secondo modulo managerial accounting, Appunti di Cost Accounting

Scarica secondo modulo managerial accounting e più Appunti in PDF di Cost Accounting solo su Docsity! Management accounting Introducing to management accounting system: MAS - The formal procedures and routines an organisation puts in place to collect and communicate information in order to support the implementation of business strategy. This information is used to assist: ◦ effective planning and monitoring ◦ effective influence on employees’ behaviour ◦ quality decision-making WHAT IS MAS? MAS’s provide information to assist the following functions Effective planning: the development of plans that support the strategic objectives of a business  Preparation of a Production Cost Budget (class 8) Effective monitoring : the checking of performance to ensure plans are being met  Variance Analysis based on the Production Cost Budget (class 9) Effective influence on employees’ behaviour: the means by which managers influence other members of the organisation to perform in ways that support the organisation’s strategies  : Budget (class 8) and variance-based performance measures (class 9) Quality decision making: decisions are made that support achievement of strategic objectives  CVP analysis (class 2) The common theme in all the previous definitions is the SUPPORTING STRATEGY. The fundamental role of a MAS is to provide information to support strategy implementation and achievement. WHY DO ORGANIZATIONS NEED MAS’S? Because the elements that make up organisations (personnel, scares resources, complex and diverse activities) need to be managed and organised  Very few organisations will be able to achieve strategic objectives without some formal process to manage the complex and diverse elements it comprises  The MAS provides relevant, timely information essential for successful INTERNAL management WHY DO ORGANIZATIONS NEED MAS ‘S IN ADDITION TO FAS’S? Why can’t business use financial accounting system (module 1) information for internal management? Financial Accounting information has a different purpose  Used in the preparation of Financial Reports for business governance NOT internal management  Financial Accounting information is too aggregated, not timely, often not relevant for internal management Therefore internal management requires it’s own Accounting System - the MAS IDENTIFYING COSTS Cost: monetary measure of the resources needed for a goal. The cost measures the employment of resources. This is expressed in monetary terms. It is always referred to a cost object (a product, a service, an event, a client, a unit, a program, a department). A cost driver is any factor that affects the costs of a cost object. DIRECT AN INDIRECT COSTS  Direct costs are those costs that are related to the particular cost object and that can be traced to it in an economically feasible (cost-effective) way  Indirect costs are those costs that are related to the particular cost object but cannot be traced to it in an economically feasible (cost-effective) way. They are often called overheads. FACTORS AFFECTING DIRECT AND INDIRECT COSTS 1. Materiality of the cost in question: the higher the cost in question, the more likely the economic feasibility of tracing that cost to a particular cost object. 2. Available information-gathering technology: barcodes 3. Design of operations: classifying a cost as direct is helped if an organisation’s facility is used exclusively for a specific product or customer.  The direct/indirect classification depends on the cost object. ◦ The salary of an assembly-department supervisor may be a direct cost of the assembly department but an indirect cost of a product. COST BEHAVOUR Fixed costs: those costs whose amount does not change regardless of changes in the level of activity (e.g.: rents, some salaries, insurances, some taxes, advertising, depreciation rates…). BEP – Contribution margin The break even point occurs where total revenue equals total costs – the firm, in this example, would have to sell Q1 to generate sufficient revenue to cover its costs. If the firm chose to set price higher than £25 (say £30) the TR curve would be steeper – they would not have to sell as many units to break even Break-even point – Sam’s racquets Unit variable costs (UVC): £15.25 Fixed costs (FC): £6,600 Unit selling price (USP): £25 How many racquets must be sold to earn an operating profit of £10,000? IMPACT OF INCOME TAXES Data: • Unit price: €200 • Unit variable costs: €120 • Fixed costs: €2,000 How many units of Do-All must be sold to earn a net profit of €1200 assuming operating profit is taxed at a 40% rate? • Target net profit = (operating profit) – [(operating profit) x (tax rate)] • Target net profit = (operating profit) x (1 – tax rate) • Operating profit = Target net profit / (1 – tax rate) The equation method yields: • Revenues – VC – FC = Target net profit / (1 – tax rate) The equation method yields: • Revenues – VC – FC = Target net profit / (1 – tax rate) • €200Q-€120Q-€2000= Target net profit / (1 – tax rate) • €200Q-€120Q-€2000= €1200/ (1 – 0.4) • €200Q-€120Q-€2000= €2,000 • €80Q = €4,000 • Q = 50 units THE MARGIN OF SAFETY Margin of safety shows how far sales can fall before losses made. If Q1 = 677 and Q2 = 1000, sales could fall by 323 units before a loss would be made. Margin of safety (in units) = Expected sales (units) – break-even point (units). It can also be expressed as a percentage: Margin of safety (as a %) = Margin of safety in units × 100% Expected sales in units. PONDER POINT The margin of safety measures the riskiness of a project. Why? It indicates by what amount you can have incorrectly judged your sales before you start suffering losses Class 4: Short-term decision making • A relevant revenue is one that results from a specific management decision and will affect the future cash position of the business by receiving incremental revenue. • A relevant cost is one that results from a specific management decision and will affect the future cash position of the business by incurring incremental costs. • An opportunity cost is the amount of benefit lost when a certain course of action is taken. This is a relevant cost for decision making purposes. NON-RELEVANT COST OR REVENUES • Non-relevant revenue or costs are those that remain unchanged, following a specific management decision. • A sunk cost is one that has already been spent and is not a relevant cost as it will not change as a result of a management decision. • A committed cost is one that has to be paid for, whether or not management make a specific decision. It is a non-relevant cost. RELEVANT AND NON-RELEVANT REV/COSTS Relevant ◦ Future, Incremental, Cash ◦ Opportunity cost Non-relevant  Sunk  Committed  Non-cash (depreciation) Non-incremental (fixed overheads) LAUNCH OF NEW PRODUCT/INNITIATIVE Radio campaign Is it beneficial to pay for further three regional slots at £5,000 each?  Slots will increase revenues for £100,000  The company has already spent £50,000 on production costs  Committed to radio slots in two regions for £10,000 PRODUCT. COST CATEGORIES AND TIME HORIZON 1 Short run: eg . A one off special cost A ) MARKET BASED & TARGET PRICING Selling prices can be the starting point of pricing calculations 1. How much are our competititors charging? 2. What is our required margin of profit? 3. Work backword/ in parallel on cost Target pricing/costing compares the selling price less the desired profit to the costed specification of the product before it is manufactured. Developing target prices and costs entails the following four steps:  Step 1 : develop a product that satisfies the need s of potential costumers ( ex: producing a computer costs 900$ a potential price might me 1000$  Step 2: choose a target price and a target operating profit per unit (competitors are lowering the price by 15%; the company must respond by decreasing prices by 20% from 1000$ per unit to 800$, at this price sales will be 200000 units  Step 3 derive a target cost per unit Step 4: perform value engineering to achieve target cost. Improve product design, changes in materials, changes in production process… Are ll features necessary ( e.g Audio features)? No! Provalue is is discontinued Provalue II: improved design  Simplified main printed circuit  Less assembly time  Less testing hours  Less reworks Value engineering is a systematic evaluation of all aspects of the value chainbusiness function with the objective of reducing costs. DESIGN AND LOCKED-IN COSTS Why can’t they just move Provalue? Because it is more expensive” by design” l Locked- in costs: those costs that have not been incurred but which based on decision that have already been mad, will be incurred in the future It is difficult to alter or reduce costs that lready locked in At the end of the design stage, direct materials, direct manufacturing labor, and many manufacturing, marketing, distribution, and customer service costs are all locked in. When a sizeable fraction of the costs are locked in at the design stage, the focus of value engineering is on making innovations and modifying designs at the product design stage. B ) COST-PLUS PRICING The general formula for setting a cost based price is to add a markup component to the cost base. Assume that the company’s engineers have resigned Provalue into Provalue II at the new cost of 720$ The company desires a 12% markup on the full unit cost What is the prospective selling price? How is the markup percentage of 12% determined?  Choose a mark-up to earn a target rate of return of investment(ROI)  ROI: Target operating profit/total assets(non current * current assets)  Suppose the company wants a 18% POI  Invested capital for Provalue II 96.000.000$  Target operating profits: 96.000.000$*0,18= 17.280.000  Target operating profit per unit of Provalue II: 17.280.000$/ 200.000= 86.40 (12% of 720$) ALTERNATIVE COST BASES AND MARK- UP PERCENTAGES Companies may find difficult to determine the capital invested to support a product (it would require allocations of investments in equipment and buildings) Alternatively, a mark-up can be calculated as:  % of variable manufacturing costs  % of variable product cost  %of manufacturing function costs (variable+fixed per any function)  % of full product costs (variable and fixed per any function) N.B. The mark-up will be higher if applied on variable manufacturing costs, lower if applied on the full total costs. The more competitive the market, the lower the mark-up (pag 393 ch 12) ADVANTAGES OF USING FULL COST 1. Full product cost recovery: ensure that the company continue in business rather that shutting down. If you base your price on carriable costs, the temptation is to cut prices until the contribution margin remains positive. 2. Simplicity 3. But …allocating fixed costs to product is arbitrary Calculating fixed costs per unit requires an estimate of future sales quantities. If actual sales fall short of this estimate, the actual full product cost exceed price! LIFE-CYCLE PRODUCT BUDGETING AND COSTING Life cycle costing: accumulates the actual costs attribute to each product from strat to finish. A new software sold in CD format Life cycle budgeting: estimating revenues and costs for initial R&D phases to final customer servicing Why is it important? For some products, the higher costs are not the manufacturing ones, but R&D and design (software development, pharmaceutical companies) Prices must be set to recover costs in all the value-chain business functions! High early stage costs (R&D) design signal the importance of develop accurate predictions of the revenues of a product Life cycle reporting highlights cause and effect: low R&D, design; high customer service costs? JUDGING PERFOMANCE Budgeted performance can be used to judge actual results. Advantages of using budgeted performance instead of past results ( past results incorporates past mistakes you would set performance targets too low) Past results refers to past scenarios. COORDINATION AND COMMUNICATION Coordination: a budget forces executives to think about relationships among departments and business functions ◦ The purchasing officers makes material purchase plans based on production requirements ◦ The production manager can make better production shedules if s(he) interacts with the marketing managers Communication: eg. The production manager must know the sales plan….the purchasing manager must know the production plan… MOTIVATION AND OTHER ISSUES Budget-related measures can motivate managers to perform well when targets for performance are attached to these measures Role of Performance Targets To encourage individuals to set work goals Performance tends to be higher when work goals are set, compared to when individuals have no set goals As long as goals are perceived as; ◦ Clearly understood ◦ Challenging but achievable TIME COVERAGE What is the time period of a budget? • life-cyle budgeting (Class 6) covers the life of a product • most frequent period is one year. Class 8: Flexible budgets, variances and management control. BUDGETS AND CONTROL  Budget is a mean of putting the organization’s strategy into effect  Quantification of management expectations  But actual performance often deviate from bdg expectations  Deviations are called variances.  Managers should focus on the most important ones management by exception VARIANCES ANALYSIS Level 0,1, and 2 excel LEVEL 3: PRICE AND EFFICENCY VARIANCES • Refer to sources of variances between actual and flexible budget regarding COSTS. • Price variance: difference between the actual price and the budgeted price of input multiplied by the actual quantity of input used. • Efficiency variance: difference between the actual quantity of input used and the budgeted quantity of input that should have been used multiplied by the budgeted price. BUDGETED INPUT PRICES AND INPUT QUANTITIES Standard price, quantity, cost Where do they come from? ◦ Actual input data from past period ◦ Data from other companies that have similar processes. ◦ Engineering studies (time and method) • Inappropriate assignment of labour or machines to specific jobs • Congestion due to scheduling a large number of rush orders. Direct manufacturing labour: €20.000 U It took them more time to manufacture their products than budgeted  Possible causes: • Sofiya’s personnel manager took on underskilled workers. • Sofiya’s production scheduler inefficiently scheduled work, resulting in more direct manufacturing labour time per jacket. • Sofiya’s maintenance department did not properly maintain machines, resulting in more direct manufacturing labour time per jacket. • Budgeted time standards were set without careful analysis of the operating conditions and the employees’ skills. VARIANCE ANALYSIS AND ORGNIZATIONAL LEARNING The cause of a variance in production can be actions taken in other parts of the value chain. Variance analysis can be used to pinpoint problems early and promote learning. Example: Direct materials= [22.200 sqm – (2sqm x 10.000)] x €30 = €66.000 U They used more materials than budgeted  possible causes: • Poor design of products or processes  DESIGN and MARKETING • Poor quality or inadequate availability of materials from suppliers  PURCHASING • Poor work in the manufacturing area  PRODUCTION • Inadequate training of the workforce  HUMAN RESOURCES • Inappropriate assignment of labour or machines to specific jobs • Congestion due to scheduling a large number of rush orders  PRODUCITON SCHEDULE WHEN TO INVESTIGATE VARIANCES • It depends on the amount of the variance or the amount of the cost • A 4% variance in direct materials costs of €1 million may deserve more attention than a 20% variance in repair costs of €10 000 • Rules such as ‘investigate all variances exceeding €5000 or 25% of budgeted cost, whichever is lower’ are common. • Managers realise that the budget is a band or range of possible acceptable outcomes and they consequently expect variances to fluctuate randomly within certain normal limits. • Investigating variances is not costless BUDGET AS CONTROL TOOLS • Variances are the differences between actual and budgeted results • they can be use mainly to address problems, not to attach blame • variances highligh the need to ask questions to the person who should have the relevant information • Variances are helpful as  Early warnings  Performance valuation  Evaluating strategy  Communicating the goals of the organisation RESPONSIBILITY AND CONTROLLABILITY Controllability is the degree of influence that a specific manager has over costs, revenues or other items in question A controllable cost/item is any cost/item that is primarily subject to the influence of a given manager In practice, controllability is difficult to pinpoint • few costs/items are clearly under the influence of one manager only  Market conditions?  Quantities (production manager) and quality (purchasing manager) • difficult to separate the costs that a manager control now from the results of decisions made by others EMPHASIS ON INFORMATION AND BEHAVIOUR • The aim of responsibility accounting should not to blame (control) but to collect information and increase knowledge • Who is best informed? Who can tell more about this, regardless of the person’s ability to exert personal control? • Responsibility accounting reports include also non-controllable iterms because unit managers are in the best position to explain variances between actual and budgeted figures