Managerial Accounting An Overview. Role in Decision-Making Provides economic and financial...
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Managerial Accounting
An Overview
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Role in Decision-Making
Provides economic and financial information to management
Focus on resources, costs, profit and liquidity management
Focus on short run performance
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Management Functions
1. PlanningPlanning– Looking forward and establishing objectives– Profit maximization versus utility?– Market share maximization?– Adding value to the business
2. DirectingDirecting– Implementation of objectives– Coordinating activities and resources
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Management Functions
3. ControllingControlling– Keeping activities on track– Role of the CFO
• Managerial accounting • Strategic planning
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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
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Common Foundation
• Different industries and businesses within industries often require different management accounting information
• However, the expected results are fundamentally the same….to more to more efficiently and effectively manage the efficiently and effectively manage the businessbusiness.
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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!!!
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Managerial Cost Concepts
1.1. Direct materialsDirect materials: raw materials physically associated with the final product
2.2. Direct laborDirect labor: employees physically and directly associated with the final product
3.3. OverheadOverhead: costs indirectly associated with the final product
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More Concepts
1.1. Period costsPeriod costs: costs matched with revenue for a specific time period. (i.e., net income for a specific period (i.e., quarterly, annual).
2.2. Product costsProduct costs: costs associated with producing the final product. Not considered an expense until the product (i.e., cost of goods sold).
3.3. Total costsTotal costs: equals product costs (direct and indirect materials and labor) plus period costs (selling and administrative expenses).
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Total CostsTotal Costs
Production CostsManufacturing Costs
Direct Materials
Direct Materials
SellingExpenses
SellingExpenses
Period CostsNon-manufacturing Costs
Direct Labor
Direct Labor
AdministrativeExpenses
AdministrativeExpenses
Manufacturing Overhead:
Indirect materialsIndirect laborOther indirect costs
Manufacturing Overhead:
Indirect materialsIndirect laborOther indirect costs
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BeginningMerchandise
Inventory
BeginningMerchandise
Inventory
Cost of Goods
Purchased
Cost of Goods
Purchased
EndingMerchandise
Inventory
EndingMerchandise
Inventory
Cost of GoodsSold
Cost of GoodsSold
Cost of GoodsAvailableFor Sale
Cost of GoodsAvailableFor Sale
BeginningFinishedGoods
BeginningFinishedGoods
Cost of Goods
Manufactured
Cost of Goods
Manufactured
EndingMerchandise
Inventory
EndingMerchandise
Inventory
Cost of GoodsAvailableFor Sale
Cost of GoodsAvailableFor Sale
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Merchandising FirmMerchandising Firm
Manufacturing FirmManufacturing Firm
Cost of Goods Sold Determination
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Cost Accounting Concepts
ProcessProcess cost accounting cost accountingJob orderJob order cost accounting cost accountingActivity basedActivity based cost accounting cost accounting
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Process Cost Accounting
Tracking costs associated with a specific a specific processprocess
Direct materials and laborManufacturing overhead costsAssigning costs to finished goods
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Raw MaterialsFactory Labor
Manf. Overhead
Raw MaterialsFactory Labor
Manf. Overhead
MixingDepartment
MixingDepartment
BakingDepartment
BakingDepartment
Production CostReport
Production CostReport
PackagingDepartment
PackagingDepartment
FinishedGoods
FinishedGoods
WIP WIP WIP
Production CostReport
Production CostReport
Production CostReport
Production CostReport
Process Costs in Making Bread
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Job Order Cost Accounting
Tracking costs associated with a specific specific order or joborder or job
Direct materials and laborManufacturing overhead costsAssigning costs to finished goods
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Comparison of Cost Systems
Features
Job Order Cost System
Process 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
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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
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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)
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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 rate4. Assign overhead costs to products – use
of cost drivers5. Comparison of unit costs across
products
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Overhead Costs
Overhead Costs
Orderingand
ReceivingMaterialsCost Pool
Orderingand
ReceivingMaterialsCost Pool
Setting Up
MachinesCostPool
Setting Up
MachinesCostPool
MachiningCostPool
MachiningCostPool
# ofPurchase
orders
# ofPurchase
orders
AssemblyCostPool
AssemblyCostPool
Inspectingand
TestingCostPool
Inspectingand
TestingCostPool
PaintingCostPool
PaintingCostPool
# ofSetups
# ofSetups
# ofMachine
hours
# ofMachine
hours
# ofParts
# ofParts
# ofTests
# ofTests
# ofDirecthours
# ofDirecthours
Products
Products
Activity cost pools:Activity cost pools:
Cost drivers: Cost drivers:
Activity Based Cost (ABC) SystemActivity Based Cost (ABC) System
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Example of ABC AccountingABC Overhead rate = Overhead per activity ABC Overhead rate = Overhead per activity ÷ Cost driver per activity÷ Cost driver per activityInitial status:Initial status:Activity Cost Pool Overhead Driver AB overhead activity rateSetting up machines $300,000 1,500 setups $200/setupMachining $500,000 50,000 hours $10/hourInspecting $100,000 2,000 inspection $50/inspection Total $900,000
Step 1: Assigning overhead driver activity to products:Step 1: Assigning overhead driver activity to products:Activity Cost Pool Cost driver Driver Product 1 Product 2
activitySetting up machines # setups 1,500 500 1,000Machining Hours 50,000 30,000 20,000Inspecting # inspections 2,000 500 1,500
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Step 1: Assigning overhead driver activity to products:Step 1: Assigning overhead driver activity to products:Activity Cost Pool Cost driver Driver Product 1 Product 2
activitySetting up machines # setups 1,500 500 1,000Machining Hours 50,000 30,000 20,000Inspecting # inspections 2,000 500 1,500
Step 2: Partitioning of overhead:Step 2: Partitioning of overhead: Overhead Product 1 Product 2___Setting up machines $300,000 (33%) $100,000 (67%) $200,000Machining $500,000 (60%) $300,000 (40%) $200,000Inspecting $100,000 (33%) $25,000 (67%) $75,000
33% = 500/1,500 and $100,000 = 500 units x $200/setup33% = 500/1,500 and $100,000 = 500 units x $200/setup
Example of ABC Accounting
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Step 1: Assigning overhead driver activity to products:Step 1: Assigning overhead driver activity to products:Activity Cost Pool Cost driver Driver Product 1 Product 2
activitySetting up machines # setups 1,500 500 1,000Machining Hours 50,000 30,000 20,000Inspecting # inspections 2,000 500 1,500
Step 2: Partitioning of overhead:Step 2: Partitioning of overhead: Overhead Product 1 Product 2___Setting up machines $300,000 (33%) $100,000 (67%) $200,000Machining $500,000 (60%) $300,000 (40%) $200,000Inspecting $100,000 (33%) $25,000 (67%) $75,000
67% = 1,000/1,500 and $200,000 = 1,000 x $200/setup67% = 1,000/1,500 and $200,000 = 1,000 x $200/setup
Example of ABC Accounting
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Step 2: Partitioning of overhead:Step 2: Partitioning of overhead: Overhead Product 1 Product 2Setting up machines $300,000 $100,000 $200,000Machining $500,000 $300,000 $200,000Inspecting $100,000 $25,000 $75,000 Total $900,000 $425,000 $475,000Step 3: Overhead costs per unit:Step 3: Overhead costs per unit:Units produced 25,000 5,000 Overhead cost per unit $17 $95
Traditional overhead cost per unit* $30 $30
* $900,000 divided by 30,000 units
Avoids overstating profitability of some enterprises and
understating profitability of others
Avoids overstating profitability of some enterprises and
understating profitability of others
Example of ABC Accounting
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Product 1 Product 2COP unit costs with COP unit costs with ABC costingABC costing::Direct materials $40 $30Direct labor $12 $12ABC overhead $17 $95 Total unit costs $69 $137
COP unit costs with COP unit costs with traditional costingtraditional costing::Direct materials $40 $30Direct labor $12 $12Traditional overhead * $30 $30 Total unit costs $82 $72
* $900,000 divided by 30,000 unitsTraditional overhead costing
suggests that Product 2 is cheaper to produce than
Product 1, which is not true!
Traditional overhead costing suggests that Product 2 is cheaper to produce than
Product 1, which is not true!
Example of ABC Accounting
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Product #1Variable expensesFixed expenses
Product #1Variable expensesFixed expenses
Product #2Variable expensesFixed expenses
Product #2Variable expensesFixed expenses
Product #nVariable expensesFixed expenses
Product #nVariable expensesFixed expenses
Total fixed expensesTotal fixed expenses
Two approaches:1. Allocate total fixed expenses using ABC accounting procedures2. Sum the budgeted fixed expenses at the product level and check
for consistency at the firm level. Reallocate if necessary.
1 2 1 2 1 2
1 2
…………..
Another Approach…
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Decision-Making Concepts
Cost behavior analysisCost-volume-profit analysisMarginal analysisPricing
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Cost Behavior Analysis
Variable costsVariable costs –costs that vary with the level of production
Fixed costsFixed costs – costs that do not vary with the level of production
Relevant rangeRelevant range – relevant segment of cost curves
Mixed costsMixed costs – sometimes called semi-variable costs (e.g., rental rates)
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Cost-Volume-Profit Analysis
• Contribution margin per unitContribution margin per unit: unit selling price minus unit variable cost
• Contribution margin ratioContribution margin ratio: units vs. $$$
• Degree of operating leverageDegree of operating leverage: contribution margin ÷ net income
• Breakeven analysisBreakeven analysis: entity vs. enterprise level
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Marginal Analysis
Short profit associated with input useSingle versus multiple input usageProductivity and pricesProduct/enterprise selection
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Product Pricing
Target costingTarget costing (TC = P – desired profit)Cost Plus pricingCost Plus pricing
Cost plus a markup Markup percentage (desired ROI per unit divided by
total unit cost)Variable cost pricingVariable cost pricing (excludes SR fixed costs) Internal pricingInternal pricing
Cost-based transfer price Market-based transfer price
Pricing powerPricing power (Price takers vs. price setters)
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Cash Management and LOC
• Identifying monthly cash flow surpluses and deficits
• Determining the required LOC – maximum monthly cash flow deficit
• Remember, cash is King!!!Remember, cash is King!!!