PowerPoint Presentation

CIMA C1Fundamentals of Management AccountingShort Term Decision Making

CIMA C1Fundamentals of Management AccountingClass Slides Ian Wilson

The syllabus expects students to competent with:Explaining Relevant Costs & Cash FlowsExplaining Make or Buy DecisionsCalculating profit maximising by obtaining the best sales mix using Limiting Factor analysisLearning Aims (CIMA)

What is a Limiting Factor?In business there are not enough resources available to fulfil ALL the plans of the organisationThe Factor which is in short supply is called a Limiting FactorWhen a resource is in short supply, it will have to make decisions based on how best to use those scarce resources.

Introduction: Limiting FactorsExamples: Can you think of any?Most obvious.a lack of sales!MaterialsLabour.skilled/trainedMachine HoursProduction capacityMoneyCashnot enough of it!Limiting Factors

Limiting FactorsLimiting Factor analysis is a technique used to calculate the mix of products that should be made to maximise the return on a single limiting factorSee the example on page 122 of your notesRed & Herring!Which one should the company make to maximise its return on scarce machine hours? Answer:Tempted by Herring?Higher Contribution - 60 compared to 30Higher Profit - 40 compared to 10Still could be wrong decision!Why?Profit includes Fixed Costs distorts the picture!Fixed Costs are apportioned Arbitrarily!Limiting FactorsExample continued:Lets assume we have 1000 machine hours available.A Red takes 1 hour & herring takes 3 hours:Re-work your thought now see foot of page 122.Work out the Contribution per Limiting FactorRed is 30, Herring is 20Your answer has changed!

Limiting FactorsKey Stages to follow:If not stated, identify Limiting FactorFind the Contribution per UnitCalculate the Contribution per Limiting FactorRank in order of priorityPrepare Production ScheduleCalculate the Total ContributionDeduct Fixed Costs if known/available

Limiting FactorsA company makes 3 Products:SpeedwellNettleLiatrisFixed costs 75001800 Hours availableHow much to produce of each of the three products to MAXIMISE profits for the Company?Exercise 1A more complex question, 3 products:A, B & CGiven sales Demand for each product:No limit on materialsMachine Hours limited to 200,000 hoursLabour hours limited to 50,000 hoursCalculate maximum profits based on best use of limited resources:Exercise 2Looked at this in Session 1Relevant CostsAvoidable CostsOpportunity CostsSunk CostsControllable CostsUncontrollable Costs

Relevant Costs & Revenues:Relevant Costs:Future cash flows arising as a direct consequence of a decision.They are:Future CostsCash FlowsIncremental Costs

Relevant Costs & Revenues:See page 125:Required:Should the company accept the offer?Follow page 125:

Exercise 3Summary Rules:Relevant cash flows are future cash flows:Relevant cash flows are incremental cash flows:Committed costs are not relevant:Relevant costs can be opportunity costs:Read page 126:Relevant Costs & Revenues:Exercise 4:Look at the 3 questions here:Exercise 5:A,B,C or D?Relevant costs can be Opportunity Costs

The decision to make a component in house or buy it in from outside is a tough business decision.Assume that all fixed costs of manufacturing are general to the businessOnly the Marginal costs are relevant thereforeCriteria:Compare marginal cost of making to the purchase price:Make or Buy Decisions:4 products, Make or Buy?Page 128Exercise 6