Contents
Management Accounting
Rationale
Management Accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions. Unlike financial accountancy information (which, for public companies, is public information), management accounting information is used within an organization (typically for decision-making) and is usually confidential and its access available only to a select few.
- Definition
- Aims
- Traditional vs. innovative management accounting practices
- Development of throughput accounting
- An alternative view of management accounting
- Lean accounting (accounting for lean)
- Related qualifications
- CIMA Forum - A place for free CIMA student support.
- AICPA Financial Management Center - Resources for CPAs working in business, industry and government.
Learning Outcomes
After completing the programme students should be able to:
1. Understand the control systems required for materials, labour and overheads
- the nature of costs
- ecognise the differences between fixed, variable, semi fixed and semi variable costs
- problems of allocation/apportionment of overheads pricing of materials calculation of overhead recovery rates
2. Analyse data according to various cost classifications
and the effect of volume on costs
- cost volume profit analysis
- comparison between the economist’s and the accountant’ss cost volume chart
3. Recognise how cost systems differ by activity i.e job and process costing
- characteristics of process costing, equivalent units, methods of pricing
- normal and abnormal waste, joint and by products
- methods of apportionment of joint costs
4. Use of costs for short-term decision making
- marginal costing, key factors, opportunity costs, sunk costs, differential costs, qualitative aspects
5. Appreciate the difference between marginal and absorption
costing
- format of a marginal profit statement, format of an absorption profit statement
6. Recognise the purpose of budgetary control
- construct budgets for both planning and control purposes. administration of budgets, roll over budgets, objectives of budgets, the budget key factor, functional budgets, master budgets, behavioural aspects of budgetary control
- zero based budgets
7. Explain the purpose of standard costing, calculate and
analyse variances for materials, labour,
- overheads and sales, types of standards, preparation of operating statements
8. Explain the purpose of working capital management
- operating cycle, funding and control of working capital
9. Understand the uses of information technology when presenting management with information.
10. Capital Investment Appraisal and Financial Mathematics
- financial and non-financial factors to be considered when making investment decisions
- methods of investment appraisal including pay back. the time value of money and average rate of return
- the calculation of compound interest
- annuities and mortgages
- discounted cash flow
- net present value
- internal rate of return.
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Teaching and Learning Resources
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Introduction
Lectures and Tutorials
- Introduction to Management Accounting
- Basic Management Accounting Concepts
- Management accounting: information for contemporary managers
What is Managerial Accounting (Management Accounting/Cost Accounting)?
Managerial accounting is concerned with providing information to managers-that is, people inside an organization who direct and control its operation. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization.
Managerial accounting provides the essential data with which the organizations are actually run. Managerial accounting is also termed as management accounting or cost accounting. Financial accounting provides the scorecard by which a company's overall past performance is judged by outsiders. Managerial accountants prepare a variety of reports. Some reports focus on how well managers or business units have performed-comparing actual results to plans and to benchmarks. Some reports provide timely, frequent updates on key indicators such as orders received, order backlog, capacity utilization, and sales. Other analytical reports are prepared as needed to investigate specific problems such as a decline in the profitability of a product line. And yet other reports analyze a developing business situation or opportunity. In contrast, financial accounting is oriented toward producing a limited set of specific prescribed annual and quarterly financial statements in accordance with Generally Accepted Accounting Principles (GAAP). (Ray H. Garrison, Eric W. Noreen 1999).
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Cost drivers, cost behaviour and cost estimation. Product costing systems: general principles and job costing
Lectures and Tutorials
- Cost behavior
- Cost drivers, cost behaviour and cost estimation
- Cost-Volume-Profit Analysis: A Managerial Planning Tool
- Product costing systems: general principles and job costing
- Job-Order Costing
- Process Costing
Readings
A "cost driver" is the unit of an activity that causes the change of an activity cost. A cost driver is any activity that causes a cost to be incurred. The Activity Based Costing (ABC) approach relates indirect cost to the activities that drive them to be incurred.
In traditional costing the cost driver to allocate indirect cost to cost objects was volume of output. With the change in business structures, technology and thereby cost structures it was found that the volume of output was not the only cost driver. Some examples of indirect costs and their drivers are: maintenance costs are indirect costs and the possible driver of this cost may be the number of machine hours; or, handling raw-material cost is another indirect cost that may be driven by the number of orders received; or, inspection costs that are driven by the number of inspections or the hours of inspection or production runs. Generally, the cost driver for short term indirect variable costs may be the volume of output/ activity; but for long term indirect variable costs, the cost drivers will not be related to volume of output/ activity.
John Shank and Vijay Govindarajan list cost drivers into two categories: Structural cost drivers that are derived from the business strategic choices about its underlying economic structure such as scale and scope of operations, complexity of products, use of technology, etc and Executional cost drivers that are derived from the execution of the business activities such as capacity utilization, plant layout, work-force involvement, etc. To carry out a value chain analysis, ABC is a necessary tool. To carry out ABC, it is necessary that cost drivers are established for different cost pools.
"Cost drivers are the structural determinants of the cost of an activity, reflecting any linkages or interrelationships that affect it" (M. Porter), therefore we could assume that the cost drivers determine the cost behavior within the activities, reflecting the links that these have with other activities and relationships that affect them.
See also
External links
Cost behavior. Reaction of costs to changes in activity
In the previous section we discussed costs and cost drivers. We will continue by discussing in more detail how costs react to changes in activity. For successful planning, managers must be able to predict how cost will behave under certain circumstances. Cost behavior is the manner in which a cost changes in relation to changes in the related activity. Understanding of how costs behave in a particular situation is crucial for decision-making process in an organization. Cost behavior information allows managers:
Depending on the cost behaviors, there are four common cost types, which are variable, fixed, mixed, and step-variable costs. |
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Cost estimation models are mathematical algorithms or parametric equations used to estimate the costs of a product or project. The results of the models are typically necessary to obtain approval to proceed, and are factored into business plans, budgets, and other financial planning and tracking mechanisms.
These algorithms were originally performed manually but now are almost universally computerized. They may be standardized (available in published texts or purchased commercially) or proprietary, depending on the type of business, product, or project in question. Simple models may use standard spreadsheet products.
Models typically function through the input of parameters that describe the attributes of the product or project in question, and possibly physical resource requirements. The model then provides as output various resources requirements in cost and time.
Cost modeling practitioners often have the titles of cost estimators, cost engineers, or parametric analysts.
Typical applications include:
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Product costing is one of the most problematic issues in lean accounting. This is especially true when a wide variety of products and a wide range of volumes exist in the same factory. Simplicity Electronics is a mythical but typical company that illustrates.
Our analysis derives directly from Simplicity's standard financial statements, sales data and some common-sense estimates. You can do a similar analysis for your own company.
We start with annualized sales volume, by product. Simplicity has ten products, as shown in the Product-Volume chart. This chart shows the sales for each product with a bar and cumulative sales with a line.
Like most manufacturers, Simplicity has a few products that account for the majority of sales and many low-volume products representing a small part of sales (Pareto's Law).
This sales information is, usually, readily available and accurate.
For conceptual purposes, assume that the products are similar in work content, material content and price. The gross margins on each product are also similar.
Total sales are $24,000,000 as the income statement shows.
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Activity Cost Behavior. Process Costing. Assigning Support Costs to Departments and Activities
Lectures and Tutorials
Readings
In a business organization, Activity-based costing (ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and control. This is a necessary tool for doing value chain analysis.
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Introduction to Activity Based Costing (ABC) Who Wins in a Dynamic World: Theory of Constraints Vs. Activity-Based Costing? article on SSRN Activity Based Costing - Global Community Portal |
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Process costing is an accounting methodology that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Eventually, costs have to be allocated to individual units of product. It assigns average costs to each unit, and is the opposite extreme of Job costing which attempts to measure individual costs of production of each unit. Process costing is usually a significant chapter.
Process costing is a type of operation costing which is used to ascertain the cost of a product at each process or stage of manufacture. CIMA defines process costing as "The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period". Process costing is suitable for industries producing homogeneous products and where production is a continuous flow. A process can be referred to as the sub-unit of an organization specifically defined for cost collection purpose.
Reasons for use
Companies need to allocate total product costs to units of product for the following reasons:
1. A company may manufacture thousands or millions of units of product in a given period of time.
2. Products are manufactured in large quantities, but products may be sold in small quantities, sometimes one at a time (automobiles, loaves of bread), a dozen or two at a time (eggs, cookies), etc.
3. Product costs must be transferred from Finished Goods to Cost of Goods Sold as sales are made. This requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against related sales revenue.
4. Managers need to maintain cost control over the manufacturing process. Process costing provides managers with feedback that can be used to compare similar product costs from one month to the next, keeping costs in line with projected manufacturing budgets.
5. A fraction-of-a-cent cost change can represent a large dollar change in overall profitability, when selling millions of units of product a month. Managers must carefully watch per unit costs on a daily basis through the production process, while at the same time dealing with materials and output in huge quantities.
6. Materials part way through a process (e.g. chemicals) might need to be given a value, process costing allows for this. By determining what cost the part processed material has incurred such as labor or overhead an "equivalent unit" relative to the value of a finished process can be calculated.
In management accounting, cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision-making to cut a company's costs and improve profitability. As a form of management accounting, cost accounting need not to follow standards such as GAAP, because its primary use is for internal managers, rather than outside users, and what to compute is instead decided pragmatically.
Costs are measured in units of nominal currency by convention. Cost accounting can be viewed as translating the supply chain (the series of events in the production process that, in concert, result in a product) into financial values.
There are various managerial accounting approaches:
- standardized or standard cost accounting
- lean accounting
- activity-based costing
- resource consumption accounting
- throughput accounting
- marginal costing/cost-volume-profit analysis
Classical cost elements are:
- raw materials
- labor
- indirect expenses/overhead
- Origins
- Elements of cost
- Classification of costs
- Standard cost accounting
- Activity-based costing
- Lean accounting
- Marginal costing
- References
Did you know that maintenance accounts for 50% to 80% of the overall product cost? Well, it does! And while most project managers are fairly good at sizing new product features, many are terrible at estimating the effort required to support a product once it becomes generally available. As a result, maintenance projects are inadequately staffed, companies can't respond to customer requests in a timely manner, and products never reach payback.
This article presents a methodology to help you guesstimate and therefore plan for the maintenance phase of generally available products. But first, let's define a few terms that are important to the comprehension of this article.
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A closer look at overhead cost. Understand the alternatives in conventional costing systems
Lectures and Tutorials
Readings
In business, Overhead, verhead cost or overhead expense refers to an ongoing expense of operating a business. The term overhead is usually used to group expenses that are necessary to the continued functioning of the business, but that do not directly generate profits. Typical examples of overhead expenses include rent, utilities, permits to operate a business, business name registration, and commercial liability insurance.
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Activity Based Costing (ABC) and Traditional Costing Systems
| A Pragmatic Approach to Activity Based Costing (ABC) Systems
Costing systems are information systems. They require a specific type of information such as direct labour hours and units produced, to be of value. It is from the input data that product costs and other information are determined according to the specific costing system defined methodology. The results obtained would depend on the costing system used, since the same input data could be used in different ways. In this case the traditional costing system or an activity based costing system. A costing system should provide information to help minimise waste, but should not be wasteful in itself. In other words, the resources required to design, implement and maintain a costing system should be less than the benefit derived from the use of the system. |
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The Traditional Costing System
It is a well-known fact that the traditional costing systems utilise a single, volume-based cost driver. This is the reason why the traditional product costing system distorts the cost of products. In most cases this type of costing system assigns the overhead costs to products on the basis of their relative usage of direct labour. For this reason traditional cost systems often report inaccurate product costs.
The problem is in the underlying methodology of the traditional costing systems. They adhere to the assumption that products cause cost. Each time a unit of product is manufactured, it is assumed that cost is incurred. This assumption makes sense for certain direct costs. The assumption does not work for activities that are not performed directly on the product units.
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Budgeting: profit planning and control. Functional and Activity Based Budgeting
Lectures and Tutorials
Readings
Budget (from french bougette) generally refers to a list of all planned expenses and revenues. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms.
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External links |
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Definition and Explanation of Profit Planning and Budgeting
- Definition and Explanation of Profit Planning and Budgeting
- Difference Between Planning and Control
- Advantages and Disadvantages of Budgeting
- Responsibility Accounting
- Budget Period
Marginal Costing & Break-even analysis Advantages of Break-even analysis |
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Adopting Public Sector’s Performance Based Budgeting to the private sector using the CPM framework. [1] [2] [3]
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Driving
Value Using Activity-Based Budgeting (Hardcover) Check the availability and buy your books from our Bookshop. |
Standard costs for control: direct material and direct labour. Standard costs for control: flexible budgets and manufacturing overhead
Lectures and Tutorials
- Standard Costing: A Managerial Control Tool
- Standard costs for control: direct material and direct labour
- Standard costs for control: flexible budgets and manufacturing overhead
Readings
In modern cost accounting, the concept of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles of GAAP (Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product.
- For example: if the railway coach company normally produced 40 coaches per month, and the fixed costs were still $1000/month, then each coach could be said to incur an overhead of $25 ($1000 / 40). Adding this to the variable costs of $300 per coach produced a full cost of $325 per coach.
This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor.
- For example: if the railway coach company made 100 coaches one month, then the unit cost would become $310 per coach ($300 + ($1000 / 100)). If the next month the company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000 / 50)), a relatively minor difference.
An important part of standard cost accounting is a variance analysis, which breaks down the variation between actual cost and standard costs into various components (volume variation, material cost variation, labor cost variation, etc.) so managers can understand why costs were different from what was planned and take appropriate action to correct the situation.
There are at least four approaches:
- Standard Cost Accounting
- Activity-based Costing
- Throughput Accounting
- Marginal Costing
Cost Elements:
1) Raw Material
2) Manual Labor
3) Indirect Expenses
Performance Evaluation, Variable Costing, and Decentralization. Measurement. Reporting and Control. Financial performance measures and transfer pricing. Contemporary Cost Management
Lectures and Tutorials
- Performance Evaluation, Variable Costing, and Decentralization
- Financial performance measures and transfer pricing
- Contemporary approaches to measuring and rewarding performance
- Contemporary cost management
Readings
Performance Prism - A Performance Measurement Approach
As the companies grow in the size, the number of stakeholders increase. Companies have to cater to the interests of its stakeholders such as local communities, vendors, employees, legislators so on and so forth. Performance prism is an ideal tool to analyse.
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Performance Prism is one of the development in management accounting put forth by Cranfield University. The theory is performance of an organisation depends on how effectively it meets the needs and requirements of all its stakeholders. The five facets of the Performance Prism: 1. Stakeholder Satisfaction |
Stakeholder Satisfaction – who are the key stakeholders and what do they want and need?
Strategies – what strategies do we have to put in place to satisfy the wants and needs of these key stakeholders?
Processes – what critical processes do we require if we are to execute these strategies?
Capabilities – what capabilities do we need to operate and enhance these processes?
Stakeholder Contribution – what contributions do we require from our stakeholders if we are to maintain and develop these capabilities?
Once the answers to the above questions have been dealt, Performance Prism can use the results to identify performance measures which will enable the company to monitor the success of processes in place.
Variable costs are expenses that change in proportion to the activity of a business.[1] Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost.
Direct Costs, however, are costs that can easily be associated with a particular cost object.[2] However, not all variable costs are direct costs. For example, variable manufacturing overhead costs are variable costs that are indirect costs, not direct costs. Variable costs are sometimes called unit-level costs as they vary with the number of units produced.
Decomposing Total Costs as Fixed Costs plus Variable Costs.
Direct labor and overhead are often called conversion cost,[3] while direct material and direct labor are often referred to as prime cost.[3]
- Cost
- Cost accounting
- Cost curve
- Cost driver
- Semi variable cost
- Fixed cost
- Total cost
- Contribution margin
- Notes
- References
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for good, services, or use of property (including intangible property). Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other purposes. OECD Transfer Pricing Guidelines state, “Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.”
Many governments have adopted transfer pricing rules that apply in determining or adjusting income taxes of domestic and multinational taxpayers. The OECD has adopted guidelines followed, in whole or in part, by many of its member countries in adopting rules. United States and Canadian rules are similar in many respects to OECD guidelines, with certain points of material difference. A few countries follow rules that are materially different overall.
The rules of nearly all countries permit related parties to set prices in any manner, but permit the tax authorities to adjust those prices where the prices charged are outside an arm's length range. Rules are generally provided for determining what constitutes such arm's length prices, and how any analysis should proceed. Prices actually charged are compared to prices or measures of profitability for unrelated transactions and parties. The rules generally require that market level, functions, risks, and terms of sale of unrelated party transactions or activities be reasonably comparable to such items with respect to the related party transactions or profitability being tested.
Most systems allow use of multiple methods, where appropriate and supported by reliable data, to test related party prices. Among the commonly used methods are comparable uncontrolled prices, cost plus, resale price or markup, and profitability based methods. Many systems differentiate methods of testing goods from those for services or use of property due to inherent differences in business aspects of such broad types of transactions. Some systems provide mechanisms for sharing or allocation of costs of acquiring assets (including intangible assets) among related parties in a manner designed to reduce tax controversy.
Most tax treaties and many tax systems provide mechanisms for resolving disputes among taxpayers and governments in a manner designed to reduce the potential for double taxation. Many systems also permit advance agreement between taxpayers and one or more governments regarding mechanisms for setting related party prices.
Many systems impose penalties where the tax authority has adjusted related party prices. Some tax systems provide that taxpayers may avoid such penalties by preparing documentation in advance regarding prices charged between the taxpayer and related parties. Some systems require that such documentation be prepared in advance in all cases.
Cost
volume profit analysis. Decision
making: relevant costs and benefits
Lectures
and Tutorials
Readings
Cost-Volume-profit (CVP), in managerial economics is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions.
Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analysis.
Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:
The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable. Changes in activity are the only factors that affect costs. All units produced are sold (there is no ending finished goods inventory). When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.
The components of Cost-Volume-Profit Analysis are:
- Level or volume of activity
- Unit Selling Prices
- Variable cost per unit
- Total fixed costs
- Sales mix
External links
Short Run Decision-Making. Relevant Costing and Inventory Management. Managing inventory and quality
Lectures and Tutorials
- Short Run Decision-Making. Relevant Costing and Inventory Management
- Inventory Management
- Managing inventory and quality
Readings
In microeconomics, the long run is the conceptual time period in which there are no fixed factors of production as to changing the output level and entering or leaving an industry.
The long run contrasts with the short run, in which some factors are variable and others are fixed, constraining entry or exit from an industry. In macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy, in contrast to the short run when these may not fully adjust.[1]
In the long run, firms change production levels in response to (expected) economic profits or losses, and the land, labor, capital goods and entrepreneurship vary to reach associated long-run average cost. In the simplified case of plant capacity as the only fixed factor, a generic firm can make these changes in the long run:
- enter an industry in response to (expected) profits
- leave an industry in response to losses
- increase its plant in response to profits
- decrease its plant in response to losses.
The long run is associated with the long-run average cost (LRAC) curve in microeconomic models along which a firm would minimize its average cost (cost per unit) for each respective long-run quantity of output. Long-run marginal cost (LRMC) is the added cost of providing an additional unit of service or commodity from changing capacity level to reach the lowest cost associated with that extra output. LRMC equalling price is efficient as to resource allocation in the long run. The concept of long-run cost is also used in determining whether the long-run expected to induce the firm to remain in the industry or shut down production there. In long-run equilibrium of an industry in which perfect competition prevails, the LRMC = Long run average LRAC at the minimum LRAC and associated output. The shape of the long-run marginal and average costs curves is determined by economies of scale.
The long run is a planning and implementation stage.[2][3] Here a firm may decide that it needs to produce on a larger scale by building a new plant or adding a production line. The firm may decide that new technology should be incorporated into its production process. The firm thus considers all its long-run production options and selects the optimal combination of inputs and technology for its long-run purposes.[4] The optimal combination of inputs is the least-cost combination of inputs for desired level of output when all inputs are variable.[3] Once the decisions are made and implemented and production begins, the firm is operating in the short run with fixed and variable inputs.[3][5]
All production in real time occurs in the short run. The short run is the conceptual time period in which at least one factor of production is fixed in amount and others are variable in amount. Costs that are fixed, say from existing plant size, have no impact on a firm's short-run decisions, since only variable costs and revenues affect short-run profits. Such fixed costs raise the associated short-run average cost of an output level over the long-run average cost if the amount of the fixed factor is better suited for a different output level. In the short run, a firm can raise output by increasing the amount of the variable factor(s), say labor through overtime.
A generic firm already producing in an industry can make three changes in the short run as a response to reach a posited equilibrium:
In the short run, a profit-maximizing firm will: 1. increase production if marginal cost is less than marginal revenue (added revenue per additional unit of output; 2. decrease production if marginal cost is greater than marginal revenue; 3. continue producing if average variable cost is less than price per unit, even if average total cost is greater than price; 4. shut down if average variable cost is greater than price at each level of output. |
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The transition from the short run to the long run may be done by considering some short-run equilibrium that is also a long-run equilibrium as to supply and demand, then comparing that state against a new short-run and long-run equilibrium state from a change that disturbs equilibrium, say in the sales-tax rate, tracing out the short-run adjustment first, then the long-run adjustment. Each is an example of comparative statics. "Classic" contemporary graphical and formal treatments include those of Jacob Viner (1931),[6] John Hicks (1939),[7] and Paul Samuelson (1947).[8]
The law of diminishing marginal returns to a variable factor applies to the short run.[9] It posits an effect of decreased added or marginal product of from variable factors, which increases the supply price of added output. [10] The law is related to a positive slope of the short-run marginal-cost curve.[11]
The usage of 'long run' and 'short run' in macroeconomics differs somewhat from the above microeconomic usage. J.M. Keynes (1936) emphasized fundamental factors of a market economy that might result in prolonged periods away from full-employment. In later macro usage, the long run is the period in which the price level for the economy is completely flexible as to shifts in aggregate demand and aggregate supply. In addition there is full mobility of labor and capital between sectors of the economy and full capital mobility between nations. In the short run none of these conditions need fully hold. The price is sticky or fixed as to changes in aggregate demand or supply, capital is not fully mobile between sectors, and capital is not fully mobile to interest rate differences among countries & fixed exchange rates.[13]
A famous critique of neglecting short-run analysis was by John Maynard Keynes, who wrote that "In the long run, we are all dead," referring to the long-run proposition of the quantity theory of, for example, a doubling of the money supply doubling the price level.[14]
See also
- Cost curve (including long-run and short-run cost curves)
Long-run average-cost curve with economies of scale
to Q2 and diseconomies of scale thereafter.
Information for decision making
- Chapter objectives
- Structure of the chapter
- Elements of a decision
- Relevant costs for decision making
- Opportunity cost
- Shutdown problems
- Key terms
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English.[1]
In the USA and Canada the term has developed from a list of goods and materials to the goods and materials themselves, especially those held available in stock by a business; and this has become the primary meaning of the term in North American English, equivalent to the term "stock" in British English. In accounting, inventory or stock is considered an asset.
- Inventory management
- Business inventory
- Principle of inventory proportionality
- High-level inventory management
- Accounting for inventory
- National accounts
- Distressed inventory
- Inventory credit
- Cash conversion cycle
- Consignment stock
- Cost of goods sold
- Economic order quantity
- Inventory investment
- Inventory management software
- Operations research
- Pinch point (economics)
- Service level
- Spare part
- Stock management
- References
The First Steps to Inventory Management
Kieso, , DE; Warfield, TD; Weygandt, JJ (2007). Intermediate Accounting 8th Canadian Edition. Canada: John Wiley & Sons. ISBN 047015313X.
Professional Inventory Management
Tempelmeier, Horst, Inventory Management in Supply Networks, Norderstedt (Books on Demand) 2006, ISBN 3-8334-5373-7
Extending the Pareto Principle to MRP Controlled Parts and Regaining MRP Control
Business Inventories monthly report
A very basic guide to setting up an inventory system.
Optimizing Retail Inventory Service Level & Turnover in Excel
External links
Pricing and product mix decisions. Capital expenditure and Investment decisions: an introduction
Lectures
and Tutorials
- Pricing and product mix decisions
- Capital expenditure decisions: an introduction
- Capital Investment Decisions
Readings
Financial modeling is the task of building an abstract representation (a model) of a financial decision making situation.[1]
This is a mathematical model designed to represent (a simplified version of) the performance of a financial asset or a portfolio, of a business, a project, or any other investment. Financial modeling is a general term that means different things to different users; the reference usually relates either to accounting applications, or to quantitative finance applications. While there has been some debate in the industry as to the nature of financial modeling - whether it is a tradecraft, such as welding, or a science - the task of financial modeling has been gaining acceptance and rigor over the years.[2] Several scholarly books have been written on the topic, in addition to numerous scientific articles.
- Financial engineering
- Financial forecast
- Financial Modelers' Manifesto
- Financial planning
- Integrated business planning
- Model audit
- Modeling and analysis of financial markets
- Selected books
- Best Practice: Spreadsheet Modelling Standards, Spreadsheet Standards Review Board
- Best Practice, European Spreadsheet Risks Interest Group
- FAST Modeling Standard, fast-standard.org
- Eliminating Risks in Spreadsheets A useful article on how to avoid common spreadsheet modeling errors
- Best practice of financial modelling - An article for finance professionals by Arixcel Ltd
Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and place. Price is the only revenue generating element amongst the four Ps, the rest being cost centers.
Pricing is the manual or automatic process of applying prices to purchase and sales orders, based on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines, and many others. Automated systems require more setup and maintenance but may prevent pricing errors. The needs of the consumer can be converted into demand only if the consumer has the willingness and capacity to buy the product. Thus pricing is very important in marketing.
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Capital Expenditures (CAPEX or capex) are expenditures creating future benefits. Capex are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset's basis (the cost or value of an asset as adjusted for tax purposes). Capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset.
Included in such amounts is spending on:
- acquiring fixed assets
- bringing them into business
- legal costs of buying buildings
- carriage inwards on machinery bought
- any other cost needed for a fixed asset ready for use.
An ongoing question of the accounting of any company is whether certain expenses should be capitalized or expensed. Costs that are expensed in a particular month simply appear on the financial statement as a cost that was incurred that month. Costs that are capitalized, however, are amortized over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business expenses are clearly either expensable or capitalizable, but some expenses could be treated either way, according to the preference of the company.
The counterpart of capital expenditure is operational expenditure ("OpEx").
See also
- Operational expenditure (OPEX)
- Cash flow statement
- Income statement
- Balance Sheet
- Expense
- Amortization/Depreciation
- Gross fixed capital formation
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Further aspects of capital expenditure decisions.Tactical Decision-Making. Segmented Reporting and Performance Evaluation
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- Further aspects of capital expenditure decisions
- Tactical Decision-Making
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Managerial Accounting - Capital Exepnditure Decisions
Technological advancements are forcing companies to scapped their old and obsolete assets and replace them with more efficient ones. Average machines life has reduced to 5-7 years. But this pays off as the new machines are cheaper to buy and more productive thereby recouping their cost in much lessor times than before. This fits into definition of technology which hovers around 'cheapest, quickest and easiest'. In a capital expediture decision, a most important factor is size. The degree of risk is closely linked with the magnitude of the investment. Capital Expanditure (Capex)The term Capital Expenditure means long term investment in fixed assets. In turn, fixed assets mean property, plant and equipment (PP&E). These are to be used for further production and are not for sale. Whether a particular assets can be classified as fixed or current depends upon nature of the business. A power generator for a sugar plant would be a fixed asset whereas the same generator for the machinery supplier would be a part of stock and therefore a current asset. |
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What is a capital expenditure?
It is an expenditure with the aim of getting benefits in future. It applies not only to invesment in fixed assets but to related such as payment of custom duties, clearance and forwarding, erection and installation, markup during construction and trial runs.
Capital expenditures are incurred to setup greenfield project or to upgrade brownfield projects. It also cover Trophy projects which just boost image of the company. The manufacturers are paying due attention to their social responsibilities and are investing in such projects which reduce polution, increase safety within the factory and improve quality of life in the neighborhood through opening schools, hospital and recration facilities.
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- Decision Making Techniques
- Financial Reporting Standards
- Segmented Reporting
- How to Prepare Relevant Information for a Financial Performance Evaluation
Support Department Cost Allocation. Strategic management accounting, and the future
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Cost allocation is a process of attributing cost to particular cost centres. For example the wage of the driver of the purchasing department can be allocated to the purchasing department cost centre. It is not necessary to share the wage cost over several different cost centers. Cost and services are not identical to each other.
Cost allocation is the assigning of a common cost to several cost objects. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that use the system. A company with only one electric meter might allocate the electricity bill to several departments in the company.
Allocation implies that the assigning of the cost is somewhat arbitrary. Some people describe the allocation as the spreading of cost, because of the arbitrary nature of the allocation. Efforts have been made over the years to improve the bases for allocation. In manufacturing, the overhead allocations have moved from plant-wide rates to departmental rates, from direct labor hours to machine hours to activity based costing. The goal is to allocate or assign the costs based on the root causes of the common costs instead of merely spreading the costs...
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