BMAC5203 Accounting for Decision Making Full Version

STUDY GUIDE

BMAC5203 Accounting for Business Decision Making

CENTRE FOR GRADUATE STUDIES

STUDY GUIDE BMAC5203 Accounting for Business Decision Making

Writer:

Assoc Prof Dr Indra Devi Kandasamy

Developed by:

Centre for Instructional Design and Technology Open University Malaysia

First Edition, September 2011 Second Edition, August 2012 Third Edition, January 2014 Fourth Edition, December 2013 Copyright © Open University Malaysia (OUM), December 2013, BMAC5203 All rights reserved. No part of this work may be reproduced in any form or by any means without the written permission of the President, Open University Malaysia.

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Contents Course Introduction ................................................................................. 5–6 Course Synopsis ................................................................................ 5 Course Aims ....................................................................................... 5 Course Outcomes .............................................................................. 6 Course Load ....................................................................................... 6 Course Requirements .................................................................................. 7 Prerequisites or Co-requisites ............................................................ 7 Feedback and Course Evaluation ...................................................... 7 Course Resources ....................................................................................... 7 Set Textbook(s) .................................................................................. 7 Additional References ........................................................................ 7 Extra Recommended Reading ........................................................... 7 my Virtual Learning Environment (myVLE) ........................................ 7 OUM Digital Library Resources .......................................................... 8 Assessment .................................................................................................. 8 Assessment Format ........................................................................... 8 Assignment Question(s) ..................................................................... 8 Final Examination ............................................................................... 8 Late Submission of Assignment(s) ..................................................... 8 Important Dates .................................................................................. 8 Weekly Study Guide ............................................................................ 10–47 Week 1 ............................................................................................. 10 Week 2 ............................................................................................. 14 Week 3 ............................................................................................. 19 Week 4 ............................................................................................. 23 Week 5 ............................................................................................. 27 Week 6 ............................................................................................. 32 Week 7 ............................................................................................. 38 Week 8 ............................................................................................. 40 Week 9 ............................................................................................. 43 Week 10 ........................................................................................... 46 Appendix A ................................................................................................. 49 Responsibilities of Learners ............................................................. 49 Ethical Behaviour ............................................................................. 49 Plagiarism, Cheating & Collusion ..................................................... 49

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COURSE INTRODUCTION Course Synopsis The BMAC5203 course is designed for business students without previous in-depth exposure to managerial accounting. Internal or managerial accounting system provides exclusive business information that assists managers in handling the tasks of planning, control and decision-making. Today’s management accountants focus on the advisory and consulting services related to strategic planning, organisational control and business decisions. Their roles are not only revolved around product costing, pricing, asset/liability management, investment analysis and performance evaluation but also extends to contemporary issues such as financial and business reengineering. The type and nature of information supplied by the internal accounting system is flexible and is customised to the needs of managers. It is also a dynamic function that evolves consistently as organisational changes occur. Parallel to the current trend in business, issues of global significance are widely discussed and explored in this course.

Course Aims The broad aims of this course are to:

1.

Introduce learners to the basic framework of Management Accounting (Managerial) Information Systems which are relevant for business planning, control and decisions;

2.

Assist learners in understanding the importance of business ethics and explain the importance of ethical behaviour for managers and accountants; and

3.

Provide learners with an understanding of the costing and pricing principles and their relationship to profit planning and business problem solving.

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Course Outcomes At the completion of this course, it is expected that learners will be able to: 1.

Explain the basic aims (viz stock valuation, profit determination, decision making, planning and control) of management accounting (managerial) information systems in an organisation;

2.

Explain the role of ethics in the managerial decision making process; and

3.

Apply management accounting concepts, principles and techniques that are fundamental to effective planning and control and efficient business decisions.

Course Load It is a standard OUM practice that learners accumulate 40 study hours for every credit hour. As such, for a three-credit hour course, you are expected to spend at least 120 hours of learning. Table 1 gives an estimation of how the 120 hours could be accumulated. Table 1: Allocation of Study Hours Activities

No of Hours

Reading the module and completing the exercises

60

Attending 5 seminars (3 hours for each session)

15

Engage in online discussion

10

Completing assignment

20

Revision

15

Total

120

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COURSE REQUIREMENTS Prerequisites or Co-requisites None.

Feedback and Course Evaluation Please refer to myVLE.

COURSE RESOURCES Set Textbook(s) Textbook (supplied in course-pack) Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc.

Additional References Mowen, M. M., Hansen, D. R., & Heitger, D. L. (2009). Cornerstones of managerial accounting (3rd ed.). South-Western Cengage Learning. Brandon, C. H., & Drtina, R. E. (1997). Management accounting strategy and control. Mc Graw-Hill Companies, Inc. Weygant, J. J, Kieso, D. E., & Kimmel, P. D. (1999). Managerial accounting: Tools for business decision-making. John Wiley.

Extra Recommended Reading Zimmerman, J. L. (2000). Accounting for decision making and control (3rd ed.). McGraw Hill Companies, Inc.

my Virtual Learning Environment (myVLE) Please refer to myVLE. 7

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OUM Digital Library Resources Download past examination questions: Click “Exam Papers”

ASSESSMENT Assessment Format Please refer to myVLE.

Assignment Question(s) Please refer to myVLE.

Final Examination Please refer to myVLE.

Late Submission of Assignment(s) Failure to submit an assignment by the due date without the granting of an official extension of time by your course tutor will incur a penalty.

Important Dates Please refer to myVLE. Note: This study guide is an excerpt from various sources. The author has made all attempts to cite the original sources.

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Weekly Study Guide Week 1 Topic 1: Introduction to Managerial Accounting and Ethics Readings Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc. 

Chapter 1 (Page 1–28)

e-Content (a)

Download PowerPoint slides (Chapter 1) from myVLE (Group Tool) and read the study guide before attending the face to face seminar.

(b)

Download past examination questions from OUM’s digital library and do the questions relevant to this topic.

Study Notes The learning outcomes: 1.

Describe accounting information and explain the differences between managerial accounting and financial accounting. (a)

The American Accounting Association describes accounting as the process of identifying, collecting, measuring, analysing, preparing, interpreting and communicating economic information to permit informed judgment to be made by users of accounting information.

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(b)


There are two different accounting information systems, serving different category of users: (i)

Managerial accounting system which meets the information needs of internal management, and

(ii)

Financial accounting system which meets the needs of external users such as bankers, creditors, government, trade unions, potential investors, etc.

Table 1 shows the differences between managerial accounting information and financial accounting information: Types of accounting information system:

Managerial accounting information systems

Financial accounting information systems

Targeted user:

Internal users and managers

External users as well as stockholders and creditors

Restrictions:

No mandatory rules for preparing reports

Must follow GAAP when preparing financial statements

Types of information:

Financial and non-financial information

Financial information

Time orientation:

Emphasises the future (planning and decision making)

Historical orientation (reports what has already occurred)

Aggregation:

Detailed information about product line, departments, etc.

Information about overall firm performance

2.

Using managerial accounting system (MAS), the focus of this course, provides information for managers to fulfil three basic objectives/aims: (a)

For stock valuation (costing products and services) and for profit determination;

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(b)

For planning, controlling, evaluation and continuous improvement; and

(c)

For decision making.

The subsequent topics in this course will require learners to learn and understand how MAS is used by managers to achieve each of the basic objectives listed above. 3.

Explain the importance of ethical behaviour for managers and management accountants. The objective of maximising profits should be constrained by the requirement that profits be achieved through legal and ethical means. The Institute of Management Accountants’ (IMA) overarching ethical principles include: (a)

Competence – Maintain an appropriate level of professional expertise by continually developing knowledge and skills;

(b)

Confidentiality – Refrain from using confidential information for unethical or illegal advantage;

(c)

Integrity – Abstain from engaging in or supporting any activity that might discredit the profession; and

(d)

Credibility – Communicate information fairly and objectively.

Study Questions (a)

How do managerial accounting and financial accounting differ? Who are the different users of accounting information?

(b)

What are the three broad objectives of managerial accounting?

(c)

What is ethical behaviour? Explain the underlying code of ethics of the IMA.

(d)

Should MAS provide both financial and non-financial information? Explain.

Now attempt the past examination questions to reinforce your understanding of this topic.

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Frequently Asked Questions 1.

Question: Do you need to learn accounting double entries (debits and credits)? Answer: No. Accounting double entries are mostly confined to financial accounting. The focus of your course is on managerial accounting.

2.

Question: Will you be asked to prepare profit and loss and balance sheet statements during exams? Answer: A full set of accounts (balance sheet and profit and loss statement) is not required in this course. You may however, be asked to prepare a simple profit summary.

Glossary of Important Terms A list of important terms and brief explanations can be found in the Glossary section of your main text. Please refer to pages 28 to 29. If the explanations are unclear, learners are advised to refer to an EnglishMalay Accounting dictionary.

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Week 2 Topic 2: Basic Cost Concepts and Cost Classifications Readings Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc. 

Chapters 2 (pages 35-66)



Chapters 3 (pages 101–129)

e-Content (a)

Download PowerPoint slides (chapters 2 and 3) from myVLE (Group Tool) and read the study guide before attending the face to face seminar.

(b)



Explain the meaning of cost and how costs are assigned to products and services. (a)

Cost is the amount of cash or cash equivalent incurred for producing goods and/or services.

(b)

A cost unit/cost object is any item such as products, departments, customers and activities for which costs are measured and assigned.

(c)

Cost are assigned to cost objects either directly or indirectly.

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2.


(d)

Direct cost such as direct material, direct labour and direct expenses are traced to cost units directly.

(e)

Indirect costs referred to as production overheads cannot be directly identified to the cost objects. Therefore, they are allocated by using a more complex approach. (This approach will be discussed later).

Define how costs are classified (cost classification). Costs can be classified using the three broad managerial accounting objectives discussed in Week 1. Figures 2.1 to 2.3 show these classifications.

Figure 2.1: Cost classification for external product costing Objective 1: For external product costing (stock valuation purposes) costs are classified by the function they serve, as summarised below:

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Figure 2.2: Cost classification for planning and control Objective 2: For planning and control purposes, costs are classified by controls as summarised below:

Figure 2.3: Cost classification for decision making Objective 3: For decision making purposes costs are classified by behaviour, as summarised below:

3.

Apply cost estimation methods to separate semi-variable costs into fixed and variable elements. (a)

For decision making purposes it is important to separate the semi-variable costs into its fixed and variable components.

(b)

Cost estimation techniques are used to separate semi-variable costs into its fixed and variable costs components.

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(c)

4.


There are a number of cost estimation methods available. However, the method relevant for this course is the “High-Low” method.

Define the various costs of manufacturing products and the various costs of behaviour. For instance, prime cost consists of: (a)

Direct materials costs – Materials directly traceable to the product/service;

(b)

Direct labour costs – Labour directly traceable to the product/ service; and

(c)

Direct expenses – Directly traceable to the product/service.

Learners can refer to the main text, for the definition. 5.

Calculate the cost of goods manufactured, the cost of goods sold and a simple income statement. Learners can refer to the main text, pages 39–41, for the calculation formats.

Study Questions Refer to your main text and attempt the following exercises: (a)

Exercise 2-2 on page 71

(b)


(c)

Problem 2-16 on pages 77-78

(d)

Problems 2-20, 2-22 and 2-24 on pages 80–82

(e)


(f)

Problem 3-13 on page 137


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Frequently Asked Question Question: How to calculate an income statement for a service organisation?

Glossary of Important Terms A list of important terms and brief explanations can be found in the Glossary section of your main text. Please refer to pages 68 to 70 and 131 to 132. If the explanations are unclear, learners are advised to refer to an EnglishMalay Accounting dictionary.

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Week 3 Topic 3: Traditional Overhead and Activity Based Costing, Job Order Costing and Process Costing Readings Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc. 

Chapter 7 (pages 275–313)






Chapter 9 (pages 401-422)

e-Content (a)

Download PowerPoint slides (chapter 7,8 and 9) from myVLE (Group Tool) and read the study guide before attending the face to face seminar.

(b)



Explain and calculate how a traditional overhead costing approach is used for product costing. Traditional approach overhead involves a two-stage approach, whereby overhead are first assigned to cost centres and then assigned to cost objects: (a)

Overhead absorption rate (OAR) is a predetermined rate calculated using the following formula: (i)

OAR 

Budgeted production Overhead Budgeted unit of base

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2.


(ii)

The above formula can be used to calculate a single or plant-wide rate.

(iii)

For the budgeted unit of base there are different methods of calculation. However the most common methods are labour rate, machine hour rate and output rate.

(iv)

Refer to page 299-300 of your text for an illustration on the traditional overhead costing approach.

Explain and calculate how an ABC system is used for product/job costing. (a)

An ABC system traces costs to activities and then to cost objects.

(b)

The steps involved in ABC are:

(c)

(i)

Identify the activities;

(ii)

Determine the cost pool by assigning costs to activities;

(iii)

Determine the cost drivers for each activity;

(iv)

Determine the total amount each driver consumed;

(v)

Calculate cost per driver (Step 2 divided by Step 4); and

(vi)

Using the calculated cost driver rates charge the overhead to each product according to its consumption.

The ABC hierarchy consists of different types of costs for different levels: (i)

Unit level activities manufactured;

(ii)

Batch level activities vary with the number of batches produced;

(iii)

Product sustaining activities vary with the number of product lines; and

(iv)

Facility sustaining activities are necessary to operate plant facility

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arise

each

time

a

product

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3.

4.

5.


Explain the difference between traditional approach and the ABC system. (a)

Traditional overhead is volume related, hence it tends to understate overhead cost of a low volume complex product and overstate the overhead costs of a high volume product.

(b)

ABC tends to allocate overheads to products which consume activities and these activities cause the overheads to rise.

Explain the advantages of ABC. (a)

ABC recognises the reality in advanced manufacturing environments that overheads are not related to direct labour. Instead, activities influence overheads. Hence, it provides more accurate product costs.

(b)

Since ABC provides more accurate product costs, decisions taken by management such as pricing decisions are better informed.

(c)

More accurate product profitability analysis can be produced.

(d)

ABC recognises the various activities that take place in an organisation, hence enabling management to target non-value adding activities for cost reductions exercises.

Describe the differences between job order costing and process costing and identify the types of firms that would use each method. (a)

Job order costing is for companies who produce unique products which are tailor-made for individual customer’s needs.

(b)

Meanwhile, process costing involves producing similar or identical products or services.

(c)

Go through Review Problem from pages 373 to 375 of the main text to understand job order costing.

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6.


Define equivalent units and explain their role in process costing. (a)

In process costing, at the end of a period, there will be a number of unfinished production units. These units are referred to as work-in-process (WIP) units.

(b)

In order to determine the cost per unit produced, the output of the period must be ascertained.

(c)

The output of the period consists of fully completed product units (products started and ended during the same period) and equivalents units, calculated from the opening and closing WIP.


Exercise 7B-2 on page 342

(b)


(c)


(d)

Exercise 8-20 on pages 383-384

(e)



Frequently Asked Question Question: Do you need to learn both traditional and ABC methods for the examinations? Answer: Both methods are examinable!!

Glossary of Important Terms A list of important terms and brief explanations can be found in the Glossary section of your main text. Please refer to pages 315, 376 and 425. If the explanations are unclear, learners are advised to refer to an EnglishMalay Accounting dictionary.

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Week 4 Topic 4: Cost-Volume-Profit (CVP) Analysis Readings Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc. 

Chapter 4 (page 151-182)

e-Content (a)

Download PowerPoint slides (chapter 4) from myVLE (Group Tool) and read the study guide before attending the face to face seminar.

(b)



Understand the underlying assumptions and limitations of the CVP analysis tool. Assumptions: (a)

All other variables remain constant (e.g. productivity);

(b)

Total revenue is a linear function of output;

(c)

Total cost is a linear function of output;

(d)

A single product or a constant sales mix; and

(e)

No closing stock at the end of the period.

The underlying assumptions are the limitations of the CVP analysis tool. This is because the above assumptions are not applicable in practice.

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2.


Determine the break-even point in sales units and sales value, the amount of revenue required for a target profit and the margin of safety. (a)

(b)

For CVP analysis, a contribution margin approach used that classifies costs by behaviour as: (i)

Variable costs – Both variable manufacturing and variable selling and administrative; and

(ii)

Fixed costs – Both fixed manufacturing and fixed selling and administrative.

Contribution margin is calculated as follows: Sales less ALL variable cost = Contribution.

(c)

Contribution/sales = C/S ratio

(d)

The break-even point (BEP) is the point where total revenue equals total cost, the point of zero profit.

(e)

BEP can be determined using:

(f)

(i)

Equation method

(ii)

Formula approach

(iii)

Graphical approach (refer to text pages 156–158)

Equation method: Operating income = (Price × Units sold) – (Variable cost per unit × Units sold) – Total fixed expenses At breakeven, this can also be expressed as: Total revenue – Total variable cost – Total fixed cost = $0 or Total revenue = Total variable cost + Total fixed cost

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(g)


Formula approach:

Break-even sales (units) 

Break-even sales (RM)  (h)

(i)

Fixed costs Contribution per unit

Fixed costs C/S ratio

Graphical approaches:

(i)

Traditional break-even chart

(ii)

Profit volume chart

Other calculations:

Target profit (RM) 

Fixed costs  Required profit C/S ratio

Margin of safety  Sales  Break-even sales Degree of operating leverage 

Total contribution margin Operating income



(b)


(c)


(d)


(e)



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Frequently Asked Questions (a)

Question: Do you need to plot a graph during the examination? Answer: Although it has not been tested previously, you are expected to know how to plot a CVP analysis graph.

(b)

Question: Will the formulas be given in the examination? Answer: No. You are expected to remember the formulas and their applications.

Glossary of Important Terms A list of important terms and brief explanations can be found in the Glossary section of your main text. Please refer to page 185. If the explanations are unclear, learners are advised to refer to an EnglishMalay Accounting dictionary.

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Week 5 Topic 5: Short-term Decision Making Readings Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc. 


e-Content (a)

Download PowerPoint slides (chapter 14 and chapter14_add) from myVLE (group tool) and read the study guide before attending the face to face seminar.

(b)

Download past examination questions from (OUM’s digital library) and do the questions relevant to this topic.

Study Notes The learning outcomes:

1.

Describe the short-run decision making model and explain how cost behaviour affects the information used to make decisions.

(a)

Read and understand the six steps decision making model.

(b)

Generally, the short-term decision making model uses two broad principles: (i)

The relevant costing principle

(ii)

The contribution approach principle

(c)

The above principles can be used for various short-term decisions.

(d)

Figure 5.1 shows the types of decisions commonly undertaken under each principle.

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Figure 5.1: Types of Decision

2.

Identify and apply relevant costs and revenue, in a variety of business decisions.

(a)

Relevant costs are future costs that affect future decisions which differ across alternatives.

(b)

If a future costs is the same for more than one alternative, then it has no effect on decisions. Such a cost is irrelevant.

(c)

Examples of relevant costs are: (i)

Variable costs: Costs that vary with output

(ii)

Opportunity costs: Costs of the next best alternative foregone

(iii)

Specific fixed costs: Costs that are incurred for a specific purpose and can be avoided

(iv)

Out-of-pocket costs: Cash spending/expenses

(v)

Replacement costs: Costs incurred to replace materials that have been used

(vi)

Incremental costs: Additional cost incurred

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(d)

(e)

3.


Examples of irrelevant costs: (i)

Sunk costs

(ii)

General fixed costs

(iii)

Depreciation and other notional costs which are non-cash items

(iv)

Overhead absorbed

As shown in Figure 5.1 earlier, relevant costing principle can be used: (i)

Pricing decisions: Minimum price that should be charged for a job or project offered.

(ii)

Make-or-buy decisions: Compare the relevant cost of making and outside price. If cost of making is less than outside price, then make it internally.

(iii)

Shutdown decisions: Estimate the relevant cost and benefits for a shutdown decision. If benefits are more than costs, then the decision should be to shut down.

Understand and apply contribution approach for decision making.

(a)

Contribution = Sales – Variable costs

(b)

Contribution is the amount available to pay off fixed costs. Any excess represents profit.

(c)

Using the contribution approach, only the variable costs are relevant for decision making. All general fixed costs are assumed to be constant in the short term.

(d)

As shown in Figure 5.1, contribution approach can be used for the following decisions: (i)

Choosing the optimal production plan;

(ii)

Make-or-buy decisions (Outsourcing); and

(iii)

Acceptance of special orders decisions.

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(e)

4.


For an optimal production plan decision: (i)

Production is limited due to a limiting factor or a resource constraint existing within the organisation.

(ii)

The limiting factor can be internal, such as materials, labour hours or machine hours; or external, such as sales demand.

(iii)

Management has to decide the best way to allocate the internal scarce resources.

(iv)

The decision process involves a number of steps: 

Step 1: Calculate contribution per unit of each product



Step 2: Identify the limiting factor and determine how much each unit of a product consumes that limited resource



Step 3: Calculate the contribution per limiting factor



Step 4: Rank the products according to their profitability



Step 5: Plan you production schedule based on the ranking and availability of the resources



Step 6: Calculate the optimal profit from the optimal mix

For make-or-buy decisions two rules apply:

(a)

Rule 1: Spare capacity is available. If spare capacity is available, then the decision to make or buy is solely based on comparing the internal variable cost of making against the price quoted by the outside supplier. If variable cost of making is less than outside price, make the component internally.

(b)

Rule 2: There is a resource constraint (No spare capacity exists). If there is no spare capacity, then the decision to make or buy depends on internal relevant costs made up of variable costs and opportunity costs. This internal relevant costs is then compared with the price quoted by the outside supplier. If

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the internal relevant costs is less than outside price, make the component internally.

5.

For acceptance of special order, learners should understand that the decision is undertaken based on the following assumptions:

(a)

Spare capacity is available;

(b)

The special order price is higher than the variable cost or relevant costs of producing the product;

(c)

General fixed costs are assumed to be constant;

(d)

Acceptance of the special order will not affect the normal sales demand; and

(e)

The special order is a one-off order only.


Exercises 14-1, 14-2, 14-3, 14-4 and 14-6 on pages 720-723 of the main text.

(b)

Problems 14-19, 14-20 and 14-21 on pages 729-731 of the main text.

Also attempt the past examination questions to reinforce your understanding

Frequently Asked Question Question: How to structure the answer for each of the decision rule?


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Week 6 Topic 6: Planning and Control: Budgetary Control Systems Readings Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc. 


e-Content (a)

Download PowerPoint slides (chapter 10) from myVLE (Group Tool) and read the study guide before attending the face-to face seminar.

(b)



1.

Define budgeting and discuss its role in planning, control and decision making.

(a)

There are three levels of planning: corporate long-term planning, medium-term planning and annual budgeting.

(b)

Budgets are financial plans for the future and are closely linked to the long-term plan of the organisation.

(c)

Budgets are part of the planning and control process.

(d)

Budgets assist an organisation: (i)

To plan and control profitability;

(ii)

To plan and control production resources; and

(iii)

To plan and control finance and capital expenditure.

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(e)

2.


A budgetary system gives an organisation several advantages: (i)

Provides information that can be used to improve decision making;

(ii)

Provides greater coordination of the different functional areas;

(iii)

Provides a standard for performance evaluation; and

(iv)

Improves communication and provides motivation to staff.

Explain the master budget, define and prepare operational/ functional budgets and financial budgets.

(a)

A master budget is a comprehensive financial plan for the whole organisation.

(b)

A budget committee reviews the budget, provides policy guidelines, resolves conflicts and approves the final budget.

(c)

A budget officer or director directs and coordinates the organisation’s overall budgeting process.

(d)

A master budget can be divided into operating/functional budgets and financial budgets.

(e)

Operating/functional budgets describe the income generating activities.

(f)

Financial budget shows the inflows and outflows of cash and the firms’ financial position.

(g)

The functional budgets consist of: (i)

Sales budget: Describes expected sales in units and dollars. Sales quantity budget is often referred to as the ‘kingpin’ of budgeting.

(ii)

Production budget: Estimates how many units must be produced to meet sales demand and also satisfy inventory requirements.

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(iii)

Direct material usage budget: Shows the amount of raw material needed to meet the production quantity budget.

(iv)

Direct materials purchases budget: Calculates the amount and cost of materials to be purchased in each time period.

(v)

Direct labour costs budget: Shows the total direct labour hours and costs needed to meet the number of units in the production budget.

(vi)

Overhead budget: Shows the expected overhead costs needed for the production quantity budget.

(vii) Selling and administrative budget: Outlines expenditure for non-manufacturing activities.

planned

(viii) Finished good inventory budget: Provides information needed to prepare balance sheet. (h)

The financial budget are: (i)

Budgeted income statement: Prepared using the functional/ operational budget information;

(ii)

Cash budget: Planning timing of inflows and outflows; and

(iii)

Budgeted balance sheet.

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Figure 6.1: Master budget and its interrelationships

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3.


Describe the behavioural dimensions of budgeting.

(a)

Budgets are often used to judge the performance of managers.

(b)

Positive behaviour occurs when the goals of each manager are aligned with company goals and the managers are motivated to achieve them.

(c)

The alignment and coordination of individual goals with that of the company is referred to as goal congruence.

(d)

Dysfunctional behaviour is when individual behaviour is in conflict with organisational goals.

(e)

Monetary and non-monetary incentives are used to control and reward manager’s performance.

(f)

Participative budgeting allows subordinate managers to have a say in the establishment of budget targets.

(g)

Participative budgeting motivates staff and communicates a sense of responsibility to subordinate managers.

(h)

However, participative budgeting has three potential problems: (i)

Setting standards that are either too high or too low – managers tend to set too loose or too tight budgets.

(ii)

Budgetary slack may be built into the budgets – Budgetary slack exists when managers deliberately underestimate revenues and overestimate costs in an effort to avoid adverse responsibility.

(iii)

Pseudo-participation – This is where top management assumes total control on the budgeting process, seeking only superficial participation from lower level managers.

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Exercises 10-1, 10-2 and 10-3 on pages 495-496

(b)

Exercises 10-7, 10-8 and 10-9 on page 497

(c)

Problems 10-15 and 10-17 on pages 499-500

(d)

Problems 10-20 on pages 502-503


Frequently Asked Questions None


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Week 7 Topic 7: Planning and Control: Flexible Budget Readings Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc. 

Chapter 11 (pages 515-530)

e-Content (a)


(b)


Study Notes The learning outcome: Prepare a flexible budget and use it for performance reporting

(a)

A static budget is a budget for a particular level of activity.

(b)

A flexible budget enables a firm to compute expected costs for a range of activity or enables to flex the original budget to actual activity level.

(c)

When preparing the flexible budget, all variable costs are flexed to the actual activity level, whilst fixed costs remain the same.

(d)

The difference between flexible budget and actual costs is referred to as variances.

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Study Questions Refer to your main text and try the following exercises: Problems 11-19 and 11-20 on pages 540-541. Now attempt the past examination questions to reinforce your understanding of this topic.

Frequently Asked Questions None


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STUDY GUIDE


Week 8 Topic 8: Planning and Control: Standard Costing Readings Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc. 


e-Content (a)


(b)



1.

Explain how standard costs are prepared.

(a)

Standards are developed from work studies, historical experience and input from personnel.

(b)

Types of standards: (i)

Ideal standards can only operate under perfect working conditions

(ii)

Currently attainable standards are achieved under efficient operating conditions.

(c)

Standard costing is a management control system which is found mostly in the manufacturing industry.

(d)

Variances represent the difference between standard costs and actual costs.

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2.


(e)

Variances are classified as favourable if the actual costs is less than standard costs and vice versa.

(f)

Advantages of standard costing: (i)

It provides a means of ensuring that production resources are used efficiently

(ii)

It provides management with a consistent method of comparing actual performance with planned performance

(iii)

It helps to motivate staff to set realistic standards.

Compute the material and labour costs variance and explain how they are used for control.

The diagram below shows the types of variances and the way to compute the variances: (a)

AQ = Actual quantity; AO = Actual production output

(b)

AP = Actual price of materials; SP = Standard price of material

(c)

AR = Actual rate of labour; AH = Actual labour hours

(d)

SC = Standard materials/labour cost per unit

(e)

AC = Actual material/labour cost per unit

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Study notes Figure 8.1: Production Costs Variances


Exercises 12-8 and 12-11 10.35 on pages 587 to 588

(b)

Problem 12-12 on pages 588-589


Frequently Asked Question Question: Will the relevant formulas for computing variances be given in the exam question paper? Answer: No, learners are required to understand, remember and apply the formulas.


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Week 9 Topic 9: Divisional Performance and Performance Report Readings Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc. 


e-Content (a)

Download PowerPoint slides (chapter 13) from myVLE (group tool) and read the study guide before attending the face to face seminar.

(b)



1.

Explain why firms choose to decentralise.

(a)

Decentralisation is the practice of delegating responsibilities.

(b)

Firms decide to decentralise for several reasons: (i)

Ease of gathering and using local information;

(ii)

Focusing of central management; and

(iii)

Training and motivating of segment managers.

(c)

Responsibility accounting involves measuring the performance of decentralised units in terms of accounting results.

(d)

Responsibility accounting involves measuring the performance of decentralised units in terms of accounting results.

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2.

Identify and explain the different types of responsibility centres.

(a)

(b)

3.


There are four major types of responsibility centres: (i)

Cost centre: Manager is responsible only for costs.

(ii)

Revenue centre: Manager is responsible only for revenue.

(iii)

Profit centre: Manager is responsible for both revenue and costs.

(iv)

Investment centre: Manager is responsible for revenue, costs and investments.

It is important to measure and monitor the performance of investment centres.

Explain the different types of divisional performance measures.

There are three basis used to measure the performance of investment centres: (a)

Return on investment (ROI)  (i)

(ii)

Operating income Average operating assets

The ROI can be further analysed into: 

Net Profit margin 



Asset turnover 

Operating income Sales

Sales Average operating assets

Advantages of ROI 

It encourages managers to focus on cost efficiency;



It encourages managers to focus on operating asset efficiency; and



It deals with profits and net assets, which are concepts well understood in business.

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(iii)


Limitations 

Can lead to sub-optimal decision making.



There can be manipulation of the ratio.

(b)

Residual Income (RI): is the difference between operating income and the minimum dollar return required on a company’s operating assets. RI = Operating Income – (Minimum rate of return  Average operating assets)

(c)

Economic value added (EVA) is net income after tax minus the total annual cost of capital.


Exercises 13-2 and 13-3 on page 656

(b)

Problems 13-17 and 13-20 on pages 662-665


Frequently Asked Question Question: Is the topic on transfer pricing included in this topic? Answer: No, transfer pricing is not included in this topic.


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Week 10 Topic 10: Other Contemporary Issues Readings Garrison, R.H., Noreen, E.W., Brewer, P.C., Cheng, N.S., & Yuen, K.C.K. (2012). Managerial Accounting, An Asian Perspective (13th ed.). Mc Graw-Hill Companies, Inc. Google www. for on-line resources.

e-Content (a)

Download and read the relevant articles before attending the seminars.

(b)


Study Notes The learning outcomes: Explain contemporary management accounting issues:

(a)

Total quality management, on-line resources;

(b)

Benchmarking, on-line resources;

(c)

Balanced scorecard, refer to pages 643-651 and on-line resources;

(d)

Target costing, refer to pages 818-819 and on-line resources;

(e)

Life cycle costing, on-line resources; and

(f)

Corporate Social Responsibility and Sustainability Reporting, refer to pages 24-27 and on-line resources.

Learners are expected to read and understand the above issues on their own.

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Study Questions (a)

What are the four categories of quality costs?

(b)

What are the advantages and disadvantages of benchmarking?

(c)

Explain the benchmarking process.

(d)

Explain Kaplan’s balanced scorecard principle.

(e)

What is target costing? Explain.

(f)

What is life cycle costing? Explain how organisations use life cycle costing.


Frequently Asked Question Question: Are these topics important for the examinations? Answer: These topics can be examined as course assignments or briefly in the examinations.

Glossary of Important Terms A list of important terms can be found in the index section of your main text. Please refer to pages 843 to 854. If the explanations are unclear, learners are advised to refer to an EnglishMalay Accounting dictionary.

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Appendix A Responsibilities of Learners 1.

Learners are required to use this study guide as a support material. For in-depth subject matter details, learners are advised to refer to the main course text provided with this course.

2.

Face-to-face learners are required to attend the five seminars held during the semester.

3.

On-line learners are required to discuss their doubts with their online facilitators using myVLE.

4.

Learners should download and practise the past examination questions to have a better understanding of the subject matter.

5.

Learners’ are advised to read the Postgraduate Students’ Handbook for further clarification.

Ethical Behaviour Learners MUST read and conform to the university’s Code of Ethics as stated in the Postgraduate Students’ Handbook.

Plagiarism, Cheating & Collusion Learners MUST read the Postgraduate Student Handbook for the university’s rules and warnings on Plagiarism, Cheating & Collusion.

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BMAC5203 Accounting for Decision Making Full Version

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