Transcript Managerial Accounting - Department of Agricultural Economics

Managerial Accounting
An Overview
Role in Decision-Making
 Provides economic and financial
information to management
 Focus on resources, costs, profit and
liquidity management
 Focus on short run performance
Management Functions
1. Planning
–
–
–
–
Looking forward and establishing objectives
Profit maximization versus utility?
Market share maximization?
Adding value to the business
2. Directing
– Implementation of objectives
– Coordinating activities and resources
Management Functions
3. Controlling
– Keeping activities on track
– Role of the CFO
• Managerial accounting
• Strategic planning
Vital Truths in Management
• “The true cost and profit picture for each
product, for each product/market segment,
and for all key customers must always be
known.”
• “A business must concentrate on cash flow
and balance sheet strengths as much as
profits.”
Quotes from article by Ames and Hlavacek in the
Harvard Business Review
Common Foundation
• Different industries and businesses within
industries often require different
management accounting information
• However, the expected results are
fundamentally the same….to more
efficiently and effectively manage the
business.
Understanding Performance
 Must be able to track the value added at each
process and the costs associated with those
processes,
 Must seek to avoid/minimize non-value added
activities and their associated costs,
 Some managers don’t want to know the results
from accounting indicators,
 Some think that financial planning is all a bunch
of “funny money”; not real!!!
Managerial Cost Concepts
1. Direct materials: raw materials
physically associated with the final
product
2. Direct labor: employees physically and
directly associated with the final product
3. Overhead: costs indirectly associated
with the final product
More Concepts
1. Period costs: costs matched with revenue for
a specific time period. (i.e., net income for a
specific period (i.e., quarterly, annual).
2. Product costs: costs associated with
producing the final product. Not considered an
expense until the product (i.e., cost of goods
sold).
3. Total costs: equals product costs (direct and
indirect materials and labor) plus period costs
(selling and administrative expenses).
Total Costs
Production Costs
Manufacturing Costs
Period Costs
Non-manufacturing Costs
Direct
Materials
Selling
Expenses
Direct
Labor
Administrative
Expenses
Manufacturing
Overhead:
Indirect materials
Indirect labor
Other indirect costs
Cost of Goods Sold Determination
Merchandising Firm
Beginning
Merchandise
Inventory
+
Cost of
Goods
Purchased
=
Cost of Goods
Available
For Sale
-
Ending
Merchandise
Inventory
Cost of
Goods
Sold
Manufacturing Firm
Beginning
Finished
Goods
+
Cost of
Goods
Manufactured
=
Cost of Goods
Available
For Sale
-
Ending
Merchandise
Inventory
Cost Accounting Concepts
Process cost accounting
Job order cost accounting
Activity based cost accounting
Process Cost Accounting
Tracking costs associated with a specific
process
Direct materials and labor
Manufacturing overhead costs
Assigning costs to finished goods
Process Costs in Making Bread
Raw Materials
Factory Labor
Manf. Overhead
Mixing
Department
Production Cost
Report
WIP
Baking
Department
Production Cost
Report
WIP
Packaging
Department
Production Cost
Report
WIP
Finished
Goods
Job Order Cost Accounting
Tracking costs associated with a specific
order or job
Direct materials and labor
Manufacturing overhead costs
Assigning costs to finished goods
Comparison of Cost Systems
Features
Job Order
Cost System
Work in process
accounts
One work in
process account
Documents used
Job cost sheets
Determination of
total manf. costs
Each job
Unit-cost
computations
Cost of each job/
units produced for
the job
Process Cost
System
Comparison of Cost Systems
Features
Job Order
Cost System
Process Cost
System
Work in process
accounts
One work in
process account
Multiple work in
process accounts
Documents used
Job cost sheets
Production cost
reports
Determination of
total manf. costs
Each job
Each period
Unit-cost
computations
Cost of each job/
units produced for
the job
Total manf. costs/
units produced
during the period
Activity Based Cost Accounting
 An approach for allocating overhead
 An activity is any event, action, transaction or
work sequence that incurs when producing a
product or providing a service
 An activity cost pool is a distinct type of activity
(e.g., ordering materials)
 A cost driver is any factor or activity that has a
direct cause-effect relationship with resources
consumed (e.g., machine hours)
Steps in ABC Accounting
1. Identify and classify activities and
allocate overhead to cost pools
2. Identify cost drivers – correlation
between driver and use
3. Compute overhead rates – ABC rate
4. Assign overhead costs to products – use
of cost drivers
5. Comparison of unit costs across
products
Activity Based Cost (ABC) System
Overhead Costs
Activity cost pools:
Ordering
and
Receiving
Materials
Cost Pool
Setting
Up
Machines
Cost
Pool
Machining
Cost
Pool
Assembly
Cost
Pool
Inspecting
and
Testing
Cost
Pool
Painting
Cost
Pool
# of
Machine
hours
# of
Parts
# of
Tests
# of
Direct
hours
Cost drivers:
# of
Purchase
orders
# of
Setups
Products
Example of ABC Accounting
ABC Overhead rate = Overhead per activity ÷ Cost driver per activity
Initial status:
Activity Cost Pool
Overhead
Driver
AB overhead
activity
rate
Setting up machines
$300,000
1,500 setups
$200/setup
Machining
$500,000
50,000 hours
$10/hour
Inspecting
$100,000
2,000 inspection
$50/inspection
Total
$900,000
Step 1: Assigning overhead driver activity to products:
Activity Cost Pool
Cost driver
Driver
Product 1 Product 2
activity
Setting up machines
# setups
1,500
500
1,000
Machining
Hours
50,000
30,000
20,000
Inspecting
# inspections
2,000
500
1,500
Example of ABC Accounting
Step 1: Assigning overhead driver activity to products:
Activity Cost Pool
Cost driver
Driver
Product 1 Product 2
activity
Setting up machines
# setups
1,500
500
1,000
Machining
Hours
50,000
30,000
20,000
Inspecting
# inspections
2,000
500
1,500
Step 2: Partitioning of overhead:
Overhead
Setting up machines
$300,000
Machining
$500,000
Inspecting
$100,000
Product 1
Product 2___
(33%) $100,000 (67%) $200,000
(60%) $300,000 (40%) $200,000
(33%) $25,000 (67%) $75,000
33% = 500/1,500 and $100,000 = 500 units x $200/setup
Example of ABC Accounting
Step 1: Assigning overhead driver activity to products:
Activity Cost Pool
Cost driver
Driver
Product 1 Product 2
activity
Setting up machines
# setups
1,500
500
1,000
Machining
Hours
50,000
30,000
20,000
Inspecting
# inspections
2,000
500
1,500
Step 2: Partitioning of overhead:
Overhead
Setting up machines
$300,000
Machining
$500,000
Inspecting
$100,000
Product 1
Product 2___
(33%) $100,000 (67%) $200,000
(60%) $300,000 (40%) $200,000
(33%) $25,000 (67%) $75,000
67% = 1,000/1,500 and $200,000 = 1,000 x $200/setup
Example of ABC Accounting
Step 2: Partitioning of overhead:
Overhead
Setting up machines
$300,000
Machining
$500,000
Inspecting
$100,000
Total
$900,000
Step 3: Overhead costs per unit:
Units produced
Overhead cost per unit
Traditional overhead cost per unit*
Product 1
$100,000
$300,000
$25,000
$425,000
Product 2
$200,000
$200,000
$75,000
$475,000
25,000
$17
5,000
$95
$30
$30
* $900,000 divided by 30,000 units
Avoids overstating
profitability of some
enterprises and understating
profitability of others
Example of ABC Accounting
Product 1 Product 2
COP unit costs with ABC costing:
Direct materials
Direct labor
ABC overhead
Total unit costs
$40
$12
$17
$69
$30
$12
$95
$137
COP unit costs with traditional costing:
Direct materials
Direct labor
Traditional overhead *
Total unit costs
$40
$12
$30
$82
$30
$12
$30
$72
* $900,000 divided by 30,000 units
Traditional overhead costing
suggests that Product 2 is
cheaper to produce than
Product 1, which is not true!
Another Approach…
Product #1
Variable expenses
Fixed expenses
1
2
Product #2
Variable expenses
Fixed expenses
1
…………..
2
1
Product #n
Variable expenses
Fixed expenses
1
2
2
Total fixed expenses
Two approaches:
1. Allocate total fixed expenses using ABC accounting procedures
2. Sum the budgeted fixed expenses at the product level and check
for consistency at the firm level. Reallocate if necessary.
Decision-Making Concepts
Cost behavior analysis
Cost-volume-profit analysis
Marginal analysis
Pricing
Cost Behavior Analysis
Variable costs –costs that vary with the
level of production
Fixed costs – costs that do not vary with
the level of production
Relevant range – relevant segment of
cost curves
Mixed costs – sometimes called semivariable costs (e.g., rental rates)
Cost-Volume-Profit Analysis
• Contribution margin per unit: unit selling
price minus unit variable cost
• Contribution margin ratio: units vs. $$$
• Degree of operating leverage:
contribution margin ÷ net income
• Breakeven analysis: entity vs. enterprise
level
Marginal Analysis
Short profit associated with input use
Single versus multiple input usage
Productivity and prices
Product/enterprise selection
Product Pricing
 Target costing (TC = P – desired profit)
 Cost Plus pricing
 Cost plus a markup
 Markup percentage (desired ROI per unit divided by
total unit cost)
 Variable cost pricing (excludes SR fixed costs)
 Internal pricing
 Cost-based transfer price
 Market-based transfer price
 Pricing power (Price takers vs. price setters)
Cash Management and LOC
• Identifying monthly cash flow surpluses
and deficits
• Determining the required LOC – maximum
monthly cash flow deficit
• Remember, cash is King!!!