Galilee College

Managerial Accounting Course No. ACC 311

Galilee Corporate Centre Joe Farrington Road

P.O. Box 1!"#$ % Nassau& Ba'a(as ) *el. +,-,.3,-%/-!! Fax +,-,.3!-%0,#, (ail1 galilee2coral3a4e.co( 333.gcollege.org 5r. 6illis 7. Jo'nson& Galilee College

Contri8ution 891 by Larry Walther Galilee College : ,##0

Galilee College Course Outline

CO;R< N;MB R: Accounting ACC 311 CO;R< *=*7 :
CR 5=* >A7; 1 3.0 5A* PR PAR 51 July 2002

Managerial

5 PAR*M N*1 Accounting CO;R< 5;RA*=ON1 1 SEMESTER

PR R ?;=<=* <

ACC 112, Princi les o! Accounting ""

PRO#RAM COOR$"%ATOR &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&& R ?;=R 5 * @*<1 MANAG M N* ACCO;N*=NG Aut'ors C'eryl S. Mc(atters, Mc#ill )ni*ersity $ale Morse, )ni*ersity o! Oregon Jerol+ ,i--er-an, )ni*ersity o! Roc'ester =<BN1 0.0/.020300.1 5escription1 1 2001 2 3ar+co*er 2 /04 ages <;PP7 M N*A7 MA* R=A7< Stu+y #ui+e !or use 5it' Manage-ent Accounting: Analysis 6 "nter retation 2 0. 0/.270084.0 CO)RSE $ESCR"PT"O% 9urt'er +e*elo -ent o! !inancial accounting conce ts, inter retation, an+ !urt'er stu+y o! -anage-ent uses o! accounting +ata. "t inclu+es a stu+y o! :asic accounting conce ts, inter retation o! accounting re orts, cost control an+ analysis, an+ -et'o+s o! -easuring er!or-ance. %ot o en to accounting -a;ors. CO)RSE O<JECT"=E Stu+ents 5ill :e e> ecte+ to: )n+erstan+ t'at cost analysis is -ost i- ortant to all :usiness an+ ersonal !unctions.

$e-onstrate an+ un+erstan+ an+ 'a*e t'e a:ility to use all !unctions an+ to ics co*ere+ in t'is course. Progra( Context: This course is a second year course in the Accounting program. (This course can also be completed in the third year )
Course 7earning Outco(es: Learning outcomes identify the knowledge, skills and attitudes that successful students will have developed and reliably demonstrated as a result of the learning e periences and evaluations during this course. 4aluation <trategies and Grading1 Class Attendance 9ull artici ation an+ atten+ance is e> ecte+ !or t'is course. Stu+ents 5'o -iss a class are res onsi:le !or any in!or-ation +iscusse+, assigne+ or +istri:ute+ in t'at class erio+.

xa(s . 9our -a;or e>a-s 'a*e :een sc'e+ule+. Stu+ents are e> ecte+ to atten+ on t'e sc'e+ule+ +ate. "! an e-ergency occurs, you s'oul+ so-e'o5 noti!y t'e instructor on t'e e>a- +ate. To recei*e a assing gra+e, t'e stu+ent M)ST ta?e t'e !inal e>a-. "! any o! t'e t'ree e>a-s are -isse+ !or A%@ REASO%, t'e !inal e>a- 5ill count again !or eac' e>a- -isse+. "n t'at case, t'e !inal e>a- 5ill :e co- re'ensi*e, t'at is, inclu+e all c'a ters co*ere+ in t'e course. Ao(e3orB 3o-e5or? is assigne+ !or eac' c'a ter co*ere+. $ue +ates 5ill :e assigne+. T'e 'o-e5or? 5ill :e gra+e+ !or neatness, correctness, an+ co- leteness. A!ter t'e +ue +ate, t'e 'o-e5or? 5ill 'a*e %O PO"%T =AA)E. Class3orB . So-e classes 5ill 'a*e class5or?. T'is is a ti-e to learn t'e -aterial. )se notes, te>ts, or 'el eac' ot'er. T'is is to +e*elo tea-5or?. "! you are a:sent, no gra+e 5ill :e gi*en.
9"%AA EBAM CAASS TESTS ASS"#%ME%TS 40C 80C 10C 100C

%ote t'at *iolation o! aca+e-ic 'onesty can a!!ect t'e course gra+e. DC'eatingD on an e>a- Ei.e., t'e gi*ing or recei*ing o! ai+F 5ill result in a course gra+e o! D9.D %ote t'at classroo- :e'a*ior E!or e>a- le, tal?ing to ot'er stu+ents +uring lectureF can negati*ely a!!ect course gra+es :y as -uc' as t'ree letter gra+es, e.g., an DAD can :eco-e a D$.D
GRA5=NG <C<* M1 A 74C . 100C E>cellent < 0/C . 73C #oo+ C /8C . 0GC A*erage

4.00 3.00 2.00

$ G0C . /4C Passe+ 1.00 0C . G/C 9aile+ 0.00

CO> RAG
A. =ntroduction

1. Manage-ent Accounting in an OrganiHational Conte>t

B. <trateg9 and Planning 5ecisions

2. Measuring an+ AnalyHing Acti*ity Costs 3. Measuring an+ AnalyHing Pro+uct Costs 4. Managing Acti*ities 8. S'ort.Ter- $ecisions an+ Constraints
C. <trateg9 and Control 5ecisions

G. Managing OrganiHations /. $ecentraliHe+ OrganiHations

5. Planning and Control =ssues

0. <u+geting 7. Cost Allocations 10. A:sor tion Cost Syste-s 11. =aria:le Costing an+ Ca acity Costs
. <u((ar9

12. Manage-ent Accounting in a $yna-ic En*iron-ent

F. Additional *opics

13. "n*est-ent $ecisions 14. Stan+ar+ Costs an+ =ariance Analysis

Additional =nDor(ation1 1. M"SSE$ TESTS ("AA RES)AT "% A ,ERO #RA$EI SEE @O)R "%STR)CTOR TO $"SC)SS T3"S. 2. Te>ts, 5or?ing a ers an+ calculators are to :e :roug't to e*ery class.

3.

So-e +etails o! your course sc'e+ule -ay *ary :y section2teac'er or c'ange as a result o! un!oreseen circu-stances, suc' as 5eat'er, cancellations, College an+ stu+ent acti*ities an+ class ti-eta:ling.

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Managerial Accounting *AB7 OF CON* N*<

1. "ntro+uction to Managerial Accounting 2. Process Costing 3. Jo:.Or+er Costing 4. Stan+ar+ Costs 8. =aria:le E$irectF 6 A:sor tion E9ullF Costing G. Acti*ity.<ase+ Costing EA<CF /. Joint Costing 6 <y.Pro+uct Costing 0. Ser*ice Cost Allocations 7. <u+geting 10. Cost.=olu-e.Pro!it EC=PF Analysis

C'a ter 1 J "ntro+uction to Managerial Accounting

GOALS @our goals !or t'is D-anagerial accounting intro+uctionD c'a ter are to learn a:out: T'e +istinguis'ing c'aracteristics o! -anagerial accounting. T'e role o! -anagerial accounting in su ort o! lanning, +irecting, an+ controlling. Key ro+uction cost co- onents: +irect -aterials, +irect la:or, an+ !actory o*er'ea+. Pro+uct costs *ersus erio+ costs. Categories o! in*entory !or -anu!acturers an+ relate+ !inancial state-ent i- lications.

DISCUSSION MA%A#ER"AA ACCO)%T"%# 9"%A%C"AA =S. MA%A#ER"AA ACCO)%T"%#: Early ortions o! t'is te>t:oo? +ealt -ostly 5it' !inancial accounting. 9inancial accounting is concerne+ 5it' re orting to e>ternal arties suc' as o5ners, analysts, an+ cre+itors. T'ese e>ternal users rarely 'a*e access to t'e in!or-ation t'at is internal to t'e organiHation, nor +o t'ey s eci!y t'e e>act in!or-ation t'at 5ill :e resente+. "nstea+, t'ey -ust rely on t'e general re orts resente+ :y t'e co- any. T'ere!ore, t'e re orting structure is 5ell +e!ine+ an+ stan+ar+iHe+. T'e -et'o+s o! re aration an+ t'e re orts resente+ are go*erne+ :y rules o! *arious stan+ar+.setting organiHations. 9urt'er-ore, t'e e>ternal users generally see only t'e su--ariHe+ or aggregate+ +ata !or an entity. "n contrast, -anagers o! a s eci!ic :usiness o!tenti-es nee+ or +esire !ar -ore +etaile+ in!or-ation. T'is in!or-ation -ust :e tailore+ to s eci!ic +ecision.-a?ing tas?s o! -anagers, an+ its structure :eco-es -ore D!ree !or-e+.D Suc' -anagerial accounting in!or-ation ten+s to :e !ocuse+ on ro+ucts, +e art-ents, an+ acti*ities. "n t'is conte>t, t'e -anage-ent rocess is inten+e+ to :e a :roa+ re!erence to enco- ass -ar?eting, !inance, an+ ot'er +isci lines. Si- ly si- ly: -anagerial accounting is a:out ro*i+ing in!or-ation in su ort o! t'e internal -anage-ent rocesses. Many organiHations re!er to t'eir internal accounting units as +e art-ents o! strategic !inance. T'is title is er'a s -ore re!lecti*e o! t'eir 5i+e range an+ sco e o! +uties. Managerial accounting is Luite +i!!erent !ro- !inancial accounting. E>ternal re orting rules are re lace+ :y internal s eci!ications as to 'o5 +ata are to :e accu-ulate+ an+ resente+. 3o e!ully, t'ese internal s eci!ications are su!!iciently logical t'at t'ey ena:le goo+ econo-ic +ecision -a?ing. 9or e>a- le, s eci!ic re orting erio+s -ay :e re lace+ 5it' access to real. ti-e +ata t'at ena:le Luic? res onses to c'anging con+itions. An+, !orecaste+ outco-es :eco-e -ore critical !or lanning ur oses. Ai?e5ise, cost in!or-ation s'oul+ :e +isse-inate+ in a 5ay t'at -anagers can !ocus on Ean+ :e 'el+ accounta:le !orMF t'ose :usiness co- onents EDseg-entsDF un+er t'eir locus o! control. "n s'ort, t'e re-ain+er o! t'is :oo? is a:out t'e i+eas an+ -et'o+s t'at can :e use+ to ro*i+e accounting in!or-ation in +irect su ort o! t'e D:roa+ly +e!ine+D role o! -anaging a :usiness organiHation. "! you as ire to 5or? in strategic !inance, t'e re-ain+er o! t'is :oo? is your

intro+uctory ri-er. <ut, !or -ost rea+ers .. t'ose 5'o -ust -anage so-e art o! an organiHation .. t'e re-ain+er o! t'is :oo? is your gui+e to ?no5ing 'o5 an+ 5'en t'e -anage-ent accountantNs tools can :e use+ to 'el you +o your ;o: :etterM PRO9ESS"O%AA CERT"9"CAT"O%S "% MA%A#EME%T ACCO)%T"%#: @ou are li?ely !a-iliar 5it' t'e CPA Ecerti!ie+ u:lic accountantF +esignationI it is 5i+ely 'el+ an+ recogniHe+. T'e certi!ication is usually acco- anie+ :y a state issue+ license to ractice u:lic accounting. 3o5e*er, t'ere are also CMA Ecerti!ie+ -anage-ent accountantF an+ C9M Ecerti!ie+ !inancial -anagerF +esignations. T'ese are not Dlicenses,D er se, :ut +o re resent signi!icant co- etency in -anagerial accounting an+ !inancial -anage-ent s?ills. T'ese certi!ications are s onsore+ :y t'e "nstitute o! Manage-ent Accountants. PAA%%"%#, $"RECT"%#, A%$ CO%TROAA"%# T3E ROAE O9 MA%A#EME%T: " once sa5 a cle*er sign 'anging on t'e 5all o! a :usiness esta:lis'-ent: NNManagers are Pai+ to Manage .. "! T'ere (ere %o Pro:le-s (e (oul+nNt %ee+ Managers.D T'is suggeste+ t'at all organiHations 'a*e ro:le-s, an+ it is -anage-entNs res onsi:ility to +eal 5it' t'e-. ('ile t'ere is so-e trut' to t'is c'aracteriHation, it is er'a s -ore re!lecti*e o! a Dnot so i- ressi*eD organiHation t'at is -o*ing !ro- one crisis to anot'er. True -anagerial talent goes :eyon+ ;ust +ealing 5it' t'e ro:le-s at 'an+. ('at +oes it -ean to -anageO Managing reLuires nu-erous s?ill sets. A-ong t'ose s?ills are *ision, lea+ers'i , an+ t'e a:ility to rocure an+ -o:iliHe !inancial an+ 'u-an resources. All o! t'ese tas?s -ust :e e>ecute+ 5it' an un+erstan+ing o! 'o5 actions in!luence 'u-an :e'a*ior 5it'in, an+ e>ternal to, t'e organiHation. 9urt'er-ore, goo+ -anagers -ust 'a*e en+urance to tolerate c'allenges an+ set:ac?s 5'ile trying to !orge a'ea+. To success!ully -anage an o eration also reLuires !ollo5 t'roug' an+ e>ecution. <ut, eac' -anage-ent action is re+icate+ u on so-e s eci!ic +ecision. T'us, goo+ +ecision -a?ing is crucial to :eing a success!ul -anager. $EC"S"O% MAK"%#: So-e -anagers see- to 'a*e an intuiti*e sense o! goo+ +ecision -a?ing. T'e reality is t'at goo+ +ecision -a?ing is rarely +one :y intuition. Consistently goo+ +ecisions can only result !ro- +iligent accu-ulation an+ e*aluation o! in!or-ation. T'is is 5'ere -anagerial accounting co-es in .. ro*i+ing t'e in!or-ation nee+e+ to !uel t'e +ecision.-a?ing rocess. Managerial +ecisions can :e categoriHe+ accor+ing to t'ree interrelate+ :usiness rocesses: planning, directing, and controlling. Correct e>ecution o! eac' o! t'ese acti*ities cul-inates in t'e creation o! :usiness *alue. Con*ersely, !ailure to lan, +irect, or control is a roa+-a to :usiness !ailure. T'e central t'e-e to !ocus on is t'is: E1F :usiness *alue results !ro- goo+ -anage-ent +ecisions, E2F +ecisions -ust occur across a s ectru- o! acti*ities E lanning, +irecting, an+ controllingF, an+ E3F Luality +ecision -a?ing

can only consistently occur :y reliance on in!or-ation. T'us, " i- lore you to see t'e rele*ance o! -anagerial accounting to your success as a :usiness -anager. AetNs no5 ta?e a closer loo? at t'e co- onents o! lanning, +irecting, an+ controlling. PAA%%"%#: A :usiness -ust lan !or success. ('at +oes it -ean to lanO "t is a:out t'in?ing a'ea+ .. to +eci+e on a course o! action to reac' +esire+ outco-es. Planning -ust occur at all le*els. 9irst, it occurs at t'e 'ig' le*el o! setting strategy. "t t'en -o*es to :roa+.:ase+ t'oug't a:out 'o5 to esta:lis' an o ti-u- D ositionD to -a>i-iHe t'e otential !or realiHation o! goals. 9inally, lanning -ust :e un+erta?en !ro- t'e ers ecti*e o! t'oug't!ul consi+eration o! !inancial realities2constraints an+ antici ate+ -onetary outco-es E:u+getsF. @ou 'a*e er'a s un+ergone si-ilar lanning en+ea*ors. 9or e>a- le, you +eci+e+ t'at you +esire+ -ore ?no5le+ge in :usiness to i- ro*e your sta?e in li!e, you ositione+ yoursel! in a rogra- o! stu+y, an+ you +e*elo e+ a -o+el o! costs Ean+ !uture :ene!itsF. So, you are Luite !a-iliar 5it' t'e notion o! lanningM <ut, you are an in+i*i+ualI you 'a*e easily ca ture+ an+ containe+ your lan all 5it'in your o5n -in+. A :usiness organiHation is -a+e u o! -any in+i*i+uals. An+, t'ese in+i*i+uals -ust :e orc'estrate+ to 5or? toget'er in 'ar-ony. T'ey -ust s'are an+ un+erstan+ t'e organiHational lans. "n s'ort, De*eryone nee+s to :e on t'e sa-e age.D Strategy: A :usiness ty ically in*ests consi+era:le ti-e an+ -oney in +e*elo ing its strategy. E- loyees, 'arrie+ 5it' +ay.to.+ay tas?s, so-eti-es !ail to see t'e nee+ to ta?e on strategic lanning. "t is +i!!icult to see t'e lin?age :et5een strategic en+ea*ors an+ t'e +ay.to.+ay cor orate acti*ities associate+ 5it' +eli*ering goo+s an+ ser*ices to custo-ers. <ut, t'is strategic lanning ulti-ately +e!ines t'e organiHation. S eci!ic strategy setting can ta?e -any !or-s, :ut generally inclu+es ele-ents ertaining to t'e +e!inition o! core *alues, -ission, an+ o:;ecti*es. Core =alues .. An entity s'oul+ clearly consi+er an+ +e!ine t'e rules :y 5'ic' it 5ill lay. Core *alues can co*er a :roa+ s ectru- in*ol*ing conce ts o! !air lay, 'u-an +ignity, et'ics, e- loy-ent2 ro-otion2co- ensation, Luality, custo-er ser*ice, en*iron-ental a5areness, an+ so !ort'. "! an organiHation +oes not cause its -e-:ers to un+erstan+ an+ !ocus on t'ese i- ortant ele-ents, it 5ill soon !in+ artici ants :eco-ing solely D ro!it.centric.D T'is :e'a*ior ine*ita:ly lea+s to a s'ort.ter- !ocus an+ otentially illegal ractices t'at ro*i+e t'e see+s o! sel! +estruction. Re-e-:er t'at -anage-ent is to :uil+ :usiness *alue :y -a?ing t'e rig't +ecisionsI an+, +ecisions a:out core *alues are essential. Earlier, re!erence 5as -a+e to t'e CMA an+ C9M +esignations t'at can :e earne+ !ro- t'e "nstitute o! Manage-ent Accountants E"MAF. @ou -ig't !in+ it interesting to !ollo5 t'is 'y erlin? to "MANs stan+ar+s o! et'ical con+uct !or its -e-:ers. Mission .. Many co- anies atte- t to re are a it'y state-ent a:out t'eir -ission. 9or e>a- le: DAt IBM, we strive to lead in the creation, development and manufacture of the industrys most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics. We translate these advanced technologies into

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value for our customers through our professional solutions and services businesses worldwide. Suc' -ission state-ents ro*i+e a sna s'ot o! t'e organiHation an+ ro*i+e a !ocal oint against 5'ic' to -atc' i+eas an+ actions. T'ey ro*i+e an i- ortant lanning ele-ent :ecause t'ey +e!ine t'e organiHationNs ur ose an+ +irection. "nterestingly, so-e organiHations 'a*e a*oi+e+ D-issioning,D in !ear t'at it 5ill li-it o ortunity !or e> ansi*e t'in?ing. 9or e>a- le, #eneral Electric s eci!ically states t'at it +oes not 'a*e a -ission state-ent, er se. "nstea+, its o erating 'iloso 'y an+ :usiness o:;ecti*es are clearly articulate+ eac' year in t'e Aetter to S'areo5ners, E- loyees an+ Custo-ers. "n so-e sense, t'oug', #EPs logo re!lects its -ission: imagination at work. Per'a s t'e su:li-inal -ission is to ursue o ortunity 5'ere*er it can :e !oun+. As a result, #E is one o! t'e 5orl+Ns -ost +i*ersi!ie+ entities in ter-s o! t'e range o! ro+ucts an+ ser*ices it o!!ers. O:;ecti*es .. An organiHation -ust also consi+er its s eci!ic o:;ecti*es. "n t'e case o! #E: Imagine, solve, build and lead ! four bold verbs that e"press what it is to be part of #$. %heir action!oriented nature says something about who we are ! and should serve to energi&e ourselves and our teams around leading change and driving performance. T'e o:;ecti*e o! a :usiness organiHation -ust inclu+e +eli*ery o! goo+s or ser*ices 5'ile ro*i+ing a return Ei.e., driving performanceF !or its in*estors. (it'out t'is o:;ecti*e, t'e organiHation ser*es no ur ose an+ an+2or 5ill cease to e>ist. O*erall, t'en, t'e strategic structure o! an organiHation is esta:lis'e+ :y 'o5 5ell it +e!ines its *alues an+ ur ose. <ut, 'o5 +oes t'e -anagerial accountant 'el in t'is rocessO At !irst glance, t'ese strategic issues see- to :e :roa+ an+ 5it'out accounting conte>t. <ut, in!or-ation is nee+e+ a:out t'e DreturnsD t'at are :eing generate+ !or in*estorsI t'is accounting in!or-ation is necessary to +eter-ine 5'et'er t'e ro!it o:;ecti*e is :eing ac'ie*e+. Actually, t'oug', -anagerial accounting goes -uc' +ee er. 9or e>a- le, 'o5 are core *alues olice+O Consi+er t'at so-eone -ust -onitor an+ ro*i+e in!or-ation on en*iron-ental co- liance. ('at is t'e -ost e!!ecti*e -et'o+ !or 'an+ling an+ ro erly +is osing o! 'aHar+ous 5asteO Are t'ere alternati*e ro+ucts t'at -ay cost -ore to acLuire :ut cost less to +is oseO ('at syste- -ust :e esta:lis'e+ to recor+ an+ trac? suc' -aterial, etc.O All o! t'ese issues reLuire Daccounta:ility.D As anot'er e>a- le, et'ical co+es li?ely +eal 5it' :i++ing roce+ures to o:tain t'e :est rices !ro- ca a:le su liers. ('at controls are nee+e+ to -onitor t'e urc'asing rocess, ro*i+e !or t'e :est rices, an+ au+it t'e Luality o! rocure+ goo+sO All o! t'ese issues Luic?ly e*ol*e into internal accounting tas?s. An+, t'e -anagerial accountant 5ill :e 'ea*ily in*ol*e+ in ro*i+ing in ut on all 'ases o! cor orate strategy. Positioning: An i- ortant art o! t'e lanning rocess is ositioning t'e organiHation to ac'ie*e its goals. Positioning is a :roa+ conce t an+ +e en+s on gat'ering an+ e*aluating accounting in!or-ation. Cost2=olu-e2Pro!it Analysis an+ Scala:ility .. "n a su:seLuent c'a ter, you 5ill learn a:out cost2*olu-e2 ro!it EC=PF analysis. "t is i- erati*e !or -anagers to un+erstan+ t'e nature o! cost :e'a*ior an+ 'o5 c'anges in *olu-e i- act ro!ita:ility. @ou 5ill learn a:out calculating :rea?. e*en oints an+ 'o5 to -anage to ac'ie*e target inco-e le*els. @ou 5ill :egin to t'in? a:out :usiness -o+els an+ t'e a:ility Eor ina:ilityF to :ring t'e- to ro!ita:ility *ia increases in scale. Managers call u on t'eir internal accounting sta!! to ull toget'er in!or-ation an+ -a?e a ro riate reco--en+ations. #lo:al Tra+e an+ Trans!er .. T'e -anage-ent accountant !reLuently er!or-s signi!icant an+ co- le> analysis relate+ to glo:al :usiness acti*ities. T'is reLuires in.+e t' researc' into la5s a:out tari!!s, ta>es, an+ s'i ing. "n a++ition, glo:al enter rises -ay trans!er in*entory an+ ser*ices :et5een a!!iliate+ units in alternati*e countries. T'ese transactions -ust :e !airly an+ correctly -easure+ to esta:lis' reasona:le trans!er rices Eor otentially run a!oul o! ta> an+ ot'er rules o! t'e *arious countries in*ol*e+F. Once again, t'e -anage-ent accountant is calle+ to t'e tas?. <ran+ing2Pricing2Sensiti*ity2Co- etition .. "n ositioning a co- anyNs ro+ucts an+ ser*ices, consi+era:le t'oug't -ust :e gi*en to :ran+ing an+ its i- act on t'e :usiness. To :uil+ a :ran+ reLuires consi+era:le

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in*est-ent 5it' an uncertain ay:ac?. 9reLuently, t'e sa-e ro+uct can :e D ositione+D as an elite :ran+ *ia a large in*est-ent in u .!ront a+*ertising, or as a :asic consu-er ro+uct t'at 5ill +e en+ u on lo5 rice to +ri*e sales. ('at is t'e correct a roac'O "n!or-ation is nee+e+ to -a?e t'e +ecision, an+ -anage-ent 5ill li?ely enlist t'e internal accounting sta!! to re are ros ecti*e in!or-ation :ase+ u on alternati*e scenarios. Ai?e5ise, ro+uct ricing +ecisions -ust :e :alance+ against costs an+ co- etiti*e -ar?et con+itions. An+, sensiti*ity analysis is nee+e+ to +eter-ine 'o5 sales an+ costs 5ill res on+ to c'anges in -ar?et con+itions. As you can see, +ecisions a:out ositioning a co- anyNs ro+ucts an+ ser*ices are Luite co- le>. T'e ru+ent -anager 5ill nee+ consi+era:le +ata to -a?e goo+ +ecisions. Manage-ent accountants 5ill :e +irectly in*ol*e+ in ro*i+ing suc' +ata. T'ey 5ill usually 5or? si+e.:y.si+e 5it' -anage-ent in 'el ing t'e- correctly inter ret an+ utiliHe t'e in!or-ation. "t :e'oo*es a goo+ -anager to stu+y t'e :asic rinci les o! -anagerial accounting in or+er to :etter un+erstan+ 'o5 in!or-ation can :e e!!ecti*ely utiliHe+ in t'e +ecision rocess. (it' t'ese sorts o! to ics in lay, it is no 5on+er t'at t'e ter- Dstrategic !inanceD is increasingly use+ to c'aracteriHe t'is ro!ession. Budgets: A necessary lanning co- onent is :u+geting. <u+gets outline t'e !inancial lans !or an organiHation. T'ere are are *arious ty es o! :u+gets. O erating <u+gets .. A lan -ust ro*i+e +e!inition o! t'e antici ate+ re*enues an+ e> enses o! an organiHation an+ -ore. T'ese o erating :u+gets can :eco-e !airly +etaile+, to t'e le*el o! -a ing s eci!ic in*entory urc'ases, sta!!ing lans, an+ so !ort'. T'e :u+gets, o!tenti-es, +elineate allo5a:le le*els o! e> en+itures !or *arious +e art-ents. Ca ital <u+gets .. O erating :u+gets 5ill also re*eal t'e nee+ !or ca ital e> en+itures relating to ne5 !acilities an+ eLui -ent. T'ese longer.ter- e> en+iture +ecisions -ust :e e*aluate+ logically to +eter-ine 5'et'er an in*est-ent can :e ;usti!ie+ an+ 5'at rate an+ +uration o! ay:ac? is li?ely to occur. 9inancial <u+gets .. A co- any -ust assess !inancing nee+s, inclu+ing an e*aluation o! otential cas' s'ortages. T'ese tools ena:le co- anies to -eet 5it' len+ers an+ +e-onstrate 5'y an+ 5'en a++itional su ort -ay :e nee+e+. T'e :u+get rocess is Luite i- ortant Eno -atter 'o5 ain!ul t'e rocess -ay see-F to t'e *ia:ility o! an organiHation. Se*eral o! t'e su:seLuent c'a ters are +e*ote+ to 'el ing you :etter un+erstan+ t'e nature an+ ele-ents o! soun+ :u+geting. $"RECT"%#: T'ere are -any goo+ lans t'at are ne*er realiHe+. To realiHe a lan reLuires t'e initiation an+ +irection o! nu-erous actions. O!ten, t'ese actions -ust :e 5ell coor+inate+ an+ ti-e+. Resources -ust :e rea+y, an+ aut'oriHations nee+ to :e in lace to ena:le ersons to act accor+ing to t'e lan. <y analogy, i-agine t'at a co- oser 'as 5ritten a :eauti!ul score o! -usic .. t'e D lan.D 9or it to co-e to li!e reLuires all -e-:ers o! t'e orc'estra, an+ a con+uctor 5'o can :ring t'e orc'estra into sync'roniHation an+ 'ar-ony. Ai?e5ise, t'e -anagerial accountant 'as a -a;or role in utting :usiness lans into action. "n!or-ation syste-s -ust :e +e*elo e+ to allo5 -anage-ent to orc'estrate t'e organiHation. Manage-ent -ust ?no5 t'at in*entory is a*aila:le 5'en nee+e+, ro+ucti*e resources E-an an+ -ac'ineF are sc'e+ule+ a ro riately, trans ortation syste-s 5ill :e a*aila:le to +eli*er out ut, an+ on an+ on. "n

()

a++ition, -anage-ent -ust :e rea+y to +e-onstrate co- liance 5it' contracts an+ regulations. T'ese are co- le> tas?s. T'ey cannot occur 5it'out strong in!or-ation resources. A -a;or ele-ent o! -anage-ent accounting is to +e*elo in!or-ation syste-s to su ort t'e ongoing +irection o! t'e :usiness e!!ort. Managerial accounting su orts t'e D+irectingD !unction in -any 5ays. Areas o! su ort inclu+e costing, ro+uction -anage-ent, an+ s ecial analysis:

Costing: A strong -anager -ust un+erstan+ 'o5 costs are ca ture+ an+ assigne+ to goo+s an+ ser*ices. T'is is -ore co- le> t'an -ost eo le realiHe. Costing is suc' an e>tensi*e art o! t'e -anage-ent accounting !unction t'at -any eo le re!er to -anage-ent accountants as Dcost accountants.D <ut, cost accounting is only a su:set o! -anagerial accounting a lications. (it' t'at in -in+, letNs !ocus on cost accounting. Cost accounting can :e +e!ine+ as t'e collection, assign-ent, an+ inter retation o! cost. "n su:seLuent c'a ters, you 5ill learn a:out alternati*e costing -et'o+s. "t is i- ortant to ?no5 5'at ro+ucts an+ ser*ices cost to ro+uce. T'e i+eal a roac' to ca turing costs is +e en+ent on 5'at is :eing ro+uce+. Costing Met'o+s .. "n so-e settings, costs -ay :e ca ture+ :y t'e D;o: costing -et'o+.D 9or e>a- le, a custo- 'o-e :uil+er 5oul+ li?ely ca ture costs !or eac' 'ouse constructe+. T'e actual la:or an+ -aterial t'at goes into eac' 'ouse 5oul+ :e trac?e+ an+ assigne+ to t'at s eci!ic 'o-e Ealong 5it' so-e -atc'ing a-ount o! o*er'ea+F, an+ t'e cost o! eac' 'o-e can :e e> ecte+ to *ary consi+era:ly. So-e co- anies ro+uce 'o-ogenous ro+ucts in continuous rocesses. 9or e>a- le, consi+er t'e costing issues !ace+ :y t'e co- anies t'at ro+uce t'e lu-:er, aint, :ric?s or ot'er suc' 'o-ogenous co- onents use+ in :uil+ing a 'o-e. 3o5 -uc' +oes eac' iece o! lu-:er, :uc?et o! aint, or stac? o! :ric?s costO T'ese ty es o! ite-s are ro+uce+ in continuous rocesses 5'ere costs are oole+ toget'er +uring ro+uction, an+ out ut is -easure+ in aggregate Luantities. "t is +i!!icult to see s eci!ic costs attac'ing to eac' unit. @et, it is i- ortant to -a?e a cost assign-ent. To +eal 5it' t'ese ty es o! situations, accountants -ig't utiliHe D rocess costing -et'o+s.D %o5, letNs t'in? a:out t'e arc'itectural !ir-s t'at +esign 'o-es. Suc' organiHations nee+ to 'a*e a sense o! t'eir costs !or ur oses o! :illing clients, :ut t'e !ir-Ns acti*ities are *ery co- le>. An arc'itectural !ir- -ust engage in -any acti*ities t'at +ri*e costs :ut +o not ro+uce re*enues. 9or e>a- le, su:stantial e!!ort is reLuire+ to train sta!!, +e*elo clients, :ill an+ collect, -aintain t'e o!!ice, rint lans, *isit ;o: sites, consult on ro:le-s i+enti!ie+ +uring construction, an+ so !ort'. T'e in+i*i+ual arc'itects are ro:a:ly in*ol*e+ in -ulti le tas?s an+ ro;ects t'roug'out t'e +ayI t'ere!ore, it :eco-es +i!!icult to say e>actly 'o5 -uc' it costs to +e*elo a set o! :lue rints !or a s eci!ic clientM T'e !ir- -ig't consi+er tracing costs an+ assigning t'e- to acti*ities Ee.g., training, client +e*elo -ent, etc.F. T'en, an allocation -o+el can :e use+ to attri:ute acti*ities to ;o:s, ena:ling a reasona:le

((

cost assign-ent. Suc' Dacti*ity.:ase+ costingD EA<CF syste-s can :e use+ in -any settings, :ut are articularly 5ell suite+ to situations 5'ere o*er'ea+ is 'ig', an+2or a *ariety o! ro+ucts an+ ser*ices are ro+uce+. Costing Conce ts .. "n a++ition to alternati*e -et'o+s o! costing, a goo+ -anager 5ill nee+ to un+erstan+ +i!!erent t'eories or conce ts a:out costing. "n a general sense, t'e a roac'es can :e +escri:e+ as Da:sor tionD an+ D+irectD costing conce ts. )n+er t'e a:sor tion conce t, a ro+uct or ser*ice 5oul+ :e assigne+ its !ull cost, inclu+ing a-ounts t'at are not easily i+enti!ie+ 5it' a articular ite-. O*er'ea+ ite-s Eso-eti-es calle+ D:ur+enDF inclu+e !acilities +e reciation, utilities, -aintenance, an+ -any ot'er si-ilar s'are+ costs. (it' a:sor tion costing, t'is o*er'ea+ is sc'e-atically allocate+ a-ong all units o! out ut. "n ot'er 5or+s, out ut a:sor:s t'e !ull cost o! t'e ro+ucti*e rocess. A:sor tion costing is reLuire+ !or e>ternal re orting ur oses un+er generally acce te+ accounting rinci les. <ut, so-e -anagers are a5are t'at sole reliance on a:sor tion costing nu-:ers can lea+ to :a+ +ecisions. As a result, internal cost accounting rocesses in so-e organiHations !ocus on a +irect costing a roac'. (it' +irect costing, a unit o! out ut 5ill :e assigne+ only its +irect cost o! ro+uction Ee.g., +irect -aterials, +irect la:or, an+ o*er'ea+ t'at occurs 5it' eac' unit ro+uce+F. @ou 5ill stu+y t'e +i!!erences :et5een a:sor tion an+ +irect costing, an+ consi+er 'o5 t'ey in!luence t'e -anage-ent +ecision rocess. "t is one o! t'e -ore use!ul :usiness +ecision ele-ents to un+erstan+ .. e- o5ering you to -a?e :etter +ecisions. 9uture c'a ters 5ill :uil+ your un+erstan+ing o! t'ese conce ts. "n re*ie5, to ro erly +irect an organiHation reLuires a ?een sense o! t'e cost o! ro+ucts an+ ser*ices. Costing can occur un+er *arious -et'o+s an+ t'eories, an+ a -anager -ust un+erstan+ 5'en an+ 'o5 t'ese -et'o+s are :est utiliHe+ to !acilitate t'e +ecisions t'at -ust :e -a+e. Aarge ortions o! t'e !ollo5ing c'a ters 5ill !ocus on t'ese cost accounting issues. Production: As you 5oul+ sus ect, success!ully +irecting an organiHation reLuires ru+ent -anage-ent o! ro+uction. <ecause t'is is a 'an+s.on rocess, an+ !reLuently entails +ealing 5it' t'e tangi:le ortions o! t'e :usiness Ein*entory, !a:rication, asse-:ly, etc.F, so-e -anagers are es ecially !ocuse+ on t'is area o! o*ersig't. Managerial accounting ro*i+es nu-erous tools !or -anagers to use in su ort o! ro+uction an+ ro+uction logistics E-o*ing goo+s t'roug' t'e ro+uction cycle to a custo-erF. To generaliHe, ro+uction -anage-ent is a:out running a DleanD :usiness -o+el. T'is -eans t'at costs -ust :e -ini-iHe+ an+ e!!iciency -a>i-iHe+, 5'ile see?ing to ac'ie*e en'ance+ out ut an+ Luality stan+ar+s. "n t'e ast !e5 +eca+es, a+*ances in tec'nology 'a*e greatly contri:ute+ to t'e a:ility to run a lean :usiness. Pro+uct !a:rication an+ asse-:ly 'a*e :een i- ro*e+ t'roug' *irtually error !ree ro:otics. Accounta:ility is 'an+le+ *ia co- re'ensi*e so!t5are t'at trac?s an array o! +ata on a real.ti-e :asis. T'ese enter rise resource ac?ages EERPF are e>tensi*e in t'eir o5er to +eli*er s eci!ic Luery.:ase+ in!or-ation !or e*en t'e largest organiHations. <2< E:usiness to :usinessF syste-s ena:le +ata interc'ange 5it' su!!icient o5er to ena:le one co- anyNs in!or-ation syste- to auto-atically initiate a ro+uct or+er on a *en+orNs in!or-ation syste-. Aoo?ing a'ea+, -uc' is :eing sai+ a:out t'e otential o! R9"$ Era+io !reLuency i+enti!icationF. Tiny -icro rocessors are e-:e++e+ in in*entory an+ e-it ra+io !reLuency signals t'at ena:le a co- uter to auto-atically trac? t'e Luantity an+ location o! in*entory. M2M E-ac'ine to -ac'ineF ena:les connecte+ +e*ices to co--unicate necessary in!or-ation Ee.g., electric -eters t'at no longer nee+ to :e rea+ !or :illing, etc.F 5it'out reLuiring 'u-an engage-ent. T'ese +e*elo -ents are e>citing, so-eti-es !rig'tening, :ut ulti-ately en'ance organiHational e!!iciency an+ t'e li*ing stan+ar+s o! custo-ers 5'o :ene!it !ro- :etter an+ c'ea er ro+ucts. <ut, +es ite t'eir ro:ust o5er, t'ey +o not re lace 'u-an +ecision -a?ing. Managers -ust ay attention to t'e in!or-ation :eing ro+uce+, an+ :e rea+y to a+;ust :usiness rocesses to res on+.

(2

Pro+uction is a co- le> rocess reLuiring constant +ecision -a?ing. "t is al-ost i- ossi:le to co- letely categoriHe an+ co*er all o! t'e +ecisions t'at 5ill :e reLuire+. <ut, -any organiHations 5ill s'are si-ilar ro+uction issues relating to in*entory -anage-ent an+ res onsi:ility assign-ent tas?s. "n*entory .. 9or a -anu!acturing co- any, -anaging in*entory is *ital. "n*entory -ay consist o! ra5 -aterials, 5or? in rocess, an+ !inis'e+ goo+s. T'e ra5 -aterials are t'e co- onents an+ arts t'at are to :e rocesse+ into a !inal ro+uct. (or? in rocess consists o! goo+s un+er ro+uction. 9inis'e+ goo+s are t'e co- lete+ units a5aiting sale to custo-ers. Eac' category 5ill reLuire s ecial consi+eration an+ control. 9ailure to ro erly -anage any category o! in*entory can :e +isastrous to a :usiness. O*erstoc?ing ra5 -aterials or o*er ro+uction o! !inis'e+ goo+s 5ill increase costs an+ o:solescence. Con*ersely, out.o!.stoc? situations !or ra5 -aterials 5ill silence t'e ro+uction line at otentially great cost. 9ailure to 'a*e !inis'e+ goo+s on 'an+ -ig't result in lost sales an+ custo-ers. T'roug'out su:seLuent c'a ters, you 5ill learn a:out -et'o+s an+ goals !or -anaging in*entory. So-e o! t'ese tec'niLues carry o ular acrony-s li?e J"T E;ust.in.ti-e in*entory -anage-entF an+ EOQ Eecono-ic or+er LuantityF. "t is i- erati*e !or a goo+ -anager to un+erstan+ t'e tec'niLues t'at are a*aila:le to ro erly -anage in*entory. Res onsi:ility Consi+erations .. Ena:ling an+ -oti*ating e- loyees to 5or? at ea? er!or-ance is an i- ortant -anagerial role. 9or t'is to occur, e- loyees -ust ercei*e t'at t'eir ro+ucti*e e!!iciency an+ Luality o! out ut are !airly -easure+. A goo+ -anager 5ill un+erstan+ an+ :e a:le to e> lain to ot'ers 'o5 suc' -easures are +eter-ine+. @our stu+y o! -anagerial accounting 5ill lea+ you t'roug' *arious relate+ -easure-ent to ics. 9or instance, +irect ro+ucti*e rocesses -ust :e su orte+ :y -any Dser*ice +e art-entsD E-aintenance, engineering, accounting, ca!eterias, etc.F. T'ese ser*ice +e art-ents 'a*e not'ing to sell to outsi+ers, :ut are essential co- onents o! o eration. T'e costs o! ser*ice +e art-ents -ust :e reco*ere+ !or a :usiness to sur*i*e. "t is easy !or a ro+uction -anager to !ocus solely on t'e area un+er +irect control, an+ ignore t'e costs o! su ort tas?s. @et, goo+ -anage-ent +ecisions reLuire !ull consi+eration o! t'e costs o! su ort ser*ices. @ou 5ill learn alternati*e tec'niLues t'at -anagerial accountants use to allocate res onsi:ility !or organiHational costs. A goo+ -anager 5ill un+erstan+ t'e nee+ !or suc' allocations, an+ :e a:le to e> lain an+ ;usti!y t'e- to e- loyees 5'o -ay not :e !ully cogniHant o! 5'y ro!ita:ility is -ore +i!!icult to ac'ie*e t'an it 5oul+ see-. "n a++ition, tec'niLues -ust :e utiliHe+ to ca ture t'e cost o! Luality .. or er'a s :etter sai+, t'e cost o! a lac? o! Luality. 9inis'e+ goo+s t'at +o not !unction as ro-ise+ entail su:stantial 5arranty costs, inclu+ing re5or?, s'i ing E:ac? an+ !ort'MF, an+ scra . T'ere is also an e>tre-e long.run cost associate+ 5it' a lac? o! custo-er satis!action. )n+erstan+ing conce ts o! res onsi:ility accounting 5ill also reLuire you to t'in? a:out attac'ing in uts an+ outco-es to t'ose res onsi:le !or t'eir ulti-ate +is osition. "n ot'er 5or+s, a -anager -ust :e 'el+ accounta:le, :ut to +o t'is reLuires t'e a:ility to -onitor costs incurre+ an+ +eli*era:les ro+uce+ :y circu-scri:e+ areas o! accounta:ility Ecenters o! res onsi:ilityF .

(!

T'is +oes not 'a

en :y acci+ent an+ reLuires e>tensi*e syste-s +e*elo -ent 5or?, as 5ell as training an+ e> lanation, on t'e art o! -anage-ent accountants. Analysis: Certain :usiness +ecisions 'a*e recurrent t'e-es: 5'et'er to outsource ro+uction an+2or su ort !unctions, 5'at le*el o! ro+uction an+ ricing to esta:lis', 5'et'er to acce t s ecial or+ers 5it' ri*ate la:el :ran+ing or s ecial ricing, an+ so !ort'. Managerial accounting ro*i+es t'eoretical -o+els o! calculations t'at are nee+e+ to su ort t'ese ty es o! +ecisions. Alt'oug' suc' -o+els are not er!ect in e*ery case, t'ey are e!!ecti*e in sti-ulating correct t'oug't. T'e see-ingly o:*ious ans5er -ay not al5ays yiel+ t'e truly correct or :est +ecision. T'ere!ore, su:seLuent c'a ters 5ill ro*i+e insig't into t'e logic an+ -et'o+s t'at nee+ to :e e- loye+ to -anage t'ese ty es o! :usiness +ecisions. CO%TROAA"%#: T'ings rarely go e>actly as lanne+, an+ -anage-ent -ust -a?e a concerte+ e!!ort to -onitor an+ a+;ust !or +e*iations. T'e -anagerial accountant is a -a;or !acilitator o! t'is control rocess, inclu+ing e> loration o! alternati*e correcti*e strategies to re-e+y un!a*ora:le situations. "n a++ition, a recent tren+ E:roug't a:out in t'e )SA :y !inancial legislation -ost co--only ?no5n as Sar:anes.O>ley or SOBF is !or en'ance+ internal controls an+ -an+atory certi!ications :y CEOs an+ C9Os as to t'e accuracy o! !inancial re orts. T'ese certi!ications carry enalties o! er;ury, an+ 'a*e gotten t'e attention o! cor orate e>ecuti*es .. lea+ing to greatly e> an+e+ e- 'asis on controls o! t'e *arious internal an+ e>ternal re orting -ec'anis-s.

Most large organiHations 'a*e a erson +esignate+ as DcontrollerD Eso-eti-es ter-e+ Dco- trollerDF. T'e controller is an i- ortant an+ res ecte+ osition 5it'in -ost larger organiHations. T'e cor orate control !unction is o! su!!icient co- le>ity t'at a controller -ay 'a*e 'un+re+s o! su ort ersonnel to assist 5it' all 'ases o! t'e -anage-ent accounting rocess. As t'is ersonNs title suggests, t'e controller is ri-arily res onsi:le !or t'e control tas?I ro*i+ing lea+ers'i !or t'e entire cost an+ -anagerial accounting !unctions. "n contrast, t'e c'ie! !inancial o!!icer EC9OF is usually res onsi:le !or e>ternal re orting, t'e treasury !unction, an+ general cas' !lo5 an+ !inancing -anage-ent. "n so-e organiHations, one erson -ay ser*e a +ual role as :ot' t'e C9O an+ controller. Aarger organiHations -ay also 'a*e a se arate internal au+it grou t'at re*ie5s t'e 5or? o! t'e accounting an+ treasury units. <ecause internal au+itors are

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re orting on t'e e!!ecti*eness an+ integrity o! ot'er units 5it'in a :usiness organiHation, t'ey usually re ort +irectly to t'e 'ig'est le*els o! cor orate lea+ers'i . As you can see, DcontrolD 'as -any +i-ensions an+ is a large tas?M Monitor: AetNs :egin :y 'a*ing you t'in? a:out controlling your car Ea?a D+ri*ingDFM @our steering, acceleration, an+ :ra?ing are not ran+o-I t'ey are care!ul correcti*e res onses to constant -onitoring o! -any *aria:les .. ot'er tra!!ic, roa+ con+itions, +estination, an+ so !ort'. Clearly, eac' action on your art is in res onse to you 'a*ing -onitore+ con+itions an+ a+o te+ an a+;usting res onse. Ai?e5ise, :usiness -anagers -ust rely on syste-atic -onitoring tools to -aintain a5areness o! 5'ere t'e :usiness is 'ea+e+. Managerial accounting ro*i+es t'ese -onitoring tools, an+ esta:lis'es a logical :asis !or -a?ing a+;ust-ents to :usiness o erations. Stan+ar+ Costs .. To assist in -onitoring ro+ucti*e e!!iciency an+ cost control, -anagerial accountants -ay +e*elo Dstan+ar+s.D T'ese stan+ar+s re resent :enc'-ar?s against 5'ic' actual ro+ucti*e acti*ity is co- are+. "- ortantly, stan+ar+s can :e +e*elo e+ !or la:or costs an+ e!!iciency, -aterials cost an+ utiliHation, an+ -ore general assess-ents o! t'e o*erall +e loy-ent o! !acilities an+ eLui -ent Et'e o*er'ea+F. =ariances .. Managers 5ill !ocus on stan+ar+s, ?ee ing a articularly s'ar eye out !or signi!icant +e*iations !ro- t'e nor-. T'ese +e*iations, or D*ariances,D -ay ro*i+e 5arning signs o! situations reLuiring correcti*e action :y -anagers. Accountants 'el -anagers !ocus on t'e e>ce tions :y ro*i+ing t'e results o! *ariance analysis. T'is rocess o! !ocusing on *ariances is also ?no5n as D-anage-ent :y e>ce tion.D 9le>i:le tools .. #reat care -ust :e ta?en in -onitoring *ariances. 9or instance, a :usiness -ay 'a*e a large increase in custo-er +e-an+. To -eet +e-an+, a -anager -ay ru+ently aut'oriHe signi!icant o*erti-e. T'is o*erti-e -ay result in 'ig'er t'an e> ecte+ 5age rates an+ 'ours. As a result, a *ariance analysis coul+ result in certain un!a*ora:le *ariances. 3o5e*er, t'is a++e+ cost 5as incurre+ :ecause o! 'ig'er custo-er +e-an+ an+ 5as er'a s a goo+ :usiness +ecision. T'ere!ore, it 5oul+ :e un!ortunate to inter ret t'e *ariances in a negati*e lig't. To co- ensate !or t'is ty e o! otential -isinter retation o! +ata, -anage-ent accountants 'a*e +e*elo e+ *arious !le>i:le :u+geting an+ analysis tools. T'ese e*aluati*e tools D!le>D or co- ensate !or t'e o erating en*iron-ent in an atte- t to sort out con!using signals. As a :usiness -anager, you 5ill 5ant to !a-iliariHe yoursel! 5it' t'ese -ore ro:ust !le>i:le tools, an+ t'ey are co*ere+ in +e t' in su:seLuent c'a ters. Scorecard: T'e tra+itional a roac' to -onitoring organiHational er!or-ance 'as !ocuse+ on !inancial -easures an+ outco-es. "ncreasingly, co- anies are realiHing t'at suc' -easures alone are not su!!icient. 9or one t'ing, suc' -easures re ort on 5'at 'as occurre+ an+ -ay not ro*i+e ti-ely +ata to res on+ aggressi*ely to c'anging con+itions. "n a++ition, lo5er.le*el ersonnel -ay :e too !ar re-o*e+ !ro- an organiHationNs !inancial outco-es to care. As a result, -any co- anies 'a*e +e*elo e+ -ore in*ol*e+ scoring syste-s. T'ese scorecar+s are custotailore+ to eac' osition, an+ +ra5 !ocus on e*aluating ele-ents t'at are i- ortant to t'e organiHation an+ un+er t'e control o! an e- loyee 'ol+ing t'at osition. 9or instance, a !ast !oo+ restaurant 5oul+ 5ant to e*aluate res onse ti-e, cleanliness, 5aste, an+ si-ilar ele-ents !or t'e !ront. line e- loyees. T'ese are t'e ele-ents !or 5'ic' t'e e- loyee 5oul+ :e res onsi:leI resu-a:ly, success on t'ese oints translates to e*entual ro!ita:ility. <alance .. ('en controlling *ia a scorecar+ a roac', t'e rocess -ust :e care!ully :alance+. T'e goal is to i+enti!y an+ !ocus on co- onents o! er!or-ance t'at can :e -easure+ an+ i- ro*e+. "n a++ition to !inancial outco-es, t'ese co- onents can :e categoriHe+ as relating to :usiness rocesses, custo-er +e*elo -ent, an+ organiHational :etter-ent. Processes relate to ite-s li?e +eli*ery ti-e, -ac'inery utiliHation rates, ercent o! +e!ect !ree ro+ucts, an+ so !ort'. Custo-er issues inclu+e !reLuency o! re eat custo-ers, results o! custo-er satis!action sur*eys, custo-er re!errals, an+ t'e li?e. <etter-ent ertains to ite-s li?e e- loyee turno*er, 'ours o! a+*ance+ training, -entoring, an+ ot'er si-ilar ite-s. "! t'ese :alance+ scorecar+s are care!ully +e*elo e+ an+ i- le-ente+, t'ey can :e use!ul in !urt'ering t'e goals o! an organiHation. Con*ersely, i! t'e ele-ents :eing e*aluate+ +o not lea+ to en'ance+ er!or-ance, e- loyees 5ill s en+ ti-e an+ energy ursuing tas?s t'at 'a*e no lin?age to creating *alue !or t'e :usiness.

(#

"- ro*e-ent .. TQM is t'e acrony- !or total Luality -anage-ent. T'e goal o! TQM is continuous i- ro*e-ent :y !ocusing on custo-er ser*ice an+ syste-atic ro:le- sol*ing *ia tea-s -a+e u o! !ront.line e- loyees. T'ese tea-s 5ill :enc'-ar? against success!ul co- etitors an+ ot'er :usinesses. Scienti!ic -et'o+ology is use+ to stu+y 5'at 5or?s an+ +oes not 5or?, an+ t'e :est ractices are i- le-ente+ 5it'in t'e organiHation. %or-ally, TQM.:ase+ i- ro*e-ents re resent incre-ental ste s in s'a ing organiHational i- ro*e-ent. More s5ee ing c'ange can :e i- le-ente+ :y a co- lete rocess reengineering. )n+er t'is a roac', an entire rocess is -a e+ an+ stu+ie+ 5it' t'e goal o! i+enti!ying any ste s t'at are unnecessary or t'at +o not a++ *alue. "n a++ition, suc' co- re'ensi*e ree*aluations 5ill, o!tenti-es, i+enti!y :ottlenec?s t'at constrain t'e 5'ole organiHation. )n+er t'e t'eory o! constraints ETOCF, e!!iciency is i- ro*e+ :y see?ing out an+ eli-inating constraints 5it'in t'e organiHation. 9or e>a- le, an air ort -ig't !in+ t'at it 'as a+eLuate run5ays, security rocessing, luggage 'an+ling, etc., :ut it -ay not 'a*e enoug' gates. T'e entire air ort coul+ !unction -ore e!!ecti*ely 5it' t'e a++ition o! a !e5 -ore gates. Ai?e5ise, -ost :usinesses 5ill 'a*e one or -ore acti*ities t'at can cause a slo5 +o5n in t'e entire o eration. TOCNs goal is to !in+ an+ eli-inate t'e s eci!ic :arriers. So !ar, t'is c'a ter 'as ro*i+e+ sni ets o! 'o5 -anagerial accounting su orts organiHational lanning, +irecting, an+ controlling. As you can tell, -anagerial accounting is sur risingly :roa+ in its sco e o! in*ol*e-ent. <e!ore loo?ing at t'ese to ics in -ore +etail in su:seLuent c'a ters, :eco-e !a-iliar 5it' so-e ?ey -anagerial accounting ;argon an+ conce ts. T'e re-ain+er o! t'is c'a ter is +e*ote+ to t'at tas?. COST COMPO%E%TS PRO$)CT"O% COSTS: Co- anies t'at -anu!acture a ro+uct !ace an e> an+e+ set o! accounting issues. "n a++ition to t'e usual accounting -atters associate+ 5it' selling an+ a+-inistrati*e acti*ities, a -anu!acturer -ust +eal 5it' accounting concerns relate+ to acLuiring an+ rocessing ra5 -aterials into a !inis'e+ ro+uct. Cost accounting !or t'is -anu!acturing rocess entails consi+eration o! t'ree ?ey cost co- onents t'at are necessary to ro+uce !inis'e+ goo+s: E1F irect materials inclu+e t'e costs o! all -aterials t'at are an integral art o! a !inis'e+ ro+uct an+ t'at 'a*e a 'ysical resence t'at is rea+ily trace+ to t'at !inis'e+ ro+uct. E>a- les !or a co- uter -a?er inclu+e t'e lastic 'ousing o! a co- uter, t'e !ace o! t'e -onitor screen, t'e circuit :oar+s 5it'in t'e -ac'ine, an+ so !ort'. Minor -aterials suc' as sol+er, tiny stran+s o! 5ire, an+ t'e li?e, 5'ile i- ortant to t'e ro+uction rocess, are not cost e!!ecti*e to trace to in+i*i+ual !inis'e+ units. T'e cost o! suc' ite-s is ter-e+ Din+irect -aterials.D T'ese in+irect -aterials are inclu+e+ 5it' ot'er co- onents o! -anu!acturing o*er'ea+, 5'ic' is +iscusse+ :elo5. E2F irect la!or costs consist o! gross 5ages ai+ to t'ose 5'o 'ysically an+ +irectly 5or? on t'e goo+s :eing ro+uce+. 9or e>a- le, 5ages ai+ to a 5el+er in a :icycle !actory 5'o is actually !a:ricating t'e !ra-es o! :icycles 5oul+ :e inclu+e+ in +irect la:or. On t'e ot'er 'an+, t'e 5ages ai+ to a 5el+er 5'o is :uil+ing an asse-:ly line t'at 5ill :e use+ to ro+uce a ne5 line o! :icycles is not +irect la:or. "n general, in+irect la:or ertains to 5ages o! ot'er !actory e- loyees Ee.g., -aintenance ersonnel, su er*isors, guar+s, etc.F 5'o +o not 5or? +irectly on a ro+uct. "n+irect la:or is rolle+ into -anu!acturing o*er'ea+. E3F Manufacturing over"ead inclu+es all costs o! -anu!acturing ot'er t'an +irect -aterials an+ +irect la:or. E>a- les inclu+e in+irect -aterials, in+irect la:or, an+ !actory relate+ +e reciation, re air, insurance, -aintenance, utilities, ro erty ta>es, an+ so !ort'. 9actory o*er'ea+ is also ?no5n as in+irect -anu!acturing cost, :ur+en, or ot'er synony-ous ter-s. 9actory o*er'ea+ is +i!!icult to trace to s eci!ic !inis'e+ units, :ut its cost is i- ortant an+ -ust :e allocate+ to t'ose units. %or-ally, t'is allocation is a lie+ to ongoing ro+uction :ase+ on esti-ate+ allocation

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rates, 5it' su:seLuent a+;ust-ent rocesses !or o*er. or un+er.a lie+ o*er'ea+. T'is is Luite i- ortant to ro+uct costing, an+ 5ill :e co*ere+ in +e t' later. "- ortantly, non-anu!acturing costs !or selling an+ general2a+-inistrati*e ur oses ES#6AF are not art o! !actory o*er'ea+. Selling costs relate to or+er rocure-ent an+ !ul!ill-ent, an+ inclu+e a+*ertising, co--issions, 5are'ousing, an+ s'i ing. A+-inistrati*e costs arise !ro- general -anage-ent o! t'e :usiness, inclu+ing ite-s li?e e>ecuti*e salaries, accounting +e art-ents, u:lic an+ 'u-an relations, an+ t'e li?e. Accountants so-eti-es use a :it o! ;argon to +escri:e certain Dco-:inationsD o! +irect -aterials, +irect la:or, an+ -anu!acturing o*er'ea+:

Pri-e Costs R $irect Aa:or S $irect Material Con*ersion Costs R $irect Aa:or S Manu!acturing O*er'ea+
Pri-e costs are t'e co- onents t'at are +irect in nature. Con*ersion costs are t'e co- onents to c'ange ra5 -aterials to !inis'e+ goo+s. PRO$)CT =ERS)S PER"O$ COSTS PRO$)CT COSTS: %o5, anot'er 5ay to loo? at -anu!acturing costs is to t'in? o! t'e- as attac'ing to a ro+uct. "n ot'er 5or+s, ro+ucts result !ro- t'e -anu!acturing rocess an+ D ro+uct costsD are t'e su--ation o! +irect -aterials, +irect la:or, an+ !actory o*er'ea+. T'is is er'a s easy enoug' to un+erstan+. <ut, 'o5 are suc' costs 'an+le+ in t'e accounting recor+sO To :uil+ your un+erstan+ing o! t'e ans5er to t'is Luestion, t'in? :ac? to your rior stu+ies a:out 'o5 a retailer accounts !or its in*entory costs. ('en in*entory is urc'ase+, it constitutes an asset on t'e :alance s'eet Ei.e., Din*entoryDF. T'is in*entory re-ains as an asset until t'e goo+s are sol+, at 5'ic' oint t'e in*entory is gone, an+ t'e cost o! t'e in*entory is trans!erre+ to cost o! goo+s sol+ on t'e inco-e state-ent Eto :e -atc'e+ 5it' t'e re*enue !ro- t'e saleF. <y analogy, a -anu!acturer ours -oney into +irect -aterials, +irect la:or, an+ -anu!acturing o*er'ea+. S'oul+ t'is s ent -oney :e e> ense+ on t'e inco-e state-ent i--e+iatelyO %oM T'is collection o! costs constitutes an asset on t'e :alance s'eet EDin*entoryDF. T'is in*entory re-ains as an asset until t'e goo+s are sol+, at 5'ic' oint t'e in*entory is gone, an+ t'e cost o! t'e in*entory is trans!erre+ to cost o! goo+s sol+ on t'e inco-e state-ent Eto :e -atc'e+ 5it' t'e re*enue !ro- t'e saleF. T'ere is little +i!!erence :et5een a retailer an+ a -anu!acturer in t'is regar+, e>ce t t'at t'e -anu!acturer is acLuiring its in*entory *ia a series o! e> en+itures E!or -aterial, la:or, etc.F, rat'er t'an in one !ell s5oo . ('at is i- ortant to note a:out ro+uct costs is t'at t'ey attac' to in*entory an+ are t'us sai+ to :e Din*entoria:leD costs. PER"O$ COSTS: So-e ter-s are 'ar+ to +e!ine. "n one sc'ool o! t'oug't, erio+ costs are any costs t'at are not ro+uct costs. <ut, suc' a +e!inition is a stretc', :ecause it !ails to consi+er e> en+itures t'at 5ill :e o! :ene!it !or -any years, li?e t'e cost o! acLuiring lan+, :uil+ings, etc. "t is :est to relate erio+ costs to resently incurre+ e> en+itures t'at relate to S#6A acti*ities. T'ese costs +o not logically attac' to in*entory, an+ s'oul+ :e e> ense+ in t'e erio+ incurre+. "t is !air to say t'at ro+uct costs are t'e in*entoria:le -anu!acturing costs, an+ erio+ costs are t'e non-anu!acturing costs t'at s'oul+ :e e> ense+ 5it'in t'e erio+ incurre+. T'is +istinction is i- ortant, as it a*es t'e 5ay !or relating to t'e !inancial state-ents o! a ro+uct ro+ucing co- any. An+, t'e relations'i :et5een t'ese costs can *ary consi+era:ly :ase+ u on t'e ro+uct ro+uce+. A so!t +rin? -anu!acturer -ig't s en+ *ery little on ro+ucing t'e ro+uct, :ut a lot on selling. Con*ersely, a steel -ill -ay 'a*e 'ig' in*entory costs, :ut lo5 selling e> enses. Managing a :usiness 5ill reLuire you to :e ?eenly a5are o! its cost structure. 9"%A%C"AA STATEME%T "SS)ES T3AT ARE )%"Q)E TO MA%)9ACT)RERS

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CATE#OR"ES O9 "%=E%TOR@: )nli?e retailers, -anu!acturers 'a*e t'ree uniLue in*entory categories: Ra5 Materials, (or? in Process, an+ 9inis'e+ #oo+s. <elo5 is t'e in*entory section !ro- t'e :alance s'eet o! an actual co- any: *+,-+T./*-0 /A1 2AT-/*AL 1./34*+45/.6-00 ((,%!$,%!# %,('$,'!&

7*+*08-9 :..90 2,($(,$2% 9or t'is co- any, o:ser*e t'at !inis'e+ goo+s is ;ust a s-all iece o! t'e o*erall in*entory. 9inis'e+ goo+s re resent t'e cost o! co- lete+ ro+ucts a5aiting sale to a custo-er. <ut, t'is co- any 'as a -ore signi!icant a-ount o! ra5 -aterials Et'e co- onents t'at 5ill :e use+ in -anu!acturing units t'at are not yet starte+F an+ 5or? in rocess. (or? in rocess is t'e account -ost in nee+ o! clari!ication. T'is account is !or goo+s t'at are in ro+uction :ut not yet co- leteI it contains an accu-ulation o! -onies s ent on +irect -aterial Ei.e., t'e ra5 -aterials t'at 'a*e :een ut into ro+uctionF, +irect la:or, an+ a lie+ -anu!acturing o*er'ea+. @our earlier stu+ies s'oul+ 'a*e ingraine+ t'ese !or-ulations: <eginning "n*entory S Purc'ases R Cost o! #oo+s A*aila:le !or Sale, an+ Cost o! #oo+s A*aila:le !or Sale . En+ing "n*entory R Cost o! #oo+s Sol+. "! you nee+ a re!res'er, loo? at C'a ter 8. O! course, t'ese relations 5ere necessary to calculate t'e cost o! goo+s sol+ !or a co- any 5it' only one category o! in*entory. 9or a -anu!acturer 5it' t'ree in*entory categories, t'ese DlogicalD !or-ulations -ust ta?e on a re etiti*e nature !or eac' category o! in*entory. Ty ically, t'is entails a +etaile+ set o! calculations2sc'e+ule !or eac' o! t'e res ecti*e in*entory categories. $onNt :e inti-i+ate+ :y t'e nu-:er o! sc'e+ules, as t'ey are all :ase+ on t'e sa-e conce t. SC3E$)AE O9 RA( MATER"AAS: 9ocusing !irst on ra5 -aterial, a co- any -ust +eter-ine 'o5 -uc' o! t'e a*aila:le su ly 5as trans!erre+ into ro+uction +uring t'e erio+. T'e sc'e+ule at rig't illustrates t'is rocess !or KatrinaNs Trin?ets, a !ictitious -anu!acturer o! ine> ensi*e ;e5elry. T'e a-ounts in t'e sc'e+ule are all D-a+e u D to su ort t'e e>a- le, :ut in a real 5orl+ scenario, t'e :eginning an+ en+ing in*entory a-ounts 5oul+ :e su orte+ :y a 'ysical in*entory an+ t'e urc'ases +eter-ine+ !ro- accounting recor+s. Or, Katrina -ig't utiliHe a so 'isticate+ er etual syste- t'at trac?s t'e ra5 -aterial as it is lace+ into ro+uction. Eit'er 5ay, t'e sc'e+ule su--ariHes t'e acti*ity !or t'e erio+ an+ conclu+es 5it' t'e +ollar a-ount attri:ute+ to +irect -aterials t'at 'a*e !lo5e+ into t'e ro+uction cycle. T'is -aterial trans!erre+ to ro+uction a ears in t'e sc'e+ule o! 5or? in rocess t'at !ollo5s. SC3E$)AE O9 (ORK "% PROCESS: T'e !ollo5ing sc'e+ule resents calculations t'at ertain to 5or? in rocess. Pay attention to its +etails, noting t'at E1F +irect -aterials !lo5 in !ro- t'e

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sc'e+ule o! ra5 -aterials, E2F t'e con*ersion costs E+irect la:or an+ o*er'ea+F are a++e+ into t'e -i>, an+ E3F t'e cost o! co- lete+ units to :e trans!erre+ into !inis'e+ goo+s is calle+ cost o! goo+s -anu!acture+. T'e a-ounts are assu-e+, :ut 5oul+ :e +eri*e+ !ro- accounting recor+s an+2or :y a 'ysical counting rocess.

SC3E$)AE O9 COST O9 #OO$S MA%)9ACT)RE$: T'e sc'e+ules o! ra5 -aterials an+ 5or? in rocess are o!ten co-:ine+ into a single sc'e+ule o! cost o! goo+s -anu!acture+. T'is sc'e+ule contains no ne5 in!or-ation !ro- t'at resente+ a:o*eI it is ;ust a co-:ination an+ slig't rearrange-ent o! t'e se arate sc'e+ules.

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SC3E$)AE O9 COST O9 #OO$S SOA$: T'e +eter-ination o! cost o! goo+s sol+ is -a+e *ia an e>a-ination o! c'anges in !inis'e+ goo+s: T3E "%COME STATEME%T: An inco-e state-ent !or a -anu!acturer 5ill a ear Luite si-ilar to t'at o! a -erc'an+ising co- any. T'e cost o! goo+s sol+ nu-:er 5it'in t'e inco-e state-ent is ta?en !ro- t'e rece+ing sc'e+ules, an+ is !oun+ in t'e inco-e state-ent at rig't. All o! t'e su orting sc'e+ules t'at 5ere resente+ lea+ing u to t'e inco-e state-ent are or+inarily Dinternal use onlyD ty e +ocu-ents. T'e +etails are rarely nee+e+ :y e>ternal !inancial state-ent users 5'o !ocus on t'e inco-e state-ent. "n !act, so-e tra+e secrets coul+ :e lost :y

2)

u:licly re*ealing t'e le*el o! +etail !oun+ in t'e sc'e+ules. 9or e>a- le, a co- etitor -ay :e curious to ?no5 t'e la:or cost incurre+ in ro+ucing a ro+uct, or a custo-er -ay t'in? t'at t'e !inis'e+ ro+uct rice is too 'ig' relati*e to t'e ra5 -aterial cost Ee.g., 'a*e you e*er 5on+ere+ 'o5 -uc' it really costs to ro+uce a air o! T100S s'oesOF. RE="E("%# COST 9AO( CO%CEPTS 9OR A MA%)9ACT)RER: Re*ie5 t'e !ollo5ing +iagra- t'at su--ariHes t'e +iscussion t'us !ar. %otice t'at costs are liste+ on t'e le!t .. t'e D ro+uct costsD 'a*e a :lue +ro s'a+o5 an+ t'e D erio+ costsD 'a*e a in? +ro s'a+o5. 9urt'er, t'e D ri-e costsD o! ro+uction 'a*e a :ac? slas' in t'e :lue s'a+o5, 5'ile t'e Dcon*ersion costsD 'a*e a !or5ar+ slas' in t'e :lue s'a+o5. @es, t'e +irect la:or s'a+o5 'as :ot' !or5ar+ an+ :ac? slas'esI re-e-:er t'at it is consi+ere+ to :e :e :ot' a ri-e an+ a con*ersion costM

CR"T"CAA T3"%K"%# A<O)T COST 9AO(: "t is easy to o*erloo? an i- ortant as ect o! cost !lo5 5it'in a -anu!acturing o eration. AetNs see i! you 'a*e ta?en note o! an i- ortant conce tM Try to ans5er t'is see-ingly si- le Luestion: "s +e reciation an e> enseO @ou are ro:a:ly incline+ to say yes. <ut, t'e !act o! t'e -atter is t'at t'e ans5er +e en+sM AetNs t'in? t'roug' t'is 5it' an e>a- le. Su ose t'at Altec Cor oration calculate+ +e recation o! T800,000 !or 20B1. G0C o! t'is +e reciation ertaine+ to t'e -anu!acturing lant, an+ 40C relate+ to t'e cor orate o!!ices. 9urt'er, Altec sol+ /8C o! t'e goo+s ut into ro+uction +uring t'e year. One t'ir+ o! t'e re-aining goo+s lace+ in ro+uction 5ere in !inis'e+ goo+s a5aiting resale, an+ t'e ot'er ortion 5as still :eing rocesse+ in t'e !actory. So, 5'at is t'e accounting i- licationO AetNs ree>a-ine t'e a:o*e +iagra- .. t'is ti-e 5it' t'e !lo5 o! t'e T800,000 o! +e reciation su eri- ose+ E!or t'is illustration, 5e are ignoring all ot'er costs an+ loo?ing only at t'e +e reciation ieceF:

2(

9irst, notice t'at t'e T800,000 o! +e reciation cost enters t'e cost ool on t'e le!tI T300,000 attri:uta:le to -anu!acturing ET800,000 B G0CF an+ T200,000 to non-anu!acturing ET800,000 B 40CF. T'e non-anu!acturing +e reciation is a erio+ cost an+ totally -a?es its 5ay to e> ense on t'e rig't si+e o! t'e gra 'ic. <ut, t'e -anu!acturing +e reciation !ollo5s a -ore rotracte+ ;ourney. "t is assigne+ to 5or? in rocess, an+ /8C o! t'e goo+s ut in rocess en+ u :eing co- lete+ an+ sol+ :y t'e en+ o! t'e year. T'ere!ore, T228,000 o! t'e T300,000 ET300,000 B /8CF is c'arge+ against inco-e as cost o! goo+s sol+. T'e ot'er T/8,000 ET300,000 . T228,000 cost o! goo+s sol+F re-ains so-e5'ere in in*entory. "n our !act situation, 123 o! t'e T/8,000 ET28,000F is attri:uta:le to co- lete+ goo+s an+ :eco-es art o! !inis'e+ goo+s in*entory. T'e ot'er T80,000 ET/8,000 > 223F stays in 5or? in rocess in*entory since it is attri:uta:le to units still in ro+uction. Con!using enoug'O T'e :otto- line 'ere is t'at only T428,000 o! t'e +e reciation 5as c'arge+ against inco-e. T'e ot'er T/8,000 5as assigne+ to 5or? in rocess an+ !inis'e+ goo+s in*entory. "n s'ort, T800,000 ET300,000 S T200,000F entere+ on t'e le!t, an+ T800,000 can :e !oun+ on t'e rig't ET80,000 S T28,000 S T228,000 S T200,000F. Returning to t'e see-ingly si- le Luestion, 5e see t'at a cost is not al5ays an e> ense in t'e sa-e erio+. "n a -anu!acturing :usiness, -uc' o! t'e +irect -aterial, +irect la:or, an+ !actory o*er'ea+ can en+ u in in*entory .. at least until t'at in*entory is +is ose+. 3o5 i- ortant are t'ese cost !lo5 conce tsO (ell, t'ey are i- ortant enoug' t'at t'e 9AS< 'as s eci!ie+ e>ternal re orting rules reLuiring t'e allocation o! ro+uction o*er'ea+ to in*entory. An+, !or ta> ur oses, t'e "RS 'as s eci!ic Duni!or- ca italiHationD rules. )n+er t'ese rules, in*entory -ust a:sor: +irect la:or, +irect -aterials, an+ in+irect costs inclu+ing in+irect la:or, ensions, e- loyee :ene!its, in+irect -aterials, urc'asing, 'an+ling, storage, +e reciation, rent, ta>es, insurance, utilities, re airs, +esign cost, tools, an+ a long list o! ot'er !actory o*er'ea+ ite-s. A co- anyNs results o! o erations are sensiti*e to ro er cost assign-ent, an+ -anage-ent accountants are !ocuse+ on rocesses !or correctly -easuring an+ ca turing t'is in!or-ation. Su:seLuent c'a ters 5ill :etter acLuaint you 5it' t'is as ect o! accounting.

22

Chapter 1: Introduction to Management Accounting Class & Home Exercise

The following information relates to 9roke 9rokey 6orp. and :roke :rokey 6orp;4
Droke Drokey Corp. !""#$ &eg. 'ear End. 'ear %roke %rokey Corp. !""#$ &eg. 'ear End. 'ear

Materials inventory Work in process inventory Finished goods inventory !"rchases o# ra$ %aterials &irect la'or Factory )verhead Indirect labor Insurance on plant Depreciation of plant building & equipment Repairs and maintenance expense +elling ,-penses .eneral and ad%inistrative e-penses Units Produce Units of Product Sold Unit Selling Price Income Tax ate

$ 52,000 $ 63,000 $ 74,000

$ $ $ $ $

66,000 77,000 ,000 130,000 10 ,000

$ $ $

31,000 42,000 53,000

$ $ $ $ $ $ $ $ $ $ $

40,000 51,000 6 ,000 102,000 (5,000 27,000 21*000 25,000 15,000 ((,000 105,000 85,000 60,000 $40 3"!

$ 41,000 $ 27,000 $ 3 ,000 $ 10,000 $ 5,000 $ 100,000 70,000 45,000 $35 30!

Class Work 1 Droke Drokey Corp. Required; for 9roke 9rokey 6orp. that produces 8air 1eaves;4 (. 6omplete the 6ost of :oods 2anufactured 0tatement for 9roke 9rokey 6orp. 2. 1hat is the cost to produce one unit !. 8ow much of the production is 5rime cost< ". 8ow much of the production is 6onversion cost< #. 6omplete the 6ost of :oods 0old 0tatement for 9roke 9rokey 6orp. $. 5repare an *ncome 0tatement for 9roke 9rokey 6orp. a. /ecord all information on 5age ( of the :eneral =ournal b. 5ost all >ournal entries to the T Accounts Home Work 1 Groke Grokey Corp. Required; 7or :roke :rokey 6orp. that produces :olden :rills (. 6omplete the 6ost of :oods 2anufactured 0tatement for :roke :rokey 6orp. 2. 1hat is the cost to produce one unit !. 8ow much of the production is 5rime cost< ". 8ow much of the production is 6onversion cost< #. 6omplete the 6ost of :oods 0old 0tatement for :roke :rokey 6orp. $. 5repare an *ncome 0tatement for :roke :rokey 6orp. a. /ecord all information on 5age ( of the :eneral =ournal b. 5ost all >ournal entries to the T Accounts

2!

C'apter , ) Process Costing

<u((ar9 1. Process Costing is accounting !or ro+uct costs o! in*entoria:le goo+s or ser*ices )se+ !or continuous rocess -anu!acturing o! units E'o-ogeneousF a. Costa are accu-ulate+ :y +e art-ents or cost centers :. ("P is state+ in ter-s o! eLui*alent co- lete+ units to calculate a*erage cost c. )nits are esta:lis'e+ on a +e art-ental :asis i. Perio+ Costs are e> ense+ 5'en incurre+. E.g. a+*ertising, o!!icers salaries, +e reciation 2. Jo:.Or+er Costing accounts !or t'e cost o! s eci!ic ;o:s or ro;ects Note1 Process 6 J2O Costing use t'e sa-e general le+ger accounts, an+ cost !lo5 is t'e sa-e 6=P !or :ot' syste-s are increase+ !or t'e a lication o! Material, Aa:or an+ 9O3 3. ELui*alent )nits o! Pro+uction (eig'te+ A*erage 1 E)P R Econ*ersion cost: $A 6 9O3F E("P A*erage E) nee+e+ to ro+uce 1 unit o! 92# S Co- lete+ )nits2 Trans!erre+ A++ nor-al s oilage or scra i! any 9"9O (eig'te+ . <("P

3. S oilage i. %or-al J occurs un+er nor-al, e!!icient o erating con+itions R ro+uct cost ii. A:nor-al J not e> ecte+ un+er e!!icient o erating con+itions J erio+ cost a. E$e:it loss 6 Cre+it ("PF 4. Scra J is nor-al an+ is a art o! cost. ('en sol+ E+e:it cas' 6 cre+it 9O3 or Re*enueF 8. (aste J no !urt'er use !or le!t o*er -aterial R e> ense G. Re5or? J c'arge to 9O3 i! nor-al /. Pro+uct Quality costs J i. Costs o! e>ternal !ailure: ro:le-s occurring a!ter s'i -ent Ee.g. 5arranty, ro+uct lia:ility, custo-er co- laintF ii. "nternal !ailure cost: ro:le-s occurring :e!ore s'i -ent Ee.g. +o5nti-e, re5or?, scra , tooling c'angesF iii. Pre*ention: atte- ts to a*oi+ +e!ecti*e out ut E re*enti*e -aintenance, e- loyee training, re*ie5 o! eLui -ent +esign 6 e*aluation o! su liersF i*. A raisal: E-:races Luality control rogra-s Estatistical Luality control rogra-s, ins ecting, testingF

2"

7ecturer Notes
Process costing is a -et'o+ o! allocating -anu!acturing cost to ro+ucts to +eter-ine an a*erage cost er unit. "t is use+ :y co- anies 5'ic' -ass ro+uce i+entical or si-ilar ro+ucts. Since e*ery unit is essentially t'e sa-e, eac' unit recei*es t'e sa-e -anu!acturing in ut as e*ery ot'er unit. Re!ineries, a er -ills, an+ !oo+ rocessing co- anies are e>a- les o! :usinesses 5'ic' use rocess costing. Si-ilarities :et5een ;o: or+er an+ rocess costing inclu+e: <ot' syste-s 'a*e t'e sa-e :asic ur oseUto calculate unit cost <ot' syste-s use t'e sa-e -anu!acturing accounts T'e !lo5 o! costs t'roug' t'e -anu!acturing accounts is :asically t'e sa-e 3o5e*er, t'ere are so-e i- ortant +i!!erences :et5een ;o: or+er an+ rocessing costing as +escri:e+ :elo5.

Jo8 Order Costing

Eac' ;o: is +i!!erent Costs are accu-ulate+ :y ;o: Costs are ca ture+ on a ;o: cost s'eet )nit costs are co- ute+ :y ;o:

Process Costing
All ro+ucts are i+entical Costs are accu-ulate+ :y +e art-ent Costs are accu-ulate+ on a +e art-ent ro+uction re ort )nit costs are co- ute+ :y +e art-ent

"n ;o: costing costs are assigne+ to s eci!ic ;o:s an+ t'en, i! necessary, to units 5it'in t'e ;o:. "n rocess costing, 'o5e*er, costs are a*erage+ an+ t'en assigne+ +irectly to units. Since e*ery unit in rocess costing is t'e sa-e, unit cost can :e calculate+ :y +i*i+ing total ro+uct costs :y units ro+uce+. "n rocess costing, total ro+uction costs are accu-ulate+ :y +e art-ent Ean+ :y ro+uct in eac' +e art-ent 5'en -ulti ro+ucts are ro+uce+F. T'e nu-:er o! units ro+uce+ can :e co- licate+ :y t'e !act t'at not all units -ay :e 100C co- lete at erio+ en+. T'is necessitates t'e calculation o! eLui*alent units. ELui*alent units o! ro+uction are t'e nu-:er o! co- lete+ units t'at coul+ 'a*e :een o:taine+ !ro- t'e in uts t'at 5ent into t'e artially co- lete+ units. 9or e>a- le i! 2,000 units are 20C co- lete at erio+ en+, t'ey are eLui*alent to 400 units E2,000V.2F. T'ere are t5o -et'o+s o! accounting !or costs in rocess costing as !ollo5s: (eig'te+ a*erage -et'o+ 9"9O -et'o+ )n+er t'e 5eig'te+ a*erage -et'o+, a single a*erage cost er unit is calculate+ !or :ot' t'e units in :eginning in*entory an+ t'e units starte+ in ro+uction +uring t'e erio+. T'e 9"9O -et'o+, on t'e ot'er 'an+, se arates units in :eginning

2#

in*entory !ro- current ro+uction so t'at a current erio+ cost er unit can :e calculate+. T'ere is a si> ste a roac' to calculating costs. %ote t'at eLui*alent units are t'e su- o! units trans!erre+ to t'e ne>t +e art-ent lus t'e nu-:er o! eLui*alent units in en+ing in*entory. Since cost in uts are entere+ at +i!!erent ti-es, se arate eLui*alent !igures -ust :e calculate+ !or -aterial an+ !or con*ersion costs. Again t'e aut'ors suggest a si> ste a roac' to calculating costs. Ste s 1 an+ 2 are t'e sa-e as use+ in t'e 5eig'te+ a*erage -et'o+ since t'ey re!er to t'e use o! 'ysical units. %ote t'at 9"9O nu-:er o! eLui*alent units is +i!!erent !rot'e 5eig'te+ a*erage nu-:er o! eLui*alent units. "n t'e 9"9O -et'o+ eLui*alent units to :e accounte+ !or is t'e su- o!: ELui*alent units in :eginning (or? in Process E100C . ercent co- lete+F )nits starte+ an+ co- lete+ t'is erio+ ELui*alent units in en+ing (or? in Process Stan+ar+ costs rat'er t'an actual costs are 5i+ely use+ !or in*entory *aluation. T'e 5eig'e+ a*erage an+ 9"9O -et'o+s can :eco-e co- licate+ !or co- anies 5'ic' ro+uce a 5i+e *ariety o! *ery si-ilar ro+ucts. T'ese co- anies !reLuently e- loy a stan+ar+ cost syste- an+ re are ro+uction re orts using stan+ar+ rat'er t'an actual costs. T'e co- utation o! eLui*alent units !or a stan+ar+ costing syste- are i+entical to t'ose o! un+er t'e 9"9O -et'o+.

2$

C'apter , @ RC=< < Class: PROCESS COSTI G: 7ife 7iffy uses a process cost system to manufacture laptop computers. The following information summari?es operations related to laptop computer model @3=32) during the Auarter ending 2arch !(. Bnits 9irect 2aterials 1*5 *nventory, =anuary ( ()) C%),))) 0tarted during the Auarter #)) 6ompleted during the Auarter ")) 1*5 *nventory, 2arch !( 2)) 6osts added during the Auarter C%#),))) Deginning work4in4process inventory was #)E complete for direct materials. -nding work4in4process inventory was %#E complete for direct materials. Bsing the 1eighted Average F 7*7. methods, 7ind the following for 2arch;4 (. -Auivalent units of production 2. Transfer out cost !. 6ost of -nding *nventory what were the eAuivalent units of production with regard to materials for 2arch< Home:. PROCESS COSTI G: Lint Linty uses a process cost system to manufacture :rape 7ruit =uice. The following information summari?es operations related to :rape 7ruit =uice the Auarter ending =une !), 2))%. Bnits 9irect 2aterials 1*5 *nventory, April ( 2)) C()),))) 0tarted during the Auarter &)) 6ompleted during the Auarter ")) 1*5 *nventory, =une !( ()) 6osts added during the Auarter C'#),))) Deginning work4in4process inventory was ")E complete for direct materials. -nding work4in4process inventory was #)E complete for direct materials. Bsing the 1eighted Average F 7*7. methods, 7ind the following for =une;4(. -Auivalent units of production 2. Transfer out cost !. 6ost of -nding *nventory what were the eAuivalent units of production with regard to materials for =une<

2%

C'apter 3 ) Jo8%Order Costing

<u((ar9 1. Accu-ulating cost :y s eci!ic ;o: %ote: "n+irect -aterial an+ in+irect la:or are 9O3 E+o not o*erstate 9O3F 2. ('en 9O3 a lie+ is -aterially +i!!erent !ro- 9O3 incurre+, t'e +i!!erence is allocate+ a-ong: 92#, C#S an+ E("P 3. Cost o! #oo+ Manu!acture+ <("P S $irect Materials S $irect Aa:or S 9O3 R Cost Accounte+ !or 4 E("P R CGM 4. )n+era lie+ 9O3: i. "! actual !i>e+ cost is greater t'an e> ecte+ R un+era lie+ 9O3 ii. "! actual !i>e+ cost is less t'an e> ecte+ R O*era lie+ 9O3 iii. "! actual *olu-e is less t'an e> ecte+ E92CF R )n+era lie+ 9O3 i*. "! actual *olu-e is greater t'an e> ecte+ E92CF R O*era lie+ 9O3 8. Cost Accounting Entries i. $irect Materials Purc'ase+ Materials "n*entory Acct. Pay2Cas' ii. Materials trans!erre+ to ("P ("P Materials "n*entory

>> >> >> >>

iii.

9actory Salaries ("P E$irect Aa:orF >> 9O3 E"n+irect Aa:orF >> (ages Paya:le2Cas' >> Payroll Ta>es Paya:le2Cas' >> t is nor-al !or custo-ers to reLuire early co- letion an+ ay an OT re-iuManu!acturing E> enses Einsurance, su in+irect Mat.F 9O3 >> E> enses O*er'ea+ c'arge+ to ("P ("P 9O3 #oo+s are co- lete+E9inis'e+F 9inis'e+ #oo+s ("P #oo+s are sol+ Cas'2Acct. Rec. Sales >> >> >> >> >> >> 2& lies, lant +e reciation, >>

i*.

*.

*i.

*ii.

C#S 9inis'e+ #oo+s

>> >>

Note1 E("P2E9#2E Ra5 Materials R +e!erre+ -anu!acturing costs.

7ecturer Notes
"n or+er to :e success!ul an+ sur*i*e, :usinesses -ust e- loy so-e ty e o! ro+uct costing syste-. "n ot'er 5or+s, co- anies nee+ to trac? t'e cost o! -a?ing a ro+uct or !urnis'ing a ser*ice. ('en a ser*ice is ren+ere+ t'e custo-er is gi*en an in*oice +etailing t'e -aterial an+ la:or WcostsX. Manage-ent nee+s to cost ro+ucts !or a nu-:er o! reasons. 9or !inancial state-ents ur oses -anage-ent nee+s to calculate Cost o! #oo+s Sol+ on t'e "nco-e State-ent an+ "n*entory on t'e <alance S'eet. 9or internal nee+s -anage-ent nee+s ro+uct cost in!or-ation to esta:lis' rices, to co- are actual 5it' :u+gete+ !igures, to ro erly +eci+e to W-a?e or :uyX, etc. O!ten outsi+ers suc' as insurance co- anies or go*ern-ent agencies reLuire ro+uct cost in!or-ation as 5ell. <e!ore a ro+uct costing syste- can :e i- le-ente+, a +ecision -ust :e -a+e 5it' regar+ to t'e !ollo5ing: ('ic' cost accu-ulation syste- is a ro riate ('ic' *aluation -et'o+ s'oul+ :e use+. T'ere are t5o :roa+ cost accu-ulation syste-s: Jo: Or+er an+ Process Costing. Jo: Or+er Costing is use+ :y co- anies 5'ere ro+ucts or ser*ices are i+enti!ia:le :y in+i*i+ual units or :atc'esUauto re air, ta> return re aration, case in an attorneyPs o!!ice, s'i construction, etc. T'e costs attri:uta:le to a articular ;o: are assigne+ +irectly to it. Process Costing is use+ in in+ustries 5'ere t'ere is -ass ro+uction o! si-ilar or i+entical ro+uctsU!oo+ ro+ucts, c'e-icals, ce-ent, etc. Since eac' ro+uct is i+entical, ro+uct cost can :e +eter-ine+ :y +i*i+ing total -anu!acturing costs :y total units ro+uce+. T'is a*erage cost a lies eLually to all units ro+uce+. At t'is ti-e, it s'oul+ :e note+ t'at -any co- anies use a 'y:ri+ cost accu-ulation syste- 5'ic' incor orates so-e !eatures o! ;o: or+er costing an+ ot'er !eatures o! a rocess costing syste-. T'ere are t'ree *aluation -et'o+s 5'ic' -ay :e use+ as !ollo5s: Actual Costing Actual +irect -aterial Actual +irect la:or Actual o*er'ea+ Eassigne+ a!ter t'e en+ o! t'e erio+F %or-al Costing Actual +irect -aterial Actual +irect la:or 2'

O*er'ea+ a Stan+ar+ Costing stan+ar+ in ut

lie+ using a re+eter-ine+ o*er'ea+ rate

Stan+ar+ +irect -aterial Stan+ar+ +irect la:or O*er'ea+ a lie+ using

re+eter-ine+ rate ti-es

As -entione+ a:o*e, in Jo: Or+er Costing costs are accu-ulate+ in+i*i+ually on a er.;o: :asis. "n a -anu!acturing en*iron-ent, costs are accu-ulate+ on a Jo: Or+er Cost S'eet. %ote t'at t'e +irect -aterial cost co-es !ro- -aterial reLuisition !or-s an+ t'e +irect la:or costs !ro- e- loyee ti-e tic?ets. "n nor-al costing, -anu!acturing o*er'ea+ is c'arge+ using a re+eter-ine+ o*er'ea+ rate. Actual an+ :u+gete+ cost +ata is inclu+e+ so t'at *ariances can :e e>a-ine+ i--e+iately as t'e ;o: is in rocess an+ as it is co- lete+. Stan+ar+ costs -ay :e use+ in a ;o: or+er costing syste-. Costs are entere+ into (or? in Process at t'e stan+ar+ rat'er t'an t'e actual rate. ('en t'e ;o: is co- lete stan+ar+ costs are co- are+ to actual costs incurre+ on t'e ;o: so t'at *ariances can :e e>a-ine+ an+ analyHe+.

!)

Jo: Or+er Cost Accounting J Su *. 6.0T A66.B+T*: 0G0T-20 A. 6ost accounting involves The measuring The recording, and The reporting of product costs

le-entary %ote

Accurate product costing is critical to a companyHs success

D. Two basic cost accounting systems

(=ob .rder 6ost 0ystem and 5rocess 6ost 0ystem)

1. JO< OR$ER COST S@STEM Costs are assigned to each >ob or batch

A job may be for a specific order of inventory

2ay be a unit; e .

or a Datch of units; e .

A key feature:

!(

Measures costs for each job completed - not for set time periods 2. 5/.6-00 6.0T 0G0T-2 Used hen a large volume of similar products are manufactured! "#amples:
6ost are accumulated for a specific time period

$a eek or a month% "". JO< OR$ER COST 9AO(S A! &n general, the cost flo parallels the physical flo of the materials as they are converted into finished goods! 2anufacturing costs are assigned to 1ork in 5rocess *nventory. 6ost of completed >obs is transferred to 7inished :oods *nventory. 1hen units are sold, the cost is transferred to 6ost of :oods 0old. $e:it ("P "n*entory Y 9# "n*entory Y CO#S when;

!2

<. Recor+ing $irect Materials, $irect Aa:or an+ O*er'ea+ costs

Use a =ob cost sheet to record the costs related to a specific job on a daily basis' used to determine the total and unit costs of a completed job! 1. $"RECT MATER"AA COSTS E$MF (ebit )a Materials &nventory hen *urchase direct or indirect materials 2aterials reAuisition slip sho s ritten authori+ation hen used in production 9ebit 1ork4in45rocess *nventory when direct materials are Bsed *ndirect 2aterials are treated as an overhead cost. (i.e., 9ebit 2anufacturing .verhead Account)

,! (&)"CT -A./) C/0T0 $(-% Consists of gross earnings of factory orkers, employer payroll ta#es on such earnings, and fringe benefits incurred by the employer! (ebit 1ork-in-*rocess &nventory
$ie!, hether paid or accrued% Manufacturing /verhead Account% hen direct labor is recorded

&ndirect labor is treated as an overhead cost! $i!e!, (ebit

!!

+ote; 0ome companies use a 7actory Labor account to initially record all factory labor costs (direct and indirect labor). 8owever, factory labor costs are closed out immediately to the 1ork4in45rocess *nventory account for 9irect Labor and to the 2anufacturing .verhead account for *ndirect Labor. Gour te tbook teaches >ournal entries using this holding account for 7actory Labor, but the account balances are identical whether or not this account is usedI

!"

2! MA3U4ACTU)&35 /6")7"A( C/0T0 $/7% Manufacturing overhead is a 6ontrol Account! &t is used to keep track of t o things: Actual /verhead costs incurred and /verhead costs assigned to inventory $also kno n as overhead applied%! 9-D*T 2anufacturing .verhead 6ontrol when actual manufacturing overhead costs are incurred.
3ote: The subsidiary ledger consists of individual accounts for each type of overhead cost, but the controlling entry is a debit to Manufacturing /7

6/-9*T 2anufacturing .verhead 6ontrol when .verhead is Applied to production. 2ust be assigned to ork in process and to specific jobs on an estimated basis by using a 5/-9-T-/2*+-9 .,-/8-A9 /AT.ased on the relationship bet een estimated annual overhead costs and e pected annual operating activity. "stablished at the beginning of the year.

!#

"#pressed in terms of an activity base such as (irect labor costs, (irect labor hours, Machine hours, or any other activity that is an e8uitable base for applying overhead costs to jobs! Assigning overhead costs to inventory involves a two4step process;

9st: (etermine the *redetermined /verhead )ate:

2n+: O*er'ea+ is WA lie+X or Assigne+ to work in process inventory during t"e period !ased on actual activity#

At t"e end of t"e period determine if manufacturing

over"ead is $% &'APP()&

*' *+&'APP()&

A +e:it :alance in manufacturing over"ead means t"at over"ead is un+era lie+. Ei.e., *ver"ead assigned to work in process inventory is less t"an over"ead incurred#, A cre+it :alance in manufacturing over"ead means t"at over"ead is o*era lie+. -i#e#, *ver"ead assigned to work in process inventory is greater t"an over"ead incurred#,

!$

&f immaterial in amount, any year4end balance in Manufacturing /verhead is eliminated by adjusting cost of goods sold!

*f Bnderapplied; *f .verapplied;

- ample; .verhead is e pected to be C()),))) ne t year. 2anagement believes the variable portion of overhead varies with direct labor hours, with "),))) direct labor hours e pected ne t year. () 6alculate the predetermined .8 /ate.

2) Apply overhead to production for =anuary if !,))) direct labor hours are worked. !) *f actual overhead at the end of =anuary is C&,))), did the company over4 or under4apply overhead during the month< 0how the ad>usting entry to close the overhead account at the end of the month.
!%

!&

EBAMPAE Z1: JO< OR$ER COST"%#

The 6ustom 9ivision of Allied 2anufacturing had one >ob in process at the beginning of 2ay (=ob @A(( with accumulated costs of C#))) and no beginning finished goods inventory. (() /ecord the following >ournal entries; May 9 9irect materials costing C&)) were purchased on account.

May , 9irect materials were issued to production as follows; =ob @A(( C2)) =ob @A(2 C!))

May 9: 5aid /ent totaling C(,!)). .f this amount, C&)) was for the factory and C#)) was for sales and administrative facilities.

May 9; 5aid factory wages for direct labor as follows; =ob @A(( (()) hours) C(,))) and =ob @A(2 ((2) hours); C(,2)). The company also paid C(,#)) for indirect labor in the factory.

May 9; 2anufacturing .verhead is applied at a rate of C! per direct labor dollar.

!'

May ,; =ob @A(( was completed.

2ay 2% =ob @A(( was sold for C&,))) on account. 2ay !( .ther manufacturing costs incurred during the period include; C2,))) for factory depreciationJ C")) for factory insuranceJ and C2)) for factory utilities.

2) 9etermine the balance in the 1ork4in45rocess and 7inished :oods *nventory accounts at the end of 2ay. Also show the >ournal entry to close out the under4 or overapplied overhead at the end of the month.

")

***. 6.:2 and 6.:0 0chedules +.T-; 1ith the information added in this chapter regarding production costs, you should note the following updates regarding the cost of goods manufactured and cost of goods sold schedules;

The cost of goods manufactured schedule no sho s manufacturing overhead applied rather than actual overhead costs! That is, current production costs include: (M Used, (- and /7 Applied!

The cost of goods sold schedule will show an ad>usting entry for over4 or under4applied overhead for the period.

"(

M $sed: Beg# 0 1 M

C*.M -completed, Beg# /)P 0 Current Production Costs M $sed ( *3 Applied 2 &nding /)P 1 C*.M

M Purc"ases M Availa!le

2&nding M 1 M $sed

C*.S Beg# 4. 0 C*.M 1 Cost of goods Availa!le 2 &nding 4. 1C*.S S2. )n+er2O*era lie+ O3 RCO#S a!ter a+;ust-ent

)ncome Stmt# Sales 2C*.S -after ad5ustment, 1.ross Margin 2*perating &6p# 1 )ncome

"2

EBAMPAE Z2: JO< OR$ER COST"%# The 6ustom 9ivision of Allied 2anufacturing had one >ob in process at the beginning of 2ay (=ob @A(( with accumulated costs of C"))) and no beginning finished goods inventory. (() /ecord the following >ournal entries; May 9 9irect materials were issued to production as follows; =ob @A(( C2)) =ob @A(2 C!))

May 9: 5aid /ent totaling C!#). .f this amount, C2)) was for the factory and C(#) was for sales and administrative facilities.

May 9; 5aid factory wages for direct labor as follows; =ob @A(( (()) hours) C(,))) and =ob @A(2 ((2) hours) C(,2))

May 9; 2anufacturing .verhead is applied at a rate of C! per direct labor hour.

May ,; =ob @A(( was completed and sold for C",))) cash.

!) 9etermine the balance in the 1ork4in45rocess *nventory, 7inished :oods *nventory and 6ost of :oods 0old accounts at the end of 2ay.

"!

-KA25L- !; =ob .rder 6osting 7oster 2anufacturing began =anuary with direct materials costing C(),))), work4in4process costing C2,))) and finished goods inventory consisting of =ob @#)) costing C(!,))). All of the costs in work4in4process are associated with =ob @#)(. 9uring =anuary, the following transactions occurred for 7oster 2anufacturing; Jan. 1 "ssue+ +irect -aterials costing T0,000 to ro+uction ET3,000 to Jo: Z801I T8,000 to Jo: Z802F. Also, !actory su costing T1,000 5ere issue+ to ro+uction. =an. # 5aid salaries as follows; Administrative 0alaries; C!,)))J 9irect Labor; C(2,))) (=ob @#)( C&,))) and =ob @#)2 C",))))J 5roduction 2anager C2,))). =an. # 2anufacturing overhead costs are applied to production based on direct labor costs at a rate of C2 per direct labor dollar. =an. (# 6ompleted =ob @#)(. =an. 2) 0old =ob @#)) for C!),))) on account. =an. !( .ther overhead costs totaled C2),))) and were paid in cash. Dased on the above information, determine the balance in the following accounts at the end of =anuary; 9irect 2aterials *nventory, 1ork4in4process *nventory, 7inished :oods *nventory and 6ost of :oods 0old. 5repare a cost of goods manufactured and a cost of goods sold schedule. Also determine the gross profit earned on =ob @#)(.

lies

""

-KA25L- "; 3A 6atering uses a >ob order costing system to assign costs to its catering >obs. .verhead is applied to each >ob based on direct labor hours. Listed below is data for the current year; Dudgeted .verhead; Actual .verhead; Dudgeted labor; Actual Labor; C'),))) C%%,))) C()),))) for (),))) hours C '#,))) for ',))) hours

/eAuired; (() show the >ournal entry to record the overhead applied during the period (2) 0how the ad>usting entry to close the overhead account at the end of the period.

"#

C'apter 3 @ RC=< < Class 1 Si- Si--yPs Ra5 Material cost 5as T20,000, $irect Aa:our 5as T40,000 an+ 9O 5as G0C o! $irect Aa:our an+ a lie+ to ro+uction. 1. ('at 5as t'e total -anu!acturing cost a lie+ to ro+uctionO 2. "! t'e total actual cost 5as T70,000 'o5 -uc' 5as 9O, 3. 9O un+er or o*er a lie+O Ao(e 1 #li #li yPs o*er'ea+ 5as a lie+ at a rate o! 200C o! +irect la:our. T'e actual o*er'ea+ 5as T2/0,000. $irect Material 5as T100,000 an+ $irect Aa:our 5as T180000. 1. ('at 5as t'e a lie+ total costO 2. ('at 5as t'e 9O actual cost. 3. 3o5 -uc' as 9O o*er or un+er a lie+, 4. (as 9O un+er or o*er a lie+O

"$

C'apter - ) <tandard Costs

<u((ar9 1. T'ese are :u+gete+ unit costs esta:lis'e+ to -oti*ate o ti-al ro+ucti*ity an+ e!!iciency T'ese are re+eter-ine+, attaina:le unit cost. 2. Stan+ar+ Cost syste- se arates e> ecte+ cost !ro- actual cost i. "s a lica:le to: . rocess an+ ;o:.or+er costing, to ser*ice an+ -ass ro+uction in+ustries ii. <est stan+ar+s are :ase+ on attaina:le er!or-ance E-oti*ate e- loyeesF 3. =ariances Accounts 5it' +e:it :alances are un!a*ora:le Accounts 5it' cre+it :alances are !a*ora:le =ariance Calculations i. $irect Material )sage2Luantity R AQ J SQ > SP Price AP J SP > AQ ii. $irect Aa:or E!!iciency23ours R Rate iii. A3 J S3 > SR AR J SR > A3

O*er'ea+ =olu-e is least controlla:le :y a ro+uction su er*isor i. Measures e!!ect o! not o erating at :u+gete+ acti*ity le*el ii. E.g. insu!!icient sales, la:or stri?e O*er'ea+ e!!iciency is 5'olly attri:uta:le to *aria:le o*er'ea+ Aa:or E!!iciency -easures t'e e!!iciency o! e- loyees 9actory O*er'ea+ i. Total =aria:le O*er'ea+: S en+ing *ariance an+ e!!iciency *ariance ii. S en+ing =ariance: Tot. Act. =ar. O23 J EAct. "n ut > S RateF iii. E!!iciency =ariance: S. Rate > EAct J <u+. Acti*ity <ase F

i*.

T5o.5ay *ariance =olu-e =ariance: 9i> O23 <u+. J 9i> O23 a lie+ :ase+ on stan+ar+ in ut allo5e+ !or actual out ut Controlla:le E:u+get *arianceF: Tot. Act. O23 J E9i> O23 S =ar. O23 :ase+ on stan+ar+ rate 6 stan+ar+ in ut allo5e+ !or actual out utF *. T'ree.5ay e!!iciency *ariance A !le>i:le :u+get can :e a+a te+ !or any le*el o! ro+uction

"%

S en+ing =ariance R Actual in utF > SR =olu-e =ariance R *i.

A O23 J E<u+. 9i> O23 S <u+. =ar O23 on E<u+. 9i> O23 J 9i> O23 a lie+ :ase+ on stan+. "n ut allo5e+ !or act. Out utF

C'ange in ca acity +oes not a!!ect s en+ing *ariance :ecause *aria:le unit costs are constant 5it'in a rele*ant range. =olu-e *ariance 5ill +ecrease or increase +e en+ing on t'e c'ange in ca acity.

9our J (ay e!!iciency *ariance =aria:le: S en+ing 6 E!!iciency 9i>e+: <u+get E!i>e+ O23 s en+ingF an+ *olu-e

7ecturer Notes
Per!or-ance -easure-ent is essential in a 5ell.run organiHation. "t can ro*i+e critical in!or-ation as to 5'at 5or?s an+ 5'at +oesnPtI it is a 5ay to e*aluate an+ -oti*ate e- loyeesI an+ it can ro*i+e a -eans o! carrying out t'e :asic strategy o! t'e co- any. Most co- anies use so-e co-:ination o! !inancial an+ non.!inancial er!or-ance -easures Estan+ar+sF to gauge er!or-ance. Many co- anies not only use stan+ar+s to -easure er!or-ance :ut t'ey e- loy a stan+ar+ cost accounting syste- 5'ic' recor+s :ot' stan+ar+ an+ actual costs. Stan+ar+ costs are t'e :u+gete+ costs incurre+ to -anu!acture a ro+uct or er!or- a ser*ice. A stan+ar+ cost syste- greatly !acilitates an analysis o! *ariances, t'e +i!!erences :et5een actual costs an+ stan+ar+ costs. "n a -anu!acturing en*iron-ent :u+gete+ costs are ca ture+ on a stan+ar+ cost car+. "n re aring a stan+ar+ cost car+ a :ill o! -aterials is re are+ an+ an o erations !lo5 +ocu-ent esta:lis'ing la:or cost stan+ar+s -ay :e re are+. O*er'ea+ stan+ar+s are esta:lis'e+ using re+eter-ine+ !actory o*er'ea+ rates. "n a stan+ar+ cost syste-, t'en, :ot' cost an+ Luantity stan+ar+s are esta:lis'e+ !or t'e cost in uts o! +irect -aterial, +irect la:or, an+ o*er'ea+. Actual rice ai+ !or a cost in ut is co- are+ to t'e stan+ar+ rice an+ actual Luantity use+ is co- are+ to t'e stan+ar+ Luantity. Any +i!!erence :et5een actual an+ stan+ar+ cost creates a *ariance, eit'er !a*ora:le or un!a*ora:le, an+ -ay :e in*estigate+ !urt'er. T'is rocess !acilitates -anage-ent :y e>ce tion..+e en+ing on t'e signi!icance o! t'e *ariance, -anage-ent ta?es a ro riate action. "nsigni!icant *ariances are +isregar+e+.

"&

T'e

general

-o+el

o!

*ariance

analysis

ta?es

t'is

!or-:

T'e rice *ariance s'o5s t'e +i!!erence :et5een actual rice ai+ an+ stan+ar+ rice. T'e Luantity *ariance -easures t'e actual Luantity use+ co- are+ to t'e stan+ar+ Luantity allo5e+ !or t'e out ut o! t'e erio+. T'e !ollo5ing illustration is use+ to resent Cost +ata: Material Price =ariance Material Quantity =ariance Aa:or Rate =ariance Aa:or E!!iciency =ariance =aria:le O*er'ea+ S en+ing =ariance =aria:le O*er'ea+ E!!iciency =ariance 9i>e+ O*er'ea+ S en+ing Eor <u+getF =ariance 9i>e+ O*er'ea+ =olu-e =ariance "n a stan+ar+ cost syste- cost in uts are entere+ at stan+ar+ cost. T'us 5'en ra5 -aterial is urc'ase+ it is entere+ at stan+ar+ not actual cost. Any +i!!erence :et5een actual an+ stan+ar+ cost is i+enti!ie+ i--e+iately an+ ;ournaliHe+. %ote t'at all un!a*ora:le *ariances 'a*e +e:it :alances an+ !a*ora:le *ariances 'a*e cre+it :alances. Stan+ar+ ro+uction costs are s'o5n in in*entory accounts an+ t'us 'a*e +e:it :alances an+ t'ere!ore e>cess costs are also +e:its. At year en+ stan+ar+ cost *ariances are eli-inate+ t'roug' t'e use o! a+;usting entries. "! t'e *ariances are in total insigni!icant t'ey can :e close+ to Cost o! #oo+s Sol+. 3o5e*er, i! t'e *ariances are signi!icant t'ey s'oul+ :e rorate+ a-ong en+ing in*entories an+ Cost o! #oo+s Sol+. A-ong t'e -any reasons 5'y co- anies use a stan+ar+ cost syste- is t'at it allo5s -anage-ent to lan !or e> ecte+ costs to :e incurre+ in -anu!acturing a ro+uct or ro*i+ing a ser*ice. A++itionally, a stan+ar+ costs syste- i+enti!ies *ariances at an early oint so t'at a ro riate action can :e ta?en at t'e earliest oint ossi:le.

"'

T'ere are t5o :roa+ ty es o! stan+ar+s..i+eal stan+ar+s an+ ractical stan+ar+s. An i+eal or er!ection stan+ar+ is t'e a:solute -ini-u- cost un+er i+eal con+itions. <ot' total Luality -anage-ent an+ ;ust.in.ti-e ro+uction syste-s in'erently !ocus on i+eal stan+ar+s :y e- 'asis on Hero +e!ects, Hero ine!!iciency, an+ Hero +o5nti-e. <ot' TQM an+ J"T atte- t to eli-inate all non. *alue a++e+ acti*ities an+ t'ere!ore all 5aste. "n t'is res ect t'ese -anage-ent conce ts are a ty e o! i+eal stan+ar+. Practical stan+ar+s can :e +escri:e+ as a Wtig't :ut attaina:leX stan+ar+ an+ t'ey allo5 !or nor-al +o5nti-e an+ e- loyee rest erio+s. At one ti-e -any ). S. -anu!acturers utiliHe+ ractical stan+ar+s in e*aluating er!or-ance. More recently t'ey 'a*e -o*e+ to a ty e o! i+eal stan+ar+. "n recent years -any co- anies 'a*e s'i!te+ to an e- 'asis on con*ersion cost as an ele-ent in stan+ar+ costing. T'is is a result o! t'e s'i!t !ro- la:or intensi*e ro+uction to -ac'ine intensi*e ro+uction.

C'apter - @ RC=< <

#)

4. T'ese are :u+gete+ unit costs esta:lis'e+ to -oti*ate o ti-al ro+ucti*ity an+ e!!iciency T'ese are re+eter-ine+, attaina:le unit cost. iii. <est stan+ar+s are :ase+ on attaina:le er!or-ance E-oti*ate e- loyeesF 8. =ariances Accounts 5it' +e:it :alances are un!a*ora:le Accounts 5it' cre+it :alances are !a*ora:le =ariance Calculations *ii. $irect Material [$irect Aa:or )sage2Luantity R AQ J SQ > SP E!!iciency23ours R A3 J S3 > SR Price AP J SP > AQ Rate AR J SR > A3 Class 1 #eorge #eorgy cost analysis s'o5e+ t'e !ollo5ing:. <tandard Actual Purc'ases o! Ra5 Material T30,000 T33,000 )nits Purc'ase+ 10,000 7,000 Aa:our Cost T70,000 T0G,000 3ours (or?e+ 20,000 22,000 9in+ t'e !ollo5ing *ariances an+ in+icate 5'et'er t'ey are !a*oura:le or un!a*oura:le:. 1, Material rice 2. Material Luantity 3. Aa:our rate 4. Aa:our e!!iciency Ao(e 1 Peorge Peorgy cost analysis s'o5e+ t'e !ollo5ing:. <tandard Actual Purc'ases o! Ra5 Material T37,000 T3G,000 )nits Purc'ase+ 13,000 12,000 Aa:our Cost T0G,000 T07,000 3ours (or?e+ 24,000 2G,000 9in+ t'e !ollo5ing *ariances an+ in+icate 5'et'er t'ey are !a*oura:le or un!a*oura:le:. 1, Material rice 2. Material Luantity 3. Aa:our rate 4. Aa:our e!!iciency

#(

C'apter " ) >aria8le +5irect. and A8sorption +Full. Costing

<u((ar9 1. A:sor tionE9ullF costing is reLuire+ !or e>ternal re orting ur oses E GAAP. "nclu+es !i>e+ an+ *aria:le 9O3 in ro+uct cost i. t'ese are inclu+e+ in 9inis'e+ #oo+s 2. =aria:le E$irectF costing treats *aria:le 9O3 as a ro+uct cost, :ut !i>e+ 9O3 as an e> ense. Si-ilar to !i>e+ 6 *aria:le selling, general 6 a+-inistrati*e e> ensesF $irect Aa:or, $irect Materials, =aria:le 9O3 are 'an+le+ ;ust li?e a:sor tion costing. REMEM<ER: 9i>e+ 9O3 is e> enses. Sales J =ar. E> enses R Contri:ution Margin J !i>e+ e> enses R o eration inco-e.

7ecturer Notes
Earlier 5e +iscusse+ actual cost syste-s 5'ic' costs ro+ucts an+2or ser*ices using actual +irect -aterial cost, actual +irect la:or cost, an+ actual o*er'ea+ cost E-ay not :e a*aila:le until t'e en+ o! t'e erio+F. (e 'a*e also consi+ere+ nor-al costing syste- 5'ic' costs ro+ucts an+2or ser*ices using actual +irect -aterial cost, actual +irect la:or cost, an+ allocate+ o*er'ea+ cost :ase+ on a re+eter-ine+ o*er'ea+ rate. Many co- anies use nor-al rat'er t'an actual costing !or t'e !ollo5ing reasons: O*er'ea+ cost can :e assigne+ as t'e ro+uction occurs or t'e ser*ice is ren+ere+. Pre+eter-ine+ o*er'ea+ rates a+;ust !or *ariations in actual o*er'ea+ costs t'at are unrelate+ to acti*ity Pre+eter-ine+ o*er'ea+ rates a+;ust !or ro:le-s o! !luctuation in acti*ity le*els t'at 'a*e no i- act on actual !i>e+ o*er'ea+ costs Pre+eter-ine+ o*er'ea+ rates allo5 -anagers to :e -ore a5are o! ro+uct an+ custo-er ro!ita:ility As -entione+ a:o*e, nor-al costing uses a re+eter-ine+ rate to allocate o*er'ea+. T'e re+eter-ine+ rate is calculate+ as !ollo5s: Total Esti-ate+ O*er'ea+ Cost Total Esti-ate+ Acti*ity <ase Since o*er'ea+ consists o! nu-erous costs so-e o! 5'ic' are not i--e+iately a*aila:le, in nor-al costing o*er'ea+ is c'arge+ on an allocate+ :asis. At t'e :eginning o! t'e year t'e co- any calculates a re+eter-ine+ o*er'ea+ rate :y +i*i+ing esti-ate+ total o*er'ea+ cost :y esti-ate+ total units o! t'e allocation :ase. O*er'ea+ is c'arge+ to (or? "n Process :y -ulti lying t'e re+eter-ine+

#2

o*er'ea+ rate :y t'e nu-:er o! actual units o! allocation :ase use+ +uring t'e erio+. Since :u+gete+ a-ounts are use+ to calculate t'e re+eter-ine+ o*er'ea+ rate t'ere 5ill ty ically :e a :alance re-aining in Manu!acturing O*er'ea+ at t'e en+ o! t'e erio+. %ote t'at Manu!acturing O*er'ea+ is a te- orary account an+ -ust :e close+ out at year en+. T'e +i!!erence :et5een t'e o*er'ea+ cost a lie+ to (or? in Process an+ t'e actual o*er'ea+ costs o! t'e erio+ is calle+ eit'er un+er.a lie+ or o*er.a lie+ o*er'ea+. ('en o*er'ea+ is un+er. a lie+, -anu!acturing costs 'a*e :een un+erstate+ an+ 5'en o*er'ea+ is o*er. a lie+, o*er'ea+ costs 'a*e :een o*erstate+. "n t'e Manu!acturing O*er'ea+ Account actual costs are recor+e+ on t'e +e:it si+e an+ a lie+ costs are recor+e+ on t'e cre+it si+e. "! t'e a-ount o! un+er.a lie+ or o*er.a lie+ o*er'ea+ is i--aterial, t'e :alance can :e close+ out to Cost o! #oo+s Sol+. 3o5e*er, i! t'e a-ount o! un+er.a lie+ or o*er.a lie+ o*er'ea+ is -aterial, it s'oul+ :e ro.rate+ a-ong t'e accounts in 5'ic' a lie+ o*er'ea+ is recor+e+.. (or? in Process, 9inis'e+ #oo+s, an+ Cost o! #oo+s Sol+.

Mi6ed costs are costs 5'ic' contain :ot' a *aria:le an+ a !i>e+ ele-ent. T'e
!i>e+ ele-ent is t'e :asic c'arge !or 'a*ing t'e ser*ice rea+y an+ a*aila:le !or use. T'e *aria:le ele-ent is t'e actual consu- tion c'arge. An e>a- le o! a -i>e+ cost is t'e cost o! a large ca acity co ier lease+ at T1,000 er -ont' lus T.01 er co y. Mi>e+ costs can :e re resente+ :y t'e eLuation @ R a S :B 5'ere

C E *otal Cost
a R Total 9i>e+ Cost : R )nit =aria:le Cost

@ E Acti4it9 7e4el
"n or+er to re+ict -i>e+ cost :e'a*ior it is necessary !or t'e accountant to se arate t'e -i>e+ cost into its !i>e+ an+ *aria:le ele-ents. As you are ro:a:ly a5are, a nu-:er o! -et'o+s are a*aila:le to co- ute t'e total !i>e+ cost co- onent an+ t'e *aria:le cost er unit co- onent in a -i>e+ cost inclu+ing t'e !ollo5ing: 3ig' lo5 -et'o+ Aeast sLuares -et'o+ E>cel or ot'er so!t5are a lications <y -eans o! t'e least sLuares -et'o+ an+ E>cel, t'e *alue o! : Ean+ o! aF can :e calculate+ using all +ata o:ser*ations. (eNll +o an E>cel e>ercise 5'ere 5e create a regression line o! a*erages an+ co- ute t'e *alues o! a an+ :. %e>t 5e +iscuss fle6i!le !udgets. A !le>i:le :u+get is a lan 5'ic' ro*i+es esti-ates o! 5'at costs s'oul+ :e !or any le*el o! acti*ity 5it'in a s eci!ie+

#!

range. <y using a !le>i:le :u+get t'e -anager can co- are actual costs to 5'at costs s'oul+ 'a*e :een !or t'at actual le*el o! acti*ity. A lant.5i+e o*er'ea+ rate is ina ro riate !or co- anies 5'ic' ro+uct +i!!erent ?in+s o! ro+ucts 5it' +i!!erent in ut reLuire-ents. Costs can :e accu-ulate+ an+ resente+ in *arious 5ays. Cost accu-ulation re!ers to 5'ic' costs are recor+e+ as ro+uct costs an+ 5'ic' costs are recor+e+ as erio+ costs. Cost resentation re!ers to 'o5 costs are s'o5n on e>ternal !inancial state-ents or internal -anage-ent re orts. Accu-ulation an+ resentation o! costs is acco- lis'e+ using one o! t5o -et'o+s, a:sor tion costing or *aria:le costing. A:sor tion costing Ealso ?no5n as !ull costingF treats all -anu!acturing costs as ro+uct Ein*entoria:leF costs in accor+ance 5it' #AAP. T'us $irect Material, $irect Aa:or, =aria:le O*er'ea+, an+ 9i>e+ O*er'ea+ are all c'arge+ into t'e (or? in Process Account. ('en ro+ucts are co- lete+, 9inis'e+ #oo+s is $e:ite+ an+ (or? in Process cre+ite+. Only 5'en !inis'e+ units are sol+ are t'ey c'arge+ as e> ense ECO#SF on t'e inco-e state-ent. "n a:sor tion costing only selling e> enses an+ a+-inistrati*e e> enses are treate+ as erio+ costs an+ c'arge+ o!! as e> ense i--e+iately. "n *aria:le costing only *aria:le ro+uct costs E$irect Material, $irect Aa:or, an+ =aria:le O*er'ea+F are c'arge+ to (or? in Process. "n *aria:le costing 9i>e+ Manu!acturing O*er'ea+ is c'arge+ as a erio+ cost. =aria:le ro+uct costs are c'arge+ to (or? in Process an+ all ot'er e> enses inclu+ing *aria:le selling an+ a+-inistrati*e e> ense, !i>e+ -anu!acturing o*er'ea+, an+ !i>e+ non. -anu!acturing e> ense are c'arge+ as e> enses i--e+iately. )sing *aria:le costing a contri:ution inco-e state-ent can :e re are+ in t'e !ollo5ing !or-at: Sales Re*enue . =aria:le E> ense R Pro+uct Contri:ution Margin . =aria:le %on.-anu!acturing E> ense R Total Contri:ution Margin . Total 9i>e+ Cost R "nco-e <e!ore "nco-e Ta> %ote t'at a:sor tion costing treats classi!ies e> enses :y !unction 5'ereas *aria:le costing classi!ies e> enses :y cost :e'a*ior.

#"

C'apter " @ RC=< < Class =1 BicB BicB9Ps 2008 -anu!acturing costs !or its ne5 lant 5ere as !ollo5s: $irect Materials T700,000, Ot'er =aria:le Manu!acturing Cost T200,000, an+ $e reciation o! 9actory :uil+ing an+ -anu!acturing eLui -ent TG0,000, Ot'er 9i>e+ Manu!acturing O*er'ea+ cost T28,000. $uring 2008 <ic? <ic?y -anu!acture+ 80,000 units an+ 20,000 5ere on 'an+ at year en+. ('at a-ount s'oul+ :e consi+ere+ ro+uct cost !or EaF internal re orting ur osesO an+ E:F e>ternal re orting ur osesO ('at is t'e *alue o! en+ing in*entory un+er :ot' EcF a:sor tion costing an+ E+F +irect costingO Ao(e =1 RicB RicB9Fs 2008 -anu!acturing costs !or its lant 5ere as !ollo5s: $irect Materials T1,100,000, Ot'er =aria:le Manu!acturing Cost T480,000, A++itional Ra5 Material ut into ro+uction TG0,000 an+ $e reciation o! 9actory :uil+ing an+ -anu!acturing eLui -ent T100,000, Ot'er 9i>e+ Manu!acturing O*er'ea+ cost T40,000. $uring 2008 Ric? Ric?y -anu!acture+ 100,000 units an+ 30,000 5ere on 'an+ at year en+. ('at a-ount s'oul+ :e consi+ere+ ro+uct cost !or EaF internal re orting ur osesO an+ E:F e>ternal re orting ur osesO ('at is t'e *alue o! en+ing in*entory un+er :ot' EcF a:sor tion costing an+ E+F +irect costingO EeF un+er *aria:le costing, 5'at is t'e erio+ costO

##

C'apter ! % Acti4it9%Based Costing +ABC.

<u((ar9 1. "+enti!ies acti*ities nee+e+ to ro*i+e ro+ucts or ser*ices, an+ i. assign cost to t'ose acti*ities, t'en ii. reassigns costs to t'e ro+ucts or ser*ice :ase+ on t'eir consu- tion o! acti*ities A<C 'el s -anage cost :y ro*i+ing -ore +etaile+ analyses o! cost t'an tra+itional -et'o+s A<C !acilitates cost re+uction :y +eter-ining 5'at acti*ities +o an+ +o not a++ *alue to t'e ro+uct or ser*ice. A<C +e!ines cost o:;ects as acti*ities rat'er t'an !unctions or +e art-ents 2. Cost O:;ects: "nter-e+iate an+ !inal +is ositions o! cost ools 3. Cost Pool: an account in 5'ic' a *ariety o! si-ilar costs are accu-ulate+ rior to allocation to cost o:;ects. 4. Cost $ri*er is a !actor t'at causes a c'ange in t'e cost ool !or a articular acti*ity T'ese are use+ as a :asis !or cost allocation. i. Cost assign-ent2allocation is :ase+ on a -ulti le cause.an+.e!!ect relations'i Note: 1. A<C syste- uses -ore cost ools an+ allocation :ases t'an a tra+itional syste-. ,. Acti*ities t'at are unnecessary are non*alue.a++ing Era5 -aterial 6 storageF 3. =alue.a++ing E+esign engineering, 'eat treat-ent an+ +rill ressF

7ecturer Notes
Acti*ity :ase+ -anage-ent EA<MF is a -anage-ent syste- 5'ic' !ocuses on analyHing an+ controlling acti*ities incurre+ in t'e ro+uction or er!or-ance rocess in an atte- t to i- ro*e custo-er *alue an+ en'ance ro!ita:ility. T'e ter- DA<MD !ocuses on ricing an+ ro+uct -i> +ecisions, cost re+uction an+ rocess i- ro*e-ent +ecisions, +esign +ecisions, an+ lanning an+ -anaging acti*ity +ecisions. A<M +i*i+es acti*ities into t5o categories..*alue a++e+ an+ non.*alue a++e+. =alue a++e+ acti*ities are t'ose 5'ic' increase t'e 5ort' o! a ro+uct or ser*ice. %on.*alue a++e+ acti*ities, on t'e ot'er 'an+, are t'ose 5'ic' a++ not'ing to t'e 5ort' o! a ro+uct or ser*ice. E>a- les o! non.*alue acti*ities inclu+e 5ait ti-e, ins ection ti-e, -o*e ti-e, etc. =alue a++e+ *ersus non. #$

*alue a++e+ ti-e can :e co- are+ using t'e -anu!acturing cycle e!!iciency EMCEF, co- ute+ as !ollo5s: MCE R =alue a++e+ ti-e Total t'roug' ut ti-e O! course, a co- any o erating in a er!ect en*iron-ent 5oul+ 'a*e no non. *alue costs an+ 5oul+ 'a*e an MCE o! 1. An i- ortant co- onent o! acti*ity :ase+ -anage-ent is acti*ity :ase+ costing EA<CF. Acti*ity :ase+ costing is a costing -et'o+ 5'ic' analyHes an+ atte- ts to accurately cost s eci!ic resources 5'ic' are consu-e+ to +eli*er a ro+uct or er!or- a ser*ice. "n A<C, t'e calculation o! +irect -aterial an+ +irect la:or is usually unco- licate+. E- 'asis is on accurately calculating o*er'ea+. Earlier 5e calculate+ ro+uct costs using a :roa+ a*eraging tec'niLue suc' as +irect la:or 'ours to allocate in+irect E-anu!acturing o*er'ea+F costs. "n t'e 'istoric ast 5'en +irect costs 5ere a large ercentage an+ in+irect costs 5ere a s-all ercentage o! total ro+uct cost t'is -et'o+ ro*i+e+ a su!!iciently a+eLuate a ro>i-ation o! ro+uct cost. C'anges in t'e econo-y t'oug' an+ c'anges in t'e nee+s o! -anage-ent reLuire t'at a ne5, -ore accurate, costing syste- :e i- le-ente+ to su le-ent t'e tra+itional !inancial accounting costing syste-. Mo+ern co- anies ro+uce a greater an+ greater *ariety o! ro+ucts an+ ser*ices. <roa+ a*eraging can lea+ to un+er or o*er costing o! ro+ucts or ser*ices. T'is is es ecially true 5'en t'e -i> o! ro+ucts inclu+es so-e ro+ucts 5'ic' consu-e relati*ely !e5 resources an+ ot'er ro+ucts 5'ic' consu-e relati*ely -any resources. Acti*ity :ase+ costing is a costing syste5'ic' !ocuses on all t'e in+i*i+ual resources consu-e+ in ro*i+ing a ro+uct or ser*ice. A<C !irst traces costs to acti*ities an+ t'en to ro+ucts an+ ser*ices. "n A<C, t'e assign-ent o! o*er'ea+ costs !irst in*ol*es t'e +i*ision o! acti*ities into in+irect cost ools an+ on i+enti!ication o! res ecti*e cost +ri*ers !or eac' acti*ity ool. One -et'o+ to acco- lis' t'is is to use a cost 'ierarc'y an+ se arate acti*ities into !our general le*els as !ollo5s: )nit le*el costs <atc' le*el costs Pro+uct2 rocess le*el costs OrganiHation or !acility costs Costs o! acti*ities er!or-e+ on eac' in+i*i+ual unit Costs o! acti*ities relate+ to a grou o! ro+ucts Costs o! acti*ities un+erta?en to su ort in+i*i+ual ro+ucts

Costs o! acti*ities t'at cannot :e trace+ to in+i*i+ual ro+ucts :ut t'at su ort t'e organiHation as a 5'ole

#%

%ote t'at in :ot' t'e a*eraging -et'o+ an+ t'e acti*ity :ase+ costing -et'o+, +irect -aterial an+ +irect la:or costs 5ere t'e sa-e. Also note t'at all costs E:ot' ro+uct an+ erio+F t'at relate to a ro+uct are co- ute+ 5'en using acti*ity :ase+ costing. Acti*ity :ase+ costing in*ol*es a t5o ste rocess. O*er'ea+ costs are !irst accu-ulate+ in acti*ity cost centers using an a ro riate cost +ri*e an+ secon+ costs are assigne+ out o! t'e acti*ity cost centers to ro+ucts.

#&

C'apter ! @ RC=< <

Class 1: /ill /illy, entire electricity 'ill #or the entire co%pany $as $500,000* /ill /illy had the #ollo$ing depart%ents 0a1 2o%p"ter 0'1 !lant 0c1 +ales 3 Marketing and 0d1 4d%inistration* 5he #ollo$ing in#or%ation $as generated #ro% /ill /illy cost sheet67 ()uare Actual Electrical Department *eet Meters used$ Maintenance 2o%p"ter 3,000 30,000 $10,000 !lant 4,500 40*000 $25,000 +ales 3 Marketing 2,500 20,000 $15,000 4d%inistration 6,000 25,000 $20,000 8n "sing 4ctivity7/ased 2osting, $hat is the cost allocated to each depart%ent9 Home 1: &"ring 2005 /ased /asedy, inc"rred $300,000 in #"el #or its %an"#act"ring division* 5he #ollo$ing #actors relate to its activity67 *uel tons$ Actual +ther *acility Consumed ,eight l-s$ *uel Cost /ottling !lant 3,000 20,000 $30,000 !rocessing !lant 4,500 15*000 $45,000 Filling !lant 2,500 25,000 $25,000 8n "sing 4ctivity7/ased 2osting, $hat is the total cost o# #"el #or each depart%ent9

#'

C'apter $ % Joint and B9%Product Costing <u((ar9

1. Joint Pro+ucts J t5o or -ore se arate ro+ucts are ro+uce+ :y a co--on -anu!acturing rocess =alue allocate+ at oint at 5'ic' ;oint ro+ucts :eco-e se arate. 2. <y. ro+ucts J s-aller *alue ro+ucts are ro+uce+ si-ultaneously !ro- a co--on -anu!acturing rocess 5it' ro+ucts o! greater *alue an+ Luantity E;oint ro+uctsF <y Pro+ucts +o not usually recei*e an allocation o! ;oint cost. 3. Joint Cost J incurre+ rior to s lit.o!! oint to ro+uce t5o or -ore goo+s -anu!acture+ si-ultaneously :y a single rocess or series o! rocesses. To assign ;oint cost, use %R= o! ro+ucts > ;oint cost 4. Se ara:le cost can :e i+enti!ie+ 5it' a articular ;oint ro+uct an+ allocate+ to a s eci!ic unit o! out ut. Cost incurre+ a!ter s lit.o!! oint.

7ecturer Notes
1. 5eDinitions a. 'oint (ost: t'e cost o! a single rocess t'at yiel+ -ulti le ro+ucts si-ultaneously. "nclu+es $M, $A, an+ -!g. O'+ u to t'e s lit.o!! oint :. )plit!off *oint: t'e oint in t'e rocess at 5'ic' t'e ro+ucts :eco-e se arately i+enti!ia:le. c. )eparable (osts: t'ose costs incurre+ :eyon+ t'e s lit.o!! oint t'at are i+enti!ia:le 5it' in+i*i+ual ro+ucts +. Main *roduct: t'e ro+uct 5it' t'e 'ig'est sales *alue relati*e to ot'er ro+ucts :eyon+ s lit.o!! e. 'oint *roducts: ot'er ro+ucts 5it' a relati*e 'ig' sales *alue t'at are not i+enti!ia:le as in+i*i+ual ro+ucts until t'e s lit.o!! oint !. Byproduct: a ro+uct :eyon+ t'e s lit.o!! oint 5it' a relati*ely lo5 sales *alue in co- arison 5it' -ain an+ ;oint ro+ucts g. )crap: ro+ucts :eyon+ s lit.o!! 5it' -ini-al *alue EMay 'a*e a negati*e sales *alue i! -ust :e 'aule+ a5ay to a lan+!illF ,. Reasons Dor Allocating Joint Costs to =ndi4idual Products a. To *alue in*entory an+ CO#S !or e>ternal re orts :. To *alue in*entory an+ CO#S !or internal re orts Einclu+ing ro!ita:ility analysis an+ er!or-ance e*aluationF c. 9or cost rei-:urse-ent un+er contracts 5'ere not all t'e se ara:le ro+ucts go to a single custo-er so t'at allocation o! t'e ;oint costs is necessary. $)

+. 9or settle-ent o! insurance clai-s in*ol*ing se ara:le ro+ucts at or :eyon+ s lit.o!!. e. 9or rate regulation 5'en one or -ore ;ointly ro+uce+ ro+ucts or ser*ices are su:;ect to rate regulation :ase+ on cost. E.g. ser*ices using tele 'one lines 3. Met'ods oD Allocating Joint Costs a. Met'o+s 5'ere a -easure is a*aila:le at t'e S lit.o!! oint !or eac' se ara:le ro+uct. i. Sales =alue at S lit.o!!: T'is -et'o+ allocates ;oint costs to t'e se ara:le ro+ucts :ase+ on t'e relati*e sla*es *alue o! eac' ro+uct at t'e s lit.o!! oint "nclu+es t'e sales *alue o! t'e entire ro+uction....not ;ust actual sales Si- le to a ly :ecause it ro*i+es a co--on -easure a lica:le to all ro+ucts i! sales *alue is rea+ily a*aila:le Also, relates cost allocate+ to t'e re*enue.generating o5er o! in+i*i+ual ro+ucts. $e-o 18.1G ii. P'ysical Measures Met'o+: T'is -et'o+ uses so-e -easure o! 5eig't o! *olu-e co--on to all se ara:le ro+ucts at t'e s lit.o!! oint. T'e ro:le- 5it' t'is -et'o+ is t'at t'e 'ysical -easure -ay :ear no relations'i to t'e re*enue ro+ucing o5er o! t'e se ara:le ro+ucts. 9or e>a- le, i! a co- any -ines gol+ an+ lea+, an ounce o! gol+ 5ill :e -uc' -ore *alua:le t'an an ounce o! lea+ :ut :ot' 5oul+ get t'e sa-e allocation 5'en ounces is use+ as t'e -easure. T'is causes 'ig' *alue ite-s er unit o! t'e 'ysical -easure to s'o5 'ig' ro!its an+ lo5 *alue ite-s er unit o! t'e 'ysical -easure to s'o5 lo5 ro!its. $e-o 18.1G :. Met'o+s 5'ere t'ere isnPt a -ar?et !or all o! t'e se ara:le ro+ucts at s lit.o!!. T'ere!ore, so-e ot'er -et'o+ 'as to :e use+ t'at appro"imates the situation at the split!off point . ET'e allocation -ust relate to t'e situation at s lit.o!! :ecause ;oint costs cease to 'a*e -eaning :eyong t'e s lito!! ointF. T'ere are t5o -et'o+s t'at can a ro>i-ate t'e situation at s lit.o!!. i. Esti-ate+ %et RealiHa:le =alue Met'o+ E%R=F T'e %R= !or eac' ro+uct as a C o! t'e total %R= o! all ro+ucts, is t'e :asis !or t'e allocation. EstP+ %R= R 9inal sales *alue o! ro+uction J Se ara:le Costs Eto get an esti-ate+ %R= !or all ro+ucts co-:ine+ t'at is a ro>i-ately eLual to ;oint costs, you 5oul+ also nee+ to

$(

+e+uct selling an+ a+-in e> enses an+ gross ro!it. T'is is not usually +one in ractice ;ust to ?ee t'ings si- leF iii. Constant #ross Pro!it C %R= Met'o+ T'is -et'o+ assu-es e*ery se ara:le ro+uct earns t'e sa-e #PC Et'is -ay not :e *ery realisticF "t starts 5it' t'e !inal sales *alue o! ro+uction an+ su:tracts t'e #ross Pro!it E5'ic' is eLual to Sales > constant #PCF, an+ t'en su:tracts t'e Se ara:le Costs. T'e result is an a ro>i-ation o! t'e Joint Costs !or eac' se ara:le ro+uct at s lit.o!!. Ste s: 1. Co- ute t'e o*erall #PC Ecalle+ t'e constant #*+F !or all ro+ucts co-:ine+ Ei.e., #P R 9S=P J JC J SC 2. Calculate t'e #P in T !or eac' ro+uct Ei.e., 9S=P > constant #PC +eter-ine+ in art 1.F 3. Calculate t'e Joint Costs !or eac' ro+uct as !ollo5s: 9S=P >> Aess: #P in T E>>F Aess Se . Costs E>>F R Joint Costs allocate+ >> %ote: So-e ro+ucts -ay en+ u 5it' a negati*e allocation o! Joint costsI Accounting Dor B9%products A by!product is a ro+uct 'a*ing a relati*ely lo5 sales *alue co- are+ 5it' t'e -ain or ;oint ro+uctsI :y. ro+ucts can :e sol+ at s lit.o!! or rocesse+ !urt'erI also, i! sales increase, a :y. ro+uct -ay :e re.classi!ie+ as a ;oint ro+uct at so-e oint. T'ere are se*eral -et'o+s o! accounting !or :y. ro+ucts in ter-s or recogniHing 5'en to recor+ t'e cost o! t'e :y. ro+uct. (e 5ill recogniHe t'e cost o! t'e :y. ro+uct only 5'en ro+uction is co- lete+. Ste s: 1. Calculate t'e %R= o! t'e :y ro+uct Ei.e., 9S=P J SC, or so-eti-es i! s eci!ie+, 9S=P J SC J nor-al #PF. 2. Su:tract t'is %R= o! t'e :y. ro+uct !ro- t'e total ;oint cost an+ set t'e a-ount u as :y. ro+uct in*entory. <y. ro+uct in*entory Joint costs >>> >>>

3. Allocate t'e re*ise+ ;oint cost in t'e usual 5ay to t'e ;oint ro+ucts using one o! t'e !our -et'o+s

$2

4. Recor+ any sales o! t'e :y. ro+uct as !ollo5s: A2R <y ro+uct in*entory >>> >>>

%ote: <ecause t'e %R= o! t'e :y. ro+uct is treate+ as a re+uction in t'e total ;oint cost allocation an+ :ecause t'e :y. ro+uct is gi*en no status as a se arate ro+uct, there is no )ales a,c and no (-#) a,c for the by! product itself......only <alance S'eet accounts. T'e sales o! t'e :y. ro+uct are eit'er a++e+ to t'e sales o! t'e ot'er ;oint ro+ucts or +e+ucte+ !ro- t'e CO#S o! t'e ot'er ;oint ro+ucts. T'ese Sales or CO#S a+;ust-ents are +one on t'e !inancial state-ent an+ not in t'e accounting recor+s. ET'is roce+ure assu-es t'at t'e selling rice an+ in*entory cost er unit o! t'e :y. ro+uct are :ot' *alue+ at t'e %R= er unit o! t'e :y. ro+uctF

$!

C'apter $ @ RC=< < Class 1: 6lent 6lenty produces >oint products :LB- and 6LB-, and a by4product DLB-, each of which incurs separable production cost after split4off. *nformation concerning a batch produced at a C$)),))) >oint cost before split4off follows;4 0eparable 5roduct 6osts 0ales ,alue :LBC&,))) C&),))) 6LB22,))) "),))) DLB!),))) 1hat is the >oint cost assigned to :LB- and 6LB- if cost are assigned using the relative net reali?able value< Home 1: Dlent Dlenty produces >oint products L-9 and 5A*+T, and a by4product *+3, each of which incurs separable production cost after split4off. *nformation concerning a batch produced at a C$)),))) >oint cost before split4off follows;4 0eparable 5roduct 6osts 0ales ,alue L-9 C2),))) C()),))) 5A*+T !),))) '),))) *+3 (produced (,))) gallons with a sales price of C#) per gallon after further processing at a total cost of C2),)))) 1hat is the >oint cost assigned to L-9 and 5A*+T if costs are assigned using the relative net reali?able value<

$"

C'apter 0 % <er4ice Cost Allocations <u((ar9

1. 9i>e+ cost o! ser*ice +e art-ents s'oul+ :e allocate+ to ro+uction +e art-ents in lu- s.su- -ounts on t'e :asis o! t'e ser*ice +e art-ents :u+gete+ cost o! long.ter- ca acity to ser*e. Criteria: Cause G eDDect, BeneDits Recei4ed, Fairness an+ A8ilit9 to 8ear ,. $irect Met'o+ E-ost co--onF J allocates ser*ice +e art-ent cost +irectly to t'e ro+ucing +e art-ents 5it'out recognition o! ser*ices ro*i+e+ a-ong t'e ser*ice +e art-ents 3. Ste Met'o+ ESte .+o5n Met'o+F J allocates ser*ice cost to ot'er +e art-ents as 5ell as to ro+uction +e art-ents $oes not ro*i+e !or reci rocal allocations -. Reci rocal Met'o+ J allo5s re!lection o! all reci rocal ser*ices a-ong ser*ice +e art-ents using si-ultaneous eLuations

7ecturer Notes
A co((on cost is t'e cost o! o erating a !acility, o eration or acti*ity t'at is s'are+ :y t5o or -ore users. T'ere are t5o -et'o+s o! allocating co--on costs. 1. Stan+ Alone Met'o+ T'is -et'o+ e- 'asiHes eLuity or !airness in t'at eac' user :ears a ro ortionate s'are o! stan+ alone cost :ase+ on t'eir in+i*i+ual stan+ alone cost. T'at is, eac' user is treate+ as i! t'ey 5ere a stan+ alone entity. S'are o! co--on cost R cost !or user Z1 stan+ alone cost o! user Z1 > actual total co--on su- o! stan+ alone costs !or all users

2. "ncre-ental Met'o+ T'is -et'o+ ran?s t'e in+i*i+ual user cost o:;ects an+ t'en uses t'is ran?ing to allocate t'e co--on costs a-ong t'e *arious users. T'e !irst ran?e+ user o:;ect is call t'e primary party. T'is user is allocate+ costs u to t'e a-ount o! t'e costs t'at 5oul+ :e incurre+ i! t'e cost o:;ect 5ere o erate+ as a stan+.alone entity an+ t'is 5as t'e only user. T'e secon+ ran?e+ user is calle+ t'e incremental party. "t is allocate+ t'e e>tra costs t'at result !ro- t'ere :eing t5o users rat'er t'an one. "! t'ere are -ore t'an t5o users, t'an all t'e users nee+ to :e ran?e+ in a seLuence. )n+er t'is -et'o+, t'e ri-ary user al5ays recei*es t'e 'ig'est allocation o! t'e

$#

co--on cost. Pri-ary user .....\ allocate t'e stan+ alone cost t'at 5oul+ e>ist i! t'is user 5as t'e only user "ncre-ental user .....\ allocate t'e re-ain+er o! t'e co--on cost to t'is user Etotal co--on cost J stan+ alone cost !or ri-ary userF

$$

C'apter 0 @ RC=< < C.A((: +erve +ervey !hotocopying &epart%ent provides photocopy services #or 'oth &epart%ents 4 and / and has prepared its total '"dget "sing the #ollo$ing in#or%ation #or the ne-t year67 Fi-ed 2osts $100,000 /"dgeted :sage67 ;aria'le 2osts $0*03 per page &ept* 4 1,200,000 pages 4vaila'le capacity 4,000,000 pages &ept* / 2,400,000 pages Instructions: 4ss"%ing that the single7rate %ethod is "sed and the allocation 'ase is '"dgeted "sage* <o$ %"ch photocopying cost $ill 'e allocated to &ept* 4 and &ept* / in the '"dget year9 H+ME: Food Foody =esta"rant provides %eal #or all o# its sta## in its 4 chains* 2hain 1, 2hain 2, 2hain 3 and 2hain 4* Food Foody has prepared its total '"dget "sing the #ollo$ing in#or%ation #or the ne-t year67 Fi-ed 2osts $300,000 /"dgeted >"%'er o# !lates67 ;aria'le 2osts $1*20 per plate 2hain 16 250,000 !lates 2hain 26 350,000 plates 4vaila'le capacity 2,000,000 plates 2hain 36 450,000 !lates 2hain 46 550*000 plates Instructions: 4ss"%ing that the single7rate %ethod is "sed and the allocation 'ase is '"dgeted n"%'er o# plates* <o$ %"ch %eal cost $ill 'e allocated to 2hain 1, 2hain 2, 2hain 3 and 2hain 4*

$%

C'apter / ) Budgeting <u((ar9

1. A !le>i:le :u+get is +esigne+ to allo5 a+;ust-ent o! t'e :u+get to t'e actual le*el o! acti*ity :e!ore co- aring t'e :u+gete+ acti*ity 5it' actual results. A set o! static :u+gets re are+ in antici ation o! *arying le*els o! acti*ity "t er-its e*aluation o! actual results 5'en actual an+ e> ecte+ ro+uction +i!!er A !le>i:le :u+get can :e re are+ !or any ro+uction le*el 5it'in a rele*ant range i. ('en ro+uction le*els +ecrease 5it'in a range, total cost 5ill +ecrease T'ese are a+;uste+ +uring t'e :u+gete+ erio+ A lica:le !or t'e entire ro+uction !acility Cas', Mar?eting, Sales, Cost, etc., Note: setting stan+ar+ costing !acilitates re aration o! a !le>i:le :u+get 2. A static :u+get is re are+ !or ;ust one le*el o! acti*ity Total *aria:le cost *aries 5it' t'e acti*ity le*el 9i>e+ cost is !i>e+ 5it'in a rele*ant range %ot use!ul !or e*aluating *ariance i! e> ecte+ sales are not reac'e+. ('en sales are less t'an :u+get: *aria:le cost R !a*ora:le. !i>e+ cost R un!a*ora:le 3. T'e Master <u+get contains esti-ates :y -anage-ent !ro- all !unctional areas :ase+ on one s eci!ic le*el o! ro+uction. A -aster :u+get is :ase+ on one le*el o! ro+uction. RecogniHe organiHations goals an+ o:;ecti*es 4. "n :u+get calculations, REMEM<ER: !i>e+ cost 5ill not c'ange. T'ere!ore, *aria:le cost 5ill c'ange as acti*ity is c'ange. 8. ,ero.:ase :u+geting is a :u+get an+ lanning rocess in 5'ic' eac' -anager -ust ;usti!y a +e art-entPs entire :u+get e*ery year, or erio+. O:;ecti*e is to encourage erio+ic ree>a-ination o! all costs i. to re+uce or eli-inate costs

7ecturer Notes
E!!ecti*e lanning, :ot' long ter- an+ s'ort ter-, is crucial to t'e success o! any :usiness organiHation. <u+geting is t'e rocess o! !or-aliHing lans an+ translating t'e- into !inancial an+ non.!inancial goals an+ e> ectations. T'e :u+get, t'e en+ result o! :u+geting, is a +etaile+ lan !or t'e acLuisition an+ use o! !inancial an+ ot'er resources o*er a s eci!ie+ ti-e erio+.

$&

T'ere are -any a+*antages o! :u+geting inclu+ing: "t reLuires -anagers to set goals an+ o:;ecti*es an+ allocate t'e -eans to ac'ie*e t'e goals an+ o:;ecti*es "t is a -eans o! co--unicating an+ coor+inating lans an+ o:;ecti*es t'roug'out t'e organiHation "t ro*i+es a -eans :y 5'ic' er!or-ance can :e e*aluate+ T'e -aster :u+get is an o*erall :u+get o! an organiHation an+ inclu+es an+ incor orates t'e :u+gets o! all su:.units o! t'e :usiness.. "t consists o! :ot' o erating an+ !inancial :u+gets. An o erating :u+get is e> resse+ in :ot' units an+ +ollars. A !inancial :u+get is a :u+get t'at aggregates t'e +etail in t'e o erating :u+gets. T'e -aster :u+get :egins 5it' a sales !orecast an+ once t'e sales e> ectation is !or-aliHe+, t'e ro+uction :u+gets can :e re are+. Pro+uction :u+gets are re are+ in t'e !ollo5ing !or-at: <u+gete+ unit sales A++: $esire+ en+ing in*entory Total units nee+e+ Aess: <eginning in*entory ReLuire+ ro+uction T'e o erating :u+gets !or inclu+e: Sales <u+get Pro+uction <u+get Purc'ases <u+get $irect Aa:or <u+get O*er'ea+ <u+get Selling an+ A+-inistrati*e <u+get Any ca ital e> en+itures in t'e current erio+ nee+ to :e incor orate+ in t'e -aster :u+get. Once t'e o erating :u+gets 'a*e :een re are+, a cas' :u+get can :e +e*elo e+. %ote t'at t'e cas' :u+get ta?es t'e !ollo5ing !or-: <eginning cas' :alance A++: Cas' collections ELuals: Cas' a*aila:le Aess: Cas' +is:urse-ents ELuals: E>cess E+e!iciencyF o! cas' Aess: Mini-u- +esire+ en+ing cas' :alance ELuals: 9inancing :orro5ings or re ay-ents

$'

"! cre+it is e>ten+e+ to custo-ers, t'en cas' recei ts 5ill tail cas' sales. Pro !or-a !inancial state-ents are re are+ as art o! t'e -aster :u+get rocess an+ t'ey inclu+e: Cost o! #oo+s Sol+ Sc'e+ule "nco-e State-ent En+ing <alance S'eet State-ent o! Cas' 9lo5s

%)

C'apter / @ RC=< < /oth C.A(( 1 and H+ME 1 pro'le%s are 'ased on the Follo$ing67
/"d /"dy co%pany is #or%"lating its plans #or the co%ing year, incl"ding the preparation o# its cash '"dget* <istorically, 20? o# the co%pany@s sales are cash sales* ,-cept #or its 5? 'ad de't, the re%aining credit sales are collected as #ollo$s67* (ales / / Collections on Account 0ercentage Aan"ary 3,(00,000 May 6,500,000 8n 1st Month 30? Fe'r"ary 4,200,000 A"ne 6,(00,000 8n 2nd Month 40? March 5,000,000 A"ly 7,200,000 8n 3rd Month 25? 4pril 6,100,000 4"g"st ,000,000 C.A(( 1: !repare a sched"le to sho$ the total cash receipts #ro% sales and collections on acco"nt #or the %onth o# 4pril* H+ME 1: !repare a sched"le to sho$ the total cash receipts #ro% sales and collections on acco"nt #or the %onth o# 4"g"st*

Class G Ao(e ,

%(

C'apter 1# % Cost%>olu(e%ProDit +C>P. Anal9sis <u((ar9

1. 2. 3. 4. 8. <rea?.E*en.Point: T'e sales *olu-e at 5'ic' total re*enue eLuals total cost <rea?e*en R =aria:le cost S 9i>e+ Cost <rea?e*en R Sales J =aria:le Cost R Contri:ution Margin J 9i>e+ Cost <rea?e*en Sales R E9i>e+ Cost 2 Contri:ution Margin RatioF <rea?e*en Sales in )nit R E9i>e+ cost 2 unit contri:ution -arginF <rea?e*en analysis assu-es t'at o*er t'e rele*ant range unit *aria:le cost re-ains constant 5it'in t'e rele*ant range. "t also assu-es t'at cost an+ re*enues are linear. Eone straig't lineF

G. Contri:ution Margin R E9i>e+ Cost 2 <EP salesF or Sales J =aria:le Cost i. Margin o! sa!ety: <u+get Sales J <rea?e*en =olu-e An increase in cost 5ill increase <EP an+ +ecrease t'e -argin o! sa!ety /. 3ig'.lo5 -et'o+: esti-ates *aria:le cost :y +i*i+ing t'e +i!!erence in cost incurre+ at t'e 'ig'est an+ lo5est o:ser*e+ le*els o! acti*ity :y t'e +i!!erence in acti*ity. Once t'e *aria:le cost is !oun+, t'e !i>e+ ortion is +eter-ina:le.

7ecturer Notes
C=P analysis is an e>a-ination o! t'e relations'i s o! rices, costs, *olu-e, an+ -i> o! ro+ucts. "t in*ol*es t'e se aration o! costs into t'eir *aria:le an+ !i>e+ categories at t'e outset o! t'e analysis. Once *aria:le an+ !i>e+ costs are isolate+, a contri:ution -argin inco-e state-ent can :e re are+ in 5'ic' total an+ er unit contri:ution -argin can :e analyHe+. T'en -eaning!ul D5'at i!D analysis can :e +one suc' as tra+ing o!! *aria:le costs !or !i>e+ costs, increasing !i>e+ costs an+ e> ecte+ *olu-e, re+ucing rice an+ stu+ying t'e i- act on sales *olu-e an+ ro!its, etc. <rea?.e*en analysis is an i- ortant as ect o! C=P analysis. T'e :rea?.e*en oint is t'at le*el o! sales 5'ere total re*enue e>actly eLuals total e> enses. Calculation o! <EP is +e-onstrate+ in t'e !ollo5ing e>a- le. Sa- le <EP Pro:lePercentage Sales Price Aess =aria:le Cost Contri:ution Margin T200 T800 300 40C 100C G0C Per <i?e

%2

9i>e+ Cost totals T00,000 er -ont' ELuation Met'o+ 1. 1. )sing +ollars T800B . T300B . T00,000 R 0

T200B R T00,000 B R 400 :i?es 2. )sing ercentages B . .GB . T00,000 R 0 .4B R T00,000 B R T200,000 )nit Contri:ution Met'o+ 1. 1. )sing +ollars . 9i>e+ Cost T00,000 R 400 :i?es )nit CM 2. 2. T200

)sing ercentages . 9i>e+ Cost T00,000 R T200,000 )nit CM .4

)# co"rse, co%panies do not $ish to B"st 'reak even* We can e-pand o"r 'reak7even calc"lations to incl"de a co%p"tation o# 5arget >et 8nco%e* For e-a%ple, let@s ass"%e the a'ove co%pany $ants to earn o# pro#it o# $40,000* What level o# reven"e $o"ld generate pro#its o# $40,0009 ELuation Met'o+ B . .GB .T00,000 R T40,000 .4B R T120,000 B R T300,000 )nit Contri:ution Met'o+ 9i>e+ Costs S Target %et "nco-e )nit CM T00,000 S T40,000 R T300,000 .4 %!

T'e Margin o! Sa!ety is t'e e>cess o! :u+gete+ sales o*er t'e :rea?.e*en *olu-e o! sales. Margin o! sa!ety R Total :u+gete+ Eor actualF sales J <rea?.e*en Sales. T'e -argin o! sa!ety s'o5s t'e a-ount :y 5'ic' sales can +ecrease :e!ore losses are incurre+. "t can :e co- ute+ in +ollars or in a ercentage as !ollo5s: Margin o! sa!ety ercentage RMargin o! Sa!ety in T2Total <u+gete+ Eor actualF Sales Cost structure re!ers to t'e relati*e ro ortion o! !i>e+ an+ *aria:le costs e>isting in an organiHation. An auto-ate+ -anu!acturing lant 5oul+ 'a*e a 'ig' ro ortion o! !i>e+ costs 5'ereas a +irect la:or intensi*e lant 5oul+ 'a*e a 'ig' ro ortion o! *aria:le costs. Any organiHation 'as so-e c'oice as to its cost structure. A co- anyPs cost structure 'as a signi!icant e!!ect on t'e 5ay in 5'ic' ro!its !luctuate in res onse to c'anges in sales *olu-e. T'e greater t'e ro ortion o! !i>e+ costs in a !ir-Ps structure, t'e greater 5ill :e t'e i- act on ro!it !ro- a gi*en ercentage c'ange in sales re*enue. T'is results !ro- t'e !act t'at !ir5it' relati*ely 'ig'er !i>e+ costs Ean+ relati*ely lo5er *aria:le costsF 5ill 'a*e a 'ig'er contri:ution -argin ratio. O erating le*erage is a -easure o! 'o5 sensiti*e net inco-e is to ercentage c'anges in sales. O erating le*erage is greatest in co- anies 5'ic' 'a*e a 'ig' ro ortion o! !i>e+ costs relati*e to *aria:le costs. A !ir- 5it' 'ig' !i>e+ costs an+ lo5 *aria:le costs 'as 'ig' o erating le*erage, t'e a:ility to 'ig'ly increase net inco-e !ro- an increase in sales re*enue. "n ot'er 5or+s, a!ter t'e :rea?.e*en oint 'as :een reac'e+, a larger a-ount o! contri:ution -argin 5ill !all to t'e :otto- line in a 'ig' !i>e+ cost structure t'an i! t'e cost structure 'a+ :een co- rise+ -ostly o! continuing 'ig' *aria:le costs, 5'ic' continue to eat a5ay at net inco-e a!ter t'e :rea?.e*en oint is reac'e+. O! course, t'e ris? is also greater :ecause i! t'e :rea?.e*en oint is not reac'e+, losses 5ill :e greater in t'e !ir- 5it' 'ig' o erating le*erage. T'e +egree o! o erating le*erage at a gi*en le*el o! sales is co- ute+ as !ollo5s: Contri:ution Margin %et "nco-e So !ar in our +iscussion o! C=P relations'i s 5e 'a*e !ocuse+ on a !ir- selling a single ro+uct. O! course, -ost :usinesses sell -ore t'an one ro+uct an+ t'us 5e nee+ to +iscuss C=P analysis in*ol*ing -ore t'an one ro+uct. Sales -i> re!ers to t'e relati*e ro ortions in 5'ic' a co- anyPs ro+ucts are sol+. Managers try to ac'ie*e t'at ro+uct -i> 5'ic' 5ill -a>i-iHe ro!its. $egree o! O erating Ae*erage R

%"

C'apter 1/ @ RC=< < /oth C.A(( and H+ME pro'le%s are 'ased on the Follo$ing67
!ro# !ro##y sells its single prod"ct at a price o# $60*00 per "nit and inc"rs the #ollo$ing varia'le cost per "nit o# prod"ct67 &irect Material $16*00 Fi-ed costs are $ 0,000 &irect Ca'o"r 12*00 8nco%e 5a- =ate 30? Man"#act"ring )verhead 7*00 5otal ;aria'le Man* 2ost $35*00 +elling e-penses 5*00 5otal varia'le costs $40*00 C.A((6 1* 8# prod"ction and sales vol"%e is 4,000 "nits o# prod"ct per %onth, $hat is the ann"al a#ter7tainco%e or loss9 2* What is !ro# !ro##y 2ontri'"tion Margin9 3* <o$ %any "nits %"st !ro# !ro##y sell to 'reak even9 H+ME6 Fi-ed 2ost is no$ $1,000,000, selling price is no$ $75*00 per "nit, direct %aterial and direct la'o"r have increased 'y 20? and 10? respectively, and the inco%e ta- rate is no$ 40?* 1* 8# prod"ction and sales vol"%e is 7,500 "nits o# prod"ct per %onth, $hat is the ann"al a#ter7tainco%e or loss9 2* What is !ro# !ro##y 2ontri'"tion Margin9

!. 8ow many units must 5rof 5roffy sell to break even<

%#