Managerial accounting, Appunti di Programmazione e controllo

Scarica Managerial accounting e più Appunti in PDF di Programmazione e controllo solo su Docsity! MANAGERIAL ACCOUNTING 1. Managerial Accounting 2. Financial Accounting vs. Management accounting 3. Functions of management accounting Accounting is the process of identifying, measuring and communicating economic information in order to permit informed decisions by users of information. You produce numbers in order to support decision making process. In a company there are different users. We can classify them into 2 broad categories: 1) users - can be external (financial accounting) or internal (management accounting). 2) decisions - the first step is to define objectives. Once objective had been defined, you select different alternatives and then you take action. The third step is to measure the results. The last step is evaluation. The typical tool provided to define objectives is budget. Tools to define Action/decision are: cost-volume-profit (CVP) analysis and relevant costs for decision making. The bulk of the course will be on measurement: • costing systems - traditional and activity based • segment profitability For evaluation • variance analysis • divisional performance evaluation One of the differences between the other “accountings” are: financial accounting deal with information of external users, while management accounting is for internal users of the information. Managers are mainly using management accounting. Since we have different users, some other characteristics are different: the first distinction is in terms of legal requirements. Why this distinction? because you cannot decide whether to implement or not a financial accounting system, because any company is expected to produce financial statements. Financial accounting is mandatory, management accounting is not (therefore is optional). The third distinction is in terms of principles, rules to prepare documents. In financial accounting you have rules, in management accounting you don’t. All the rules of financial statement are included in GAAP. In Italy the accounting principles are in Codice Civile. If you are an italian company listed to the stock exchange you need to apply to the IFRS. In these documents you find the rules to prepare financial statements. When I buy a new asset i will have to depreciated according to certain accounting principles. For internal purposes i might want to use 10 years instead of 5 years to depreciate. Because maybe your machine will last more. Another difference is also i n terms of priority. The priority for financial accounting is an equation (A = L + Equity what we call Partita Doppia, Double Entry accounting system). Also the focus is different: for management accounting is for sure the company, but also segments of the companies, while for financial accounting is just the company. Last distinction concerns time perspective and frequency: in financial accounting you continuously record transaction but then you have only a final output (annual report); the only exception is for listed companies which produce it quarterly. In management accounting the frequency depends on you choices. Could be monthly, weekly, daily, real time exc. of 1 49 MANAGERIAL ACCOUNTING 1. Identifying segments 2. Format for segmented income statement —> teatro lirico case 1. We can identify segments according to 3 different perspectives. The objective of any company is to satisfy some material or immaterial needs. Who is being satisfied by my offer? (we segment the company by customer groups). How is this need being satisfied? (we segment by technology or product line). What is being satisfied? (we segment the company by customers’ needs). You can divide customers by geographical areas and analyse the results. Segment by product. Exercise Strategy: key words: geographically reined; we know that focus is on spirits. If a product is sold with different prices means that your strategy is by geography. CRODARI CASE Segment profitability analysis: our objective is to start form the P&L of a company, and to open it in order to have different income statements (or P&L), and segmenting them to understand performance. In order to perform this you need to implement two steps: 1) identifying segments, and for this purpose we used the Crodari group case, to understand the logic of segments (how many segments, to which criteria we segment) and 2) Format of this income statements (identify the rows, the items we will include. You can prepare financial statements according to different formats, different approaches in classifying contents. In order to identify segments you can use three broad criteria to identify segments: by customer groups, by technology (product line), by customer needs. These are potentially the criteria you can use to segment a company. How to chose the most relevant one for my company? 1) First criteria to use is based on strategy. By reading the strategy of Crodari group, Campari has a strategy which is heavily geographically oriented: the key words were “focus on spirits”, but in this “we want to grow in emerging markets”, “buy local brands”, all the key words of strategy were geographically oriented. In addition, efficiency in distribution was mentioned. 
 
 This strategy can be read in the words of the company (website and annual report) but also in the numbers. We mentioned USO, realising that different products had huge differences in terms of margins, while the different geographical area had more or less the same margin. By putting together these two aspects, we realised that the mathematical explanation didn’t work, and the strategic explanation is that you don’t sell at the same price, the same product. 2) The second aspect you have to tae into consideration is the organisation. What you find in the organisational structure of the group is the CEO of the company, some corporate departments, then the so called first line, in which you find “ITALY”, “NORTH AMERICA”, “SOUTH AMERICA”, “CENTRAL EUROPE (rest of Europe)”, “WINE”, “SUPPLY CHAIN”.
 Boxes written in blue represent geographical divisions. The red box is a product division. The black item is a business unit, but from an organisational point of view is a function.
 You organise functions when you want to foster efficiency, because you put together people of 2 49 MANAGERIAL ACCOUNTING How was La fenice able to increase its result? they asked the orchestra to play more, because the salary was the same Artists will have a fixed component and then a variable one for the number of performance. When you find low staging cost is because it is a revival. Revival is related to an vent that is related to a block buster. Levers: mix revival vs. new; new artists; printing costs; re using staging components; saturation of production capacity (double stage); pricing policy (is not increasing prices GIULIO CESARE EDITORE CASE Allocation system - in many companies this amount of common costs is not deducted from the total, but some criteria are find to allocate to different segments: each segment will take a portion of this cost. Any criteria will be subjective, because per se these costs are common. If we allocate a portion of common cost to different segments we have the opportunity to calculate an additional margin, the 2nd segment margin. 1st segment margin = gross segment margin (because is gross of common fix cost; gross means that it does not include something, it is the opposite of net) = controllable segment margin (someone can control it; for each segment there would be manager responsible for that division; until this level there are items that can be controlled, below is an allocation of common stock) of 5 49 MANAGERIAL ACCOUNTING Why? - to understand the “real” profitability of segments. - cost control How? - Plant-wide allocation rates: you use few criteria to allocate all the common costs; you are not very detailed in separating the costs. It is a very rough method. A typical criteria is based on revenues: the higher revenue you generate the higher the allocation you receive. - Traditional costing systems - Activity-based costing systems 2nd segment margin = net segment margin 1. Sales : n° copies x selling price 2. Advertising: n° pages x % of advertising pages x selling price per advertising page TOT REVENUES: 1 + 2 3. Paper cost: paper cost per page x n° pages x average circulation per issue x weekly issues 4. Printing cost per page: printing cost per page x n° pages x average circulation per issue x weekly issues 5. Distribution: distribution cost x n° weekly issues CONTRIBUTION MARGIN: 3 - 4 - 5 6. Director: director’s salary x n° in chart 7. Chief editors: chief editor’s cost x n° in chart 8. Journalists: journalist’s salary x n° in chart 9. Third parties: third parties collaborations 10. Advertising costs: advertising costs 1st SEGMENT MARGIN: 6-7-8-9-10 ADMINISTRATIVE ALLOCATION RATE (OVERHEAD RATE)= administrative costs / sum of issues 11. Admin: 12. Marketing: marketing cost/ n° copies sold= marketing rate per copy 2nd SEGMENT MARGIN/ NET SEGMENT MARGIN:11-12 of 6 49 MANAGERIAL ACCOUNTING COST VOLUME AND PROFIT ANALYSIS (CVP ANALYSIS) 1. Cost structure 2. Applications of CVP analysis in detail
 - Calculation of break-even point (BEP)
 - Other simulations 3. CVP analysis to multi-product companies CVP analysis examines the relationship between changes in activity (i.e. output) and changes in total sales revenue, costs and net profit. It allows us to predict what will happen to the financial results if a specified level of activity or volume fluctuates. This information is vital to management, since one of the most important variables influencing total sales revenue, total costs and profits is output or volume, Knowledge of this relationship will enable management to identify critical output levels, such as the level at which neither a profit not a loss will occur (i.e. the break-even point). CVP analysis highlights the effects of changes in sales volume on the level of profits in the short run. 1. Cost structure Revenues
 - Variable costs =Contribution margin
 - Fixed costs
 =EBIT (Operating profit) Because the variable cost per unit and the selling price per unit are assumed to be constant, the contribution margin per unit is also assumed to be constant A - rigid cost structure - because the majority of the costs are fixed, risky business - if you lose, you lose more, if you win, you win more B - flexible cost structure - high incidence of variable costs - if you lose, you lose little, if you win, you win little Different degree of operating risk. A is more risky than B A A -10% A +10% B B -10% B +10% Revenues 100 90 110 100 90 110 - Variable costs (20) (18) (22) (40) (36) (44) Contribution margin 80 72 88 60 54 66 - Fixed costs (40) (40) (40) (20) (20) (20) EBIT or Operating Profit 40 31 48 40 34 46 of 7 49 MANAGERIAL ACCOUNTING CVP is based on the distinction between variable and fixed costs. TARGET AFTER-TAX PROFIT pxQ-vcxQ-FC=EBIT If we know that the profit after taxes (PAT) is equal to EBITx(1-tax rate) PAT=EBITx(1-t) EBIT=PAT/(1-t) Ex. t=40% PAT(target)=24,000$ => EBIT = 24.000/(1-40%) = 40.000$ Q=(FC+EBIT(target))/(p-vc) = (60.000+40.000)/(20-10)=10.000 units Hp: 8.000 tickets sold EBIT(target)=30.000$ unit VC=50%xp FC=60.000$ What’s the price that we have to charge in order to reach this target profit given the hypothesis ? px8.000-50%xpx8.000-60.000=30.000$ 4.000p=90.000$ p=22.5$ In any case the unknown variable is only 1!!! A company prepared a budget to estimate future revenues and costs. In the estimated budget for units sold are 100.000. The company computes the BEP (in units) is 95.000 units. This is a risky company. This concept is called Margin of Safety - by how much can your sales decrease before you incur in a loss. Margin of Safety (1,2 in Quantity and 3,4 in Revenues) 1. In absolute terms
 Q(budgeted) - Q(BEP)
 In the example: 100.000-95.000=5.000 units 2. As a percentage
 (Q(budgeted) - Q(BEP))/Q(budgeted) 3. Budgeted Revenues - Revenues (BEP) 4. (Budgeted Revenues - Revenues (BEP))/Budgeted Revenues VAT - Value added tax of 10 49 MANAGERIAL ACCOUNTING NON SOLO OSCAR CASE Question 1: Ticket p = 7$ Pre-sales rights = 0.5$ Advertising = 0.3$ Food and Beverage = 1.5$ => Revenue per unit = 9.30$ Music rights = (0.12$) Rent = 40%x7 = (2.8$) Printing cost = (0.08$) VAT = 10%x7 = (0.7$) COGS Food and Beverage = 20%x1.5 = (0.3$) => Costs per unit = (4.00$) Unit contribution margin = CM = 9.3-4=5.3$ Contribution margin index = CM% = 5.3/9.3 = 56.99% OR Contributed margin/Revenues = CM% = 4.240.000/7.440.000 = 56.99% Question 2: FC=2.600.000$ Contribution margin per unit = 5.3$ Number of viewers required to cover the fixed costs => BEP in units BEP = FC/uCM = 2.600.00/5.3=490.567 tickets (always round to the following units) Question 3: Number of viewers needed to achieve Operating Profit => target EBIT = 2.000.000 Q(target)=(FC + EBIT (target))/CM = (2.600.000+2.000.000)/5.3 = 867.925 (however, this is over capacity so out target is not achievable - it is impossible !) Question 4: Degree of Operating Leverage = DOL = CM(total, not per unit)/EBIT = 4.240.000/1.640.000 = 2.59 Margin of Safety (in volume) = SM = 800.000 tickets (sold in this case since we don’t have the budget) - 490.567 tickets = 309.433 tickets BEP (Revenues) = FC/CM% = 2.600.000/56.99% = 4.562.264$ => Margin of Safety (in revenues) = SM = 7.440.000-4.562.264 = 2.877.736$ of 11 49 MANAGERIAL ACCOUNTING Question 5: D%xEBIT = DOL x D%xRev (Volume) D%xEBIT = 2.59x5% = 12.93% New EBIT = 1.640.000x(1+12.93%)=1.852.052 Question 6: Net of taxes => PAT PAT = 1.300.000$ EBIT (target) = 1.300.000/(1-25%)=1.733.333$ Revenues = (FC + EBIT (target))/CM% = (2.600.000+1.733.333)/56.99% = 7.603.774$ Question 7: Ticket p = 8$ Pre-sales rights = 0.5$ Advertising = 0.3$ Food and Beverage = 1$ => Revenue per unit = 9.80$ Music rights = (0.12$) Rent = 40%x8 = (3.2$) Printing cost = (0.08$) VAT = 10%x8 = (0.8$) COGS Food and Beverage = 20%x1.5 = (0.3$) - remains unchanged => Costs per unit = (4.50$) The new unit contribution margin is 5.30$ which is the same as the last one. We lose 1.000 tickets => 1.000x5.30 = 5.300$ The operating income will decrease by 5.300$ Multi-product companies FC=200.000$ BEP (Q) = ? Mix in units - 75% is product A and 25% is product B Weighted average CM = CM(A)x%(u)+CM(B)x%(u) = 25x75%+85x25% = 40$ p vc Units CM Mix in units Product A 40$ 15$ 6000 25$ 75% Product B 160$ 75$ 2000 85$ 25% Total 8000 100% of 12 49 MANAGERIAL ACCOUNTING SOCKS COMPANY THE REVENGE Question 1: Blue - changing in value Black - remain the same Quantity: Product A = 90.000 units Product B = 160.000 units Total - 250.000 units Mix in units : 36% A and 64% B WACM = 5.94x36%+14.15x64% = 11.1944$ FC(total) = 120.000+1.040.000+57.000(new expense) => BEP(Q) = (120.000+1.040.000+57.000)/11.1944 = 108.715 units out of which 36% = 39.137 units of Product A and 64% = 69.578 units of product B In revenues : A-> 39.137x13 = 508.787$ and B-> 69.578x22.5 = 1.565.497$ Question 2: Revenues - vc - FC = EBIT Revenues - vc = Contribution margin = CM% x Revenues CM%xRevenues = Revenues - vc =>( CM%xRevenues - FC ) -> is net of taxes ( CM%xRevenues - FC ) x (1-0.4) = 12% x Revenues CM%(A) = 45.69% and CM%(B) = 62.89% WACM% = 45.69%x24.53% + 62.89%x75.47% = 58.67% (we use the mix in revenues !!!) ( CM%xRevenues - FC ) x (1-0.4) = 12% x Revenues => 58.67%xRevenues - 1.217.000)x(1-0.4) = 12%xRevenues => Revenues = 3.147.142$ Product A Product B p 13 22.5 Direct material cost (3.6$) (3.6$) Direct labor cost (2.2$) (3.3$) Other VC (1$) (1$) Commissions (2%) (0.26$) (0.45$) unit Contribution Margin 5.94$ 14.15$ of 15 49 MANAGERIAL ACCOUNTING COST ACCOUNTING SYSTEM (CAS) • cost allocation • traditional method • allocation of service department costs: direct method and step-down method Starting from manufacturing companies because that’s where the topic is most common. Manufacturing organisations assign costs to product for: • inventory valuation and profit measurement • providing information for decision-making For inventory valuation and profit measurement the aim is to allocate costs between COGS and inventories. Accurate individual product costs are not required - only an accurate allocation at the aggregate level between inventories and COGS. Cost Object - the object where we allocate costs to. Might be: • product • service • customer or a segment of customers (how much is my cost to serve the customer) • department We are normally going to focus on products. Direct costs - that I can measure exactly for a specific product. Easily to define and identify and so we say that we have direct tracing to the cost object • direct material (I know exactly how much material I need) • direct labour (I know exactly how much labour I need) Indirect costs (overheads) - those costs that I cannot directly address. Such as maintenance, rent, computer processing, etc. I don’t know how much of this cost is generated by a product of mine. We need to allocate it to the product. This is where we talk about Cost Allocation. 1. Traditional method 2. ABC (Activity based costing) We use all those in order to calculate the full cost of our product. Direct cost and Indirect cost is NOT the same as Variable cost and Fixed cost. The most important thing here is to decide whether a cost is direct or indirect. Traditional method to allocate indirect costs to products Direct costs can be specifically and exclusively identified with a given cost object – hence they can be accurately traced to cost objects. Indirect costs cannot be directly traced to a cost object – therefore assigned to cost objects using cost allocations. Cost allocations = process of assigning costs to cost objects that involve the use of surrogate rather than direct measures (surrogates known as allocation bases or cost drivers) Allocation Rate = Overhead rate = Indirect costs/Allocation base
 For accurate cost assignment, allocation bases should be significant Indirect costs Allocation base determinants of the costs (i.e. cause-and-effect allocations). of 16 49 MANAGERIAL ACCOUNTING Slide 7, example Total indirect cost: 1.000.000$ (Manufacturing overheads) 2 products: Product A and Product B 1. Allocation base: Machine hours used 
 A = 500 (0.25 each)
 B = 500 (0.167 each) 2. Allocation rate = 1.000.000/(500+500) = 1.000$ 3. Allocate to A and B
 A = (500x1.000) = 500.000
 B = (500x1.000) = 500.000
 1.000.000 For surrogates we never use costs 1. Allocation base: Direct Labour Hours 
 A = 100 (0.05 each)
 B = 300 (0.1 each) 2. Allocation rate: 1.000.000/(100+300) = 2.500$ 3. Allocate to A and B
 A = (2.500x100) = 250.000
 B = (2.500x300) = 750.000
 1.000.000 We are searching for differences between the numbers of the products - when it comes to machine hours we have the same hours, while in direct labour hours we have differences so it will be more accurate. Slide 11, example Allocation process 2 stages Stage 1: align overheads initially to cost centres Stage 2: allocate cost centre overheads to cost objects using second allocation based/cost drivers of 17 49 MANAGERIAL ACCOUNTING Allocation to service department 1. Direct method - don’t care about the service between the service departments 2. Step-down method Budgeted OH allocation rate Allocation rate = Total OH/Total allocation base (might be DLH, DM) We have to estimate both the total OH and the total activity (allocation base) Ex. Estimated OH rate = estimated OH/estimated activity = 2.000.000$/1.000.000=2$ => for every DLH I will charge 2$ Under/over-applied OH Question 1: Budgeted OH = 2.000.000$ Budgeted activity = 1.000.000 Budgeted OH rate = 2$ Actual activity = 900.000 Actual Overheads = 2.000.000$ OH allocated = 900.000x2$ = 1.800.000$ => We have an under-recovery of 200.000$ Question 2: Actual OH = 1.950.000$ Actual activity = 1.000.000 OH allocated = 2x1.000.000=2.000.000$ => We have an over-recovery of 50.000$ S1 S2 P1 P2 Total Total OH 20.000$ 60.000$ 100.000$ 150.000$ 330.000$ Purchase from S1 20% IGNORE 40% 40% 1:1 => 10.000$ EACH Purchase from S2 30% IGNORE 50% 20% 2.5:1 => 60.000:3.5 =17.143 S1 (20.000$) 10.000$ 10.000$ S2 (60.000$) 42.858$ 17.143$ TOTAL 152.858$ 177.143$ 330.000$ S1 S2 P1 P2 Total Total OH 20.000$ 60.000$ 100.000$ 150.000$ 330.000$ Purchase from S1 20% 40% 40% Purchase from S2 30% 50% 20% of 20 49 MANAGERIAL ACCOUNTING SCALIFICIO PESARESE CASE Allocation rate (power energy) = 20.000/(60.000+20.000) = 0.25 Assembly : 0.25x20.000 = 5.000$ Packing : 0.25x60.000 = 15.000$ DATA ASSEMBLY PACKING MAINT. CANTEEN TOTAL WORKERS 16 4 2 2 24 COST X WORKER X 24.000$ (workers x salary) 24.000$ 8.000$ 160.000$ (because we multiply by number of workers) DLH COST 18 INDIRECT MATERIAL 40.500$ 33.520$ 74.020$ DEPRECIATION 20.000$ 60.000$ 6.000$ 12.000$ 98.000$ SPECIAL COSTS 2.200$ 2.200$ RENT 25.000$ 15.000$ 5.000$ 5.000$ 50.000$ TRAINING 8.000$ 8.000$ POWER ENERGY 5.000$ 15.000$ 20.000$ MAINT. HOURS 200 1800 ASSEMBLY PACKING MAINT. CANTEEN TOTAL INDIRECT LABOUR 96.000$ 48.000$ 16.000$ 160.000$ DEPRECIATION 20.000$ 60.000$ 6.000$ 12.000$ 98.000$ INDIRECT MATERIAL 40.500$ 33.520$ 74.020$ OTHER SPECIFIC COSTS 2.200$ 2.200$ RENT 25.000$ 15.000$ 5.000$ 5.000$ 50.000$ TRAINING 8.000$ 8.000$ POWER ENERGY 5.000$ 15.000$ 90.500$ 219.520$ 67.000$ 35.200$ 412.220$ of 21 49 MANAGERIAL ACCOUNTING Step 2: Allocation of service department 1. Canteen Total OH = 35.200$ Total allocation base = (16+4+2) = 22 Allocation rate = 35.200/22 = 1.600$ 2. Maintenance Total OH = 70.200$ Total allocation base = 200+1.800 = 2.000 Allocation rate = 70.200/2.00 = 35.1$ STAGE 2: STEP 3: Compute separate OH rates for product depts ASSEMBLY PACKING MAINT. CANTEEN TOTAL OH 90.500$ 219.520$ 67.000$ 35.200$ CANTEEN ALLOCATION 1.600$x16 = 25.600$ 1.600$x4 = 6.400$ 1.600$x2 = 3.200$ X (since we are allocating the costs we are not considering the canteen) TOTAL OH 116.100$ 225.920$ 70.200$ MAINTENANCE 35.1X200 = 7.020$ 35.1X1.800 = 63.180$ TOTAL OH 123.120$ 289.100$ ASSEMBLY PACKING TOTAL OH 123.120$ 289.100$ TOTAL DL/MINUTES ASSEMBLY: - CLASSIC 80x7.000units produced=560.000 - DESIGN 160x3.000 units produced=480.000 - CHIOCCIOLA 40x12.000 units produced=480.000 TOTAL 1.520.000 minutes of 22 49 MANAGERIAL ACCOUNTING Budgeted OH rate Maintenance: 33$ per hour 33x200=6.600$ (Assembly) (given part A) 33x1.800=59.400$ (Packing) (given part A) Total 66.000$ Canteen: 1.700$ per employee 1.700x2=3.400$ (Maintenance) 1.700x4=6.800$ (Packing) 1.700x16=27.200$ (Assembly) Total 37.400$ Question 2: Budgeted - needs to be calculated Actual - usually given ASSEMBLY PACKING MAINTENANCE CANTEEN Total OH (=2016) 90.500$ 219.520$ Allocation Canteen 27.200$ 6.800$ (3.400$) (37.400$) Allocation Maintenance 6.600$ 59.400$ (66.000$) New Total OH cost 124.300$ 285.720$ Normal capacity/h 25344 8976 Allocation rate hour 4,9045 31,8316 Allocation rate/ minutes 0,0817 0,5305 ASSEMBLY PACKING Budgeted allocation rate (question 1) 0,0817 0,5305 Minutes worked (same as 2016) 1520,000 590,000 Budgeted OH (0.0817x1.520.000) 124.184$ (0.5305x590.000) 313.000$ MAINTENANCE CANTEEN 66.000$ 37.400$ Actual OH (question 2) 130.000$ 300.000$ 67.000$ 36.000$ Under/Over absorption of OH (5.816$) 13.000$ (1.000$) 1.400$ under over under over of 25 49 MANAGERIAL ACCOUNTING RECAP TRADITIONAL COSTING For the allocation of OH costs 2 stage method: 1. Allocation of OH to Departments (Production and Service) - cost centres 2. Allocation of OH to Products - cost objects ALLOCATION RATE = TOTAL OH COST/TOTAL ALLOCATION BASE Allocation base = Activity Done on direct labour hours or machine hours Might be: - one blanket Allocation rate for the whole company - several department departmental rates ALLOCATION OF SERVICE DEPARTMENTS TO PRODUCTION DEPARTMENTS 1. Direct method 2. Step-down method Calculation of the unit full cost Recuperation of the budgeted OH rate Calculation of under/over absorption of OH costs Normal available capacity EXAM QUESTION A Allocation rate Canteen = 9.000/(6+16+2) = 375 (we count all employees except for the employees of the Canteen) Allocation rate Maintenance = 24.000/(20+2) = 2.000 Allocation rate Cutting = 138.000/((0.5x6.000)+(0.6x5.000)) = 23 Allocation rate Sewing = 70.200/((0.8x6.000)+(1.2x5.000)) = 6.5 CUTTING SEWING MAINTENANC E CANTEEN total Total OH 115.750$ 60.200$ 23.250$ 9.000$ 208.200$ 375x6=2.250$ 375x16=6.000$ 375x2=550$ 24.000$ 2.000x10=20.0 00$ 2.000x2=4.000 $ Total OH Allocated 138.000$ 70.200$ 208.200$ BOY GIRL DM 10$ 12$ DL 9.6$ 14.4$ Allocation of cutting 23x0.5=11.5$ 23x0.6=13.8$ Allocation of sewing 6.5x0.8=5.2$ 6.5x1.2=7.8$ UNIT FULL COST 36.3$ 48$ of 26 49 MANAGERIAL ACCOUNTING EXAM QUESTION B What is the purpose of CAS What is the relevant rage in CVP What is the difference between fixed and variable costs Open questions on the cases BOY GIRL PRODUCTION VOLUME 6000 5000 SALES VOLUME 5500 4500 change of INVENTORY 500 500 PLUS 1000 UNIT COST 36.3 48 Value of Final goods inventory 36.3x500=18.150$ 48x500=24.000$ TOTAL 42.150$ of 27 49 MANAGERIAL ACCOUNTING EXAM EXERCISE Question 1: Allocation rate = Total OH/Allocation base = 2.960.000/(20.000x2+40.000x3) = 18.5 Product A = 18.5 x 2h = 37 Product B = 18.5 x 3h = 55.5 Question 2: Total drivers: Total DLH = 40.000+120.000 = 160.000 Total set-up = 200+80 = 280 Total handlings = 1.000+600 = 1.600 Cost driver rates: Manufacturing = 1.600.000/160.000 = 10 euros/DLH Setup = 560.000/280 = 2.000 euros/setup Handling = 800.000/1.600 = 500 euros/handling Product A: Manufactuting = 2x10 = 20 Setup = (200x2.000)/20.000 = 20 Handling = (500x600)/20.000 = 15 Total 55 Product B: Manufacturing = 3x10 = 30 Setup = (80x2.000)/40.000 = 4 Handling = (500x1.000)/40.000 = 12.5 Total 46.5 of 30 49 MANAGERIAL ACCOUNTING COLLEGE PRODUCTIONS CASE STUDY Job costing system = Traditional costing system In this case we relate to specific fixed costs as direct costs. Financing management - activity driver: financing documents Payroll processing - activity driver: Purchasing activities - activity driver: purchases (invoices) Actors recruiting processes - activity driver: actors (30%!!! wrong in the case) Technical staff recruiting processes - activity driver: technical staff Operating management of making movies - activity driver: making movie (days) 3 products: 1. Accademia pericolosa 2. Banchi affollati 3. Crediti che scottano 2 departments: 1. Administration 2. Production Traditional costing system (current system used) Administration 320.000$ Allocation base - specific costs Allocation rate = 320.000/800.000 = 0.4$ Accademia = 400.000x0.4 = 160.000$ Banchi = 250.000x0.4 = 100.000$ Crediti = 150.000x0.4 = 60.000$ Production 270.000$ Allocation base - evenly on products Allocation rate = 270.000$/3 => For each movie we charge 90.000$ of Production Accademia = 90.000$ Banchi = 90.000$ Crediti = 90.000$ Specific fixed costs OH Administration OH Production Total Accademia 400.000$ 160.000$ 90.000$ 650.000$ Banchi 250.000$ 100.000$ 90.000$ 440.000$ Crediti 150.000$ 60.000$ 90.000$ 300.000$ Total 800.000$ 320.000$ 270.000$ 1.390.000$ of 31 49 MANAGERIAL ACCOUNTING ABC system In ABC we first allocate OH to activities !!! Administration 320.000$ 1. Financing 30% = 96.000$ 2. Payroll 30% = 96.000$ 3. Purchasing 40% = 128.000$ Production 320.000$ 1. Actors recruiting 20% = 54.000$ 2. Staff recruiting 30% = 81.000$ 3. Making movies 50% = 135.000$ We have to identify the correct cost drivers and later the cost driver rate. Payroll - what we pay all the employees so we use actors and staff Now we have to find how each cost driver absorbed the different costs. We do so by multiplying the cost driver rate and the “usage” we have of it for each movie. Activities Cost Cost Driver Volume of Cost Driver Cost Driver Rate Financing 96.000$ Financing documents 5 96.000/5 = 19.200$ Payroll 96.000$ Actors and Technical staff 30+90 = 120 96.000/120 = 800$ Purchasing 128.000$ Purchases (invoices) 256 128.000/256 = 500$ Actors recruiting 54.000$ Actors 30 54.000/30 = 1.800$ Technical staff recruiting 81.000$ Technical staff 90 81.000/90 = 900$ Operating management of movies 135.000$ Making movies (days) 100 135.000/100 = 1350$ Accademia Banchi Crediti Total Specific fixed costs 400.000$ 250.000$ 150.000$ 800.000$ Financing 38.4000$ 38.400$ 19.200$ 96.000$ Payroll 25.600$ 36.800$ 33.600$ 96.000$ Purchasing 37.000$ 43.000$ 48.000$ 128.000$ Actors recruiting 9.000$ 23.400$ 21.600$ 54.000$ Technical staff recruiting 24.300$ 29.700$ 27.000$ 81.000$ Operating management of movies 32.750$ 54.000$ 47.250$ 135.000$ Full cost 568.050$ 475.300$ 346.650$ 1.390.000$ of 32 49 MANAGERIAL ACCOUNTING The budgeted process 1. Communicate details of budget policy and guidelines to those people responsible
 for preparing the budget. 2. Determine the factor that restricts output. 3. Preparation of the sales budget. 4. Initial preparation of budgets. 5. Negotiation of budgets with higher management. (See figure on slide 4) 6. Co-ordination and review of budgets. 7. Final acceptance of budgets. 8. Ongoing review of the budgets. The master Budget: 1. Operating budget - describe the income-generating activities of a firm: sales, production, and finished good inventories 2. Financial budgets detail the inflows and outflows of cash and the overall financial position Operating Budget 1. Sales and sales revenues -> Finish good inventories policy -> Production —Direct material cost
 (DM inventory policy) —Direct labour cost —Overheads -> 2. Cost of goods sold 3. Other expenses (Marketing, R&D, Administration) —>BUDGETED INCOME STATEMENT Revenues (Cost of goods sold) Gross margin (Other expenses) Operating income = Earning before income taxes Thursday 8:45 N21 of 35 49 MANAGERIAL ACCOUNTING Objective: Budgeted process in cultural events - The budget process - “Società Concertistica Torinese” case Budget process: 1. Planning of operation
 Plan the activities to be made, set budget, try to plan costs, the expectation of sales
 (Ex. Hiring new manager, Opening new distributers) 2. Coordinate activities
 Coordinating people because this is a team, so that when we act we act together 3. Communicate plans
 Let people know what the target is 4. Motivate managers
 If you have a target you are more motivated to arrive to the goal 5. Control activities
 If you decide the activities, then you have the roadmap and it is easier to control process (the activities) and, therefore, result. But if you only control the result you will not perform as good as if you try to control the process 6. Evaluate performance
 It is always a matter of setting targets, whether you keep up with the expectations, the target you set up.
 You can set a target to lose money (Ex. top collection Valentino).
 To evaluate is to compare actual and budget. The best manager you have is assigned to the weakest spot you have. of 36 49 MANAGERIAL ACCOUNTING SOCIETÀ CONCERTISTICA TORINESE CASE STUDY We are going to ask the Comune di Torino 140.423$, we should explain that the common costs are also fundamental for the performance of the concerts. BUDGET INCOME STATEMENT (ARTISTIC) Where, why, how ? Ticketing 22.763$ 15$ x Table 6 (occupancy rate) = 22.763$ Subscriptions 7.500$ 50 subscriptions x 150$ = 7.500$ ARTISTIC REVENUES 30.263$ 2-3 Artists (97.620$) Table 1 Artistic coordination (5.000$) p.3 - coordinator Electrician, Fireman, Usher (4.950$) p.5
 Electrician = 75$x13
 Fireman = 150$x13
 Usher = (3x3hx15$x10) + (5x3hx15$x3) = 4.950$ Rentals (3.580$) Table 3 Staging cost (6.000$) p3. 2.000x3 = 6.000$ Church rental (15.300$) p.3 ARTISTIC COSTS (132.450$) 5-10 ARTISTIC MARGIN (102.188$) Artistic revenues - Artistic costs BUDGETED INCOME STATEMENT (NON- ARTISTIC) Where, why, how ? Artistic margin (102.188$) Sponsorship 25.000$ Programmes 500$ Cost for printing programmes (5.200$) p.5 400$x13 = (5.200$) Marketing expenses (9.800$) Table 4 MARGIN BEFORE COMMON COST ALLOCATION (91.688$) Commercial cost centre (19.500$) See bellow Artistic director cost center (13.245$) See bellow Accounting (15.990$) See bellow MARGIN AFTER COMMON COST ALLOCATION (140.423$) of 37 49 MANAGERIAL ACCOUNTING Sales margin variance (ACT unit margin - STD unit margin) x ACT sales volume Sales volume variance (ACT sales volume - BDG sales volume) x STD margin unit Total market variance (ACT mkt volume - BDG mkt volume) x BDG mkt share% x STD margin Market share variance (ACT mkt share% - BDG mkt share%) x ACT mkt volume x STD margin DIRECT MATERIAL VARIATION Volume = # units of finished goods Quantity = quantity of the factor, raw material (in this case direct material) Quantity = volume x coefficient rate The difference is unfavourable since Budgeted < Actual Direct Material price variance (Standard purchased price - Actual purchased price) x Actual purchased quantity = (10-11) x 19.000 = 19.000$ -> unfavourable Material usage variance (Standard used quantity - Actual used quantity) x Standard price = (18.000-19.000) x 10 = 10.000$ -> unfavourable => 19.000 + 10.000 = 29.000$ unfavourable BDG ACT VOLUME 10.000. 9.000. PRICE 88 90 COST 68 68 MARGIN 20 22 MARKET SIZE 100.000. 112.500. MARKET SHARE 10% 8% BUDGET ACTUAL PRICE 10 euros per kilo 11 euros per kilo VOLUME UNITS 900 units COEFFICIENT RATE 2 kg/unit QUANTITY 18.000 kilos 19.000 kilos TOTAL COST 180.000 euros 209.000 euros of 40 49 MANAGERIAL ACCOUNTING DIRECT LABOUR VARIATION Unfavourable ! Quantity = number of hours Wage rate variance (Standard rate - Actual rate) x Actual quantity = (9.00 - 9.60) x 28.500 = 17.100 euros -> unfavourable Labour efficiency variance (Standard quantity - Actual quantity) x Standard rate = (27.000 - 28.500) x 9 = 13.500 euros -> unfavourable =>17.100+13.500 = 30.600 $ unfavourable INDIRECT COSTS VARIATION VARIABLE — energy Standard = 2 euros/DLH Actual cost = 52.000 euros Variable OH expenditure variance (Actual hours x Standard rate) - Actual cost = (28.500 x 2) - 52.000 = 5.000 -> favourable Actual hours x Standard rate = Flexed budget allowance Variable OH efficiency variance (Standard hours - Actual hours) x Standard rate = (27.000 - 28.500) x 2 = 3.000$ -> unfavourable => 5.000-3.000 = 2.000$ favourable INDIRECT COSTS VARIATION FIXED Fixed budgeted costs = 1.440.000 euros per year Actual cost = 116.000 euros per month We consider what the actual cost is Fixed OH spending variance Budget fixed OH - Actual fixed OH 1.440.000/12 - 116.000 = 4.000 $ -> favourable BUDGET ACTUAL RATE PER HOUR 9.00 euros per hour 9.60 euros per hour VOLUME 9.000 units COEFFICIENT RATE 3 hours per unit QUANTITY 27.000 hours 28.500 hours COST 243.000 euros 273.600 euros of 41 49 MANAGERIAL ACCOUNTING HEALTH FOOD CASE Marketing: 1 Unit margin variance (Actual unit margin - Budgeted unit margin) x Actual volume = (3.60 - 3.40) x 29.000 = 5.800 euros -> favourable 2 Selling volume variance (Actual volume - Budget volume) x Budgeted unit margin = (29.000 - 32.000) x 3.40 = 10.200 euros -> unfavourable => 5.800-10.200 = 4.400$ unfavourable 2.1 Industry volume variance (comes from the 10.200$) (Actual volume of industry - Budgeted volume industry) x Budgeted market share x Budget margin = (100.000 - 128.000) x 25% x 3.40 = 23.800 -> unfavourable - market is decreasing 2.2 Market share variance (Actual market share - Budgeted market share) x Actual volume industry x Budgeted margin = (29% - 25%) x 100.000 x 3.40 = 13.600 -> favourable very good sales performance, we were able to gain market share even though the market is decreasing => 10.200$ UNFAVOURABLE BUDGET ACTUAL UNIT MARGIN 3.40 euros 3.60 euros VOLUME 32.000 units 29.000 units MARKET SHARE 25% 29% MARKET SIZE 128.000 units (volume x 4 since we have 25%) 100.000 units CONTRUBUTION MARGIN 108.800 euros (unit margin x volume) 104.400 euros unfavourable since it is margin and not cost of 42 49 MANAGERIAL ACCOUNTING DIVISIONAL PERFORMANCE (12) AND TRANSFER PRICES (13) Functional: CEO and bellow we have different functions (purchase, manufacturing, sales, R&D), finance on the side Divisional: CEO and bellow we have different divisions (A, B, C), staff on the side This division can be created according to: 1. Different products 2. Geographic area 3. Distribution channels 4. Customers 5. Brands Advantages of divisionalisation: - Improved quality of decisions (fits with the market, better knowledge on the market) - Speedier decisions (if you manage the market you decide on your own and you are faster) - Increases managerial motivation (you make a decision, you take credit for the results) - Enables top management to devote more time to strategic issues Disadvantages of divisionalisation: - Sub-optimisation and may promote a lack of goal congruence. - More costly to operate a divisionalised structure. - Loss of control by top management. Prerequisites for successful divisionalisation: - More appropriate for companies with diversified activities. - Relations between divisions regulated so that no division, by seeking to increase its own profit, can reduce the profitability of the company as a whole Measuring divisional profits Financial criteria: - ROS% = EBIT/Sales - ROI% = EBIT/Invested capital 
 If we have a target of 10%:
 1. end of year adjustments (adjust the result in order to anticipate revenues and send costs to January)
 2. cut discretionary costs (
 3. divestments (1974 oil crisis, and therefore the car market shut down 50%; in Ford nobody was able to reach the target except 1; 1975 the same manager reached target; this manager sold 50% of the invested capital, this works in the short term)
 => MANAGEMENT MIOPIA - the short term focus on your manager, this happens whenever the manager has the incentive on short-term results only of 45 49 MANAGERIAL ACCOUNTING HQ (Media) ————————————————Staff (cost centre) / \ Division A Division B (Film) (Television) Profit centre Profit centre When we have exchange between a profit centre and a cost centre we do cost allocation But when we have exchange and therefore charge between 2 profit centres -> Transfer price A = Paramount B = CBS TRANSFER PRICE The A cost + a certain margin Let’s suppose: Cost A = 100 Price = 200 What is the right price in between ? Purposes of transfer price 1. To provide information that motivate divisional managers to make good economic decisions 2. To provide information that is useful for evaluating the managerial and economic performance of the divisions. 3. To intentionally move profits between divisions or locations (remember to be compliant with the fiscal law) 4. To ensure that divisional autonomy is not undermined A = textile B = clothing Variable cost (T) = 30$ Full cost (T) = 50$ Market price (C) = 70$ Clothing division costs = 5$ Expected margin (T) = 10% MARKET BASED TRANSFER PRICE In order to work need to find the right comparables. Where there is a perfectly competitive market for the intermediate product, the current market price is the most suitable basis for setting the transfer prices. TP’s will motivate sound decisions and form a suitable basis for performance evaluation. MARGINAL/VARIABLE COST TRANSFER PRICE Economic theory indicates TP based on the MC/VC of producing the intermediate product at the optimum output level for the company as a whole will encourage total organisational optimality. Adopting a short-run perspective to derive MC results in MC = VC and the assumption that MC is constant per unit throughout the relevant output range. MC/VC not widely used:
 1. Provides poor information for performance evaluation 2. MC may not be constant over entire range of output 3. Measuring MC beyond short-term is difficult
 4. Managers reject short-term perspective of 46 49 MANAGERIAL ACCOUNTING FULL COST TRANSFER PRICE Widely used because managers require an estimate of long-run marginal cost for decision- making. Traditional costing systems tend to provide poor estimates of long run MC. Does not enable supplying division to report a profit on goods transferred. COST-PLUS A MARK-UP TRANSFER PRICE Attempts to meet the performance evaluation purpose of transfer pricing (profit allocated to the supplying division). Results in non-optimal decisions (See Figure 1 - slide 3) because TP exceeds short-run or long-run MC. Enormous mark-ups can result when goods/services are transferred between several divisions. NEGOTIATION TRANSFER PRICE Most appropriate where there are market imperfections for the intermediate product and managers have equal bargaining power. To be effective managers must understand how to use cost and revenue information. Claimed behavioural advantages. Limitations: 1. Can lead to sub-optimal decisions 2. Time - consuming 3. Divisional profitability may be strongly influenced by the 
 bargaining skills and powers of the divisional managers. 4. Inappropriate in certain circumstances (e.g. no market for the intermediate product or an imperfect market exists). We cannot transfer on the cost level because the supplier is a cost centre. So we cannot use Marginal/Variable cost TP or Full Cost TP. of 47 49