Master of Business Administration
Accounting for Managers
Prepared by:
Intake: October, 2006
C O N T E N T –
Question ………………………………………………………………….. 3
INTRODUCTION ……………………………………………………………………………………… 3
( A ) PUBLIC SECTOR ACCOUNTING ……………………………………………………………. 4
1. The nature of the public sector ……………………………………………………………… 4
2. Public sector accounting ……………………………………………………………………. 4
3. Economy, efficiency and effectiveness …………………………………………………… 4
( B ) MANAGEMENT ACCOUNTING AND CONTROL …………………………………………. 5
1. Accounting and control ………………………………………………………………………. 5
2. Planning and control …………………………………………………………………………. 5
3. Fundamental aims and objectives …………………………………………………………. 6
4. The management planning and control cycle …………………………………………….. 6
5. Investment appraisal …………………………………………………………………………. 7
6. Financial planning ……………………………………………………………………………. 7
7. Capital budgeting ……………………………………………………………………………… 7
( C ). FINANCIAL REPORTING ……………………………………………………………………….. 8
1. Annual reports and accounts …………………………………………………………………. 8
2. Accounting uniformity …………………………………………………………………………. 8
3. Performance measurement …………………………………………………………………… 9
( D ). THE PRIVATE SECTOR AND DEVELOPMENT – Bolivia case study ………………………. 9
1. Paying Taxes ……….…………………………………………………………………………… 9
2. Establishing a Community – Oriented Foundation ………………………………………….. 9
3. Health Care………………………………………………………………………………………. 10
4. Rural Education …………………………………………………………………………………. 10
5. Training …………………………………………………………………………………………… 10
6. Good Neighbor Assistance ……………………………………………………………………. 10
CONCLUSION ………………………………………………………. 10
REFERENCES ………………………………………………………. 11
Accounting for managers
Question: .
To what extent should the financial reporting practices of public sector organizations differ from those used by companies in the private sector? .
ANSWER
INTRODUCTION
Most of the descriptions of management systems and management accounting tend to assume a business environment, and whilst there are many similarities between private and public sector organizations the special characteristics of the latter do result in some important differences.
Review public and private sectors – key difference
Private sector Public sector
Market driven Funded by taxation
Reliance upon sales Activity determined politically
Uncertainty of sales Annual decisions
Need for flexibility fixed budgets
Profit oriented – simple success criteria Services oriented – success criteria?
Single objective multiple objectives
measurable outputs Difficulty of output measurement
Resource mix Labor intensive
Products – cost drivers clear Services – lack of clarity
Profit Services
Income Not so much
Tax No tax
Accounting concepts in the public sector Traditional view:
Accrual concepts was not generally applied. Estimation such as depreciation rates, residual value. Affect the measurement of surplus / deficit, hence not used. No separation of capital and revenue. All are treated as expenses. Spending on capital assets not Capitalized.
Include a balance sheet, asset register, depreciation, Modified historical cost accounting ( combines the fundamental principles of historic cost accounting with the current valuations of some classes of assets )
Exam index of problem
compare example – Factors for a successful budget (RULE / PRINCPLE)
1. Communicate clearly the objective of a budget.
2. Staff participation.
3. Link corporate budget to personal (e.g. promotion )objectives, if possible.
4. Get reasonable targets and reward, if achieved.
5. Do not be over-precise, particularly in uncertain situations.
( A ) PUBLIC SECTOR ACCOUNTING
To provide an introduction to the nature of public sector accounting. We begin with a discussion of some characteristics of public sector organizations and then offer an overview of the origins of the sub-discipline of public sector accounting. The final part discusses the concepts of economy, efficiency and effectiveness.
1. The nature of the public sector
The etymology of the word ‘public’ is of little help because it has even more shades of meaning. A common source of difficulty in accounting is with the phrase ‘ public accountants’: from the Anglo-American perspective this is understood as private accountants in public practice, but in Continental Europe, in English translation, it often means accountants in a governmental organization.
2. Public sector accounting
It began to use the phrase ‘the public sector’ in preference to ‘the public services ad part of the body’s new objective of representing all professional accountants outside the private sector. Accounting and auditing in the public sector became part of its syllabus (though it has since been taken out). The main point to be made from this overview is that the creation of the sub-discipline of public sector accounting followed, first , from the ways in which we then thought about our economy (and society), and secondly, and more immediately, from the changed objectives of a professional accounting body. It was, and still is, possible that such impulses would not lead to a sub-discipline of accounting, not least because, the ‘public sector’ is very heterogeneous. But this criticism would strike at the heart of the accounting discipline, since the ‘private sector’ is also heterogeneous (incorporated/unincorporated, public/private companies, service/manufacturing, very large/ very small, businesses / charities ).
3. Economy, efficiency and effectiveness
Efficiency is the greater the ratio, the more output for input, the more efficient, not used in an absolute sense but in a relative. Effectiveness is the success or otherwise in achieving objectives, concerned only with outputs. Economy is the phrase ‘value for money’ is used to refer to economy, efficiency, and effectiveness. It’s relates output (value) to input (money) and is therefore another way of saying ‘efficiency’.
( B ) MANAGEMENT ACCOUNTING AND CONTROL
All organizations, whether they operate in the private or the public sector, exist in order to achieve one or more objectives. While the exact nature of the objectives may vary considerably, ad may the manner in which they are pursued, there is one feature that seldom varies – the resources available are never sufficient to permit the achievement of every desired aim.
1. Accounting and control
Decisions need to be taken on which strategies to pursue and which to reject, which activities to undertake immediately and which to delay until later, which activities to modify or abandon, and which to reinforce, planning process, the plans have to be implemented, and systems are needed to ensure that the planned activities are followed and the ultimate objectives achieved, control process. Management accounting is to present accounting information that is aimed directly at the key elements of the overall management system, i.e. planning, decision making and control. Accounting information is not limited to financial information only but also incorporates information about staff levels and usage, output statistics, activity levels, and so on.
2. Planning and control
Essential for the setting of the overall objectives of the organization, fundamental aims and objectives, essential for implementing the actions needed to achieve the fundamental aims and objectives. This is operational planning.
Figure 1, The managerial planning and control processes of public sector organizations.
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3. Fundamental aims and objectives
Setting the overall organizational aims and objectives. Strategy formulation and involves looking beyond day-to-day operational concerns and taking a longer-term perspective.
4. The management planning and control cycle
The purpose of operational plans is to break the fundamental objectives down into a series of targets to be aimed for and activities to be pursued. Importance of the budget in public sector organizations stems originally from its use in determining taxation levels or the amounts to be charged for services. Budget provides the essential link between planning and control. Its planning role is achieved by expressing in monetary terms the inputs needed to achieve the planned activities of the budget period. Many of the inputs will take the form of labor, materials, equipment, heating and lighting, and so on, and the only sensible way that these can be compared or combined is by referring to them in terms of a common denominator, i.e. monetary value. Its control role is achieved by preparing the budget in such a way that it shows clearly the inputs and resources that have been allocated to individuals or to departments to permit them to undertake the tasks for which they are responsible. Public sector organizations are frequently lack of suitable output measurements and there fore inputs consumed are often used as a measure of effect, expenditure allocated in the budget crucially important because not only does it place a limit on the costs that can be incurred on this service but also the costs themselves reflect the planned level of service. Control can then be exercised by comparing budgeted results with actual results to ensure that expenditure levels are not exceeded and that planned activity levels are achieved, controlling and measuring stage, reporting, and analysis and feedback stage. Basic role of management accounting in public sector provide managers with the accounting information they need to carry out the planning and control functions. Out puts are clearly measurable and costs recovered from consumers, recovered costs should be full costs, market costs, or subsidized costs depends on political attitudes. Recovered by levying a tax on the whole community rather than by charging individual users. A large part of the costs of private sector organizations tend to be engineered cost which vary directly with output, whereas the costs of most public sector organizations are discretionary costs which are fixed at the beginning of the budget period and often have no obvious relationship with level of activity. a. Long-term planning – usually five years or more ahead; b. Medium-term planning – usually one to five years ahead; c. short-term planning – up to one year ahead.
5. Investment appraisal
The cost of investing in new assets is , of course , not only the capital cost of the asset itself, but also the running costs that will be incurred when the asset is brought into, techniques that can be used to calculate and compare the total capital and revenue costs of different proposals and also to evaluate the benefits, investment appraisal..
6. Financial planning
Financial planning related to the process of investment appraisal, basic purpose of financial planning is to ensure that the financial consequences of fulfilling the fundamental aims and objectives of public sector organizations, and also meeting forecasted demands for services, are considered at the earliest possible stage.
7. Capital budgeting
Capital budgets contain details of the estimated receipts from the sale of assets, and the estimated payments for the acquisition of new non-current assets, where the capital spending requirements exceed the capital receipts then the difference is the amount that has to be financed, either from a surplus on revenue account, or from borrowing or as a private finance initiative project. Any model is to enable some representation of a real-life situation to be examined and experimented with. Financial modeling involves assigning a numerical value to each variable and then expressing the relationship between the variables in a mathematical form. Budgetary control is concerned with ensuring that actual expenditure is in line with budgeted amounts and that the objectives and levels of activity envisaged in the budget are achieved. A crucial role of management accounting is that of introducing and maintaining a sound system of budgetary control. Set up accounts for collecting data on inputs and outputs at the lowest distinct level of activity, cost centers, together such cost centers form a responsibility centre.
( C ). FINANCIAL REPORTING
Concerned with the published annual report and accounts. There has been a significant increase in the use of this medium by public sector organizations in recent years. Probably the most dramatic context is in government: formerly ‘ reporting’ and ‘accounting’, while pervasive, typically did not focus on relatively small groups of civil servants; now, each Department and each Executive Agency produces and annual report and accounts. Included in these reports, and many others, is a profusion of performance measures.
We begin the assignment by introducing the essential parts of these annual reports and accounts, including their relationship to the statutory audit. We then discuss accounting uniformity as a core issue in comparing the accounts of different organizations. We then turn to the use of unit cost statistics to report on performance and finally to wider accountability issues.
1. Annual reports and accounts
Companies have long produced a single document called the annual report and accounts. It satisfies statutory and other requirements but also includes material at the discretion of management. Some financial statements are required by company law to be published (profit and loss account, balance sheet), some are required by accounting standards (cash flow statement); together with their accompanying notes, these are known as the financial statements. They are audited ( as part of the statutory audit) and the consequent audit report is published in the annual report and accounts and specifically refers, by page numbers, to the financial statements covered by the audit report.
2. Accounting uniformity
In the developed countries of the world, the UK and the USA represent the ‘flexible’ view of financial reporting : accounting standards exist to narrow the areas of difference; they do not exist to eliminate them.
a. Services – these are the main services, such as education, health, highways, etc.
b. Divisions of service – for example, education will be divided into primary, secondary, continuing education, etc.
c. Subdivisions of service – which provides a further breakdown of the division.
d. Standard groupings – for each division of service, these groupings represent the main areas of expenditure and income, e.g. employees, premises, transport, etc.
e. Sub-groupings – a subdivision of the above standard groupings.
f. Detail heads – a detailed analysis of the sub-groupings.
3. Performance measurement
Financial reports provide a picture of the resources entrusted, how the resources were employed during the year , and in what form the resources are now held. The emphasis has always been on producing verifiable statements of income and expenditure, balance sheets and, latterly, cash flows. Function of the accounts is to provide verifiable information: what users of that information choose to do with it is a matter for them.
( D ). THE PRIVATE SECTOR AND DEVELOPMENT – Bolivia case study
Economic development doesn’t happen without smart people, good ideas, and money to invest in both. The International Finance Corporation provides investment capital and know-how to privately sponsored ventures that further economic growth in developing countries – and profitably for all investors. What is more, IFC stands by its commitments. The International Finance Corporation’s primary mission is to encourage economic growth in developing countries through the private sector.
1. Paying Taxes
Inti Raymi is a prime source of government revenue, both local and national. With input from Inti Raymi, the government passed a new mining code in early 1997. The new code abrogated the grandfather clause on income tax payments for mining companies established before 1992 and requires all firms to pay both a 25 percent corporate income tax and a sliding royalty on gold sales. The royalty or complementary mining tax rate will range from 3.5 percent to 7 percent, based on prices quoted on the international metal exchange. Inti Raymi estimated that its tax liability would increase if the price of gold exceeds 0 an ounce and decrease if the price falls below 0 an ounce. The gold price 1997 averaged less than 0 an ounce.
Worker income is also subject to personal income tax. At a tax rate of 13 percent, Inti Raymi employees pay about .4 million in personal income taxes each year. These workers must also pay the 13 percent value-added tax on their personal and household purchases.
2. Establishing a Community – Oriented Foundation
Foundation management is well aware that Inti Raymi’s financial support will not go on forever, its programs all have a five year horizon, starting in 1996. After five years, program management will be transferred to the local government. As fiscal decentralization evolves, local governments should have the fiscal revenues to take over the foundation’s functions. The foundation’s activities are concentrated in three major areas: health care, rural educations, and training.
3. Health Care
Operating out of the company financed health clinic in Chuquioa, the foundation provides primary health care to the surrounding population. This program is directed mainly at cutting the area’s high maternal and child morbidity and mortality. The foundation pays the clinic’s staff of two doctors, two nurses, and a dentist. The local communities are already doing better than other rural communities by social indicators such as birth weight and nutrition.
4. Rural Education
To help communities attract and keep qualified teachers in their somewhat remote schools, the foundation pays teachers a bonus on top of their government salaries. Even so, the professional level of teachers has tended to be low. By offering training and orientation courses to teachers, the foundation has sought to improve their skills and performance.
5. Training
Recognizing that sustainable development requires economic activities beyond the Kori Kollo mine, the foundation has undertaken several projects to develop the local economy. Since most of the surrounding communities depend on sheep herding and subsistence farming, providing technical assistance and training through its Agricultural and Livestock Breeding Project has been the foundation’s primary activity. Under the project, a local slaughterhouse cooperative has been formed, and improvements in the handling and marketing of local sheep have allowed local herders to increase the value added of their product. Foundation activities have been available to people from outside the 25 surrounding rural communities as well as to local farmers and herders.
6. Good Neighbor Assistance
In addition to financing the operations of the Inti Raymi Foundation, the company itself has and annual budget of about 0,000 to fund community-originated projects . Every Friday, the mine’s operations manager meets with members of the community who are seeking assistance. These requests usually involve small sums of money, for example, funding for rural festivities, soccer teams, championships, and trophies; restoring local churches or community buildings; or buying school supplies. The mine’s management sees this as another opportunity to exercise its social responsibility as a part of the community.
CONCLUSION
It was pointed out earlier in this assignment that an increasing range of public sector activities are now required to be exposed to competition. Typical of these is the laundry service of a hospital, and in the example that follows the issues that need to be considered when deciding whether to continue with in-house provision or contract out to the private sector are examined.
REFERENCES
Credit:ivythesis.typepad.com
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