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Management Accounting. own notes

Book: Management and cost accounting Collin Drury 6 edition

Timetable :Mon 17h00, fri 13h00 ,sat 10H00 ,Tests sat 08h00 Lecturer:Mr Ngomane office 2020 k block 015-268-3297

CONTENTS

Contents....................................................................................................................................................................1

QUESTIONS:...............................................................................................................................................................6

Reconcilliation of Absorbtion profit to absorbtion profit(pg 142 viggio)..................................................................6 LAST QUESTION PLACE...........................................................................................................................................7 To scan in/do still:......................................................................................................................................................9 Rem: Notes special things to remember..................................................................................................................10 2-TERMS:(vig ch 1+2)..............................................................................................................................................11

Intro:....................................................................................................................................................................11

Cost Objects:........................................................................................................................................................11 Direct and Indirect Costs......................................................................................................................................11

the production point of indifference, :...............................................................................................................11 analysis of the companies cost structure: ........................................................................................................11 inventory valuation:(note)................................................................................................................................11 DIRECT COSTS : ...............................................................................................................................................12 INDIRECT COSTS :.............................................................................................................................................12 Categories of manufacturing costs. – with direct/indirect costs ........................................................................12 DIRECT MATERIALS :.........................................................................................................................................12 INDIRECT MATERIALS :......................................................................................................................................12 DIRECT LABOUR :..............................................................................................................................................12 INDIRECT LABOUR ..........................................................................................................................................12 DIRECT EXPENSE :............................................................................................................................................12 PRIME COST .....................................................................................................................................................12 MANUFACTURING OVERHEAD :.........................................................................................................................12 COST ALLOCATIONS :........................................................................................................................................12 TOTAL MANUFATURING COST :.........................................................................................................................12 Period and Product Costs ..................................................................................................................................13 PRODUCT COSTS :............................................................................................................................................13 PERIOD COSTS :................................................................................................................................................13 Relevant and Irrelevant Costs:.............................................................................................................................13

RELEVANT COSTS AND REVENUES :.................................................................................................................13 IRRELEVANT COSTS AND REVENUES: ..............................................................................................................13 Avoidable or Unavoidable costs:..........................................................................................................................13

AVOIDABLE=....................................................................................................................................................13

UNAVOIDABLE..................................................................................................................................................13

Opportunity Costs:...............................................................................................................................................14 -Incremental /or Differential- and Marginal Costs.................................................................................................14

INCREMENTAL or DIFFERENTIAL COSTS :..........................................................................................................14 MARGINAL COSTS :...........................................................................................................................................14 Job Costing and Process Costing systems:............................................................................................................14

JOB COSTING SYSTEMS:....................................................................................................................................14 PROCESS COSTING SYSTEMS:...........................................................................................................................14 ABSORPTION COSTING AND VARIABLE COSTING:and STANDARD COSTING .........................................................14

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inventory valuation:(note)................................................................................................................................14 IAS 2 on INVENTORIES States the Following.:...................................................................................................14 Absorbtion costing :..........................................................................................................................................15 Cost Absorbtion Rate :......................................................................................................................................15 Fully Integrated Absorbtion costing System ( or “full” absorb. costing system)................................................15 Variable Costing (or Marginal or Direct Costing)...............................................................................................16 Direct Costing ...................................................................................................................................................16 Marginal Costing ...............................................................................................................................................16 Standard Costing:.............................................................................................................................................16 Sunk Costs:..........................................................................................................................................................16

SUNK COSTS : ..................................................................................................................................................16 Responsibility Accounting :..................................................................................................................................16 RESPONSIBILITY ACCOUNTING :........................................................................................................................16 PROFIT CENTRE :..............................................................................................................................................16 COST CENTRE:..................................................................................................................................................17 INVESTMENT CENTRE:......................................................................................................................................17 Maintaining a cost database:................................................................................................................................17 Fixed and Variable Production Overheads : and Cost Behaviour of......................................................................17 VARIABLE COSTS :............................................................................................................................................17 FIXED PRODUCTION COSTS :............................................................................................................................18 SEMI-FIXED (or STEP-FIXED COSTS) : ...............................................................................................................19 SEMI-VARIABLE (or MIXED COSTS) :..................................................................................................................19 Relevant Range....................................................................................................................................................19 Relevant Range: ..............................................................................................................................................19 Selling Costs.........................................................................................................................................................19 Selling Costs :...................................................................................................................................................19 Conversion Costs:.................................................................................................................................................20

Conversion Costs :............................................................................................................................................20 HIGH-LOW COST ANALYSIS:..............................................................................................................................20

contribution:.....................................................................................................................................................20

budget:.............................................................................................................................................................20

“Standard Hours Produced”:.............................................................................................................................20 “Standard PROFIT STATEMENT”: ......................................................................................................................20 STATIC BUDGET ...............................................................................................................................................20 FLEXED BUDGET ..............................................................................................................................................21 BILL OF MATERIALS ..........................................................................................................................................21 STANDARD COST CARD ...................................................................................................................................21 3-Own notes reconcilliations : any and all types possible ........................................................................................22

1-Chapter 1 :INTRODUCTION(drury ch1)..................................................................................................................23 Definition of Accounting ( USA acc. Association)..................................................................................................23 Users of Acc info:..................................................................................................................................................23 Difference between Mngmt and Fin Acc.:.............................................................................................................23 The Decision Making Process:..............................................................................................................................23 Influence of Changing Competitive environment on Mngmnt Acc. Practice..........................................................24 Impact of I.T./Computers Mngmt Acc ...................................................................................................................25 International Convergance of Mngmnt Acc ...........................................................................................................25 FUNCTIONS OF MANAGEMENT ACCOUNTING:......................................................................................................25 HISTORY OF MANAGEMENT ACCOUNTING ............................................................................................................25 Ch6-CHAPTER : COST CLASSIFICATION AND ESTIMATION :ch6 viggario book

................................................................................................................................................................................26

rem/ Note for exams : cost classification chapter.................................................................................................26 1)COST CLASSIFICATION .........................................................................................................................................26 Fixed and Variable Production Overheads : and Cost Behaviour of......................................................................26

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VARIABLE COSTS :............................................................................................................................................26 FIXED PRODUCTION COSTS :( or ‘long term variable costs’).............................................................................27 SEMI-FIXED (or STEP-FIXED COSTS) : ...............................................................................................................27 mixed costs (ofted referred to as semi-variable costs ,but we call it mixed)....................................................27 SEMI-VARIABLE COSTS (NOT ALLWAYS SAME AS MIXED COSTS,BUT VISA VERSA TRUE)..................................28 how to separate the fixed and variable part of mixed costs : normal method ......................................................28

HIGH-low analysis -method :identification of fixed & variable components ......................................................29 THE learning curve:..............................................................................................................................................30

1-CUMULATIVE AVERAGE TIME-LEARNING MODEL ............................................................................................30 B-INCREMENTAL UNIT-TIME LEARNING MODEL:................................................................................................32 c-use of models ................................................................................................................................................32 4 Chapter :COST –VOLUME PROFIT ANALYSIS ch. 7 in vigario book........................................................................33

1.ECONOMIST VS ACCOUNTANTS VIEW...................................................................................................................33 Economists VS Accountants COST-VOLUME-PROFIT graph. :................................................................................33 ECONOMISTS GRAPH:.......................................................................................................................................33 Accountants graph ............................................................................................................................................33 C.v.p. analysis. (cost-volume-profit.).......................................................................................................................34 assumptions of cvp analysis:................................................................................................................................34 Break-even analysis:............................................................................................................................................34 target profit:.........................................................................................................................................................34 Contribution : ......................................................................................................................................................34 margin of safety:..................................................................................................................................................34 key ratios for cvp.................................................................................................................................................35

(PV ratio) Profit Volume ratio: ( or also called ‘contribution margin %’ )...........................................................35 profit ratio.........................................................................................................................................................35 (B/E sales) break-even sales revenue:( not a ratio)..........................................................................................35 break-even sales volume:( not a ratio).............................................................................................................35 margin of safety ratio ......................................................................................................................................35 OTHER TYPES:...................................................................................................................................................35 abbreviations for ratio’s etc: ...............................................................................................................................35

analysis of cost structure USING CVP PRINCIPLES : (of a company).....................................................................35

METHOD: fORMAT OF SPREADSHEET FOR: full year FINAL ANALYSIS

viggario page 247...............................36

Income statement (or budget) showing contribution separately .........................................................................37

cost –volume –profit chart/diagram .....................................................................................................................37

LABELS:...........................................................................................................................................................38

Income statement showing manufacturing costs separately (or also called income &expenditure statement

showing ...

)............................................................................................................................................................38

1+2 CHAPTER :ABSORBTION COSTING : sYSTEMS FOR RECORDING AND CONTROLLING COSTS :vigario ch-1+2...40

To remember for exam/ tricky stuff......................................................................................................................40 from ch1 vigario:the meaning of management accounting .....................................................................................40 Financial accounting .............................................................................................................................................40 Objective of Financial Accounting:....................................................................................................................40 Management accounting......................................................................................................................................41

Variable Costing (or Marginal or Direct Costing)...............................................................................................42 1.from ch 2 vig. systems for recording and controlling product costs. : ..................................................................42

Rem: use 4 decimal places for hourly labour/machine rates for products .........................................................42 DEFINITION: Absorbtion costing :......................................................................................................................42 DEFINITION :Cost Absorbtion Rate :..................................................................................................................43 DEFINITION :Fully Integrated Absorbtion costing System .................................................................................43 IAS 2 on INVENTORIES States the Following.:...................................................................................................43 METHOD TO DO ABSORBTION COSTING ...............................................................................................................44

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INtRO : ALLOCATING SERVICE COSTS TO PRODUCTION DEPTS:........................................................................44 Cost allocation procedure.................................................................................................................................44 OVERHEAD and MANUFACTURING ACCOUNTS IN LEDGER:...............................................................................46 overhead recovery rates:.....................................................................................................................................46

Purposes of allocating mnftring Overhead to a product ...................................................................................46 pre-determined overhead rates ........................................................................................................................46 job costing accounting treatment ........................................................................................................................49

REM: notes to remember .....................................................................................................................................51

cost CLASSIFICATION FOR SHORT TERM /LONG TERM DECISIONS ........................................................................51

5 Chapter abc (activity based costing)

vig ch 5....................................................................................................52

Special Notes to watch out for:............................................................................................................................52 ACTIVITY BASED COSTING: GENERAL ...................................................................................................................52 abc: Methodogy ...................................................................................................................................................53

ACTIVITIES – COST DRIVERS. : Examples of .....................................................................................................53 VALUATION OF CLOSING STOCK:......................................................................................................................54 ABRIDGED(shortened) INCOME STATEMENTS FOR ABC COSTING:...................................................................54 The Logical error of ABC costing.......................................................................................................................54 How relevant is abc costing?............................................................................................................................54 ch 4 vig VARIABLE AND ABSORBTION COSTING .......................................................................................................57

Special Notes to watch out for:............................................................................................................................57

ARGUMENTS FOR VARIABLE VS ABSORBTION COSTING.......................................................................................57 aRGUMENTS IN FAVOUR OF VARIABLE COSTING:.............................................................................................57 Arguments in favour of absorbtion costing:......................................................................................................57 viewpoint: any system which reports inconsistent profits if sales remain same should be discarded ...............58 Accounting Statement on inventories:-ias 2.....................................................................................................58 effect on profit (Income) of variable .vs. absorbtion costing ...............................................................................58 EXACT only difference between 2 Types of variable costing and 3 types of absorbtion costing ...........................59 What is variable costing.(or marginal or direct costing).......................................................................................60 METHOD : VARIABLE COSTING (CALCULATING VARIABLE PROFIT )..................................................................61 What is absorbtion costing:..................................................................................................................................62 Calculating Absorbtion Profit : 3 METHODS.......................................................................................................62

reconcilliation : standard absorbtion costing : budget profit to

actual.

............................................................66

Reconcilliation of Absorbtion profit to variable profit(pg 141 viggio)....................................................................71 Reconcilliation of Absorbtion profit to absorbtion profit(pg 142 viggio)................................................................71

income statements formats:................................................................................................................................73

............................................................................................................................................................................74

RECONCILLIATIONS:.................................................................................................................................................75

For over/under recovery in fully integrated absorbtion costing( just copied , must still sort it all out).................75 ch 9 standard costing (Pg 325 vig)..........................................................................................................................76 purpose of standard costing:................................................................................................................................76 Method of Standard costing:................................................................................................................................76 raw MATERIAL variance ....................................................................................................................................77

reconcilliation budget profit to actual

profit.

......................................................................................................77

1-Chapter 8 :BUDGETS(ch8Viggio book)..................................................................................................................82

Principles of Budgeting:........................................................................................................................................82

Define Budgeting:.............................................................................................................................................82 3 categories of budgets:...................................................................................................................................82 Reasons for budgeting:.....................................................................................................................................82 financial & management budgeting:.................................................................................................................82 Long term planning:.........................................................................................................................................82

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Positive factors of budgeting............................................................................................................................83 Budgeting & the human factor.........................................................................................................................83 Method for Budgets:.............................................................................................................................................84 Master Budget:.................................................................................................................................................84 Financial budget...............................................................................................................................................85 Operating budget.............................................................................................................................................85 Cash Budget: (or cash flow statement).............................................................................................................85 sales Budget:....................................................................................................................................................87 Purchases Budget : for raw materials / or retail stock /or any..........................................................................89 opening stock (finished goods or raw materials etc) Budget:...........................................................................90 Production Budget:...........................................................................................................................................90 Opening stock -Raw / direct materials- Budget:................................................................................................91 Labour Budget:.................................................................................................................................................92 Budget income Statement/ statement of inc&expenditure:..............................................................................92 chapter 11 relevant costs (vig ch11)......................................................................................................................96 Context of relevant costs:....................................................................................................................................96 terms: Definitions ................................................................................................................................................96 adding a new product...........................................................................................................................................97 Dropping a product or division.............................................................................................................................97 Make or buy decision............................................................................................................................................97 special orders.......................................................................................................................................................98 IMPortant : use the relevant costing decision model as an aid in choosing among competing alternatives .........99

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QUESTIONS:

(1) See page 19 vigario – no ii roman figures at bottom –is there a printing error 'budget' should read 'actual"

  • (i) Same place no -4- last sentence – how is no fixed cost carried to balance sheet, or where are fixed

costs ever carried to balance sheet??? By not going and subtracting over/under recovery or how?

(2) Semi-variable NOT the same as mixed costs – vigio and drury books different. (3) Google search for different learning curves for different industries/ mnftr. Types e.g. electr.etc.

(4) See page 224 viggio- how does example work- not include fixed costs? Why? Also is answer 268 or -268?

(5) Pg 246-example1- what means 'Other Costs are 20% VAR (6) Differential cost driver ???? what's this mean? (7) Absorption costing :

WITH PRODUCTION UNITS.

"?

  • (i) The IAS statement on inventories states that ALL overheads,eg management salaries and

depreciation and administration MUST BE INCLUDED IN COST OF INVENTORIES on page 1 ch 1.But PAGE 27 CH2 it says any costs that come after PRESENT CONDITION should not be included eg: selling costs. BUT WE learn to do a COST OF SALES analysis in the INCOME statement where SALARIES ARE NOT INCLUED nor admin nor depreciation, but opening and closing inventory is included in the calculation.SO how do you use the figure above to do this calc. which needs opening - closing inventories + purchases ? where does one get these figures then, or where do you use the IAS inventory rate then? ( the rest of income statement has salaries, depreciation etc- you cannot charge it twice/double!! In income statement.!!) I MEAN : DOES ONE SUBTTRACT/ADJUST THE COSTS CHARGED TO CLOSING STOCK --OUT OF THE NORMAL SALARIES & OVERHEADS IN THE INCOME STATEMENT SO IT DOSNT GET SUBTRACTED TWICE? (ii) WHO MAY USE LIFO method of stock valuation?? (iii) STEP COST ALLOCATION METHOD This tequnique does account for inter-service dept. cost allocation. The method used here is to allocate the cost for the service dept. which services the greatest no. of other service depts. first. Or if you get a situation where some service depts. service each other,as in example

here, then first to be allocated is the one with highest cost. SO WHICH GOES FIRST IF ONE GETS BOTH TYPES AT SAME TIME?

(8) METHOD OF DOING OVERHEAD ACCOUNT AND OVER/UNDER RECOVERY INCOME STATEMENT.

  • (i) Overhead account CONTRA WIP account. : All estimated/charged overheads to CR , Actual

overheads to DR , Balancing amount as Over/Under recovery to Income Statement. (ii) REM: ???????just remember the over/under recover amount that goes to income statement or

comes from this account , WILL NOT INCLUDE ANY OVER/UNDER RECOVERY FOR CLOSING STOCK?????????

SO FOR (8) WHAT IS THE ANSWER TO BETWEEN ????? QUEST. MARKS. YES/NO ? HOW

7) RECONCILLIATION of BUDGET to ACTUAL PROFIT.

 

a)

When a STANDARD COSTING SYSTEM is used, the under/over recovery is shown as :

 
 

i)

Volume Variance (difference between budget –actual)

ii)

AND Expenditure Variance. (difference between budget –actual)

EXAMPLE: Example 1 on left and 2 on right are completely different exercises, both are Reconcilliations.The one on the right seems the more correct one.-includes units- but not sure if both are equally correct- ASK.

8)

Is marketing costs part of mnftring overheads for absorbtion costing? Delivery costs, packaging, etc?

9)

On page 52 viggio, why does it say contribution instead of gross profit,3 rd row from bottom far left, because fixed manufacturing costs do and must get included in the the box above- to calc gross profit!

10)

Next Qusetion – read the yellow carefully –there are 2 questions here!

 

RECONCILLIATION OF ABSORBTION PROFIT TO ABSORBTION PROFIT (PG 142

VIGGIO)

 

1) METHOD :Whether it is a year to year or month to month recon . for the 1 company or whatever :

 
 

a)

No units on left needed.

 

b)

Start with 1 st profit AFTER over/under adjustment, end with last profit after over/under adjustment.

c)

Add any Variable Non-mnftr costs (eg:selling costs) subtracted before for net profit.(yes or no or what –

 

not shown in exercise)

 
 

d)

Any non-mnftr fixed costs : Add them back in

.{or maybe ; not sure but do other one rather- it seems you want to see

 

the gross profit somewhere)) if different you must do a separate item line to recon it : just subtract one from the other then put

 

difference in recon ( highly unlikely to happen anyway!) what do you do? And dothey want to see the gross profit for both somewhere

or not?

 
 

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e)

1 st :Do opposite to over/under to bring to first period gross profit( if added in income stat, -then subtract it and visa-versa)

f)

Now you have next periods Gross Profit.

 

g)

Now add/minus previous months over/under- same as you would in income stat,(not add if subtracted etc but add again – you are going toward getting NEXT PERIODS NET PROFIT now as if it is a normal income stat.)

h)

Now add next periods Variable and Fixed non-mnftr overheads in.

 

Next question:

 

Part (a)

For a Variable Standard Costing recon, in the” Volume Variance Part” at top top,

,(ask : 1-but what do

 

you do with closing stock – or 2- opening stock with different fixed cost to this year?)

you will also leave out fixed-

mnftring costs here, because you don’t do a special “Overheads Volume –variance subtraction” in the expenditure section below, because you don’t have any fixed costs in the closing stock to wheedle out (if the numbers are

right it could cause a error, If You don’t do all this I think)

 

Part (b)

And for same issue as above

: what do you do wuth the variable and fixed manufacturing costs whem yopu get a

closing stock for this year, or also Opening stock for this year from last year with different fixed costs to this

 

year.?????

 

11)For high –low costing, book vig and drury say you use activities as the one to choose for the HIGH-LOW method- not price, but in test for last question in the 2 nd CVP test, the memorandum uses the price to choose

the high + low one?? Which do we use? 12)What do you do with a closing stock in the budget – if you are doing a recon for budget to actual profit in absorption or variable or standard costing?????? How do you handle this closing stock in the recon itself. 13)What does ‘full costing mean?test 3 14)What does constant price level terms mean? In test 3 15)In job costing for manufacturing accounts : where do you get wages from? (ALL WRITTEN OUT?)

 

a)

You must pay taxes on all all wages in WIP, as asset or asset increase, esp. in closing stock- how does that

work?ie add the wages then subtract them again fior profit, but for plain retail they only use wages as tax deductable( msut a stremans wages go to closing inventory?) but for mnftring it is not tax deductable. 16)For overhead account; for 1 st month could you CR transfer wages to WIP before any DR it all- so you have a CR

but not a DR in WIP? 17)For fixed costs in variable costing, must fixed go to cost of sales before gross profit or NOT?????/VERY IMPORTANT: ie in vigg textbook it does both! See drury exercise 7.16: here it is NOT included –fixed costs in cost of sales- also this was a test question and we got marked wrong for having fixed costs in cost of sales- BUT in Viggio pg 137 he DOES put fixed costs in Cost of Sales! So what do we do???? 18)Do you get a fully integrated STANDARD absorbtion costing system? 19)What for mat does one do the profit statements and income statements for variable costing, and also absorbtion – drury and viggario each have 2 or 3 methods each , so 6 or more methods. I mean with cost of sales , or using ccontribution as a heading or putting some stuff at the top first then others below- general mix- up each has his own method – spo what is a standard accepted format one should use consistently???BIG MESS!!!!!!!also with including fixed mnftring costs in variable cost of sales figure - or not - etc etc.

20)

INDIFFERENCE POINT

 

21)

-Don’t know –try find out

22)

INCREMENTAL ANALYSIS

23)

Don’t know –try find out

LAST QUESTION PLACE

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| 9) For reciprocal allocation (algebra method) of allocating costs to production depts., what happens if you get a fraction at the end – like R0.345543 - how do you allocate these last fractions between depts.? On page 35 viggio at bottom of page.35 viggio 10)RECON OF PROFITS or also overheads : start at Budget and end at Actual.( or maybe any way you want?)

11)For a JOB COSTING system , part of fully integrated absorbtion costing ,on page 49 viggio , what is contra for "JOB 1-5" accounts, ie:where does "Job completed" on cr side get posted to? Do these acc's go to trial balance and Fin Stats? Where in fin stats do they go? 12)Fully integrated absorbtion : do you use budget or actual overheads for closing stock ?- if budget , then if over/under –recovery is for all of production (incl closing stock) then why is it only added to sold production – this will give a wrong value for 1-closing stock and 2-profit.OR is the overheads charged to incomplete jobs already "actual' and not "budget"?

  • a) TRY PUT sales as only 1 for example pg 130 vig ? then this all becomes clear! (see pg 129 2 nd paragraph from bottom for rule to use budget

..

budget)

in closing stock only!Also?? before it was said one could use actual or

  • b) Fully integrated absorbtion :On page 130 vig highlighted : if over –recovery is for all of production (incl closing stock) then why is it only added to sold production – this will give a wrong value for 1-closing stock and 2-profit.OR is the overheads charged to incomplete jobs already "actual' and not "budget"?

  • c) Over/Under recovery is only applied to sales,not closing stock, but at the full total for closing stock +sales , so there is a mistake where sales takes ov/und recovery away from closing stock and visa versa, and Opening stock dilutes it all a bit too wrongly.(say sales was only 1, then apply this to any example)

  • d) Pg 150 viggio blu highlight,: for variable costing , if asked for the GROSS PFOFIT, or COST OF SALES BREAKDOWN, do you include fixed mnft costs or EXCLUDE them then?????

Chapter 9 standard costing :

  • a) Pg 345 vig – bottom o page, how do they get Standard = R165 000, shouldn’t it be 1.875X 110000?

  • b) If you have closing stock in a budget ,how do you do the recon for : sales variance: is it mnftr profit less ‘sales variable costs” or [contribution less closing stock less fixed mnftr- costs] .-before you div by units and X by difference in sales volume.?

  • c) From variable &

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TO SCAN IN/DO STILL:

(1) Pg 53/54 example 1 of absorbtion costing. (2) Go through all the 'accountant will recomend ' stuff and summarise well : pg 199 vig top,175/176 vig,180 vig bottom, (3) Scan pg 177 for abc costing + opdrag page before (4) Scan Pg 181 for format of a "costing statement "

(5) Limiting factors calculations for abc costing : pg 186 + 187 vig scan + re-study (6) See page 194 vig and put it all together with the rest of the verbal abc vs absorbtion costing notes in abc costing chapeter in notes.(get 1 good answer to learn – not 100's) (7) CHAPTER 4 variable costing: pg 144 to end of book- do the last 2 headings didn’t finish. (8) Learning curves: scan in some good examples and the text out of textbook to explain better- your explain is not very clear esp. example 1 page 218 viggio (9) Fully integ absorb- get examples & exaplain rught pg 35 vig

(10)

In RECONCILLIATIONS: do a over/under recovery of fixed overheads for Fully Integrated Absorbtion Costing

 

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REM: NOTES SPECIAL THINGS TO

 
 

REMEMBER

 
  • I) (1)SEE PAGE 244 in Viggario book for Quest. + Answers.

II) (3)REM: if they ask :the company gets an order for an extra 100 units, what will a profitable price be for this –it means ONLY FOR THE LAST 100 – not all units,ie the differential/ price. III) If asked to get the profit for extra hundred(not just 'last' –but 'extra') DONT FORGET TO LEAVE OUT FIXED COSTS PER UNIT in your calculations!!!!! It is supposedly already paid by the first few –see pg 244 viggio.

 

I

E:IN MANAGEMENT ACC. IF FIXED COSTS ARE GIVEN IN A BUDGET AS A PER UNIT WORKED OUT

 

COST – IT MEANS THAT THE TOTAL FIXED COSTS HAS ALREADY BEEN DIVIDED UP BETWEEN

 

THE NUMBER OF UNITS IN THAT BUDGET- ANY EXTRA UNITS WOULD NOT SIMPLY INCUR THESE COSTS WITHOUT IT BEING STATED HOW-IE: IF PRODUCTION WOULD THEN AN EXTRA MONTHS

 

RENT UP ETC.SO YOU IGNORE THESE FIXED COSTS FOR ANY EXTRA UNITS PRODUCED.unless

 

told otherwise.

 

2)

REM: NOTE

: if you have to find out the fixed costs for a very large units- ONLY first convert variable costs to

 

3)

single/per unit(because lecturer/book/everyone does this) ,but do not first convert total costs and fixed costs to :per unit- use straight from large amounts because otherwise any- 0.33333 so R0.33 -recurRing fractions will give you wrong ANSWERS.(becuase you cannot get all the recurring parts in) If asked to redraft a budget for a learning curve question, do a full total profit/ costs/fixed/var/ budget and also

a per unit one next to it ,just to show, not just a per unit one even if the first budget was not even shown on paper.

  • a) Also , if they say fixed costs of R50 each for 300 units, thyen for an extra 100 units the fixed costs will not apply, it has already been paid.- so leave fixed out in any calc. for the last 100 units.

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2-TERMS:(VIG CH 1+2)

The Correct Method To Adopt When Looking At Product Decision-Making Is As Follows :

  • 1.1. Identify the main or flag-ship product that the company manufactures.

  • 1.2. Maximise the profit on the main product by maximising production ,sales and contribution.

  • 1.3. Sell other products manufactured by the company only if there is spare capacity.

  • 1.4. Sell other products at a price higher than variable cost.

  • 1.5. One can only Max contribution( using Variable costing) per limiting factor, not max profitability by using ABC or Absorption costing unless you work it out from the start {incl. total activities/total cost drivers=to get cost driver rate} for each price & production level.)

1)

COST RECOVERY RATE.: the rate or basis eg machine hours. at which costs are recovered to a specific eg production dept.

2) BASIS : the rate/basis is the measurement used to allocate costs eg: labour hours or machine hours. 3) COST PLUS BASIS :means you work out the final figure by starting with the cost price and then adding a certain amount or % to it.

4)

LIMITING FACTORS OF PRODUCTION: like a bottleneck at the machine dept – because machines only produce a maximum amount each , or one cannot get more than a certain amount of some raw input product per month etc

INTRO:

1) Management accounting is primarily concerned with producing budgets, setting performance standards, and evaluating performance

2)

Acc sys used for measure costs for profit measurement,inventory valuation ,decision making,performance measurement, control.

COST OBJECTS:

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  • 1. COST OBJECT :Definition:

ANY ACTIVITY for which a SEPARATE MEASUREMENT of COSTS is desired

.

  • a) Eg; cost of a product , of rendering a service to a bank customer ,of operating a particular sales territory or dept.

The Cost Collection System works as such ; it accumulates costs-by assign into categories-eg labour,materials ,overheads.( or by fixed & variable).THEN assigns these costs to cost objects.

DIRECT AND INDIRECT COSTS

THE PRODUCTION POINT OF INDIFFERENCE, :

Where the total cost of a capital-intensive company = the total cost of a labour-intensive company.

ANALYSIS OF THE COMPANIES COST STRUCTURE:

Its fixed costs and contribution per unit.

INVENTORY VALUATION

:(NOTE)

IAS 2 : INTERNATIONAL STATEMENT ON INVENTORIES states that : Firstly, closing stock – work completed but unsold- (??? What About inventories & work in progress???) must be valued at the lower of cost and net realisable value.Inventories are valued at : all costs incurred in bringing to current state – ONLY manufacturing direct and indirect costs-The Costs of conversion of inventories include costs directly related to the units of production,such as direct labour.They also include a systematic allocation of fixed & variable overheads that are incurred in converting material into finished goods.Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation ,maintenance of factory buildings and equipment,and the cost of factory management and administration. However FIXED OVERHEADS are only allocated at the normal production capacity(over anumber of seasons or periods under normal circumstances,taking into account the loss of activity relating to planned maintenance) .If idle plant /low production inventory costs are ONLY allocated at normal prod. Capacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to each product unit is decreased so inventories are not valued at below cost.

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As a result of this accounting definition ,the valuation of stock is carried out on a FIFO or weighted average basis.LIFO is strictly prohibited.

DIRECT COSTS

:

Costs that can be specifically and exclusively identified with a particular cost object. in a desk, maintenance labour in -(cost object maintenance dept)-but NOT

Eg:wood

. Maint.Labour in a –(cost

..

object desk produced).The more direct cost and less indirect costs

=the more accurate the estimate.

INDIRECT COSTS

:

Costs that cannot be identified specifically and exclusively with a particular cost object, but can only be identified

with a a number of depts

..

/cost objects.

CATEGORIES OF MANUFACTURING COSTS. – WITH DIRECT/INDIRECT COSTS.

Direct Materials

Xx

Direct Labour

Xx

Prime Cost

Xx

 

Xx

Manufacturing Overhead Total Manufacturing Cost

Xx

  • i) In manufacturing organisations traditional product costs accumulated as follows – ( developed esp. from/for ext. accounting requirements.

DIRECT MATERIALS

:

Cost of all materials that can be identified with a specific product.eg wood for desk is, but maintenance materials on machine to produce with is not,that is an indirect materials cost.

INDIRECT MATERIALS

:

cannot be identified with any one product, eg:because used for all.eg maintenance materials spares.

DIRECT LABOUR :

can be specifically traced to or identified with product eg:labour assemble product

INDIRECT LABOUR

can not be specifically traced to or identified with product eg:labour maintenance of many different product lines machines.

DIRECT EXPENSE :

NOT labour/materials/overheads/ can be specifically traced to or identified with product eg hiring of machine to produce a specific quantity of a product is a direct expense. (other than /not labour/materials-in this context) anything else in this category would be classed as 'OVERHEADS' –see below.

PRIME COST

= Direct materials+Direct Labour +Direct Expenses.

MANUFACTURING OVERHEAD :

All manufacturing costs exept : Direct materials+Direct Labour +Direct Expenses eg:rent of factory.

COST ALLOCATIONS :

process of assigning indirect costs(overheads) to products- using surrogate ,not direct measures.ALSO – the assigning of eg: rent between mnftring and / non-mnftring depts.

TOTAL MANUFATURING COST

:

Direct materials+Direct Labour +Direct Expenses+Mnfctring overheads

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PERIOD AND PRODUCT COSTS.

1) Because of external fin acc rules in most countries that require that for inventory evaluation

MANUFACTURING COSTS

/or

RETAILER = PURCHASE COSTS + FREIGHT IN

ONLY
ONLY

-should be included in the

calculation of product costs AS WELL AS ONLY costs related directly to the units of production- accountants

therefore classify costs as product costs and period costs.

  • a) BECAUSE OF THIS ONLY the FIFO or weidghted average methods may be used to calc. inventory- NOT

L.I.F.O.-ie. Costs must relate directly to units of production. REASONS CITED FOR THIS:

  • b) Inventories represent a future probable inflow of revenue , period costs(overheads) do not

  • c) Many non-manufacturing costs are NOT incurred when the product is being stored-thus inappropriate to include them in inventory valuation.

INTERNATIONAL STATEMENT ON INVENTORIES states that :Inventories are valued at : all costs incurred in bringing to current state – ????ONLY manufacturing direct and indirect costs- ie: COSTS OF CONVERSION ???????YES OR NO . Includes systematic allocation of fixed & variable overheads. However FIXED OVERHEADS are only allocated at the normal production capacity.If idle plant /low production inventory costs are ONLY allocated at normal prod. Capacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to each product unit is decreased so inventories are not valued at below cost.

PRODUCT COSTS

:

costs identified with goods purchased or produced for resale.-in mnftring is costs attached to product for inventory

valuation of finished goods ,work in progress, matched against sales for recording profits.

OVERHEADS
OVERHEADS

ONLY MANUFACTURING

may be INCLUDED as part of absorbtion costing in the valuation of closing stock.Variable costing

would treat it as a period cost and write it off in period it occoured.(IFRS/etc) =recorded as an ASSET until sold

,then as an expense.(when you 'write out' last inventory count and write in new inventory in the profit & loss statement at year end I THINK? ) ! Product costs= TOTAL MANUFACTURING COSTS =direct labour+dir.material+direct expenses +Mnftring overheads( from last section) NOT eg: distribution+telephone for telesales .as per book exactly: Admin Overheads or selling overheads may never be assosiated with production.

PERIOD COSTS :

costs treated as expenses in the period in which they occoured, BUT NOT included in the cost calc. of inventory valuation.(or /sales/work in progress.)recorded as an expense ONLY,never as an asset! Period costs= eg: sales expenses+ admin +distribution expenses.

RELEVANT AND IRRELEVANT COSTS:

RELEVANT COSTS AND REVENUES

:

Those Future costs and Revenues that will be changed by any specific decision relating to production volume or selling volume.eg: material costs change if choose to produce more

IRRELEVANT COSTS AND REVENUES:

Those Future costs and Revenues that will NOT be changed by any specific decision relating to production

volume or selling volume

..

Eg: rent for factory will not change if higher production or selling volume.

AVOIDABLE OR UNAVOIDABLE COSTS:

AVOIDABLE

=

relevant costs (sometimes used in place of other name)

UNAVOIDABLE

irrelevant costs (sometimes used in place of other name)

INDIFFERENCE POINT

-Don’t know –try find out

INCREMENTAL ANALYSIS

Don’t know –try find out

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OPPORTUNITY COSTS:

1)

OPPORTUNITY COS

T =The cost of a foregone opportunity in favour of having chosen another one :eg . if the

cost of selling a new product is to stop selling another one , the opportunity cost is the rvenue one used to

receive from the old one.

-INCREMENTAL /OR DIFFERENTIAL- AND MARGINAL COSTS

INCREMENTAL OR DIFFERENTIAL COSTS

:

Accountants use this : means the different in total costs for ALL THE EXTRA PRODUCTS WHEREBY the PRODUCTION HAS BEEN INCREASED.

MARGINAL COSTS

:

Economists use this : means difference in costs for ONLY ONE extra product –ie. For each separate new whereby production has been increased.

product

JOB COSTING AND PROCESS COSTING SYSTEMS:

JOB COSTING SYSTEMS

:

Relates to a costing system where all the costs associated with each job could be different for each job completed and , so direct materials and labour are allocated at actual cost and fixed overheads are allocated on a pre-determined cost rate for each separate job.This is also known as a fully integrated absorption costing system. eg. In constructiion industry –where each house could be unique and have a completely different set of costs to other houses.

PROCESS COSTING SYSTEMS

:

The method used to value stock in mnftring where at end of period some of the closing stock is partially manufactured-not all finished yet.

ABSORPTION COSTING AND VARIABLE COSTING:AND STANDARD COSTING.

INVENTORY VALUATION

:(NOTE)

IAS 2 ON INVENTORIES STATES THE FOLLOWING.:

IAS 2 : INTERNATIONAL STATEMENT ON INVENTORIES states that : Firstly, closing stock – work completed but unsold- (??? What About inventories & work in progress???) must be valued at the lower of cost and net realisable value.Inventories are valued at : all costs incurred in bringing to current state – ONLY manufacturing direct and indirect costs-The Costs of conversion of inventories include costs directly related to the units of production,such as direct labour.They also include a systematic allocation of fixed & variable overheads that are incurred in converting material into finished goods.Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation ,maintenance of factory buildings and equipment,and the cost of factory management and administration. However FIXED OVERHEADS are only allocated at the normal production capacity(over anumber of seasons or periods under normal circumstances,taking into account the loss of activity relating to planned maintenance) .If idle plant /low production inventory costs are ONLY allocated at normal prod. Capacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to each product unit is decreased so inventories are not valued at below cost.

Variable Production overheads are those indirect costs of production that vary directly,or nearly directly,with the volume of production,such as indirect materials and indirect labour.

As a result of this accounting definition ,the valuation of stock is carried out on a FIFO or weighted average basis.LIFO is strictly prohibited.

Cost accounting grew out of the need that financial accountants have for financial information ,and gathers and analyses costs for the purposes of :product costing,job costing,stock valuation.

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ABSORBTION COSTING

:

IN EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED

USING ABSORBTION COSTING, ONE MUST QUICKLY CALCULATE THE SAME FIGURES USING VARIABLE COSTING – OR YOU WILL NOT BE ABLE TO DO PROPER COMPARISONS AND WORK THINGS OUT! Due to fixed costs being in there- always take them out and convert to CONTRIBUTION ..

Method used to VALUE

 

any NON-MNFTRING COSTS AT ALL!!!!!!

CLOSING STOCK that includes ALL

MANUFACTURING COSTS-VARIABLE AND FIXED-NOT

((WHICH DOES/can INCL. RENT AND MAINTENANCE per book)

The fixed cost element can be determined by budget or by actual,and is added to all variable mnftring

costs(eg direct material) to get the total per unit product cost for inventory valuation per the IAS definition ( which says ALL MNFTRING COSTS must be included in Inventory Valuation incl. fixed mnftring costs eg:

Maintenance etc.)

ONLY Financial Accounting

uses it.

NOTE: every time production volume changes ,the

. cost per unit will change because fixed costs get divided by a larger /or smaller number now.So it is an

inconvenient method requiring constant raising of under/over recovery charges to balance the figures.The 2 reasons for this is:

1-Actual volume is different to budget volume. 2-Actual manufacturing overhead being different to budget overhead. That is why Management Accounting uses a different method –: called "Variable Costing".

FOR ABSORBTION COSTING THRE ARE 2 WAYS OF VALUING STOCK:1-BUDGET AND 2- ACTUALVARIABLE PLUS FIXED COST OF PRODUCTION. But for variable costing ther are also these

2 ways , exept there it is only VARIABLE COSTS OF PRODUCTION, not fixed and variable in the stock valuation(per book vigario pg14-concl. ALSO, FOR ABSORBTION COSTING THERE ARE 3 POSSIBLE WAYS OF PRESENTING THE INFORMATION IN THE FINANCIAL STATEMENTS. 1-FULLY INTEGRATED ABSORBTION COSTING (BUDGET COST) 2-NON-INTEGRATED ABSORBTION COSTING (BUDGET COST)

3-ACTUAL COST ABSORBTION COSTING.

(all exactly per vig. Pg 14 book!)

IS ABSORBTION COSTING ACCEPTABLE:? NO, because it will distort true company profits due to showing fixed costs as closing inventory costs –you cannot compare 2 periods properly,or budget properly if you use include rent at a pre-determined rate eh R300 per product it will not be accurate if production rises or falls.- it will eg show excessive profits when stock holding is rising ? per book vig pg14. HOW DO YOU MAKE IT ACCEPTABLE:

You explain on any budget that the Per Unit cost can vary by the TOTAL FIXED COSTS AMOUNT

included in the costing eg R500 –at any level above or below the no. of units that the budget was calculated at.

However ,for calculating costs of products in a Job Costing environment, where the costs are used to quote on future jobs eg: Printers , when using absorbtion costing, one must remember that one company allocates fixed costs differently to another one,and there is no right or wrong method to allocate fixed costs really, ie some allocate all overheads, some only admin + management , some only maintenance and depreciation etc.

COST ABSORBTION RATE :

the cost rate at which a group of costs or fixed costs or overheads are charged to a specific product eg:

machine hours divided between no. of products.(it is used by fin . accountants to calculate absorbtion costing system.

FULLY INTEGRATED ABSORBTION COSTING SYSTEM

( OR “FULL” ABSORB.

COSTING SYSTEM)

If the fixed element is pre-determined .So when fixed elements eg: rent+maintenance ,are pre-calculated in the previous years as a per unit cost, from per average normal production levels,so eg R1000 rent / 500products made per mnth= R2 rent per product ;and these amounts are added to normal vriable costseg direct material, to get a (estimated/ avg)total cost per product unit . (NOTE: not all fixed costs need to be allocated as such ONLY mnftring costs MUST BE(WHICH DOES INCL. RENT AND MAINTENANCE per book), other fixed costs eg admin and computer,marketing costs(more 'sales costs' types get left out)can be left out and the system would still be called Fully Integrated absorbtion Costing) ONLY where the fixed cost element is pre- determined though and not based on actual fixed costs ,which is another type of absorbtion costing.The actual amount will differ from the allocated amount though and OVER or UNDER recovery of fixed overhead will occour, which must be balanced by a BALANCING AMOUNT known as the over/under –recovered fixed

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overhead.This amount is included by 'raising a charge' (possibly it's very own ledger account-CRJ/CPjournal) and including it in the Cost of sales breakdown in Income statement for Gross Profit calc. Do NOT ASSUME every company uses fully integrated abs.cost. to allocate costs in order to arrive at the cost of a product.Only companies that have a JOB COSTING environment , require a pre-determined FIXED COST to allocate to FUTURE production.Very few companies will allocate costs to production and service depts. , followed by re-allocation from service depts. to production depts. However , when using absorbtion costing, one must remember that one comapny allocates fixed costs differently to another one,and there is no right or wrong method to allocate fixed costs really, ie some allocate all overheads, some only admin + management , some only maintenance and depreciation etc.

VARIABLE COSTING (OR MARGINAL OR DIRECT COSTING)

IN EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED USING ABSORBTION COSTING, ONE MUST QUICKLY CACULATE THE SAME FIGURES USING VARIABLE COSTING – OR YOU WILL NOT BE ABLE TO DO PRPER COMPARISONS AND WORK THINGS OUT! Due to fixed costs being in there- always take them out and convert to CONTRIBUTION ..

The method used to VALUE CLOSING STOCK using variable manufacturing costs only- fixed costs are written off as period costs.(as per book- fixed mnfrtring costs are charged to the Income statement as an expense for the period.So closing stock is valued on manufacturing variable costs only. Ie: the valuation excludes all mnfring fixed costs.The System is representative of managerial accounting for decision making.

Variable costing is consistent with CVP analysis,ie fixed costs are treated as period costs.(per book exactly)

FOR VARIABLE COSTING ,THERE ARE 2 WAYS OF VALUING STOCK – 1-BUDGET OR 2-ACTUAL.

DIRECT COSTING

.

MARGINAL COSTING

.

STANDARD COSTING:

Another method of VALUEING CLOSING STOCK – but at a pre-determined rate for BOTH VARIABLE AND FIXED COSTS.

(1) STANDARD VARIABLE COSTING : (a) when only pre-determined variable costs are used. (2) STANDARD FIXED
(1)
STANDARD VARIABLE COSTING :
(a)
when only pre-determined variable costs are used.
(2)
STANDARD FIXED COSTING :
(b)
when only pre-determined fixed costs are used.
SUNK COSTS:
SUNK COSTS :

These are COSTS created by a decision in the PAST that cannot be changed by any future decision – or which has a zero value when making future decision: eg:depreciation,or money spent on material that is no longer required/ or sellable.-OR buy a car for 10000, when you sell it the 10000 is sunk cost because selling price depends on what the buyer will pay –it can be above or below 10000 .

RESPONSIBILITY ACCOUNTING :

RESPONSIBILITY ACCOUNTING

:

accounting for a RESPONSIBILITY UNIT -an organisation unit or part of a business for which a manager is reponsible.Revenues & Costs so deviations from performance budget can be attributed to resposible individual.

PROFIT CENTRE

:

same as above :Accountability for profitability of assets placed under a managers control.

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COST CENTRE

:

SAME AS above but AREA or DEPT. for which a manager is responsible.

INVESTMENT CENTRE

:

term defines accountability for profit generation AS WELL AS choices in what will or will not be purchased by way of capital expenditure in running a business.

MAINTAINING A COST DATABASE:

1)

Database to be maintained so relevant cost info can be extracted easily.

2) Need eg: By products, responsibility centres,depts.,distribution channels, + categ. of expense eg direct labour

3)

+ categ. of cost behaviour eg fixed and variable. For cost control and performance measurement:

  • a) Reports by resposibility centre per week/ etc

  • b) Future reports for eg: possible price changes.

  • c) Standards costs stored & used to evaluate

FIXED AND VARIABLE PRODUCTION OVERHEADS : AND COST BEHAVIOUR OF

  • a) Measurements of volume needed to :patients seen-one more patient/day?=costs/revenue/(or units sold ? reduce price to sell more?,or units produced ,guests booked etc)

VARIABLE COSTS

:

vary directly or very nearly directly according to incr./decr. in volume(eg:of production).See chart below : total variable costs are linear/direct and Unit var. cost is constant.

UNITS vs VARIABLE COSTS GRAPH

VARIABLE COSTS : (a) TOTAL

5000 50 4000 4000 3000 3000 2000 2000 1000 1000 0 0 0 100 200 300
5000
50
4000
4000
3000
3000
2000
2000
1000
1000
0
0
0
100
200
300
400
500
Activity Level
TOTAL Variable
Cost

Variable Costs :(b) Per Unit (cost =R 10 per

unit) 40 30 20 10 10 10 10 10 10 1 0 0 100 200 300
unit)
40
30
20
10
10
10
10
10
10
1
0
0
100
200
300
400
500
UNIT Variable
Cost

Activity Level (units of output)

PROFIT vs VARIABLE COSTS GRAPH.

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FIXED PRODUCTION COSTS :
FIXED PRODUCTION COSTS :

basicaly stay constant regardless of volume of production –OVER a specific period of time- (before inflation pushes up input prices etc),but also called ‘long term variable costs’ because over the long term ALL costs are seen a variable-due to inflation etc. eg:rent, municipal rates

UNITS vs FIXED COSTS GRAPH

FIXED COSTS :(a) Total

50 0 0 100 200 300 400 500 Total Fixed Costs Unit Fixed Cost
50
0
0
100
200
300
400
500
Total Fixed Costs
Unit Fixed Cost

Activity Level (no.of units)

FIXED COSTS:(b) unit (supposed hyperbolic!) 1000 500 0 0 2 4 6
FIXED COSTS:(b) unit (supposed hyperbolic!)
1000
500
0
0
2
4
6

Activity Level : Output -no of units produced

PROFIT vs FIXED COSTS GRAPH

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SEMI-FIXED (OR STEP-FIXED COSTS) :
SEMI-FIXED (OR STEP-FIXED COSTS) :

They are fixed in (Relevant Ranges )at specific activity levels :eg at 100 – 5000 products ,-within a specific time period (same as fixed –to exclude inflation etc)- but if production goes above that they change to the next level etc.– usually in steps-

STEP FIXED COSTS

300 250 200 150 100 50 0 0 100 200 300 400 500 Activity Level Total
300
250
200
150
100
50
0
0
100
200
300
400
500
Activity Level
Total Fixed Costs

SEMI-VARIABLE (OR MIXED COSTS)

:

These include both a FIXED and a VARIABLE component eg:maintenance = fixed cost + a variable cost according to amount of activity ; or sales rep. costs =salary + commission per amount of sales. Eg rent= rent +10%gross revenue

RELEVANT RANGE

RELEVANT RANGE

:

A limited level of activity under which costs are analysed as either fixed or variable,eg for production of 1-1000 units, over that another costing structure is used,or another range.

SELLING COSTS

SELLING COSTS

:

relate to sales, written off in period incurred. Eg :commission costs,etc.

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CONVERSION COSTS:
CONVERSION COSTS :

All costs other than Direct Material costs that are incurred in manufacturing a product.The word conversion is normally associated with process costing and refers to all costs exept direct material directly related to the manufacturing process.

ADMINISTRATION Costs:

Administration Costs: treated as a manufacturing overhead only if relate to work being carried out in mnftring process – but in most instances they are written off as a period cost- not mnftr. Cost. Eg: cost of accountant= period cost , cost of person who records all manufacturing processes number produced, materials used etc only in mnftring = manftring admin cost .

HIGH-LOW COST ANALYSIS:

REFERS TO ANALYSIS OF SEMI-VARIABLE COSTS where the var. & fixed. Elements are calc. by analysing incr. in cost in comparison to incr. in prod. Volume.

CONTRIBUTION:

CONTRIBUTION is the SELLING PRICE of a product LESS all VARIABLE COSTS.The term used by Management accountants to describe the incremental profit that a company will make as the company sells one more unit of production.(DOES NOT include FIXED COSTS, ONLY SELLING PRICE – VARIABLE COSTS = contribution, then after that ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Variable costs would include selling,marketing,distribution costs etc,so ALLl variable costs,none are left out. Mngmn acc only concerned with contribution,not profit since incr. sales = incr.contribution where fixed costs stay constant. Means ' Profit contributed toward total profit of firm before fixed costs' so.This happens because fixed costs do not change , but production volume does, so once all fixed costs have been paid by current production volume, any increase in production volume above this results in a higher profit than before the fixed costs were paid for.Thus before fixed profit is paid for , PART OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for, ALL OF THE CONTRIBUTION goes toward profit.

 

SALES

-

Variable Costs (incl.marketing,selling,distrib ution ie: ALL.

=

CONTRIBUTION

-

Fixed Costs

=

PROFIT

BUDGET:
BUDGET:

A budget is a quantitative analysis of a plan or corporate action.It is intended that production/sales etc be co- ordinated by various depts. to achieve expectations about future income/cash flows/fin pos , fin perf and supportin plans.

“STANDARD HOURS PRODUCED”:

-“– is the time it takes to produce one product ,used as a common denominator to divide up costs into different products.

“STANDARD PROFIT STATEMENT”:

This is an income statement , using pre-determined standard cost rates , showing what profit we can expect from a given sales volume.The volume is usually estimated from known sales and production capacity, but could also just mean the volume for the flexed budget, when using standard costing.

STATIC BUDGET

The plain original realistic budget for the year drawn up at beginning of year.

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FLEXED BUDGET

Standard Budget : The budget the is drawn up using the ACTUAL sales VOLUME, but with the original costs from the Original Budget, not the Actual Costs. This can then be compared to the actual Income statement to see what the difference in each cost was once converted to the actual sales level.

BILL OF MATERIALS

A list of all the actual materials needed to manufacture a specific product. Does not include labour/overheads etc. like the ‘Standard Cost Card.’

STANDARD COST CARD

Card with the costs of all the Inputs used to make 1 output product.(That should (actual) be used to produce a product.)1 card is kept for each different product made. (-historical cost -not a goal type cost).Nowdays on computer.

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3-OWN NOTES RECONCILLIATIONS : ANY
AND ALL TYPES POSSIBLE.
1.
Pages with recons:
a.
Bottom pg 46 viggio
b.
2.
Remember you one can be a few rands out with a Recon. Of Explanation of Over/Under Recovered
overhead due to different(wrong) (amount/hours=rate ) for one or other cost driver in BUDGET as opposed
to ACTUAL.One calls it "Rounding Off"- just write in the list of the calculation in order to balance the
reconcilliation properly – at approximate place where it is relevant : Rounding Off -R20 on page 55 in
viggio
3.
RECON OF OVERHEADS: you start at allocated (namely Actual Amount. ), not budget ,so if you sold more
you start there Pg 54 bottom viggio.
4.
EXAMPLE OF A RECON: ??? yet to be classified ….
5.

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1-CHAPTER 1 :INTRODUCTION

(drury ch1)

The Correct Method To Adopt When Looking At Product Decision-Making Is As Follows :

  • 1.6. Identify the main or flag-ship product that the company manufactures.

  • 1.7. Maximise the profit on the main product by maximising production ,sales and contribution.

  • 1.8. Sell other products manufactured by the company only if there is spare capacity.

  • 1.9. Sell other products at a price higher than variable cost.

DEFINITION OF ACCOUNTING ( USA ACC. ASSOCIATION)

  • a) Process of identifying ,measuring and communicating economic info to permit informed judgements + decisions by users of

  • b) Objective of Fin Acc :generate info ext. users use to make decisions about investment in company + analyse how company is performing.

USERS OF ACC INFO:

Fin Acc :External reporting /Ext users Mngmt Acc: Internal reporting /Int Users USERS:= MNGMT , SHAREHOLDERS , EMPLOYEES , CREDITORS + LOAN PROVIDERS , INVESTORS ALSO: Private Individuals ,Non-profits eg church , Companies

DIFFERENCE BETWEEN MNGMT AND FIN ACC.:

  • a) Legal Requirements

: Fin Acc ( ie:fin stats) are legally required

: Mngmt Acc IS NOT legally req.

;

  • b) Focus on Individual Parts :Fin Acc : reports generated on WHOLE ; : Mngmt acc : reports generated on SEGMENTS

  • c) GAAP

  • d) Time Dimension

  • e) Report Frequency

f)

Users

:Fin Acc: Uniformity must according IFRS/usa-fasb/uk asb ; :Mngmt acc NOT REQUIRED

:Fin Acc:

PAST ONLY

:Mngmt Acc: FUTURE & PAST

:Fin: Annual & less detail Semi-annual :Mngmt: Daily/Weekly/mnthly etc

:Fin:

Ext

:Mngmt: Int.

(+ int you say)

THE DECISION MAKING PROCESS:

1)

Identify Objectives :

i)

Maximise Pres.Value. of future net cash flows.

ii)

Social Goals

iii)

Security.

2)

Search for Alternative Courses of action

i)

SWOT /opportunities+threats eg:new products to a New Market or products to an Old market

 

3) Gather Data about Alternatives

 

i)

States Of nature for each eg boom or recession /inflation

ii)

Used for (1) Short term Decision ::Price / Media to use in advert etc. (2) Long term decision : Product to sell /machinery to use

4)

Select Appropriate Course of action

5)

Eg: based on difference in cash flows ( profitability) Implement Decisions

i)

i)

In the form of a budget mostly

6)

Compare actual and planned outcomes ( Master budget)

i)

Performance reports /from feedback

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ii)

To facilitate management by exeption.

INFLUENCE OF CHANGING COMPETITIVE ENVIRONMENT ON MNGMNT

ACC. PRACTICE

1)

Pre- 80's No Incentive for Efficiency/costs/ Mngmt practice

2) Post 80's Globalisation competition caused

  • a) Innovative products

  • b) Changing Product Life Cycles – (needs flexibility)

    • i) From initial expense on research /develop to time customer support is withdrawn

ii) Increasing: sophistication+discriminating customer demands ;tech innovation ;global compete iii) Many costs are locked in by decisions at design stage –THUS mngmt Acc is used to cost optimise at the design stage iv) Reduce time to market of new + modified products,adapt to changing customer requirements

  • c) High Quality

  • d) At low Cost

  • e) First Class Customer Service c

  • i) How a value chain works to explain below diagram (1)Research and development -2 Design-3- Production 4- marketing 5- Distribution 6- Customer Service

ii)

KEY SUCCESS FACTORS: KEY SUCCESS FACTORS: 1-Cost 2-Quality:eg:tQM=customer 1-Cost 2-Quality:eg:tQM=customer Efficiency:Costing Efficiency:Costing accurate accurate orientate orientate
KEY SUCCESS FACTORS:
KEY SUCCESS FACTORS:
1-Cost 2-Quality:eg:tQM=customer 1-Cost 2-Quality:eg:tQM=customer Efficiency:Costing Efficiency:Costing accurate accurate orientate orientate ,no ,no process-continuous under process-continuous under or or over over costing costing improve,stats+all improve,stats+all loose loose customers+profits, customers+profits, processes processes
3- Time:Cust. Demand speed - Mngmnt Acc do time based measures eg cycle time= time from
3- Time:Cust. Demand speed - Mngmnt Acc do time based measures eg cycle time= time from
start to finish of product= process time +move time+wait time+inspect time –where eg:non-value
start to finish of product= process time +move time+wait time+inspect time –where eg:non-value
add activities be eiminated to decrease .(all exept process time)
add activities be eiminated to decrease .(all exept process time)
4-Innovation:ability 4-Innovation:ability to to adapt adapt to to changing changing customer customer requirements requirements –flexibility –flexibility
5-Reliability
5-Reliability
CONTINUOUS
CONTINUOUS
IMPROVEMENT:
EMPLOYEE
IMPROVEMENT:
EMPLOYEE
CUSTOMER
1- Mngmt acc supports this
EMPOWERMENT
CUSTOMER
1-Mngmt acc supports this
1-Empowering EMPOWERMENT is giving
SATISFACTION
by identify ways to
SATISFACTION
employees 1-Empowering closest is to giving the
by identify ways to
employees closest to the
as TOP
action /customer authority
improve and then report
as TOP
action /customer authority
improve and then report
to improve processes/
PRIORITY
to improve processes/
on progress
PRIORITY
approaches.
on progress
approaches.
TOTAL VALUE-CHAIN ANALYSIS
TOTAL VALUE-CHAIN ANALYSIS
1-Co-ordinating all parts of chain to work as a team to improve cost
1-Co-ordinating all parts of chain to work as a team to improve cost
efficiency , reliability and delivery
efficiency , reliability and delivery

iii) Social Responsibility and Corporate ethics also form part of customer satisfaction

  • f) Greater Product variety

New replaced old BY:

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  • a) Just in Time Production Systems

  • b) AMT : Advanced Manufacturing Systems

3) Service Industries :( esp large eg financial or airlines)

  • a) Pre-80's : Monopolies with barriers /or Govt.

  • b) Post 80's : Deregulation + Privatisation caused :

    • i) Before NOT costing of individual services , now COSTING PRESSURE causes costing of individ. Services TO REDUCE COSTS (before easy to pass on cost , now not)

IMPACT OF I.T./COMPUTERS MNGMT ACC.

1)

E-business ,e-commerce, internet commerce

2) Derive cost savings from eg; paperless airline tickets,internet banking 3) ERPS: Enterprise resource planning System : eg SAP/Baan/Oracle/J.D.Edwards.= all business function streamlined in one info system – real time info manager/ one database / single data entry(no duplication)

4)

For Mngmt Acc it means no reason to ask mngmnt acc for reports,just push button instead ,but limits ability to produce locally relevant info.Now to avoid redundancy accoubtants must concentrate more on provide a

supportive/ interpretative/advisers/internal consultants. –THEY SPEND MORE TIME

ANALYSING
ANALYSING

DATA NOW -

INTERNATIONAL CONVERGANCE OF MNGMNT ACC.

1) Generally Mngmnt Acc is standardised throughout industrialised countries-esp. on macro level (overall sys)

FUNCTIONS OF MANAGEMENT ACCOUNTING:

1) A Management and Cost accounting System should generate info. to meet the following requirements:

 
  • a) between

Allocate costs

 

GOODS SOLD

and

INVENTORIES

for

INTERNAL and

EXT.
EXT.

PROFIT REPORTING

 

i)

Match costs to revenues per year/mnth etc. /Get inventory value / costs

 

Provide

  • b) RELEVANT INFO

. to

HELP MANAGERS

mage better decisions.

 
 

i)

A-routine reports all for Resouce allocation+product mix/discontinuation decision etc.

 

ii) B-non-routine – strategic decision eg: new machinery investment / negotiate long-term contracts etc

  • c) Provide info. on

PLANNING ,CONTROL ,PERFORMANCE MEASUREMENT ,and CONTINUOUS IMPROVEMENT

.

 

i)

In form of BUDGETS.

 

2) COST ACCOUNTING : definition: concerned with

cost accumulation for inventory valuation

to meet

requirements of ext. reporting & int. profit measurement.

 
  • a) OBJECTIVE OF COST ACC.:cost acc gathers + analyses costs for purpose of :

 
 

i)

Product costing

 

ii) Stock valuation /costing

iii) Job costing

3) MANAGEMENT ACCOUNTING : definition: provision of

appropriate info. for DECISION MAKING , PLANNING ,CONTROL and EVALUATION. / provision of info. to internal
appropriate info. for DECISION MAKING , PLANNING
,CONTROL and EVALUATION. / provision of info. to internal users to help them to make better decisions and
improve the efficiency and effectiveness of operations.

4) NOTE : in many organisations database is originally designed for fin acc, not mngmnt acc, and still in use.!

HISTORY OF MANAGEMENT ACCOUNTING.

1) Most of practices used today from before 1925 -industrial revolution.

2)

In 1980s- crisis due mngmnt acc not developed enough to be useful to then.Since 1980 major development to

now.Now it is seen as useful enough.

 

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CH6-CHAPTER : COST CLASSIFICATION

 
 

AND ESTIMATION : ch6 viggario book

 

REM/ NOTE FOR EXAMS : COST CLASSIFICATION CHAPTER

2) Exams ask:

  • I) (1)SEE PAGE 244 in Viggario book for Quest. + Answers.

II) (3)REM: if they ask :the company gets an order for an extra 100 units, what will a profitable price be for this –it means ONLY FOR THE LAST 100 – not all units,ie the differential/ price. III) If asked to get the profit for extra hundred(not just 'last' –but 'extra') DONT FORGET TO LEAVE OUT FIXED COSTS PER UNIT in your calculations!!!!! It is supposedly already paid by the first few –see pg 244 viggio.

4)

 

I

E:IN MANAGEMENT ACC. IF FIXED COSTS ARE GIVEN IN A BUDGET AS A PER UNIT WORKED OUT

COST – IT MEANS THAT THE TOTAL FIXED COSTS HAS ALREADY BEEN DIVIDED UP BETWEEN

 

THE NUMBER OF UNITS IN THAT BUDGET- ANY EXTRA UNITS WOULD NOT SIMPLY INCUR THESE COSTS WITHOUT IT BEING STATED HOW-IE: IF PRODUCTION WOULD THEN AN EXTRA MONTHS

RENT UP ETC.SO YOU IGNORE THESE FIXED COSTS FOR ANY EXTRA UNITS PRODUCED.unless

 

told otherwise.

 

REM: NOTE

: if you have to find out the fixed costs for a very large units- ONLY first convert variable costs to

 

single/per unit(because lecturer/book/everyone does this) ,but do not first convert total costs and fixed costs to :per unit- use straight from large amounts because otherwise any- 0.33333 so R0.33 -recurRing fractions will give you wrong ANSWERS.(becuase you cannot get all the recurring parts in)

1) COST CLASSIFICATION

  • I) Costs are classified as

(1)

FUNCTIONAL COSTS:

OR

 

Used mainly for EXTERNAL REPORTING , costs classified as per function , into eg: departments etc. ,like ‘manufacturing’ or ‘administration’.

(2)

BEHAVIOURAL COSTS:

 

Used for INTERNAl REPORTING/ DECISION MAKING like to evaluate a product division.Behavioural costs refers to the way costs change in relation to changes in the volume of activity. : Eg fixed or variable costs. So if mngmnt want to close a division, they will want to know which detailed costs will be eliminated, and which partially eliminated etc.

FIXED AND VARIABLE PRODUCTION OVERHEADS : AND COST BEHAVIOUR

OF

  • i) Measurements of volume needed to :patients seen-one more patient/day?=costs/revenue/(or units sold ?reduce price to sell more?,or units produced ,guests booked etc)

VARIABLE COSTS

:

Vary directly or very nearly directly proportionaly to incr./decr. in activity/VOLUME(EG:OF PRODUCTION).See chart below : total variable costs are linear/direct and Unit var. cost is constant.

Total Fixed Costs

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VARIABLE COSTS : (a) TOTAL

5000 50 4000 4000 3000 3000 2000 2000 1000 1000 0 0 0 100 200 300
5000
50
4000
4000
3000
3000
2000
2000
1000
1000
0
0
0
100
200
300
400
500
Activity Level
TOTAL Variable
Cost

Variable Costs :(b) Per Unit (cost =R 10 per

unit) 40 30 20 10 10 10 10 10 10 1 0 0 100 200 300
unit)
40
30
20
10
10
10
10
10
10
1
0
0
100
200
300
400
500
UNIT Variable
Cost

Activity Level (units of output)

FIXED PRODUCTION COSTS

:( OR ‘LONG TERM VARIABLE COSTS’)

Basicly stay constant regardless of VOLUME OF PRODUCTION –OVER a specific period of time- (before inflation pushes up input prices etc),therefore also called ‘long term variable costs’ because over the long term ALL costs are seen a variable-due to inflation etc. eg:rent, municipal rates REM: watch for over how many units your fixed costs are written off- to be sure any units after that are costed excluding fixed costs – for quotations etc .Also watch when they are re-activated eg new periods rent etc. for further costing.

FIXED COSTS :(a) Total

50

   
 

0

0

100

200

300

400

500

Activity Level (no.of units)

FIXED COSTS:(b) unit (supposed hyperbolic!)

1000 500 0 0 2 4 6 Unit Fixed Cost
1000
500
0
0
2
4
6
Unit Fixed Cost

Activity Level : Output -no of units produced

SEMI-FIXED (OR STEP-FIXED COSTS)

:

They are costs that are fixed in (Relevant Ranges )at specific activity levels :eg at 100 – 5000 products ,-within a specific time period (same as fixed –to exclude inflation etc)- but if production goes above that they change to the next level etc.– usually in steps-

STEP FIXED COSTS

300 250 200 150 100 50 0 0 100 200 300 400 500 Activity Level Total
300
250
200
150
100
50
0
0
100
200
300
400
500
Activity Level
Total Fixed Costs

MIXED COSTS (OFTED REFERRED TO AS SEMI-VARIABLE COSTS ,BUT WE

CALL IT MIXED)

 

These include both a FIXED and a VARIABLE component eg: maintenance = fixed cost for permanent labour? + a variable cost according to amount of activity(spares used) ; or sales rep. costs =salary + commission per amount of sales. Eg rent= rent +10%gross revenue MOST INDIRECT COSTS (incl labour costs) exhibit mixed costs characteristics.

Variable Costs

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600 500 400 300 200 100 0 0 200 400 600
600
500
400
300
200
100
0
0
200
400
600
+ VARIABLE FIXED
+ VARIABLE
FIXED

SEMI-VARIABLE COSTS (NOT ALLWAYS SAME AS MIXED COSTS,BUT VISA

VERSA TRUE)

 

COSTS that increase with production,BUT NOT ON A PROPORTIONATE BASIS. Classified into:

  • (a) costs that increase at an INCREASING RATE

  • (b) costs that increase at a DECREASING RATE. (often called LEARNING CURVE COSTS)

Costs that increase at an INCREASING RATE VARIABLE COSTS 0 0 200 400 600 Activity Level.
Costs that increase at an
INCREASING RATE
VARIABLE
COSTS
0
0
200
400
600
Activity Level.

600

500

400

300

200

100

Costs that increase at a DECREASING RATE (also sometimes just called 'LEARNING CURVE COSTS') 400 VARIABLE
Costs that increase at a
DECREASING RATE (also sometimes
just called 'LEARNING CURVE COSTS')
400
VARIABLE
200
COSTS
0
0
200 400
600

Activity Level.

HOW TO SEPARATE THE FIXED AND VARIABLE PART OF MIXED COSTS :

NORMAL METHOD.

1)

.

WARNING !:

You ONLY EVER calculate the TOTAL FIXED COSTS spent per period , NEVER the per unit fixed

cost for any calculations with this method- OR you will definitely get wrong answers!!!!

2)

METHOD: You just work out the increase between any 2 levels of production (in a single RELEVANT RANGE) of by how much the costs increased for each /per single unit per any number of production units increase.This is the VARIABLE COST COMPONENT – because the fixed costs component does not change at all, so only the var. costs will have changed for any increase in units produced etc(marginal increase).-! REM: specify 'only per relevant range' in your answer.

  • a) After you have the variable component you can now find the fixed component.REMEMBER; fixed costs can

 

NEVER BE COMPARED ON A PER UNIT BASIS.

WARNING !:

You ONLY EVER calculate the TOTAL FIXED

COSTS spent per period , NEVER the per unit fixed cost for any calculations with the high low method-

OR you will definitely get wrong answers!!!!

 
 
  • b) Then, to get the fixed costs after this , the fixed cost component is calculated by taking any 1 single level of production eg : at 60000 units in below example, and subtracting the (no. units X variable cost) from the total cost for the period for that item eg for direct materials.so you end up subtracting the total variable cost from the total total cost and get the total fixed cost!

3)

Allways do the breakdown of costs to calc. variable costs in the standard format as shown in first table below.

REM: NOTE

: if you have to find out the fixed costs for a very large units- ONLY first convert variable costs to

single/per unit(because lecturer/book/everyone does this) ,but do not first convert total costs and fixed costs to :per unit- use straight from large amounts because otherwise any- 0.33333 so R0.33 -recurRing fractions will give you wrong ANSWERS.(because you cannot get all the recurring parts in)

4)

Note: below ,remember that the fixed costs REMAIN THE SAME, so they are all there anyway in the figures below.Only the variable costs can change AT ALL EVER, the fixed costs just stay, no matter what the units produced is.So any marginal can only be ‘variable costs’.That is the logic.

5) Example: You are given following cost budget at 2 levels of activity:Required: determine fixed & variable levels of activity.

 

COST BUDGET

   
     

MARGINAL

VARIABLE Per Unit Costs

(Differential Units =A-minus-B)

(Tot. Price/Tot.Units=

 

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change per unit)

 

UNITS produced:

60000

80000

80000-60000= 20000

.

R

R

R

 

R

 

R

Direct Materials

600000

800000

=(800000-600000)=200000

200000/20000=R10 per unit

Labour

400000

500000

=500000-400000=100000

100000/20000=R5 per unit

Production Overheads

380000

440000

=440000-380000=60000

60000/20000= R3 per unit

Rent

120000

120000

0

0/0=0 per unit

 

Power

200000

260000

=60000

60000/ 20000=R3 per unit

ANSWER Cont. TO SHOW THE FIXED COSTS AS WELL you basicly now do a Full analysis of costs worksheet for CVP

 
 

Units

 

Unit Total Cost LESS

Per Unit Fixed Costs

Variable

variable costs at that

Cost(from

level(use any level-say

above)

 

60000)

 
 

Remember: FIXED costs

 
 

cannot be worked out for a

 

PER UNIT basis–only as a

 

“total value” per relevant

 

range

 

Direct Materials

R10

600000 –(60000*10)=

 

0

Labour

R5

  • 400000 –(60000 * 5)

 

100000

Production Overheads

R3

  • 380000 –(60000 * 3)

 

200000

Rent

R0

120000-(60000 *0)

 

60000

Power

R3

200000-(60000 *3)

 

20000

 
 

HIGH-LOW ANALYSIS -METHOD

 

:IDENTIFICATION OF FIXED & VARIABLE

COMPONENTS.

1)

WARNING !:
WARNING !:

You ONLY EVER calculate the TOTAL FIXED COSTS spent per period , NEVER the per unit fixed

cost for any calculations with the high low method- OR you will definitely get wrong answers!!!! This is a very simple method, and not very accurate because only 2 values are used, not all the values like some other mathematical methods.Very commonly well known method.Managers sometimes use very simple

methods to estimate cost functions- 2) The high / low method is used where MULTIPLE cost differences are given for MULTIPLE LEVELS OF PRODUCTION eg: values at 100,300,500,700 etc etc -not where just 2 levels are given eg:at 30 units and 100 units, as in previous Standard Method & example. 3) – METHOD: Simply Take the HIGHEST and LOWEST values of the COST DRIVER (some books use costs

4)

instead)(eg:a cost driver is = total.units -NOT total.cost- ) and use these as the 2 different values , then carry on as in Normal Standard method above.–ie subtract low from high and carry on as in Normal Standard method above. Note ‘units produced’ or any other cost driver could also be used as the COST DRIVER in a high-low method ,

5)

to calculate any similar type of exercise , it does not have to be ‘units produced’. Cost function is y=a+bX ,so differential costs/(diff.cost driver ???? whats this)= slope=b.,any of high or low can

be used to compute constant from here ('because both equations are linear with 2 unknowns-slope+constant-as per book' !). So

6)

fixed is =a ,and X = cost driver eg machine hours or units produced. PROBLEMS WITH HIGH/LOW METHOD.:

  • a) Highest & Lowest values may not be representative of entire population.

  • b) The 2 values may be outliers(extremes – not part of average).

  • c) Ignores all other values (not like regression analysis,which dos'nt)

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THIS method only works in IN RELEVANT RANGE – not out of rel. range .eg:idle plant. One CANNOT use a value that came from an idle plant where it is exceptionally low , because this will not be an accurate value to base a calculation on-_ie there was no real production taking place.So it would be wise in real life to also check the line on the graph of the plotted values of all values given to choose from, and look for outliers or stepped fixed costs or relevant ranges before using high-low method NOTE: sometimes another 2 values are chosen which are more representative if managment suspects outliers/non-representative BUT for exam , unless specifically mentioned, just use the highest and lowest values.

THE LEARNING CURVE

:

1) This is a method to calc. how much faster it gets to produce units as workers get more experienced.It is only quoted as a percentage % -all else works from or around this %.Time decreases exponentially and learning continues at same rate till conditions change or a steady state is reached.

1-CUMULATIVE AVERAGE TIME-LEARNING MODEL.

1)

The whole formula works in a funny way- the % quoted as the learning curve ONLY applies to the time it takes to DOUBLE the production from one level to another.(stats type maths funny thing).IF you multiply this % by a time taken for the first unit ever made – it gives you :NOTE FUNNY THING:

the average of 1 st unit +2 nd +3 rd +4 th / 4 =average time per unit.(and that includes the extra in 1 st +

little less extra in 2 nd ...

to

end.SO IT DOES NOT GIVE YOU THE EXACT TIME TO PRODUCE THE VERY

LAST UNIT – YOU MUST MULTIPLY THIS ANSWER BY THE nth value of unit-eg: No.16 th unit so multiply answer from (% X learning curve) by 16 and then if you could do the same for unit no 15,which is difficult because it only works in “doubles”, then If you could subtract final figure for 15 th from 16 th - you now get the exact time how long unit 16 actually took(true MARGINAL time).The first

figure from the learning curve % is thus just an average of TOTAL TIME TO NOW / final unit you land

on eg :16th etc.

ALSO :To get in-between % of say 3 units- between 2 & 4 –you must??? (1) Make

2)

a Graph –read off. (2) try use algebra mathematical model instead BATCHES: because factory production is mostly in batches,if you get ANY QUESTIONS QUOTED IN BATCHES of eg:100 units –DO NOT CONVERT TO SINGLE UNITS – all answers get done per batches(as if each batch is a single product) and learn.curve %'s only apply to each full batch.

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Example : using 80% learning curve : 40hrs to make first unit
½ way MARGINAL
times
Units
Learning
Produce
Curve %
n
Productio Cumulativ
:for last e
Average
Total
Total
Average Note : this
Time (per
Time (all
Time (last Unit
marginal is
d
half of
total units .
Production unit)
units)
made
½ of total
units
made)
Time(pe cockeyed – it
r each
of last
half of
total
units
made)
is only for
the last ½ of
units made ,
an average
for them
only
1
100%
1
1
40
40
40 40
2
80%
1
2
80%*40=32
32
64-40=24 24
(Or 40*80%)
X2=64(note)
3
4
64%(80*80) 2
4
32*80=25.6
25.6*4=102.4
102.4-
19.2
38.4/2=19.2
(Or 40*64%)
64=38.4
5
6
7
8
51.2%(64*8 4
8
25.6*80%=20. 20.48*8=163.
163.84-
15.4
61.44/4=15.
0)
48
84
102.4=61.4
4
(Or
4
40*51.2%)
16
40.96%
8
16
20.48*80%=
262.14
98.3
12.3
98.3/8=12.3
(51.2*80 %)
16.384
(Or40*40.96
%)
Previous
AverageTime
Current
Previous
Average X
.X
multiply
Total Time
column
80%
Cumulative
–minus
divided
(Or new
learning
curve * hours
for 1 st one
ever made)
Production
Previous
by
KNOWN
Number
Total Time
of units
in this
last half
of TOTAL
units
made.

3) MATHEMATICAL ALGEBRA FORMULA FOR LEARNING CURVE:(use esp.to work out between doubles ie: 3,5,6 etc.)

  • I) y=ax b

II) y= cumulative average time /unit when x units are produced (ie: it gives you avg. time per unit as an answer,same as the answer you get when you multiply {learning curve % by hours taken sort of thing}) III) a=time to produce first unit

IV) x= cumulative number of units produced (eg:d if you want to know avg. time ea. For for 15 units, then x=15)

  • V) measure or learning (where b = log % / log 2 )rem: on calculator 80% =0.8 NOTE )
    a)

VI) NOTE: to get b – you do it on calculator : b= log (learning%as decimal) / div by / log (2)

VII)

Use this formula esp. to work out between doubles ie: for number 3,5,6 etc.)

VIII)

You can use it to make a % TABLE for units 1-200 etc where each no.of units has a simple % next to it to use.

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B-INCREMENTAL UNIT-TIME LEARNING MODEL:

1)

THIS method works exactly the same as the other model, incl. the formula exactly ,exept that the

final figure one gets for the answer eg: 30,5 hours for 4 units , IS NOT THE AVERAGE TIME per unit , but the marginal time for only the last one .If you want to calc. the average time from this, to compare to other method – you must add all the cumulative values to here- from unit 1 upwards- then divide by the no. of units of course. 2) TO CHOOSE BETWEEN 2 MODELS : Each industry different – so best to study workflow and make graphs – then compare answers between 2 models to find the one that fits best to that industry.This model will only differ in some weird exponential / type way from first.

C-USE OF MODELS.

These models can can also be used to measure quality betterment instead of production increment.Other factors , other than time that the workers have been learning the job , also contribute to quality eg:job rotation & divide workers into teams.

 

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4 CHAPTER :COST –VOLUME PROFIT

 
 

ANALYSIS ch. 7 in vigario book

 

1. ECONOMIST VS ACCOUNTANTS VIEW

1) The economists view is different from the accountants view for following reasons:

  • a) Economists view whole range of activity 0- end behave in a linear relationship.

Accountants view only relevant range where costs

  • b) Economists assume info.on price, cost, volume is available all levels activity , Accountants assume limited availability of this info , and linearity over relevant range.

  • c) Economists view is EXPOSITIONAL , Accountants view is PRACTICAL.

ECONOMISTS VS ACCOUNTANTS COST-VOLUME-PROFIT GRAPH. :

ECONOMISTS GRAPH:

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  • a) TOTAL REVENUE LINE IS CURVILINEAR : Firm cannot increase sales by holding selling price constant- thus total revenue will be max where slope is zero(starts to fall as sales volume increase) or marginal revenue from n'th sale = zero.

  • b) INCREASING AND DECREASING RETURNS TO SCALE :Costs at start (A-B) increase direct linear (normal increase) then (B-C) as bulk buy discounts & division of labour kicks in , costs level out (decrease ) then (C- end) costs increase sharply again due to bottlenecks & production beyond normal capacity.

  • c) Note : there are 2 break –even points for econ. View. ,profit max where distance between cost/revenue lines is greatest. ACCOUNTANTS GRAPH.

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  • i) CONSTANT FIXED COST LINE :Assumption that costs are constant in relevant range only

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ii)

CONSTANT VARIABLE COST & SELLING PRICE /UNIT: these 2 are also constant in relevant range – because range is small.(sales increase from promotion etc)\

iii) This is representative of a VARIABLE COSTING SYSTEM method.

C.V.P. ANALYSIS. (COST-VOLUME-PROFIT.)

ASSUMPTIONS OF CVP ANALYSIS:

  • i) All other variables remain constant (when you calc. change from another variable) Profits calc. on the variable/direct costing basis.

ii)

iii) Assumes a short term (normally 1 year) planning period – ie inflation/ market changes are not worked in. iv) A single product or constant sales mix exists.

BREAK-EVEN ANALYSIS:

The number of units that must be sold to break even = Fixed Costs / Contribution.

TARGET PROFIT:

If a company requires a certain profit during a period- we must determine whether it is fixed or varies with each unit sold.If profit required is fixed we treat it in same way as fixed cost – if variable we treat it in same way as a variable cost.

CONTRIBUTION :

CONTRIBUTION is the SELLING PRICE of a product LESS all VARIABLE COSTS.The term used by Management accountants to describe the incremental profit that a company will make as the company sells one more unit of production.(DOES NOT include FIXED COSTS, ONLY PRICE – VARIABLE COSTS = contribution, then after that ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Mngmn acc only concerned with contribution,not profit since incr. sales = incr.contribution where fixed costs stay constant. Means ' Profit contributed toward total profit of firm before fixed costs' so.This happens because fixed costs do not change , but production volume does, so once all fixed costs have been paid by current production volume, any increase in production volume above this results in a higher profit than before the fixed costs were paid for.Thus before fixed profit is paid for , PART OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for, ALL OF THE CONTRIBUTION goes toward profit.

 

Change in Variable Costs

 

Divided by

Change in SALES VOLUME

=

CONTRIBUTION per unit

 

OR

Total Sales revenue

less

Variable Costs

=

CONTRIBUTION

-

Fixed Costs

=

PROFIT

MARGIN OF SAFETY:

  • a) Difference between :

Budgeted Sales Volume MINUS Break-Even Sales Volume.

  • b) Sometimes Expressed as % of Budgeteted Volume or Budgeted Revenue.

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KEY RATIOS FOR CVP

%
%

(PV RATIO) PROFIT VOLUME RATIO: ( OR ALSO CALLED ‘CONTRIBUTION MARGIN %’ )

= Contribution / Sales.

=0.abxy or ( * 100/1= ab.xy %) TO 4 decimal places OR to 2 decimal

places for

PROFIT RATIO

=Profit / Sales

=0.abcd or ( * 100/1= ab.cd %) TO 4 decimal places OR to 2 decimal places for %

(B/E SALES) BREAK-EVEN SALES REVENUE:( NOT A RATIO)

=Fixed Expenses / PV Ratio

= Rands ,2 decimal cents.

REM: FIXED expenses is NEVER just the totals that do not change –you must FIRST CHECK EVERY TOTAL eg: labour-MATERIALS-OVERHEADS ETC FOR THE FIXED PART AND VAR. PART BEFORE you calc. the total fixed costs.

BREAK-EVEN SALES VOLUME:( NOT A RATIO)

=Fixed Expenses / Contribution

per unit
per unit

. =

units
units

(round- off unwards only –ie: per unit)

MARGIN OF SAFETY RATIO

Sales - (B\E Sales revenue ) / Sales

=

=0.abcd

or ( * 100/1= ab.cd %)

TO 4 decimal places OR to 2

...

depends on needs)

decimal places for %

{sales means budget sales revenue. –but could also be actual

OTHER TYPES:

  • 1.1. contribution ratio = marginal contribution/marginal sales

  • 1.2. variable cost ratio

= marginal variable costs / marginal sales

ABBREVIATIONS FOR RATIO’S ETC:

(1) FC -fixed costs (2) VC -variable costs (3) SP -selling price (4) OP - operating profit???? (5) UCM -unit contribution margin IE: contribution per unit (6) UVC -unit variable costs :the variable costs per unit. (7) USP -unit selling price : the selling price per unit

ANALYSIS OF COST STRUCTURE USING CVP PRINCIPLES : ( OF A COMPANY)

  • 2. If sales ‘NUMBER OF UNITS’ not given –do the same ‘analysis spreadsheet’ but calculate ratios TO FIND ANSWERS instead of using the per unit cost to calculate them:

    • 2.1. ie: contribution ratio = marginal contribution/marginal sales

    • 2.2. variable cost ratio

= marginal variable costs / marginal sales

  • 2.3. Use the var cost ratio to find fixed & var. costs from sales – then you can firn break-even sales volume etc etc from here.

  • 2.4. Use the contribution & var. cost ratios to also find increase in sales effect on contribution etc etc. IF NO UNITS OF PRODUCTION ARE GIVEN

ii)

REM: if selling price goes up by 10% -you cannot just * profit by 10% to get new answer- because fixed cost : var. cost ratio will stuff it up.You must first * ‘contribution’ by 10% then subtrACT fixed costs to get new profit.

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METHOD: FORMAT OF SPREADSHEET FOR: FULL YEAR FINAL ANALYSIS

VIGGARIO PAGE 247

  • i. Simply divide costs up into a spreadsheet of 4 columns with totals at bottom(see where to write names):

    • a. Names/itemised

    • b. all Variable costs PER UNIT/ea – Not Totals

    • c. PER TOTALS – Not per Unit/ea.

All Fixed costs

  • d. Per Item (multiply Variable cost column * Number sold

Total column

Then add Fixed Costs)

 

Name

Variable per

 

Variable

Fixed

Total (R)

Initial

(TO

ILLUSTRATE

 

Unit

Cost Totals

 

figures from

ONLY)

 

budget.

 

Units

100000 units

 

(TO

ILLUSTRATE

 

ONLY

 

(Put R here to split

 

Note format!!!

 

Format!

R

R

R

Note FORMAT: (TO

ILLUSTRATE

lines)

 

R

 

ONLY

 

Sales

58(see

 

5800000

5800000

(to illustrate) (TO

ILLUSTRATE

 

calc.below)

   

ONLY

 

Mnftr Costs:

 

(to illustrate) (TO

ILLUSTRATE

   

ONLY

 

Direct

 

(20)

2000000

2000000

  • 2000000 Only var

 

materials

   
 

Labour Costs

 

(8)

800000

200000

1000000

  • 1000000 80% variable

 

Overhead

 

(2)

200000

300000

500000

  • 500000 40% variable

Costs

 

Non-Mnft

 

Costs

 

Rent

400000

400000

  • 400000 fixed

 
 

Accounting

 

200000

200000

  • 200000 Fixed

 

Marketing

 

(1.2)

120000

180000

300000

  • 300000 40% var

 

Salaries

 

500000

500000

  • 500000 Fixed

 

Other Costs

 

(0.2)

20000

80000

100000

  • 100000 40%

var.with

   

prod.units.

 

(to illustrate)

 

CONTRIBUTIO

 

26.6

(=sales-all

 

2660000

(to illustrate) (TO

ILLUSTRATE

N

costs)

   

ONLY

 

FIXED COSTS

 

NOTE ABOVE

 

1860000

(to illustrate) (TO

ILLUSTRATE

   

ONLY

 

PROFIT

 

800000

(to illustrate) (TO

ILLUSTRATE

   

ONLY

II )METHOD: fORMAT OF SPREADSHEET FOR: Pre-Calculations of Variable & Fixed Costs from multiple years figures.

Name

Variable per

 

Variable Cost

Fixed

 

Total (R)

Initial

(TO

ILLUSTRATE

Unit

Totals

figures from

ONLY)

 

budget.

Units

100000 units

 

(TO

ILLUSTRATE

 

ONLY

 

Note format!!!

 

Format!

R

R

R

Note FORMAT: (TO

ILLUSTRATE

 

R

 

ONLY

Sales

58(see

 

5800000

5800000

(to illustrate) (TO

ILLUSTRATE

calc.below)

   

ONLY

Mnftr Costs:

(to illustrate) (TO

ILLUSTRATE

 

ONLY

Direct

(20)

2000000

2000000

2000000

Only var

materials

 
 

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Labour Costs (8)

 

800000

200000

1000000

1000000

80% variable

 
 

Overhead

(2)

200000

300000

500000

  • 500000 40% variable

Costs

 
 

Non-Mnft

Costs

 

Rent

400000

400000

  • 400000 fixed

 
 

Accounting

200000

200000

  • 200000 Fixed

 

Marketing

(1.2)

120000

180000

300000

  • 300000 40% var

 
 

Salaries

500000

500000

  • 500000 Fixed

 
 

Other Costs

(0.2)

20000

80000

100000

  • 100000 40%

var.with

   

prod.units.

 
 

(to illustrate)

 

CONTRIBUTI

26.6

(=sales-all

2660000

(to illustrate) (TO

ILLUSTRATE

ON

costs)

   

ONLY

 

FIXED COSTS

NOTE ABOVE

 

1860000

(to illustrate) (TO

ILLUSTRATE

   

ONLY

 

PROFIT

800000

(to illustrate) (TO

ILLUSTRATE

   

ONLY

INCOME STATEMENT (OR BUDGET) SHOWING CONTRIBUTION

SEPARATELY.

INCOME STATEMENT OF XYZ FOR PERIOD 123 R Sales(Revenue) 5800000 0 Variable Costs: Total Var. Direct
INCOME STATEMENT OF XYZ FOR PERIOD 123
R
Sales(Revenue)
5800000
0
Variable Costs:
Total
Var.