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Block 8&9: Management Accounting - Coggle Diagram

- - - - Cost Analysis & Efficiency (e.g., identifying cost-saving opportunities). Identifies where money is being spent (e.g., staff wages, food supplies, maintenance, refurbishment). Highlights major overheads to optimize expenses. Enhances resource allocation for smoother operations.
      - Performance Measurement (e.g., KPIs, ROI, variance analysis).Allows comparison with competitors and past performance (e.g., monthly/yearly revenue, occupancy rates). Financial ratios (e.g., profit margins, liquidity ratios) provide insights into financial health.
      - Budgeting & Forecasting allocating resources in line with strategic plans and expected expenditure and income. (e.g., cash flow projections, financial planning). Assists in setting financial targets and budgets. Supports strategic decisions (e.g., expansion, pricing strategies) for better financial control. Improves forecasting for stable income and controlled outgoings.
        
        Zara’s fast-fashion dominance relies on dynamic budgeting to respond to trends.
      - Pricing & Profitability Decisions (e.g., CVP analysis, contribution margin).
      - Strategic Investment Choices (e.g., capital budgeting, make-or-buy decisions).
- - - - Set Mission and Objectives: Define long-term business goals at senior levels.
      - Assess Current Position: Analyze the gap between the business's current state and its goals.
      - Evaluate Options: Consider strategies to bridge the gap.
      - Formulate Plans: Choose the best option and develop long-term plans.
      - Implement Short-Term Plans: Use tools like budgets to achieve long-term objectives.
      - Monitor Progress: Compare actual performance to planned performance.
      - Address Deviations: Investigate causes of underperformance and adjust plans as needed.
  - - - Incremental Budgeting:
        
        It is less time-consuming HOWEVER, may lead to inefficiencies if past budgets were not optimal.
      - Zero-based Budgeting
        
        It is more thorough BUT also more time-consuming and costly.
        
        Pros
        
        resources are allocated to activities that require it, instead of all activities being allocated funds simply because funds were allocated to it in the previous year
        
        Save costs by not assuming a need for similar budgets every year For example, managers must present their training plans each year, and then the amount necessary for training is derived from these new plans.
        
        Cons
        
        , this method requires more time and effort from managers to present plans for each budget element, therefore it is more costly to produce budgets than the incremental budgeting method. And because of this managers might engage in shortcutting and formfilling to get it done, rather than really thinking about it in the way that the firm expects them to.
- - - - Fixed and variable costs
        
        enable managers to identify the break-even how many products will need to be sold to cover both fixed and variable costs, before profit can be made. The margin of safety can be calculated, how much profit will be made from expected product sales
      - Direct and indirect costs
        
        direct costs can be evaluated to find ways to reduce input costs for the new product. Direct costs may include specific costs for product launch e.g., marketing campaign, which can be reduced in the longer term. Indirect costs can be apportioned to the new product, which will reduce the share of these costs for other products.
- - - - Suppliers: Interested in a company’s liquidity (ability to pay short-term debts). For example, if a company has high liquidity, suppliers are more likely to extend credit terms.
      - Owners: Focus on profitability and cash flow. Owners want to know if the business is generating enough profit to cover expenses and provide a return on investment.
      - Managers: Use financial data to track performance, set budgets, and make strategic decisions. For example, managers may use financial statements to identify areas where costs can be reduced or where additional investment is needed.
  - - - Management Accountant: Focuses on internal decision-making, providing flexible, forward-looking information that includes both financial and non-financial KPIs (e.g., customer satisfaction, employee productivity). example: preparing budgets, forecasts and cost analyses
        
        Management accountant primarily future-oriented, involves forward-looking activities such as scenario analysis
        
        Management accounting is not bound by formal accounting standards reports are tailored to the specific needs of management and can include non-financial metrics. Example: Customized reports on departmental performance or project profitability
      - Financial Accountant: Focuses on external reporting, providing standardized, historical financial information that complies with accounting standards. Financial accountants ensure that financial statements are accurate and reliable, which is critical for maintaining stakeholder trust.
        
        While financial accountant is primarily historical-oriented focuses on recording and reporting past financial transactions
        
        Financial accountant must adhere to strict accounting standards and regulations reports are standardized to ensure consistency, comparability, and compliance.
- - - - Revenue: Income from core business activities (e.g., sales of products or services).
      - Cost of Sales: Direct costs related to producing goods or services (e.g., raw materials, labor).
      - Gross Profit: Revenue minus cost of sales. This shows how much profit the business has made before deducting overhead expenses.
      - Operating Profit: Profit from day-to-day operations, excluding interest and tax. This is a key indicator of a company’s operational efficiency.
        
        Operating Profit=Revenue−Cost of Goods Sold−Operating Expenses
      - Net Profit (bottom line): Final profit after all expenses, including tax. This is the amount that can be distributed to owners or reinvested in the business.
        
        The aim is to max. this which is through cost cutting (short-term strategy and not sustainable because it be harm equipment and quality) OR increase selling volume and so revenues Or combine both strategy
      - SG&A expenses: these are not directly related to production (salaries, rent)
  - - - Assets: Resources owned by the business (e.g., cash, inventory, property). it retains its value over time
        
        Current Assets: Short-term assets that can be converted into cash within a year (e.g., inventory, accounts receivable).
        
        Non-Current Assets: Long-term assets that are not expected to be sold within a year (e.g., machinery, buildings), money is locked into the item and would need to be sold off be to converted into cash.
        
        They can be intangible too like patents and licensing agreements
        
        Depreciation: lose of value through wear and tear the assets decrease in value over time
      - Liabilities: Amounts owed by the business.
        
        Current Liabilities: Short-term debts that must be paid within a year (e.g., accounts payable).
        
        Non-Current Liabilities: Long-term debts (e.g., loans, mortgages).
      - Owner’s Equity: Owner’s investment plus retained earnings. This represents the owner’s stake in the business.
      - Accounting Equation:
        
        Owner’s Equity=Assets−Liabilities
        shows that everything left in the business after paying debts is for the owners which means that if assets go up this increases their stake and if liabilities increase it decreases their stake
      - Example: If a company has £500,000 in assets and £300,000 in liabilities, the owner’s equity is £200,000.
      - Owner's equity
        
        The amount shareholders have invested in the company and includes retained earnings which are profits that git reinvested in the company
    - - There is a link to the Income Statement from the Balance Sheet. Profit or loss is taken from the bottom line of the income statement and recorded on the balance sheet in the Retained Earnings equity account. As a result, the Total Assets always match the Total Equity and Liabilities, and the Balance Sheet balances. The figure in Retained Earnings will bring the figures to the same total. Even if a company is heavily in debt, the balance sheet still balances.
  - - - Operating Activities: Cash flows from day-to-day business operations (e.g., cash from customers, payments to suppliers).
      - Investing Activities: Cash flows from buying or selling assets (e.g., equipment, investments).
      - Financing Activities: Cash flows from borrowing, issuing shares, or repaying loans.
- - - - Gross Profit Margin: Shows the percentage of revenue turned into gross profit. A high gross profit margin indicates that the company is efficient at producing goods or services.
        Gross Profit Margin= Gross Profit / Revenue ×100
      - Return on Capital Employed (ROCE): Measures how effectively resources are used to generate profit. A high ROCE indicates that the company is using its capital efficiently.
        ROCE= Operating Profit / Capital employed ×100
      - Analyze on the profit focused performance
    - - Current Ratio: Assesses the ability to pay short-term liabilities with current assets. A ratio of 2:1 is generally considered healthy and so a loan can be taken out. BUT be careful what they assets are made off is they are slow-moving then using this ratio is incorrect
        Current Ratio= Current Assets / Current Liabilities
      - Quick Ratio: Similar to the current ratio but excludes inventory, focusing on more liquid assets. A ratio of 1:1 is generally considered healthy.The figure represents how many times current assets would cover current liabilities.
        Quick Ratio= Current Assets−Inventory / Current Liabilities
      - A company would usually want the current ratio to be more than 2 or 3 times to ensure they always have the ability to pay, so managers need to monitor the financial performance to prevent the current ratio falling below this level, taking action if necessary. A manager would be interested in the current ratio because it will show them if more short-term assets (cash) are required to cover liabilities as they fall due. (A liquidity ratio. The current ratio measures how much immediate cash and cash
        equivalents a company has in order to pay their debts as they fall due.)
    - - Inventory Holding Period: Measures how long inventory is held before being sold or used. A shorter holding period indicates better inventory management BUT too short indicate that it may run out faster.
        Inventory Holding Period= Average Inventory / Cost of sales ×365
      - Holding for too long risks inefficiencies and obsolescence and damage Holding for not long enough risks the company running out of inventory and losing costumers
    - - Price/Earnings (P/E) Ratio: Indicates how much investors are willing to pay for each pound of profit. A high P/E ratio suggests that investors expect future profit growth (indicate their confidence)
        P/E Ratio= Market Value per Share / Earnings per share
    - - Ratios allow for standardized comparisons across companies and industries, helping investors and managers evaluate performance. For example, a company with a high gross profit margin may be more attractive to investors than one with a low margin.
      - However, ratios should not be used in isolation; other factors like customer satisfaction, industry trends, and economic conditions should also be considered. For example, a company with high profitability but declining customer satisfaction may face future challenges.
  - - - This approach provides context, ensures reasonableness, and supports more accurate decision-making.
    - - Example: Tesco overstated profits by £263M, showing the importance of cross-verifying financial data.
  - - - this may be improved by increasing revenue or reducing the cost of sales which is an ethical method and involves operational changes or manipulation e.g., of booking in sales before order actually received can improve this ratio
    - - Earnings per share could be increased by selling unused property at greater than book value (ethical) or revaluing assets to increase their value (this may be valid if property prices have increased or unethical if the basis for revaluation is too optimistic)
- - - - Incremental Budgeting: Adjusts previous budgets based on expected changes (e.g., a 10% increase in sales). This method is less time-consuming but may lead to inefficiencies if past budgets were not optimal.
      - Zero-Based Budgeting: Starts from zero, requiring justification for all expenses. This method is more thorough but also more time-consuming and costly.
    - - Align budgets with strategic goals.
      - Allocate responsibility for budget setting.
      - Monitor actual performance against budgeted figures.