MANAGEMENT - AIS can be used for: routine management reporting for

- process of leading and controlling a group of people, current operations and decisions; special management
resources, or an organization in totality to achieve the reporting for long-term decisions; routine financial
goals and objectives of the entity in pursuit of success reporting
and value-creation - AIS components: forms, equipment, procedures,
- process of planning, decision making, organizing, people
leading, motivation and controlling the human - an accounting system should be flexible, reliable,
resources, financial, physical, and information resources simple, helpful to the entity and users, economical, and
of an organization to reach its goals efficiently and has control mechanisms on accuracy, honesty, and
effectively speed
- transaction systems in a typical firm:
MANAGEMENT (ACCOUNTING) INFORMATION o order entry system
SYSTEMS o cash receipts system
- system that provides past, present, and projected o purchases system
information that is timely and relevant to be able to be o production planning and control system
used as a tool for decision making o cash disbursement system
- system that captures data from operations within the o personnel system
firm and organizes them into information relevant to o general accounting system
managerial decision making
- provides a way for managers to generate information ELEMENTS OF A GOOD INTERNAL CONTROL
they needed 1. Reliable personnel
- design of a management accounting system should fit 2. Separation of duties
within the operations of the entity and conform with 3. Supervision
the characteristics of the firm (legal nature, 4. Responsibility
organizational structure, and organizational culture and 5. Document control
specific processes) 6. Job rotations and forced leaves
7. Periodic review of the system
COST MANAGEMENT SYSTEM 8. Physical safeguards
- includes a set of formal methods developed for 9. Routine and spot checks
planning and controlling an organization's cost- 10. Cost feasibility
generating activities relative to its goals and objectives
- helps managers:
o identify the cost of resources consumed in
performing significant activities INTRODUCTION TO COST MANAGEMENT
o determine the efficiency and effectiveness of SYSTEM
the activities performed
o identify and evaluate new activities that can FINANCIAL ACCOUNTING
improve future performance - uses cost accounting information for external
o adapt the firm to changes in new technologies reporting
- conforms to GAAP
CHARACTERISTICS AND QUALITIES OF INFORMATION - highly aggregated
- accuracy and verifiability - completeness - historical
- relevance - timeliness
MANAGEMENT ACCOUNTING
ACCOUNTING INFORMATION SYSTEMS - uses cost accounting information for internal purposes
- an AIS serves as an efficient way of providing accurate (planning, controlling, decision making, and
financial information that could help in decision-making performance evaluation)
and help the firm achieve its goals and objectives on - segmented
operating results, setting of priorities, and problem- - current
solving - relevant
- major components of system: inputs, processes,
outputs, feedback
 when cost accounting is shaped and dominated by - determine accountability for cost management
financial accounting needs, the information generated and organizational control
may be of limited value to managers - determine the information needed by the decision
maker
COST MANAGEMENT SYSTEM  CULTURE:
- may provide information that is more relevant to - underlying set of assumptions about the entity and
internal users the goals, processes, practices, and values that are
- part of the Management Information System shared by its members
- how people interact with each other
COST MANAGEMENT SYSTEM (CMS) - extent to which individuals take authority and
- formal methods to plan and control an organization's assume responsibility for organizational outcomes
cost-generating activities with major challenges of:
o achieving profitability in the short run - organizational mission and core competencies
o maintaining a competitive position in the long  MISSION:
run - business mission regarding competition
Short Run Long Run o avoid competition: product differentiation,
Objective Organizational Survival cost leadership
efficiency o confront competition by identifying and
Focus Specific costs: Cost categories: exploiting temporary opportunities
manufacturing, customers, - business mission in relation to product life cycle
service, suppliers, products,  CORE COMPETENCIES:
marketing, distribution - timeliness
administration channels - quality
Information Timely, accurate, Periodic, reasonably - customer service
characteristics highly specific, accurate, broad - efficiency and cost control
short term focus, long term - responsiveness to change
- the cost management system gathers data and
COST MANAGEMENT SYSTEM GOALS reports about core competencies
1. Develop product costs
2. Assess product/service life-cycle performance - operations and competitive environment and
3. Improve understanding of processes and activities strategies
4. Control costs - management needs to assess the:
5. Measure performance 1. cost structure, including the proportion of
6. Allow pursuit of organizational strategies fixed and variable costs
2. level of technology costs, which tend to be
COST MANAGEMENT SYSTEM fixed and not susceptible to short-run control
- the design of the CMS is influenced by: organizational 3. production capacity
form, structure, and culture 4. flexibility to respond to a change in short-
 FORM: term conditions
- choice of form affects:  STRATEGIES:
o cost of raising capital - being first to market, which allows pricing
o cost of operating business flexibility
o cost of litigating o increase market share
o statutory authority to make decisions o large per-unit profit
- forms of business include: corporations, - substantial reducing product costs
partnerships, LLPs, LLCs o develop new production processes
 STRUCTURE: o capture learning curve effects
- distribute authority and responsibility o increase capacity utilization
- centralized or decentralized decision making o create a focused factory arrangement
- groups subunits: geographically, by similar o design for manufacturability, logistical
missions (build, harvest, or hold), by natural product support, reliability, maintainability
clusters - supplier relations
o form strategic alliances
 o involve suppliers in product design and - PLANNING - involves developing objectives and
development preparing various budgets to achieve these objectives
o link electronically - CONTROL - involves the steps taken by management
- integration of entire information system (payroll, that attempt to ensure the objectives are attained
inventory, budgeting, costing)
ADVANTAGES OF BUDGETING
ELEMENTS OF CMS 1. Define goals and objectives
1. MOTIVATIONAL ELEMENTS 2. Think about and plan for the future
- performance measure 3. Means of allocating resources
- reward structure 4. Uncover potential bottlenecks
- support of organizational mission 5. Coordinate activities
- competitive strategy 6. Communicate plans
2. INFORMATION ELEMENTS
- budgeting RESPONSIBILITY ACCOUNTING
- cost control - managers should be held responsible only for those
- value-added and non value-added activities items that the manager can actually control to a
- assessment of core competencies significant extent
- analysis of make-or-outsource and other
decisions CHOOSING THE BUDGET PERIOD
3. REPORTING ELEMENTS - annual operating budget may be divided into quarterly
- preparation of financial statements and other reports or monthly budgets
for financial accounting and management accounting
purposes SELF-IMPOSED BUDGET
- a participative budget is prepared with the full
IMPLEMENT CMS cooperation and participation of managers at all levels;
- gap analysis aka participative budget
1. Identify gap to overcome
2. Prioritize differences - ADVANTAGES:
3. Develop and deploy improvements 1. Individuals at all levels of the organization are
4. Repeat process to ensure continuous improvement viewed as members of the team whose
judgements are valued by top management.
ENTERPRISE RESOURCE PLANNING 2. Budget estimates prepared by front-line
- for a truly integrated CMS: managers are often more accurate than
1. Standardize information system/replace legacy estimates prepared by top managers.
systems 3. Motivation is generally higher when
2. Automate and integrate transfer of data among individuals participate in setting their own goals
systems than when the goals are imposed from above.
3. Improve the quality of information 4. A manager who is not able to meet a budget
4. Improve timeliness of information (real-time, on- imposed from above can claim that it was
line reporting) unrealistic. Self-imposed budgets eliminate this
explanation.

- most companies do not reply exclusively upon self-

PROFIT PLANNING
BASIC FRAMEWORK OF BUDGETING
- BUDGET - detailed quantitative plan for acquiring and
using financial and other resources over a specified
forthcoming time period
- BUDGETING - act of preparing a budget
- BUDGETARY CONTROL - use of budgets to control an
organization's activity
imposed budgets in the sense that top managers usually
initiate the budget process by issuing broad guidelines
in terms of overall target profits or sales
- self-imposed budgets should be reviewed by higher
levels of management
- managers should watch out for budgetary slack
HUMAN FACTORS IN BUDGETING
- success of budgeting depends upon three important
factors:
1. top management must be enthusiastic and 5. BUDGETED INCOME STATAMENT AND BUDGETED
committed to the budget process BALANCE SHEET
2. top management must not use the budget to - last step
pressure employees or blame them when something
goes wrong *for detailed sample of budgets, see ppt*
3. highly achievable budget targets are usually preferred
when managers are rewarded based on meeting budget
targets
BREAK-EVEN POINT AND COST-VOLUME-
BUDGET COMMITTEE
- standing committee responsible for: overall policy
PROFIT ANALYSIS
matters relating to the budget; and coordinating the
COST-VOLUME-PROFIT (CVP) ANALYSIS
preparation of the budget
- relationship of: revenue; costs; volume changes; taxes;
- consists of president, vice-president (in charge of
profits
various functions such as sales, production, purchasing),
- applies to: manufacturers; wholesalers; retailers;
and controller
service industries
MASTER BUDGET
VARIABLE COSTING AND CVP
- consists of separate but interdependent budgets:
1. VARIABLE COSTING
1. SALES BUDGET
- separates costs into fixed and variable
- shows the expected sales for the budget
components
period expressed in dollars and units
- shows fixed costs in lump-sum amounts, not
- based on company's sales forecast
on a per-unit basis
- all other budgets on master budget are
- does not allow for deferral/release of fixed
dependent on sales budget
costs to/from inventory when production and
sales volumes differ
2. PRODUCTION BUDGET
- created after the sales budget
2. CVP
- lists the number of units that must be
- use CVP analysis to:
produced during each budget period to meet
1. Compute the break-even point
sales needs and provide desired ending
2. Study interrelationships of: prices; volumes;
inventory
fixed and variable costs; contribution margins;
- directly influences the direct materials, direct
profits
labor, and manufacturing overhead budgets
3. Calculate the level of sales necessary to
which enables the preparation of ending
achieve a target profit
finished goods inventory budget
4. Set sales price
- must be adequate to meet budgeted sales and
5. Answer "what-if" questions to influence
provide for sufficient ending inventory
current operations and predict future
operations
3. ENDING INVENTORY BUDGET
- combined the data from sales budget and data
- CVP assumptions:
from selling and administrative expense budget
1. Company is operating within the relevant
to determine the cash budget
range
2. Revenue per unit remains constant
4. CASH BUDGET
3. Variable costs per unit remain constant
- detailed plan showing how cash resources will
4. Total fixed costs remain constant
be acquired and used over a specified time
5. Mixed costs are separated into variable and
period
fixed elements
- all of the operating budgets have an impact on
6. no change in inventory (production equals
the cash budget
sales)
7. no change in capacity
8. sales mix remains constant
 9. anticipated price level changes included in PROFIT VOLUME GRAPH
formulas $
10. labor productivity, production technology,
and market conditions remain constant

CVP EQUATIONS
BEP
1. BREAK-EVEN POINT
total revenues = total costs Activity Level
total revenues - total costs = zero profit
Fixed Costs
2. BREAK-EVEN (UNITS)
TFC/(SPu - VCu)

3. BREAK-EVEN (DOLLARS) INCREMENTAL ANALYSIS

TFC/[(SPu - VCu)/SPu] - focuses only on factors that change from one option to
another
4. CONTRIBUTION MARGIN (CM) - changes in revenues, costs, and/or volume
sales price - variable cost = CM per unit - break-even point increases when:
revenue - total variable costs = total CM o fixed costs increase
o sales price decreases
5. CONTRIBUTION MARGIN RATIO (CM%) o variable costs increase
(sales price - variable cost)/sales price
MULTIPRODUCT COST-VOLUME-PROFIT ANALYSIS
6. SETTING A TARGET PROFIT - assumes a constant product sales mix
(TFC + desired before tax profit)/[(SPu - VCu)/SPu] - contribution margin is weighted on the quantities of
each product included in the "bag" of products
7. SETTING A TARGET PROFIT (CONVERTING AFTER-TAX - contribution margin of the product making up the
PROFIT TO BEFORE-TAX PROFIT) largest proportion of the bag has the greatest impact on
before-tax profit = after-tax profit/(1- tax rate) the average contribution margin of the product mix
*for detailed sample of budgets, see ppt*
8. SET PROFIT PER UNIT
sales volume = TFC/(CMu - PuBT) MARGIN OF SAFETY
- how far the company is operating from its break-even
GRAPH APPROACH TO BREAKEVEN point
- break-even chart illustrates relationships among: - budgeted (or actual) sales after the break-even point
revenue, volume, and costs - the amount that sales can drop before reaching the
break-even point
TRADITIONAL CVP GRAPH - measure of the amount of "cushion" against losses
Total Revenues - indication of risk
- the lower the margin of safety, the more carefully
management must watch sales and control costs
Total Costs
Total MARGIN OF SAFETY EQUATIONS
$ BEP 1. UNITS
Variable Costs
actual units - break-even units
Fixed Costs 2. DOLLARS
actual sales dollars - break-even sales dollars
3. PERCENTAGE
Activity Level margin of safety in units or dollars/actual unit sales or
dollar sales
OPERATING LEVERAGE
- relationship of variable and fixed costs
- effect on profits when volume changes
- cost structure strongly influences the impact that a
change in volume has on profits

High Operating Leverage Low Operating Leverage

Low variable costs
High fixed costs
High contribution margin
High break-even point
Sales after break-even
have greater impact on
profits
High variable costs
Low fixed costs
Low contribution margin
Low break-even point
Sales after break-even
have lesser impact on
profits

DEGREE OF OPERATING LEVERAGE

- measures how a percentage change in sales will affect
profits
- when margin of safety is mall, the degree of operating
leverage is large

DEGREE OF OPERATING LEVERAGE AND MARGIN OF

SAFETY EQUATIONS
1. degree of operating leverage =
contribution margin/profit before taxes
2. degree of operating leverage = 1/margin of safety%
3. margin of safety% = (actual sales - break-even
sales)/actual sales
4. margin of safety% = 1/degree of operating leverage