#Provide Management Accounting Information 3
#Provide Management Accounting Information 3
#Provide Management Accounting Information 3
BY:YARED KEBEDE
Welcome to the module “Manage Overdue Customer Accounts”. This learner’s guide
was prepared to help you achieve the required competence in “ACCOUNTING AND
FINANCE LEVEL – IV”. This will be the source of information for you to acquire
knowledge attitude and skills in this particular occupation with minimum supervision or help
from your trainer.
o Read through the Learning Guide carefully. It is divided into sections that cover
all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of each section
to check your progress
o Read and make sure to Practice the activities in the Operation Sheets. Ask your
trainer to show you the correct way to do things or talk to more experienced
person for guidance.
o When you are ready, ask your trainer for institutional assessment and provide you
with feedback from your performance.
LEARNING MODULE 12
ASESSMENT CRITERIA:
LO.1: Gather and record operating and cost data
Systems are identified and established to generate data
Data are systematically coded, classified and checked for accuracy and reliability in
accordance with organizational policies and procedures
LO.2 Analyze data
Costs are assigned to specified products, services and organizational units and data is
reconciled to ensure calculations are accurate and comply with organizational procedures
Interpretation of revenues and costs is supported by valid analysis and is consistent with
the organization's business performance objectives
Cost information advice is sought from all sections of the organization when formulating
budgets
Structure and format of budgets and reports are made clear and conformed to
management information requirements
Variances against budget are identified and prioritized for review and decision making
Reports are made error free, comprehensive and complied with management
requirements and organizational practices
LO.4: Review costing system integrity
Cost data means factual information concerning the cost of labor, material, overhead, and
other cost elements which are expected to be incurred or which have been actually incurred
by the contractor in performing the contract.
The definition of data gathering procedure is that it is the technique used to obtain the
information used in a dissertation to substantiate the claims made by a writer. To get
the perfect outcome, you should use the best procedure
Certain assumptions are made about cost behavior so that cost information can be used in
accounting computations. The following list summarizes these simplifying assumptions about
revenue and cost function.
1. Relevant Range- A primary assumption is that the company is operating within the
relevant range of activity specified in determining the revenue and cost
information.
2. Revenue- Total revenue fluctuates in direct proportion to units sold. Revenue per
unit is assumed to remain constant, and fluctuations in per-unit revenue
for factors such as quantity discounts are ignored.
3. Variable Costs- Total variable costs fluctuate in direct proportion to level of activity of
volume. On a per unit basis, variable costs remain constant. Variable
costs exist in all functional business areas including production,
distribution, selling and administration.
4. Fixed Costs- Total fixed costs remain constant: thus, per unit fixed cost decreases as
volume increases and increases as volume decreases. Fixed costs
include both fixed factory overhead and fixed selling and administrative
expenses.
5. Mixed Costs- Mixed costs must be susceptible to separation in to their variable and
fixed elements.
LO-2: ANALYZE DATA
Data Analysis is the process of systematically applying statistical and/or logical techniques
to describe and illustrate, condense and recap, and evaluate data.
1. It is a comprehensive and coordinated plan- It is a comprehensive plan in the sense that all
activities and operations are considered when it is prepared.
2. It is expressed in financial terms- For operational purposes; a budget is always quantified in
financial terms.
3. It is a plan for the firm's operations and resources-A budget is a mechanism to plan for the
firm's over all operations or activities. The two aspects of every operation are revenues and
expenses. The budget must plan for and quantify revenues and expenses related to a specific
operation.
4. It is a future plan for a specified period- A budget is meaningful only when it is related to a
specific period of time. A budget is not the same thing as forecast. A budget is an expression of
the management's intensions of achieving forecasts through positive and conscious actions and
influencing the events.
3.2. . Purpose of Budgeting
Budgeting is systematic and formalized approach for stating and communicating the firm's
expectations and accomplishing the planning, coordination, and control responsibilities of
management in such a way as to maximize the use of given resources. The major purposes of
budgets on budgeting are:
1. To state the firm's expectations (goals) in clear, formal terms to avoid confusion and to
facilitate their attainability. (Planning)
2. To communicate expectations to all concerned with the management of the firm so that
they are understood, supported & implemented. (Communication)
3. To provide a detailed plan of action for reducing uncertainty and for the proper direction of
individual and group efforts to achieve goals. (Planning)
4. To coordinate the activities and efforts in such a way that the use of resources is
maximized. (Coordination)
5. To provide a means of measuring and controlling the performance of individuals and units
and to supply information on the basis of which the necessary corrective action can be
taken. (Control)
3.3. Types of Budgets
There are many different ways of classifying budgets. Thus, budgets may be classified based on
capacity, time, and coverage, each of which is briefly discussed in this section.
1) Based on Capacity
Budgets are classified based on capacity, into fixed and flexible budgets.
(a) Fixed budgets- A fixed (static) budget is a budget prepared for only the planned level of
activity and will remain unchanged irrespective of changes in the level of activity.
These budgets are suitable for planning purposes but are inadequate for evaluating how
well costs are controlled.
(b) Flexible budgets- A flexible budget is a budget that takes into account changes in
costs that should occur as a consequence of changes in activity. A flexible budget
provides estimates of what cost should be for any level of activity within a specified
range.
2) Based on Time
Budgets are developed for specific time periods.
a) Short-range budgets- cover a year, a quarter, or a month,
b) Long-range budgets cover periods longer than a year.
c) Continuous or perpetual budgets- are used by a significant number of organizations. A
continuous or perpetual budget, also known as a rolling or revolving budget, is a 12-
month budget that rolls forward one month or quarter as the current month or quarter is
completed.
3) Based on Coverage
On the basis their coverage, budgets are classified as functional and master budgets.
(a) Functional budgets- The functional budgets represent the budgets that relate to the
various functional activities of an organization. The functional budgets are further
categorized into the following classes:
1. Physical budget- The physical budgets provide information about physical units like
sales, production, and the like. Units of sales and production are but few examples of
physical budgets.
2. Profit budgets- The profit budgets are budgets prepared to ascertain the profits. These
budgets include sales budget and profit and loss budget.
3. Cost budgets- These budgets provide information on such costs as manufacturing,
selling, and administrative.
4. Financial budgets-These budgets provide information on the financial condition of the
firm such as the cash budget and capital expenditure budget.
(b) Master budgets- A master budget, the central focus of this chapter, is a consolidated
summary of the various functional budgets. It coordinates all the financial projections
in an organization’s individual budgets into a single company-wide set of budgets for a
specified time period. The master budget incorporates the impact of both operating and
financing decisions. The term “master” in master budget stands to reflect the fact that the
master budget is a comprehensive, company-wide set of budgets.
3.4. Advantages of Budgeting
The following are some of the more significant advantages of budgeting:
1. Forced Planning: - Budgeting compels mgt to plan for future.
2. Coordinated Operations: - Budgeting helps to coordinate, integrate and balance the
efforts of various departments in the light of the overall objectives of the enterprise.
3. Performance Evaluation and Control: - Budgeting facilitates control by providing
definite expectations in the planning phase that can be used as a frame of reference for
judging the subsequent performance.
4. Effective Communication: - Budgeting improves the quality of communication. The
enterprise objectives, budget goals, plans, authority and responsibility and procedures to
implement plans are clearly written & communicated through budgets to all individuals in
the enterprise..
5. Optimum Utilization of Resources: - Budgeting helps to optimize the use of the firm's
resources- capital and human: it aids in directing the total efforts of the firm into the most
profitable channels.
6. Productivity Improvements: - Budgeting increases the morale and thus, the productivity
of the employees by seeking their meaningful participation in the formulation of plans and
policies.
7. Profit Mindedness: - Budgeting develops an atmosphere of profit mindedness and cost-
consciousness.
8. Mgt by Exception: - Budgets permits to focus mgt attention on significant matters through
budgetary reports; thus, it facilitates mgt by exception & there by saves mgt time and
energy considerably.
9. Efficiency: - Budgeting measures efficiency, permits mgt self-evaluation and indicates the
progress in attaining the enterprise objectives.
1) Operating budgets are expressed in both units and dollars when an operating budget is
related to revenues, the units are those expected to be sold, and the dollars reflect selling
prices. When an operating budget relates to expense items, the units are those expected to
be used and the dollar reflect costs.
2) Financial budgets reflect the funds to be generated or consumed during the budget
period. (Source and uses of funds).Financial budgets include the company’s cash and
capital budgets as well as its proforma financial statements. These budgets are the
ultimate focal points for the firm's top management.
The master budget is prepared for a specific period and is static rather than flexible. If is static in
that it is based on a single, most probable level of output demand. The demand level of sales or
service quantities selected for use in the preparation of the master budget affects all
organizational components.
The budgetary process in a manufacturing organization can be shown as under.
Cash
Receipts
Cash Disbursements
Treasurer
(Funds Management)
The above figure indicates the budgetary interrelationships among the primary department of
manufacturing organizations. A budget developed by one department is commonly an essential
ingredient in developing another department's budget.
Assuming that top management is engaging in participatory budgeting, each department in the
budgetary process either prepares its own budget or provides information for inclusion in a
budget. The master budget has 3 functions:
1. It illustrates how the activities of the different departments interact within the
organization.
2. If summarizes the budgets of the individual departments- all of which are based on
the most likely level of future activity.
3. It combines the individual budgets into an integrated plan for the firm as a whole.
Operating budget is accompanies by the following schedules:
Sales budget
Production budget
Purchase budget
Labor budget
Production cost budget
Ending inventory budget
Manufacturing overhead budget
Selling and administration expense budget
Budgeted income statement
Financial budget includes:
Capital budget
Cash budgets including receipts & disbursements
Budgeted balance sheet
Note: The preparation of a master budget must begin with the sales budget because of the sales
budget is the basis for all other budgets.
Sales budget is developed based on the sales forecast, a formal prediction of the quantities
expected to be sold in the budget period and the price at which the expected volume of
sales is to be sold.
The sales budget is the foundation for the production budget in mfg enterprises. The
production budget stems from the sales budget. Once the sales forecast and the sales
budget are completed, the next phase in developing the master budget is to prepare the
production budget.
After decision is reached as to how many units should be produced, the mfg cost can be
estimated. The manufacturing cost budget is the summary of each manufacturing cost
elements- DM & DL & OH costs.
Capital budgeting is making of long-term planning decisions for investments plans for the
acquisition of various properties such as building machinery equipment etc.
The cash budget is into sections that show cash receipts, cash disbursements, cash surplus
or deficiency and financing activities.
Benefit of Budgets
However, regardless of the type and size of the firm there are 3 ways in which budgets can
benefit all firms.
1. Better planning
2. Control of performance
3. Communication and coordination
Budgets indicate mgt how profitable the firm is expected to be, and the resources that are
expected to be generated or used during the forthcoming budget periods.
When changes from normal operating activities are being considered, a budget can also
inform the manager of the consequences of alternative courses of action, providing a
basis for deciding which will be the best alternative.
Without a budget, a manager can only hope that he/she is going in the best direction and
has little idea of the ultimate results to expect.
. The performance report, prepared by the accountant, shows the actual results, the
budgeted results, and any differences between actual and budget, referred to as variances.
LO-4: REVIEW COSTING SYSTEM INTEGRITY
4.1. What are the 5 principles of costing?
5 important fundamental principles of costing
(1) Cost is always related to its cause:
(2) Abnormal costs are charged in costing:
(3) Cost is charged after it is incurred:
(4) Past costs are not taken into consideration to future costs:
(5) Keeping of accounts for cost is also based on Double entry principle: