Sie sind auf Seite 1von 28

MODULES

Strategic Cost Management

Jellyren Gutierrez, CPA


INSTRUCTOR
MODULE 1
The Strategic Cost Management Process

Learning Objectives:
OVERVIEW:
• Describe the Strategic Cost Management and its
Due to new markets, innovations, stages
technologies, and new regulations, competition • Understand the role strategic cost management
among business had been increasing over the years. in gaining competitive advantage for the
It is a challenge for all business to step up and ace the business.
competition globally and locally. Most efficient firms • Understand the need for Strategic cost
make efficient investment spending based on their management
strategic vision and their wise decision-making • Explain and discuss the components of SCM
capabilities. Firms with low performance and under • Explain Porter’s generic strategies
the pressure of closing down tends to cut their costs • Explain the life cycle of a product
without thinking about the long-run effect on
sustainability growth and the overall effect on their
busines strategy.

This module will give you insight to Strategic


Cost Management. Its underlying concepts, and its
importance to every business. This module also
contains review questions and exercises set which
aims to enhance your understanding.

1.1 Introduction and Overview of Strategic Cost Management


Strategic Cost Management or otherwise called as SCM is the cost management technique that aims at reducing costs
while strengthening the position of the business. This may be accomplished by having a thorough understanding of the
company’s costs—those costs which supports the business and those costs which weaken or have no impact in the
business strategy. It is a process of combining the decision-making structure with the cost information, in order to
reinforce the business strategy as a whole. It measures and manages costs to align the same with the company’s business
strategy.

Let us use a fast food chain as an example. Suppose that the fast food chain redesigns its order-taking process, and adapted
a self-ordering kiosk which makes it more convenient and easier for customers to order. The strategic position of the fast
food chain over its competitors will increase due to more customers choosing it over other fast food chain.

Now, suppose a fast food decides to reevaluate its accounts payable system. This will make the system more efficient but
it has no impact in the external market of the business.

Another example, suppose a fast food chain opted to have two cashiers who will cater to customer orders, this will stir
dissatisfaction to customers due to long lines and will have a negative impact on the image of the fast food chain which
may result to decrease in customers over other competitors. Even though having two cashiers will save up cost in the long
run it will harm the business.

The examples stated above illustrates the types of cost management: Those that strengthen the organization’s competitive
position, those that that have no impact on the organization’s position, and those that weaken the organization’s position,
respectively.

1.2 The Stages of SCM

1. Clarify objectives
This stage involves defining the short and long-term goals of a business and identifying how to accomplish these
objectives. Once defined, it is important to gather and analyze information which may affect the objectives, the
analysis should focus on understanding the needs of the business as a sustainable entity, its strategic direction
and identifying initiatives that will help the business grow.
2. Formulating Strategies
A review of the information gathered in the analysis is needed to formulate strategies. Identification of areas in
the business that will be helpful in the objective, and also those areas that needs to be prioritized. Once identified,
begin formulation of strategies that will cater to the immediate needs of the business. Alternatives should also be
developed in this stage since business and economic environment might change anytime.
3. Communication of Strategies in the entire organization.
Everyone and anyone contribute to achieving the goals of the business. Communication of strategies will give
individuals an understanding of what the business is aiming to achieve.

4. Planning and Carrying out tactics, to execute those strategies.


This is the action stage of SCM. In this stage, it is important that the responsibilities and accountability of each
individuals are made clear. Resources needed for the strategy must also be secured at this stage.
5. Developing and implementing controls to track the success.
This stage includes performance measurement, consistent review of internal and external issues and making
corrective actions when necessary. This helps the management to gather new information which may be helpful
to modify/ improve their strategy.
“In Strategic Cost Management (SCM), primary importance is given to constant improvement in the product to provide
better quality to its target customers. It is an essential part of the value chain that covers every facet such as purchase,
design, production, sales and service.”
1.3 Why businesses need SCM?
1. It is an updated form of cost analysis, in which the strategic elements are more clear and formal and improves the
overall position of the company.
2. It is used to analyze cost information, and use it to develop various measures to achieve a sustainable competitive
advantage.
3. It provides a better understanding of the overall cost structure in the quest of gaining a sustainable competitive
advantage.
4. It uses cost information specifically to govern the strategic management process – formulation, communication,
implementation and control.
5. It helps in identifying the cost relationship between value chain activities and its process of management to gain
competitive advantage.

1.4. Components of SCM


There are three important components of strategic cost management:

1. Strategic Positioning Analysis:

It determines the company’s comparative position in the industry in terms of performance. The ultimate
goal of this work is to ensure the continuity of the business. It involves research and analysis of the possible future
situation of the company internally and externally.

Some of the questions these types of strategic management concepts are trying to answer include:
• What are the opportunities and threats you can perceive in the current economic climate?
• What is the future economic landscape like for your products, market and business?
• What is the current state of your business?
• How could the company be roughly positioned in the future landscape?
• What systems need to be instigated in order to attain this future position?

2. Cost Driver Analysis:

Cost driver analysis is concerned with determining what the actual drivers of activity costs are within your
operations. Cost drivers are divided into two: structural cost drivers and executional cost drivers.

Structural cost drivers relate to choices of management about the size and scope of operations also their
product mix and complexity. Executional cost drivers relates to the execution of the business activities such as
utilization of employees, provision of quality service, and product design and manufacturing.

*source: http://www.hkiaat.org
3. Value Chain Analysis: The process in which a firm recognizes and analyses, all the activities and functions that
contribute to the final product. It was propounded by Michael Porter, to show the way a customer value assembles
along the activity chain that results in the final product or service.

“In a nutshell, strategic cost management is not just about controlling the costs but also uses the information for
managerial decision making. The fundamental objective of strategic cost management (SCM) is to gain a sustainable
competitive advantage by way of product differentiation and cost leadership”

1.5. Porter’s Generic Strategies


Michael E. Porter, an American academic, introduced in his book titled "Competitive Advantage: Creating and Sustaining
Superior Performance" the approaches which can be used to determine the direction or strategy of an organization.

*Source: https://www.mindtools.com/pages/article/newSTR_82.htm

Let us further understand the strategies:

1. Cost Leadership
In this strategy, the objective is to become lower-cost producer in the industry. This objective may be
achieved either by increasing profits by reducing costs, while charging industry-average prices or
increasing market share by charging lower prices, while still making a reasonable profit on each sale
because you've reduced costs. To be the lowest-cost producer, a firm is likely to achieve or use several of
the following:
▪ High levels of productivity
▪ High capacity utilization
▪ Use of bargaining power to negotiate the lowest prices for production inputs
▪ Lean production methods (e.g. JIT)
▪ Effective use of technology in the production process
▪ Access to the most effective distribution channels
2. Differentiation Strategy
This strategy’s objective is to make your products or service different from and more attractive than those
of your competitors, you are targeting differentiation across the whole industry. This may be achieved by
making your product as exclusive as possible, making it more attractive than comparable products offered
by the competition. You can also use:
▪ Superior product quality (features, benefits, durability, reliability)
▪ Branding (strong customer recognition & desire; brand loyalty)
▪ Industry-wide distribution across all major channels (i.e. the product or brand is an essential item
to be stocked by retailers)
▪ Consistent promotional support – often dominated by advertising, sponsorship etc.
3. Focus Strategy
In this strategy, you concentrate or target a narrow competitive scope within the industry or what we call
a niche market. By targeting you understand the dynamics the market segment and the needs of the customers
within it and then develop a uniquely low-cost (Cost Focus) or well-specified products for the market
(Differentiation Focus).

1.6. Value Chain Analysis


A value chain analysis gives a visual model of a business’ value chain—a value chain is used to describe the
activities of a business from production to finished goods. With this analysis, a business can create competitive
advantage, improve production efficiency and increase profit margins.

Steps in Value Chain Analysis:


1. Determine the business' primary and support activities.
2. Analyze the value and cost of the activities.
3. Identify opportunities to gain a competitive advantage.

 PORTER’S VALUE CHAIN ANALYSIS MODEL

*source: https://www.smartsheet.com/everything-you-need-to-know-about-value-chain-analysis
1.7. Life Cycle Cost Management
Life Cycle Management is a business management approach that can be used by all types of business (and other
organizations) in order to improve their sustainability performance. A method that can be used equally by both large and
small firms, its purpose is to ensure more sustainable value chain management. LCM can be used to target, organize,
analyze and manage product-related information and activities (Remmen et al,. 2007) towards continuous improvement
along the product life cycle.

 PRODUCT LIFE CYCLE


The product life cycle is the process a product goes through from when it is first introduced into the market until it declines
or is removed from the market. The life cycle has four stages - introduction, growth, maturity and decline.
In a product’s introduction stage, companies generally invest substantially in promotion and advertising to build demand
for the product and to get it into the hands of its target consumers. This is the stage where the management gets a grasp
on how the consumers responds to the product and how successful it may be. When the product gets successful entry, it
enters the growth stage where the product gets popular and the demand grows as a result the market expands. Production
will also increase and will seek improvement to the product features to maintain and expand further the market share.
The most profitable life of the product is when it enters the maturity stage. Maturity stage is where sales is maxed out
and saturation is reached, and competition with other products will be very high and the product sales and market share
will tend to go slower because of the competition. Businesses will attempt to keep its product in the market during the
maturity stage as long as possible, but when it cannot held on longer product sales will decline drastically and demand will
deteriorate making the product life decline.

*Source: https://www.thestreet.com

1.8. Activity Based Costing and Activity Based Management

Activity-based costing is a costing method that assigns indirect costs to activities and to the products based on
each product’s use of activities. It is used to improve the tracing of manufacturing costs to products. Activity-based
costing is based on the premise: Products consume activities; activities consume resources.
Activity-based management (ABM) is a procedure used by businesses to analyze the profitability of every segment
of their company, enabling them to identify problem areas and areas of particular strength. It helps managers
improve the value of products and services to increase the firm’s competitiveness.
References Used:

• Archna Mohan Strategic Cost Management: An Overview n.d, < https://www.accountingnotes.net>


• Dr Fong Chun Cheong Cost Drivers and Company Activities n.d, <http://www.hkiaat.org/images/uploads/articles>
• Porter's Generic Strategies Choosing Your Route to Success n.d, <https://www.mindtools.com>
• Rod Dunne, March 2011, <http://product-ivity.com/strategic-cost-management>
• Strategic Cost Management (SCM) n.d, <https://businessjargons.com/strategic-cost-management>
• Tutor2u Porter's Model of Generic Strategies for Competitive Advantage n.d, <https://www.tutor2u.net>

Learning Activities

Exercise 1: True/False:

1. Strategic cost management measures and manages costs to align the same with the company’s business
strategy.
2. Demand on product is on rise when it enters the growth stage.
3. Management needs to be involved in cost reduction activities, so that they can provide input regarding how
certain costs must be incurred in order to support the competitive position of the firm.
4. Differentiation focus is similar to differentiation strategy but only involved in a wider market.
5. Promotion and advertising of product stops once it starts the growth stage.

Exercise 2: Essay

Do you think Strategic cost management in big business is more important than those in small business? Explain your
answer.
Exercise 3:

ABC Ltd. is engaged in business of manufacturing branded readymade garments. It has a single manufacturing facility at
Ludhiana. Raw material is supplied by various suppliers. Majority of its revenue comes from export to Euro Zone and US.
To strengthen its position further in the Global Market, it is planning to enhance quality and provide assurance through
long term warranty. For the coming years company has set objective to reduce the quality costs in each of the primary
activities in its value chain. Required STATE the primary activities as per Porter’s Value Chain Analysis in the value chain of
ABC Ltd with brief description.

Exercise 4:

Wireless is a manufacturer of mobile phones. The company operates in a market that is dynamic, extremely competitive
and consumer centric. The market is broadly fragmented into those customers who are price conscious looking only for
basic features and those who are technology savvy wanting to try out the latest offering. Wireless manufactures phones
that cater to both these segments. Mobile A has the very basic features that a customer requires from a phone. It is
marketed to attract the price conscious customers. There are many other manufacturers who have similar product offering
for this market. Mobile Z offers the latest technology features and an attractive design. Wireless has invested substantial
amount in research and development that has resulted in Mobile Z having many unique features. It is marketed to attract
customers willing to try out newer products. The research has also yielded results whereby a large section of the design
of Mobile A and Z can be standardized to have a similar components and engineering. This would enable Wireless to enter
into agreements with its suppliers to provide components Just in Time based on the production schedule. With this
change, the quality of Mobile A is expected to improve, thereby improving its sales offtake manifold. Online shopping has
given customers complete access to the prices of phones offered by different manufacturers. This channel of shopping
contributes to almost 70% of the sales. Huge discounts by its rivals has forced Wireless to reduce the prices of Mobile A
as well. This has stretched its profit margins. Various cost reduction measures have been initiated to maintain profitability.
Mobile Z on the other hand is currently doing well since it is targeted at a more niche segment of customers. Wireless is
able to charge premium price for Mobile Z. The latest news in the industry of personal devices like mobiles, laptops etc. is
the use of Artificial Intelligence and Augmented Reality to enhance user experience. The technical staff at Wireless feel
that this could be the next new frontier that could really change the way we use our devices, most of which could even go
redundant.

Required:

1. IDENTIFY the strategy that Wireless is using for Mobile A and Mobile Z.
2. DISCUSS the risks involved in each of these strategies.
Evaluation

What am I learning from this


module?

What am I finding hard or


challenging about the topic?

What was the most important


thing I learned from this
module?
MODULE 2
The role, historical perspective and direction of management accounting

OVERVIEW: Learning Objectives:

This module will introduce you to • Understand the role and environment of
management accounting. It highlights the distinction management accounting
between management accounting and financial • Distinguish financial accounting from
accounting, the management process, and the management accounting
organizational structure and roles of management • Understand how management accounting
accountant. A set of exercises is also provided to fits into an organization’s structure
gauge your understanding on the topic.

2.1 Objectives, Scope, Relationship with Financial Accounting

Management accounting is the process of analyzing business costs and operations to prepare internal financial report,
records, and account to aid managers’ decision-making process in achieving business goals. The main objectives of
management accounting is to provide:
• information for costing out services, products, and other objects of interest to management.
• information for planning, controlling, evaluating, and continuous improvement.
• information for decision making.
 Difference between Management Accounting and Financial Accounting:

Financial Accounting Management Accounting


Reports to those outside the Reports to managers inside the
organization organization
Emphasizes financial consequences of Emphasizes decisions affecting the
past activities future
Emphasizes objectivity and verifiability Emphasizes relevance
Emphasizes precision Emphasizes timeliness
Emphasizes company-wide reports Emphasizes segment reports
Must follow GAAP/PFRS Need not follow GAAP/PFRS
Mandatory for external reports Not mandatory

 Management Process
PLANNING
Planning involves setting goals and specifying how to achieve them. Planning can be classified as strategic planning
or operational planning. Strategic planning involves developing long-term actions to achieve the company’s objectives
or goals, while operational planning develops short-term actions to manage day-to-day operations.

DIRECTING
Directing is the process where the managers run day-to-day operations putting into action those developed from
planning stage.

CONTROLLING
It is important to monitor the implementation of the plans and actions. In this process, comparison of actual
results and expected results are made in order to evaluate and get feedback on areas that may need to be improved
or revise.

DECISION-MAKING
It is important for managers to continually decide among alternatives in order to achieve goals. And this can be
done by relying on the information reported by management accounting.

Managerial accounting supports management in all the phases of the management process

2.2 Role and activities of Management Accountant

Management accountant aids the managers in making informed decision-making in achieving business goals. To
perform this role, management accountant’s function is to establish, coordinate and administer an adequate plan for
the control of operations. This includes preparation of sales forecasts, budgets, investment schemes and the like.
Management accountants also compare actual performance with the operating plan and standards and report and
interpret the results to the management.
It is important to remember that management accountant only assists the management in key decision-making,
formulation and implementation of the business strategy. Management accountants do not make the decision, it is
on the hands of the management.

2.3 Organizational Structure and the Management Accountant

*source: https://slideplayer.com
A typical organizational structure is presented in the illustration above. Line Management: such as production,
marketing, and distribution management, is directly responsible for attaining the goals of the organization. Staff
Management: such as management accountants and information technology and human-resources management,
provides advice, support, and assistance to line management. For example, A plant manager (a line function) may be
responsible for investing in new equipment. A management accountant (a staff function) works as a business
partner of the plant manager by preparing detailed operating cost comparisons of alternative pieces of equipment.
The controller is the one responsible for managerial and financial accounting.

2.4 Management Accounting Information System

Management accounting information system (MAIS) is a formal system that collects operational and financial data to
report information that are useful in decision-making and control o operations. A management accounting information
system can help businesses run better by providing timely information on internal operations. Managers need to have
specific data on certain processes to control costs and to make sound decisions.

Three main objective of MAIS are:

1. To provide information for costing out services, products, and other objectives of interest to management.
2. To provide information for planning, controlling, evaluation, and continuous improvement.
3. To provide information for decision making

References Used:

• Managerial Accounting; Mowen, Maryanne M. et. al; Cengage Learning Asia Pte Ltd; copyright 2016
• Principles of Managerial Accounting 11th Edition; Reeve, James M.; Cengage Learning Asia Pte; copyright 2017
• Introduction to Managerial Accounting; Brewer, Peter C. et. al; New York Mc Mgraw-Hill; copyright 2016
• Managerial Accounting; White Cotton, Stacey; New York McGraw-Hill; copyright 2016
• Managerial Accounting: The Cornerstone of Business Decisions; Mowen, Maryanne M.; Australia South Western,
Cengage Learning; copyright 2016

• Management Accounting by Cabrera, 2016 edition

• Introduction to Managerial Accounting by Brewer, Garrison, and Noreen; 7th Edition; McGraw-Hill Education

• Managerial Accounting by Hilton and Platt; Global Edition; copyright 2015; McGraw Hill Education
Learning Activities

Exercise 1:

1. Indicate whether the following statements are true or false:


____1. Managerial accounting information is designed primarily to meet the needs of external users such as
shareholders, creditors, and the general public.
____2. Managerial accounting reports must be prepared for the business as a whole.
____3. Operational planning develops short-term actions for managing the day-to-day operations of the
company.
____4. Although financial and managerial accounting differ in many ways, they are similar in that both rely
on the same underlying financial data.
____5. Managerial accounting is a branch of financial accounting and serves essentially the same purposes
as financial accounting.
____6. Managerial accounting places greater emphasis on the future than financial accounting, which is
primarily concerned with the past.
____7. The controller occupies a line position in an organization.
____8. When carrying out their planning activities, managers obtain feedback to ensure that the plan is
actually carried out and is appropriately modified as circumstances change.

2. Match the following descriptions to the proper phase:


Phase of Management Process Description
Planning a. Monitoring the operating results and comparing the actual results with
expected results
Controlling b. Rejects solving problems with temporary solutions that fail to address
the root cause of the problem
c. Used by management to develop the company’s objectives

Exercise 2:

Examine the extent to which the role and nature of management accountants might differ within the public and private
sectors.
Evaluation

What am I learning from this


module?

What am I finding hard or


challenging about the topic?

What was the most important


thing I learned from this
module?
MODULE 3
Management Accounting and Ethical Conduct

OVERVIEW: Learning Objectives:

Professional accountants have special obligations in • Understand what professional ethics mean
terms of ethics since they are responsible for the to management accountants
veracity of the financial information presented to • Be familiar with the certifications available to
users. management accountants

This module discusses the code of conduct that


management accountants are expected to adhere. As
well as the certifications available for management
accountants.

3.1 Code of Conduct for Management Accountants

Ethical behavior is like a lubricant that keeps the economy going. Without the lubricant, the economy would operate
much less efficiently—less would be available to consumers, quality would be lower, and prices would be higher. It is
important that every business must be carried out with ethical conduct. As management accountants, we influence
the decisions of the management and we are needed to perform our roles within the ethical perspective.
The Institute of Management Accountants (IMA) of the United States has adopted an ethical code called the Statement
of Ethical Professional Practice that describes in some detail the ethical responsibilities of management accountants.

The standards consist of two parts. The first part provides general guidelines for ethical behavior. In a nutshell, a
management accountant has ethical responsibilities in four broad areas: first, to maintain a high level of professional
competence; second, to treat sensitive matters with confidentiality; third, to maintain personal integrity; and fourth,
to disclose information in a credible fashion. The second part of the standards specifies what should be done if an
individual finds evidence of ethical misconduct.
3.2 Certification Available to Management Accountants

A certification available for management accountants, sponsored by the IMA, is called Certified Management
Accountant certification exam. This certification will increase your credibility, career advancement and earning potential.
The examination is divided into two parts: (1) Financial Planning, Performance, and Control and (2) Strategic Financial
Management, covering 12 competencies. The CMA examination focuses on the planning, controlling, and decision-
making skills that are critically important to nonpublic accounting employers. The CMA’s internal management
orientation is a complement to the highly respected Certified Public Accountant (CPA) exam that focuses on rule-based
compliance—assurance standards, financial accounting standards, business law, and the tax code.
*source: https://www.imanet.org

A specialty credential, Certified in Strategy and Competitive Analysis (CSCA), is also available for those who passed both
parts of the CMA certification exam. It complements and expands upon the strategic planning and analysis skills
developed through the CMA certification. This credential will help you master the concepts and techniques that are
required to become a key player in driving the strategic planning process at your organization.

3.3 Institute of Management Accountants

Institute of Management Accountants (IMA) is the worldwide association of accountants and financial professionals in
business. Founded in 1919, it is one of the largest and most respected associations focused exclusively on advancing the
management accounting profession. The organization visions to be the leading resource for developing, certifying,
connecting, and supporting the world’s best accountants and financial professionals in business.

3.4 Non-Compliance with Law and Regulations

In July 15, 2017 the International Ethics Standards Board for Accountants (IESBA) revised the IESBA Code to address the
professional accountant’s responsibility in relation to Non-Compliance with Law and Regulations (NOCLAR). Essentially,
NOCLAR is an action that violates a law or regulation that has a direct impact on financial statements or violates laws
which address compliance matters. The framework will serve as a guide to professional accountants in what actions to
take in the public interest when they become aware of a potential illegal act, NOCLAR, committed by a client or employer.

The duty of confidentiality has been a barrier for professional accountants to disclosure of potential NOCLAR to public
authorities. Most of times, professional accountants choose to just resign or leave engagement with client because of
lack of guidance on how to best respond to potential NOCLAR.

The standard aims to achieve ENHANCED ETHICAL CONDUCT, PROTECTION FOR STAKEHOLDERS AND GENERAL PUBLIC,
and ENHANCED ROLE AND VALUE OF THE ACCOUNTANCY PROFESSION. It includes considerations and actions when
faced with potential NOCLAR such as:

• Specific communications with management and those charged with governance, assessing the appropriateness
of their response to non-compliance and determining whether further action is needed.
• Communicating identified or suspected noncompliance with laws and regulations to other auditors (e.g., in an
audit of group financial statements).
• Determining whether further action is needed, which may include reporting to an appropriate authority outside
the entity.
• Documenting in accordance with the requirements of the revised IESBA Code.

As management accountant, when you came into a situation where you suspects NOCLAR within your company or of
your client, the proposed response will be to:

1. Become aware (see it, but do not seek it)


2. Obtain an understanding of the matter
3. Address the issue with management and those charged with governance
4. Communicate the matter to the entity’s external auditor
5. Consider whether further action is needed in the public interest (e.g. disclosing to authorities or withdrawing
from the engagement)
6. Documentation – the matter, result of discussion with management or those charged with governance,
actions taken.

References Used:

• Managerial Accounting; Mowen, Maryanne M. et. al; Cengage Learning Asia Pte Ltd; copyright 2016
• Principles of Managerial Accounting 11th Edition; Reeve, James M.; Cengage Learning Asia Pte; copyright 2017
• Introduction to Managerial Accounting; Brewer, Peter C. et. al; New York Mc Mgraw-Hill; copyright 2016
• Managerial Accounting; White Cotton, Stacey; New York McGraw-Hill; copyright 2016
• Managerial Accounting: The Cornerstone of Business Decisions; Mowen, Maryanne M.; Australia South Western,
Cengage Learning; copyright 2016
• Management Accounting by Cabrera, 2016 edition

• Introduction to Managerial Accounting by Brewer, Garrison, and Noreen; 7th Edition; McGraw-Hill Education

• Managerial Accounting by Hilton and Platt; Global Edition; copyright 2015; McGraw Hill Education

Learning Activities

Exercise 1:
Richmond, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of Richmond
approved a large-scale remodeling of its stores to attract a more upscale clientele. Before finalizing these plans,
two stores were remodeled as a test. Linda Perlman, assistant controller, was asked to oversee the financial
reporting for these test stores, and she and other management personnel were offered bonuses based on the
sales growth and profitability of these stores. While completing the financial reports, Perlman discovered a
sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer.
She discussed the situation with her management colleagues; the consensus was to ignore reporting this
inventory as obsolete because reporting it would diminish the financial results and their bonuses.
Required:
1. According to the IMA’s Statement of Ethical Professional Practice, would it be ethical for Perlman not to
report the inventory as obsolete?
2. Would it be easy for Perlman to take the ethical action in this situation?
Exercise 2
Marcia Miller is division controller and Tom Maloney is division manager of the Ramses Shoe Company. Miller
has line responsibility to Maloney, but she also has staff responsibility to the company controller. Maloney is
under severe pressure to achieve the budgeted division income for the year. He has asked Miller to book
$200,000 of revenues on December 31. The customers’ orders are firm, but the shoes are still in the production
process. They will be shipped on or around January 4. Maloney says to Miller, “The key event is getting the sales
order, not shipping the shoes. You should support me, not obstruct my reaching division goals.”
Required
1. Describe Miller’s ethical responsibilities.
2. What should Miller do if Maloney gives her a direct order to book the sales?

Evaluation

What am I learning from this


module?

What am I finding hard or


challenging about the topic?

What was the most important


thing I learned from this
module?
MODULE 4
Cost Terms and Concepts

OVERVIEW: Learning Objectives:

This module aims to explain the different types costs • Understand cost classifications used for assigning
and its classification depending on the needs of the costs to cost objects: direct costs and indirect
immediate needs of the management. costs
• Understand cost classifications used to prepare
Cost behavior analysis and separation is also
financial statements: product costs and period
highlighted in this module.
costs.
• Understand cost classifications used to predict
cost behavior: variable costs, fixed costs, and
mixed costs.
• Analyze and separate mixed costs

4.1 Nature and Classifications of Cost

Cost is the amount of resource given up to achieve a specific objective. A cost is usually measured in monetary amounts
that must be paid to acquire goods or services. In managerial accounting, cost is used in many different ways. The
reason is that there are many types of costs, and these costs are classified differently according to the immediate needs
of management.

COST CLASSIFICATION based on:

Assigning costs to cost objects:


Direct Costs—is a cost that can be easily and conveniently traced to a specified cost object. For example,
a furniture manufacturing’s cost of woods used will be a direct cost when assigning cost to the
production.

Indirect costs—is a cost that cannot be easily and conveniently traced to a specified cost object. For
example, the salary of production supervisor of a furniture manufacturing is indirect cost to the
furniture because the salary is not incurred to produced a specific furniture hence you cannot trace the
cost easily.

Preparing financial statements:


Product Costs—these are costs that become part of the cost of a product and are included in inventory
values that are presented in the balance sheet. They are recognized as asset until they are sold and then
recognized as expense or as cost of goods sold. Product costs are also called inventoriable costs.

Period Costs—are costs that are expensed outright when incurred, they are presented in the income
statement either as administrative expense or selling expense.

Behavior to changes in activity


Fixed Costs—remains static or constant irrespective of changes in output or activity
Variable Costs—changes in direct proportion of change in volume of output or activity
As to function
Manufacturing cost— cost of operating the manufacturing division of a company is production cost. It
includes costs beginning with supplying materials, labor and services and ends with the primary packing
of the product.
Administration cost—cost of formulating the policy, directing the organization and controlling the
operations, which is not related directly to a production, selling, distribution, research or development
activity or function are administration costs.
Selling cost—cost of seeking to create and stimulate demand (sometimes termed as marketing)and of
securing orders.

For making decisions


Opportunity costs—represents the cost of an alternative given up when a decision is made

Sunk costs—are historical or past costs and cannot be changed by any decision that will be made in the
future. They are irrelevant for decision making

Differential cost—the difference in total costs between two alternatives

4.2 Basics of Cost Behavior

Cost behavior refers to how a cost reacts to changes in the level of activity. As the activity level rises and falls, a particular
cost may rise and fall as well—or it may remain constant. It is important for management to understand the behavior of
costs, whether cost will change and by how much depending on the decision they are making.

VARIABLE COSTS
As mentioned earlier, variable cost varies in direct proportion to changes in activity level. A cost to be variable must be
variable with respect to something or what we call an activity base—which is a measure of whatever causes the incurrence
of a variable cost. An activity base is sometimes referred to as a cost driver. Some of the most common activity bases are
direct labor-hours, machine-hours, units produced, and units sold.
For example a small inn provides breakfast to its guests. The cost of one breakfast is P120. The behavior of the
cost is shown below:
Number of Guest Cost per breakfast Total cost of breakfast
7 120 840
10 120 1,200
13 120 1,560

As you can see the cost varies directly with the number of delivery ON A TOTAL basis, it is to be noted that variable cost
remains constant on a PER UNIT basis.

FIXED COSTS

A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity. Unlike variable costs,
fixed costs are not affected by changes in activity. For example, assumes the inn rents its building. Monthly rental is
P10,000. Regardless of the number of delivery, the monthly rent will still remain at P10,000 pesos. Take note that fixed
costs remain constant in total, but is indirectly proportional on a per unit basis.

Monthly Rental Number of Guest Rental per guest


10,000 7 1,428.57
10,000 10 1,000
10,000 13 769.23

Presenting fixed cost on a per unit basis is discouraged because its causes misunderstanding to users and readers that it
is like a variable cost and that its total cost will vary depending on the activity level.

Summary of Cost Behavior

Cost behavior within the relevant range


Cost Per Unit In total
Variable constant Varies directly
Fixed Varies indirectly Constant

 The Linearity Assumption and the Relevant Range

Management accountants ordinarily assume that costs are strictly linear; that is, the relation between cost on the
one hand and activity on the other can be represented by a straight line. Economists point out that many costs
are actually curvilinear; that is, the relation between cost and activity is a curve. Nevertheless, even if a cost is not
strictly linear, it can be approximated within a narrow band of activity known as the relevant range by a straight
line.
Relevant range is the range of activity within which the assumption that cost behavior is strictly linear is reasonably
valid. Outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be
strictly variable. It is important to remember that assumptions on cost behavior may be invalid outside the
relevant range.

MIXED COSTS

A mixed cost is a cost which contains both variable and fixed cost elements. Mixed costs are also known as semivariable
costs.

For example, a company incurs a mixed cost called fees paid to the state. It includes a license fee of $25,000 per year plus
$3 per rafting party paid to the state’s Department of Natural Resources. If the company runs 1,000 rafting parties this
year, then the total fees paid to the state would be $28,000, made up of $25,000 in fixed cost plus $3,000 in variable cost.
Exhibit 2–5 depicts the behavior of this mixed cost. Even if Nooksack fails to attract any customers, the company will still
have to pay the license fee of $25,000. This is why the cost line in Exhibit 2–5 intersects the vertical cost axis at the $25,000
point. For each rafting party the company organizes, the total cost of the state fees will increase by $3. Therefore, the
total cost line slopes upward as the variable cost of $3 per party is added to the fixed cost of $25,000 per year. (Adapted
Managerial Accounting Garrison, Noreen, Brewer)
The total cost hence can be expressed using the equation:
Y= a +bX
Y represents total cost
a represents total fixed cost
b represents variable cost per unit
X represent the level of activity

Applying the equation, supposed that the company organize 800 rafting parties, the total cost can be calculated as:
Y= 25,000 + (3 x 800)
=27, 4000

 Separating mixed costs


It is important to separate mixed cost for proper analysis and decision-making. You can use variety of methods
to separate mixed cost including High-Low Method and Least-Squares Regression Method.

Illustration:
A company produces a product, the following costs were incurred during the first half of the year:
Units produced Total Cost
January 500 12,000
February 800 15,000
March 1000 19, 500
April 1250 23,000
May 900 18,000
June 600 13,500
Let us separate the mixed cost using:

HIGH-LOW method
The high-low method uses the highest and lowest activity levels and their related costs to estimate the variable
cost per unit and the fixed cost.

First Step: Identify the highest point of activity and lowest point activity.
Looking at the table, the highest activity level is 1,250 units and the lowest is 500 units
Second step: Calculate the variable cost. Variable cost will be calculated using the formula:
Cost at high activity level – cost at low activity level
Variable Cost= High activity level – Low activity level

P23,000 – P12,000 11,000


Variable Cost= =
1,250 units – 500 units 750

Variable Cost= 14. 67/unit

Third step: After calculating the variable cost, determine the fixed cost. This is done by taking the total cost at
either the high or the low activity level and deducting the variable cost element.

Let us take the high level total cost of 23, 000 at 1, 250 units.

Fixed cost = Total cost - Variable cost

Fixed cost = 23,000 - (14.67 * 1, 250 units)


Fixed cost= 23, 000 – 18, 337.5
Fixed cost= 4, 662. 5

Fourth step: Since the fixed and variable elements are now separated we can now formulate our cost formula
that can be used to calculate costs at different activity levels.
Total Cost= 4, 6662.5 + 14.67X

Least-Squares Regression Method

The least-squares regression method, unlike the high-low method, uses all of the data to separate a mixed cost
into its fixed and variable components. This is the edge of least-squares over high-low, since it uses all data it
provides a more accurate information. A regression line of the form Y= a + bX is fitted to the data, where a
represents the total fixed cost and b represents the variable cost per unit of activity.

First Step: Find the value of a and b. The formula to calculate the values is presented below.

Second Step: Calculate the figures needed for the formula. To do this, identification of variables should be made.

Using the illustration, the independent variable will be the number of units produced and dependent
variable is the total cost.

x y xy x2
January 500 12,000 6,000,000 250,000
February 800 15,000 12,000,000 640,000
March 1000 19, 500 19,500,000 1,000,000
April 1250 23,000 28,750,000 1,562,500
May 900 18,000 16,200,000 810,000
June 600 13,500 8,100,000 360,000
Total 5,050 101,000 90,550,000 4,622,500
Mean 841.67 16,833.33

Third step: Substitute the figures to the formula to find a and b. Thus,

90,550,000 – 6(841.67)( 16833.33) 5,541,346.83


b= = =14.89
4,622,500 – 6(841.67)( 841.67) 372, 049. 67

a= 16,833.33 – 14.89(841.67) = 4, 300. 86


Fourth Step: After determining the variable and fixed cost, we can now formulate our cost formula that can be
used to calculate costs at different activity levels.

Y= a +bX
Y= 4, 300. 86 + 14. 89X

References Used:

• Managerial Accounting; Mowen, Maryanne M. et. al; Cengage Learning Asia Pte Ltd; copyright 2016
• Principles of Managerial Accounting 11th Edition; Reeve, James M.; Cengage Learning Asia Pte; copyright 2017
• Introduction to Managerial Accounting; Brewer, Peter C. et. al; New York Mc Mgraw-Hill; copyright 2016
• Managerial Accounting; White Cotton, Stacey; New York McGraw-Hill; copyright 2016
• Managerial Accounting: The Cornerstone of Business Decisions; Mowen, Maryanne M.; Australia South Western,
Cengage Learning; copyright 2016
• Management Accounting by Cabrera, 2016 edition

• Introduction to Managerial Accounting by Brewer, Garrison, and Noreen; 7th Edition; McGraw-Hill Education

•Learning
Managerial Accounting by Hilton and Platt; Global Edition; copyright 2015; McGraw Hill Education
Activities

Exercise 1
What effect does an increase in volume have on
a. Unit fixed costs?
b. Unit variable costs?
c. Total fixed costs?
d. Total variable costs?

Exercise 2
Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures
sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately
owned, has approached a bank for a loan to help it finance its growth. The bank requires financial statements before
approving such a loan. You have been asked to help prepare the financial statements and were given the following list of
costs:
1. Depreciation on salespersons’ cars.
2. Rent on equipment used in the factory.
3. Lubricants used for machine maintenance.
4. Salaries of personnel who work in the finished goods warehouse.
5. Soap and paper towels used by factory workers at the end of a shift.
6. Factory supervisors’ salaries.
7. Heat, water, and power consumed in the factory.
8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.)
9. Advertising costs.
10. Workers’ compensation insurance for factory employees.
11. Depreciation on chairs and tables in the factory lunchroom.
12. The wages of the receptionist in the administrative offices.
13. Cost of leasing the corporate jet used by the company’s executives.
14. The cost of renting rooms at a Florida resort for the annual sales conference.
15. The cost of packaging the company’s product.

Required: Classify the above costs as either product costs or period costs for the purpose of preparing the financial
statements for the bank.

Exercise 3
O&W Metal Company makes designer emblems for luxury vehicles. Each emblem is handcrafted out of titanium to the
customer’s design specifications. O&W’s artisans are paid an hourly wage and work between 30 and 60 hours a week.
O&W uses the straight-line method of depreciation. To ensure that each emblem conforms to the customer’s
specifications, O&W has each emblem inspected by an independent company. The inspection company charges a set
price per month, plus an additional amount for each item inspected. After inspection, each emblem is shipped in a
crush-resistant shipping container.

a. Which of O&W’s costs (titanium, artisan wages, equipment depreciation, inspection, shipping containers) is a mixed
cost?
b. Data on total mixed costs and total production for O&W’s five months of operations are as follows:

Units Produced Total Cost


August 1,000 units 80,000
September 1,200 86,000
October 1,600 98,000
November 2,500 125,000
December 2,200 116,000

Using the high-low method and least-squares regression method, determine the (1) variable cost per unit and (2) total
fixed costs.

c. O&W estimates that it will produce 2,000 units during January. Using your answer to (b), estimate the (1) total
variable costs and (2) fixed cost per unit for January.

Exercise 4
What is meant by classifying costs functionally and behaviorally? Why would a company be concerned about functional
and behavioral classifications?
Evaluation

What am I learning from this


module?

What am I finding hard or


challenging about the topic?

What was the most important


thing I learned from this
module?

Das könnte Ihnen auch gefallen