Advanced Managerial
Accounting
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Advanced
Managerial
Accounting
Prescribed Textbook
Assignment
Examination
What is Management
Accounting?
Management accounting combines accounting, finance and
management with the leading edge
techniques needed to drive successful businesses
● Explain the financial consequences of businessdecisions.
● Formulate business strategy.
● Monitor spending and financial control.
● Conduct internal business audits.
● Explain the impact of the competitive landscape.
Management accounting skillset
● Analysis – they analyse information and using it to make business
decisions.
● Strategy – they formulate business strategy to create wealth and
shareholder value.
● Risk – they identify and manage risk.
● Planning – they apply accounting techniques to plan and budget.
● Communication – they determine what information management
needs and explain the numbers to non-financial managers.
Risk and Uncertainty
Risk is applied to a
situation where there
are several possible
outcomes and there is
relevant experience to
enable statistical
evidence to be
produced for predicting
the possible outcomes
Uncertainty exists
where there are
several possible
outcomes, but there
is little previous
statistical evidence
to enable the
possible outcomes
to be predicted
Probabilities
The likelihood that an event will occur is known as its probability,
and this is normally expressed in decimal form with a value between
0 and 1.
Flicking of a coin. Probability of heads = 50%
Expected Value
Standard Deviation and Coeff of Variation
Standard deviation is the conventional measure of the dispersion of a
probability distribution
used as an indicator of market volatility and thus of risk. The more
unpredictable the price action and the wider the range, the greater the
risk
When the risk structure and returns for two independent projects are
different, it is necessary to calculate the weighted average risk per R1 of
return. This statistical measure is called the coefficient of variation (CV)
Decision trees
A decision tree is a diagram showing several possible courses of action and
possible events (i.e. states of nature) and the potential outcomes for each
course of action.
Each alternative course of action or event is represented by a branch, which
leads to subsidiary branches for further courses of action or possible events.
Decision trees are designed to illustrate the full range of alternatives and events
that can occur, under all envisaged conditions.
Pricing decisions
Price takers vs Price Setters
Price takers Firms that have little or no influence over setting the selling price of their products
or services
Price setters Firms that have some discretion over setting the selling price of their products or
services
Price Setting in the short run
Applies to situations where companies are faced with the
opportunity of bidding for one- time special orders in competition
with other suppliers. Only the incremental cost of undertaking the
order should be taken into account. The incremental costs are likely
to consist of:
Extra materials that are required to fulfil the order;
Any extra part-time labour, overtime or other labour costs;
The extra energy and maintenance costs for the machinery and
equipment required to complete the order.
A price-setting firm facing long-run
Pricing customised products/services.
Pricing non-customised products/services.
Target costing for pricing non-customised products/services
A price-taking firm facing short-run product
mix decisions
Price-taking firms with a temporary excess capacity may be faced
with opportunities of taking on short-term business at a marketdetermined selling price.
Means accepting short-term business where the incremental sales
revenues exceed incremental short-run costs will provide a
contribution towards committed fixed costs that would not
otherwise have been obtained
A price-taking firm facing long-run product mix
decisions
When prices are set by the market a firm has to decide
which products or services to sell- given their market prices.
In the longer term, a firm can adjust the supply of resources
committed to a product.
Other readings
Establishing target mark-up percentages
Limitations of cost-plus pricing
Reasons for using cost-plus pricing
Pricing policies - price skimming policy vs penetration pricing policy
Relevant Costing
A relevant cost can be described as having three qualities: It is a
differential, future, cash flow. Costs that have already been incurred
or committed to (sunk costs) are irrelevant when establishing the
financial impact of a decision on an enterprise, as these costs will be,
or have been, incurred regardless of the decision to be made.
Similarly, income that will be given up and no longer received as a
result of choosing the new course of action should be taken into
account
Relevant Costing
Relevant cost: Future cash flow that differs between alternatives. Relevant costs
and revenues are those future costs and revenues that will be changed by a
decision.
Irrelevant Cost: A cost that does not differ between alternatives, and/or does
not represent a future cash flow. These costs and revenues will not be changed
by the decision under consideration.
Opportunity cost: The best alternative foregone, i.e. an opportunity that is
sacrificed if the decision under consideration is made.
Sunk Cost : A cost has already been incurred or irrevocably committed to.
Differential Cost: A cost that differs between alternatives.