Principles of Accounting 2
Principles of Accounting 2 ACG 2071
Popular in Course
Popular in Accounting
This 261 page Class Notes was uploaded by Pamela Jerde on Monday October 12, 2015. The Class Notes belongs to ACG 2071 at Florida Atlantic University taught by William Urquhart in Fall. Since its upload, it has received 52 views. For similar materials see /class/221654/acg-2071-florida-atlantic-university in Accounting at Florida Atlantic University.
Reviews for Principles of Accounting 2
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 10/12/15
Responsibility Accounting and Transfer Pricing Chapter 22 McGIaW HiIIIrwin Copyright 2010 by The NIchwHill Companies Inc All rights reserved Responsibility Centers Large complex businesses are divided into responsibility centers enabling managers to have a smaller effective span of control A The Need for Information About Responsibility Center quot Performance The accounting system provides information about resources used and outputs achieved This information is used to Plan and allocate resources Control operations Evaluate the performance of center managers Cost Centers Profit Centers and Investments Centers Cost Center A business section that has control over the incurrence of costs but no control over revenues or investment funds Cost Centers Profit Centers w and Investments Centers Profit Center A part of the business that has control over both costs and revenues but no control over investment funds Revenues 0 Sales 0 Interest 0 0 Other 0 Costs I o Mfg costs 0 0 Commissions o 0 Salaries o o Other Cost Centers Profit Centers a and Investments Centers Investment Center A profit center where management also makes capital investment decisions Corporate Headquarters Cost Centers Profit Centers a t and Investments Centers Cost Center Profit Center Investment Center Evaluation Measures Cost control Quantity and quality of services Profitability Return on assets ROA Residual income RI Responsibility Accounting Systems An accounting system that provides information Relating to the To evaluate responsibilities of managers on individual managers controllable items Responsibility Accounting ystems 0 Prepare budgets for each responsibility center each responsibility center 6 Prepare timely performance reports comparing actual amounts with budgeted amounts 229 Successful implementation of responsibility accounting may use organization charts with clear lines of authority and clearly defined levels of responsibility Vice President Vice President Vice President of Finance of Operations of Marketing 2210 Responsibility Accounting Systems Amount of detail varies according to level in organization A department manager receives detailed reports A store manager receives summarized information from each department 2211 Responsibility Accounting Systems Amount of detail varies according to level in organization Management by exception Upperlevel management does not receive operating detail unless problems arise The vice president of operations receives summarized information from each store 2242 Responsibility Accounting Systems To be of maximum benefit responsibility reports should Be timely Be issued regularly Be understandable Compare budgeted and actual amounts Assigning Revenue and Costs w to Responsibility Centers Revenue is easily and automatically assigned to specific departments using point of sale entries from cash registers Assigning Revenue and Costs a to Responsibility Centers Two guidelines should be followed in allocating costs to the various parts ofa business 0According to cost behavior patterns Fixed or variable GAccording to whether the costs are directly traceable to the quot centers involved 2215 Contribution Margin a Responsibility Reports Webber Inc has two divisions VVebbenlnc I liommmMMr mnEion WeieMt wt us39W J Let s look more closely at the Television Division s income statement 2216 Contribution Margin w Responsibility Reports Income Statement Contribution Margin Format Television Division Sales 300000 Variable COGS 120000 Other variable costs 30000 Total variable costs 150000 Contribution margin 150000 Traceable fixed costs 90000 Responsibility margin 60000 2217 Contribution Margin Responsibility Reports Income Statement Contribution Margin Format Television Division Sales 300000 Variable COGS 120000 Other variable costs 30000 A Total variable costs 150000 Contribution margin 150000 Traceable fixed costs 90000 Responsibility margin 60000 A Fixed and variable costs are listed in separate sections 2218 Contribution Margin Responsibility Reports Income Statement Contribution Margin Format Television Division Sales 300000 Variable COGS 120000 Other variable costs 30000 Total variable costs 150000 Contribution margin 150000 Traceable fixed costs 90000 Responsibility margin 60000 Responsibility margin is the Television Division s contribution to overall operations 2219 Traceable Fixed Costs Traceable xed costs would disappear over time if the center itself disappeared No computer No computer division means division manager 2220 Common Fixed Costs Common xed costs arise because of overall operation of the company and are not due to the existence of a particular center No computer We still have a division means company president 2221 Contribution Margin Reports Let s see how the Television Division fits into Webber Inc 2222 Contribution Margin Responsibility Reports Income Statement Company Television Computer Sales 500000 300000 200000 Variable costs 230000 150000 80000 CM 270000 150000 120000 Traceable FC 170000 90000 80000 Responsibility margin 1000 m inn lri quot Net income 75000 00 60000 40000 j V V M lnl Common costs arise because of overall operating activities and are not due to the existence of a particular division 2223 Traceable Costs Can Become if Common Costs quot Fixed costs that are traceable on one level can become common if the business is divided into smaller parts Let s see how this works 2224 Contribution Margin Responsibility Reports Income Statement Television Division Color HDTV Sales 300000 200000 100000 Variable costs 150000 95000 55000 CM 150000 105000 45000 Traceable FC 1 80000 I 45000 4 35000 I Responsibility margi 70000 60000 10000 Common costs 10000 Netincome 60000 l 45003 To Color 3500 To HDTV 10000 Common quotquot quot39 39 quot 90000 TV Division 2225 a Responsibility Margin Responsibility margin is the best gauge of the longrun profitability of a business center Profits Time 2226 When is 3 Responsibility Center Unprofitable Home Appliance company Income Statement La undry Division Washers Dryers Sales 300000 200000 100000 Va ria ble costs 150000 95000 55000 CM 150000 105000 45000 Tra cea ble FC 95000 45000 50000 Responsibility margin 55000 60000 5000 Com mon costs 10000 Net income 45000 The Dryer Division is unprofitable because the responsibility margin is negative 2227 When is a Responsibility w Center Unprofitable Home Appliance company Income Statement La undry Division Washers Dryers Sales 300000 200000 100000 Va ria ble costs 150000 95000 55000 CM 150000 105000 45000 Tra cea ble FC 95000 45000 50000 Responsibility margin 55000 60000 5000 Common costs 10000 Net income 45000 While contribution margin is used for shortrun decisions responsibility margin is used for longrun decisions Should the Dryer Division be discontinued because the responsibility margin is negative 2228 Evaluating Responsibility N Center Managers Managers should be evaluated on the portion of responsibility margin they control Common fixed costs can not be traced to the Dryer Division or the Washer Division so they are excluded from the responsibility margin The key issue is controllability 2229 Arguments Against Allocating a Common Fixed Costs 0Common fixed costs would not change even if a business center were eliminated Common fixed costs are not under the direct control of the center s managers Allocation of common fixed costs may imply changes in profitability that are unrelated to the center s performance 2230 Transfer Prices ed The amount charged when one division sells goods or services to another division W5 nnn q mm FHHi irHl Auto Division Battery Division DDEII 2231 Transfer Prices x4 The transfer price affects the profit measure i forbithbuying and selling divisions A higher transfer price for batteries means H Batter39es or HHHIEEEZIFEHFEL i H ml Battery Division greater Auto Division profits for the Battery Division 2232 Transfer Prices x 4 i The transfer price affects the profit measure i forbithbuying and selling divisions A higher transfer price for batteries means H Batter39es or nnniiEiEFBUE ml Battery Division IOWGF Auto Division profits for the Auto Division 2233 Transfer Prices Many companies use the external market value of goods transferred as the transfer price Transfer prices have no direct effect upon the company s overall net income E 2234 Transfer Prices When the external market value of goods transferred is unavailable Negotiated Costplus transfer transfer p ce price Transfer prices have no direct effect upon the company s overall net income 2235 Nonfinancial Objectives and Information Product Qualiy Personnel Number of defective parts Number of sick days taken Number of customer returns Employee turnover Number of customer complaints Number of grievances led Marketing Ef ciency and Capacity Number of new customers Cycle time manufacturing Number of sales calls initiated Occupancy rates hotels Market share Passenger miles airlines Number of product stockouts Patient days hospitals Transactions processed banks M 2236 Ethics Fraud and Corporate Governance Many companies provide investors and creditors with nonGAAP information and pro forma results The SarbanesOxley Act attempts to reduce or eliminate the abuses that can be associated with pro forma reporting by requiring public companies to provide a reconciliation of the differences between any nonGAAP financial measures provided to investors and creditors and the comparable GAAPbased result 2237 End of Chapter 22 2238 f ManagementAccounting 39 A Business Partner 39x 1 Chapter 16 McGIaW HiIIIrwin Copyright 2010 by The NIchwHill Companies Inc All rights reserved Management Accounting Basic Framework i v V Management accounting and W assigning decisionmaking authority Accounting systems help to identify who has authority over assets Accounting information supports planning and decisionmaking Accounting reports provide a means of monitoring evaluating and rewarding performance 162 Management Accounting System Framework ITop Managementl gt Budget Plans Actual Results Performance Future Current Evaluation Past Assign 7 Support Evaluate Decision Making Decision Making Decision Making 163 Demand fer Accounting Information Financial Accounting Management Accounting Provide information about the Provide information 39for Purpose financial position and planning evaluating and performance of the company rewarding perf0rm a nce Types of Balance sheet income statement and statement of Various nonstandard reports Reports cash ows Standard GAAP None tr Time Usually a year quarter or a Periods month Any pened39 Investors creditors and other Management customers and Users external parties others In the value chain Accounting for Manufacturing 7 Operations The cost to produce a unit of product includes oDirect material oDirect labor oManufacturing overhead Direct Materials Raw materials amp Sggspfhnaint Can be traced become an directly and integral part conveniently of finished to products products If materials cannot be traced directly to products the materials are considered indirect and are part of manufacturing overhead Direct Labor Includes the payroll cost of direct workers i Those employees who work directly on the goods being manufactured Direct labor x Wage hours rate The cost of employees who do not work directly on the goods is considered indirect labor and is part of manufacturing overhead Manufacturing Overhead All manufacturing costs other than direct materials and direct labor Includes o Indirect materials o Indirect labor o Machinery and equipment costs o Cost of regulatory compliance Does not include selling or general and administrative expenses 168 Flow of Physical Goods in Production Direct Direct Materials Materials Purchased Used Finished Goods Direct Manufacturing Labor Overhead W i MegaLoMart 169 Flow of Physical Goods in Production Manufacturing costs are often combined as follows Direct 7 Direct Manufacturing Materials Labor Overhead Conversion Cost 1610 f Product Costs versus Period Costs W Balance Sheet quot manUfaCturmg Current assets costs and finished as goods inventory incurred When goods Income Statement are sold Period Costs operating Revenue expenses and COGS income taxes Gross margin Period expenses as Operating profit incurred 1611 Ethics Fraud and Corporate Governance Product costs are capitalized as part of inventory and only charged to expense when the inventory is sold Income will be artificially inflated if period costs are capitalized 1612 Inventories of a Manufacturing Business aquot a r 1 2 t i v K 1 1w J r l i 5 g x g x a x k I u v 5 Raw materials inventory on hand and available for use Work in Finished process goods partially completed completed goods awaiting goods sale 1613 Flow of Costs Associated With Production Direct Materials Dire Work in Process materials Inventory mifer39dals Inventory We gt Direct labor amp Manufacturing Overhead COSt Of g dS Finished Goods Cost of manufactured Inventory Goods Sold gt 1614 Accounting for Manufacturing Costs PureIce Inc had 52000 of inventory in direct materials inventory on January 1 of this year During the year PureIce purchased 586000 of additional direct materials At December 31 of this year 78000 of the direct materials were still on hand How much direct material was placed into production during the year Accounting for Manufacturing Costs Beginning materials inventory 52000 Materials purchased 586000 Materials available to be placed into production 638000 9 Materials placed into production Ending materials inventory Accounting for Manufacturing Costs Beginning materials inventory 52000 Materials purchased 586000 Materials available to be placed into production 638000 Materials placed into production 560000 Ending materials inventory 78000 Accounting for Manufacturing Costs In addition to the direct materials Pure ce incurred 306000 of direct labor cost during the year Manufacturing overhead for the year was 724000 PureIce started the year with 132000 in work in process During the year units costing 1480000 were transferred My finished goods inventory What is the balance in work in process at the end of the year Accounting for Manufacturing Costs Beginning work in process inventory 132000 Ma nufa ctu ring costs added 1590000 Direct Materials 560000 Direct Labor 306000 Manufacturing Overhead 724000 Total costs added during the year 1590000 Accounting for Manufacturing Costs Beginning work in process inventory 132000 Manufacturing costs added 1590000 Total costs in process during the year 1722000 Cost of goods completed during the year 1480000 Ending work in process inventory 242000 Direct Costs and Indirect Costs Direct costs 0 Costs that can be easily and conveniently traced to a unit of product or other cost objective 0 Examples direct material and direct labor Indirect costs 0 Costs cannot be easin and conveniently traced to a unit of product or other cost object 0 Example manufacturing overhead 0 U Q 1621 7 Determining the Cost of Finished Goods Manufactured r l A schedule of the cost of nished goods manufactured is prepared to provide managers with an overview of manufacturing activities during a period 1622 CONQUEST INC Schedule of the Cost of Finished Goods Manufactured For the Year Ended December 31 2009 Work in process inventory beg Manufacturing cost assigned to production Direct materials 150000 Direct labor 300000 Manufacturing overhead 360000 Total manufacturing costs Total cost of all work in process during the year Less Work in process inventory end of year Cost of nished goods manufactured 30000 810000 840000 40000 800000 1623 Beginning finished goods inventory 150 000 Add Cost of nished goods manufactured during the year Cost of finished goods available for sale C1 Schedule of the Cos inventory For the Year Cost of goods sold Work in process inventory L T Manufacturing cost assigned to production Direct Materials 150000 Direct Labor 300000 Manufacturing overhead 360000 Total manufacturing costs Total cost of all work in process during the year Less Work in process inventory end of year Cost of nished goods manufactured Less Ending finished goods 810000 840000 800 000 950 000 1 68 000 782 000 The cost of goods completed during the period is used to compute COGS for the period 1624 Financial Statements of a Manufacturing Company 1 5 o O 3 m 0 Fl 9 Fl m 3 e w L m o m I r m m FI M HHHHHE 1625 CONQUEST INC Income Statement For the Year Ended December 31 2009 Sales 1300000 Cost of goods sold 782000 Gross profit on sales 518000 Operating expenses 400000 Income from operations 118000 Less Interest expense 18000 Income before income taxes 100000 Income tax expense 30000 Net income 70000 The income statement is prepared using established financial accounting procedures 1626 Financial Statements of a Manufacturing Company CONQUEST INC Partial Balance Sheet December 31 2009 Cu rre nt Assets Cash and Cash Equivalents 60000 Accounts Receivable net 190000 lnve ntories Wiork i n Process 40000 Finished seeds 391 68 000 Total lnve ntories 228000 Total current Assets 478000 l 7 l E I 0 r39 0 quot 1quot can 79 i or 9 Wing gurkvgx r r h til 11539 w Ilvg N yllrf al g lnleiwud lLllLllflzfl Lll liQmewlfgy Sagaclaimtruest End of Chapter I6 1628 CostVolumeProfit Analysis Chapter 20 McGIaW HiIIIrwin Copyright 2010 by The NIchwHill Companies Inc All rights reserved CostVolumeProfit Relationships Costvolume profit CVP analysis is used to answer questions such as How much must I sell to earn my desired income How will income be affected ifl reduce selling prices to increase sales volume What will happen to profitability if I expand capacity 202 Fixed Costs and Fixed Expenses G C g o Q7 17gt 0 3 9 0 0 3 0 I9 5 C O 2 o 3 5 8 lt6 L C a m G O 6 gt C E I E E E m 0 E Number Of Local Calls Number of Local Calls Total fixed costs Cost per call remain constant as decines as activity increases aCt39VIty Increases Varable Costs and Variable Expenses VG LC 9 E 5 gm E D L CDO D C C Q 00 4 49 8 G at 0 39 Minutes Talked Minutes Talked Total variable costs increase as Cost per Minute is constant as activity increases activity increases Cost Behavior Summary Summary of Variable and Fixed Cost Behavior Variable Costs Fixed costs Remains the same even Dereases as activity level Per Unit when actIVIty level changes Increases Total Changes as acti vityleve l Remains the same over wide 39 changes rangesof activity Semivariable Costs Mixed Costs Mixed costs contain a fixed portion that is incurred even when facility is unused and a variable portion that increases with usage Example monthly electric utility charge I Fixed service fee a I Variable charge per W kilowatt hour used m 55 llllll Ill39l Total Utility Cost a Semivariable Costs Mixed Costs Variable Utility Charge Fixed Monthly Slope is variable cost per unit of activity 9 6 0 Activity Kilowatt Hours Utility Charge CVP Relationships A Graphical i Analysis 0 Starting at the origin draw the total revenue line with a slope equal to the unit sales price 9 Draw the total cost line Breakeven Profit with a slope P lnt equal to the unit variable horizontally from the vertical axis Costs and Revenue In Dollars Volume in Units Economies of Scale Economies of scale are most apparent in business with high fixed costs Number Fixed Costs of Flights Fixed Cost per Month per Month per Flight 100000000 1000 100000 100000000 2000 50000 100000000 4000 25000 100000000 8000 12500 Semivariable Costs 2rquotltquot quotquot39i 1 Total cost increases to a 39 i new higher cost for the next higher range of activity Total cost remains constant within a narrow range of activity Cost Activity 2010 Curvilinear Costs Total Cost Curvilinear Cost Function Relevant Range A straight line closely constant unit variable cost approximates a curvilinear variable cost line within the relevant range Volume of Output 2011 Computing BreakEven Point The breakeven point expressed in units of product or dollars of sales is the unique sales level at which a company neither earns a profit nor incurs a loss 2012 Computing BreakEven Point 7 3 Total Unit Sales Revenue 2000 units 100000 50 Less Variable costs 60000 30 Contribution margin 40000 20 Less Fixed costs 30000 Operating income 10000 How many units must this company sell to cover its fixed costs break even Answer 30000 20 per unit 1500 units 2013 I How Many Units MustWe Seili We have just seen one of the basic CVP relationships the breakeven computation Breakeven Fixed costs point in units Contribution margin per unit Unit sales price less unit variable cost 20 in previous example 2014 How Many Dollars in Sales Must 1 We Generate The breakeven formula may also be expressed in sales dollars Breakeven Fixed costs point in dollars Contribution margin ratio quot39 Unit variable cost 2015 Computing BreakEven Sales ABC Co sells product XYZ at 500 per unit If fixed costs are 200000 and variable costs are 300 per unit how many units must be sold to break even 100000 units b 40000 units 0 200crm mun d 66 E Unit contribution 500 300 200 Fixed Costs 200000 39 Unit contribution 200 per unit 100000 units 2016 Computing BreakEven Sales Use the contribution margin ratio formula to determine the amount of sales revenue ABC must have to break even All information remains unchanged fixed costs are 200000 unit sales price is 500 and unit variable cost is 300 a e w b 4000003100000 39 revenue e A I I I I I 3 c c Q1 500000 2017 Computing Sales Needed to Achieve Target Operating Income Breakeven formulas may be adjusted to show the sales volume needed to earn any amount of operating income Unit sales Fixed costs Target income Contribution margin per unit Fixed costs Target income Contribution margin ratio Dollar sales 2018 Computing Sales Needed to Achieve Target Operating Income ABC Co sells product XYZ at 500 per unit If fixed costs are 200000 and variable costs are 300 per unit how many units must be sold to earn operating income of 40000 a 100000 l 120 000 l Fixed costs Target income Unit contribution C 80000 L 200000 40000 d39 200 000 l 200 per unit Unit contribution 500 300 200 120000 units 2019 a What is Our Margin of Safety Margin of safety is the amount by which sales may decline before reaching breakeven sales Margin of safety Actual sales Breakeven sales Margin of safety provides a quick means of estimating operating income at any level of sales Operating Income Margin of safety Contribution margin ratio 2020 a What is our Margin of Safety ADM contribution margin ratio is 40 percent If sales are 100000 and break even sales are 80000 what is operating income Operating Margin Contribution Income 39 of safety x margin ratio Operating Income 20000 x 40 8000 2021 What Change in Operating 1 Income Do We Anticipate Once breakeven is reached every additional dollar of contribution margin becomes operating income Contribution Change in margin ratio Change in operating income 39 sales volume ADM expects sales to increase by 15000 and has a contribution margin ratio of 40 How much will operating income increase 6000 2022 Change in I operating income 15000 x 40 a Business Applications of CVP Consider the following information developed by the accountant at Speedo a bicycle retailer Total Per Unit Percent Sales 500 bikes 250000 500 100 Less variable expenses 150000 300 60 Contribution margin 100000 200 40 Less fixed expenses 80000 Operating income 20000 2023 a Business Applications of CVP Should Speedo spend 12000 on advertising to increase sales by 10 percent Total Per Unit Percent Sales 500 bikes 250000 500 100 Less variable expenses 150000 300 60 Contribution margin 100000 200 40 Less fixed expenses 80000 Operating income 20000 2024 a Business Applications of CVP f Should Speedo spend 12000 on advertising to increase sales by 10 percent 5 55 x Bikes 550 500 Bikes Sales 250000 a 275000 Less variable expenses 150000 550 x 300 165000 Contribution margin 100000 110000 Less fixed expenses 80000 80K 12K 92000 Operating income 20000 18000 No income is decreased 2025 Business Applications of CVP Now in combination with the advertising Speedo is considering a 10 percent price reduction that will increase sales by 25 percent What is the income effect 500 l 125 X 500 gt 625 Bikes Bikes Sales 250000 625 X 450 281250 Less variable expenses 150000 187500 Contribution margin 100000 625 x 300 93750 Less fixed expenses 80000 92000 Operating income 20000 80K 12K 1750 Income is decreased even more 2026 Business Applications of CVP Now in combination with advertising and a price cut Speedo will replace 50000 in sales salaries with a 25 per bike commission increasing sales by 50 percent above the original 500 bikes What is the effect on income Sales Less variable expenses Contribution margin Less fixed expenses Operating income 500 15 x 500 750 Bikes Bikes 3 250000 750 x 450 337500 150000 243750 100000 750 325 93750 80000 92K 50K 42000 20000 51750 The combination of advertising a price cut and change in compensation increases income W9 2027 Additional Considerations in CVP 0 Different products with different contribution margins 9 Determining semivariable cost elements 6 Complying with the assumptions of CVP analysis 2028 CVP Analysis When a Company Sells Many Products Sales mix is the relative combination in which a company s different products are sold Different products have different selling prices costs and contribution margins If Speedo sells bikes and carts how will we deal with breakeven analysis 2029 CVP Analysis When a Company g Sells Many Products Speedo provides us with the following Information Bikes Ca rts Total Sales 250000 100 300000 100 550000 100 Va r exp 150 000 60 135 000 45 285 000 52 Contri b m a rgi n 100 000 40 165 000 55 265 000 48 Fixed exp Operating income 170 000 95000 2030 CVP Analysis When a Company 7 Sells Many Products I The overall contribution margin ratio is Bikes Carts Total Sales 250000 100 300000 100 550000 100 Var exp 150000 60 135000 45 285000 52 Contrib margin 100000 40 165000 55 265000 Fixed exp 170000 Operatingincome 95000 265000 o 550000 48 A rounded 2031 CVP Analysis When a Company Sells Many Products Breakeven in sales dollars is Bikes Ca rts Total Sales 250 000 100 300 000 100 550 000 100 Va r exp 150 000 60 135 000 45 285 000 52 Contri b m a rgi n 100 000 40 165 000 55 265 000 48 Fixed exp 170000 Operating income 95000 m 354167 rounded 48 2032 Determining Semivariable Cost Elements The HighLow Method Matrix Inc recorded the following production activity and maintenance costs for two months Units Cost High activity level 9000 9700 Low activity level 5000 6100 Change 4000 3600 Using these two levels of activity compute 0 the variable cost per unit 9 the total fixed cost 9 total cost formula Determining Semivariable Cost 1 Elements The HighLow Method Units Cost High activity level 9000 9700 Low activity level 5000 6100 Cha nge 4000 3600 0 Unit variable cost 3600 4000 units 090 per unit 9 Fixed cost Total cost Total variable cost Fixed cost 9700 090 per unit x 9000 units Fixed cost 9700 8100 1600 9 Total cost 1600 90 per unit The HighLow Method If sales commissions are 10000 when 80000 units are sold and 14000 when 120000 units are sold what is the variable portion of sales commission per unit sold Units Cost a 008 6 p High level 120000 14000 010 pe Low level 80000 10000 C 4 C 012 p6 hange 40000 000 4000 40000 units d F 010perunit 2035 w The HighLow Method lf sales commissions are 10000 when 80000 units are sold and 14000 when 120000 units are sold what is the fixed portion of the sales commission 2000 b 40 Total cost Total fixed cost Total variable cost 0 100 14000 Total fixed cost d 120 10 x 120000 units Total fixed cost 14000 12000 Total fixed cost 2000 2036 Assumptions Underlying CVP Analysis 0 A limited range of activity called the relevant range where CVP relationships are linear Unit selling price remains constant Unit variable costs remain constant Total fixed costs remain constant 9 Sales mix remains constant 9 Production sales no inventory changes I 2037 Ethics Fraud and Corporate Governance Some industries such as the airline industry are characterized by high fixed costs namely investments in equipment The SarbanesOxley Act requires public companies to disclose material changes in these fixed costs within four business days after they occur 2038 End of Chapter 20 2039 Costing and the Value Chain Chapter 19 McGIaW HiIIIrwin Copyright 2010 by The NIchwHill Companies Inc All rights reserved TheValue Chain The value chain is the set of activities and resources necessary to create and deliver products and services valued by customers R amp D Suppliers Distribution Customer and and and Service Design Production Marketing International Financial Reporting A i b aMm iapa 0 ii iii Cc 1 973 i i L g a i 1 r 3 y 2 Ra7 A A xagwm 5 a aAEP liming Iii la 06 3 in pmywamga N f IUF FE E Q E R34 ii I JiFiRE Ul REa D Value and NonValuleAddlel Activities Valueadded activities add to product s or service s desirability in customers eyes Nonvalu Identify activities added Nonvalueadded activities add cost without additional desirability and can be eliminated without reducing quality or performance 194 I Activities Nonvalue Added Activities Reduce or Eliminate L Analysis and Classification i3 Values and Non Value Adcled Value Added Activities Continually Evaluate and lmprovle95 ValueAdded Activities Valueadded activities enhance the value of products and services in the eyes of I love them39 the customer while meeting goals of the business o Designing to customer specification o Processing forjustintime delivery to customers o Competent customer service NonValue Added Activities Nonvalueadded activities use resources without providing value to customers o Material and other inventory Get rid SW of them o Movmg parts and materials in the factory 0 Waiting for work o Inspection o Creating scrap and rework o Product design without customer input ActivityBased Management What s the difference between activitybased costing and activitybased management ActivityBased Management We use Activitybased costing to 1 Identify activities Activitybased 2 Create associated activity cost management DOOIS focuses on 3 Identify an activity measure managing the 4 Create the cost per unit of actiVitieS t0 activity reduce costs ActivityBased Management Across theVaIue Chain oChart activities needed to meet customer expectations 1 9Use ABC to determine l cost of activities r GClassify all activities as valueadded or nonvalueadded L lmprove valueadded activities and eliminate nonvalue added activities 1910 ABC a Subset of ActivityBased Management ActivityBased Management Identify Create Identify Determine activities Cost activity Cost per unit pools measures of activity ABC Collect external benchmark information l Analyze activities for nonvalue added activities Manage activities lJ 1911 The Target Costing Process Driven by the customer Target costing is aimed at the earliest stages of new product and service development Consideration given to the Focused simultaneously entire value chain 1912 on profit and cost planning Components of the Target Costing Process 39 Establishing the Target Price Attaining the Target Cost Concept development Target PI price annlng and market 1 analysis Target cost Production design and value engineering Production and con nuous improvement 1913 Components of the Target 939 1 Costing mcess M Components of the Target Costing Process Developing target prices and target costs requires four steps l l 0Develop products 9 Target price that satisfy Profit margin customer needs Target cost GSet target price using Use value engineering competitors prices and to find least costly customers perceived combination of resources value for product to meet customer needs 1915 f LifeCycle Product Target Costing and Pricing i 39jfi 9Product 0Research discontinued design and and customer development support ends Life cycle cos ng 9Marketing 9Production 1916 LifeCycle Product Target Costing and Pricing 9Product 0Research j discontinued design and and customer development support ends Prlcmg must generate revenue to cover costs of all phases of product 1 life cycle 9Marketing 9Production 1917 Characteristics of the Target Costing Process x r 171i 0lnvolve entire value 9An understanding of chain in reducing relationships between costs while satisfying process components customer needs and costs is critical 6A product s functional characteristics to the customer are emphasized W 39 9A primary objective is reducing def nife39jf development time k 2 1918 JUS ClnTime Inventory 2quot F 393 Procedlu res r 1 Receive quot quot customer Complete products orders just in time to I ship to customers Schedule production Receive materials Complete parts just in time for just in time for production assembly into products 1919 JustInTimelnventory Procedures Less warehouse space needed Reduced inventory carrying costs Reduced risk of obsolete inventory With reduced inventories quality must be emphasized to avoid production delays and late 1920 I JustInTime Inventory ggif iI Procedu res f i V x IIT Benefits Less warehouse space needed Reduced inventory carrying costs Reduced risk of obsolete inventory More rapid response to customer orders Greater ngher qual39ty customer DI39OdUCtS satisfaction 1921 JIT Characteristics Across the Value Chain 39 5D 39 y giwzls39 I l DemandPull Production I Driven by customer orders and customer quality expectations Ontime delivery to customers Factory Goals Continuously Reduce I Inventory I Wait time I Downtime I Customer delivery time I Defects Continuously Increase I Quality I Employee cross training I Teamwork I Process design efficiencies I Equipment reliability Supplier Relations I On time delivery I High quality inputs I Strong partnership I Few suppliers I Longterm contracts I Minimize paperwork 1922 f JIT Supplier Relationships and Product Quality of Successful implementation of a JIT system requires 0 A limited number of suppliers who will 7 make ontime deliveries of quality materials 9 Quality that is designedin and manufacturedin rather than inspectedout 6 A welltrained flexible work force 9 An ef cient plant layout 1923 Measures of Efficiency in a 3 JIT System Production Goods Started Shipped Process Time Inspection Time Storage and Waiting Time Move Time Cycle Time Only the process time is valueadded time 1924 Measures of Efficiency in 21 JIT System Production Goods Started Shipped Process Time Inspection Time Storage and Waiting Time Move Time Cycle Time ManUfaCturing Valueadded time Efficiency Ratio Cycle tIme 1925 Measures of Efficiency in a 1 JIT System If cycle costs may and delivery time go up time may goes up go down 1926 Total Quality Management and the vaiue Chain Qualit product Increased and business volume serwces 7 a Greater customer satisfaction 1927 Components of the Cost of Quality 0 Prevention costs Inspection of materials upon delivery Inspection of production process Equipment inspection i Employee training 9 Appraisal costs Finished goods inspection Field testing of products Components of the Cost of Quality discovered before delivery to squot customers Scrap materials I 9 Internal failure costs defects J Rework Reinspection of rework Lost sales resulting from late deliveries 1929 Components of the Cost of Quality 9 External failure costs defects discovered after delivery to customers Warranty repairs Product liability Marketing costs to improve product image Lost sales due to poor product quality Components of the Cost Of I Quality A Cost of prevention and appraisal Internal and external failure costs 1931 Components of the Cost of Quality Cost of prevention and appraisal K Ultimate Obiective Zero defects while minimizing all four quality cost categories Internal and external failure costs 1 1932 Components of the Cost of Quality External and 3 Internal Failure Total Cost of Quality 5 3 O 5 73 8 Direction of Preventhn recent trend and Appralsal in industry Low Quality High Quality 1933 BOARDS AND MORE INC Quality Cost Report For The Quarter Ended September 30 2009 Amount Total of Sales Prevention Costs Training 12000 Maintenance 10000 Quality planning 8000 30000 32 Appraisal Costs Material inspections 6000 Equipment inspections 2000 Supplier relations 4000 Testing 5000 17000 18 Internal Failure Costs Rework 5000 Downtime 7000 Scra p 8 000 20 000 21 External Failure Costs Warranty 4500 Lost sales 20000 Re pa i rs 6500 31000 3 3 Total 98 000 104 1934 Productivity and Quality 0 Traditional managerial accounting systems may emphasize production quotas and cost minimization 0 Managers often find that emphasis on quality also increases productivity 1935 Ethics Fraud and Corporate Governance To increase the accuracy and reliability of financial statements the SarbanesOxley Act requires public companies and separately their auditors to issue a report on the effectiveness of their internal control structures Because a company s value chain typically engages in transactions recorded in accounting records the internal control structure must take into account the reliability of the entire value chain 1936 End of Chapter l9 1937 Operational Budgeting Chapter 23 McGIaW HiIIIrwin Copyright 2010 by The NIchwHill Companies Inc All rights reserved Profit RichYet Cash Poor shortages when profits are high Conditions leading to cash Large investments in assets to support rapid revenue growth Long operating cycles cashtocash cycles eiiiicniriiing Profit RichYet Cash Poor Inventories liti Ll l 9 166 days 247 Days Accounts Receivable 81 days Even if sales are growing rapidly cash is tied up in inventory and receivables for so long that a cash shortage will be the likely result Budgeting The Basis for Planning and Control A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization Planning Control Developing Steps taken by objectives for management to acquisition ensure that and use of objectives are resources attained Bene ts Derived from Budgeting Enhanced management responsibility Coordination of activities Benefits Performance evaluation Assignment of decision making responsibilities Establishing Budgeted Amounts Behavioral Approach Budget Problems I Perceived unfair or unrealistic goals I Poor management employee communications Solution I Reasonable and achievable budgets I Employee participation in budgeting process Establishing Budgeted Amounts Total Quality Management Approach A commitment to the Budgeted amounts set goal of completely at levels representing eliminating inefficiency absolute efficiency Small failures to achieve budgeted amounts direct management to areas where improvement is possible Participation in Budget Process Top Management Flow of Budget Data Ethics Fraud and Corporate Governance Budgets are often included in documents given to investors when governmental and notfor profit entities seek to obtain debt financing Material misstatements in these budgets act as a fraud upon the purchasers of bonds issued by the governmental or notfor profit entities and expose both individuals and organizations to civil and criminal penalties The Budget Period The annual operating budget may be divided into quarterly or monthly budgets I I I 39l 2005 2006 2007 2008 Capital Budgets A continuous budget is usually a twelvemonth budget that adds one month as the current month is completed 2310 I The Master Budget Cost of goods manufactured alllaiia lllli Sales Production bUdget 39 budgets Cash V and sold budget 1 Selling and budget administrative budget 2311 Steps in Preparing a Master Budget Saws Budget Estimated Unit Price Estimated Unit Sales Analysis of economic and market conditions Forecasts of customer needs from marketing personnel 2312 2 Preparing the Master Budget Basket Inc is preparing budgets for the quarter ending June 30 The sales price is 0 per magnet Budgeted sales for the next four months are April 20000 magnets I 0 200000 May 50000 magnets 0 500000 june 30000 magnets 0 300000 july 25000 magnets 0 250000 The Sales Budget IJuly is needed for June ending inventory com putationsI 2313 The Production Budget Production must be adequate to meet budgeted sales and to provide sufficient ending inventory Budgeted product sales in units Desired product units in ending inventory Total product units needed Product units in beginning inventory Product units to produce The management of Basket wants ending inventory to be 20 percent of the next month s budgeted sales in units 4000 units were on hand March 31 Let s prepare the production budget 2314 The Production Budget Budgeted unit sales Desired ending inventory Total units needed Less beginning inventory Units to produce April May June 20000 50000 30000 10000 6000 5000 30000 66000 65000 4000 0000 6000 26000 46000 29000 Ending inventory 20 of next month39s sales needs June ending inventory 20 x 25000 July units 5000 units Beginning inventory is last month39s ending inventory 2315 The Production Budget Material Purchases The material purchases budget is based on production quantity and desired material inventory levels Units to produce Material needed per unit Material needed for units to produce Desired units of material in ending inventory Total units of material needed Units of material in beginning inventory Units of material to purchase 2316 The Production Budget Material Purchases April May June Units to produce 26000 46000 29000 Pounds per unit 5 5 5 Material needs lbs 130000 230000 145000 Desired ending inventory 23000 14500 11500 Total material needs lbs 153000 244500 156500 Less beginning inventory 13000 23000 14500 Mate rial purchases I bs 140000 221500 142000 Ending inventory 10 of next month39s material needs June ending inventory 10 x 23000 units x 5 lbs per unit June ending inventory 11500 lbs Beginning inventory is last month39s ending inventory 2317 Cash Payments for Material Purchases Materials used in production cost 040 per pound Onehalf of a month s purchases are paid for in the month of purchase the other half is paid for in the following month No discount terms are available The accounts payable balance on March 3 is 2000 2318 Cash Payments for Material Purchases Material purchases lbs Cost per pound Total cost Payables from March April purchases May purchases June purchases Total payments in month 12 x 56000 28000 12 X 88600 44300 12 X 56800 28400 April May June 140000 221500 142000 040 040 040 56000 88600 56800 12000 28000 28000 44300 44300 28400 40000 72300 72700 2319 The Production Budget Direct Labor Each unit produced requires 3 minutes 05 hours of direct labor Basket employs 30 persons for 40 hours each week at a rate of 10 per hour Any extra hours needed are obtained by hiring temporary workers also at 10 per hour Units to produce Hours per unit Total hours required Wage rate per hour Direct labor cost April May June 26000 46000 29000 005 005 005 1300 2300 1450 10 10 10 13000 23000 14500 2320 The Production Budget Manufacturing Overhead Variable manufacturing overhead is 1 per unit produced and fixed manufacturing overhead is 50000 per month Fixed manufacturing overhead includes 20000 in depreciation which does not require a cash out ow 2321 Cash Payments for Manufacturing Overhead April May June Units to produce 26000 46000 29000 Variable overhead rate 100 100 100 Variable overhead cost 26000 46000 29000 Fixed overhead 50000 50000 50000 Total mfg overhead cost 76000 96000 79000 Deduct depreciation 20000 20000 20000 Manufacturing overhead cash 56000 76000 59000 2322 Selling and Administrative SampA Expense Budget Selling expense budgets contain both variable and fixed items Variable items shipping costs and sales commissions Fixed items advertising and sales salaries Administrative expense budgets contain mostly fixed items Executive salaries and depreciation on company offices 2323 Cash Payments for 5ampA Expenses Variable selling and administrative expenses are 050 per unit sold and fixed selling and administrative expenses are 70000 per month Fixed selling and administrative expenses include 10000 in depreciation which does not require a cash outflow 2324 Cash Payments for SampA Expenses April May June Budgeted unit sales 20000 50000 30000 Variable SampA per unit 050 050 050 Variable SampA expense 10000 25000 15000 Fixed SampA expense 70000 70000 70000 Total SampA expense 80000 95000 85000 Deduct depreciation 10000 10000 10000 SampA expense cash 70000 85000 75000 2325 Cash Receipts Budget All sales are on account Basket s collection pattern is 70 percent collected in month of sale 25 percent collected in month after sale 5 percent will be uncollectible Accounts receivable on March 31 is 30000 all of which is collectible 2326 Cash Receipts Budget April May June Budgeted unit sales 20000 50000 30000 Price per unit 10 10 10 Budgeted sales revenue 200000 500000 300000 Receipts from March sales 30000 Receipts from April sales 140000 50000 Receipts from May sales 350000 125000 Receipts from June sales 210000 Total cash receipts 170000 400000 335000 April 70 x 200000 140000 and 25 x 200000 50000 May 70 x 500000 350000 and 25 x 500000 125000 June 70 X 300000 210000 2327 Comprehensive Cash Budget Additional Information Basket Company Has a 100000 line of credit at its bank with a zero balance on April 1 Maintains a 30000 minimum cash balance Borrows at the beginning of a month and repays at the end of a month Pays interest at 16 percent when a principal payment is made Pays a 51000 cash dividend in April Purchases equipment costing 143700 in May and 48800 in June Has a 40000 cash balance on April 1 2328 Comprehensive Cash Budget April May June Beginning cash balance 40000 30000 30000 Cash receipts 170000 400000 335000 Cash available 210000 430000 365000 Cash payments Materials budget 40000 72300 72700 Labor budget 13000 23000 14500 Manufacturing OH budget 56000 76000 59000 SampA expense budget 70000 85000 75000 Equipment purchases 0 143700 48800 Dividends 51000 0 0 Total cash payments 230000 400000 270000 Balance before financing 20000 30000 95000 Borrowing 50000 0 0 Principal repayn 50000 Interest x x 312 gt 2000 Ending cash balance 30000 30000 43000 2329 The Budgeted Income Statement Basket Company Budgeted Income Statement For the Three Months Ended June 30 Sales 100000 units 10 1000000 Cost of goods sold 100000 499 499000 Gross margin 501000 Selling and administrative expenses 260000 Operating income 241000 Interest expense 2000 Net income 239000 May 95000 June 85000 Total 260000 2330 The Budgeted Income Statement Production costs per unit Quantity Cost Total Direct materials 500 lbs 040 200 Direct labor 005 hrs 1000 050 Manufacturing overhead 005 hrs 4970 249 Total unit cost 499 Total mfg OH for quarter 251000 Total labor hours required 5050 hrs 4970 per hr Manufacturing overhead is applied based on direct labor hours From labor and Mfg OH budgets Labor Hours Mfg 0H April 1300 76000 May 2300 96000 June 1450 79000 Total 5050 251000 2331 The Budgeted Balance Sheet Basket reports the following account balances on June 30 prior to preparing its budgeted financial statements Land 50000 Building net 174500 Common stock 200000 Equipment net 192500 Retained earnings 148150 Paid dividends of 51 000 2332 Basket Com pa ny Budgeted Balance Sheet 25 of June June 30 2009 sales of Current assets 300000 Cash 43090 Accounts receivable 75000 Raw materials inventory 460039 Finished goods inventory 24950 11500 lbs Total current assets 1475 40 per lb Property and equipment 5600 units Land 50 000 499 each Building 174500 Equipment 192500 Beginning balance 148150 mm Add net income 239000 W 50 of June Deduct dividends 51000 purchases Ending balance 336150 28400 of 56800 200000 336 150 Retained earnings 564550 Total liabilities and equities 2333 Flexible Budgeting Hmm Comparing Consider the following costs at differ nt A condensed example 39eVe39S Of aCt39Vty from Barton Inc 395 I39ke compar39ng apples with oranges Performance evaluation is dif cult when actual activity differs from the activity originally budgeted 2334 Flexible Budgeting Original Actual Budget Results Variances Units of Activity 10000 8000 2000 U Va ria 39 In U Unfavorable variance Barton In Inc was unable to achieve the pc budgeted level of activity Fix Since cost variances are favorable have we done a good job controlling costs Insurance 2000 2000 Total overhead costs 89000 77300 11700 F 2335 Flexrble Budgeting 39 How much of the favorable cost variance is due to lower activity and how much is due to good cost control I don t think I can answer the question using the original To answer the question we must the budget to the actual level of activity activity was for the period I will tell you What your costs and revenue should have been Central Conce t If you can tell me what39your 2336 Flexible Budgeting Show expenses that should have occurred at the actual level of activity May be prepared for any activity level in the relevant range Reveal variances due to cost control or lack of cost control Improve performance evaluation 2337 Flexible Budgeting To flex a budget for different activity levels we must know how costs behave with changes in activity levels I Total variable costs change in direct proportion to changes in activity I Total fixed costs remain unchanged within the relevant range 2338 Flexible Budgeting Cost Total Flexible Budgets Formula Fixed 8000 10000 12000 Per Hour Cost Hours Hours Hours Units of Activity 8000 10000 12000 Variable costs Fixed costs are expressed as Indirect labor 400 a total amount that does not d39rect mater39a39 323 change within the relevant ower Total variable cost 750 I Y rnge of acflv39ty39 Y Fixed costs Depreciation 12000 12000 12 300 12000 Insurance 2000 2000 2000 2000 Total fixed cost 14000 14000 14000 Total overhead costs 74000 89000 104000 Total variable cost 750 per unit x budget level in units 2339 Flexible Budgeting Performance Report Cost Total Formula Fixed Flexible Actual Per Hour Costs Budget Results Variances Power has a favorable 8 000 8 000 o variance because the 32000 34000 2000 U actual cost IS less than 24000 25500 1500 U the flexible budget COSt 4000 3300 200 F 39 39 39 39 60000 63300 3300 U Fixed Costs Depreciation 12000 12000 12000 0 Insurance 2000 2000 2000 0 Total fixed costs 14000 14000 0 Total overhead costs 74000 77300 3300 U 2340 End of Chapter 23 2341 111111 Job Order Cost Systems and J Overhead Allocations 511 Chapter 17 McGIaW HiIIIrwin Copyright 2010 by The NIchwHill Companies Inc All rights reserved Cost Accounting Systems Planning and Determining unit manufacturing costs control functions Cost accounting systems provide information supporting decisions making the business successful Assessing the efficiency and Providing products or services to customers effectiveness of operations Cost Accounting Systems Evaluate and Disclose reward inventories employee and cost of 1 performance goods sold Cost accounting systems are the procedures and techniques used by management i i Manage activities that consume resources 173 Job Order Costing produced to each job 0 Used for production of large unique highcost items 0 Built to order rather than mass 0 Many costs can be directly traced 0 Typical job order cost applications Specialorder printing Building construction 0 Also used in service industry Hospitals Law firms 17 4 i Job Order Cost Systems and the Creation of Goods and Services Receive orders from customers Schedule Order jobs 7 materials 175 Job Order Cost Systems and the Creation of Goods and Services Manufacturing overhead OH Applied to each Direct 7 job using a materials aced dir predetermined 0 sac7 ectly rate POHR lob ed 36 3 0 Direct 0 ea m labor 176 Job Order Cost Systems and the Creation of Goods and Services Charge direct material and direct labor costs to each job as work is performed I Direct Materials I Direct Labor Manufacturing Job No3 Overhead Apply overhead to each job using a predetermined rate 177 Overhead Application Rates The predetermined overhead rate POHR used to apply overhead to jobs is determined before the period begins Estimated total manufacturing POHR overhead cost for the coming period Estimated total units in the activity base for the coming period Ideally the activity base is a cost driver that causes overhead 178 Overhead Application Rates Using a predetermined rate makes it possible to estimate total job costs Actual overhead for the period is not known until the end of the period 179 Overhead Application Rates Based on estimates and determined before the period begins my Overhead applied POHR x Actual activity Actual amount of the cost driver such as units produced direct labor hours or machine hours incurred during the period 1710 Overhead Application Rates Compuline nc applies overhead based on direct labor hours Total estimated overhead for the year is 360000 Total estimated labor hours are 30000 What is Compuline s predetermined overhead rate per hour 1711 Overhead Application Rates Estimated total manufacturing POHR overhead cost for the coming period Estimated total units in the allocation base for the coming period POHR 360000 239 30000 direct labor hours DLH 521 POHR 1200 per DLH For each direct labor hour worked on a job 1200 of manufacturing overhead will be applied to the job 1712 fer Job Order Costing The primary document for tracking the costs associated with a given job is the job cost sheet Let s investigate 1713 The Job Cost Sheet Product Oak and Glass Furniture Co Job Cost Sheet Number of units 100 French Court Dinin Tables Date started 831 1I03I09 Date Completed 1I21I09 Manufacturing Direct Direct Labor Manufacturing Overhead Department Materials Hours Cost Rate Cost Applied Milling 10000 70 14000 150 21000 Finishing 15000 300 6000 150 9000 Cost Summary Total Cost Unit Cost Direct materials used 25000 250 Direct Labor 20000 200 Manufacturing overhead applied 30000 300 Cost of finished goods manufactured 100 tables 75000 750 1714 The Job Cost Sheet Oak and Glass Furniture Co Job Cost Sheet 831 Product French Court Dinin Tables Date started 1I03I0 Numbmfunit E A materials requisition Manufacturing Dir form is used to Department quot Hour Milling authorize the use of materials on a job Finishing Cost Summary Total Cost Unit Cost libl jmrik l39h39lilqiifleliillq He lilig iazil 25 1 1 229101 Direct Labor 20000 200 Manufacturing overhead applied 30000 300 Cost of finished goods manufactured 100 tables 75000 750 1715 The Job Cost Sheet Oak and Glass Furniture Co Job Cost Sheet Date Product French Court Dinin Tables Number of units 100 Manufacturing Direct Accumulate direct labor costs by means of a work record Department Materials Milling 10000 such as a time Finishing 15000 ticket for each employee I Cost Summary Direct materials used 25000 250 l9 eel Manufacturing overhead applied 210 Hi mm 30 000 300 Cost of finished goods manufactured 100 tables 75000 750 1716 The Job Cost Sheet Apply manufacturing overhead to jobs using a predetermined overhead rate POHR based on direct labor cost Manufacturing Direct Direct Labor Department Materials Hours Milling 10000 70 Finishing 15000 300 Cost Summary Total Cost Unit Cost Direct materials used Direct Labor 25000 250 20000 200 lmy liliwl am l fftlljil i lil Cost of finished goods manufactured 100 tables 75000 750 1717 Flow of Costs in Job Costing A materials requisition indicates the cost of direct material to charge to jobs and the cost of indirect material to charge to overhead Regqiui sziifi n Direct Material 39 Job Cost Sheets materials l Indirect Material Manufacturing Overhead Account 1718 Flow of Costs in Job Costing Employee time tickets indicate the cost of direct labor to charge to jobs and the cost of indirect labor to charge to overhead Direct Labor 39 Job Cost Sheets i V r aequot3939I39mquot39 iEmgpIdeges Times l Indirect Labor Manufacturing Overhead Account 1719 Flow of Costs in Job Costing Indirect Labor Job Cost 0th M fquot t Overhead er anu ac urlng A lied Actual OH Overhead Sgth Charges Acceunt POHR Materials Indirect Requisition Material Sheets 1720 Flow of Costs in Job Costing Work in Process 7 739 Materials Inventory JOb COSt Sheet Materia oDirect Direct Purchases Material Material ndirect Material 1 L Mfg Overhead ndirect Material 1721 Flow of Costs in Job Costing Labor oDirect Labor ndirect Labor Mfg Overhead ndirect Material ndirect Labor Overhead Applied to Work in Process Work in Process Job Cost Sheet oDirect Material Direct 39Labor Overhead Applied When Actual Applied factory factory overhead overhead the difference is closed to cost of goods sold 1722 Flow of Costs in Job Costing Work in Process Job Cost Sheet Finished Goods Direct Material Cost of Cost of Cost of Direct Goods Goods Goods Labor Mfd Mfd Sold Overhead Applied Cost of Goods Sold Cost of Goods Sold 1723 DvenorlJnderappHed Dverhead If Manufacturing Overhead is Effect of Closing to Cost of Goods Sold UNDERAPPLIED Applied OH is less than actual OH INCREASE Cost of Goods Sold OVERAPPLIED Applied OH is greater than actual OH DECREASE Cost of Goods Sold 1724 ActivityBased Costing ABC One of the most difficult tasks in computing accurate unit costs lies in Assigning overhead is difficult determining the proper amount of overhead cost to assign to each job 1725 ActivityBased Costing ABC unityBased Costing Plantwide Overhead Rate 7 Overhead Allocation In the ABC method we recognize that many activities within a department drive overhead costs 1726 The Benefits of ABC More detailed measures of costs Better understanding of activities a More accurate product costs for oPricing decisions oProduct elimination decisions oManaging activities that cause costs Benefits should always be compared to costs of implementation 39 quot 1727 Identifying Cost Drivers Most cost drivers are related to either volume or complexity of production 0 Examples machine time machine setups purchase orders production orders Three factors are considered in choosing a cost driver 0 Causal relationship 0 Bene ts received 0 Reasonableness Activity Based Costing Procedures o Identify activities that consume resources o Assign costs to a cost pool for each activity o Identify cost drivers associated with each activity o Compute overhead rate for each cost pool Estimated overhead costs in activity cost pool Faksgign co gimamdmfgr of activity units Overhead x Actual Rate Activity ABC Versus a Single Applicatio Rate A Comparison n1 Pear Company manufactures a product in regular and deluxe models Overhead is assigned on the basis of direct labor hours Budgeted overhead for the current year is 2000000 Other information Deluxe Regular Model Model Direct Material 150 112 Direct Labor Cost 16 8 Direct Labor Time 16 hours 08 hours Expected Volume units 5000 40000 First determine the unit cost of each model using a single application rate 1730 Single Application Rate 1 Direct Labor Hours Deluxe Model 5000 units 16 hours 8000 Regular Model 40000 units 08 hours 32000 Total Direct Labor Hours DLH 40000 Overhead Estimated overhead costs Rate Estimated activity Overhead 2 000 000 50 per DLH Rate 40000 DLH 1731 Single Application Rate l ABC will have different overhead cost per unit Direct Material Direct Labor Manufacturin Overhead Total Unit Cost Deluxe Regular Model Model 150 112 16 8 246 1732 Activity Based Costing Pear Company plans to adopt activitybased costing Using the following activity center data determine the unit cost of the two products using activitybased costing Overhead Activity Cost Cost for Units of Activity Cost Pool Driver Activity Deluxe Regular Purchasing Orders 84000 400 800 Scrap Rework Orders 216000 300 600 Testing Tests 450000 4000 1 1000 Machine Related Hours 1250000 20000 30000 Total Overhead 2000000 1733 Activity Based Costing Overhead Units Activity Cost Cost for of Cost Pool Driver Activity Activity Rate Purchasing Orders 84000 1200 Scrap Rework Orders 216000 900 Testing Tests 450000 15000 Machine Related Hours 1250000 50000 Total Overhead 2000000 H 400 deluxe 800 regular 1200 total 1734 Activity Based Costing Overhead Units Activity Cost Cost for of Cost Pool Driver Activity Activity Rate Purchasing Orders 84000 1200 70 per order Scrap Rework Orders 216000 900 240 per order Testing Tests 450000 15000 30 per test Machine Related Hours 1250000 50000 25 per hour Total Overhead 2000000 Rate Overhead Cost for Activity Units of Activity 1735 Activity Based Costing Deluxe Model Regular Model Actual Cost Actual Cost Activity Units of Allocated Units of Allocated Cost Pool Rate Activity to Product Activity to Product Purchasing 70Iorder 400 28000 800 56000 Scrap Rework 240Iorder 300 600 Testing 30Itest 4000 11000 Machine Related 25Ihour 20000 30000 Total Overhead Cost Allocated to Product Actual Units of Activity x Rate 70 x 400 28000 Let s complete the table 1736 Activity Based Costing Deluxe Model Regular Model Actual Cost Actual Cost Activity Units of Allocated Units of Allocated Cost Pool Rate Activity to Product Activity to Product Purchasing 70Iorder 400 28000 800 56000 Scrap Rework 240Iorder 300 72000 600 144000 Testing 30Itest 4000 120000 11000 330000 Machine Related 25Ihour 20000 500000 30000 750000 Total Overhead 720000 1280000 Cost Allocated to Product Actual Units of Activity x Rate Total overhead 720000 1280000 2000000 Recall that 2000000 was the original amount of overhead assigned to the products using traditional overhead costing 17 Activity Based Costing Overhead Costs Assigned to Products Deluxe Model 720000 5000 units 144 per unit Regular Model 1280000 40000 units 32 per unit Deluxe Regular Model Model Direct Materials 150 112 Direct Labor 16 8 Manufacturing Overhead 144 32 Total Unit Cost 310 152 1738 ABC Versus a Single Applicatio Rate A Comparison quotl Single Rate ABC Deluxe Regular Deluxe Regular Model Model Model Model Direct materials 150 112 150 112 Direct labor 16 8 16 8 Overhead 80 40 144 32 Total cost 246 160 310 152 This result is not uncommon when activitybased costing is used Many companies have found that lowvolume specialized products have greater overhead costs than previously realized 1739 Costs and Cost Drivers in ActivityBased Costing Cost Cost Driver Materials purchasing Number of purchase orders Materials handlin Number of materials requisitions Personnel processing Number of employees hired or laid off Equipment depreciation Number of products produced or hours of use Quality inspection Number of units inspected Indirect labor for Number of setups required equipment setups Engineering costs for Number of modifications product modi cations 1740 Ethics Fraud and Corporate Governance In addition to allocating manufacturing overhead costs to products many companies allocate corporate overhead charges to their segments or divisions 1741 End of Chapter l7 1742 Incremental Analysis Chapter 21 McGIaW HiIIIrwin Copyright 2010 by The NIchwHill Companies Inc All rights reserved The Challenge of Changing Markets Product markets can change quickly due to competitor price cuts changing customer preferences and introduction of new products by competitors Managers must make shortrun decisions with a fixed set of resources to react to the changing market place Special Product Make Joint order mix or buy decisions decisions decisions l The Concept of Relevant Cost Information 0 Will you drive or fly to Florida for spring break 0 You have gathered the following information to help you with the decision Motel cost is 80 per night Meal cost is 20 per day Your car insurance is 100 per month Kennel cost for your dog is 5 per day Roundtrip cost of gasoline for your car is 200 Roundtrip airfare and rental car for a week is 500 0 Driving requires two days with an overnight stay cutting your time in Florida by two days 213 The Concept of Relevant Cost Information Florida Spring Break Drivel Fly Analysis 8 days 80 Cost Drive Fly Eating out costs 160 160 quot Kennel cost 40 40 lt 8 days 5 Car insurance 100 100 Gasoline 20 V Airfa rel re ntal car 500 The Concept of Relevant Cost Information Florida Spring Break Drivel Fly Analysis Cost Drive Fly Motel 640 640 lt Eating out costs 160 160 lt Costs do Otd39 er so they are not Kennel COSt 40 40 relevant to decision Car insurance 100 100 lt Gasonne 200 39 Also car insurance Airfa relre ntal car 500 is not relevant to the decision as it is a past cost The Concept of Relevant Cost Information Are the extra two 1 days in Florida Florida Spring Break Drivel Fly Analysis worth the 300 Cost Drlve Fly extra cost to fly Motel 640 640 Eating out costs 160 160 Kennel cost 40 40 Transportatlon Car Insurance 100 100 costs differ between GaSOIme 200 39 the two alternatives Airfa relre ntal car 500 so they are relevant to your decision 216 Decision Making Decision making involves these five steps 0 Define the problem 9 Identify the alternatives 6 Collect information on alternatives 0 Eliminate irrelevant information 6 Make a decision with the remaining relevant information Relevant Information in Business Decisions Information that varies among the possible courses of action being considered Incremental costs and revenues Important cost concepts for business decisions 0 Opportunity costs 0 Sunk costs 0 Outof pocket costs a Opportunity Cost The benefit that could have been attained by pursuing an alternative course of action Example If you were not attending college you could be earning 20000 per year Your opportunity cost of attending college for one year includes the 20000 Opportunity costs are not recorded in the accounting records but are relevant to decisions because they are a real sacrifice 219 Sunk Costs Versus Outof Pocket Costs All costs incurred in the past that cannot be changed by any decision made now or in the future Sunk costs should not be considered in decisions Example You bought an automobile that cost 10000 two years ago The 10000 cost is sunk because whether you drive it park it trade it or sell it you cannot change the 10000 cost 2110 Sunk Costs Versus Outof Pocket Costs 95 Cost 10000 Trade Cost 25000 two years ago today The dealer will trade for 20000 plus your car What amount is relevant to your decision the 10000 sunk cost of your car or the 20000 outofpocket cash differential 2111 Ethics Fraud and Corporate Governance The Sarbanes Oxley Act and subsequent changes to the NYSE and NASDAQ listing standards require public companies to have at least one financial expert on the audit committee The SEC defines a financial expert as a person having 1 an understanding of GAAP and financial statements 2 experience applying GAAP with the accounting for estimates 3 experience preparing or auditing financial statements 4 experience with internal controls and procedures for financial reporting and 5 an understanding of audit k committee functions 2112 Special Order Decisions The decision to accept additional business should be based on incremental costs and incremental revenues Incremental amounts are those that occur only if the company decides to accept the new business 2113 Special Order Decisions View Co currently sells 100000 units of its product The company has revenue and costs as shown below Per Unit Total Sales 1000 1000000 Direct mate rials 350 350000 Direct labor 220 220000 Factory overhead 110 110000 Selling expenses 140 140000 Administrative expenses 080 80000 Total expenses 39s 900 900000 Operating income 100 100000 2114 I Special Order Decisions View Co is approached by an overseas company that offers to purchase 10000 units at 850 per unit If View Co accepts the offer total factory overhead will increase by 5000 total selling expenses will increase by 2000 and total administrative expenses will increase by 1000 Should View Co g 7 accept the offer g 7 4 R a 91 N U1 Special Order Decisions First let s look at incorrect reasoning that leads to an incorrect decision Our cost is 900 per unit I can t sell for 850 per unit 2116 Special Order Decisions This analysis leads to the correct decision 10000 new units x 350 35000 Current Additional Business Business Combined Sales 1000000 85000 1085000 Direct mate rials 350000 35000 385000 Direct labor 220000 22000 242000 Factory overhead 110000 5000 115000 Selling expenses 140000 2000 142000 Admin expenses 8000 1000 81000 Total expenses 900060 65000 965000 Operating income 0000 20000 320000 10000 new units x 350 85000 l 10000 new units x 220 22000 2117 Special Order Decisions Even though the 850 selling price is less than the normal 10 selling price View Co should accept the offer because net income will increase by 20000 Current Additional Business Business Combined Sales 1000000 85000 1085000 Direct mate rials 350000 35000 385000 Direct labor 220000 22000 242000 Factory overhead 110000 5000 115000 Selling expenses 140000 2000 142000 Admin expenses 80000 1000 81000 Total expenses 900000 65000 965000 Operating income 100000 20000 120000 2118 Special Order Decisions We can also look at this decision using contribution margin Per Unit Total Special order revenue 850 85000 Direct mate rials 350 35000 Direct labor 220 22000 Contribution margin 8 280 28000 Increase in fixed costs Factory overhead 5000 Selling expenses 2000 Administrative expenses 1000 Special order profit 20000 2119 Production Constraint Decisions 2quotquotcquotquot N I n K I I EQ Managers often face the problem of deciding 6quot how scarce resources are going to be utilized Usually fixed costs are not affected by this particular decision so management can focus on maximizing total contribution margin Let s look at the Kaiser Company example 2120 Production Constraint Decisions Kaiser Company produces two products and selected data is shown below Products 4 4 Selling price per unit 60 50 Less variable expenses per unit 36 35 Contribution margin per unit 24 15 Current demand per week units 2000 2200 Contribution margin ratio 40 30 Processing time required on machine A1 per unit 100 min 050 min q 21m Production Constraint Decisions Machine A1 is the scarce resource because there is excess capacity on other machines Machine A1 is being used at 100 of its capacity Machine A1 capacity is 2400 minutes per week Should Kaiser focus its efforts on Product 1 or 2 2122 b q Production Constraint Decisions Let s calculate the contribution margin per unit of the scarce resource machine A1 Products 4 4 Contribution margin per unit 24 15 Time required to produce one unit 100 min 050 min Contribution margin per minute 24 30 Ifthere are no other considerations the best plan would be to produce to meet current demand for Product 2 and then use any capacity that remains to make Product 1 2123 Production Constraint Decisions Let s see how this plan would work Allotting Our Scarce Resource Machine A1 Weekly demand for Product 2 2200 Time required per unit X 050 Total time required to make Product 2 1100 Total time available 2400 Time used to make Product 2 1100 Time available for Product 1 1300 Time required per unit 100 Production of Product 1 1300 units min min min min min units 2124 Production Constraint Decisions According to the plan we will produce 2200 units of Product 2 and 1300 of Product 1 Our contribution margin looks like this Product 1 Product 2 Production and sales units 1300 2200 Contribution margin per unit 24 1500 Total contribution margin 31200 33000 The total contribution margin for Kaiser is 64200 2125 Make or Buy Decisions Should I continue to make the part or should I buy it lsupposel should compare the outside purchase price with the additional costs to manufacture the part What will I do with my idle facilities if I buy the part 2126 Make or Buy Decisions Incremental costs also are important in the decision to make a product or buy it from a suppHen The cost to produce an item must include 1 direct materials 2 direct labor and 3 incremental overhead We should not use the predetermined overhead rate to determine product cost Make or Buy Decisions Unit Costs Direct Material 900 Direct Labor 500 Variable Overhead 100 Fixed Overhead 1300 Total 2800 2128 Make or Buy Decisions An outside supplier has offered to provide the 20000 chips at a cost of 25 per chip Fixed overhead costs will not be avoided if the chips are purchased Excel has no alternative use for the facilities Should Excel accept the offer 2129 I Make or Buy Decisions Differential costs of making costs avoided if bought from outside supplier Unit Cost Direct Material 900 Direct Labor 500 Variable Overhead 100 Total 1500 Excel should not pay 25 per unit to an outside supplier to avoid the 15 per unit differential cost of making the part Fixed costs are irrelevant to decision 2130 Make or Buy Decisions New Information If Excel buys the chips from the outside supplier the idle facilities could be leased to another company for 250000 per year Should Excel buy the chips and lease the facilities 2131 Make or Buy Decisions Disadvantage of buying 20000 units x 25 15 200000 Opportunity cost of facilities The lease revenue 250000 Advantage of buying part and leasing facilities 50000 The opportunity cost of facilities changes the decision The real question to answer is What is the best use of Excel s facilities 2132 Sell Scrap or Rebuild Decisions Costs incurred in manufacturing units of product that do not meet quality standards are sunk costs and cannot be recovered As long as rebuild costs are recovered through sale of the product and rebuilding does not interfere with normal production we should rebuild 2133 Sell Scrap or Rebuild Decisions Servo has 10000 defective units that cost 100 each to make The units can be scrapped now for 40 each or rebuilt at an additional cost of 80 per unit If rebuilt the units can be sold for the normal selling price of 150 each Rebuilding the 10000 defective units will prevent the production of 10000 new units that would also sell for 150 Should Servo scrap or rebuild 2134 Sell Scrap or Rebuild Decisions Servo should scrap the units now lquot 10000 mum Wu p5 u Scrap Now Rebuild Sale of defects 4000 15000 Less rebuild costs 8000 Less opportunity cost A5000 Net return 4000 g 2000 If Servo fails to include the opportunity cost the rework option would show a return of 7000 mistakenly making rebuild appear more favorable m 2135
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'