CMA PART 1

Volume 1: Sections A and B FINANCIAL PLANNING, PERFORMANCE AND CONTROL

Section A: Planning, Budgeting and Forecasting: 1. Planning and Budgeting Concepts 2. Budget Methodologies 3. Other Types of Budgets 4. Ongoing Budget Reports 5. Forecasting Techniques 6. Learning Curves 7. Probability 8. Risk, Uncertainty, and Expected Value 9. Sensitivity Analysis 10. Top-Level Planning and Analysis

Section B: Performance Management 1. 2. 3. 4. 5. 6. 7. 8. Cost and Variance Measures Variance Analysis Concepts Manufacturing Input Variances Sales Variances Market Variances Variance Analysis for a Service Company Responsibility Centers and Reporting Segments Performance Measures

CMA Part 1
A. B. C. D. E. PLANNING, BUDGETING AND FORECASTING PERFORMANCE MANAGEMENT COST MANAGEMENT INTERNAL CONTROLS PROFESSIONAL ETHICS : : : : : 30% 25% 25% 15% 05%

Part 1 is a four-hour exam that will contain 100 multiple-choice questions and 8 to 10 written-response or calculation questions based on two scenarios.

PLANNING AND BUDGETING CONCEPTS

Planning in Order to Achieve Superior Performance: To increase company profitability that leads to attain ultimate goal of the company, maximizing shareholder value. Role of Management in Attaining Profitable Growth: Two opposing philosophies between market theory and planning and control theory. The External Environment in Planning and Budgeting
Three interrelated environments affect managements planning and budgeting: 1) The industry in which the company operates, 2) The country or the national environment in which the company operates, and 3) The wider macro environment in which the company operates. E.g: Economic growth, level of interest rates, Changes in currency exchange rates, inflation and deflation, social factors.

Setting Objectives and Goals:

1. 2. 3. 4. Identification of Companies Objectives Clearly stated in specific terms Communicated to all individuals though mission statement Goals are developed and implemented at department level Planning is the process that enables a company to achieve its goals through efficiency and effectiveness

Types of Plans and General Principles 1. Strategic Plans (Long-Term Plans): broad, general, long-term plans 2. Intermediate and Short-Term Plans 3. Other Types of Plans: Single Purpose Plan, Standing Purpose Plan, Contingency Planning The Relationship among Planning, Budgeting and Performance Evaluation 1. Management Develops plan in quantitative terms > Revise the plan through budget feed backs > carry out the plan > compare with actual > control tool > revision of existing plan. 2. Master Budget is summarized set of budgeted financial statements, including budgeted balance sheet, budgeted income statement and budgeted statement of cash flows. Meaning of Budgeting: A budget is realistic plan for the future that is expressed in quantitative terms. It is intended as a planning tool and is a guideline to follow in order to achieve the companys planned goals and objectives. A budget is a planning tool, a control tool, a communication tool and a motivational tool.

Roles of Budget: 1. Budget as a TOOL

A Budget is a Planning Tool. It anticipates problems before they occur. A firm with a goal in the form of a budget will be able to plan The budget is a Control Tool. Control through cost guideline and it reveals the efficiency and inefficiency of company resources Budgetary Slack / Overestimation of expenses must be avoided. It must be integrated with the accounting system and the organizational structure. That integration enhances control by transmitting data and assigning variances to the proper organizational submits. Budget is a Motivational Tool. A budget helps to motivate employees to do a good job. Some managers view budget as a restriction. Some degree of flexibility should be allowed to motivate employees Budget is a means of Communication. It tells the employees, what goals of the company Each dept might think the firms has different goals, where there is no overall budgets. 2. Budget as a formal quantification of Mgt;s Firms goals cannot be achieved without careful planning about the allocation of resources and the expected results. It lays out consumption of resources and the resulting outcomes. 3. Budgetings Role in the overall Planning & Evaluation Process Planning is the process by which an organization sets specific goals for itself and sets about pursuing those goals. o Mission Statement> Strategic Plan>Loan Term Objectives>Priorities>Short Term Objectives. To evaluate process, quantification is necessary, this is the role of various budgets. o Compare actual results to the budget 4. Budgetings Role in formulating and controlling short term objectives: Companies goals can be achieved through the completion of incremental steps Budgets is applying on month by month basis. 5. Role of Budgets in Measuring Performance against Established goals It provide guideposts for the assessment of success/failure It helps to determine where the organizational performance. 6. The Role of Budgets in Monitoring & Controlling Expenditures Analysis of variance reveals the efficient / inefficient use of company resources. 7. Role of Budgeting process in Facilitating Communication among organizational Units and Enhancing Coordination of Organizational Activities. The budget informs employees at all levels what objectives the firm is attempting to accomplish It facilitates coordination of the activities of a firm.

Characteristics of Successful Budgeting

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Start with the companys short-and long term plan Support of Management at all levels Feel ownership of budget Motivating device To minimize adverse effects Flexible Accurate Representation Coordination Not be rigid Time Period

The Budgeting Process

1. Characteristics of a Successful Budgeting Process: a. Sufficient Lead Time: Budget should be finalized when the fiscal year begins. Budget Planning calendar is the schedule of activities for the development and adoption of the budget b. Budget Manual: Educate all on the detailed procedures for preparing and submitting their parts of the overall budget c. Buy-in at all levels: participative budget may has a much greater chance of acceptance. 2. Participation in the Budget Process: a. Board of directors b. Senior Management c. Budget Department/Committee d. Middle / Lower Management e. Top down budgeting f. Bottom up budgeting g. Budgetary Slack: padding of the budget. 3. Time Frames for Budgets: a. Strategic Plans: Concern senior manager and have a time frame of10 Years and More. b. Intermediate Plans: concern middle managers and have time frames of up to 2 years. c. Operational Plans: concern lower level managers and have time frames of 1 month to 1 year. 4. Effects of External Factors on the budgeting process: a. General Economic Conditions b. Industry Situation 5. The Concept of Controllability: 6. Revisions to the budget: a. Establishing standards of performance b. Measuring actual performance c. Analyzing and comparing performance with standards d. Devising and implementing corrective actions e. Reviewing and revising the standards.

The Budget Development Process

1) 2) 3) 4) 5) 6) Budget guidelines are set and communicated Initial budget proposals are prepared by responsibility centers Negotiation, review, and approval Revisions. Reporting on variances Use of the variance reports

Methods of Developing the Budget

1. A participative budget is developed from the bottom up. Advantages: a. Gives senior managers a better grasp of the problems their employees face. b. more likely to gain employee commitment to fulfill budgetary goals c. A participative budget is more likely to be achievable because it was developed with input from the people responsible for achieving it. Disadvantages: a. Budgetary slack. b. Integrating corporate strategic plans into the budget can be more difficult when it has a bottom-up process. c. Participative budgeting is more time-consuming than authoritative budgeting 2. An authoritative budget is developed from the top down Advantages: a. Gives senior management better control over the decision-making process b. More emphasis on the achievement of the strategic plans developed by top management. c. Authoritative budget development can be done more rapidly and with greater flexibility d. Budgetary slack is not a problem. Disadvantages: a. Lower-level managers & employees has less commitment to the budget and be less accepting of it. b. An authoritative budget issues, or dictates, orders c. It does not take into account existing limitations that senior mgt might not be aware of. d. Communication between senior management and lower-level management and employees is reduced with an authoritative budgeting process. 3. A consultative budget is a combination of authoritative and participative budget development methods. Advantages and Disadvantages of Consultative Budget Development: a. Senior managements strategic plans are integrated into the budget a nd budgetary slack is not a problem. b. The amount of time required to develop a consultative budget is greater c. If lower-level managers see the input they provided incorporated into the final budget

Best Practice Guidelines for the Budget Process

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. The development of the profit plan should be linked to corporate strategy. Use the budgeting process to minimize the adverse effects The profit plan must have the support of management at all levels. Communication is vital. The profit plan should be coordinated, Budgeting should not be rigid. The profit plan should be a motivating device. Design procedures to allocate funding resources strategically. Managers should be evaluated on performance measures other than simply meeting budget targets. Link cost management efforts to budgeting. The strategic use of variance analysis. Reduce budget complexity and budget cycle time. The time period for a budget should reflect the purpose of the budget Develop budgets that can be revised if necessary. Review the profit plan on a regular basis throughout the year.

Cost Standards in Budgeting:

Standard Cost/Budgeted cost are costs for direct materials, direct labr and manufacturing overhead that are predetermined or estimated as they would apply under specified conditions. Standard cost may be either called theoretical costs, currently attainable / expected costs. Used most standard costing system. Setting Standards Costs: a. Activity Analysis: It involves identifying all the input factors and activities that are required to complete a job b. Historical Data Data on costs involved in the manufacture of a similar product in prior periods c. Target Costing The cost that yields the required profit margin for the product

d. Strategic Decisions Strategic Decisions can also affect a products standard cost. e. Benchmarking The best performance anywhere can be chosen to attainable standards and can help a firm maintain its competitive edge.

The Standard Setting Process:

A Company can either use authoritative or participative procedure in setting the standards costs Authoritative Standard-Setting Process: management sets the standards and handed down Advantages: a. Proper consideration of all the factors that will affect the costs b. the process can be handled more expeditiously than individuals are involved Disadvantage: a. affected the employees not involved and reduces motivation. Participative Standard Setting Process: Involves all employees who will be affected by the standard. Advantages: Employees are most likely to accept them Disadvantage: results standards may not support achievement of the firms strategic goals. 1. Establishing Direct Materials standards 2. Establishing Direct Labor standards 3. Establishing Overhead Standards

Budget Methodologies:
The Budgeting Cycle: it is a process that goes on throughout the year, even though the budget is probably completed before the year begins. Development of the annual profit plan, although that is a big part of the cycle. Variance analysis is another important part. The Budgeting process includes: a. Using data from past performance as well as future expectations.
b. Actual results are reported on and compared with budgeted results on a monthly or quarterly basis. c. Management accountants assist managers in investigating the variances from the plan.

d. Managers and management accountants monitor market feedback, external conditions, and actual results as they plan for the next budget period. Budget/Profit Planning Manual The budget or profit-planning manual details the budgeting process. It is written and maintained by the department in charge of coordinating the development of the profit plan and it is their guidebook for the whole budget development process. It outlines what needs to be done and when. The manual contains: