfect information
calculate the value of perfect and imperfect information :

Expected value of the decision with (im)perfect information
MINUS Expected value without it
example :
with perfect information without perfect information
p x px demand 40 50 60 70
0.1 80 8 EV 80 90 80 30
0.2 100 20
0.4 120 48
0.3 140 42
with 118
without -90
information value 28

BUDGETING
Purpose Planning organisation's objectives can be achieved

Evaluation asses the manager performance
Motivation have target to aim
Coordinate bring together activities from different department
Communicate allow senior & junior to converse
Control facilitate cost control
Functions provide basis for :

1. Details sales target
2. Staffing plans
3. Cash investment & borrowing
4. Capital expenditure
5. Pre-approval for execution of spending plan
Performance
Hierarchy STRATEGIC
Long term - develop new products
Medium term - plan resources, train

TACTICAL
staff
OPERATIONAL
Short term - most budget activities
Management Styles STYLE EVALUATION BEHAVIOURAL

[Hopwood] Budget Constrained Job related pressure
Achieve budget in short time
Expense at long term
Poor working relations
Poor result - criticised
Manipulation of data
Profit Conscious Reduce cost, increase profit in Less job related pressure
long term
Better working relations
Prepared to exceed budgetary
limit in short term Less manipulation of data
Non Accounting Same as profit conscious - less
Non accounting indicators
concern on accounting info
Quality, customers' satisfaction Strict monitor of performance
Set Budget Expectations Set at current achievable levels

More accurate forecasts
Demotivate managers
Aspirations Set EXCEEDS current achievable levels
Motivate managers
Difficult to achieve

BUDGETING
Behavioural Aspects Motivation & cooperation :

1 Personal goals strongly link to organisational goals
2 Managers perceives his goals by helping organisations achieve it goals
goal congruence
3 Budget is pressure device
4 Some do anything that not best interest of organisations to "meet budget"
Failure of goal congruence :

1 Budget control - ensure manager behave in best advantage of organisation
2 May get positive (reward) or suffer negative (punishment) sanctions
3 Manager ensure he has good performance but ignore company's goal
Budget as pot of cash :

1 For government sector, they need to spend all the budget
if less - budget will reduce next year
if more - manager will be punished
Budget negotiation :
1 Padding budget - budget > actual estimates
no meaningful measurement
managers can manipulate
infighting will become a habit
time & energy wasted instead of directed to actual management
Influence on accounting policy :

1 Indirect cost are usually contain subjective element
2 Managers will use this to argue if they overbudget
3 Managers may shift the cost to other department
Budget stretch
1 Loose budget - poor motivators
2 Tight budget - more motivation
3 Very tight budget - cease motivation
APPROACHES TO BUDGETING
Budget & IMPOSED (TOP DOWN) PARTICIPATIVE (BOTTOM UP)
Participation without permitting budget holder budget holder (manager) invited to set
(manager) to set budget budget
advantages : advantages :
quicker morale of management improved
senior manager has better overall view more likely to achieve budget
senior manager aware long term plan managers have more detailed knowledge
manager may build budgetary slack
manager may not have the skills

BUDGETING
Incremental Budget previous year’s budget / actual result + incremental amount

suitable for stable business - cost will not change significantly
Quick and easy Build in previous problem
Suitable for stable & good historic figure May continue uneconomic activity
organisation Unnecessary spending - to use up budget
Zero Based each cost element justified before included in budget, no approval = 0 budget
Budgeting suitable for public sector & discretionary cost (R&D, training)
stages :
1 manager specify their responsibility centre - individual evaluation
2 each activity describe in decision package
3 each decision package will be evaluated & ranked - cost benefit analysis
4 allocate resources to various packages
Decision Package [Peter Phyrr] :

a document that:
1 analyse cost of activity
2 state purpose of activity
3 identify alternative method for same purpose
4 assess consequences of not doing anything / at different activity level
5 establish measure of performance activity
two types:
1 mutually exclusive - different methods, same objective
2 incremental - divide activity to different activity level
base : minimum effort + cost needed
other : incremental cost + benefits when added
In public sector :
to prepare decision package - timely & costly
solutions : use incremental budgeting yearly then use ZBB every 3 - 5 years
(major change occurs)
: use ZBB for some department not for others
Identify inefficient / obsolete operation Emphasis short term benefit
Increase staff involvemnet at all level Budgeting process too rigid
Responds to change in environment Need high menagement skills
Enhance knowledge about cost behaviour Manager feels demotivated
Allocate resource - efficient & economic Difficult to rank activities

BUDGETING
Rolling Budget continuously update budget by adding another accounting period

suitable if cannot made accurate forecast or any business need tight control
More accurate budget Costly & time consuming
Reduce element of uncertainty Demotivate employees
Assess budget regularly May be become last budget
Extends into future (12 months) Confusions in meeting
Activity Based preparing budget using ABC method

Budgeting
Activity Matrix :
collumn : activities // row : resources
collumn : activities
Receive Stock Stock

Total
delivery issuing ordering
store no of
Cost drivers : delivery requisition order
Number 400 800 400
rows : resources
$ $ $ $
Basic wages 20000 25000 5000 50000
OT payments 5000 0 0 5000
Stationery 1000 2000 2000 5000
Other 6000 5000 4000 15000
Total 32000 32000 11000 75000
Cost /activity 80 40 27.5
Focus on OH activity - large proportion Effortful, timely
Can control cost drivers Difficult identify cost drivers
Useful information for TQM OH cost not controllable - short term
Feedback Control 1. compare budget against actual

2. listen to explanation
BUDGET vs ACTUAL 3. choose either to revise budget / corrective action - to achieve required result
types : POSITIVE NEGATIVE

better than plan worse than plan
reinforce a deviation from standard reverse a deviation from standard
input/process will not be altered amend input/process to steady state
single loop : internal, only change strategy if not achieve
TARGET STRATEGIES RESULTS
double loop : external, may modify/reject target if not achieve

BUDGETING
Feed-forward 1. compare budget against forecast (use sales to date)

Control 2. if there's difference, control action will be taken to close gap
Select a Suitable Factors to consider :

Budget System 1 type & size of organisation
2 type of industry
3 type of product & product range
4 culture of organisation
Sources of information for budgeting :

1 previous year's result
2 internal - managers's knowledge
3 external - suppliers / customers data
4 estimates of new product cost
5 models (EOQ-forecast optimal level)
Changing factors impacting budget :

P Politic change in government policy
boom / recession of economy
E Economy
could be local, national, international
S Social population, lifestyle
T Technology old method - irrelevant, so need to update
E Environment pollution, weather
L Legal bans, changes of safety laws
Examples :
SITUATION BUDGET SYSTEM
Diverse range of activity Incremental
New venture ZBB
Fixed overhead cost is major cost ABB
Many controllable cost
BOTTOM UP
Trained managers
Many uncontrollable cost
TOP DOWN
Centrally controlled

BUDGETING
Uncertainty Usually external factors :

Social / political issues
Natural disasters
Machine breakdown
Material increase prices
Workforce not perform well
Inflation, change interest rate
How to deal (techniques) :

Flexible budget Different level of activity (1000, 2000, 3000…)
Useful in control stage
Rolling budget Update budget regularly
Uncertainty is reduced
Sensitivity analysis Variable change one at a time
What happen if sales volume is only 75%
Simulation Variable change MORE than one at a time
Spreadsheets computer package that store data in matrix format

use to assist in budgeting process
Can store large volume of information Take time to develop / train stuff
Easy to amend, immediately calculated May accidentally change data
Can be print / virtually distribute Complex - difficult to detect error
Can represent result graphically Security issues - unauthorise access
Beyond Budgeting modern - rapidly changing environment, short life cycle product, highly customise
idea that husiness need to move BEYOND budgeting due to inherent flaw in budget
6 principles :
Clear principles and manager has no doubts over his responsibility / authority
boundaries concept of internal market may be relevant here
Targets based on must linked to shareholder value
relative success may be based on KPI / benchmark / balace scorecard
High degree of freedom consistent with TQM & BPR concept
freedom - manager organisation chart should be flat
Decision by front decision that generate value
line team consitent with TQM & BPR concept
Relationship with facilitate direct communication with all parties
3rd party - front line consistent with SCM concept
Transparent & use activity based on accounting system to report activity that is
ethical support syst. responsible by manager & team
Fast response to threat & opportunity Resistance to change
Lower cost Resource constraints
Improve customer & supplier loyalty

QUANTITATIVE ANALYSIS
High Low Method steps :

1 select the highest & lowest ACTIVITY
2 calculate variable cost/unit
(cost @high - cost @low)
(activity @high - activity @low)
3 find fixed cost
total cost - total variable cost
4 forecast total cost at specified level
very simple assume that only activity affect cost
easy to understand assume history cost reliable for future
easy to use only use two values (high & low)
Learning Curve cumulative output DOUBLE, cumulative average time/unit FALLS to fixed percentage
[Wright's Law] as labour intensive procedure is repeated, the labour time decrease
once steady state reached, direct labour hour will not reduce any further
limitations :
process is labour modern manufacturing more to capital intensive (machine)
intensive labour effect cannot apply if machine limit the speed of labour
product is new short lifecycle product
new products introduce regularly
product is complex more likely learning curve will be significant
more time for leraning curve to reach 'plateau'
production no major breaks in production
repetitive JIT or customer demand leads to loss of learning effect
TABULAR APPROACH ALGEBRAIC APPROACH

steps : Y = 𝑎∗ 𝑥 𝑏
1. calculate cumulative average time for Y cumulative average time
target production a time required for 1st unit
2. calculate total cumulative time x cumulative number of units
3. time to make next n unit b index of learning (log r/log 2)
r learning rate, %
item time each cum time cum avg
A 10.000 10.000 10.000 8 units :
B 8.000 18.000 9.000 a 10.000
C 7.386 25.386 8.462 x 8
D 7.014 32.400 8.100 r 0.9
rate, % 90 b -0.152
8 units : Y 7.29
1 cumulative average 7.29
2 cumulative t. time 58.32
3 next 4 units 25.920
*low % learning rate - faster

QUANTITATIVE ANALYSIS
applications :
Pricing Decision price set too high if based on first few unit
Work Schedule less labour needed - wokers may be laid off
Product Viability viability change if learning effect exist
Standard Setting standard cost will be too high if ignore learning effect
Budgeting take into account learning effect when prepare

ADVANCE VARIANCES
Sales Variances PRICE (actual price - standard price) x quantity sold
Favourable Adverse
price increase : price decrease :
high demand low demand
competitors low demand competitors high demand
improvement in quality reduce in quality
VOLUME (actual quantity - budget quantity) x standard margin

*margin = contribution
Favourable Adverse
demand increase : demand decrease :
low price high price
competitors low quality competitors high quality
improvement in quality reduce in quality
marketing campaign success marketing campaign fail
MIX 1. total actual sales quantity

2. apportion sales quantity - basis of standard quantity (AQSM)
3. calculate the difference
4. multiply difference with standard margin per unit
QUANTITY 1. copy AQSM

2. budget sales quantity
4. multiply difference with standard margin per unit
OR
actual sales quantity XX
budget sales quantity (XX)
difference XX
x standard weighted average margin XX
XX

ADVANCE VARIANCES
Materials Variances PRICE (actual price - standard price) x quantity purchased
Favourable Adverse
poor material quality high material quality
discounts - buy in bulk price increase unexpectedly
cheaper supplier more expensive supplier
USAGE (actual quantity - standard quantity) x standard price
Favourable Adverse
high material quality poor quality material
more efficient use of material less experienced staff
change in product specification change in product specification
material waste (evaporation / scrapping / testing) :

1. order right quantity & quality at favourable price
2. ensure material arrive at right time
3. active measure against theft, breakage & storage cost
MIX 1. total actual input quantity

2. apportion the input quantity - basis of standard quantity (AQSM)
4. multiply difference with standard price
Favourable : higher portion of cheap material being used - reduce avg cost per unit
YIELD 1. copy AQSM

2. calculate standard quantity for actual production
4. multiply difference with standard price
OR
actual output XX
expected output from actual input (XX)
difference XX
x standard material cost per unit XX
YILED VARIANCE XX
Adverse : less output has been achieved for given input
*favourable mix may lead to adverse yield - difference in quality of material used
Control of production process :

quality measure (reject rate, % waste, % yield)
customer satisfaction rating
average cost of input / output

ADVANCE VARIANCES
Labour Variances RATE (actual rate - standard rate) x actual hours worked
Favourable Adverse
low skilled staff high skilled staff
cut in overtime/bonus increase in overtime/bonus
EFFICIENCY (actual hours worked - standard flexed hours) x standard rate
Favourable Adverse
high skilled staff low skiled staff
improved staff motivation fall in staff motivation
IDLE TIME (actual hours paid - actual hours worked) x standard rate
idle time prevention :

1. proper maintenace of tools and machines
2. advance production planning
3. advance planning for machine utlisation
Operational & ADVANTAGES DISADVANTAGES

(market share) useful in volatile & changing environment element of subjectivity
Planning up to date information involve large amount of labour time
(market size) make standard cost more acceptable temptation to put variance as
have positive impact on motivation uncontrollable factors
help identify planning deficiencies conflict between operating & planning
staff - blame each other
OPERATIONAL PLANNING
SALES (actual sales - revise budget (revise budget sales - original
sales) x standard margin budget sales) x standard margin
MATERIALS :
PRICE (actual price - revise standard (revise standard price -
price) x actual quantity standard price) x actual
USAGE (actual quantity - revise (revise standard quantity -
standard quantity) x std price standard quantity) x std price
LABOUR :
RATE (actual rate - revise standard (revise standard rate - standard
rate) x actual hours worked price) x actual hours worked
EFFICIENCY (actual hours worked - revise (revise standard hours -
standard hours) x standard rate standard hour) x standard rate
Actual
Operational
Revised (flexed)
Planning
Original (flexed)
ARO OP

ADVANCE VARIANCES
Variable Overhead EXPENDITURE (actual VOH - standard VOH) x actual hours worked
Variances
Favourable Adverse
unexpected saving in cost of service unexpected increase in cost of service
more economic use of service less economic use of service
EFFICIENCY (actual hours worked - standard flexed hours) x standard rate
Favourable Adverse
Fixed Overhead EXPENDITURE actual cost - (budgeted hours x standard rate)

Variance
Favourable Adverse
decrease in price increase in price
seasonal effects seasonal effects
CAPACITY (budgeted hours - actual hours) x standard rate
Favourable Adverse
hours worked higher than budget hours worked lower than budget
EFFICIENCY (actual hours - standard flexed hours) x standard rate
Favourable Adverse
VOLUME (capacity variance + efficiency variance)
Favourable Adverse
increase in production volume decrease in production volume
increase in demand decrease in demand
change in productivity of labour production lost (labour strike)

ADVANCE VARIANCES
Operating budgeted profit XX

Statement sales volume variance X/(X)
standard profit on actual sales XX
sales price variance X/(X) absorption
XX costing
all cost variance
material, labour, VOH, FOH X/(X)
actual profit XX
OR
budgeted contribution XX
sales volume variance X/(X)
standard contribution on actual sales XX
sales price variance X/(X)
XX
all variable cost variance marginal
material, labour, VOH X/(X) costing
actual contribution XX
budgeted FOH XX
FOH expenditure variance X/(X)
actual profit XX
When to SIZE fixed size (investigate if variance >$5000)

Investigate fixed percentage (investigate if variance >10%)
statistical rule (investigate if variance likely to arise <5%)
FAVOURABLE /
concentrate on adverse
ADVERSE
COST cost of investigation < benefits of correcting cause
PAST PATTERN investigate area that has steadily worsening trends
BUDGET budget might be unreliable/unrealistic
should discuss to change budget instead of investigate variance
RELIABLILTY OF system used to record may be unreliable - meaningless variance,
FIGURES should not investigate
Method to example :
Investigate
standard time : 50 minutes
control limit : 30 - 70 minutes
if variance falls between limit - no significant variance

ADVANCE VARIANCES
Revising Budget when :

change in main materials
unexpected increase in price material
changing working method & procedure
unexpected change rate of workforce
more relevant budget setting is subjective
operational variance - fair reflection of large amount of admin work - distiguish
actual result in actual condition controllable & not
manager will motivated (theoritically) tend to exaggerate relationship of variance
help in standard-setting learning process frequent demand to revise bugdet - bias
variance analysis may NOT appropriate in modern manufacturing :

non standard product - customised product
standard cost outdated quickly - short life cycle products
production is highly automated - controlled by machine rather tha workforce
ideal standard is used - modern manufacturer use JIT & TQM
emphasis continuous improvement
need detail information - difficult for complex & constantly changing environment
more "real time" events - can not report at year end
Standard Cost aims :

set target for performance
motivate manager to achieve target
hold manager accountable for actual performance
rewarding manager for good performance
types :
Ideal standard level of performance is high
not achieveable - manager & employee not try to get it
Current standard level of performance is not challenging
easy to achieve-manager & employee don't want to improve performance
Attainable standard level of performance is challenging
realisitic to achieve - manager & employee motivated and try to achieve
Basic standard level of performance has long term to achieve
may quickly outdated - manager & employee demotivated
particiption :
ARGUMENT IN FAVOUR ARGUMENT AGAINST
motivate employee to set higher standard staff feel their suggestion being ignored
staff more likely to accept standard staff may want to build "slack" into budget
morale & performance improved conflicts > cooperation / collaboration
staff understand clearly what is expected senior management reluctant to share
from them responsibility

PERFORMANCE MEASUREMENT CONTROL
FINANCIAL PERFORMANCE & RATIO ANALYSIS

General Considerations :
1 may not representative of position throughout the period - seasonal trade, large one off item
2 can compare :
current year vs last year OR own company vc competitors
3 can be manipulated by manager - window dressing
4 ratio indicates further investigation rather than give answers to management
Profitability FORMULAE EXPLANATION

[maximise profit] Gross Profit Margin : higher is desirable :
GP 1. sales price is high
x 100
Turnover 2. cost under control
Net Profit Margin : higher is desirable :

NP 1. sales price is high
x 100
Turnover 2. cost under control
Return On Capital Employed : NP generated from $1 assets employed

1 NP
x 100
CE higher is desirable :
1. increase NP - high price / low cost
Capital Employed = Total Asset - Current 2. reduce CE - repay long term debt
Liability
= Total Equity + Non
Current Liability
2 NP margin x asset turnover
Asset Turn Over : TO generated from $1 assets employed

Turnover
CE higher is desirable :
1. increase TO - launch new product /
Turnover = Sales Revenue successful advertising campaign
2. reduce CE - repay long term debt

Liquidity FORMULAE EXPLANATION

[cash flow problem] Current Ratio : ability to meet short term liability
CA
CL >1 is usually desirable
if < industry average - liquidity problem
improve : pay creditor when due

: reduce level of bad debts
Quick Ratio (Acid Test) : ability to meet short term liability EXCEPT
CA - Inv inventory - poor liquidity in short term
CL
>1 is usually desirable
if < industry average - liquidity problem
improve : pay creditor when due

: reduce level of bad debts
Inventory Holding Period : average no of days to held inventory

Inventory
x 365
COS longer (short is desirable) :
1. take more time to sell
2. increased level of obsolete stock
improve : remove any slow moving item

: get rid obsolete stock
if too short - may have cash problem to

hold optimum level of inventory
Receivable Collection Period : average no of days for debtors to pay

Receivable
x 365
Turnover longer (short is desirable) :
1. struggle to collect debts
improve : credit checks on customer

: improve credit control
if too short - not competitive
Payable Period : average no of days to pay purchases

Payable
x 365
Purchases longer (short is desirable) :
1. struggle to pay debts
2. take better advantage of credit
if too short, not good - supplier is a good
financial source

Measuring Risk FORMULAE EXPLANATION

[manage risk] Financial Gearing : high level :
1 Debt 1. relies heavily on debt
x 100
Equity
If firm has excessive debt, they need to
OR pay interest before dividends - increase
risk (profit may fall)
2 Debt
x 100
Debt + Equity improve : reduce level of long term debt
: raise long term finance using
equity
Interest Cover : low level :

OP 1. unable to make finance payment
Finance cost
improve : increase OP - low cost / low
finance cost by reduce debt
Dividend Cover : low level :

NP 1. unable to make dividend payment
Dividend
Issues With Short-termism :
Financial manager decide to improve short term financial performance - link to reward
Performance may have negative impact on long term profit
Indicators e.g : cut investment / purchase cheaper but poorer quality of material
Manipulation of result - window dressing :

tempted to manipulate result - achieve target
accelerate revenue - wrongly record revenue to improve profit in one year
delaying cost - wrongly record cost to improve profit in one year
understate provision / accrual
Do not convey full picture :

since use short term indicator - limited benefit
customer satisfaction / quality
External Stakeholder - any individual / group has interest in business

Considerations e.g : shareholder / employees / loan providers / government / community /
customers / environmental groups
Market conditions - impact business performance

e.g : downturn in industry / economy
Competitors - their action should be considered

demand decrease because :
1 they reduce price
2 they has successful advertising campaign

NON FINANCIAL PERFORMANCE INDICATORS

additional tool to monitor performance
mixture of Financial Performance & Non Financial Performance - optimum system
Balanced Scorecard provide management with set of information that cover all relevants area :
PERSPECTIVES GOALS
Customer increase number of new & existing customer
reduce % of customer's complaint
Internal reduce time taken between customer order & deliver
reduce staff turnover
Innovation & increase proportion of revenue from new product
learning increase % of staff training time
Financial increase spend per customer
increase gross profit margin
BENEFITS PROBLEMS
focus on factors - financial & non financial difficult to select measure
provide external & internal information overload info - large no of measure
difficult to obtain info
Building Block framework to design & analyse performance - particular for service industry
Model
[Fitzgerald & Moon] DIMENSIONS STANDARDS (measures) REWARDS
goal for business target set for dimension motivators to achieve standard
6 dimensions :
DOWNSTREAM RESULTS
Competitive market share
sales growth
customer base
Financial profitability
Performance liquidity
risk measure
UPSTREAM DETERMINANTS
Quality of Service reliability
responsiveness
competence
drivers of Flexibility volume flexibility
downstream delivery speed
results Resource Utilisation productivity
efficiency
Innovation ability to innovate
performance for innovation

DIVISIONAL PERFORMANCE MEASUREMENT TRANSFER PRICING
DIVISIONAL PERFORMANCE MEASUREMENT

DIVISION DESCRIPTION MEASURE INSTRUMENT
Cost Centre incur cost but no revenue Total cost and cost per unit
IT support department Cost variances
Non financial performances :
quality
productivity
efficiency
Revenue Centre only generate revenue Total revenue and revenue per unit
Revenue sales variance
Profit Centre has both cost & revenue EVERYTHING in cost & revenue centre
manager has no authority to Market share
alter level of investment Profit
Working capital ratio
Non financial performances :
productivity
quality
customer satisfaction
Investment Centre has both cost & revenue EVERYTHING in cost, revenue, profit
manager has authority to invest centre
/dispose asset Return on Investment (ROI)
Residual Income (RI)
ROI used to appraise investment decision of each division
Controllable profit Controllable Profit = after depreciation, before tax

x 100
Capital employed if Capital Employed not given, use Net Asset
widely used & accepted lead to dysfunctional decision making
enable comparison between company or age asset increase (NBV), ROI increase -
division with different size hang on inefficient, obsolete machine
can be broken down to secondary ratio - manipulation of figure - to improve result
profit margin / asset turnover diff account policy - confuse to compare
RI Controllable profit - Notional interest on capital
Controllable Profit = after depreciation, before tax

Notional % = CE x Notional rate
encourage investment centre to make new not facilitate comparisons between
investment divisions
not lead to dysfunctional decision making manipulation of figure - to improve result
more aware on cost of asset
risk can be incorporated by choice of
interest rate used

DIVISIONAL PERFORMANCE MEASUREMENT TRANSFER PRICING
Compare Divisional Variance Analysis monitor & control performance

Performance identify controllability & responsibility
Ratio Analysis profitability & liquidity measure
Other Management Ratio sales per employee
transport cost per mile
Other Information staff turnover
market share
TRANSFER PRICING
price which goods / services transferred from one division to another within same organisation
Objectives Goal Congruence consistent with objective of organisation as a whole

e.g : maximise overall company profit
Performance buying and selling divisions will be treated as profit centre
Measurement allow performance assess fairly, or else manager demotivated
Autonomy maintain autonomy of profit centre manager
manager will be highly motivated BUT sub-optimal decision may
be made
Record Movement assist in recording movement of goods / services
Methods MARKET BASED APPROACH

If external market exist, transfer price could be set at external market price
transfer price deemed to be fair : may not be an external price
selling - receive same price of sales external price may not stable
buying - pay same price of purchase saving may be made from internal
company performance not impacted transfering - reduce delivery cost
negatively - same price as external market
COST BASED APPROACH

supply goods at cost plus profit
standard cost should be used rather than actual cost :
1 actual cost does not encourage selling division to control cost
2 buying division can know in advance & plan accordingly
e.g : full cost / marginal / opportunity
Problems different environment of divisions

transfer pricing may distort divisional performance
different age of asset in each division
different accounting policy
lead to manipulation of data - only few indicators

NOT FOR PROFIT ORGANISATION
Not for Profit Sector e.g : local governement / charities / trusts / executive agency
1. not desire to maximise profit
2. non quantifiable benefits, might be ignored - social welfare
3. cost benefit analysis need to use judgement
4. usually do not generate revenue but have fixed expenditure
Performance Measurement :
e.g : university
OVERALL overall costs vs budget
number of students
amount of research funding received
proportion of excellent student
quality of teaching
DEPARTMENT cost per student
cost per examination pass
staff / student ratio
student per class
number of teaching hours
Multiple Objectives Primary not to make money

benefit certain group of people
has multiple stakeholders = multiple objectives
Non Financial more important & more complex :

Objectives 1. most key objectives are difficult to quantify
2. multiple and conflicting objectives
management needs to decide which to be prioritised
Value For Money Economy input measure

balance cost with quality of resource
Efficiency link input with output
efficient use of resources acquired
Effectiveness output measure
achieve objective of organisation

Revision Management Account Topics: Cost Per Unit

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REVISION MANAGEMENT ACCOUNT TOPICS

Cost per unit FUNCTIONS :

Standard cost predetermined cost per unit

Types of standards Efficient but not perfect operating condition

Flexible budgeting Fixed - before preparing budget. single level of activity

Controllability Cost controllable if : manager responsible for it being incurred

rental of material storage - outside of control.

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

ABSORPTION COSTING MARGINAL COSTING

SKY MOON SUN Units 2500 5000 7500

DM 0.07 0.14 0.12 Cont/unit 8 8 8

OHAR = budgeted OH cost / budgeted activity

ADVANTAGES DISADVANTAGES ADVANTAGES DISADVANTAGES

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

Data fact / figures in raw, unprocessed format

Information data that has been processed, has useful meaning

users : managers provide records (history & current)

data processing (data to information) :

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

Information capture / storage / transmission / present of information

Information System provision & management of information

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

Networks LANs link devices between buildings

Data capture data input into computer through a reader

OCR image to text applications

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

Privacy & security General control overall control over IS

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

Virus protection control the use of external software

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

Level of control STRATEGIC

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

can be used at all characteristics :

offers : useful for :

Customer build and sustain long term development process :

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

Activity Based TRADITIONAL MANUFACTURE MODERN MANUFACTURE

TRADITIONAL METHOD ABC METHOD

ABC in PUBLIC SECTOR :

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

Throughput Total Quality Management (TQM) Just In Time (JIT)

Fundamental features : Key characteristics :

Key features of company that operate both :

throughput = sales revenue - direct material cost

TP aims : make best use of scarce resource (bottleneck) in JIT environment

theory of constraint (TOC) :

TPAR : improving TPAR :

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

value analysis : a critical and systematic examination by a group of specialists on a

aim : maintain esteem value of product but at lower cost

problems of service organisation :

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

Total cost of products over its entire life

Pre production Launch Growth

Set high selling price : Reduce selling price :

Maintain selling price : Cut price

maximise product's return :

DIDI DAYANA PASS PERFORMANCE MANAGEMENT ACCA

Environmental MARTIN BENNETT & PETER JAMES

6 ways to achieve business & environmental benefits :