Operational Accounting

Process Economics and Mgmt 423

Curtin University Lectures
2012
By Dr Anbalagan Krishnan
Key Learning Outcomes
Planning and Control
Describe how you would set up a system of cost
control .
Capital and Expense
Why is this distinction important to understand?
Cost Management
What other activities are important to achieve
improving cost performance?
The Planning Process
Strategic Plan

Operating Plan

Expense Capital
(Operating) (Improvement)
Budget Budget
Strategic Plan
Companys Vision and Mission
Where the business is headed
The path it intends to take
The distance and rate at which it intends to
move
Strategic Analysis

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Operating Plan
Set direction
Develop plan
Implement plan
Monitor progress on the plan
Sets sales / marketing plan
Flows to production plans
Identifies non-financial indicators
Devolved to operating centres, departments, and crews
Identify customer & business requirements

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ault.aspx
 Expense (Operating) Budget
Process initiated by management, usually on an
annual basis
Input required from line, technical and functional
personnel
Use to assign responsibility to the departments.
Zero-based budget is ideal
Exercise
What are the Major Components of a Refinery Expense
Budget?

Raw material usages

People levels
Maintenance costs
Cash expenses (supplies, contractors)
Depreciation (non-cash cost)
Raw material prices
Salary levels
Capital (Improvement) Budget

Process initiated by management, usually

on an annual basis
Input required from line, technical and
functional personnel
Engineering focussed
Budget levels usually based on availability
of cash to finance new assets and business
goals designed to increase shareholder
value
What is Shareholder Value?
Shareholder value is ultimately represented by the
market value of the companys shares
The share price is determined by market
expectations of long term cash flows
Measures of shareholder value need to be sensitive
to management actions which improve results in
the short term but have long term detrimental
consequences
What Drives Shareholder Value ?
Business Profitability .
Organization stability .
Demand of the company product.
Business expansion .
Social involvement .
Staff commitment .
Economic conditions.
What is Economic Profit?
A way of measuring an operations real
profitability.
The operation raises capital to manufacture
products, and sell it at an operating profit.
Then the cost of that capital is paid.
Shareholders receive the balance.
It is a measure of value added to the
shareholders.
Economic Profit - An Example
Which company is more likely to have an
improving share price?
Company A: profit of $1 million, using assets
which cost $5 million
Company B: profit of $5 million, using assets
which cost $50 million
The weighted average cost of capital for
both companies is 15%
Economic Profit - An Example
Co A: $1 m - (15% of $5 m) = $0.25 m EP
Co B: $5 m - (15% of $50 m) = -$2.5 m EP

Company A has increased shareholder

value, while company B has destroyed it
Cost Management
What are Costs?
Not just expenditure
Waste is usually hidden cost within our
normal processes - appears normal
Waste usually develops as changes to
systems and processes are implemented, but
not all the related systems are changed
Categories of Total Costs
Strategic Operational
Debt costs Labour
New plants Materials
Product Energy
Tangible development Supplies
Market development Contractors

Poor product Poor quality

positioning Absenteeism
Technological Turnover
Intangible obsolescence Poor morale
Poor facility Lost output
location Late delivery
Unnecessary
conveyance

Source: Cost Containment, Peter R Richardson 1988

Key Learning Outcomes
Revisited
Planning and Control
Describe how you would set up a system of cost
control at a chemical refining operation
Capital and Expense
Why is this distinction important to
understand?
Cost Management
What other activities are important to achieve
improving cost performance?