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INTERNATIONAL JOURNAL OF MANAGEMENT IJM ISSN 0976 6367 Print ISSN 0976 6375Online Volume 3 Issue 2 May August 2012 pp 0112 IAEME wwwiaemecomiimhtml Journal Impact Factor 2011 15030 Calculated by GISI wwwiifactorcom USE OF THE MIXBASED COSTING MIXBC TO DETERMINE PRODUCT PROFITABILITY LEVEL OF ATTRACTIVENESS AND SYNERGY OF THE PRODUCTION MIX LEANDRO TORRES DI GREGORIO MSc GraduateProgram Civil Engineering Fluminense Federal University Niteroi RJ leandrogregorioigcombr Address Rua Primeiro de J aneiro 43 Vila Madalena Belford Roxo RJ Brazil CEP 26130320 Telephones 55 21 37756862 55 21 96473566 Fax 55 21 37756862 CARLOS ALBERTO PEREIRA SOARES DSc Graduate Program Civil Engineering Fluminense Federal University Niteroi RJ carlos uff globocom Address Rua Passo da Patria 156 510 Domingos Niteroi RJ Brazil CEP 22320000 Telephone 55 21 26295410 ABSTRACT By analyzing different production scenarios MIXBC allows the distribution of costs and indirect costs to products without the subjectivity and uncertainty typical of traditional apportionment After a bibliographic research on costing methods philosophies and an analytical deduction of the MIXBC method the method was applied to the items that make up the assets cash inventory receivables and fixed asset assets The results were used to determine the product return rate The concepts of synergy and level of attractiveness of the mix were also presented and demonstrated These concepts are useful to evaluate the performance of the production mix Keywords Cost management Rate of return MIXBC Mix Based Costing Mix synergy Level of attractiveness of the mix International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 1 INTRODUCTION The aim of this paper is to demonstrate the possibility of using the Mix Based Costing MIXBC method to calculate product profitability synergy and level of attractiveness of the mix These last two parameters were defined so as to show the performance of the production mix The major drawback of all costing methods is that they include subjective and arbitrary elements in the determination of production costs when dealing with the apportionment of indirect costs The uncertainties of this process lead to imprecise evaluations on product profitability and consequently on production strategies particularly when the parameter expenses is involved This problem is aggravated by the difficulty of apportionment Besides the sharing of the infrastructure and of the resources by the production mix causes effects that are not well understood There is a lack of parameters that re ect more clearly the mix performance The aim of this paper is to demonstrate that the Mix Based Costing MIX BC method allows the full calculation of product profitability based on the distribution of indirect costs indirect expenses and assets to products Another aim is to present the synergy and level of attractiveness parameters for the production mix These parameters calculated from the results of the MIXBC method are important in the evaluation of the mix performance The methodology adopted was bibliographical research followed by an analytical approach in which the results of the MIX BC were applied to the calculation of product profitability synergy and level of attractiveness of the production mix The advantages resulting from this work include the improved quality of accounting information on product profitability and production mix performance thus contributing to more profitable production strategies 2 COST ACCOUNTING AND PRODUCTION STRATEGIES The purpose of costing methods is to determine how costs should be allocated to products At present absorption costing is the only method legally accepted in Brazil for financial accounting purposes but it presents strong managerial limitations This method consists in the appropriation of all production costs to the products produced and only those of production MARTINS 2010 Absorption costing philosophy is not concerned about the distinction between fixed and variable costs Its basic premise is the separation of costs from expenses with the sales generated and expenses are recorded directly in the result of the period BEUREN SOUZA and RAUPP 2003HORNGREN FOSTER and DATAR 2004 state that absorption costing is the inventory costing method in which all manufacturing costs variable and fixed are considered countable costs That is inventory absorbs all manufacturing costs It is the only method accepted for tax purposes in Brazil AZEVEDO GOUVBA and OLIVEIRA 2006 point out that absorption costing is useful in the evaluation of business inventory and in aiding price decision taking for products and services provided the part apportioned be small For managerial decision taking however complementary information is necessary SILVA 1998 mentions that absorption costing cannot be used indiscriminately without taking into consideration problems that may be entailed particularly its incentive to overproduction Another system widely used is Variable Costing ANDRADE BATISTA and SOUSA 2004 suggest that this system tries to reduce the distortion present in the International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 apportionment required by the absorption costing system In the absorption costing system fixed costs are apportioned to products andor services whereas in variable costing these costs are treated as expenses and as such are recorded directly in the result It is clear then that different methods may result in significantly different interpretations particularly as regards product profitability Product profitability is a crucial parameter in decision making of production volume the amount of products to be manufactured in a certain period of time and of business strategies In this context Cost Accounting plays an important role and when used with a costing system that is both efficient and coherent with the characteristics of the organization it provides an understanding of product profitability and of possible ways to reduce costs BEUREN et al 2003 state that cost information may be useful in cost structure reduction expansion of production capacity launching of new products or calculation of sales price 3 MIX BASED COSTING METHOD MIX Based Costing is a costing method that allows the reduction of uncertainties caused by arbitrary apportionment of indirect costs and expenses in product cost The MIXBased Costing method was built on the analyses of the product mix rather than on that of products individually and also on the hypothesis that the absence of a certain product in the mix provides clues as to the degree of utilization of shared costs costs shared by one or more products usually indirect by that particular absent product MIX BC allows costs and indirect shared expenses which cannot be actually separated for each product to be treated in a mathematical and coherent way MIX BC contrasts then with the other methods which usually apportion or track expenses In this sense MIX BC is an apportionmentfree costing system since the uncertainties are calculated by a process of cost inference based on the exclusive production only the product analyzed is produced and excludent production only the product analyzed is not produced scenarios The distribution of xed indirect costs Let us examine the hypothetical case of a business that produces three products exemplified as Alpha Beta Gamma which have total fixed costs CF and fixed expenses DF Thus the total fixed cost CF of the Product Mix Alpha Beta and Gamma can be written as EFALFBLA ET s salmf Fimr EFIXEFHXEFMXEFIE EF F EFIXEFV Eq39 V International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 Figure 1 Graphic representation of the universe of fixed costs for a business which produces products Alpha Beta and Gamma Source authors Considering the situation in which product Alpha is discontinued by the business and its production is not substituted by any other product the new distribution of fixed costs would be Figure 2 Graphic representation of the universe of xed costs for a business which produces products Beta and Gamma Source authors The total fixed cost for the new product mix only Beta and Gamma without the participation of Alpha can be written as EFmm EFHEEFWEFEEFHEFW Eq Vi International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 Substituting Eq Vi in Eq V This result can also be considered as the Minimum Fixed Cost that can be ascribed to product AlphanEF LFEL in On the other hand if there were only product Alpha without the other mix products the fixed costs related to it would be maximum and would be calculated by Substituting Eq ix in Eq x EF LFELfEstLmi iLiE JEF Li ELEhmiz F TTEFVITEFVE Ecl Xi In which the term EFJEFELfEFwE q m could be considered as the range of variation of fixed costs for product Alpha and it represents the extent of use of the mix structure by product Alpha or the extent to which product Alpha depends on the mix structure The fixed cost of the structure shared by the product mix can be defined by EF myEFw Fv F Fm Eq xviii Applying the same reasoning and substituting in Eq V EF1EKEFALmirmiTEFuEraamTEFGLxmLaawTEmem Eq Xix That is the fixed cost of the structure shared by the mix can be determined by subtracting from the present situation the minimum fixed costs for each product determined by the scenarios of absence of each one sequentially EFmirfEF1M EF1M JEFiuaaLFEL EFiufESFma E mj EEFREK JEFl E i mx Eq xx Thus EEmuEFina Isl13mTEFina HemTEEiuK um g mmr Eq 3930 Generalizing for a mix of N products crmifcrlmlacrlma crmg ri l rm Eq xxi International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 As previously seen the ranges of fixed costs for each product EFij show the utilization of the mix for each product respectively Thus the following equation defines the degree of use of the Mix for product I based on costs UC UCCFE El Eq xxii cm Thus in order to define the participation of each product in the Fixed Cost of the Mix the amount each of them absorbs from the mix when compared with the remaining products it is necessary to normalize the UC parameter obtaining what was called FACTORS OF COST PARTICIPATION FPCs that is w Rim 4m EFLhi Emitsa EllFF Eq xxvi Thus the total fixed cost for a particular product in terms of its shared structure in the mix can be written as EEEF m FPEJEFEMEq xxx CHECKING COHERENCE The situations in which the model loses its coherence may be due to misevaluation by the cost analyst or due to a degree of coherence that is not easily perceived by the analyst thus inducing to error 0 Individual conditions 0 In the exclusive production scenario for product i resources should not exceed amounts available in the mix 0 In the excludent production scenarios for product i resources should not exceed the amount available in the mix 0 In the exclusive and excludent scenarios for product i resources should not be lesser than the amount available in the mix 0 For a certain product the maximum resources should be greater than the minimum resources defined from the mix 0 Collective condition Resources shared in the production mix should not be negative APPORTIONMENT OF FIXED EXPENSES Fixed expenses can also be analyzed in the light of MIXBC that is by applying the same sequence of reasoning used to solve the problem of xed costs In managerial terms applying MIXBC to fixed expenses is extremely reasonable since in a business every expenditure cost or expense exists or should exist to somehow make possible the production and commercialization of one or more products From this point of view it is reasonable to associate expenses to products which is possible with the MIXBC method International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 Applying the MIXBC to xed expenses DFs the following equations for product i of a Mix of N products are to be found DEE F3E F3m i Eq xxxiv yil z Eq xxxv DFFE Fi ira rDFum Eq XXXVi Dchm F1m m1 DF1m quotIJ MERE EQ XXXVii Likewise the degree of use of the structure U and the participation factor FP must be calculated using the parameter Fixed Expenses expressed as ADI7 9 mm mum Eq xxxv111 Dims ADE 9 3 r 1 1 L39I1j E ADE Eq xxxix l Ijr 3E5 l t Brigg X1 It must be pointed out that the MIXBC could have been applied to the xed costs fixed expenses set and in that case participation factors corresponding to the whole set would be obtained FPCDs or it could have been applied separately to the fixed costs with costspeci c FPs FPCs and then to the xed expenses with expensespecific FPs FPDs 4 DETERMINING PRODUCT PROFITABILITY MARTINS 2010 stresses that the best way to evaluate the level of business success is to calculate its returnon the investment made According to him the Rate of Return TR is the ideal way to perform this task Fi39 i tieEme Imzxnme and hitE Emma eaglemes Total Same15 mim Eq xli The author further explains that profit calculation should not include Financial Expenses since these are derived from Liabilities financing rather than from Assets Investment He then proceeds to state that a part of the return yielded by Investment shall be used to remunerate creditors equity Financial Expenses and another part shall be used to remunerate owners equity0wners Net Profit The total return the sum of both parts is what best defines global performance The author ends by stating that the problem of using this idea for each product consists not only in assessing profit but also in determining which investment belongs to each product International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 As demonstrated the problem of profit assessment was solved by the MIXBC method Investments Assets can also be separatedby using the same procedure As an example MARTINS 2010 subdivides Assets as Cash Assets Inventory Receivables Net and Fixed Assets Net He explains that Assets are general Inventories contain raw material finished products and identifiable packages containing each product and several materials for industrial use common to all Receivables are all identified finally part of the Fixed Assets is made up of machinery and facilities identified with the products and the greatest part is common to all products It should be pointed out that in terms of the items of the Assets Cash Assets Inventory Receivables and Fixed Assets it makes no difference whether MIXBC is applied to each item as a whole or only to the common shared part of each product This possibility happens because in the scenarios set by the method the identified part and the common part of each item can be readily differentiated Applying MIXBC to the item Cash Assets DIS of the Assets Dls mz lslmDlsm Eq xlii 131 mInIsj Eq xliii EDIEEDIE lmalalm Eq Xliv Dlg lm l lml D15m32 DIEmh ii 1DISM Eq xlv Now the degree of use of the structure U and the participation factor FP must be calculated using the parameter Cash Assets expressed as 1315 Emmi UDIEiZFilj 31m Eq xlvi L39DIampE5 ma LEIIE FPDI Si E 1115 sisa Elf miss Eq39 XIVii DI SEDI lm FPDI Ef l mmEq xlviii Applying MIXBC to the item Inventory EST of the Assets EETQEFEETmK EETlm iv Eq xlix BEL jLjiiliEsTi Eq 1 E T EETE EEKESTng Eq 1i Ey Tc lm EET3EE 1 EETmE 2 EETmK f 39l HEETRM Eq lii Now the degree of use of the structure U and the participation factor FP must be calculated using the parameter Inventory expressed as International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 iE Ti EETCJJE UE Ti Eq 1111 13151111111 1111 r5 EsrfEsr m W srww Eq 1v There is no need to apply the method to the item Receivables REC since it is already identified for each product according to the sales earned Applying MIXBC to the item Fixed Assets IMO of the Assets 111121 m rz111om Implm Eq 1v1 11111113111111 Ema mam Eq lviii 111111mm111111mn 1110m2 111111mr11111 131111111m Eq lix Now the degree of use of the structure U and the participation factor FP must be calculated using the parameter Fixed Assets expressed as mm UIMIDi Emm 1111111 Eq 1x V L39EIDfaj mmf FP I M ri mum11 E John1111j Eq lxi rainfrzum lmW ji flih ml Eq lxii The distribution of Assets ATV for each product of the example according to the method is Table 1 Distribution of assets for each product according to the MIXBC method Source authors Assets Alpha Beta Gamma Total CashAssets Eil gmm WEEEM WEMMIME ES Inventory EST1J1LLPZEE1 1 ESTEZET1 HE STMMME dEST Receivables net HEM EEEEEM REGGAE111E111 RE FixedAssets net 111111 mEn a 1111111EEm 11111u mm JFEMU 1 Al TOtal Assets i mrrms TE EEm Tgmmmu Tv International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 Presuming that the results for each product Rmpm REEWRmMM have been previously obtained by applying the MIXBC method to costs and expenses it is possible to calculate the return on investment for each product of the example for managerial purposes using Eq xli ll 3quot 11m Eq lxiii AIMLa TRam riff amt Eq lxiv EETL L TRGm EJEQ39E REE 11m Eq lxv n mama The parameter Rate of Return for each product makes it possible to evaluate which product maximizes investment value This evaluation constitutes important managerial information 5 DETERMINING SYNERGY AND LEVEL OF ATTRACTIVENESS Synergy derives om the Greek synergia cooperation It means that the effect resulting from the action of several factors that make up an action coordinated towards a common aim may be greater than that of all these agents acting individually In terms of the production mix synergy meansmore specifically the installed capacity machinery area occupied by production etc and the administrative and supporting structure indirect labor force fixed expenses etc Actually everything that is shared in one way or another must presentsynergy otherwise it would be preferable not to share at all In other words the effect of the shared structure must be that of reducing business operational costs and consequently generating an increase in efficiency when compared with a structure which is not shared Bearing this in mind Synergy of Fixed Costs in the Mix SINCF that is the amount saved by sharing xed costs can be defined as Emilia r EFE In this equation parameter EFL MMrepresents the fixed costs necessary in a scenario in which there is only product i exclusive production of i and BEE represents the total xed costs of the mix Additionally Synergy of Fixed Expenses in the Mix SINDF that is the amount saved by sharing xed expenses can be de ned as 31HDFE DFir 3m r DFmg Eq lxvii 10 International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 In this equation parameter EFL lL represents the xed expenses necessary in a scenario in which there is only product i exclusive production of i and DFEE represents the total xed costs of the mix In this case the synergy created by sharing costs and expenses are being analyzed but there are other aspects of the synergy of the production mix largescale acquisitions products with strategic positioning in the market that are not discussed in the present article Thus the MIX SYNERGY in terms ofsharing of production and administrative infrastructure can be defined as EIH3EEIHEF EIHDF Eq lxviii So far SYNERGY has been seen in absolute terms but it can also be expressed in percentages Expressing in percentages provides a more precise view of how the mix acts on optimization of resource consumption when compared with the scenarios of exclusive production of products SYNERGY in percentages can be expressed by the equation EIH3E xiumEq lxix E39FimE DFm The LEVEL OF ATTRACTIVENESS OF THE MIX GAT is a parameter that can be used to evaluate and compare different mix arrangements identifying which of them maximizes investment It can be de ned by mf EMMEq lxx 3mg BREE 9 53 m 6 CONCLUSIONS The MIX based costing is a method that allows product cost to be obtained from a sequence of analyses performed on the production mix Its application is particularly useful for the treatment of indirect costs in the hypothesis that the absence of a particular product in the MIX provides clues as to the degree of utilization of shared costs costs that are common to one or more products and that are usually indirect for the absent product The major advantage of the method may lie in allowing costs and indirect shared expenses which cannot be actually separated for each product to be treated in a mathematical and coherent way MIX BC contrasts then with the other methods which usually apportion or track expenses In this sense MIX BC is an apportionmentfree costing system since the uncertainties are calculated by a process of cost inference based on the exclusive production only the product analyzed is produced and excludent production only the product analyzed is not produced scenarlos 11 International Journal of Management IJM ISSN 0976 6502Print ISSN 0976 6510Online Volume 3 Issue 2 MayAugust 2012 MIXBC can also be used to determine the profile of assets sharing according to product The profitability of each product can thus be completely obtained which was not previously possible using the other costing methods It should be pointed out that MIX BC is a method strongly dependent on the experience and on the systemic vision of cost analysts who should have an indepth knowledge of the reality of the business operations The good foresight of these professionals shall be responsible for building coherent scenarios of resource consumption and the application of the method shall lead to the safe completion of the cost distribution task and to results free of arbitrary apportionments It is recommended that the scenario analyses be performed by a multidisciplinary team comprising professionals from human resources production and administrative managerial level MIXBC can also be used to identify the synergy present in the use of the infrastructure and of production resources It is also possible to compare different production mixes by means of the level of attractiveness of the mix MIXBC is therefore a valuable managerial and strategic tool It reduces the arbitrariness caused by apportionmentand therefore allows coherent product costing It permits analyses of product profitability It makes it possible to identify the amount of value aggregated by the production mix in the product structure when different resources are shared REFERENCES 1 ANDRADE Nilton de Aquino BATISTA Daniel Gerhard and SOUSA Cleber Batista de2004 Vantagens e Desvantagens da Utilizacao do Sistema de Custeio ABC inPublicag es d0 1quot Semindrio de Gestdo de Nego cios da FAE Curitiba PRAvailable athttpwwwfae edupublicacoespdfart cieart 37pdf20 May 2011 2 AZEVEDO Ana P F GOUVEA Josiane B and OLIVEIRA Ualison R 2006 Custeio por Absorcao X Custeio ABC inAnais d0 3quot Simpo sio de Excel ncia em Gestdo e Tecnologia SEGET Rezende RJAvailableat httpwwwaedbbrsegetartigos06871 CUSTEIO20POR20ABSORCAO20X20CUSTEIO20ABCpdfl20 May 2011 3 BEUREN Ilse Maria SOUZA Marco A B de RAUPP Fabiano Maury2003 Um Estudo Sobre a Utilizacao de Sistemas de Custeio em Empresas Brasileiras in AnalesdelCongresodel Instituto Intemacional de Costos n 8 Puntadel Este Uruguay Availableat httpeco unneeduarcontabilidadcostosVIIIcongreso 1 10doc20 May 201 1 4 HORNGREN Charles T FOSTER and George DATAR Srikant M 2004 Contabilidade de Custos Rio de J aneiro RJ Ed Pearson Prentice Hall 5 MARTINS Eliseu 2010 Cantabilidade de Custos Livro texto 50 Paulo SPzEd Atlas 6 SILVA C sar A T1998 Utilizacao do Custeio por Absorcao para Fins Gerenciais Revista UnB ContcibiZ 1 1 Available at httpwwwcggamgunbbrindexphp contabilarticleview98pdf 6l20 May 2011 12
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