Topic 4
Strategic management accounting (SMA)
It is the provision and analysis of management accounting data relating to business strategy, particularly the relative levels and trends in real costs and prices, volumes, market share, cash flows and the demand on a firm’s total resources.
It looks beyond the financial year to the longer term, particularly in relation to the product/service life cycle, and looks beyond the boundary of the organisation to its supply chain (from raw material supplier to consumer), and makes comparisons with competitors to continually seek competitive advantage.
(1) Target costing
It is concerned with managing whole-of-life costs during the design phase of the product life cycle.
Stages
(i) Determining the target price that customers will be prepared to pay for the product/service
(ii) Deducting a target profit margin to determine the target cost, which becomes the cost to which the product/service should be engineered
(iii) Estimate the actual cost of the product/service based on the current design (iv) Investigating ways of reducing the estimated cost to the target cost (2) Environmental management accounting
It is concerned with recognising environmental costs for the purposes of internal decision making, and involves collecting, measuring and reporting costs about the environmental impact of an organisation’s activities.
Classification:
(i) Prevention costs to avoid environmental damage e.g. employee training, equipment to reduce pollution (ii) Measurement costs to determine the extent of an entity’s environment impact e.g. testing, monitoring,
external certification
(iii) Internal failure costs where remedial action has to be taken e.g. cleaning spillages or leakage to cover employee health- and safety-related damages
(iv) External failure costs e.g. penalties incurred for environmental damage caused
Budgeting basics
A budget is a formal written statement of management’s plans for a specified future time period, expressed in financial terms. It promotes efficiency and serves as a deterrent to waste and inefficiency.
A fixed budget covers a defined period, usually a financial year.
Rolling budgets are continuously updated, with additional months added to the end of the period so that at any time during the financial year there is always a 12-month forward-looking budget for the business.
A forecast usually refers to a revised estimate, or a budgetary update, part-way through the budget period.
Budgets and accounting
Accounting information makes major contributions to the budgeting process. E.g. accounting records, historical data on income, costs and expenses Helpful in formulating future budget goals
Accountants have the responsibility for expressing management’s budgeting goals in financial terms. They translate management’s plans and communicate the budget to all areas of responsibility.
Accountants also prepare periodic budget reports that provide the basis for measuring performance and comparing actual results with planned objectives.
Benefits of budgeting
(i) It requires all levels of management to plan ahead and to formalise their goals on a recurring basis.
(ii) It provides definite objectives for evaluating performance at each level of responsibility.
(iii) It creates an early warning system for potential problems. Time to make changes before things get out of hand.
(iv) It facilitates the coordination of activities within the business by correlating the goals of each segment with overall company objectives.
(v) It results in greater management awareness of the entity’s overall operations and the impact on operations of external factors, such as economic trends.
(vi) It motivates personnel throughout the organisation to meet planned objectives.
Essentials of effective budgeting
Effective budgeting depends on a sound organisational structure where responsibility and authority for all phases of operations are clearly defined.
Budgets based on research and analysis should result in realistic goals that will contribute to the growth and profitability of a company. Also the effectiveness of a budget program is directly related to its acceptance by all levels of management.
Once adopted, budget should be an important tool for evaluating performance. Variation should be systematically and periodically reviewed to determine causes. However, individually should not be held responsible for variations that are beyond their control.
Length of the budget period
The budget period can cover any period of time. The most frequently used time period is a year (12 months).
The budget period should be long enough to provide an attainable goal under normal business conditions. Ideally, the time period should minimise the impact of seasonal or cyclical fluctuations, and it should not be so long that reliable estimates are impossible.
Businesses are increasingly using rolling budgets.
Budgeting process
It usually begins with the collection of data from each part of the company. Past performance is often the starting point from which future budget goals are formulated.
The budget is developed within the framework of a sales forecast which shows the potential sales for the industry and the company’s expected share of sales.
Sales forecasting involves a consideration of various factors: (1) general economic conditions, (2) industry trends, (3) market research studies, (4) anticipated advertising and promotion, (5) previous market share, (6) changes in prices and (7) technological developments.
Master budget
A master budget is a comprehensive set of budgets that covers all aspects of a firm’s activities. It contains:
(i) Operating budgets – sales budget, cost of sales budget, selling and administrative expense budget, budgeted income statement
(ii) Financial budgets – capital expenditure budget, cash budget, budgeted statement of financial position Sequential nature of sub-budgets, budgets are linked together and impact on each other.
Operating budgets
(1) Sales budget
Expected unit sales 500
Unit selling price 10
Total Sales $ 5000
(2) Purchase budget
Expected unit sales 500
Add: Ending inventory unit 50
Total required units 550
Less: Beginning inventory unit 0 Required purchases of units 550 Required purchases @ $1 $ 550 (3) Cost of sales budget
Expected unit sales 500
Purchase cost per unit 1
Cost of sales 500
(4) Selling and administrative expense budget Variable expenses (e.g. sales
commissions, freight-out) 600 Fixed expenses (e.g.
advertising, sales salaries, office salaries, depreciation, insurance)
700
Total selling and admin exp. $ 1300 (5) Budgeted income statement
Sales 5000
Less: Cost of sales (500)
Gross profit 4500
Less: Selling and admin exp. (1300) Profit from operation 3200 Less: Interest expense
Profit before income taxes Less: Income tax expense Profit
