accounting for control & performance measurement pia nylinder [email protected]
TRANSCRIPT
Aim of the chapter
To establish a context for the understanding of control in organizations, and to examine in detail one specific approach to accounting control in the form of standard costing, flexible budgeting and variance analysis.
From Gowthorpe, 2008
Learning outcomesAfter reading the chapter and completing the exercises at
the end, students should:• Know about a classification of control mechanisms within
organizations.• Know about some of the problems of control in firms.• Understand the use of a standard costing system in a
manufacturing environment.• Be able to compare actual results against flexed budgets.• Understand and be able to analyse some of the possible
reasons for variances that emerge from the comparison of actual with standard costs.
• Understand the pros and cons of standard costing systems.
From Gowthorpe, 2008
Sid 341-342
Analysis of variances
• Where have the variances occurred?• What are the reasons to the variances?• Who is responsible to the variances?• How are we future development?• Ado we have to change anything? Budget (standard cost) – Actual cost = deviation
Variance analysis of resultRevenues Budget Acutal VarianceRevenues 1 200 000 kr 1 450 000 kr + 250 000 krOther revenues 150 000 kr 72 500 kr - 77 500 kr
Sum. revenues1 350 000 kr 1 522 500 kr + 172 500 kr
CostsCost of goods sold480 000 kr 529 200 kr - 49 200 krWages 420 000 kr 380 800 kr +39 200 krRent 120 000 kr 120 000 kr 0 kr
Sum costs 1 020 000 kr 1 030 000 kr - 10 000 kr
Operating income 330 000 kr 492 500 kr + 162 500 kr(Result)
Actual resultBudget
Difference depending on changes in variance of price and quantity
Difference depending on changes in variance of volume
Total variance
Variance analysis
Accounting for control
P 228, Gowthorpe, 2008
Variance analysis – an example
I consult company are budgeting for every order demand 52 hours to a price per hour of 183 Skr. Every order thus demand 9 516 Skr (budgeted hours * budgeted price).
De actual outcome however show that the actual hours worked are 51 hours and the cost is 184 Skr. The actual cost is 9 384 Skr (actual price * actual hours worked).
Variance analysis – its parts
Quantity variance
Price variance
Actual
Actual
Budgeted
Budgeted
Price
Quantity
Variance analysis – an exampleI consult company are budgeting for every order demand
52 hours to a price per hour of 183 Skr. Every order thus demand 9 516 Skr (budgeted hours * budgeted price).
De actual outcome however show that the actual hours worked are 51 hours and the cost is 184 Skr. The actual cost is 9 384 Skr (actual price * actual hours worked).
The total variance is: Budgeted price * budgeted quantity – actual price *
actual quantity
Price variance
Quantity variance
Price variance
Actual
Actual
Budgeted
Budgeted
Price
Quantity
Part of total variance for a productioncost(ex. material or salary)
Total variance = Budgeted price * budgeted quantity – actual price * actual quantity
Price variance = (Budgeted price - actual price )* actual quantity
Price variance, from the example
Quantity variance
Price variance
Actual 51
Actual 184
Budgeted 52
Budgeted183
Price
Quantity
Price variance = (Budgeted price - actual price )* actual quantity = (183 – 184)*51 = -1*51 = -51 SkrThe variance depend on an increased cost per hour, maybe caused by use of more qualified staff than initially planned
Quantity variance
Quantity variance
Price variance
Actual
Actual
Budgeted
Budgeted
Price
Quantity
Total variance = Budgeted price * budgeted quantity – actual price * actual quantity
Quantity variance = (Budgeted quantity – actual quantity) * budgeted price
Quantity variance, from the example
Quantity variance
Price variance
Actual 51
Actual 184
Budgeted 52
Budgeted 183
Price
Quantity
Quantity variance = (Budgeted quantity – actual quantity) * budgeted price = (52 – 51)*183 = 1*183 = 183 SkrThe positive variance depend on an decreased time than budgeted. Maybe staff has been more productive, do more per hour.
Variance analysis
Budgeted costs (=Budgeted price * budgeted quantity)- Actual costs (=Actual price * Actual quantity)= Total variance
Price variance Quantity varianceThe effect of changes The effect of changes in quantlityin price
Performance Measurement
• …”should provide information that is useful to managers in their planning, controlling, monitoring and decision-making functions”.
• The aim of the chapter:To develop an understanding of ways in which performance is
measured, managed and reported within the firm budgeting.
For use with: Management Accounting Catherine Gowthorpe (ISBN: 9781844802043)
Copyright Cengage Learning 2008
10 Performance Measurement
Aim of the chapter
To develop an understanding of ways in which performance is measured, managed and reported within the firm budgeting.
Sid 424
Performance measurement
• Performance– What has been achieved, performed, realized, or– What will be achieved, performed, realized
• Performance measurement– To measure different aspects of the performance.
Sid 426
Some operative aims
•Follow up the organization toward goals
•Be a communication
•Motivate employees
•Give signal when there are variances from plan
•Basis for comparison•Base for reward employees•Base for decisions•Inform intressents
Sid 427-428
Characteristics of performance measurements
•The performances should be related to the strategy•Performance goals should be tied to choosen mearsurements. •All employees should understand the goals and measurements and what action they indicate
•Employees have to be able to influence the performaces thay are responsible for •Employees should be informed of the outcome of their performances.
IKEAs vision and business idea
At IKEA our vision is to create a better everyday life for the many people. Our business idea supports this vision by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.
Sid 428-453
Performance measurementFinancial
Examples:
•Profitability ratios
•Solidity
•Liquidity
Non-financial•Customer service
•Avalability of sales staff•Avarage time between order and delivery•Number of repurchase
•Quality •Number of defects detected •Customer satisfaction level•Number of customers complaints
•Measures for employees•Sex, age •Competence of sales staff
•Time
Financial performance measures
• Liquidity Ratios
• Solidity ratio
• Profitability Ratios
Liquidity RatiosLiquidity is a measure of how quickly an asset can be converted to cash.
E.g. Accounts receivable = quite liquidBuilding = not very liquid
One important liquidity ratio is: Current Ratio
Liquidity RatiosCurrent Ratio:
“Under normal circumstances, a company will pay its current liabilities (bills due) with its current assets. The ratio between the two is therefore a good indicator for how well a company can pay its bills.”
A high current ratio: the company are more easily able to pay its bills. “That’s good to know if the company owes you money. But … if you’re an investor, too high a current ratio could mean that the company is not using its assets optimally”.
Current Ratio =Current Assets
Current Liabilities
Liquidity Ratios
Current Ratio:
Most successful businesses have a current ratio of about 1.5 – 2.0.
Let’s have a look at the Balance Sheet and add the current ratio.
Adding RatiosA B C D E F G
345
6 Assets Ratios:7 Cash and Equivalents 100008 Accounts Receivable 1200 Current 2.29 =G10/G189 Inventory 830010 Total Current Assets 1950011 Plant and Equipment 80012 Accumulated Depreciation 50013 Net fixed assets 30014 Total Assets 19800
15 Liabilities and Owner's Equity16 Accounts Payable 760017 Other Current Liabilities 90018 Total Current Liabilities 850019 Long Term Debt 120020 Total Liabilities 970021 Common Stock 600022 Retained Earnings 410023 Total Shareholder's Equity 1010024 Total Liabilities and owner's Equity 19800
Golden Win Double Dragon InternationalBalance Sheet, As of Dec 31 2000
Pretty good!
Leverage RatiosLeverage in business refers to how much debt a company uses to finance its operations.The idea is that if a company can borrow money at say 7% and then use this money to make a 27% profit, it’s clever to take out the loan.
Important leverage ratios are:
• Total Debt Ratio•Solidity
Leverage RatiosTotal Debt Ratio
The Total Debt Ratio shows how much of a company’s assets are financed through loans.
It is defined as:Total Debt
RatioTotal Debt
Total Assets=
Solidity=Equity capital
Total assets
Solidity %
The solidity shows how much of a company’s assets are financed through equity capital.
It is defined as:
Leverage Ratios
Total Debt Ratio
In general:• a low Total Debt Ratio is good with the critical number being 1.• Smaller than one means that the company has more assets than debts.
Vice versa, larger than one mean that the company has more debts than assets. If this is the case you’d better hope they will not go out of business …
Adding RatiosA B C D E F G
345
6 Assets Ratios:7 Cash and Equivalents 100008 Accounts Receivable 1200 Current 2,29 =G10/G189 Inventory 830010 Total Current Assets 1950011 Plant and Equipment 80012 Accumulated Depreciation 50013 Net fixed assets 30014 Total Assets 19800
15 Liabilities and Owner's Equity16 Accounts Payable 7600 Total De. 0,49 =G20/G1417 Other Current Liabilities 900 Solidity 0,51 =G23/G1418 Total Current Liabilities 850019 Long Term Debt 120020 Total Liabilities 970021 Common Stock 600022 Retained Earnings 410023 Total Shareholder's Equity 1010024 Total Liabilities and owner's Equity 19800
Golden Win Double Dragon InternationalBalance Sheet, As of Dec 31 2000
Sid 424-425
Weaknesess with financial measurements
•Focus on what has already happened•Encourage short term actions•Often too aggregated•Does not include customers and supplier
•Difficult to understand in relation to the work
For use with: Management Accounting Catherine Gowthorpe (ISBN: 9781844802043)
Copyright Cengage Learning 2008
10 Performance Measurement
FIGURE 10.2 The balanced scorecard
