managerial accounting, Appunti di Economia Manageriale

Scarica managerial accounting e più Appunti in PDF di Economia Manageriale solo su Docsity! Managerial Accounting Helena NAFFA, PhD Department of Finance 8th September, 2016 Traditional and Advanced Costing Methods I How to calculate cost per unit? Traditional costing methods: • Absorption costing (AC) • Marginal costing (MC) Total cost Production costs Non-production costs E.g. selling and distribution costs (advertising, delivery) and administrative costs (cleaners, postage) Direct (prime) costs E.g. materials and labour Indirect costs (prod. overheads) E.g. factory rent, supervisor’s salary, electricity, depreciation Absorption Costing • Aim: to determine the full production cost per unit. • When using absorption costing to determine the cost per unit, focus is on production costs only. • These costs are summarised by a cost card Direct materials per unit x € Direct labour per unit x € Production overhead per unit x € Full production cost per unit x € Easy to calculate Difficult to calculate Sky Bar Moon Egg Sun Bar Direct labour cost per unit € 0.07 0.14 0.12 Direct material cost per unit € 0.17 0.19 0.16 Actual production/sales (units) 500,000 150,000 250,000 Direct labour hours per unit 0.001 0.01 0.005 Direct machine hours per unit 0.01 0.04 0.02 Selling price per unit € 0.50 0.45 0.43 Annual production overhead = € 80,000 Solution • Absorb overheads into units of production. • Calculate an overhead absorption rate (OAR). • Activity level must suite the business. Saturn may choose amongst the following: levelActivity overhead ProductionOAR 1. Units of production – This would not be appropriate since Saturn produces more than one type of product. It would not be fair to absorb the same amount of overhead into each product. 2. Machine hours or labour hours – It is fair to absorb production overheads into the products based on the labour or machine hours taken to produce each unit. To decide which activity level to apply we look at the nature of the process. Production appears to be more machine intensive because each unit takes more machine hours to produce than it does labour hours. Sky Bar Moon Egg Sun Bar Direct labour cost per unit € 0.07 0.14 0.12 Direct material cost per unit € 0.17 0.19 0.16 Production overhead per unit € 0.05 0.20 0.10 Full production cost per unit 0.29 0.53 0.38 Selling price per unit € 0.50 0.45 0.43 Profit (loss) per unit 0.21 (0.08) 0.05 Outcome of absorption costing • Based on absorption costing, the Sky Bar and Sun Bar are both profitable. The Moon Egg, however, is loss making. Managers need to consider the future of this product line. They could possibly either increase its selling price or reduce its costs. If these are not possible, they may stop manufacturing the product. • This may be a wrong decision. Absorption costing does not always result in an accurate calculation of the full production cost per unit. ABC can be more accurate. Under- and over- absorption • A predetermined overhead absorption rate is used to smooth out seasonal fluctuations in overhead costs, and to enable unit costs to be calculated quickly throughout the year. volumeBudgeted overhead Budgeted rate absorption overhead nedPredetermi • Budgeted volume may relate to units, direct labour hours, machine hours, etc. If either or both the actual overhead cost or activity volume differ from budget, the use of this rate is likely to lead to under- absorption or over-absorption of overheads. • The budgeted fixed overhead amount to 3,000 units * € 9 = € 27,000. • The unit cost of production will include overhead at the predetermined rate and, generally, overhead under- or over-absorbed will be shown as a separate item in the costing income statement. overheads Incurred - overheads Absorbed absorption (under)Over/ € Fixed overhead absorbed (3,200 units * €9) 28,800 Fixed overhead incurred (27,000 units * 1.05) 28,350 Over-absorbed fixed overheads 450 The unit cost of production will include overhead at the pre-determined rate and, generally, overhead under- or over-absorbed will be shown as a separate item in the costing income statement. Marginal Costing • Marginal costing is the accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full against the aggregate contribution. • Its special value is in recognising cost behaviour, and hence assisting decision making. Level of activity 2,500 units 5,000 units 7,500 units 10,000 units Revenue 50 000 100 000 140 000 200 000 Variable Costs -30 000 -60 000 -84 000 -120 000 Total Contribution 20 000 40 000 56 000 80 000 Fixed Costs -25 000 -25 000 -25 000 -25 000 Total Profit / (Loss) -5 000 15 000 31 000 55 000 Contribution per unit 8 8 8 8 Profit / (Loss) per unit -2 3 4 6 • The table illustrates that contribution per unit remains constant at all levels of activity. However, profit per unit changes. Hence marginal costing is a useful method when trying to analyse and manage costs. Absorption costing does not distinguish between fixed and variable cost elements. It is not a useful method for internal reporting. Reasons for ABC • Absorption costing is based on the principle that production overheads are driven by the level of production. Activity level in OAR calculated by units, labour or machine hours. • Overheads used to be small in relation to other costs in traditional manufacturing where production was more labour intensive. • Overheads are now a larger proportion of total costs in modern manufacturing where production is more machine intensive. • Nature of manufacturing has changed, the diversity and complexity of products has increased. • Small-volume products place a much higher relative demand on the support departments than low share of volume might suggest. • Intuitively, it must cost more to produce low- volume red pens than high-volume blue pens. • Traditional volume-based costing systems tend to overcost high-volume products and undercost low-volume products. • To remedy this discrepancy, ABC expands the second stage assignment bases for assigning overheads to products. Calculating full production cost per unit using ABC 1. Group production overheads into activities (cost pools), according drivers. 2. Identify cost drivers. 3. Calculate OAR for each activity. 4. Absorb activity costs into the product. 5. Calculate the full production cost and profit / (loss). Sky Bar Moon Egg Sun Bar Direct labour cost per unit € 0.07 0.14 0.12 Direct material cost per unit € 0.17 0.19 0.16 Actual production/sales (units) 500,000 150,000 250,000 Direct labour hours per unit 0.001 0.01 0.005 Direct machine hours per unit 0.01 0.04 0.02 Selling price per unit € 0.50 0.45 0.43 Annual production overhead = € 80,000 Solution • STEP 1: Group overheads into activities according to how they are driven. • This has been done. The € 80,000 production overhead has been split into four different cost pools (activities). Solution • STEP 2: Identify cost drivers for each activity. What causes these activity costs to be incurred. Activity Cost driver Machining costs Number of machine hours Component costs Number of components Set-up costs Number of set-ups Packing costs Number of customer orders • STEP 2: Calculate an OAR for each activity. hour machineper 0.31 € hours machine 000,16 costs machining 5,000 €costs machining OAR componentper 500 € components )2064( costscomponent 15,000 € costscomponent OAR up-setper 1,000 € ups-set )2613( costs up-set 30,000 € costs up-set OAR orderper 600 € orders )25421( costs packing 30,000 € costs packing OAR Compare results Activity-based costing Sky Bar Moon Egg Sun Bar Direct labour cost per unit 0.07 0.14 0.12 Direct material cost per unit 0.17 0.19 0.16 Production overhead per unit 0.04 0.06 0.21 Full production cost per unit 0.28 0.39 0.49 Selling price per unit 0.50 0.45 0.43 Profit / (Loss) per unit 0.22 0.06 (0.06) Absorption costing method Sky Bar Moon Egg Sun Bar Direct labour cost per unit € 0.07 0.14 0.12 Direct material cost per unit € 0.17 0.19 0.16 Production overhead per unit € 0.05 0.20 0.10 Full production cost per unit 0.29 0.53 0.38 Selling price per unit € 0.50 0.45 0.43 Profit (loss) per unit 0.21 (0.08) 0.05 Outcome of ABC • Production overheads absorbed in a more accurate way using ABC. • There are twenty components in a Sun Bar, compared with only six in a Moon egg. It is therefore fair that the Sun Bar receives more of the component cost. • There are only four orders for the Moon Eggs but twenty five for the Sun Bar. It is therefore fair taht hte Sun Bar receives more of the packing costs. Advantages of ABC • More accurate cost per unit. • Better insight into what drives overhead cost. • Recognises that overhead are not all related to production and sales volume. • Useful in businesses where overhead are a significant part of total costs. • Can be applied to derive realistic costs in a complex business environment. • Can be applied to all overhead costs, not just production overheads. • Used also in service costing, not just product costing.