managerial accounting - introduction n review of basic concepts_1

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Objective of the CourseEnhancing Decision Making Skills Through

Management Accounting Techniques

Course Instructor

Abdul Rahim Suriya

FCA, FCMA

COST AND MANAGEMENT ACCOUNTING

Session 1

Introduction and Objectives

Review of Basic accounting

knowledge



AL QUARN AL ASR



AL QURAN - TRANSLATION



KNOWLEDGE

Knowledge is to knowand

To know what you dont know(Mrs Ta hira Khan)

CAN THEY WHO KNOW AND THEY WHODO NOT KNOW BE DEEMED EQUAL.

(Ayat # 9 of Surat Az-zuman)

THE GREATEST THING IN THE WORD IS NOT SO MUCHWHERE WE STAND, AS IN WHICH DIRECTION WE ARE

MOVING.



COURSE CONTENTS

�� Introduction and ObjectivesIntroduction and Objectives

�� Review of Basic accounting knowledgeReview of Basic accounting knowledge

�� Cost conceptsCost concepts

�� Inventory Planning and valuationsInventory Planning and valuations

�� Labour CostingLabour Costing

�� FOH accountingFOH accounting

�� Absorption vs. Marginal costingAbsorption vs. Marginal costing

�� Break Even AnalysesBreak Even Analyses

�� Decision Making techniquesDecision Making techniques

�� Capital Budgeting TechniquesCapital Budgeting Techniques

�� Gross Profit AnalysisGross Profit Analysis

�� Case studyCase study



Class Room METHODOLOGY

1.1. RULE FOR PARTICIPATION RULE FOR PARTICIPATION Tell me, I·ll forget

Show me, I may remember

Involve me, I·ll understand

2. CONCEPT REVIEW TEST/ Quiz ² at the end of each session

3. Examples : Real life case studies of business

situations for enhancing decision making skill with the support of Management Accounting Concepts 4 . SHARING PARTICIPANTS· EXPERIENCES 5. CASE STUDIES at the end of the term



OBJECTIVETo Enhance Decision Making Skills

This course primarily covers

t he areas of Management Account ing which arehelpful for execut ives in

making t heir day t o daybusiness decisions.



NEED FOR BUSINESS EXECUTIVES

� The knowledge and techniques of Management

Accounting is normally possessed by finance

professionals but its practical application by them isvery limited.

� There are financial implications in virtually all day

to day business activities .

� Therefore non-finance executive must know enough

managerial accounting concepts to work these

implications into their own specialized fields for

efficient decision making.



NEED FOR BUSINESS EXECUTIVES

� Generally in our country businessmen (seth) do not

hire professional accountants as they presume that it

is an unnecessary cost and they limit their accounting function up to transactions recording

and reporting the results only.

� In my opinion, all non-finance executives viz

marketing, inventory planning and plant managers

must acquire some basic knowledge of theseconcepts to run business more efficiently.



MANAGEMENT ACCOUNTINGA basis for Decision Making

�� Decision making requires:Decision making requires:

1.1. Accurate data;Accurate data; andand

2.2. its Analyses.its Analyses.

�� Management accounting providesManagement accounting provides such datasuch data

and analyses which lead toand analyses which lead to effectiveeffective

decision making.decision making.



MANAAGMENT ACCOUNTINGA Basis for Decision Making

Quality DecisionQuality Decision

requiresrequires

Quality InformationQuality Information



BASIS OF SELECTION OF TOPICS

Teaching Experience

Industry Experience



KNOWLEDGE TEST

With a view to assess thebasic accounting knowledge

of all students so that I candecide the pace of the classit is essential to know your

basic accounting knowledge.



KNOWLEDGE TEST

What are t he component s of

financial st at ement s.

Who are t he users of Financial St at ement s



KNOWLEDGE TEST

Fill in t he blanks1. _____________ Account ing is mainly a met hod of

report ing t he result and financial posit ion of abusiness.a) Management b) Financial

2 The --------------------Audit ors are appoint ed byDirect ors/Management

a) Ext ernal b) Int ernal3 Preparat ion of financial st at ement is t he responsibilit y

of _________.a) Management b) Audit ors4 Asset s represent s ____________ of an organizat ion.

a) Resources b) Sources5 _______________ indicat es t he sales point at which

t he company neit her makes profit nor suffers loss.



KNOWLEDGE TEST

6 Increase in Liabilit ies is --------------

a) debit ed b) Credit ed

7 Financial St at ement s are prepared are ----

basis a) Accrual b) Cash8--------expendit ure result in acquisit ion of Fixed

asset s

a) Capit al b) Revenue

9 Sales is recorded on -------------a) receipt of money b) receipt of order c) dispat ch

of goods

10 Balance Sheet shows t he --------

a) operat ing result s b) financial posit ion



ACCOUNTING PROFESSIONA GENERAL IMPRESSION

� The Accounting Profession has been

considered as DRY & BORING

� Two decade back students used to feel

shy in opting for ³Commerce´, but

now the situation has changed.

� It is considered as most charming and

rewarding profession of in our country



IMAGE OF ACCOUNTANTSTRADITIONAL VIEWS

The Account ant s were considered as MUNSHI, but t his percept ion has t remendously changed.

Tradit ional account ing work is most ly t aken over bycomput ers.

Professional Account ant s are now considered asBUSINESS MANAGERS. (Similarly ot herFunct ional Managers should also evolve as Business

Managers.)

In Companies which are managed professionally,t he finance person is a key member of all t heBusiness Management Committ ees.



IMAGE OF ACCOUNTANTSLATEST VIEWS

� A new publication , is released by the International Federation of Accountant (IFAC), which provides insights into the variedresponsibilities of professional accountants in business.

� It includes interviews with 16 senior-level accountants working in avariety of organizations in 11 different countries.

� The interviews were conducted by Robert Bruce, a leadingaccountancy journalist.

� One of the interviews include Mr. David LI,CHAIRMAN OF A BIGCHINESS BANK IN HONGKONG who says that:

³Accountants can see the trend of

how the company is doing

and can warn against pitfalls´



IMAGE OF ACCOUNTANTSLATEST VIEWS

� This study highlights the following 3 key roles of

professional accountants in business :

� Providing assurance,� Facilitating management decision-making and

strategic development, and

� Serving as the gatekeeper of corporate integrity.



WHAT IS ACCOUNTING?

� Accounting could be defined as the process of :

� Collecting,

� Recording,

� Summarizing and

� Communicating

� The recording of financial transactions and

preparation of financial statements in accordance

with acknowledged methods and conventions.



FINANCE

Finance is a word used to describe:

� Money resources and

� The Management of those resources

Dictionary meanings of Finance is:

� the system of money, credit� to provide or obtain funds, capital or credit

� to manage or secure financial resources



WHAT IS ACCOUNTING?

N o one can avoid Accounting

� Accounting is not limited to business world. Everyone in day to daylife file income tax returns, settle credit cards bills or obtain bank loans etc.

� Accounting may be considered as a subject close to nature as our religion ISLAM has the concept of recording each and every act for JAZZA & SAZZA on the day of Judgment.

� Quran has specifically described various accounting matters likedistribution of ³WIRASAT´

� Every professional whether he is Consultant ,Engineer or Doctor isAccountable for professional duties.



WHAT IS ACCOUNTING?

Accounting is skill /language of business

� In today¶s business world, an understandingof accounting is not just useful it¶s a survival

skill.

� It is the language of business and its difficult

to communicate if you can¶t speak the

language.



WHAT IS ACCOUNTING?

Basis for business decision

� Accounting is the basis for business decisions.

� The basic purpose of accounting is to provideaccurate and timely information to the decisionmakers.

� Example: For accepting an special order at reducedprices marketing/sales manager should know thebifurcation of each cost elements for competingwith other bidders.



WHAT IS ACCOUNTING?

E mphasis on interpretation

� Recently there is reduced emphasis on preparing

information due to introduction of IT.

� Emphasis has now increased on interpretation of financial information

� Traditional work of transaction processing is beingoutsource by some multinational companies. For example Unilever Australia, LASMO OIL haveoutsource this function.



BASIC KNOW HOW OF ACCOUTNING

� You may be aware about following symbols

� +

� -

� In mathematics, + is used for addition and ±

for deduction

� In Accounting, symbols of D

ebits and Credits areused to convey specific meanings either increase or

decrease. Debit does not always mean increase.




� There are 5 pillars of Accounting.

� Rules for Debit and Credit under Double Entry System for all theseheads are different as follows:

+ -Increase Decrease

Balance Sheet

� Assets Debit Credit

� Liabilities Credit Debit

� Capital/Equity Credit Debit

P rofit and Loss Account

� Revenue Credit Debit

� Expense Debit Credit




� Basic Accounting Equation

Assets = Liabilities + Equity

Equity = Capital + Retained Earning

� Retained earning may be described as reserves and un-appropriated profits

� This Basic Accounting Equation is applied for Balance Sheet.

� Formula to Compute Profitability Net Profit = Gross Profit ± Marketing. Exp. ± Admin Exp. ± Financial charges +

Other Income

Gross Profit = Sales ± Cost of goods sold

Cost of goods sold = Opening inventory + purchases ± closing inventory




RESOURCES mo t SOURCES Amo t

IN AN I E ASSETS Equity

Good ill xxx apital xxx

Trade ark xxx eserves xxx

TAN I E ASSETS ( ro it ± oss) xxxFi e Assets

and xxx ong Term oans xxx

uilding xxx

achinery xxx

Vehicles xxx

omputers xxx

Curre t Assets Curre t ia ilities

ash xxx ayable t upplier xxx

ank xxx hort term inancing xxx

ebtors xxx ividend payable xxx

tocks xxx Taxes payable xxx

Total Assets Total Equity & ia ility

FORMAT OF ALANCE SHEET




Amount

Sales xxxx

Less: Discount, rebates, Commission - xxxx

Net Sales xxxx

Cost of Good Sold

Opening Inventory xxxx

Purchases + xxxx

Closing Inventory - xxxx

Cost of Goods Sold xxxx

Gross profit ( 2 -3 ) xxxx

Less : Marketing Expenses - xxxx

Administration Expenses - xxxx

Operating Income xxxx

Less: Financial Charges - xxxx

Add: Other Income xxxx

Net Profit xxxx

Format of Profit and Loss Account




Resources and Costs concept

� In Basic Accounting equation:

� the Assets represent Resources of a company

� the Liability & Capital side represents Sources of those resources

Example

DR CR

Invested Rs. 100 in a business

Cash««««««««««. 100

Capital«««««««««««««.. 100

Took loan of Rs. 500Cash ««««««««««. 50

Loan«««««««««««««. 50

Received Rs. 25 as rental income

Cash ««««««««««. 25

Rent Income««««««««««««. 25




Impact on Balance Sheet after transactions.

DR ( Resources) CR (Sources)Cash 175 Capital 100

Income Loan 50

175 175=== ===

Rs. 175 is the total resources i.e. Assets whereas it has 3sources i.e.1. Capital2. Income3. Loan



WHAT IS THE FINANCIAL STATEMENTS?

� It is a structured financial representation of

the financial position, performance and

Changes in financial position of anenterprise.

� The word Accounts is generally used for

Financial Statements.



COMPONENTS OF FINANCIAL STATEMENTS

� Balance Sheet

� Income Statement

� Cash Flow Statement

� Accounting Policies and notes to the

Accounts.

� Statement of changes in Equity.



ANNAUL REPORT

� Annual report contains� Financial Statements

� Directors¶ Report

� Auditors¶ Report

� Notice of AGM

� Company¶s Information

� Corporate Governance

� Compliance Statement

� Statement of value added� Business policies

� Pattern of holding of shares

� Financial information of six years etc



ACCOUNTING FLOW

TransactionTransaction

Financial StatementsFinancial Statements

Journal EntryJournal Entry General Ledger General Ledger Books of AccountsBooks of Accounts

Trial BalanceTrial Balance AdjustmentsAdjustments Adjusted TBAdjusted TB

Balance SheetBalance Sheet

IncomeIncomeStatementStatement

Cash FlowCash FlowStatementStatement

Statement of Statement of Changes in EquityChanges in Equity

Notes to A/csNotes to A/cs& Accounting& Accounting

PolicyPolicy



FINANCIAL STATEMENTRESPONSIBILITY FOR PREPARATION

� The Board of Directors is responsible for

preparation and presentation of financial

statements , NOT THE AUDITORS



WHAT IS THE FINANCIAL STATEMENTS?

� BASIS OF PREPARATION

The financial statements disclose basis of

preparation in notes to the accounts.

� Practical Example: from Aventis Pharma

³These accounts have been prepared inaccordance with the requirements of the

Companies Ordinance 1984 and IAS««´



ACCOUNTING CONCEPTS

� In order to understand it is necessary to understand

some basic assumptions and concept/terms used in

preparation of financial statements:

� Going concern

� Accrual

� Consistency

� Historical cost convention

� Materiality� Substance over form

� IAS

� GAAP



CASE STUDYTO UNDERSTAND THE IMPORTANCE OF ACCOUNTINGCONCEPTS AND ASSUMPTIONS

The President of your firm is from Engineeringbackground. Today he walked int o your officeand said, A year ago we bought a piece of land for Rs.300, 000. This year inflat ion hasdriven prices up by 10% and an appraiser just t old us t hat we could easily resell t he land forRs.400, 000. Yet our Balance Sheet shows it

at Rs.300, 000. It should be valued at Rs.400,000. That s what it s wort h. Or, at a minimum,at Rs.330, 000. Respond t o t his st at ement



ACCOUNTING CONCEPTS

G oing Concern

³The enterprise is normally viewed as a going

concern, that is, as continuing in operationfor the foreseeable future. It is assumed that

the enterprise has neither the intention nor

the necessity of liquidation or of curtailing

materially the scale of its operations.´



ACCOUNTING CONCEPTS

Accrual

Revenue and cost are recognized as they are earned or incurred respectively, not on the basis of money received or paid.

H istorical Costs Concept

A basic principle of accounting is that transactions arenormally stated in accounts at their historical amount. Usuallya note is provided that these accounts are prepared under historical cost convention.

In general, accountants prefer to deal with objective costs,rather than with estimated values. This is because valuationstend to be subjective and to vary according to what thevaluation is for .



ACCOUNTING CONCEPTS

Consistency

There are many areas in which judgment must be exercised in attributingmoney values. Like for charging depreciation we assume useful life of assets& for valuing inventories either LIFO or FIFO method is used.

It is normally assumed that accounting policies are consistent from one periodto another

M ateriality

Each material item should be presented separately in Financial Statements.

Immaterial amounts should be aggregated with amounts of a similar nature or

function and need not be presented separately.

In deciding whether an item is material, the nature and size of the items areevaluated together.



ACCOUNTING CONCEPTS

G enerally Accepted Accounting P rincipals

It signifies all rules, from whatever sources, which

govern accounting

In other words, GAAP is a set of rules for conducting behavior in a way acceptable to themajority of people. This includes:

1. Requirement of the securities and Exchange Commissionof Pakistan (SECP)

2. International Accounting Standards

3. Stock Exchange requirements.



USERS OF FINANCIAL STATEMETNS

USERS USAGE

Managers To manage the business efficiently

To take planning decission

To know proitability

To know financial position

Employees To evaluate their future and benefit

CBA For preparing their demands

Shareholders To deter mine break up value of investments

To estimate dividends and capital gain

Investors To assess the risk and potentials of the Company

Creditors / Suppliers To ascertain the ability of the Company to pay

Bankers To assess the financial health

To assess the company's ability to pay off bank's dues



USERS OF FINANCIAL STATEMETNS

USERS USAGE

Government Authorities

Tax Authorities To calculate the correct tax liabilities

Customs For post importation audit

Health Ministry For central resarch fund

Director Labor For WPPF/WWF

Financial Analysts To ascertain the shares prices

To work out the credit rating of the Company

Auditors To give opion on the financial statements

SECP For supervision and controlling corporate culture

Stock Exchnage To see the complaince of its requirements.

State Bank of Pakistan To see the compliance on remittance of dividend

To see the compliance on reporting of foreign balance sheet

Holding Company For the purpose of consolidation of accounts

For publishing it with their annual report

Monopoly Control Authority To monitor the undertakings whose assets are over Rs. 300m

ICAP To review accounts in order to review the quality control

requirements and compliance of IAS and statutory

requirements.

Other users are Students, Journalists, Donors, etc.



FINANCIAL STATEMETNSSTATUTORY REQUIREMENTS

1. BOOKS OF ACCOUNTS

Every company to keep at its registered office proper booksof account.

2. ANNUAL ACCOUNTS

The directors of the company are required to prepare andpublish Annual Accounts and take approval of shareholdersof the company in AGM.

3. PERIODIC ACCOUNTS

Every listed company is required to prepare and publish thequarterly accounts, & half yearly accounts as well as annualaccounts.



AN OVERVIEW OF ALL TYPES OF ACCOUTINGFINANCIAL, COST & MANAGEMENT ACCOUNTING

FIN AN C I AL ACCOU NTING

� Financial accounting is mainly a method of :

- reporting the results (i.e. through Profit Loss A/c) and

- financial position (i.e. through Balance Sheet) of a business.

� It is not primarily concerned with providing information as a guide to the moreefficient conduct of the business since they portray the past events.

� Regulations by Securities and Exchange Commission of Pakistan and IAS to befollowed for preparation of accounts.

� Financial Accounting provides information basically to those who are involved inday to day running of the business like shareholders, bankers, etc

� Financial Statement enables shareholders and other outsiders to assess how well thedirectors have carried out their stewardship function in running the business affairsof the company.




M AN AGEMENT / COS T ACCOU NTING

The terms Cost Accounting and Management Accounting areinterchangeably used.

Cost Accounting is a technique or method for determining the cost of a project, process or product.

Management Accounting is used in its broadestsense and it is a process of identification,measurement, accumulation, analysis, preparation,interpretation and communication.




Management Accounting present

accounting information in the form most

helpful to management and it is used for:

1. Formulation of strategy;

2. Planning and controlling the activities;

3. Decision making;

4. Optimizing the use of resources; and

5. Performance appraisal




MANAGEMENT / COST ACCOUNTING

� In its scope Management Accounting is notrestricted in application to the manufacturing

functions of industrial organizations.

� It also covers non-manufacturing activities viz.Selling and administration.

� Its principles, methods and techniques can beapplied with quite an ease to trading businesses,service industries, financial institutions, insurancecompanies, educational institutes and hospital etc.



COMPARISIONFINANCIAL VS. MANAGERIAL ACCOUNTING

Financial Accounting Managerial Accounting

Report s t o t hose out side t he organizat ion:

Shareholders

Lenders

Tax aut horit iesRegulat ors

Emphasis is on financial informat ion of

past act ivit ies.

Object ivit y and verifiabilit y of dat a are

emphasized.

Summarized dat a for t he ent ire organizat ion

are prepared.

Follow GAAP and regulat ions of t he count ry

Mandat ory for ext ernal report s.

Report s t o t hose inside t he organizat ion for:

Planning

Direct ing and Cont rolling

Performance evaluat ion

Emphasis is on decisions affect ing t he fut ure.

Relevance and flexibilit y of dat a areemphasized.

Det ailed segment report s about depart ment s,

product s, cust omers, and employees areprepared.

Need not follow GAAP and regulat ion.

Not mandat ory for ext ernal report s.



AN OVERVIEW OF FINANCIAL MANAGEMENT

� FINANCIAL MANAGEMENT

The financial manager is responsible for raising finance andcontrolling financial resources. The kind of decisions he or she will be required to make include the following:

� Should the company borrow from a bank or raise funds byissuing shares?

� Should the inventory be bought on credit or financedthrough bank overdraft?

� How much should be paid as a dividend?� Should the company spend money on new machinery?

� How much credit and discount should be given tocustomers?




� FUNCTIONS OF FINANCIAL MANAGEMENT

Managing ------ Assets Structure

To decide about the most desirable level & combination of assets

holding like1. Cash Sales vs. Credit Sales (Trade Discounts)

2. Inventory Management (Inventory levels, size of order)

3. Credit policy

4. Evaluation of Capital Expenditure Proposals - Justification

Managing ----- Financial Structure1. Decide combination of Capital Structure i.e. debt & equity

2. Credit terms with supplier vs. short term running finance

3. Loan, Equity or leasing options for Capital Expenditures

4. Dividend policy




� CATEGORIES OF FM DECISIONS

Financial Management decisions may be

classified into three main categories:i. Operating decisions

ii. Investment decisions

iii.Financing decisions



CONCEPT REVIEW EXERCISE

Fill in the blanks from choices given below:

1- ______________ Accounting is mainly a method ofreporting the result and financial position of a business.a) Management

b) Financial

2- Profit and Loss Account shows ________________a) Operating resultsb) Financial Position

3- Decrease in liability is -------------------a) Debitedb) Credited



CONCEPT REVIEW EXERCISE

4- Asset s represent s ______ of an organizat ion.

a) Resources

b) Sources

5- Asset s = Capit al +Reserves + ______.

a) Liabilit ies

b) Expenses



DO NOT WAIT FOR EXTRA ORDINARY

CIRCUMSTANCES TO DO GOOD;

TRY TO USE ORDINARY SITUATION.

-----------------------------------------------------

IT IS NOT ENOUGH TO HAVE A GOOD

MIND .

THE MAIN THING IS TO USE IT WELL

WORDS OF WISDOM



TIP TO SUCCESS

WHERE THERE IS A WILL

THERE IS A WAY

managerial accounting - introduction n review of basic concepts_1

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