Engineering Management Accounting Lecture 6 Revision

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Engineering ManagementAccounting Lecture
6Revision
ELE 22EMT
George Alexander G.Alexander_at_latrobe.edu.au http/
/www.latrobe.edu.au/eemanage/
17 October, 2003
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Financial Accounting

• That part of an accounting system that tries to
  meet the needs of various external users.
• Bazley et al

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Management Accounting

• That part of an accounting system that tries to
  meet the needs of management and internal users.
• Bazley et al

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Broad categories studied

• Financial Accounting
• Management Accounting
• Budget Process

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Resources Human Materials Equipment Financial Inf
ormation
managerial Planning Organisation Leading Controll
ing Technology
Outcomes Products services Profit
loss employees growth satisfaction
Inputs
Transformation Process
Outputs
Bartol Management A Pacific Rim Focus,
McGraw-Hill, 2001
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The Firm a simple model
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Summary of week 2

• Cash Flows In/Out
• Assets
• Expenditures
• Liabilities
• Balance Sheet
• PL Statement
• Cash Flow Statement
• Forms of Ownership

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Balance Sheet

• Records the financial position of the
  organisation at a given point in time.

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Telstra Balance Sheet
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Profit and Loss Statement(Statement of Financial
Performance)

• Reports receipts and expenditure over the period
  in question the accounting period.

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Telstra Profit and Loss Statement
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Cash Flow Statement

• Is an indicator of the organisations ability to
  survive in the short term

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Telstra Cash Flow Statement
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Summary of week 4

• Management Accounting
• The budget process
• Inputs to the budget process
• Internal organisation structure
• Functions within a typical organisation
• Typical types of expenditure

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Budget

• This is a key aspect of management accounting
  within the organisation.
• Bazley et al define the budget as
• A short and long-term plan of action for the
  future operating activities of a business,
  expressed in monetary terms.
• It covers a period of time called the budget
  period which is normally one year.

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Overall Purpose of the Budget

• Budgetary Control actual performance can be
  compared with the budget to identify any
  deviations so that management can take corrective
  actions. (Bazley et al).
• Budgetary control provides a useful mechanism for
  predicting likely financial outcomes to the
  stakeholders.

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PL/Balance Sheet/Budget

• PL reports receipts and expenditure over the
  period in question the accounting period.
• The Balance Sheet records the financial position
  of the organisation at a given point in time.
• The budget is attempting to predict in advance
  what the PL will look like in the same timeframe
  the budget period, and what the balance sheet
  will look like at the end of the same period.

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Possible Organisation Structure
Board of Directors
CEO
Operations
Human Resources
Finance Treasury
RD
Sales Marketing
Budget Control
IT Services
Production
Engineering Support
Service
Logistics
Quality Assurance
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Manufacturing budgets required

• Budget Type
• Capital
• Personnel
• Expenses
• Inventory
• Purchases

• Impacts
• Cash flow, depreciation expenses
• People-related expenses
• Hourly rate calculations
• Borrowings, warehouse planning
• Cash flow

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Manufacturing Resource PlanningMRP II

• Computer based information system integrating
  production planning and control activities of
  basic MRP systems with related financial,
  accounting, personnel, engineering and marketing
  information.
• MRP Materials Requirements Planning
• Bartol, K.M., Martin, D.C., Tein, M.,
  Matthews, G., Management A Pacific Rim Focus,
  McGraw-Hill, 2002 (Supplement 2 to Chapter16)

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Budget Inputs Required

• Forecast of specific product volumes
• The latest comparison of budget and actuals
• Forecasts of inflation rates and salary
  increases.
• Specific cost reduction/efficiency initiatives.
• Charges from other departments (facilities,
  support etc.)

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Summary of week 5

• Management Accounting
• The impact on the budget of volume variations
• Calculating the hourly rate for an RD or Service
  organisation
• Financial Accounting
• TELSTRA results for 2002/03

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One method of calculating direct labour and
overhead costs

• Determine the total number of direct hours i.e.
  those budgeted hours directly spent on production
  - H.
• Determine total budgeted costs associated with
  the budgeted direct hours C.
• Determine all other budgeted expenses E.
• Direct labour rate C/H per hour
• Overhead rate E/H per hour
• The labour and overhead costs of each unit are
  then determined by applying the rates to the unit
  direct hours.

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For example

• 1 Total number of direct hours
• H 100,000
• 2 Total budgeted costs associated with the
  budgeted direct hours
• C 5,000,000
• All other budgeted expenses
• E 8,333,000
• 4 Direct labour rate C/H 50.00 per hour
• 5 Overhead rate E/H 83.33 per hour
• For a unit with direct labour content of 0.3
  hours,
• direct labour cost 0.3 x 50 15
• overhead cost 0.3 x 83.33 25
• Assume material cost 60.
• Total standard cost 100

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Impact of volume variations

• This occurs when actual sales vary from budget.
• The most serious consequence is when sales fail
  to meet budget.
• As a rule, direct costs are variable and can be
  adjusted to changed volumes.
• This rule may not apply if the volume variation
  is significant but temporary.
• The major problem arises with overhead costs
  which are relatively fixed.

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Impact on Profit Loss Statement
Budget Actual Net Sales
69,160,000 62,244,000 Less cost of goods
sold 33,250,000 30,613,000 Gross Margin
(gross profit) 35,910,000 31,631,000
Less operating expenses 31,813,600
31,813,600 Net Profit 4,096,400
(182,600)
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How to react?

• Scrutinise all budget elements for cost-cutting
  possibilities.
• Actions will depend on the size of the volume
  variation, and how sustained it is expected to
  be.
• Increase the price to restore the margin???
• Refer price elasticity

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Bringing together the Accounting and Economics
streams
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Performance Ratios

• The gross margin percentage
• The net profit percentage
• The operating expenses ratio
• Market ratios
• Other financial ratios
• Employee ratios
• The stock turnover ratio

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Example Break-Even Calculation
Suppose the following Selling price
10 Variable cost 5 Fixed cost 50,000
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Price Elasticity

• Defined as the effect of a change in price on the
  quantity of product demanded.
• It involves calculating the ratio of the
  percentage change in quantity to the percentage
  change in price.

E Elasticity Q1 Initial quantity
demanded Q2 New quantity demanded P1 Initial
price P2 new price
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References

• Bazley, Hancock, Berry, Jarvis Contemporary
  Accounting, Nelson
• Accounting lecture notes, and Economics, lecture
  10 notes

Thanks you for your attention - and good luck