Management accounting
Help assigment 
LO-4Notes1.pptxUnit code: H/508/0489
Unit 5 – Management Accounting
Assessor: Sujata suresh / kumutha krishnan
Professional Studies Department
Management Accounting
Module level: 4
Credit value: 15
Unit type: core
Professional Studies Department
Management Accounting
Learning outcome: 4
Learning outcome:
Compare ways in which organizations could use management accounting to respond to financial problems.
topic: identifying financial problems
Professional Studies Department
Management Accounting
| Pass | Merit | Distinction |
| Compare ways in which organizations could use management accounting to respond to financial problems | ||
| P5 Compare how organizations are adapting management accounting systems to respond to financial problems. | M4 Analyse how, in responding to financial problems, management accounting can lead organisations to sustainable success.. | D3 Evaluate how planning tools for accounting respond appropriately to solving financial problems to lead organizations to sustainable success.. |
Learning outcomes and Assessment Criteria
Management Accounting
Professional Studies Department
Learning objectives
Upon completion of this Lecture, students should demonstrate an understanding of.
organizations could use management accounting to respond to financial problems by use of KPI
Management Accounting
Professional Studies Department
Introduction
The purpose of management accounting in the organization is to support competitive decision making by collecting, processing, and communicating information that helps management plan, control, and evaluate business processes and company strategy.
Management accounting helps to forecast the future. Forecasting helps decision to be made and answers questions like: Should a company invest more in equipment or not ?
Helping in Make-or-buy Decisions.
Forecasting Cash Flows.
Helping Understand Performance Variances.
Analysing the Rate of Return etc.
Management Accounting
Professional Studies Department
Benchmarking
The comparison of business outputs and systems with other like or different organizations.
Benchmarking is about finding ,adapting and using best practice.
Benchmarking can help organizations to :
Assess how well they are performing
Set realistic performance targets
Search out new ideas and practices
Stimulate creativity and performance innovation
Drive improvement through an organisation
Management Accounting
Professional Studies Department
Using benchmarking
Benchmarking is the name given to the process of measuring the organization’s operations, products and services against those of competitors recognized as market leaders, in order to establish targets which will provide a competitive advantage.
The stages of benchmarking are:
1. Decide what are of activity to benchmark (e.g. customer services, business processes in particular departments, quality of employees, standard of training).
2. Select a competitor who is reputedly the best in the area of activity to be benchmarked. Major companies in one country may target an international competitor rather than domestic company. In some benchmarking situations the competitor may agree to an exchange of information because both parties believe they can benefit from the exchange.
Management Accounting
Professional Studies Department
3. Decide on the appropriate measurements to be used in defining performance levels.
4. Determine the competitor’s strengths and compare these with the company’s own record.
5. Use the information collected and the basis for an action plan. To be effective, this action plan must involve all grades of employee working in the area of activity.
Management Accounting
Professional Studies Department
Key Performance Indicator
A key performance indicator (KPI) is a measure used to reflect organisational success or progress in relation to a specified goal.
The purpose of KPIs is to monitor progress towards accomplishing the strategic objectives that are typically communicated in a strategy map.
KPIs are typically included in a reporting scorecard or dashboard that enables top management, the board or other stakeholders to focus on the metrics deemed most critical to the success of an organisation.
Financial KPIs are generally based on income statement or balance sheet components and may also report changes in sales growth (by product families, channel, customer segments) or in expense categories. Non-financial KPIs are other measures used to assess the activities that an organisation sees as important to the achievement of its strategic objectives.
Key Performance Indicators ( KPI)
Management Accounting
Professional Studies Department
Typical non-financial KPIs include measures that relate to customer relationships, employees, operations, quality, cycle-time, and the organisation’s supply chain or its pipeline. Some prefer to use the term ‘extra-financial’ rather than non-financial, suggesting that all measures that contribute to organisational success are ultimately financial.
In addition to financial and non-financial, other common categorizations of performance indicators are quantitative versus qualitative; leading or lagging; near-term or long-term; input, output or process indicators etc.
Management Accounting
Professional Studies Department
Some key financial performance indicators and formulae for calculation
Management Accounting
Professional Studies Department
Profitability ratios
| Ratio | Meaning |
| Return on capital employed Profit from operations _________________________x 100 Total equity + Non-current liabilities | Return on capital employed (ROCE) is the best measure of profitability, indicating how successful a business is in utilising its assets. |
| Operating profit percentage(PROFIT MARGIN) Operating profit (PBIT) _________________x 100 Revenue | A low net profit margin (NPM) indicates low selling prices or high costs. Comparative analysis will reveal the level of prices and costs in relation to competitors |
Management Accounting
Professional Studies Department
Profitability ratios
| Ratio | Meaning |
| Gross profit percentage Gross profit _________________x 100 Revenue | The gross profit margin considers the profitability of the actual production or trading element of the business. A low margin could indicate selling prices are too low or cost of sales too high. |
Management Accounting
Professional Studies Department
Gross Profit margin as a KPI
Management Accounting
Professional Studies Department
Net Profit Margin as a KPI
Management Accounting
Professional Studies Department
Liquidity Ratios
| Ratio | Meaning |
| Current ratio Current assets _____________ Current liabilities The current ratio should ideally fall between 1:1 and 2:1 | It indicates the extent to which the claims of short-term creditors are covered by assets that are expected to be converted to cash in a period roughly corresponding to the maturity of the claims. |
| Acid test ratio (quick ratio) Current assets - Inventories ______________________ Current liabilities | This is calculated in the same way as the current ratio except that inventories are excluded from current assets. This ratio is a much better test of the immediate solvency of a business because of the length of time necessary to convert inventories into cash. |
Management Accounting
Professional Studies Department
Current and Quick Ratios as KPIs
Management Accounting
Professional Studies Department
Efficiency or working capital Ratios
| Ratio | Meaning |
| Trade receivables collection period Trade receivables _________________x 365 days Revenue /credit sales | A long average collection period probably indicates poor credit control, but it may be due to other factors such as overseas sales where the collection period will be much longer, or a deliberate decision to extend the credit period to attract new customers |
| Trade payables payment period Trade payables _________________x 365 days Cost of sales/credit purchases | If the payments period is very low, then the business might not be making the best use of its cash by paying suppliers early. If the period is very long, then this is a free source of credit, but the business must be careful not to harm relations with suppliers. |
Management Accounting
Professional Studies Department
Efficiency or Working capital Ratios
| Ratio | Meaning |
| Inventory holding period in days Inventories _________________x 365 days Cost of sales | This ratio indicates whether inventory levels are justified in relation to cost of sales. The LOWER the DAYS, the healthier the cash flow position |
Management Accounting
Professional Studies Department
The Accounts Payable Turnover KPI measures the rate at which your company pays off suppliers and other expenses. This ratio is important for understanding the amount of cash that your business spends on suppliers during any given period. It shows how many times over the course of the year your business is able to pay off its accounts payable.
Management Accounting
Professional Studies Department
The Accounts Receivable Turnover KPI measures the rate at which you collect on outstanding accounts. The problem in maintaining a large bill for a customer is that you are essentially offering them an interest-free loan. Monitoring this metric is essential to ensure that accounts receivable is collecting on bills in a timely manner. This KPI is an essential piece of understanding your organization's cash flow process.
Management Accounting
Professional Studies Department
The Inventory Turnover KPI measures how often you are able to sell off your entire in-stock inventory each year. This KPI is closely related to your supply chain and indicates the ability of your organization to generate sales and increase revenue. As well, it's important to move aging inventory since it the cost of carrying inventory increases at the same time the value of that inventory decreases.
Management Accounting
Professional Studies Department
Debt and gearing /leverage ratio
| Ratio | Meaning |
| Gearing Non current liabilities __________________________x 100 Total equity + Non current liabilities | Gearing gives an indication of long-term liquidity and the financial risk inherent within the business. Highly geared companies have to meet large interest commitments before paying dividends and may have problems raising further finance if expansion is necessary. |
Management Accounting
Professional Studies Department
ACTIVITY 01
Management Accounting
Professional Studies Department
ACTIVITY 01
| (OMR in ‘000’) | ||
| Sales | 3000 | 1500 |
| Cost of sales | (1950) | (1050) |
| Gross profit | 1050 | 450 |
| Distribution costs | (390) | (135) |
| Administration expenses | (250) | (190) |
| Operating profit | 410 | 125 |
| Interest | (150) | (90) |
| Profit before taxation | 260 | 35 |
| Taxation | (75) | (30) |
| Profit after taxation | 185 | 5 |
Management Accounting
Professional Studies Department
| 2019 OMR ‘000’ | 2018 OMR ‘000’ | |
| Noncurrent assets | 3975 | 3150 |
| Current assets | ||
| Inventory | 375 | 150 |
| Receivable | 450 | 300 |
| Cash | 450 | 150 |
| Total Assets | 5250 | 3750 |
| Equity and Liabilities | ||
| Ordinary share capital (OMR 1 per share) | 1800 | 1200 |
| Share premium | 900 | 0 |
| Reserves | 450 | 300 |
| Noncurrent liabilities | ||
| 10% Loan notes | 1600 | 1000 |
| Current liabilities | ||
| Loans and other borrowing | 300 | 1050 |
| Other payables | 200 | 200 |
| Total Equity and liabilities | 5250 | 3750 |
Statements of financial position as at 31st December
Management Accounting
Professional Studies Department
| Ratio for financial year ended December 2017 | Benchmark |
| Gross profit ratio | 38% |
| Net profit ratio | 29% |
| Return On Capital Employed (ROCE) | 9% |
| Current ratio | 1.8:1 |
| Quick ratio | 1:1 |
| Inventory days | 55 days |
| Receivables days | 50 days |
| Payable days | 65 days |
| Gearing ratio | 40% |
Other relevant information:
Benchmarks – Industry average
Management Accounting
Professional Studies Department
You are required:
Using benchmarks, calculate key performance indicators (financial and non-financial) & address the key results .
Management Accounting
Professional Studies Department
References
DRURY, C. (2015) Management and Cost Accounting. 9th Ed. Cengage Learning.
EDMONDS, T. and OLDS, P. (2013) Fundamental Managerial Accounting Concepts. 7th Ed. Maidenhead: McGraw-Hill.
HORNGREN, C., SUNDEN, G., STRATTON, W., BURGSTALHER, D. and SCHATZBERG, J. (2013) Introduction to Management Accounting. Global Ed. Harlow: Pearson.
SEAL, W. et al (2014) Management Accounting. 5th Ed. Maidenhead: McGraw-Hill.
Hugh Coombs, David Hobbs, Ellis Jenkins, 2005,Principles and Applications: SAGE Publications Ltd .
The Institute of Management Accounting (1997-2015), http://www.imanet.org/resourcespublications/student-educators/students/what-is-management-accounting
Atrill, P and McLaney, E 2009, Management Accounting for Decision Makers, 6th edn, Prentice Hall Financial Times, Pearson Education
The Institute of Management Accounting (1997-2015), http://www.imanet.org/resources-publications/student-educators/students/what-ismanagement-accounting rat Finance Institute, n.d. Qualittative characteristics of Accounting
Images credit– Google subject related pictures
Management Accounting
Professional Studies Department
