Cost Management Accounting Techniques 1204758241780170 2

7/31/2019 Cost Management Accounting Techniques 1204758241780170 2

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Cost & Management

Accounting Techniques Must for Effective Decision Making

BY:

A AMIR

INSTITUTE OF COST & MANAGEMENT ACCOUNTANTS OF PAKISTAN



CONTENTS

Cost & Management Accounting

Cost & Management Accounting Techniques

Conclusion



Cost & Management Accounting

The Process of

Identifying

Measuring Analyzing

Interpreting

Communicating Information



Techniques

The Make or Buy Decision Just-In-Time

Inventory Management

Budgeting

Variance Analysis

Const-Volume-Profit Analysis

Activity Based Costing

Linear Programming

Enterprise Cost Management



The Make or Buy Decision

A decision concerning whether an item shouldbe produced internally or purchased from an

outside supplier is called a “Make or Buy” decision.

Let’s look at the Astech Company example.




Astech manufactures part 4A that is used inone of its products.

The unit product cost of this part is:

Direct materials $ 9

Direct labor 5

Variable overhead 1

Depreciation of special equip. 3 Supervisor's salary 2

General factory overhead 10 Unit product cost 30$



The Make or Buy Decision Equipment used to manufacture part 4A has no resale value.

Total general factory overhead, which is allocated on thebasis of direct labor hours, would be unaffected by thisdecision.

The $30 unit product cost is based on 20,000 parts producedeach year.

An outside supplier has offered to provide the 20,000 parts at

a cost of $25 per part.

Should we accept the supplier’s offer?



Cost

Per Unit Cost of 20,000 UnitsMake Buy

Outside purchase price $ 25 $ 500,000

Direct materials 9$ 180,000

Direct labor 5 100,000

Variable overhead 1 20,000

Depreciation of equip. 3 -

Supervisor's salary 2 40,000

General factory overhead 10 - Total cost 30$ 340,000$ 500,000$


20,000 × $9 per unit = $180,000



Cost










The special equipment has no resalevalue and is a sunk cost.



Cost










Not avoidable; irrelevant. If the product is dropped,it will be reallocated to other products.




Should we make or buy part 4A?

Cost












DECISION RULE

In deciding whether to accept the outsidesupplier’s offer, Astech isolated the relevant

costs of making the part by eliminating: The sunk costs.

The future costs that will not differ betweenmaking or buying the parts.



Techniques



Budgeting

Variance Analysis



Linear Programming




Impact of JIT Inventory Methods

In a JIT inventory system . . .

Productiontends to equalsales . . .

So, the difference between variable andabsorption income tends to disappear.



Techniques


Just-In-Time


Budgeting

Variance Analysis



Linear Programming




Qunatity Discounts

Avoid DisturbanceReduce number of ordering / setupHedge against inflationMeet Unexpected Demands

Quantity Discounts

When to order

How much to orderBuffer Stock Maximum InventoryHow often to review stock



Techniques



Budgeting

Variance Analysis



Linear Programming




Budgeting

Define goaland objectives

Uncover potentialbottlenecks

Coordinateactivities

Communicatingplans

Think about andplan for the future

Means of allocatingresources



Techniques



Budgeting

Variance Analysis



Linear Programming Investment Decision

Robust Decision




Variance Analysis

Material Variances

Labor Variances

Factory Overhead Variances



Techniques



Budgeting

Variance Analysis




Robust Decision




-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

- 100 200 300 400 500 600 700 800

CVP Graph

Fixed expenses

Units

Total Expenses

Total Sales



-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

- 100 200 300 400 500 600 700 800

Units

CVP Graph

Break-even point



Equation Method

Profits = Sales – (Variable expenses + Fixed expenses)

Sales = Variable expenses + Fixed expenses + Profits

OR

At the break-even point

profits equal zero.



Techniques



Budgeting

Variance Analysis




Robust Decision




Activity Based Costing (ABC)

ABC is designed toprovide managers

with cost informationfor strategic and

other decisions thatpotentially affect

capacity andtherefore “fixed”

costs.

ABC is agood supplement to our traditional

cost system

I agree!



Techniques



Budgeting

Variance Analysis




Robust Decision




LP Applications

1. Development of a production schedule thatwill

satisfy future demands for a firm’s

production while minimizing total production and

inventory costs

2. Selection of product mix in a factory to make best use of machine-hours and

labor-hours available

while maximizing the firm’s products



LP Applications

3.

Determination of grades of petroleumproducts to yield the maximum profit

4. Selection of different blends of raw

materials to feed mills to produce finishedfeed combinations at minimum cost

5. Determination of a distribution systemthat will minimize total shipping cost fromseveral warehouses to various marketlocations



Techniques



Budgeting

Variance Analysis



Linear Programming




ECM



CONCLUSION

Corporate Decision-Makers Rely on

Cost & Management Accountants

Thank you.

Cost Management Accounting Techniques 1204758241780170 2

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