No.

11 28 1

Syllabus topic Environmental accounting Not-for-profit organisations Absorption costing

Chapter U1: MA Intro U1: MA Intro U3: CAS U3: CAS U3: CAS U3: CAS U3: CAS U3: CAS U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U5: Budgeting U5: Budgeting U5: Budgeting U5: Budgeting U5: Budgeting U5: Budgeting U5: Budgeting U5: Budgeting U6: SC & VA U6: SC & VA U6: SC & VA U6: SC & VA U6: SC & VA U6: SC & VA U6: SC & VA

NPO CP(Single period) Costing principle CP(Multiperiod) CP(Single period) Costing principle Costing principle C5: Pricing decisions C3: CPV C7: Risk & Uncertainty C5: Pricing decisions C7: Risk & Uncertainty C6: ST decision C5: Pricing decisions C4: LF analysis C6: ST decision C7: Risk & Uncertainty C6: ST decision C5: Pricing decisions C6: ST decision C6: ST decision C7: Risk & Uncertainty C7: Risk & Uncertainty C7: Risk & Uncertainty C6: ST decision

2 Activity based costing 21 24 46 47 7 8 9 10 12 17 19 22 23 25 30 32 33 35 36 40 41 43 5 6 15 16 20 34 Life-cycle costing Marginal costing Target costing Throughput accounting Cost function Cost volume profit (CVP) analysis Decision rules Demand Expected values Further processing decision Incremental costs and revenues Linear programming Make-or-buy decisions Market research Outsourcing Pricing decisions Process costing Relevant costs Research techniques Risk and uncertainty in decision making Sensitivity analysis Shutdown decisions Budgetary systems and types Budgeting objectives Flexible budgets Forecasting Learning curve Quantitative analysis in budgeting

Question numbers Note 12, 22 66, 67, 68, 69, Mock 3 Q5 1, 2, 3, 4, 5, 10, Mock 2 Q1, Mock 3 Q4 2, 3, 4, 5, 6, 10, 36, 68, Mock 1 Q1, Mock 2 Q2,Mock 3 Q4 7, 9, 10, 38 1, 11, 48, 50 7, 8, 10 10, 11, 12, 13 20, 32 14, 15 30, 31, 32, 33 20, 32 30, 31, 32, 39 24, 29 29 16, 17, 18, 19, Mock 3 Q3 26 7, 20, 32 26, 27, 28 3, 4, 5, 20, 21, 22, 23, 25, 28, 29, 43, Mock 2 Q2 24 24, 25 31, 33 30, 31, 32, 33, Mock 2 Q5 30, 32 28 35, 36, 38, 45, 69, Mock 3 Q5 34, 72 45, 51 8, 37, 73 40, 41, 42, 43, 68, Mock 1 Q5 37, 39, 40, 41, 42, 44, 45, Mock 1 Q2 54 37 48, 49, 51, 52, 68 49, 68 49, 52, 53, 55 46, 48, 67, Mock 2 Q3 52, 54 48, 49, 52, Mock 1 Q3 45, 46, 47, 48, 49, 50, 51, 52, 53, 55, 56, 57,Mock 1 Q3, Mock 2 Q3, Mock 3 Q1 60, 61, 64, 65 59, Mock 2 Q4 58, 59, 60, 61, 62, 66, 70, 71, 73, 74, 75, 76,Mock 1 Q4, Mock 3 Q2 60, 75 58, 59, 63, 68, 71, 74, 75, 76, Mock 3 Q2 60, 61, 62, Mock 2 Q4 59, 60, 62, 74, Mock 2 Q4 58, 73

Quantitative analysis

39 Revised budgets 44 Spreadsheets 4 Behavioural aspects of standard costing 18 26 29 31 45 49 Idle time variances Material mix and yield variances Operating statements Planning and operating variances Standard costs Variance analysis

Quantitative analysis

48 Transfer pricing 3 Balanced Scorecard 13 Financial performance indicators

U7: TP U8: PM U8: PM

Divisional performance measures Scorecard FPI

14 Fitzgerald & Moon Building Block model U8: PM 27 Non-financial performance indicators 37 Residual income 38 Return on investment 42 Short-termism U8: PM U8: PM U8: PM U8: PM

Bulding Block Model N-FPI Divisional performance measures Divisional performance measures Short-termism and manipulation

Materials
Materials
x SQ

SP.

10

SP.

10

SP.

10 75,000

AP. x AQ purchased

12 75,000 75,000

60,000 x AQ consumed Qty (u) 12,000 5 Usage ( kg /u) (10x12000x5)= 600,000 (10x65000)=

65,000 x AQ purchased

650,000 (10x75000)=

750,000

75000x12 =

900,000
2,00,000 (A)

Materials Materials

Usage = 50,000 (A)

6 SR. w SIT 6 SR. w/o SIT

Price = 1,50,000 (A)

6 AR. x AH paid for AO 7 115,000 12,000 9.6

Labour

SR. w SIT x SH wrk Qty (u) Base ( h /u)

Labour AO for

120,000 x AH work for AO 12,000 10.0

114,000 x AH paid for AO 12,000 9.5

115,000 12,000 10 690,000

(6x12000x10) 720,000 (6x114000) 684,000 (6x115000)= = = Efficiency = 36,000 (F) Idle-time = 6,000 (A ) Labour Labour

115000x7 =

805,000
85,000 (A)

Rate = 1,15,000 (A)

2 AR. x AH paid for AO 2 115,000 12,000 9.6

Variable OHs
Variable AO for OHs
x SH wrk Qty (u) OAR/CD ( h /u)

SR. Work

SR. Work

SR. Work

120,000 x AH work for AO 12,000 10.0

114,000 x AH paid for AO 12,000 9.5

115,000 12,000 10 230,000

(2x12000x10) 240,000 (2x114000) 228,000 (2x115000)= = = Efficiency = 12,000 (F) Idle-time = 2,000 (A) Variable OHs Variable OHs

(1.96x115000)=

225,000
15,000 (F)

Expenditure = 5,000 (F)

3 SR. Work 3 AR. 1.96 115,000

Fixed OHs
Fixed OHs
x SH wrk for AO Qty (u) OAR/CD ( h /u)

SR. Work

SR. Work

SR. Work

120,000 x AH work for AO 12,000 10.0

114,000 x AH paid for AO 12,000 9.5

115,000 x BH for BO 12,000 9.6

100,000 x AH paid for AO 12,000 8.3

12,000 9.6

(2x12000x10) 360,000 (2x114000) 342,000 (2x115000)= 345,000 (2x1150 = = 00)= Efficiency = 18,000 (F) Idle-time = 3,000 (A) Capacity = 45,000 (F) Fixed OHs Fixed OHs 90 SC. 40 SC. 40 AC. (SP- SVC ) (SP- SVC ) ( A P- SVC )

300,000 (1.96x115000) =

225,000
40,000 (F)

Expenditure = 20,000 (A)

Sales Margin

x BQ Sales Margin

10,000 x AQ 10,000 1 Usage ( kg /u) (10000x40)= 400,000 (9000x40)= Qty (u)

9,000 x AQ

9,000

360,000 (9000x90)=

810,000

Margin value

Margin volume=40000(A) Sales Margin

Margin price = 450000 (F)

4,10,000 (F)

Sales Margin

SC. (SP- SVC )

P ($/u) VC ($/u)

56

SC. (SP- SVC )

56

AC. ( A P- SVC )

41

Sales Margin x BQ
56x8400=

240 184 8,400 x AQ 470,400 56x8000=

240 184 8,000 x AQ 448,000 41x8000=

225 184 8,000 328,000

Margin value

Sales Margin

Cont. Vol.

-22,400 (A)

Margin price

-120,000 (A)

(142,400)

Sales Margin

SProfit. (SP- SCOS )

P ($/u) VC ($/u) FC ($/u)

SP. (SP- SCOS)

AP. ( A P- SCOS )

Sales Margin x BQ Sales Margin 6x5100= Sales Vol. Sales Margin

20.0 6.6 7.4 5,100 x AQ 30,600 6x4850=

20.0 6.6 7.4 4,850 x AQ 29,100 5.71x4850=

19.7 6.6 7.4 4,850 27,700

(AS-SCOS)-BP=Sales V
Margin value

-1,500 (A)
4

Sales price
4

-1,400 (A)
4 AP. x AQ for AO 4 2,300 4,850 0.5

(2,900)

(F)

Materials
Materials

SP.
x SQ for AO Qty (u) Usage ( kg /u) 4x2425=

SP.

SP.

2,425 x AQ consumed 4,850 0.5

2,300 x AQ purchased

2,300

Materials Materials Materials

Usage
SR. w SIT x SH wrk for AO Act. Qty (u) Base ( h /u) 2x9700=

9,700 4x4= 500 (F)

2 SR. w SIT

9,200 4x2300= Price

2 SR. w/o SIT

9,200

4.26x2300=

9,800
(100)

-600 (A) 2
8,500 4,850 1.75 17,000 1.98x8500= AR. x AH paid for AO 2.0 8,500 4,850 1.8

(A)

Labour
Labour

Labour Labour Labour

9,700 x AH work for AO 4,850 2.0 19,400 2x8000=

8,000 x AH paid for AO 4,850 1.6 16,000 2x8500=

Efficiency
SR. Work x SH wrk

3,400 (F)
0.3 SR. Work

Idle-time
0.3 SR. Work

(1,000)

(A) 0.3
8,000 4,850 1.6 2,400

Rate
AR.

16,800 200 (F)

0.33 8,000 4,850 1.6

2,600

(F)

Variable OHs

Variable OHs for AO Act. Qty (u) Variable OHs Variable OHs Variable OHs
OAR/CD ( h /u) 0.3x9700=

9,700 x AH work for AO 4,850 2.0 2,910 0.3x8000=

8,000 x AH work for AO 4,850 1.6 2,400 0.3x8000=

x AH work for AO

0.3x8000=

2,600
310

Efficiency
SR. Work x SH wrk for AO Qty (u)

510 (F) 3.7

SR. Work

Idle-time 3.7
SR. Work

(A) 3.7
10,200

Expenditure
AR.

-200 (A)
5.29 8,000

(F)

Fixed OHs
Fixed OHs

9,700 x AH work for AO 4,850 2.0 35,890 3.7x8000=

8,000 x BH for BO 4,850 1.6

x AH work for AO

Fixed OHs Fixed OHs Fixed OHs

OAR/CD ( h /u) 3.7x9700=

Efficiency

6,290 (F)

29,600 3.7x10200= Capacity (8,140)

5,100 2.0 37,740

4,850 1.6 5.3x8000=

(A)

Expenditure

42,300 -4,560 (A)

(6,410)

(A)

Budget $ Sales Qty Sales Raw Mat. Labor Cost Variable OH VCOS Cont. FC Profit 5,100 $20.0 $2.0 $4.0 $0.6 $6.6 $13.4 102,000 10,200 20,400 3,060 33,660 68,340 $37,740 $30,600

Actual 8,000 95,600 9,800 16,800 2,600 29,200 66,400 $42,300 $24,100

AC
$ $

MC Operating statement
$30,600 (1,400) (1,500) (2,900) 27,700 (100) (600) 500 2,600 200 3,400 (1,000) 310 (200) 510 (6,410)
Budgeted Contribution

Operating statement
Budgeted Profit

$68,340 (1,400) (3,350) (4,750) 63,590 (100)

Variances
Sales price Sales volume

Variances
Sales price Sales volume

(1,850)

Actual sales minus SCOS (AS-SCOS) MCV

Material price Material usage

LCV
Labour rate Labour efficiency

Idle time VOHV VOH expenditure VOH efficiency FOHV

FOH Expenditure FOH Volume

Actual profit

(4,560) (1,850) (3,600) (3,600) $24,100

Actual sales minus Svariable COS (AS-SVCOS) MCV Material price (600) Material usage 500 LCV Labour rate 200 Labour efficiency 3,400 Idle time (1,000) VOHV VOH expenditure (200) VOH efficiency 510 Actual Contribution Budgeted fixed cost 37,740 Less: FOH expenditure variance (4,560) FOH Volume 0
Actual fixed cost Actual profit

2,600

310

2,810 66,400

$42,300 $24,100

Std ingred ients Mat. 1 Mat. 2 Output

Std Mat. Usage per unit 5.0 kg 10.0 kg 80 units

SU for AO

Std Cost

Input

$2.0 $3.0

$/kg $/kg

$10.0 $ $30.0 $
AU in SM AQ input in SM

500.0 kg 730.0 kg
AU for AO AU in AM 6 1/3 2/3 AM 6 2/5 3/5

MaterialSM
Mat.1 Mat.2
5.0 10.0 15.0 AO:
SQ input for AO

Std Cost
1/3 $2.0 2/3 $3.0

SM

80
1,200

units AQ input for AO 1,230 AQ Output for AO 1,230

Mat.1 Mat.2

400-410= 800-820=

400 800

Yield

(10) ($20) 410-500= (20) ($60) 820-730= ($80.0) (F) Usage

410 820

(90) 90

Mix

($180.0) $270.0 $90.0 (A)

500 730 $10.0 (A)

Standard Cost Std Material Usage per unit Standard Mix (SM) Actual Output (AO) Standard Quantity at AO (SQ) MIX INPUT Yield Mix
SM SM AM SQ AQ AQ 1 2 3

$/kg kg/u units kgs

<MIX> M1 $2.0 5.0 1/3

M2 $3.0 10.0 2/3

<INPUT> Total 15 1 80 1,200

SQ in SM AQ in SM AQ in AM Mix Variance (2)-(3) Variance in Variance in

(1) (2) (3) (SM-AM) @

kgs kgs kgs

400 410 500

800 820 730.0

1,200 1,230 1,230

AQ
kg $ (90) -$180.0 (A) (10) -$20.0 (A) (100) (200) (A) 90 $270.0 (F) (20) -$60.0 (A) 70 210 (F) $90.0 (F) (30) -$80.0 (A) (30) $10.0 (F)

(SQ-AQ) @ Yield Variance (1)-(2) Variance in Variance in Usage Variance (SQ-AQ) @ Variance in Variance in

SM
kg $

AO

kg $

Standard Cost Std Material Usage per unit Standard Mix (SM) Actual Output (AO) Standard Quantity (SQ) MIX INPUT Yield Mix
SM SM AM SQ AQ AQ

$/kg kg/u units kgs

1 2 3

<MIX> M1 $2.0 5.0 1/3

M2 $3.0 10.0 2/3

<INPUT> Total 15 1 80 1,200

Mix Variance (SM-AM) @ AQ in SM (2) AQ in AM (3) Variance in Variance in (SQ-AQ) @ Yield Variance SQ in SM (1) AQ in SM (2) Variance in Variance in Usage Variance (SQ-AQ) @ SQ in SM (1) AQ in AM (3) Variance in Variance in

AQ

kgs kgs kg $

410 500 (90) (180) (A)

820 730.0 90 270 (F)

1,230 1,230 $90.0 (F)

SM
kgs kgs kg $ 400 410 (10) (20) (A) 800 820.0 (20) (60) (A) 1,200 1,230 (30) (80) (A)

AO

kgs kgs kg $

400 500 (100) (200) (A)

800 730.0 70 210 (F)

1,200 1,230 (30) 10 (F)

USAGE VARIANCE SU

2 SCost /kg $/kg 2.0 (F) 3.0 (F) Mix Variance $ -200.0 (A) 210.0 (F) 10.0 (F)

Mat. 1 Mat. 2 Total MIX VARIANCE

5 10 15

SU for AU for AQ Variance AQ kg kg kg 1/3 400.0 500.0 -100.0 (A) 2/3 800.0 730.0 70.0 (F) 1,200.0 1,230.0 1 2

SU

Mat. 1 Mat. 2 Total YIELD VARIANCE

5 10 15

SM for AM for AQ Variance AQ kg kg kg 1/3 410.0 500.0 -90.0 (A) 2/3 820.0 730.0 90.0 (F) 1,230.0 1,230.0 1

SCost /kg $/kg 2.0 (F) 3.0 (F)

Mix Variance $ -180.0 (A) 270.0 (F) 90.0 (F)

SU

Mat. 1 Mat. 2 Total

5 10 15

SU for SU for AQ Variance SQ kg kg kg 1/3 400.0 410.0 -10.0 (A) 2/3 800.0 820.0 -20.0 (A) 1,200.0 1,230.0

SCost /kg $/kg 2.0 (F) 3.0 (F)

Mix Variance $ -20.0 (A) -60.0 (A) -80.0 (A)

Std ingred ients Mat. 1 Mat. 2 Output Loss: Input

Std Mat. Usage per unit

SQ input for AO 40,000.0 kg 20,000.0 kg 60,000.0 53,000 units 10% 58,889 units
AU in SM

Std Cost

AQ Input for AO $1.9 $ $1.5 $ $3.4 34,000.0 kg 22,000.0 kg

AU for AO

Act. Cost $2.50 $4.00

0.8 kg 0.4 kg 1.1

$2.5 $/kg $4.0 $/kg

SU for AO

AQ input in SM

AU in AM 6 2/3 1/3 AM 6 3/5 2/5

MaterialSM
Mat.1 Mat.2
0.8 0.4 1.1 Loss: AO:
SQ input for AO

Std Cost
2/3 $2.5 1/3 $4.0

SM

10% 53,000
60,000

units AQ input for AO 56,000 AQ Input for AO 56,000

Mat.1 Mat.2

4000037333= 2000018667=

40,000 20,000

2,667 1,333

$6,667 37333-34000= $5,333 18667-22000= (F) Usage

37,333 18,667

3,333 (3,333)

$8,333.3 ($13,333.3) ($5,000.0) (A)

34,000 22,000 $7,000.0 (A)

Yield

$12,000.0

Mix

<MIX> M1 Standard Cost Std Material Usage Standard Mix (SM) Actual Output (AO) Loss SQ input for AO (SQ) MIX INPUT Yield Mix
SM SM AM SQ AQ AQ 1 2 3

<INPUT> M2 $4.0 20,000.0 $80,000.0 1/3 Total $3.0 60,000 180,000 1 53,000 10% 58,889

$/kg kg $ units kgs

$2.5 40,000.0 $100,000.0 2/3

SQ input in SM AQ in SM AQ in AM Price Variance SP in AQ AP in AQ Variance in

(1) (2) (3) (SP-AP) @

kg kg kg

39,259 37,333 34,000

19,630 18,667 22,000.0

58,889 56,000 56,000

AQ
$ $ $ (SO-AO) @ 85,000 4,100 80,900 (A) 88,000 9,600.0 78,400 (F) $159,300.0 (F) 49,467 53,000 3,533 (F) $10,600 (F) 1,926 $4,814.8 (A) 963 $3,851.9 (A) 2,889 $8,666.7 (F)

Yield Variance in total AQ in SU AQ in AU Variance in Variance in Yield Variance (1)-(2) Variance in Variance in Mix Variance (2)-(3) Variance in Variance in Usage Variance Variance in Variance in (SQ-AQ) @ (SQ-AQ) @

Scost
kg $ kg $

x Std Cost

SM

(SM-AM) @

AQ
kg $ 3,333 $8,333.3 (A) 5,259 13,148 (A) (3,333) -$13,333.3 (A) (2,370) (9,481) (A) (0) -$5,000.0 (A) 2,889 $3,666.7 (F)

AO
kg $

<MIX> M1 Standard Cost Std Material Usage per unit Standard Mix (SM) Actual Output (AO) Standard Quantity (SQ) MIX INPUT Yield Mix
SM SM AM SQ AQ AQ

<INPUT> M2 Total $4.0 0.4 0 1 0 80 91

$/kg kg/u units kgs

1 2 3

$2.5 0.8 0

Mix Variance AQ in SM AQ in AM Variance in Variance in Yield Variance SQ in SM AQ in SM Variance in Variance in Usage Variance SQ in SM AQ in AM Variance in Variance in

(SM-AM) @ (2) (3)

AQ
kgs kgs kg $ 1 #REF! #REF! #REF! 0.352201258 #REF! #REF! #REF! (A) 1 #REF! #REF! #REF!

(F)

(F)

(SQ-AQ) @ (1) (2)

SM
kgs kgs kg $ 1 1 0 0 (F) 0.37037037 0.4 0 0 (A) 91 1 0 0 (F)

(SQ-AQ) @ (1) (3)

AO
kgs kgs kg $ 1 #REF! #REF! #REF! 0.37037037 #REF! #REF! #REF! (A) 91 #REF! #REF! #REF!

(F)

(F)

USAGE VARIANCE SU Mat. 1 Mat. 2 Total MIX VARIANCE SU Mat. 1 Mat. 2 Total YIELD VARIANCE SU Mat. 1 Mat. 2 Total 3/4 3/8 1 1/8 3/4 3/8 1 1/8 3/4 3/8 1 1/8

1 SU for AQ AU for AQ kg kg 2/3 40000.0 #REF! 1/3 20000.0 #REF! 60,000.0 #REF! 1 SM for AQ AM for AQ kg kg 2/3 #REF! #REF! 1/3 #REF! #REF! #REF! #REF!

2 Variance kg #REF! #REF! SCost /kg $/kg #REF! #REF! 2.5 (F) 4.0 (F) Mix Variance $ #REF! #REF! #REF!

#REF! #REF! #REF!

2 Variance kg #REF! #REF! SCost /kg $/kg #REF! #REF! 2.5 (F) 4.0 (F) Mix Variance $ #REF! #REF! #REF!

#REF! #REF! #REF!

1 SU for SQ SU for AQ kg kg 2/3 40000.0 #REF! 1/3 20000.0 #REF! 60,000.0 #REF! Variance kg #REF! #REF! SCost /kg $/kg #REF! #REF! 2.5 (F) 4.0 (F) Mix Variance $ #REF! #REF! #REF!

#REF! #REF! #REF!

BSC

FISC

OMTI

F I S C

FINANCIAL PERFORMANCE INTERNAL PROCESSES STUDY & GROWTH CUSTOMERS

O M T I

Objective Measure Target Initiative

Customers How do customers see us?

Financial Performance How do we look to SH? M O

I Internal Processes What must we excel at? O

Vision & Strategy

Learning & Growth Can we continue Improve & Create value? M O T I

Zero based budgeting involves preparing a budget for each cost centre from a zero base. Every item of expenditure must be justified in its entirety in order to be included in the next year's budget. ZBB rejects the assumption inherent in incremental budgeting that this year's activities will continue at the same level or volume next year, and that next year's budget can be based on this year's costs plus an extra amount, perhaps for expansion and inflation. Implementing: There is a three-step approach to ZBB. Define decision units activities used for ranking Evaluate and rank packages @Benefit of organization Allocate resources funds allocated @ ranking ZBB should result in a more efficient allocation of resources. Advantage Identify and remove inefficient or obsolete operations. It forces employees to avoid wasteful expenditure. It can increase motivation. It responds to changes in the business environment. ZBB documentation provides an in-depth appraisal of an organisation's operations. It challenges the status quo. Disadvantage: a lot of management time and paperwork (a) Short-term benefits might be emphasised to the detriment of long-term benefits. (b) All decisions have to be made in the budget. Management must be able to meet unforeseen opportunities and threats at all times, however, and must not feel restricted from carrying out new ideas simply because they were not approved by a decision package, cost benefit analysis and the ranking process. (c) Call for management skills which the organisation does not possess both in constructing decision packages and in the ranking process . Managers may have to be trained in ZBB techniques. (d) The organisation's information systems may not be capable of providing suitable information. (e) Ranking process can be difficult. Managers face three common problems. (i) A large number of packages may have to be ranked. (ii) It can be difficult to rank packages which appear to be equally vital, for legal or operational reasons. (iii) It is difficult to rank activities which have qualitative rather than quantitative benefits such as spending on staff welfare and working conditions. USING: ZZB useful for budgeting for discretionary costs and for rationalisation purposes. (spend cutting) ZBB is not particularly suitable for direct manufacturing costs, which are usually budgeted using standard costing, work study and other management planning and control techniques. It is best applied to support expenses, that is expenditure incurred in departments which exist to support the essential production function. These support areas include marketing, finance, quality control, personnel, data processing, sales and distribution. In many organisations, these expenses make up a large proportion of the total expenditure. These activities are less easily quantifiable by conventional methods and are more discretionary in nature. ZBB can also be successfully applied to service industries and non-profit-making organisations

ACTIVITY BASED BUDGETING At its simplest, activity based budgeting (ABB) is merely the use of costs determined using ABC as a basis for preparing budgets. Activity based budgeting involves defining the activities that underlie the financial figures in each function and using the level of activity to decide how much resource should be allocated, how well it is being managed and to explain variances from budget. Implementing ABC (see Chapter 2) leads to the realisation that the business as a whole needs to be managed with far more reference to the behaviour of activities and cost drivers identified. For example, traditional budgeting may make managers 'responsible' for activities which are driven by factors beyond their control: the personnel department cost of setting up new employee records is driven by the number of new employees required by managers other than the personnel manager. 4.1 Principles of ABB (a) It is activities which drive costs and the aim is to control the causes (drivers) of costs rather than the costs themselves, with the result that in the long term, costs will be better managed and better understood. (b) Not all activities are value adding and so activities must be examined and split up according to their ability to add value. (c) Most departmental activities are driven by demands and decisions beyond the immediate control of the manager responsible for the department's budget. (d) Traditional financial measures of performance are unable to fulfil the objective of continuous improvement. Additional measures which focus on drivers of costs, the quality of activities undertaken, the responsiveness to change and so on are needed. 4.3 Benefits of ABB Some writers treat ABB as a complete philosophy in itself and attribute to it all the good features of strategic management accounting, zero base budgeting, total quality management, and other ideas. For example, the following claims have been made. (a) Different activity levels will provide a foundation for the 'base' package and incremental packages of ZBB. (b) It will ensure that the organisation's overall strategy and any actual or likely changes in that strategy will be taken into account, because it attempts to manage the business as the sum of its interrelated parts. (c) Critical success factors will be identified and performance measures devised to monitor progress towards them. (A critical success factor is an activity in which a business must perform well if it is to succeed). (d) Because concentration is focused on the whole of an activity, not just its separate parts, there is more likelihood of getting it right first time. For example what is the use of being able to produce goods in time for their despatch date if the budget provides insufficient resources for the distribution manager who has to deliver them?

Dynamic conditions making original budget inappropriate Organisational changes New technology Environment Inflation

ctivities will continue at n this year's costs plus an

times, however, ere not approved by a decision

ay have to be trained in ZBB

table information.

or operational

e benefits such

s. (spend cutting) budgeted using standard s best applied to support e essential production onnel, data processing, roportion of the total ds and are more organisations

ned using ABC as a

ial figures in each function , how well it is being

a whole needs to be s identified. For example, driven by factors beyond ds is driven by the number

of costs rather than managed and better

lit up according to

he immediate control

ve of continuous

he good features of ent, and other ideas. For

incremental packages

changes in that as the sum of its

to monitor progress erform well if it is

parate parts, there is ng able to produce

STDM:

Optimal alternative selected to achieve objective - CVP - Limiting factors Decision (LFD) - Mutually Exclisive Decision (MED) - Pricing Decision (PD)

Calculating Moving Means Table B Table of Moving Average & Seasonal Variation 1 2 3 4
Year Quarter Sales Yearly Total

5
Moving Mean Centred Mean (Trend Line)

7
Seasonal Variation Quarter Quarter Quarter Quarter 1 Jan, 2 Apr, 3 Jul, 4 Oct, Feb, Mar May, Jun Aug, Sep Nov, Dec

Q1.04 Q2.04 Q3.04 Q4.04 Q1.05 Q2.05 Q3.05 Q4.05 Q1.06 Q2.06 Q3.06 Q4.06 Q1.07 Q2.07 Col. 4. Col. 5. Col. 6. Col. 7.

2004

2005

2006

2007

1 2 3 4 1 2 3 4 1 2 3 4 1 2

248 204 166 230 292 260 210 264 336 334 288 360 414 381

2004 848 892 948 992 1,026 1,070 1,144 1,222 1,318 212 223 237 248 257 268 286 306 330 218 230 243 252 262 277 296 318 353 166 12 62 17 -42 2 59 38 -30 7

166

12

2005

62

17

-42

2006 Total Mean

59 121 60.5

38 55 27.5

124 62

14 7

The moving sum of the computer sales during four successive quarters. The numbers are obtained by adding each successive four quarters.

The sum is placed in the middle of the numbers being totalled.

The moving means for consecutive 4 quarter periods. These are obtained by dividing each yearly total (column 4) by 4.

These figures represent the mean quarterly sales of computers during the year. The seasonal fluctuations are averaged out.
The mean of the two nearest moving means. This allows the centred mean to correspond to that time when the sales occurred.

These figures (called the centred mean) are plotted to become the trend line.
Contains the difference between quarterly sales and the moving mean (trend) for that quarter.

Note, if column six was not centred, we could not have done this.

Sales by Mahobe Computer Company Sales by Mahobe Computer Company Quarterly Sales ($100's)
450 400 350 300 250 200 150 100 50
0 Q1.04 Q2.04 Q3.04 Q4.04 Q1.05 Q2.05 Q3.05 Q4.05 Q1.06 Q2.06 Q3.06 Q4.06 Q1.07 Q2.07 Time (Quarter) Computer Sales Trend Line Deseasonalise 353 336 292 334 318 288 360 414 381

296
260 252 262 210 277 264

Sales

248
204 218 166 230

243

Sales by Mahobe Computer Company Sales by Mahobe Computer Company Quarterly Sales ($100's)
50

Sales 0 Time (Quarter)

Computer Sales

Trend Line

Deseasonalise

3.5.1 Example: Forecasting

The sales (in $'000) of swimwear by a large department store for each period of three months and trend values found using moving averages are as follows. Quarter 20X4 20X5 20X6
Year Quarter Actual $'000 Yearly Total Moving Mean Centred Seasonal Mean Variation (Trend Line)

100 90

92 80

20X4

20X5

04.Q1 04.Q2 04.Q3 04.Q4 05.Q1 05.Q2 05.Q3 05.Q4 06.Q1 06.Q2 06.Q3 06.Q4 07.Q1 07.Q2 07.Q3 07.Q4 08.Q1

80

Profit

20X6

20X7

20X8

24 8 30 60 20 20 50 80 40 40 62 92 54.75 54.75
Q1

70

122 118 130 150 170 190 210 222 234 248.75 263.5

30.5 29.5 32.5 37.5 42.5 47.5 52.5 55.5 58.5 62.1875 65.875

30 31 35 40 45 50 54 57 61 65 69 73
Q4

0 29 -15 -20 5 30 -14 -17

60

60 50

50 40 30

50

54
40

57
40

62 61

65

69

73

54.75 54.75

45 31 35

40

30
24

20
Total

20 8
04.Q4 05.Q1 05.Q2 05.Q3 05.Q4

20

Q2

Q3

10 0

20X5 20X6 20X7 Total Average

Spread across 4 Qrts (/4) Adj. to reduce variation to 0

-20 -17 -37 -18.5

0 5 0 5 2.5 0.25 2.75 3.00

29 30 59 29.5 0.25 29.75 30.00

-15 -14 -29 -14.5 0.25 -14.25 -14.00

06.Q1

06.Q2

06.Q3

06.Q4

07.Q1

07.Q2

07.Q3

07.Q4

0.25 Final Est. of Qrt Variations -18.25 Rounded -18.00

-1 -0.25 1 0.00

Time (quarters) Sales Trend Line

Predict sales for the Q4.X7 and the Q1.X8, stating any assumptions.
We might guess that the trend line is rising steadily, by (57 40)/4 = 4.25 per quarter in the period 1st quarter 20X6 to 1st quarter 20X7 (57 being the prediction in 1st quarter 20X7 and 40 the prediction in 1st quarter 20X6). Since the trend may be levelling off a little, a quarterly increase of +4 in the trend will be assumed. T= b + aX a= (57 40)/4 = 4.25 4
b= 57

Y= T+S

Seasonal
Trend
Seasonal

Forecast

20X7 20X7 20X7 20X7 20X8 Rounding

Year

57 -18.25 38.75 (+(3x4)) 61 2.75 63.75 (+(2x4)) 65 29.75 94.75 (+(3x4)) 69 -14.25 54.75 (+(4x4)) 73 -18.25 54.75 to the nearest thousand pounds, the forecast sales are $55,000 for each of the two quarters.
Q1.07 Q2.07 Q3.07 Q4.07 Q1.08 0 1 2 3 4
Quarter Actual $'000 Yearly Total Moving Mean Centred Seasonal Mean Percenta (Trend Line) ge

variation

100 90

92 80

20X4

20X5

04.Q1 04.Q2 04.Q3 04.Q4 05.Q1 05.Q2 05.Q3 05.Q4 06.Q1 06.Q2 06.Q3 06.Q4 07.Q1 07.Q2 07.Q3 07.Q4 08.Q1 Q1

80

Profit

20X6

20X7

24 8 30 60 20 20 50 80 40 40 62 92

70

122 118 130 150 170 190 210 222 234 194

30.5 29.5 32.5 37.5 42.5 47.5 52.5 55.5 58.5 48.5

30 31 35 40 45 50 54 57

1.935 0.571 0.500 1.111 1.600 0.741 0.702

60 50 40 30

60 50

62

50

54
40

57
40

45
31 35

40

30
24

20X8

20 Q2 Q3 Q4 Total 10 0

20 8
04.Q4 05.Q1 05.Q2 05.Q3 05.Q4

20

20X5 20X6 20X7 Total Average

0.500 0.702 1.20175 0.60088 0.10 0.71 0.706

1.935 0.571 1.111 1.600 0.741 1.11111 3.53548387 1.31216931 0.55556 1.76774194 0.65608466 0.10 0.66 0.660 0.10 1.87 1.873 0.10 0.76 0.761

06.Q1

06.Q2

06.Q3

06.Q4

07.Q1

07.Q2

07.Q3

07.Q4

Spread across 4 Qrts (/4) Adj. to reduce variation to 0 Final Est. of Qrt Variations Rounded

3.5803 -0.42 0.4197 4.00

Time (quarters) Sales Trend Line

Seasonal
Trend
Seasonal

Forecast

20X7 20X7 20X7 20X7 20X8

Q1.07 Q2.07 Q3.07 Q4.07 Q1.08

(+(3x4)) (+(2x4)) (+(3x4)) (+(4x4))

0 1 2 3 4

57 61 65 69 73

variation

0.71 0.66 1.87 0.76 0.71

40.23 61.66 66.87 52.51 51.52

Q. 8/P.9 (a) Target costing process - Target cost= Competitive market price - Profit margin - Determining a product specification using analysis of what customers want => product features - Set selling price - desired profit margin => target cost. If the cost is higer => cost gap = costs - target. Try to close the gap. (b) Benefits of adopting target costing - External focus: look at what competitors are offering at earlier stage - Customer focus: Only features that are value to customers will be included in the product design - Cost control: emphasised at the design stage. Changes must happen before production stage - Faster time to market: "get things right first time" and avoids go back to the drawing board - Enhances profitability: Costs per unit are often lower under a target costing environment. (c) Steps to reduce a cost gap - Review features - Team approach: bring together members, brainstorming to allow discussion of methods to reduce costs - Review the whole supplier chain: Each step in the supply chain should be reviewed - Components: look at the significant costs involved in components - Assembly workers: Productivity gains by changing working practices or by de-skilling the process. Automation - Overheads: Productivity increases help by spreading FOH over a greater number of units - Consider ABC approach to its OH allocation => reveal more favourable cost allocations or ideas for reducing costs

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008
x State the constraints Silk powder Silk amino acids Skilled labour C = 9x + 8y y1 y2 2,500.00 3,200.00 1,600.00 100.00 1,400.00 400.00 400.00 828.57 1,257.14 1,542.86 333.33 2,000.00 2,533.33 1,066.67 900.00 1,066.67 600.00 1,600.00 2,000.00 (100.00) 2,650.00 3,400.00 C = 9x + 8y State the constraints Silk powder 3x + 2y 5,000 Silk amino acids 1x + 05y 1,600 Skilled labour 4x + 5y 9,600 x y3 1,920.00 640.00 y4 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 Cont. 900.00 (900.00) (675.00) (32.14) 525.00 (300.00) 225.00 1,012.50 3x 1x 4x 0x 9x y 2y 0.5 y 5y 1y = 8y

Bai thc hanh 3

VP 5,000 1,600 9,600 2,000 7,200

4,000

Axis Title

800.00
1,257.14 1,653.33 1,066.67 1,440.00 2,000.00

3,500

3,000

y = -2x + 3200

2,500 y = -1.5x + 2500

2,000 y = -0.8x + 1920 1,500 c, 0, 1257.14 c, 828.57, 1257.14

1,000

500

D, 0, 400 c, 828.57, 0 1,000 Axis Title

500

Tran Thanh Phong/ Tran Thanh Thai

18

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

Bai thc hanh 3

500 1,000 Axis Title

x 3x 1x 4x 0x 9x

y 2y 0.5 y 5y 1y = 8y

VP 5,001 1,600 9,600 2,000 7,200

Max. Contribution: Shadow Price:

17,514.29 17,516.14 1.857

Shadow price used to determine the maximum price that worth paying to obtain one additional unit of the binding constraints at original cost=> Slack = 0 at SP Slack: Unused resource/Idle capacity => SP = 0 at Slack eg: Current purchase price 2.200 $/g Premium (SP) 1.857 $/g Max. Price 4.057 $/g

Tran Thanh Phong/ Tran Thanh Thai

19

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

Bai thc hanh 3

> Cn tm t nht 2 ta im Ln lt cho x mt gi tr no ri tnh ra y

(a) Optimum production plan Define the variables Let x = no. of jars of face cream to be produced Let y = no. of bottles of body lotion to be produced Let C = contribution State the objective function The objective is to maximise contribution, C C = 9x + 8y State the constraints Silk powder 3x + 2y 5,000 Silk amino acids 1x + 05y 1,600 Skilled labour 4x + 5y 9,600 Non-negativity constraints: x, y 0 Sales constraint:

Tran Thanh Phong/ Tran Thanh Thai

20

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008
y 2,000 Draw the graph Silk powder 3x + 2y = 5,000 If x = 0, then 2y = 5,000, therefore y = 2,500 If y = 0, then 3x = 5,000, therefore x = 1,6667 Silk amino acids 1x +05y = 1,600 If x = 0, then 05y = 1,600, therefore y = 3,200 If y = 0, then x = 1,600 Skilled labour 4x + 5y = 9,600 If x = 0, then 5y = 9,600, therefore y = 1,920 If y = 0, then 4x = 9,600, therefore x = 2,400

Bai thc hanh 3

Tran Thanh Phong/ Tran Thanh Thai

21

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008
A y1 y2 y3 y4 Cont. 2,500 3,200 1,920 2,000 900 B -1.5 x -2 x -0.8 x 0x -1.125 x y 2,500 3,200 1,920 2,000 900 x 1,666.67 1,600.00 2,400.00 #DIV/0! 800.00 y 0 y1 0 y2 0 y1 0 y3 0 y1 y4 y2 y3 y2 y4 y3 y4 x 1 2 3 4 5 6 1,400.00 828.57 333.33 1,066.67 600.00 (100.00) A

Bai thc hanh 3

A-1

x
3.0 1.0 3.0 4.0 3.0 0.0 1.0 4.0 1.0 0.0 4.0 0.0

y
2.0 0.5 2.0 5.0 2.0 1.0 0.5 5.0 0.5 1.0 5.0 1.0 y 400.00 1,257.14 2,000.00 1,066.67 2,000.00 2,000.00 5,000 1,600 5,000 9,600 5,000 2,000 1,600 9,600 1,600 2,000 9,600 2,000 -1 2 1 -1 0 0 2 -1 1 0 0 0

c, 828.57, 1257.14

D, 1400, 400 c, 828.57, 0 Axis Title D, 1400, 0 1,500

2,000

y1 y2 y3 y4 Cont. D y1 y2 y3 y4 Cont. y1 y2 y3 y4 Cont. D y1 y2 y3 y4 Cont. y1 y2 y3

Tran Thanh Phong/ Tran Thanh Thai

22

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008 1,500 2,000
Axis Title

Bai thc hanh 3

y2 y3 y4

A y1 y2 y3 y4 Cont. 2,501 3,200 1,920 2,000 900

B -1.5 x -2 x -0.8 x 0x -1.125 x

y 2,501 3,200 1,920 2,000 900

x 1,667.00 1,600.00 2,400.00 #DIV/0! 800.00

y 0 y1 0 y2 0 y1 0 y3 0 y1 y4 y2 y3 y2 y4 y3 y4

A-1

x
3.0 1.0 3.0 4.0 3.0 0.0 1.0 4.0 1.0 0.0 4.0 0.0 x 1 2 3 4 5 6 1,399.00 829.29 333.67 1,066.67 600.00 (100.00)

y
2.0 0.5 2.0 5.0 2.0 1.0 0.5 5.0 0.5 1.0 5.0 1.0 y 402.00 1,256.57 2,000.00 1,066.67 2,000.00 2,000.00 5,001 1,600 5,001 9,600 5,001 2,000 1,600 9,600 1,600 2,000 9,600 2,000 -1 2 1 -1 0 0 2 -1 1 0 0 0

at original cost=> Slack = 0 at SP

Tran Thanh Phong/ Tran Thanh Thai

23

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

Bai thc hanh 3

Tran Thanh Phong/ Tran Thanh Thai

24

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

Bai thc hanh 3

Tran Thanh Phong/ Tran Thanh Thai

25

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

Bai thc hanh 3

4 x1= -6 y1= 0 x2= 0 y2= -1 1 0 0 -1 1 -1 1 x3= y3= x4= y4= x5= y5= x6= y6=

1,400.0 400.0 828.6 1,257.1 333.3 2,000.0 1,066.7 1,066.7 600.0 2,000.0 -100.0 2,000.0

Tran Thanh Phong/ Tran Thanh Thai

26

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

Bai thc hanh 3

4 x1= -6 y1= 0 x2= 0 y2= -1 1 0 0 -1 1 -1 1 x3= y3= x4= y4= x5= y5= x6= y6=

1,399.0 402.0 829.3 1,256.6 333.7 2,000.0 1,066.7 1,066.7 600.0 2,000.0 -100.0 2,000.0

Tran Thanh Phong/ Tran Thanh Thai

27

CIMA -Managerial Paper P1 (Mgt Accounting - Performance Evaluation) - Pg 236

Planning Variance: or revision variance - campares an original standard with a revised standard that would have been used if the planner had known what was going to happen

Operational Variance: or Operating variance - compares an actual results with revised standard

Example 6.2: At the beginning of 20x0, WB set a standard marginal cost for its major product of $25 per unit. The standard cost is recalculated once a year. Actual production cost during August 20x0 were 304000, and actual units 8,000 produced With the benefit of hindsight, the management of WB realized that realistic standard cost for current conditions would be $40 per unit. The planned Standard cost of $25 is unrealistically low. Required: Calculate the total planning and operational variance

Planning Variance:
Standard Cost Revised Standard (8,000 x $ 25) (8,000 x $ 40) 200,000 320,000

Planning Variance Operational variance:

Revised Standard Actual Cost (8,000 x $ 40) 320,000 304,000

120,000

UF

Operational Variance Total Variance Tradtional Variance:

Standard Cost Actual Cost (8,000 x $ 25) 200,000 304,000

16,000 104,000

Fav UF

104,000

UF

I.

1 Direct material cost variances 1 Direct material purchased price variances Actual qty should cost x Actual qty did cost x 2 Direct material usage variances

2,300 kg should cost ( 2300 kg x $4) But did cost Direct material price variance 4850 units should use But did used at Standard cost per unit ( 4850 units x 0.5kg)

$ 9,200 9,800 -600 (A) 2,425 2,300 125 (F) $4.00 $500 (F)

II.

Direct labour cost variances 3 Direct labour

price variances 8500 hours should cost But did cost ( 8500 hours x $2)

17,000 16,800 200 (F) 9,700 8,000 1,700 (F) $2.0 3,400 (F) 8,500 8,000 -500 (A) $2.0 -1,000 (A)

4 Direct labour

Efficiency variances 4850 units should take But did take at Std cost ( 4850 units x 2 hrs)

5 Direct labour

Iddle time variances Hours paid Hours works at Std cost

III. Variable production overhead variances (POH) 6 Variable P. O. H. expenditure variance 8000 hours incurring overhead(should cost x $0.3) 8000 hours But dis cost 7 Variable P. O. H. Efficiency variance 4850 units should take But dis take at Std cost IV. Fixed production overheads variances 8 Fixed POH expenditure variances Budgeted F.O.H Actual Fixed overhead Fixed POH 9 10 V. Sales variances 11 Sales 12 Sales volume variances eficiency variance capacity variances ( 5100 units x 0.6) ( 4850 units x 2 hrs)

2,400 2,600 -200 (A) 9,700 8,000 1,700 (F) $0.30 510 (F)

37,740 42,300 -4,560 (A)

Selling price variance Sales volume profit variance

Q.2/Vol. 1/P. 48 Product Selling Price (SP) Variable Cost (VC) Fixed Cost (FC) Sales Quantity (SQ) IS: MC X SP $/u 10.00 VC $/u -6.00 Contribution per unit 4.00 $/u SQ u 4,500 Total Contribution $ 18,000 (FC) $ Profit Total Contribution $ 18,000 Sales 45,000 C/S Ratio 0.40 Ranking 2 BEP Sales Value(BEP) 28,481 SQ(BEP) 2,848 Y 15.00 -5.00 10.00 1 10 6 4,500 2 15 5 8,000 3 20 12 100,000 7,500

Product Z Total 20.00 -12.00 7.90 8.00 8,000 7,500 80,000 60,000

80,000 120,000 0.67 1 75,949 5,063

60,000 150,000 0.40 3 94,937 4,747

20,000 158,000 -100,000 58,000.0 158,000 315,000 0.501587

199,367 12,658

Ranking Product (FC) 1Y 2X 3Z BEP Slope Coefficient: CONTRIBUTION/UNIT

80.0 60.0 40.0 20.0 (20.0) -

SQ 8.0 4.5 7.5

Cum. SQ 8.0 12.5 20.0 12.7

Revenue 120.0 45.0 150.0

Cum. Rev. 120.0 165.0 315.0 199.4

Unit: Contributi on 80.0 18.0 60.0

1,000.00 Cum. Profit (100.0) (20.0) (2.0) 58.0 -

C/S RATIO
80.0 60.0 20.0 , 58.0 40.0 12.7 5.0 10.0 8.0 , (20.0) 12.5 , (2.0) 15.0 20.0 20.0 (20.0) 25.0

(20.0) (40.0) (60.0) (80.0) (100.0) (120.0)

5.0

10.0 8.0 , (20.0)

15.0

20.0 Sales Volume

(20.0) (40.0) (60.0) (80.0)

25.0

- , (100.0) Cum. Profit Sales Volume

(100.0) (120.0)

$-

$315

$165 50 100 150 $120 200 199.4 250 300 350

50

100

150 $120

200 199.4

250

300

350 Revenue

Cum. Profit

Revenue

Product G Selling Price (SP) Variable Cost (VC) Fixed Cost (FC) Sales Quantity (SQ) OH Expected (SQ) Avoidable Fixed Cost IS: MC G SP V. OH Cost Total VC Relevant Cont./unit Rel. Cont. per $ of Mat. B Expected SQ Total Contribution (FC) Profit Total Contribution Sales C/S Ratio Ranking BEP Sales Value(BEP) SQ(BEP) 25,654 2,565 $/u $/u $/u $/u u $ $ $ 10.00 1.00 (9.2) 0.80 0.40 4,100 3,280 (3,000.0) 280.0 3,280 41,000 8% 2.0 10 6 3,000 6 1 5,000 8 4,100 1

H 20 5 3,000 13 1 5,000 19 4,600 1

J 15 12 3,000 11 1 Product 5,000 17 3,800 1

K 30

3,000 11 1

5,000 17 4,400 1

H 20.00 3.00 (18.6) 1.40 0.70 4,600 6,440 (4,000.0) 2,440.0 6,440 92,000 7% 3.0 57,565 2,878

J 15.00 3.00 (17.1) -2.10 (0.47) 3,800 (7,980) (2,000.0) -9,980.0 (7,980) 57,000 -14% 4.0 35,666 2,378

K 30.00 3.00 (26.4) 3.60 0.30 4,400 15,840 (2,000.0) 13,840.0 15,840 132,000 12% 1.0 82,594 2,753

Total

1.04 16,900.0 17,580.0 (11,000.0) 6,580.0 17,580.0 322,000.0 0.054596

201,479 10,575

High- Low Method to calculate Var. OH The P/V chart has revenue on X axis and Profit on the Y axis Plot in the order of C/S Ratio. Selling Product with highest C/S Ratio First Starting point for the graph, ie. Determine Profit or Loss when revenue is nil = Fixed Cost Contribution and Revenue occurs when we finish selling products Unit: Contributi on (7.000) (1.000) 15.840 (1.000) 3.280 (1.000) 6.440 (1.000) (7.980) C/S RATIO
20.0
Profi/Loss axis

Ranking Product (FC) Start Selling K Finish Selling K Start Selling G Finish Selling G Start Selling H Finish Selling H Start Selling J Finish Selling J BEP CONTRIBUTION/UNIT
20.0 Profi/Loss axis

SQ 4.400 4.100 4.600 3.800

1K 2G 3H 4J

Cum. SQ 4.400 4.400 8.500 8.500 13.100 13.100 16.900 10.575

Revenue Cum. Rev. 132.000 132.000 132.000 41.000 173.000 173.000 92.000 265.000 265.000 57.000 322.000 201.479

1,000.00 Cum. Profit (7.000) (8.000) 7.840 6.840 10.120 9.120 15.560 14.560 6.580 -

Multi-product profit/volume chart

15.560 14.560
10.120 9.120 6.580

Multi-product profit/volume chart

15.560 14.560
10.120 9.120 6.580

15.0

15.0

10.0

10.0

7.840 6.840 5.0

7.840 6.840 5.0

5 10 15 20 Sales Quantity

50 100 150 200 250 300 350 Revenue ($000)

(5.0)
(7.000) (8.000) (10.0)

(5.0)
(7.000) (8.000) (10.0)

Cum. Profit

Profit

Cum. Profit

Revenue

14 ABC Plc/P.15/Revision Kit 2011

Selling Price (SP) Variable Cost (VC) Fixed Cost (FC) Sales Quantity (SQ) OH Total Demand (SQ) Avoidable Fixed Cost IS: MC SP DM Unit Revenue A Budget Cost/u Revised factor Unit

ABC Plc W 10 Product Y 15 Z 30

6,000 12 2

10,000 16 8,200 2

6,000 22 2

10,000 34 7,600 2 Product

6,000 22 2

10,000 34 8,800 2

W $/u ku k$ $/u 6.00 18.00 3.00 4.20 12.00 2.00 12.00 2.00 1.00 (9.2) 0.80 0.40 8,200 6,560 (6,000.0) 560.0 6,560 82,000 45.00 27.00 10.00 6.00 9.00 1.50

Y 15.00 6.00 36.00 6.00

Z 30.00

Total

36.00

1 2.10 72.00 4.50 18.00 7.50 3.00 (17.1) -2.10 (0.47) 7,600 (15,960) (4,000.0) -19,960.0 (15,960) 114,000 3.00 3.00 (26.4) 3.60 0.30 8,800 31,680 (4,000.0) 27,680.0 31,680 264,000 12.00 8.40

2/5

(x factor) $/u DM A Cost/u k$ Revenue B $/u DM B Cost/u k$ DL Cost $/u DL Cost/u $/u V. OH Cost $/u Total VC $/u Relevant Cont./unit Rel. Cont. per $ of Mat. B Expected SQ u Total Contribution $ (FC) $ Profit Total Contribution $ Sales

0.91 24,600.0 22,280.0 (14,000.0) 8,280.0 22,280.0 460,000.0

C/S Ratio
BEP BE Revenue BE Sales Quantity $ u

8%
51,526 5,153

-14%
71,634 4,776

12%
165,889 5,530

0.048435
289,048 15,458

Ranking C/S
HIGHLIGHTS (use info. to)

2 LOWEST (GRADUAL) HIGHEST INCREASE=> SQ DECREASE NO

3 HIGHEST (STEEPEST) LOWEST DECREASE=> SQ INCREASE YES

Products shown individually on PV Chart from left to right, in the order of C/S Ratio

PROFITABILITY (SLOPE) BE REVENUE PRICING EXPAND

LENGTH OF EACH LINE

Value of sales achieved by that product

REVENUE
JAGGED LINE STRAIGHT LINE P/V CHART IDENTIFY i) ii) iii) iv) ASSUMPTIONS SP, VC/u, TOTAL FC Inventory C/S Ratio

SHORTTEST (SMALLEST) LONGEST (BIGGEST) Cum. Profit/loss and Cum. Sales as each products in turn are add to the sales mix 2 end ponts indicate the average profit will earned by sales mix
Overall Company BEP Change in SP and SQ have effect on BEP and Profit No products were sold would make loss due to FC. When production start, there is reduction in profit due to specific FC. But on selling, cost were covered by contribution

i) SP, VC/u are CONSTANT at all levels of sales. Total FC are the same ii) Inventory level : NO CHANGE => Ignore increases and decrease in inventory levels ii) Selling products with highest C/S Ratio first

High- Low Method to calculate Var. OH The P/V chart has revenue on X axis and Profit on the Y axis Plot in the order of C/S Ratio. Selling Product with highest C/S Ratio First Starting point for the graph, ie. Determine Profit or Loss when revenue is nil = Fixed Cost Contribution and Revenue occurs when we finish selling products Ranking (FC) Start Selling Z Finish Selling Z Start Selling W Finish Selling W Start Selling Y Finish Selling Y BEP CONTRIBUTION/UNIT
30.0 Profi/Loss axis 25.0 8.800 ; 21.680 20.0 8.800 ; 19.680 15.0 10.0 5.0 (5.0) (10.0) (15.0) Cum. Profit Profit - ; (8.000) - ; (10.000) 5 10 15 20 25 30 Sales Quantity 24.600 ; 8.280 17.000 ; 24.240

Product

SQ 8.800 8.200 7.600 0.91

1 Z 2 W 3 Y

Cum. SQ 8.800 8.800 17.000 17.000 24.600 15.458

30.0 Profi/Loss axis

Revenue 264.000 82.000 114.000 C/S RATIO

Cum. Rev. 264.000 264.000 346.000 346.000 460.000 289.048 0.048435

Unit: Contribution (8.000) (2.000) 31.680 (2.000) 6.560 (2.000) (15.960)

1,000.00 Cum. Profit (8.000) (10.000) 21.680 19.680 26.240 24.240 8.280 251.641

Multi-product profit/volume
17.000 ; 26.240

Multi-product profit/volume
264.000 21.680 264.000 19.680

25.0 20.0 15.0 10.0 5.0 (5.0) (10.0) (15.0) 50 (8.000) (10.000) 100 150 200

346.000 26.240 346.000 24.240

460.000 8.280

250

300

350

400

450

500

Revenue ($000)

Cum. Profit

Revenue

CVP 14RK.11

1 Direct cost Raw material Cost RM cost/usage RM usage per unit Direct labor cost DL cost/usage DL usage per unit Direct Cost/u Overhead cost Budgeted OH Budgeted Activity level Direct labour hours per unit Production volume OAR OH/u (MC) FC/u (MC) Cost Driver 1 Activity level 1 CDR 1 Cost Driver 2 Activity level 2 CDR 2 Cost Driver 3 Activity level 3 CDR 3 Cost Driver 4 Activity level 4 CDR 4 Overhead per annum Production volume OH/u (ABC) FC/u (MC) $ $/u $/kg kg/u $/u $/h $/h h/u $/u $/u

$1.20 2.0 $2.40 $14.80 0.1 $1.48 $3.88 $42,450

$1.20 3.0 $3.60 $14.80 0.2 $2.22 $5.82 $50,940 1,800 0.2 15,000 $2.83 $6.71 $11,800 12 $15,514 8,400 $12,255 28 $18,624 30 $58,193 15,000 $3.88 $7.76 $52,164 12,000 $4.35 $10.17 $11,640 $14,298 $17,376 12,000 $4.25 $10.07 $8,850

$1.20 4.0 $4.80 $14.80 0.2 $2.96 $7.76 $101,880 3,600 0.2 18,000 $5.66 $13.42 $5,900 8 $33,510 16,200 $21,447 42 $24,056 62 $84,913 18,000 $4.72 $12.48

I.

II.

III.

IV.

$ h 1,500 h/u 0.1 units $/h $/u $/year/units $/year p.r 16 $/year/p.r $/year m.h 7,500 $/year/m.h $/year p.o 24 $/year/p.o $/year del. 48 $/year/del. $/year units $/year/units $/year/units

Conventinal approach is simple and easy, but simplicity does not justify the production and may lead to wrong information ABC requires spend more time and effort to identify cost causer, but understanding what cause costs is an essential part of performance management

IV.

V.

1 Units manufactured & sold R&D Product design Marketing Variable Cost - Manufacturing - Distribution - Selling Total variable cost Fixed OH Cost - Manufacturing - Distribution - Selling - Administration Total Cost Production units LLC/u u $ $ $ $/u $/u $/u $ $ $ $ $ $ $/u

Year 1

Year 2 100,000 160,000 800,000 1,200,000 40.0 4.0 3.0 47.0 4,700,000 650,000 120,000 180,000 900,000 7,550,000 100,000

Year 3 200,000

1,000,000 42.0 4.5 3.2 49.7

1,750,000

9,940,000 1,290,000 120,000 180,000 1,500,000 14,780,000 200,000

200,000 2,360,000

IV.

V.

1 Direct cost Raw material Cost RM cost/usage RM usage per unit Direct labor cost DL cost/usage DL usage per unit Direct Cost/u Overhead cost Budgeted OH Budgeted Activity level Direct labour hours per unit Production volume OAR OH/u (MC) FC/u (MC) Cost Driver 1 Activity level 1 CDR 1 Cost Driver 2 Activity level 2 CDR 2 Cost Driver 3 Activity level 3 CDR 3 Cost Driver 4 Activity level 4 CDR 4 Overhead per annum Production volume OH/u (ABC) FC/u (MC) $ $/u $/kg kg/u $/u $/h $/h h/u $/u $/u

$0.00 2.0 $0.00 $0.00 0.1 $0.00 $0.00 $42,450

$0.00 3.0 $0.00 $0.00 0.2 $0.00 $0.00 $50,940 1,800 0.2 15,000 $2.83 $2.83 $11,800 12 $15,514 8,400 $12,255 28 $18,624 30 $58,193 15,000 $3.88 $3.88 $52,164 12,000 $4.35 $4.35 $11,640 $14,298 $17,376 12,000 $4.25 $4.25 $8,850

$0.00 4.0 $0.00 $0.00 0.2 $0.00 $0.00 $101,880 3,600 0.2 18,000 $5.66 $5.66 $5,900 8 $33,510 16,200 $21,447 42 $24,056 62 $84,913 18,000 $4.72 $4.72

I.

II.

III.

IV.

$ h 1,500 h/u 0.1 units $/h $/u $/year/units $/year p.r 16 $/year/p.r $/year m.h 7,500 $/year/m.h $/year p.o 24 $/year/p.o $/year del. 48 $/year/del. $/year units $/year/units $/year/units

IV.

V.

Relevant cost is any type of cost that is subject to change, depending on what kind of decision is made. Considered a key function within management accounting, the idea behind this type of cost definition is to determine how the budget will be impacted if a particular course of action is pursued.

In order to properly evaluate the situation, it is necessary to look at all current costs, and determine which ones would change as a result of the decision, and which ones would remain constant . Those that will change are said to be relevant to the consideration of that course of action. Assessing the relevant cost is not a particularly difficult process. All that is required is to project the chain of events that will take place should a particular action be taken. For example, a restaurant that wishes to attract more customers for lunchtime may consider implementing a lunchtime special that is only available for a few hours each day. Before actually implementing this new offering, the owner will look closely at what type of impact the project will have on labor, supplies, and utilities. If it is determined that the number of servers on duty is sufficient to handle the larger lunch crowd, that cost factor is not relevant, as it changes nothing from what already takes place. Should it be determined that an additional laborer in the kitchen is needed to prepare food during the lunchtime period, this does constitute a change in labor costs and would be considered a relevant cost. Since more food would likely be required to manage the additional lunchtime customers, that cost would also be relevant. The same general principal can be applied to just about any decision. Investors may look at what choosing a given investment scheme would mean in terms of additional expense or demand of their time, and determine if the effort is worth the expected outcome. Shopkeepers can decide if adding a specific product to the items they carry is likely to result in an increase of sales volume that will offset the cost of ordering that additional product. Understanding what the decision will change as far as the normal state of operations always makes it easier to determine if the decision is ultimately beneficial, or likely to have a negative impact. Understanding the type and nature of a relevant cost can make it much easier to use the accounting process to effectively manage expense, thus increasing the opportunity for earning a profit. Should the amount of relevant cost be so great that the potential for earning profit is greatly diminished, it may be determined that the course of action under consideration is not viable, and is abandoned. From this perspective, identified a relevant cost or costs in any given situation not only enhances the potential for increasing profits, but also prevents the deterioration of the current level of profit.

Relevant costs are future costs that will differ among alternatives

Microsoft Excel 14.0 Answer Report Worksheet: [F5_ Variance.xlsx]PTb1 Report Created: 26/03/2012 1:38:23 PM Result: Solver found a solution. All Constraints and optimality conditions are satisfied. Solver Engine Engine: GRG Nonlinear Solution Time: 0 Seconds. Iterations: 0 Subproblems: 0 Solver Options Max Time Unlimited, Iterations Unlimited, Precision 0.000001 Convergence 0.0001, Population Size 100, Random Seed 0, Derivatives Central Max Subproblems Unlimited, Max Integer Sols Unlimited, Integer Tolerance 1% Objective Cell (Max) Cell Name Original Value $V$14 y3 VT 9,600

Final Value 9,600

Variable Cells Cell Name $U$14 y3 Bin $U$15 y4 Bin

Original Value 320 2,000

Final Value Integer 320 Contin 2,000 Contin

Constraints Cell Name $V$10 y2 VT $V$11 y3 VT $V$12 y2 VT $V$13 y4 VT $V$14 y3 VT $V$15 y4 VT $V$4 y1 VT $V$5 y2 VT $V$6 y1 VT $V$7 y3 VT $V$8 y1 VT $V$9 y4 VT

Cell Value 1,600 9,600 1,600 2,000 9,600 2,000 5,000 1,600 5,000 9,600 5,000 2,000

Formula $V$10=$W$10 $V$11=$W$11 $V$12=$W$12 $V$13=$W$13 $V$14=$W$14 $V$15=$W$15 $V$4=$W$4 $V$5=$W$5 $V$6=$W$6 $V$7=$W$7 $V$8=$W$8 $V$9=$W$9

Status Binding Binding Binding Binding Binding Binding Binding Binding Binding Binding Binding Binding

Slack 0 0 0 0 0 0 0 0 0 0 0 0

ax 1 2 1

by 2 1 4

cz 3 1 2

Bien 5 -3 9

Ve trai 26 16 11

Ve phai 25 14 10

B1: Lp bi ton trn Excel A 1 2 1

A*X=B 2 1 4 3 1 2

==>

x=A *B X x y z

-1

B 25 14 10

B2: Tm ma trn nghch o ca h A -0.15385 0.615385 -0.07692 -0.23077 -0.07692 0.384615 0.538462 -0.15385 -0.23077

x= y= z=

4 -3 9

Calculating basic variances Material Variance xxx - Price variance Actual qty should cost x Actual qty did cost x Variance x xxx - Usage variance Actual product should use x Actual production did use x x @ std rate x Variance x Labour variance xxx - Rate variance Actual hrs should have cost x Actual hrs did cost x Variance x xxx - Efficiency Actual production should take x Actual production did take x x @ std rate x Variance x Variable overhead variance xxx - Expenditure Actual hrs should have cost x Actual hrs did cost x Variance x xxx - Efficiency Actual production should take x Actual production did take x x @ std rate x Variance x Fixed overhead variance xxx - Expenditure Budgeted O/Hs x Actual O/Hs x Variance x Page 25 of 296 xxx - Volume Budgeted units x Actual units x x @ absorption rate x Variance x o Capacity

Budgeted hours x Actual hrs worked x X @ absorption rate x Variance x o Efficiency Actual production should take x Actual production did take x x @ absorption rate x Variance x xxx - Sales variance o Price Actual qty should sell for x Did sell for x Variance x o Volume Budgeted units x Actual units x x @ std profit x Variance x

Total variance = (AQ * AP) - (SQ * SP)

Price variance = (AP - SP) * AQ

Quantity variance = (AQ - SQ) * SP Total variance = Price variance + Quantity variance
Robert A. McLean, 2004

 Robert A. McLean, 2004

variance