Sie sind auf Seite 1von 28

ACCT2102

1

Lecture 1: Introduction to Managerial and Cost Accounting
1 The Manager and Management Accounting
Financial Accounting, Management Accounting and Cost Accounting
Financial accounting: focuses on reporting to external parties and is focused on the past.
Measures and records business transactions and provides financial statements that are based on
Generally Accepted Accounting Principles (GAAP). Financial accounting affects a managers
perceived performance and thus their compensation.
Management accounting: measures, analyses and reports future orientated financial and
nonfinancial information that helps managers (internal users) and other employees make
decisions to fulfil the goals of an organization. Managers use management accounting
information to develop, communicate and implement strategy and decisions. Management
accounting does not follow set rules.
Cost accounting: measures, analyses and reports financial and nonfinancial information relating
to the costs of acquiring or using resources in an organisation. It provides information for
management accounting and financial accounting. Cost accounting can be seen as a part of
management accounting.
Strategic Decisions and the Management Accountant
Management accountants contribute to strategic decisions by providing information about the
sources of competitive advantage.
Strategy describes how an organization will compete and the opportunities its managers should
seek and pursue.
Cost leadership
Product differentiation
Strategic cost management: cost management that specifically focuses on strategic issues.
Who are our most important customers, and how can we be competitive and deliver
value to them?
What substitute products exist in the marketplace, and how do they differ from out
product in terms of price and quality?
What is our most critical capability?
Will adequate cash be available to fund the strategy, or will additional funds need to be
raised?
Value Chain and Supply Chain Analysis and Key Success Factors
Value chain: the sequence of business functions in which customer usefulness is added to
products.
1. Research and Development
2. Design of products and processes
3. Production
4. Marketing
5. Distribution
6. Customer service
Customer Relationship Management (CRM): a strategy that integrates people and technology in
all business functions to deepen relationships with customers, partners, and distributors.
Supply Chain: the flow of goods, services and information from the initial sources of materials
and services to the delivery of products to customers, regardless of whether those activities
occur in the same organisation or in other organisations. Cost management emphasizes
ACCT2102

2

integrating and coordination activities across all companies in the supply chain to improve
performance and reduce cost.

Key Success Factors: customers want companies to deliver performance through:
Cost and efficiency: managers must eliminate some activities and reduce the costs of
performing activities in all value chain functions to reach a target cost the cost from
subtracting operating income from the target price.
Quality: Total Quality Management (TQM) aims to improve operations throughout the
value chain and to deliver products and services that exceed customer expectations.
Products are designed with zero defects and waste, with minimal inventory.
Time: Managers ned to understand the cost and benefits of a product over the length of
its life cycle to make product and design decisions. Organisations also need to reduce
customer response time and deliver goods in a timely fashion.
Innovation: managers rely on management accounting information to evaluate
alternative investment and R&D decisions so that it can create a constant flow of
innovative products and services.
Decision Making, Planning and Control: Five-Step Decision-Making Process
Managers use the Five Step Decision Making Process to implement strategy:
1. Identify the problem and uncertainties
2. Obtain information
3. Make predictions about the future: what would happen in response to actions?
4. Make decisions by choosing among alternatives
5. Implement the decision, evaluate performance and learn
Steps 1-4 are referred to as planning. Planning comprises selectiong organisation goals and
strategies, predicting results under various alternative ways of achieving those goals, deciding
how to attain the desired goals, and communicating the goals and how to achieve them to the
entire organisation.
Budget is the most important tool when implementing strategy. It is a quantitative expression of
a proposed plan of action by management and is an aid to coordinating what needs to be done to
execute that plan.
Step 5 is control, which comprises taking actions that implement the planning decisions, deciding
how to evaluate performance, and providing feedback and learning to help future decision
making.
Learning is examining past performance and systematically exploring alternative ways to make
better informed decisions and plans in the future.

ACCT2102

3


Key Management Accounting Guidelines
Three guidelines help management accountants provide the most value in their strategic and
operational decision making:
Cost Benefit Approach: managers need to employ the cost benefit approach to making
decisions. Resources should be spent only if the expected benefits to the company
exceed the expected costs.
Behavioural and Technical Considerations: whenever decisions are made the
behavioural aspects as well as technical aspects of the outcomes must be considered for
evaluation. Management is not always technical, it involves working with people.
Different Costs for Different Purposes: the different methods of computing cost should
be used for the correct purpose, eg. an external reporting of cost may not be useful for
internal purposes.
Organisation Structure and the Management Accountant
Line management is directly responsible for attaining the goals of the organisation eg.
production, marketing and distribution management.
Staff management provides advice, support and assistance to line management eg. management
accountants, IT and human resources management.
Chief Financial Officer (CFO, Finance Director): the executive responsible for overseeing the
financial operations of an organisation. Responsibilities include:
Controllership: providing financial information for reports to managers and
shareholders, and overseeing the overall operations of the accounting system.
Treasury: banking and financing, investments and cash management.
Risk management: managing the financial risk of interest rate and exchange rate changes
and derivatives management.
Taxation
Investor relations
Internal audit
Controller (Chief Accounting Officer): financial executive primarily responsible for management
accounting and financial accounting. Reports to the CFO. By reporting and interpreting relevant
ACCT2102

4

data the controller influences the behaviour of all employees and exerts a force that impels line
managers toward making better informed decisions as they implement their strategies.


Professional Ethics
Management accountants have ethical responsibilities that relate to:
Competence
Confidentiality
Integrity
Credibility
Chapter 2 An Introduction to Cost Terms and Purposes
Cost and Cost Terminology
Actual cost: the cost incurred (historical or past cost).
Budgeted cost: a predicted or forecasted cost (future cost).
Cost object: anything for which a measurement of cost is desired.
Cost accumulation: the collection of cost data in some organised way by means of an accounting
system. These accumulated costs are then assigned to designated cost objects.
Cost information is used when making decisions (how to price products, how much to invest in
R&D etc.) and implementing decisions (using cost information to inform strategy, eg. rewarding
employees for reducing costs).
Direct Costs and Indirect Costs
Direct costs of a cost object: related to the particular cost object and can be traced to it in an
economically feasible (cost effective) way.
Indirect costs of a cost object: related to the particular cost object but cannot be traced to it in an
economically feasible (cost effective) way.
Cost allocation: the assignment of indirect costs to a particular cost object.
Cost assignment: general term that encompasses both tracing direct costs to a cost object and
allocating indirect costs to a cost object.
ACCT2102

5

Challenges in Cost Allocation
Factors Affecting Direct/Indirect Cost Classifications
The materiality of the cost in question: the smaller the amount of a cost (the more immaterial the
cost is), the less likely that it is economically feasible to trace the cost to a particular cost object
eg. the cost of tracing invoice paper in mail orders would be considered indirect.
Available information gathering technology: improvements in information gathering technology
make it possible to consider more and more costs as direct costs.
Design of operations: classifying a cost as direct is easier if a companys facility is used exclusively
for a specific cost object.
Cost may be both a direct cost of one cost object and an indirect cost of another cost
object, eg. salary of a worker is a direct cost to an assembly department but an indirect
cost to the products, cars.
Cost-Behaviour Patterns: Variable Costs and Fixed Costs
Variable cost changes in total in proportion to changes in the related level of total activity or
volume.
Fixed cost remains unchanged in total for a given time period, despite wide changes in the
related level of total activity or volume.
Costs can be both variable and fixed, eg. registration of planes are fixed with regards to each
plane, but variable in regards to the number of planes.
Cost driver: a variable, such as the level of activity or volume that causally affects costs over a
given time span.
Relevant range is the band of normal activity level or volume in which there is a specific
relationship between the level of activity or volume and the cost in question. Outside the relevant
range variable costs may not change proportionately.
Relationships of the types of costs:

Total Costs and Unit Costs
Total costs can be difficult to interpret alone, so unit cost is used as a tool.
Unit cost (average cost): cost per unit of output




Unit costs need to be monitored as changed in the number of units or the manufacturing cost
occur often. Using a historical unit cost that is incorrect can be detrimental.
ACCT2102

6

Business Sectors, Types of Inventory, Inventorial Costs and Period Costs
Sectors of the economy:
Manufacturing sector companies purchase materials and components and convert them
into various finished goods.
Merchandising sector companies purchase and then sell tangible products without
changing their basic form.
Service sector companies provide services (intangible products)
Inventory types for manufacturing companies:
Direct materials inventory
Work in process inventory
Finished goods inventory
Merchandising companies only hold one type of inventory (products in their
original form), called merchandise inventory.
Service sector companies do not have inventories.
Classifications of Manufacturing Costs
Direct materials cost: the acquisition of costs of all materials that eventually become part
of the cost object, and can be traced to the cost object in an economically feasible way eg.
freight charges, sales tax, cost of tires.
Direct manufacturing labour costs: the compensation of all manufacturing labour that
can be traced to the cost object in an economically feasible way eg. wages, fringe
benefits.
Indirect manufacturing costs (manufacturing overhead costs): all manufacturing costs
that are related to the cost object but cannot be traced to that cost object in an
economically feasible way eg. plant maintenance, plant rent.
Inventoriable costs: all costs of a product that are considered as assets in the balance sheet when
they are incurred and that become cost of goods sold only when the product is sold.
All manufacturing costs are Inventoriable
In merchandising companies Inventoriable costs are the costs of purchasing the goods
that are to be resold.
Service sector companies do not have Inventoriable costs.
Period costs: costs in the income statement other than cost of goods sold. They are expensed in
the accounting period in which they are incurred eg. marketing, distribution and customer
service costs.
In manufacturing, period costs are all non-manufacturing costs.
In merchandising, period costs are all costs not related to the cost of goods purchased for
resale.
All costs in service sector companies are period costs.
Prime Costs and Conversion Costs
Prime costs are all direct manufacturing costs

The greater the proportion of prime cost in a companys cost structure, the more confident
managers can be about the accuracy of the costs of products.
As information technology improve, more costs can be allocated into the direct cost category eg.
power costs metered at specific areas of a plant
Conversion costs are all manufacturing costs other than direct material costs. Conversion costs
represent all manufacturing costs incurred to convert direct materials into finished goods.

ACCT2102

7

Direct labour costs are in both prime costs and conversion costs
Measuring Costs Requires Judgement
Labour costs classifications can vary significantly among companies, and many use multiple
labour cost categories.
Special cases of indirect labour:
Overtime premium is the wage rate paid to workers in excess of their straight time wage
rates. Although it is easily traceable, it is usually considered an indirect cost as it is not
related to any single product. Its cost is regarded as part of overhead, which is borne by
both products. However when overtime is not random, it would be regarded as a direct
cost.
Idle time: wages paid for unproductive time caused by lack of orders, machine or
computer breakdowns, etc. Also considered an overhead.
Defining costs associated with labour is very important, as misunderstandings can generate
disputes eg. payroll fringe costs as labour cost or overhead if fringe benefits are classified as
labour, then it is taxable.
Managers often assign different product costs to the same cost object depending on the purpose:
Pricing and product-mix decisions: for making decisions about pricing and profit,
managers are interested in assigning overall costs to products.
Contracting with government agencies: government contracts often reimburse
contractors on the basis of the cost of a product plus a pre-specified margin of profit.
Government agencies thus provide detailed guidelines for calculating cost.
Preparing financial statements for external reporting under GAAP: under GAAP only
manufacturing costs can be assigned to inventories in financial statements.

A Framework for Cost Accounting and Cost Management
The features of cost accounting and cost management:
1. Calculating the cost of products, services and other cost objectives.
2. Obtaining information for planning and control and performance evaluation: budgeting
is a tool for planning and control, and forces managers to look ahead, formulate
strategies, execute and then evaluate.
3. Analysing the relevant information for making decisions.

ACCT2102

8

Income Statement and Schedule of Cost of Goods Sold
Company Name
Schedule of Goods Manufactured
For Year Ended December 31, 2009 (000s)


Step 1 (materials)
Cost of direct materials
Direct Materials:
Beginning inventory
Purchases of direct materials

$11 000
73 000

Cost of direct materials available for use
Less Ending inventory
84 000
(8 000)

Direct materials used $76 000

Direct Manufacturing labour 9 000

Step 2 (overhead + labour)
Cost of manufacturing

Manufacturing overhead costs
Indirect manufacturing costs 20 000
Manufacturing overhead cots 20 000


Step 3
Cost of goods
manufactured
Total Manufacturing costs incurred
Beginning work in process inventory
105 000
6 000
Total manufacturing costs to account for
Less Ending work in process inventory
111 000
(7 000)
Cost of goods manufactured $104 000

Company Name
Income Statement
For Year Ended December 31, 2009 (000s)


Step 4
Cost of goods sold
Revenues $210 000
Cost of goods sold:
Beginning finished goods inventory
Cost of goods manufactured
$22 000
104 000

Cost of goods available for sale
Ending finished goods inventory
126 000
18 000

Less Cost of goods sold (108 000)
Gross Profit 102 000

Operating costs:
R&D, design, marketing etc.

70 000

Operating costs 70 000
Operating income $32 000

Cost of goods manufactured is the sum of direct materials, direct manufacturing labour and
manufacturing (indirect) overhead, adjusted for inventory (both materials and WIP inventory)
COGS is cost of goods manufactured adjusted for finished goods inventory.
Gross Profit = Revenues COGS
Operating income = Gross Profit Operating Costs
ACCT2102

9

Lecture 2: Cost Behaviours and CVP Analysis
10 Determining How Costs Behave
Basic Assumptions and Examples of Cost Functions
Cost function: a mathematical description of how a cost changes with changes in the level of an
activity relating to that cost.
Assumptions:
Variations in the level of a single activity (cost driver) explain the variations in the
related total costs.
Cost behaviour is approximated by a linear cost function within the relevant range.
A mixed cost is a cost that has both fixed and variable elements.

Classifying costs as variable or fixed:
Choice of cost object: a particular cost item can be variable with respect to one cost
object and fixed with respect to another cost object, eg. Registration for vans is variable
with number of vans, but fixed for miles driven for each van.
Time horizon: the longer the time horizon, the more likely that the cost will be variable.
Relevant range
Identifying Cost Drivers
Managers use cost estimation to measure a relationship based on data from past costs and the
related level of an activity. Managers use past cost behaviour functions to help in cost prediction.
Cause and effect relationships need to exist for estimating cost functions. They can arise through:
A physical relationship between the level of activity and costs (units of production affect
direct material costs)
A contractual arrangement (costs can be specified in contracts)
Knowledge of operations (eg. number of parts used as the activity measure of ordering
costs)
Managers must be careful not to interpret a high correlation or connection in the relationship
between two variables to mean that either variable causes the other (eg. Using labour costs to
predict material costs when certain materials cost more or less compared to labour)
Cost drivers and the decision making process (5 step decision making process, ch. 1):
Step 1: identify the problem and uncertainties
Step 2: obtain information
Step 3: make predictions about the future
Step 4: make decisions by choosing among alternatives
Step 5: implement the decision, evaluate and learn
ACCT2102

10

Cost Estimation Methods
Industrial engineering method (work measurement method) estimates costs functions by
analysing the relationship between inputs and outputs in physical terms. Very thorough and
detailed but is time consuming and costly.
Conference method estimates cost functions on the basis of analysis and opinions about costs
and their drivers gathered from various departments of a company. Encourages
interdepartmental cooperation and the pooling of expert knowledge from different business
functions of the value chain.
Account analysis method estimates cost functions by classifying various cost accounts as
variable, fixed or mixed with respect to the identified level of activity. This method is rather
qualitative, however is widely used because it is reasonably accurate, cost effective and easy to
use. Account analysis can be supplemented with conference method to improve credibility.
Quantitative analysis method uses a formal mathematical method to fit cost functions to past
data observations.
Steps in Estimating a Cost Function Using Quantitative Analysis
Steps in estimating cost function:
Step 1: Choose the dependent variable:
Step 2: Identify the independent variable, or cost driver. A cost driver should have an
economically plausible relationship with the dependent variable (based on a physical
relationship, a contract, or knowledge of operations). When there isnt the same cost
driver, cost pools should be allocated for items with the same cost drivers to create more
than one function.
Step 3: Collect data on dependent variable and the cost driver.
Time-series data pertain to the same entity over successive past periods. Ideally
data should not be affected by economic or technological change.
Cross-sectional data pertain to different entities during the same period. Should
be drawn from entities with similar relationships between cost driver and cost.
Step 4: Plot the data.
Step 5: Estimate the cost function (high low method, regression analysis).
Step 6: Evaluate the cost driver of the estimated cost function.
High-Low Method uses only the highest and lowest observed values of the cost driver within the
relevant range and their respective costs to estimate the slope coefficient and the constant of the
cost function. Is easy to compute and gives quick insight, but ignores information from other
points.
Regression Analysis Method
Regression analysis is a statistical method that measures the average amount of change
in the dependent variable associated with a unit change in one or more independent
variables.
Simple regression analysis estimates the relationship between the dependent variable
and one independent variable
Multiple regression analysis estimates the relationship between the dependent variable
and two or more independent variables.
The least squares technique determines the regression line by minimizing the sum of the
squared vertical differences from the points to the regression line.
Residual term: the vertical different, measures the distance between actual cost and
estimated cost for each observation of the cost driver.
Goodness of fit indicates the strength of the relationship between the cost driver and
costs.
ACCT2102

11


Evaluating Cost Drivers of the Estimated Cost Function
Understanding of operations is crucial in determining costs functions. As an example, a company
may schedule repairs during periods of low production to minimise taking machines out of
service when they are most needed. Thus repair costs will be high during periods of low
production someone without operations experience may misinterpret the information as an
inverse relationship. Repair costs will also lag behind periods of high production, as production
wears out machines.
Evaluating and choosing cost drivers:
Economic plausibility
Goodness of fit
Significance of independent variable: a flat or slightly slope line indicates a weak
relationship between cost and cost driver.
Choosing the correct cost driver to estimate indirect manufacturing costs is important because
identifying the wrong drivers or misestimating cost functions can lead management to incorrect
and costly decisions.
Activity based costing (ABC) systems focus on individual activities as the fundamental cost
objects. ABC systems have a large number and variety of cost drivers and cost pools, which
require many cost relationships to be estimated.
Nonlinear Cost Functions
Nonlinear cost function: a cost function for which the graph of total costs is not a straight line
within the relevant range. This could be caused by economies of scale or quantity discounts on
direct materials.
Step cost function: a cost function in which the cost remains the same over various ranges of the
level of activity, but the cost increases by discrete amounts (steps) due to set up costs for each
batch of production, or because production inputs (labour, supervision) are acquired in discrete
quantities.
Step fixed cost function
ACCT2102

12


Nonlinear functions can also result from learning curves.
Learning curves are a function that measures how labour hours per unit decline as units of
production increase because workers are learning and becoming better at their jobs. Managers
use learning curves to predict how labour hours or labour costs will increase as more units are
produced.
Experience curve: a function that measures the decline in cost per unit in various business
functions of the value chain as the amount of these activities increases. Broader than simply
production as described by the learning curve.
Cumulative average-time learning model: cumulative average time per unit declines by a
constant percentage each time the cumulative quantity of units produced doubles eg. An 80%
learning curve means that when quantity is doubled, average time per unit decreases from 100%
to 80%.
Incremental unit time learning model: incremental time needed to produce the last unit declines
by a constant percentage each time the cumulative quantity of unit produced doubles.

Many companies incorporate learning curve effects when evaluating performance and
predicting performance.
Other models of learning have been developed that focus on quality.
Data Collection and Adjustment Issues
An ideal database should:
ACCT2102

13

Contain numerous reliably measured observations of the cost driver and the related
costs.
Consider many values spanning a wide range for the cost driver. Too few values grouped
together considers a small segment of relevant range and reduces the confidence of
estimates.
Frequently encountered data problems:
The time period for measuring the dependent variable does not properly match the
period for measuring the cost driver. Occurs when accounting records are not kept on an
accrual basis.
Fixed costs are allocated as if they are variable, eg. Insurance and depreciation are
allocated to products to calculate per unit cost.
Data are either not available for all observations or are not uniformly reliable. This is
mitigated through designing data collection reports that regularly and routinely obtain
the required data.
Extreme values of observations occur from errors in recording costs, from non-
representative periods (random costs eg. Machinery break down), or from observations
outside the relevant range. Analysts should adjust or eliminate unusual observations
before estimating a cost relationship.
There is no homogenous relationship between the cost driver and the individual cost
items in the dependent variable cost pool. A homogenous relationship exists when each
activity whose costs are included in the dependent variable has the same cost driver. In
this case, a single cost function can be estimated. When this isnt the case multiple cost
functions should be estimated with more than one independent variable using multiple
regression.
The relationship between the cost driver and the cost is not stationary the underlying
process that generated the observations has not remained stable over time eg. Due to
technology.
Inflation has affected costs, the cost driver or both. Inflation may cause costs to change
even when there is no change in the level of the cost driver. Purely inflationary price
effects from the data should be removed by dividing each cost by the price index on the
date the cost was incurred.
There are three types of linear cost functions, variable, fixed and mixed (semi-variable).
The most important issue in estimating a cost function is determining whether a cause and effect
relationship exists between the level of an activity and the costs related to that level of activity.
Only a cause and effect relationship, not merely correlation, establishes an economically
plausible relationship between the level of an activity and its costs.
Nonlinear cost functions can occur due to quantity discounts, step cost functions and learning
curve effects.
The most difficult task in cost estimation is collecting high quality, reliably measured data on the
costs and the cost driver. Common problems include missing data, extreme values of
observations, changes in technology and distortions resulting from inflation.
3 Cost-Volume-Profit Analysis
Cost-volume-profit (CVP) analysis studies the behaviour and relationship among total revenues,
costs and come as changes occur in the units sold, the selling price, the variable cost per unit, or
the fixed costs of a product.
Contribution margin: indicates why operating income changes as the number of units sold
changes

Contribution margin per unit

ACCT2102

14


Contribution income statement: groups costs into variable costs and fixed costs to highlight
contribution margin.
Contribution margin percentage(ratio): contribution margin per dollar of revenue.





There are 3 ways to model CVP relationships:
Equation method: calculating operating income for different quantities of units sold.


Contribution Margin Method

Graph Method: total costs and total revenues are represented graphically.
The total costs line is the sum of fixed costs and variable costs.
Useful for visualising the effect of sales on operating income over a wide range
of quantities sold.
Contribution and Equation methods are useful for analysing operating income at
a few specific levels of sales.

Assumptions of CVP analysis:
Changes in the levels of revenues and costs arise only because of changes in the number
of product units sold. The number of units sold is the only revenue drier and only cost
driver.
Total costs can be separated into two components: a fixed component that does not vary
with units sold and a variable component that changes with respect to units sold.
When represented graphically the behaviours of total revenues and total costs are linear
in relation to units sold within a relevant range and time period.
Selling price, variable cost per unit, and total fixed costs are known and constant.
ACCT2102

15

Breakeven Point and Target Operating Income
Breakeven point (BEP): the quantity of output sold at which total revenues equal total costs; the
quantity of output sold that results in $0 of operating income.
BEP can be calculated by setting operating income to $0.




A PV graph shows how changes in quantity of units sold affect operating income.

Net income: operating income plus non-operating revenues (such as interest revenue) minus
non-operating costs (such as interest cost) minus income taxes. When doing CVP analysis it is
thus important to account for target net income by looking at tax.
Using CVP Analysis for Decision Making
Higher contribution margin is better than low for deciding without calculations with the income
statement. Contribution margin needs to be greater than fixed costs for positive operating
income.
Sensitivity Analysis and Margin of Safety
Sensitivity analysis is analysing the effects of changing variables
Margin of safety tells us how far the targeted budget can drop. A higher margin is better as it
decreases the risk of making a loss.

()

( )

Cost Planning and CVP
Alternative Fixed-cost/variable-cost structures
CVP analysis helps managers evaluate fixed/variable cost structures.
ACCT2102

16


Operating Leverage: the effects that fixed costs have on changes in operating income as changes
occur in units sold and contribution margin; the risk return trade off across alternative cost
structures.




Companies have high operating leverage if there is a high proportion of fixed costs. Small
increases in sales will lead to large increases in operating income, and small decreases in
sales causes large decreases in operating come.
Allows companies to evaluate the effects of sales fluctuations on operating income.
Whenever there are fixed costs, the degree of operating leverage decreases as the level
of sales increases beyond the breakeven point. If fixed costs is $0, contribution margin
equals operating income, and operating leverage is always 1.
It tells the percentage change in operating income when changes are made to
contribution margin (sales)
Helps managers calculate the effects of fluctuations in sales on operating income.
Effects of Sales Mix on Income
Sales mix: the quantities of various products that constitute total unit sales of a company.
Sales mix affects the breakeven point.
CVP Analysis in Service and Non-profit Organisations
CVP analysis can be applied to service organisations by focusing on output: passenger miles for
airlines, room-nights occupied (hotels), patient days (hospitals) and student credit-hours
(universities).
Contribution Margin Versus Gross Margin
Gross Margin = Revenues COGS (manufacturing costs only)
Contribution Margin = Revenues All variable costs (variable costs only)
Gross margin measures how much a company can charge for its products over and above the cost
of acquiring or producing them.
Contribution margin indicates how much of a companys revenues are available to cover fixed
costs, and assess risk of loss.
Within the manufacturing sector, contribution margin and gross margin differ in two respects:
fixed manufacturing costs and variable non-manufacturing costs.
Gross margin percentage: gross margin divided by revenue.
Gross margin and contribution margin are identical in merchandising companies, since cost of
goods sold equals the variable cost of goods purchased.
ACCT2102

17

CVP analysis assist managers in understanding the behaviour of a products or services total
costs,, total revenues and operating income as changes occur in the output level, selling price,
variable costs or fixed costs.
The BEP is the quantity of output at which total revenues equal total costs. The 3 methods to
compute BEP and the output required to achieve target operating income are the equation
method, the contribution margin method and the graph method.
BEP is unaffected by taxes as no income tax is paid when operating income is zero.
Managers compare how revenues, costs and contribution margins change across alternatives,
and choose the option that maximizes operating income.
Sensitivity analysis examines how an outcome will change if the original predicted data are not
achieved or if an assumption changes. VCP analysis is used to compare contribution margins and
fixed costs under different assumptions.
Choosing a cost structure is a strategic decision. Proportions of a companies fixed and variable
cost structure influence risk and profits. High operating leverage are high risk high reward.
CVP analysis can be applied to a company producing multiple products by assuming sales mix of
products sold remains constant as the total quantity of units sold changes (or for different levels
of revenue).

ACCT2102

18

Lecture 3: Costing Systems Job Costing
4 Job Costing
Building-Block Concepts of Costing Systems
Cost assignment is a general term for assigning costs, indirect or direct, cost tracing refers to
assigning direct costs, and cost allocation refers to assigning indirect costs.
Cost pool: a grouping of individual indirect cost items.
Cost allocation base: a systematic way to link an indirect cost or group of indirect costs. The ideal
cost allocation base is the cost driver of the indirect costs, since there is a cause and effect
relationship eg. Costs should be allocated to products of a metal cutting machine by machine-
hours used to produce different products. Can be financial cost or non-financial cost (machine
hours). When the cost object is a job, product or customer it is known as cost-application base.
Job-Costing and Process-Costing Systems
Job-costing system: the cost object is a unit or multiple units of a distinct product or service
called a job. Because the products and services are distinct, job-costing systems accumulate costs
separately for each product or service.
Process-costing system: the cost object is masses of identical or similar units of a product or
service. In each period total costs of production are divided by the number of units to get an
average cost.
Companies use a mixture of both job costing and process costing systems.
Job Costing: Evaluation and Implementation
Actual costing: a costing system that traces direct costs to a cost object by using the actual direct
cost rates times the actual quantities of the direct-cost inputs.
Actual costs are not commonly used as they cannot be computed in a timely manner.
Actual direct costs are easy to compute for direct materials and direct manufacturing labour,
however actual indirect costs are difficult to calculate.
Reasons for longer periods in calculating indirect cost rates:
The numerator reason (indirect-cost pool): the shorter the period, the greater the
influence of seasonal patterns on the amount of costs (and non-seasonal erratic costs).
Pooling costs over a year helps smooth erratic bumps associated with shorter periods.
The denominator reason (quantity of the cost-allocation base): to avoid spreading
monthly fixed indirect costs over fluctuating levels of monthly output and fluctuating
quantities of the allocation base. Fixed costs should be spread evenly over a longer
period, as if it is charged for one period, costs will be inflated. Also, the number of work
weeks varies from 20-23 a month, which again alters unit costs of jobs.
Normal Costing
Managers cant calculate actual costs of jobs as they are completed because of the difficulty in
calculating actual indirect-cost rates on a weekly or monthly basis.
Because of the need for immediate access to job costs, a predetermined (budgeted) indirect-cost
rate is calculated for each cost pool at the beginning of the fiscal year, and overhead costs are
allocated to jobs as work progresses.
Budgeted indirect-cost rate:




Normal costing: a costing system that (1) traces direct costs to a cost object by using the
actual direct cost rates times the actual quantities of the direct-cost inputs and (2)
allocates indirect costs based on the budgeted indirect-cost rates times the actual
quantities of the cost-allocation bases.
ACCT2102

19

Steps in job costing (normal costing):
1. Identify the job that is the chosen cost object.
Source document: an original record that supports journal entries in an
accounting system.
Job-cost record: records and accumulates all the costs assigned to a specific job,
starting when work begins.
2. Identify the actual direct costs of the job (for manufacturing, direct materials and direct
manufacturing labour).
Materials-requisition record contains information about the cost of direct
materials used on a specific job and in a specific department.
Labour-time sheet contains information about the amount of labour time used
for a specific job in a specific department.
3. Select the budgeted cost-allocation bases to use for allocating indirect costs to the job.
Indirect manufacturing costs are costs that are necessary to do a job but that
cannot be traced to a specific job (supervision, manufacturing engineering,
repairs etc.). Since they cannot be traced they must be allocated.
Companies use cost-allocation bases to allocate indirect costs because different
indirect costs have different cost drivers.
4. Identify the budgeted indirect costs pools associated with each cost-allocation base.
Eg. Direct manufacturing labour-hours. Put into a cost pool.
5. Compute the budgeted cost-allocation base rate used to allocate indirect costs to the
job
Budgeted total quantity of the cost-allocation base (step 3)
Total indirect costs in the pool (step 4)




6. Compute the allocated indirect costs allocated to the job.
The indirect costs of a job are calculated by multiplying the actual quantity of
each different allocation base associated with the job by the budgeted indirect
cost rate of each allocation base (step 5).
7. Compute the total cost of the job by adding all direct and indirect costs assigned to the
job.


ACCT2102

20


Actual Costing
Actual costing uses actual indirect-cost rates calculated annually at the end of the year, whereas
normal costing uses budgeted indirect cost rates frequently.
Actual costing method is exactly the same as normal costing steps, except that actual indirect
costs are used rather than budgeted.

A Normal Job-Costing System in Manufacturing

Manufacturing overhead costs are first accumulated in a manufacturing overhead account, and
later allocated to individual jobs. As manufacturing overhead costs are allocated, they become
part of work in process inventory.
Period costs (marketing and customer service) do not create any assets in the balance sheet as
they are not incurred while transforming materials into a finished product, so they are expensed
in the income statement as they are incurred.
ACCT2102

21



Overheads can only be added to work-in-process control when they are allocated.
ACCT2102

22


Subsidiary ledgers contain the underlying details of the general ledger. Pg. 114-117 MUST
REVIEW
Materials Records is the subsidiary ledger for materials, and keeps a continuous record
of quantity received, quantity issued to jobs and inventory balances for each type of
material.
Labour Records by employee are used to trace direct manufacturing labour to individual
jobs and to accumulate the indirect manufacturing labour in manufacturing department
overhead records.
Manufacturing department overhead records are the subsidiary for manufacturing
overhead control and show details of different categories of overhead costs such as
indirect materials, indirect manufacturing labour, supervision and engineering, plant
insurance and utilities, and plant depreciation.
Work in Process Inventory Records by jobs
Finished goods inventory records by jobs
Budgeted Indirect Costs and End-of-Accounting-Year Adjustments
Adjustments are needed when at the end of the fiscal year, indirect costs allocated differ from
actual indirect costs incurred.
Under-allocated indirect costs occur when the allocated amount of indirect costs in an accounting
period is less than the actual (incurred) amount.
Over-allocated indirect costs occur when the allocated amount of indirect costs in an accounting
period is greater than the actual (incurred) amount.
()

AKA under-applied/under-absorbed
There are two indirect-cost accounts in the general ledger that have to do with manufacturing
overhead:
Manufacturing overhead control; the record of the actual costs in all the individual
overhead categories (indirect materials, indirect manufacturing labour, supervision,
engineering, utilities, plant depreciation etc.)
Manufacturing overhead allocated; the record of the manufacturing overhead allocated
to individual jobs on the basis of the budgeted rate multiplied by actual direct
manufacturing labour-hours.
Under allocation and over allocation occur because of inaccuracies in the indirect-cost pool
(incorrect cost, numerator reason) or in the quantity of allocation base (incorrect quantity,
denominator reason).
There are 3 methods to accounting for under/over allocation:
ACCT2102

23

1. Adjusted Allocation-Rate Approach: restates all overhead entries in the general ledger
and subsidiary ledgers using actual cost rates rather than budgeted cost rates.
Actual manufacturing overhead is computed, and the actual manufacturing
overhead rate is used to job cost every job.
Yields the benefits of the timeliness and convenience of normal costing during
the year and allocation of actual manufacturing overhead costs at the year-end.
Due to computerized accounting systems this approach is very easy to apply.
2. Proration Approach: spreads under-allocated overhead and over-allocated overhead
among ending work-in-process inventory, finished goods inventory and cost of goods
sold (no materials inventory because there are no manufacturing overhead costs
associated with it). Pg. 120 REVIEW
3. Write Off to COGS Approach: the total under/over allocated manufacturing overhead is
included in COGS.

Variations from Normal Costing: A Service-Sector Example
Pg. 122-123
A major challenge of job costing is estimating the actual cost of jobs in a timely manner.
A job costing system in manufacturing records the flow of inventoriable costs in the general and
subsidiary ledger for (a) acquisition of materials and other manufacturing inputs, (b) their
conversion into work in process, (c) their conversion into finished goods, and (d) the sale of
finished goods. The job costing system also expenses period costs, such as marketing costs, as
they are incurred.
There are two theoretically correct approaches for disposing of under/over allocated
manufacturing overhead costs at the end of the fiscal year for correctly stating balance sheet and
income amounts: to adjust the allocation rate, or to prorate on the basis of the total amount of the
allocated manufacturing overhead cost in the ending balances of work in process control,
finished goods control and COGS. Many companies simply write off amounts of under/over
allocated manufacturing overhead to COGS when amounts are insignificant.
In some variations from normal costing, organisations use budgeted rates to assign direct costs, as
well as indirect costs, to jobs.

ACCT2102

24

Lecture 4: Cost Allocation Support Department Costs
14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis
Purposes of Cost Allocation
Indirect costs of a particular cost object are costs that are related to that cost object but cannot be
traced to it in an economically feasible (cost-effective) way and form a large proportion of overall
costs assigned.
Costs in different business functions of the value chain:

Purposes of Cost Allocation:
Information for economic decisions
Motivating managers and employees
Justifying costs or computing reimbursement amounts
Measuring income and assets
For economic-decision purposes (long run product pricing), the costs in all six functions are
relevant, for short run economic decisions, costs from only one or two functions might be
relevant.
For reimbursement, a particular contract will stipulate what costs are relevant for
reimbursement.
For measuring income and assets for reporting to external parties under GAAP, only
manufacturing costs and in some cases product design costs are inventoriable and allocated to
products.
Criteria to Guide Cost-Allocation Decisions
After identifying the purposes of cost allocation, managers and management accountants must
decide how to allocate costs.
Criteria for cost-allocation decisions:
1. Cause and effect: managers identify the variables that cause resources to be consumed.
Costs under this criterion are usually the most credible to operating personnel.
2. Benefits received: managers identify the beneficiaries of the outputs of the cost object.
The costs are allocated among the beneficiaries in proportion to the benefits each
receives. Divisions with higher revenues thus usually take on more costs.
3. Fairness/Equity: often cited in government contracts when cost allocations are the
basis for establishing a price satisfactory to the government and its suppliers. Based on
fairness, a matter of subjective judgement.
4. Ability to bear: allocates costs in proportion to the cost objects ability to bear costs
allocated to it.
Cause and effect and the benefits received criteria are superior, especially when the purpose of
cost allocation is to provide information for economic decisions or to motivate managers and
employees.
Fairness and ability to bear are less frequently used and are problematic.
Ability to bear distorts the perceived profitability of products. Cross subsidising invites
regulatory scrutiny and competitors attempting to undercut artificially higher-priced services.
ACCT2102

25

15 Allocation of Support-Department Costs, Common Costs, and Revenues
Allocating Support Department Costs using the Single-Rate and Dual-Rate Methods
Operating department (production department): directly adds value to a product or service.
Support department (service department): provides the services that assist other internal
departments in the company eg. Information systems, plant maintenance.
Most companies believe that fixed costs of support departments should be allocated because the
support department needs to incur fixed costs to provide operating divisions with the services
they require.
There are two approaches to allocating ongoing support department costs: the single rate cost
allocation method, and the dual rate cost allocation method.
Single-rate method: makes no distinction between fixed and variable costs. Divisions are charged
the budgeted rate for each hour of actual use.




Benefits:
Low cost to implement, avoids expensive analysis necessary to classify the
individual cost.
Offers users operational control over the charges they bear because they
condition the final allocations on the actual usage of central facilities, rather
than basing them solely on uncertain forecasts of expected demand.
Costs:
Makes the allocated fixed costs of the support department appear as variable
costs to the operating divisions. Thus it may lead division managers to make
outsourcing decisions that are in their own best interest but may be inefficient
from the standpoint of the organisation as a whole (because fixed costs look
seem variable, managers may look for outsourcing which is cheaper than this
variable rate, without noticing fixed costs will still be incurred).
This divergence in interests may be lessened when allocation is done on the
basis of practical capacity.
Dual-rate method: partitions the cost of each support division into two pools, a variable cost pool
and a fixed cost pool. Fixed costs are based on budgeted hours, whilst variable costs are based on
actual hours. Fixed cost is allocated in advance in a pre-set lump sum charge.








Benefits:
Signals to division managers how variable costs and fixed costs behave
differently. Guides division managers to make decisions that benefit the
organisation as a whole, as well as each division.
If costs can be easily separated into variable and fixed, the dual rate method should be used as it
provides better information for decision making.
Under the two methods, managers can allocate support-department costs to operating divisions
based on either a budgeted rate (preferred) or the eventual actual cost rate.
Under the two methods, the same amount is charged for variable costs, however the overall
assignment of costs differ because the single-rate method allocates fixed costs of the support
department based on actual usage, whereas the dual-rate method allocates fixed costs based on
budgeted use.
ACCT2102

26

When practical capacity is used to allocate costs, the single-rate method allocates only the
actual fixed-cost resources used by the divisions, while the dual-rate method allocates the
budgeted fixed-cost resources to be used by the operating divisions.



Same as single rate, BUT also allocate costs for the remaining unused supply capacity.
Same as dual rate, BUT only fixed costs are allocated to unused supply capacity.
Focuses managers attention on unused capacity, and avoids burdening the user
divisions with the cost of unused capacity. When costs are allocated on the basis of the
demand, all of the budgeted fixed costs, including unused capacity are allocated to user
divisions.
Budgeted Versus Actual Fixed Costs, and the Choice of Allocation Base
Budgeted rates:
Gives managers decision making information in advance as they know costs to be
allocated, and can thus plan the amount of service and whether to use internal source or
external vendor.
Helps motivate managers of the support department to improve efficiency, as the
support department bears the risk of cost variances. User divisions do not pay for the
costs or inefficiencies of the support department.
Some organisations try to identify uncontrollable factors that cause cost variances and
relieve support department managers of responsibilities of changes in costs compared to
budgeted rates. In other organisations, the supplier department and the user division
agree to share the risk.
Fixed cost allocation based on budgeted rates and budgeted usage (dual-rate method)
Helps user divisions with both short run and long run planning.
May tempt managers to underestimate planned usage, resulting in their divisions
bearing a lower percentage of fixed costs. Firms either give rewards for accurate
estimates, or penalties for underestimates.
Fixed cost allocation based on budgeted rates and actual usage (single-rate method)?
Allocating budgeted fixed costs based on actual usage?
The use of budgeted rates enables managers of user departments to have certainty about the
costs allocated to them, and insulates users from inefficiencies in the supplier department.
Changing budgeted variable cost rates to users based on actual usage is causally appropriate and
promotes control of resource consumption.
Allocating Costs of Multiple Support Departments
Departments can provide reciprocal support to each other as well as to operating departments
eg. Costs of training and recruitment for all departments. Costs need to be allocated accurately
for this problem.
Direct Method:
Allocates each support departments costs to operating departments only. Does not
allocate support costs to other departments.
Allocation is done proportionately (hours of department/total hours worked by
operating departments * total cost)
Step-Down Method (sequential allocation method):
Allocates support department costs to other support departments and to operating
departments in a sequential manner that partially recognises the mutual services
provided among all support departments.
Requires support departments to be ranked in the order that the step-down allocation is
to proceed. Support costs are distributed to the other support divisions and operating
ACCT2102

27

divisions. Added together, and the next departments costs are distributed again until all
support costs are distributed.
Usually the first support department is the one that renders the highest percentage of its
total services to other support departments. Continues with the department with next
highest percentage and so on.

Step Down Diagram:
Support 1 costs Support 2 costs Operating 1 costs Operating 2 costs




Support 2 +
a*Support 1 = x
Operating 1+
b*Support1 = y
Operating 2+
c*Support1 = z




y+d*x z+ex

Once a support departments costs have been allocated, no subsequent support-
department costs are allocated back to it. The result is that the step down method does
not recognise the total services that support departments provide one another.
Reciprocal Method:
Allocates support department costs to operating departments by fully recognising the
mutual services provided among all support departments. Fully incorporates
interdepartmental relationships into the support-department cost allocation.
Is similar to the step down method, except that the allocated support costs are
reallocated back to the original support department, and done back and forth until no
support costs are left to be allocated, since they have all been allocated to operating.
Gives a more accurate distribution of costs allocated to operating departments.
Sometimes called matrix method due to required inverse of matrix when solving
algebraically.
Reciprocal diagram:

Support 1 costs Support 2 costs Operating 1 costs Operating 2 costs




$0




$0




$0 $0

Can be solved through linear equations
1. Express support department costs and reciprocal relationships


ACCT2102

28

Where 100 and 150 represent department costs, coefficients are the reciprocal
relationship, A and B are the complete reciprocated costs. 0.1 is proportion of B
used by A (A = cost of A + cost of B used by A)
2. Solve the linear equations
3. Allocate the complete reciprocated costs of each support department to all other
departments based on percentages of usage.
o For each operation department: Cost = existing cost + (proportion
department reciprocal cost)
Differences among the three methods allocations increase:
1. As the magnitude of the reciprocal allocations increases
2. As the differences across operating departments usage of each support departments
services increase.
Summary: Direct method allocates each support departments costs to operating departments
without allocating a support departments cost to other support departments. The step down
method allocates support department costs to other support departments and to operating
departments in a sequential manner that partially recognises the mutual services provided
among all support departments. The reciprocal method fully recognises mutual services provided
among all support departments.
Managers need to clarify the method used for cost allocation to avoid disputes in cost-
reimbursement contracts that require the allocation of support department costs.
Reciprocal method is the most accurate, but the direct and step down methods are easiest to use.
However computing power is increasing making it easier to compute repeated iterations or
multiple simultaneous equations.
Another advantage of the reciprocal method highlights the complete reciprocated costs of
support departments and how they differ from budgeted or actual costs of departments, and
assist in deciding whether to outsource cheaper support department services.
A departments complete reciprocal cost should be looked at when comparing outsourcing prices,
as the costs from other departments will be saved as well.

Das könnte Ihnen auch gefallen