Flexible Budgets and Variance Analysis - Review Notes

Budgets can be developed as flexible budgets wherein revenues and expenditures vary in relation to the achieved sales volumes and variances can be calculated from the expected budgets as well as the achieved sales volume.

Now activity-based budgeting is popular. Activity-based budgets are flexible budgets to start with itself.

To be updated

21.9.2024

Pub. 9.12.2011

Accounting Information for Management Control in Decentralized Organizations

Accounting provides information to facilitate management control in decentralized organizations.

Control systems are important for ensuring that plans are being pursued and are being achieved by various units or divisions in an organization.

All control systems are imperfect. Judgments about their merits should concentrate on which alternative systems will bring more of the actions top management seeks

To be updated

21.9.2024

Pub. 9.12.2011

Financial - Cost and Management Accounting - Subject Update Articles

                                      Narayana Rao K.V.S.S. on Cover Page of Business Today 

October 22 - November 6, 1997

2020

Video Lectures on Financial Accounting by Prof. Elbarrad
https://www.youtube.com/channel/UCXQAlFxCIlihCazcGq65wBA


Cost Effective Supply Chain
Brand owners require effective processes for collecting and managing cost data from manufacturing partners, item suppliers and logistics partners at the individual item and bill-of-material (BOM) levels. E2open’s Cost Management application enables multi-tier cost capture and management by providing a single view of BOMs, cost forecasting and rebate management. The result is efficient, optimized processes and lower supply chain costs.
https://www.e2open.com/intelligent-applications/supply-management/cost-management/

2019

Bain and Company
______________

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Save-to-transform as a catalyst for embracing digital disruption
Deloitte's 2019 Global Cost Survey
Cost-management remains a strong imperative around the world.
https://www2.deloitte.com/us/en/pages/operations/articles/global-cost-management-survey.html

Strategic Cost Transformation - Capgemini

https://www.capgemini.com/wp-content/uploads/2017/07/Strategic_Cost_Transformation.pdf

Manufacturing cost transformation

Situation
Our client, which primarily serves coal power generators, faced a unique set of market challenges driven by fossil fuel price and regulatory uncertainty:
https://www.strategyand.pwc.com/power-utilities/infrastructure-mining/casestudy/cost-transformation

Cost Transformation

We help you embark on major cost reduction—without losing focus on profitable growth.
https://www.atkearney.com/operations-performance-transformation/cost-transformation

IBM: Cost transformation for the digital era

In the new digital era, the classical dichotomy of grow and invest, or reduce costs has changed and it’s no longer an either/or choice. Organizations have new opportunities to identify cost take-out, rethink operational efficiency and fund growth from the inside out.
https://www.ibm.com/thought-leadership/institute-business-value/report/cognitive-cost

How do you take your enterprise cost reduction strategy from alienating to engaging?
https://consulting.ey.com/take-enterprise-cost-reduction-strategy-alienating-engaging/


February 5, 2019

IMA Releases Enhanced Management Accounting Competency Framework for Professionals in the Digital Age

IMA® (Institute of Management Accountants) has released its enhanced Management Accounting Competency Framework. The updated Framework reflects the skills management accountants will need to remain relevant and be future-ready.
https://www.imanet.org/about-ima/news-and-media-relations/press-releases/2019/2/5/ima-releases-enhanced-management-accounting-competency-framework?ssopc=1

IMA Management Accounting Competency Framework 

Strategy, Planning & Performance
The competencies required to envision the future, lead the strategic planning process, guide decisions, manage risk, and monitor performance.

Reporting & Control
The competencies required to measure and report an organization’s performance in compliance with relevant standards and regulations.

Technology & Analytics
The competencies required to manage technology and analyze data to enhance organizational success.

Business Acumen & Operations
The competencies required to contribute as a cross-functional business partner to transform company-wide operations.

Leadership
The competencies required to collaborate with others and inspire teams to achieve organizational goals.

Professional Ethics & Values
The competencies required to demonstrate the professional values, ethical behavior, and legal compliance essential to a sustainable business model.
Download full framework from https://www.imanet.org/career-resources/management-accounting-competencies?ssopc=1

2018

Strategic Cost Transformation

by Dr. Reginald Tomas Lee
Publisher: Business Expert Press
Release Date: December 2018
https://www.oreilly.com/library/view/strategic-cost-transformation/9781631578809/

Virtual Issue on Empirical Management Accounting Research

Journal of Accounting Research, August 2018
Margaret A. Abernethy
University of Melbourne, Department of Accounting
Dennis Campbell
Harvard University - Accounting & Control Unit

Review of empirical papers published in JAR over the past 10 years examining management accounting and control systems in organizational contexts that are complex, ambiguous and where performance is difficult to measure. These papers use a variety of newer economic models of organization culture, relational contracts and related theories from sociology and psychology to provide a direction to management accounting.

2015

Cost Transformation Model of CGMA

http://www.cgma.org/Resources/Tools/pages/cost-transformation-model.aspx

Cost Transformation - Tata Steel Europe Case Study

http://www.cgma.org/Resources/Tools/Documents/Cost_Transformation_COL_TATA.PDF


2014

May 2014
Corporate and Integrated Reporting
HBS working paper
http://hbswk.hbs.edu/item/7502.html


Jan 2014
Environmental Accounting - ACCA
http://www.accaglobal.com/zw/en/student/acca-qual-student-journey/qual-resource/acca-qualification/f5/technical-articles/Env-MA.html


2009

How to Cut Cost Strategically

Harvard Business Review
Published on 22 Sep 2009
Cesare Mainardi, managing director of Booz & Company, details how executives should cut costs--but often dont.
______________

______________


1997

Effective Management of Future Costs through New Product Target Costing

Effective cost management must start at the design stage. As much as 90-95% of a product's costs are added in the design process. That is why effective cost management programs focus on design and manufacturing. The primary cost management method to control cost during design is a combination of target costing and value engineering.
Target Costing and Value Engineering - Robin Cooper - 1997
https://nraoiekc.blogspot.com/2019/07/target-costing-and-value-engineering.html
Value Analysis and Engineering - Online Book

Financial, Cost and Management Accounting - Review Notes List

Top 100 Management Theory Articles of the blog

Updated on 28 July 2019,  29 May 2019,  10 December 2015

Budget, Budgeting and Budgetary Control

Online MBA Management Theory Handbook 

Budget

A budget is a formal quantitative expression of management plans.

Budgets can be made by managers at any level including a single person managing a machine or operating a machine. In the context of business, budget may have revenue, expenses and profits, all in a single statement. But one can think of a budget for revenues alone, budget for expenses alone.

Master Budget

Master budget for a big organization summarizes the goals of all subunits of an organization - either business divisions if the company is organized along divisional lines or managerial functions if the company is organized along functional lines.

The master budget consists of expected or projected income statement, balance sheet, and a cash flow statement, along with supporting schedules.

Benefits of Budgeting or Imperative for Budgeting

The advocates of budgeting state that the process of preparing budget forces executives to become better managers. Budgeting schedule of a company puts planning where it belongs - in the forefront of every manager's mind. It also forces him to review his performance in the last period and identify good practices that enhanced performance and issues that contributed negatively to performance.

The formal budgeting system has the following major benefits.

1. Budgeting due to its formal time table or schedule compels managers to think ahead apart from taking care of their current activities.

2. Budgeting, due to its approval and authorization  by the superiors, provides definite expectations that are the best framework for judging subsequent performance.

3. Budgeting helps in coordinating the various departments of the organization. The budget harmonizes the goals (objectives) of the individual departments into the organization wide goals (objectives).

Budgetary control at department level is encouraging department level personnel to plan their operations for the forth coming period. Both outputs and inputs are to be planned. If possible outputs and inputs are converted into revenues and costs.

The accounting system of the company will prepare the actual revenues and costs generated at the end of the period as well as during the period. The department managers have to responsibility to carry out the day to day activities to achieve the best possible results with their plan/budget as the guiding document.

Budgets can be made flexible so that cost estimates are in relation to the output produced.

Variance analysis can be done to pin point the variables that changed during the period and their effect on actual results.

Budgetary control system facilitates participation of department managers as well as senior level managers in explicitly planning for the future. The plan can be optimized with various optimization techniques.

These techniques include linear programming (for product mix problems), transportation (for planning transport of finished goods) and assignment (assigning machines for jobs or operators for jobs) and other operations research techniques. A formal budgeting system can question the department managers on whether they have applied the optimization techniques or not and where necessary advise them to use those techniques and provide specialist support in cases where necessary.

References

Horngren, Charles, T., Gary L. Sundem, and William O. Stratton, Introduction to Management Accounting, 13th Ed., Prentice Hall, 1999.

Videos

_________________________

_____________





_____________ _____________ ______________


For Further Study or More Information

http://www.alliancetac.com/index.html?PAGE_ID=2464


https://www.slideshare.net/Jaynegamgee/budgeting-thesis

Zero-based Mindset: Getting ahead by cutting back
OCTOBER 25, 2019
Most companies today base their cost management approaches on exactly that—setting budgets based on what happened last year. Against a backdrop of increasing volatility, it’s time to reimagine cost structures based on what’s needed in this new, disruptive environment. Basing resource demand on what’s needed now rather than on last year’s performance frees up capital that can then be used in ways that will have the most impact on building innovation and fueling sustainable growth.
https://www.accenture.com/be-en/insights/strategy/getting-ahead-cutting-back

Related Knols


Cost Accounting - More articles
Financial Accounting - More articles
Management Accounting - More articles

_______________________________________________________

Top 100 Management Theory Articles of the blog



 Knol no. 62

Updated on 15 Jun 2020, 16 Feb 2012

Financial, Cost and Management Accounting - Review Notes List

 

                                   Narayana Rao K.V.S.S. on Cover Page of Business Today 

October 22 - November 6, 1997

Financial Accounting - Horngren - Review Notes List

Introduction to Financial Accounting - Google Books Link

Links to review notes and power point presentations accompanying the book are available as follows:

1. Accounting: The Language of Business

2. Measuring Income to Assess Performance

3. Recording Transactions

4. Accrual Accounting and Financial Statements

5. Statement of Cash Flows

6. Accounting for Sales

7. Inventories and Cost of Goods Sold

8. Long-Lived Assets and Depreciation

9. Liabilities and Interest

10. Stockholder's Equity

11. Intercorporate Investments and Consolidations

12. Financial Statement Analysis

Cost Accounting
1. Role of Costing and Cost Accounting in the Organization
2. Introduction to Cost Terms - Review Notes
3. Traditional Cost Objectives and Their Utility
4. Job Costing - Review Notes

Variance Analysis, Flexible Budget and Management Control



Management Accounting

1. Managerial Accounting or Management Accounting - Role in Business and Industrial Organizations

MBA Knowledge Revision Schedule

January  - February  - March  - April  - May   -   June

July       - August     - September  - October - November  - December


Updated 6 August 2017, 27 June 2014

The Master Budget - Accounting Information

Budgets are the output of the planning information. They become the standards or targets for control function of management. Accountants prepare the final versions of budgets and collect accounting information to present periodical reports on budgeted versus actual performance.

Budgeting is the most widely used accounting tool for planning and controlling organizations.

A budget is a formal quantitative expression of management's plan of action for a future time period and it acts as the coordination and implementation device. The budget can include both financial and nonfinancial aspects of operating and financial plans.

The master budget of a company is a comprehensive expression of management's operating and financial plans for a future time period (usually a year) that is summarized in a set of budgeted financial statements. Some organizations use the term "pro forma statements" for budgeted statements. Some firms refer to budgeting as targeting. Many companies prepare budgeted income statement, balance sheet and statement of cash flow as the summarized budget statements.

Advantages of Budgets

The advocates of budgeting state that the process of preparing budget forces executives to become better managers. Budgeting schedule of a company puts planning where it belongs - in the forefront of every manager's mind. It also forces him to review his performance in the last period and identify good practices that enhanced performance and issues that contributed negatively to performance.

The formal budgeting system has the following major benefits.

1. Budgeting due to its formal time table or schedule compels managers to think ahead apart from taking care of their current activities.

2. Budgeting, due to its approval and authorization by the superiors, provides definite expectations that are the best framework for judging subsequent performance.

3. Budgeting helps in coordinating the various departments of the organization. The budget harmonizes the goals (objectives) of the individual departments into the organization wide goals (objectives).

Steps in Developing an Operating Budget

1. Prepare the revenues budget
2. Prepare the production budget
3. Prepare the direct materials usage budget and direct materials purchases budget
4. Prepare the direct manufacturing labor budget
5. Prepare the manufacturing overhead budget
6. Prepare the ending inventories budget
7. Prepare the cost of good sold budget
8. Prepare the nonmanufacturing costs budget.
9. Prepare the budgeted income statement

Preparing the Revenue Budget

A revenue budget is the initial starting point for budgeting because production and inventory levels depend upon the planned level of unit sales of goods and services. Planned revenues are related to expected/estimated/forecasted demand. But if estimated demand is higher than available production capacity or any limiting factor or resource, the revenue budget would be based on the maximum that could be produced.

Preparing the production budget

The total finished goods units to be produced in the budget year is determined based on the inventory level of the finished goods planned for the end of the year.

Production quantity = Sales quantity +  Closing inventory -  Opening inventory

Prepare the direct materials usage budget and direct materials purchases budget

Materials usage budget is calculated from the opening inventory of the direct materials, materials to be used for the remaining planned units from new purchases. (Standard costs for existing inventory and new purchases will differ).

Direct materials purchases plan or budget depends on the closing inventory level planned for budgeted.

Prepare the direct manufacturing labor budget

The number of direct labor employed in various categories based on production plan are determined. Wage rate is estimated and direct labor cost is planned/budgeted.

Prepare the manufacturing overhead budget

Individual overhead accounts are estimated based on the cost driver, direct manufacturing labor-hours.

Prepare the ending inventories budget

The year end inventories are already planned for finish goods as well as raw materials inventory.

Prepare the cost of good sold budget

The above production related budgets will be assembled into cost of goods sold budget.

Responsibility Accounting

While a master budget includes all revenues and expenses an organization earns and incurs, statements that assess the responsibility of a manager need to highlight the revenues and expenses under the control of the manager.

Controllability and responsibility are important concepts in this regard.

Controllability is the degree of influence that a specific manager has over costs, revenues, or other items in question.

Originally posted at
http://knol.google.com/k/narayana-rao/master-budget/2utb2lsm2k7a /3137

Updated on 11 May 2019, 8 December 2011

Managerial Accounting or Management Accounting - Role in Business and Industrial Organizations

Management decision making requires accounting information.

The management process is a series of activities in a cycle of planning and control.

Planning involves decision making - the purposeful choice from among a set of alternative courses of action designed to achieve some objective. Control also involves decision to plan a control action. The difference between planning and control decisions is planning is more open ended with less constraints. Control is a more constrained process in which the main objective is achievement of plans and the main input is actual results in a period and comparison of them with the planned results.

Management accounting formalizes plans of the organization as budgets. It also formalizes the control process by preparing as performance reports.

Management accounting information is also used in organization of material resources. Which technology to us and the individual pieces of equipment are determined on the basis of accounting information provided by management accountants. The activity of directing involves resource allocation. Resource allocation decisions are also taken using management accounting information.

Updated on 8 May 2019, 8 December 2011

Relevant Information and Decision Making - Marketing Decisions - Review Notes

Many marketing decision models use accounting information

Illustrative Decisions

The special sales order

_________________

_________________
Rutgers Accounting Web

Deletion or addition of products, services, or departments

Optimal use of limited resources

Pricing decisions

Target costing - Price derived new product target cost


Updated 3 May 2016, 8 Dec 2011

Relevant Information and Decision Making - Production Decisions - Review Notes

Many production decision models require accounting information.

Management accounting is branch of accounting wherein accountants provide data that helps in taking specific management decisions. Management has various subject based approaches and quantitative management decision making approach requires cost data for taking decisions using various optimization models. Revenue data is also required for management decision making. Decision making is future oriented and hence requires estimates of various costs and revenues for the future periods. But estimates of costs and revenues cannot be made and verified (for their accuracy) unless accounting system provides actual historical costs and revenues. Historical cost details provided by the accounting system can be modified for volume data and price expectations and estimates can be made more easily and accurately by operation personnel. Management cost objective related accounting work involves going through ledger data and summarizing the data that accurately reflects the cost elements that go into the cost objective in various transactions done by various departments of the organization.

Some of the decision models requiring cost data are:

1. Product mix determination: Requires revenue estimates and cost estimates to give profit estimates for each of the products considered for product mix determination.

2. Economic order quantity model (Purchase)

Simple economic order quantity formula is given by EOQ = SQRT (2AS/I)
where A = annual demand in units, S = order cost for each order issue and receipt and I = Inventory carrying cost per unit per annum.

To implement this model inventory control manager requires the estimates of ordering cost and inventory carrying cost.

3. Economic Order quantity model (Production)

The model is similar to purchase model. But now S is set up cost for the machine. To implement this model production planner or controller needs the estimate of set up cost for each machine. Management accountants have to take the set up cost for machine of each machine as cost objective and find out the set up cost.

4. Quality Cost

Quality cost model argues companies are incurring less cost in designing quality and preventing defects and are spending more in repairing defects and related losses. Management accountants have to take these cost ideas as cost objectives and prepare a statement showing cost of designing quality, cost of preventing defects and cost of actual defective parts. This data is going motivate the company management to increase investments in designing for quality and preventive devices or systems.

Product Line Decision - Keep it or Drop it
________________

________________
Mean That


One Time Special Order Decision

________________

________________
Brian Routh TheAccountingDr


Decision Making & Relevant Information: Make-or-Buy,

_________________

_________________

Brian Routh TheAccountingDr

Originally posted at
http://knol.google.com/k/narayana-rao/cost-based-management-decision-making/2utb2lsm2k7a/2084


Updated   3 May 2016, 12 May 2015
First posted 8 Dec 2012

Relevant Information and Decision Making - HR and Other Functions

Accounting information is used in HR function decision making.

Human resource accounting is now a well developed field in management accounting.

Human resource management decision like investing in training are done through quantitative cost benefit models and accounting provides cost related inputs to these decision models in human resource management.


Human Resources Accounting
_________________

_________________
NIMTx

Updated 3 May 2016

Value Chain Analysis - IMA Guideline

A summary of IMA guideline

I. Need

     Value chain analysis is a strategic tool to measure the customer's perceived value. The analysis enables companies to determine the strategic advantages and disadvantages of their value creating processes and activities.

II. Value Chain - Definition

Customer value accumulates along the  chain of activities that a firm performs and delivers an end product or service to customers.

Activities and processes are performed by the firm to understand market, design, produce, sell (market), deliver and support its product.

A firm's value chain structure and the way the individual activities in the  value chain are  performed are a reflection of the firm's history, its current strategy, its approach to implementing its strategy and the underlying economics of the activities.

The activities in a value chain are categorised as primary and support activities.

III. Competing in the Market, Customer Value and Competitive Advantage

In order to compete in a market as a supplier of a product or service a firm must supply what customers want to buy. It has to create customer value so that customer pays a price for the offering. In any market there are competitors. The firm has to be provide some unique benefits to a certain section of persons in the target market to survive the competition.

The competitive advantage of a firm derives from the difference between the value it offers to customers and its cost of creating that customer value.

Thus the competitive advantage is obtained from two sources:

1. Differentiation advantage. Customer perceives more value from the firm's products.

2. Low cost advantage. The firm is able to provide the service or product at a cost lower than the market average.

IV. The Role of Management Accountant

Champion the use of value chain analysis.

V. Value Chain Analysis - Procedure

Internal cost analysis

Internal differentiation analysis

Vertical linkage analysis

VI. Strategic Frameworks for Value Chain Analysis

From the strategy theory the following concepts or frameworks are relevant for value chain analysis

Industry structure analysis

Core competencies

Segmentation analysisi

VII. Limitations of Value Chain Analysis

It is not an exact science. It is not easy. Finding costs, revenues and assets for each activity sometimes presents serious difficulties.

Despite such difficulties, experience indicates that value chain analysis yields firm swith invaluable information on their competitive situation, cost structure, and linkages with suppliers and customers.

VIII. Organizational and Managerial Accounting Challenges

Value chain analysis offers an opportunity to integrate strategic planning and management accounting. Management accounting department has to champion this to maintain its critical role as the information profession.

Download full guideline from
http://www.imanet.org/PDFs/Public/Research/SMA/Value%20Chain%20Analysis.pdf

Index of articles on Cost Accounting, Costing and Cost Management

Cost Accounting, Costing and Cost Management - Article Directory

Originally posted in Knol
http://knol.google.com/k/narayana-rao/value-chain-analysis-ima-guideline/2utb2lsm2k7a/508

Post updated 24.9.2012

Responsibility Accounting for Management Control

Responsibility accounting creates reports showing performance of various responsibility centers vis a vis their budgets and plans.

A management control system is a logical interpretation of techniques to gather and use information to make planning and control decisions, to motivate employee behavior, and to evaluate performance.

Purposes of management system are:

1. To clearly communicate the organization's goals (communication)
2. To ensure that managers understand the specific actions required of their units to achieve organization's goals. (unit level goals)
3. To record and communicate the results of units and summarise them into aggregate results and then communicate them across the organization.
4. To ensure that actions at unit level and corporate level are adjusted to changes in the environment so as to achieve planned goals.

Capital Budgeting - Accounting and Cost Information

Accounting function provides information that is used in capital budgeting activities by managers.

Why are accountants involved in capital budgeting decisions?
Accountants function primarily as information specialists. One of the uses of accounting information is in predicting future events, and predicting outcome of capital budgeting decisions is an important prediction.

Variance Analysis, Flexible Budget and Management Control

Variance Analysis

Variance is the difference between an actual result and a budgeted amount. Variances assist managers in their planning and control decisions. Management by exception is facilitated by variance analysis. Management by exception is the practice of concentrating on areas not operating as anticipated as per plan and giving less attention to areas operating as per plan. Areas with sizable variances are given managerial attention.

Static Budgets and Flexible Budgets

in the case of flexible budgets, planned or budgeted expenses are the actual out multiplied by unit costs or expenses. Flexible budget recognizes that there can be fluctuations in output and hence expenses also vary in a month or a year. Static budget concept which was the older concept did not incorporate this idea. In a static budget, both operating figures, unit expenses and hence total expenses were kept the same during the plan period. But flexible budget concept recognized that, if output goes down, the manager of a department has to cut down his variable expenses and similarly if output goes up he has spend more.

Variance Analysis from Static Budget

Variances can be divided into favorable and unfavorable variances. Example of favorable variance is increased in revenue. Example of unfavorable variance is increase in cost.

Steps in the Preparation of Flexible Budget

1. Determine budgeted selling prices, budgeted variable costs per unit and budgeted fixed costs
2. Determine the actual quantity of output
3. Determine the flexible budget for revenues based on budgeted selling price and actual quantity of output.

Variance Analysis - Components

Sales-volume variance = Flexible budget amount (actual sales) - Static budget among

Price and Efficiency variances

Price variance = (Actual price of input - Budgeted price of input) * Actual quantity of input

Efficiency variance = (Actual quantity of input used - Budgeted quantity of input allowed for actual output) *
Budgeted price of input



Performance Measurement

Two attributes of performance are commonly measured:

1. Effectiveness: the degree to which a predetermined objective or target is met.
2. Efficiency: the relative amount of input used to achieve a given level of output.

For more details, the chapter in Cost Accounting by Horngren et al.
Cost Accounting - Horngren et al., Book Information and Review


Financial, Cost and Management Accounting - Review Notes List

Originally posted in
http://knol.google.com/k/narayana-rao/variance-analysis-flexible-budget-and/2utb2lsm2k7a/3141