1. Accounting for Control & Performance measurement Pia Nylinder Pia.nylinder@lnu.se

2. Aim of the chapter To establish a context for the understanding of control in organizations, and to examine in detail one specific approach to accounting control in the form of standard costing, flexible budgeting and variance analysis. From Gowthorpe, 2008

3. Learning outcomes After reading the chapter and completing the exercises at the end, students should: Know about a classification of control mechanisms within organizations. Know about some of the problems of control in firms. Understand the use of a standard costing system in a manufacturing environment. Be able to compare actual results against flexed budgets. Understand and be able to analyse some of the possible reasons for variances that emerge from the comparison of actual with standard costs. Understand the pros and cons of standard costing systems. From Gowthorpe, 2008

4. Sid 341-342 Analysis of variances Where have the variances occurred? What are the reasons to the variances? Who is responsible to the variances? How are we future development? Ado we have to change anything? Budget (standard cost) – Actual cost = deviation

5. Variance analysis of result RevenuesBudgetAcutalVariance Revenues1 200 000 kr1 450 000 kr+ 250 000 kr Other revenues150 000 kr72 500 kr- 77 500 kr Sum. revenues1 350 000 kr1 522 500 kr+ 172 500 kr Costs Cost of goods sold480 000 kr529 200 kr- 49 200 kr Wages420 000 kr380 800 kr+39 200 kr Rent120 000 kr120 000 kr0 kr Sum costs1 020 000 kr1 030 000 kr - 10 000 kr Operating income 330 000 kr492 500 kr+ 162 500 kr (Result)

6. Actual resultBudget Difference depending on changes in variance of price and quantity Difference depending on changes in variance of volume Total variance Variance analysis

7. Accounting for control P 228, Gowthorpe, 2008

8. Variance analysis – an example I consult company are budgeting for every order demand 52 hours to a price per hour of 183 Skr. Every order thus demand 9 516 Skr (budgeted hours * budgeted price). De actual outcome however show that the actual hours worked are 51 hours and the cost is 184 Skr. The actual cost is 9 384 Skr (actual price * actual hours worked).

9. Variance analysis – its parts Quantity variance Price variance Actual Budgeted Price Quantity

10. Variance analysis – an example I consult company are budgeting for every order demand 52 hours to a price per hour of 183 Skr. Every order thus demand 9 516 Skr (budgeted hours * budgeted price). De actual outcome however show that the actual hours worked are 51 hours and the cost is 184 Skr. The actual cost is 9 384 Skr (actual price * actual hours worked). The total variance is: Budgeted price * budgeted quantity – actual price * actual quantity

11. Price variance Quantity variance Price variance Actual Budgeted Price Quantity Part of total variance for a productioncost (ex. material or salary) Total variance = Budgeted price * budgeted quantity – actual price * actual quantity Price variance = (Budgeted price - actual price )* actual quantity

12. Price variance, from the example Quantity variance Price variance Actual 51 Actual 184 Budgeted 52 Budgeted183 Price Quantity Price variance = (Budgeted price - actual price )* actual quantity = (183 – 184)*51 = -1*51 = -51 Skr The variance depend on an increased cost per hour, maybe caused by use of more qualified staff than initially planned

13. Quantity variance Price variance Actual Budgeted Price Quantity Total variance = Budgeted price * budgeted quantity – actual price * actual quantity Quantity variance = (Budgeted quantity – actual quantity) * budgeted price

14. Quantity variance, from the example Quantity variance Price variance Actual 51 Actual 184 Budgeted 52 Budgeted 183 Price Quantity Quantity variance = (Budgeted quantity – actual quantity) * budgeted price = (52 – 51)*183 = 1*183 = 183 Skr The positive variance depend on an decreased time than budgeted. Maybe staff has been more productive, do more per hour.

15. Variance analysis Budgeted costs (=Budgeted price * budgeted quantity) -Actual costs (=Actual price * Actual quantity) =Total variance Price varianceQuantity variance The effect of changes The effect of changes in quantlity in price

16. Performance Measurement …”should provide information that is useful to managers in their planning, controlling, monitoring and decision-making functions”. The aim of the chapter: To develop an understanding of ways in which performance is measured, managed and reported within the firm budgeting.

17. For use with: Management Accounting Catherine Gowthorpe (ISBN: 9781844802043) Copyright Cengage Learning 2008 10 Performance Measurement Aim of the chapter To develop an understanding of ways in which performance is measured, managed and reported within the firm budgeting.

18. Sid 424 Performance measurement Performance – What has been achieved, performed, realized, or – What will be achieved, performed, realized Performance measurement – To measure different aspects of the performance.

19. Sid 426 Some operative aims Follow up the organization toward goals Be a communication Motivate employees Give signal when there are variances from plan Basis for comparison Base for reward employees Base for decisions Inform intressents

20. Sid 427-428 Characteristics of performance measurements The performances should be related to the strategy Performance goals should be tied to choosen mearsurements. All employees should understand the goals and measurements and what action they indicate Employees have to be able to influence the performaces thay are responsible for Employees should be informed of the outcome of their performances.

21. IKEAs vision and business idea At IKEA our vision is to create a better everyday life for the many people. Our business idea supports this vision by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.

22. Sid 428-453 Performance measurement Financial Examples: Profitability ratios Solidity Liquidity Non-financial Customer service Avalability of sales staff Avarage time between order and delivery Number of repurchase Quality Number of defects detected Customer satisfaction level Number of customers complaints Measures for employees Sex, age Competence of sales staff Time

23. Financial performance measures Liquidity Ratios Solidity ratio Profitability Ratios

24. Liquidity Ratios Liquidity is a measure of how quickly an asset can be converted to cash. E.g.Accounts receivable = quite liquid Building = not very liquid One important liquidity ratio is: Current Ratio

25. Liquidity Ratios Current Ratio: “Under normal circumstances, a company will pay its current liabilities (bills due) with its current assets. The ratio between the two is therefore a good indicator for how well a company can pay its bills.” A high current ratio: the company are more easily able to pay its bills. “That’s good to know if the company owes you money. But … if you’re an investor, too high a current ratio could mean that the company is not using its assets optimally”. Current Ratio = Current Assets Current Liabilities

26. Liquidity Ratios Current Ratio: Most successful businesses have a current ratio of about 1.5 – 2.0. Let’s have a look at the Balance Sheet and add the current ratio.

27. Adding Ratios Pretty good!

28. Leverage Ratios Leverage in business refers to how much debt a company uses to finance its operations. The idea is that if a company can borrow money at say 7% and then use this money to make a 27% profit, it’s clever to take out the loan. Important leverage ratios are: Total Debt Ratio Solidity

29. Leverage Ratios Total Debt Ratio The Total Debt Ratio shows how much of a company’s assets are financed through loans. It is defined as: Total Debt Ratio Total Debt Total Assets =Solidity= Equity capital Total assets Solidity % The solidity shows how much of a company’s assets are financed through equity capital. It is defined as:

30. Leverage Ratios Total Debt Ratio In general: a low Total Debt Ratio is good with the critical number being 1. Smaller than one means that the company has more assets than debts. Vice versa, larger than one mean that the company has more debts than assets. If this is the case you’d better hope they will not go out of business …

31. Adding Ratios

32. Sid 424-425 Weaknesess with financial measurements Focus on what has already happened Encourage short term actions Often too aggregated Does not include customers and supplier Difficult to understand in relation to the work

33. For use with: Management Accounting Catherine Gowthorpe (ISBN: 9781844802043) Copyright Cengage Learning 2008 10 Performance Measurement FIGURE 10.2 The balanced scorecard