Ch1 - Introduction Costs across Value Chain - (i) (Upstream) R&D; Design; Supply ⇒ Period costs; (ii) (Types):

(i) (Upstream) R&D; Design; Supply ⇒ Period costs; (ii) (Types): Discretionary ‒ cost resullting from mgmt decision, decision can be changed
1.1 MA: A process that focuses on effective & efficient use of resources to support Manu & Pdn ⇒ Product costs; (iii) Mkt, Distribution; Customer service ⇒ Period costs easily; Committed ‒ cost resulting from organisation basic structure & facilities,
managers in their task of enhancing both customer value and shareholder difficult to change in ST
value. 1.3 Cost Flow D. Step-fixed costs - remain fixed
Type of Strategies Material is purchased ⇒ RM inventory or Direct labour and manufacturing overhead over a wide range of activity levels
- Operational Excellence Strategy ↔ deliver products & services faster, more ⇒ WIP inventory. but change outside that range i.e.
conveniently, and at lower prices. ~Cost Leadership Strategy: Economies of Direct materials consumed in production: RM inventory ⇒ WIP inventory. managers' salaries: fixed within x
production; Superior Process Technologies; Tight cost control Products are completed: WIP inventory ⇒ FG inventory. hours, if reach another "tier",
- Customer Intimacy Strategy↔understand & respond to individual customer needs Products are sold: FG inventory ⇒ COGS another fixed salary payout
- Product/Price Leadership Strategy↔Higher quality / value for money i.e. Product > Schedule of Cost of Goods Manufactured E. Step-variable - increases in small steps
differentiation: Superior quality; Customer service; Delivery performance; Product - RM inventory: → Beg + RM purchased - End = RM used in production instead of continuously
features {basically what is so good about your product/services that makes people - usually include inputs purchased & used in
- Manufacturing Costs → Direct materials + Direct labor + MOH = Total Manu
want to buy} small increments i.e. batch packaging materials
Stategic Planning - formulate strategies after ST & LT planning with MA Info (budget; Costs F. Semi-variable (mixed) costs – both fixed &
costs) - WIP inventory → Beg + Total Manu Costs - End = Cost of Goods Manufactured variable component i.e. delivery truck
Implementing plans and strategies - new structures, systems, production > Schedule of Cost of Goods Sold G. Curvilinear costs - activity level impact
processes, marketing approaches and HR management policies; performance - FG inventory → Beg + Cost of Goods Manufactured - End = COGS marginal cost. semi-variable cost pattern is used
measurement systems that compare actual outcomes to budgets/targets. This is the * COGS incl VC and fixed manu costs! to approximate curvilinear cost i.e. electricity
responsibility of managers -> under variable costing method, exclude fixed costs Relevant Range: range of activity over which a particular cost behaviour pattern is
Controlling {execution} - putting mechanisms in place to ensure that operations assumed to be valid (or can be defined and approximated)
proceed according to plan and that objectives are achieved; - taking corrective - once outside the relevant range ⇒ the cost behaviour pattern may not hold
actions when actual performance deviates from plans and rewarding employees - Helps Approximating Variable Cost function ⇒ when QTY produced is below or
when targets are met.; - MA information provides information for controls. i.e. the above certain amount (too much or too little) - Total variable costs against Q will no
performance measurement and reporting system: compare actual performance longer be linear (no longer proportional)
against the budgets/targets/plans Sales Performance Report, Manufacturing Cost
Variances Report and others. 2.3 Cost Estimation & Prediction
A. Managerial Judgement:
1.2 Cost Classifications - uses experience & knowledge of the manager to estimates future costs by
Product - go to BS | Period – go to exp immediately [salary as expensed off every examining past costs and identifying factors that might affect costs in the future
mth] B. Engineering method:
Variable - change over level of activity [wages; DM]| Fixed - same no matter level of - Uses time and motion studies (a.k.a. task analysis or work measurement) for
activity [advertising; depr; salary] estimating cost behaviour. Observation and task analysis of the steps performed
Manu – DM/DL/MOH within factory | Non-manu – SGA/outside factory provide data on time needed for each step, employees required and materials to
Direct costs: easy to trace to particular cost object [more wider defined, more DC perform the steps
traceable] C. Quantitative Analysis of historical data to identify relationships between costs and
activities
Direct - Consumed in manufacturing process [IN ORDER OF INCREASING RELIABILITY]
Material - physically incorporated into finished products (EXCL small items) Ch2 – Cost Behavious, Cost Driver, Cost Estimations / DO Method 1 - Scatter Diagram Plots | Using data points to eyeball & detect linear
- can be directly traced to products 2.1 Cost Drivers relationship
- a variable costs (wrt production output) Volume-based cost drivers | units produced; DLhours; DL cost; machine hours - draw line through data points with equal no. of points above & below the line ⇒
Direct - directly traced to a product - salary of workers directly working on - Unit Level ‒ conventional production volume ensure straight line passes at least 1 point
Labor pdts (EXCL supervisors) - Batch Level ‒ activities performed for a grp of product units (i.e. batch/delivery - only within relevant range
- usually treated as a variable cost unless contractual load; batch setup cost) - find corresponding Y (total cost) at given X (cost driver/qty).
arrangements that pays fixed salary - Product Level ‒ activities performed for specific products/product group (i.e. Method 2 - High–low method | Taking 2 observations with highest & lowest level of
MOH - cannot be directly traced to product product design costs) activity [NOT cost] to calculate the cost function using cost equation
(indirect - can be both fixed or variable - Facility Level ‒ non-specific costs that cant be attributed to above 3, but for
manu) - EXAMPLES: cost of indirect materials (small items) & indirect manufacturing facility (i.e. facility rental; facility manager salary)
labour (supervisors; security guards of manu plants); depreciation;
Method 3 - Regression analysis | Uses a range of data points to estimate the r/s
insurance on factory equipment; utilities/rental; manufacturing 2.2 Cost Behaviours
support departments (not directly producing goods i.e. equipment between cost (Y) and cost drivers (X) through best fit ⇒ more accurate than high-low
A. Variable costs: Y = a + bX
maintenance/security guard; automated machines; tools & (uses all data)
- where Y: Total Costs; a: fixed costs; b: slope or variable cost per unit of X; X: cost
machine supplies; fixed council rates - Multiple regression | estimates linear r/s btw 1
driver
quality checkers overtime premium & idle time of factory workers - - Variable cost change in direct proportion in level of activity dependent (Y) & 2 or more independent (X1, X2..) ⇒
cant trace, multiple products typically: - Variable cost per unit remains constant. - regression line can be evaluated by: (i) How well the line fits the data points. (ii)
Overtime Premium Computation: OT1.5x, Base 40h + OT 5h, base B. Engineered Cost ‒ cost that bears a defined physical relation to level of output. Using excel regression ⇒ R^2 > 0.8 is considered a good fit.
pay $10/h i.e. a certain amount of direct material that is a must for each product, so can predict - Least Squares regression method
⇒ Direct labour costs = $10 x (40+5)h = $450 engineered cost if we know level of output
⇒ OT Premium = $5 x 5h = $25 C. Fixed costs Cost formula can be used to predict cost at any activity level within the relevant
- remain unchanged in total as level of activity changes range.
Prime cost: DM + DL (major costs)
- Fixed cost per unit decreases as activity level increase - The relevant range of activity should be specified for each method.
Conversion costs: DL + MOH
[used for product costs but not in mgmt decision - X reflect how it behave] Practical issues in cost estimation:
Product costs (Manu costs) = DM + DL + MOH
- Collection of data may be problematic ‒ i.e. data quality issue; lack of
Non- - Selling: Costs necessary to secure order & deliver products i.e.
manpower/supporting IT system
manu marketing; promotion; sales; delivery
- Learning curve effect may influence cost behaviour ‒ labour time/unit decrease as
(outside - Admin: All other organisational supporting costs that are non
labour force gain experience
factory selling & non manu
/SGA)
- Accuracy of cost estimations subjected to cost-benefit decisions when choosing - can be done w/o opening or closing WIP inventory
estimation method - Weighted Average Method!
- All cost functions based on simplifying assumptions: cost behaviours depend on - Production cost takes into account: (i) Beg WIP; (ii) units started & completed in
single/few types of activity; cost behaviours are linear within relevant range period; (iii) End WIP (incomplete)
- DM put into process at 1 or more discrete points | DL & MOH (Conversion Cost)
Ch3 – Product Costing System used uniformly & continually through production
3.1 Product Costing - for Ending WIP, where products are partially completed ⇒ need to convert to
ST profitability: manufacturing + downstream costs (mkt/distribution/customer Equivalent Units (smaller, fully completed units)
service) - DM added to process already = 100% EU | DL/MOH (Conversion Cost) 50%
LT profitability: pricing/product mix – ALL costs complete = 50% EU
A. Job Costing (unique single G&S) – manufactured to order/customised/distinct
jobs Step 1: Analyse physical flow of units
- requires tracing & allocation to each job + maintain each job’s costs i.e. BEG WIP physical units + physical units started – physical units completed &
consultancy svc transferred out = physical units in END WIP
B. Process Costing (identical bulk G&S) – same cost/unit. Assign all pdn cost to Step 2: Calculate EU for DM & Conversion
process/dpt → avg across all units EU only relevant for END WIP: 100% for DM that was already added, and %
produced completion for conversion costs
3.2 Allocating OH costs Step 3: Calculate unit costs
DC: traced directly to each job/process - Cost per EU for DM = Total DM cost / Total EU for DM
OH: X trace directly – allocated - Total DM: includes costs of BEG WIP (DM) & DM costs incurred in the month
Documents used - Applies to conversion costs the same way
- Bill of materials ‒ list all materials required for a job Step 4: Analyse total costs
- Material requistion form ‒ authorise movement of RM from warehouse to jobs ⇒ - Cost of goods completed & don’t out in the month = No. units txf out x total cost per
Actual DM costing EU
- Direct labour time sheets ‒ record labour hours spent on jobs ⇒ Actual DL costing - Cost remaining in end WIP:
- Job cost sheet ‒ summarise DM; DL; MOH incurred - cost of DM remaining = No. of EU of DM x cost per EU of DM
- cost of conversion remaing = No. of EU of conversion x cost of EU of conversion
- Sum of above = total cost of accounted for (beg + total incurred cost of DM, DL,
MOH in the mth)

1) Purchase of RM Dr. RM inv • Cr. AP

2) Txf DM to job 1 (record DM Dr. WIP inv – Job 1 JE of Transfer of COG completed & don’t to finishing department:
cost when used): Cr. RM inv > Dr. WIP inventory: finishing dept – Cr. WIP inventory: mixing dept
3) Charging DL to job 1 (record Dr. WIP inv – Jobb 1 FIFO vs Weighted Avg:
DL cost when wages paid out): Cr. Wages/P FIFO: cost per EU based on only cost incurred in the mth (don’t add BEG WIP) ÷ EU of
4) Applied MOH (est/budgeted): Dr. WIP inv – Job 1 work done in mth. If no beg wip, both method same
Cr. Manu OH (applied)
5) Actual MOH Dr. MOH(actual) Treatment for system with multiple dept/treatment – partially completed goods
Cr. Manu supplies; Wages/P; Prepaid rent; txf to nxt dept for next steps in production – finishing department:
Acc. Depr on Equpm WIP Inventory Mixing Department:
6) Completion of Pdn Job 2: Dr. FG inv • Cr. WIP inv – Job 2 - Dr. DM, Conversion costs (DL + MOH) | Cr. COG (partially) completed &
transferred out
7) Sales of goods Dr. A/R or cash • Cr. Sales Rev
WIP Inventory Finishing Department:
Dr. COGS • Cr. FG inv
- Dr. Transferred in cost (same as COG above); new DM + new Conversion costs
8) End of period closing of MOH If MOH underapplied, actual > applied, MOH
(DL+MOH)
to COGS (MTHD 1) Dr bal → Dr. COGS⬆ Cr. MOH
If MOH overapplied, actual < applied, MOH
cr bal → Dr. MOH, Cr. COGS⬇
9) End of period closing of MOH Allocate based on % of total applied MOH
to 3 ACCOUNTS (WIP, FG, COGS) [typically don’t unless specifically required]
(MTHD 2)

Ch4 – Process Costing System

Process Costing: (1) Estimate cost of pdn process; (2) Calc avg cost per unit
 Ch5 – Activity-based Costing & Service Costing For: high OH cost; OH not directly related to pdn volume; diverse pdt range; high
Traditional Activity-based (ABC) complecity/ diverse batch size; high stakes when inaccurate decision based on
- DC traced to pdts; MOH allocated to pdts Measure both cost of costing; low cost adopting such system due to sophisticated IT support
- Calc of MOH rate using vol-based cost driver cost obj + performance
☹ X INCLUDE Non-manu costs (not assigned to pdts) of activities
☹ X adapt to changing business envmt (i.e. growing - costing view: better > Unit Level
automation; greater pdt diversity; more invmt in estimate costs by Activities –
downstream activities) improving allocation of performed for
☹ Inaccurate pdt cost when: MOH to pdt each unit
- more cost pools (directly tied to
> proportion of DL cost decrease/proportion of vol-
- activity view: info to pdn/
unrelated MOH cost increase
better manage processing of
> non-manu costs but pdt related becomes
activities/costs; create each unit)
substantial (but prev not included)
value
> product diversity increases
> Batch Level –
Tend to:
performed for
Overstate cost of high-volume, simple pdt (large
each batch, not
batches)
each unit at
Understate cost of low-volume, complext pdt (small
one timeCentr > Machine-related
batches) – costs that could relate to single activity driver: #machine h
• ABC is not limited to a single driver when allocating costs to products: Not all
> Product level -operating & maintenance: wages of pdn worker; depr machines;
costs vary with units and ABC allows users to select non-unit level cost drivers. insurance
– specific
- TC assumes product costs are driven by volume-based cost drivers. > Facility level
products/pdt
- TC may incorrectly allocate non-unit level costs, e.g., batch level costs line – support business as a whole (cant related to pdn of specific pdt)
• ABC can resolve the issue of over-costing of simple product and undercosting -depr & maintenance of building; manager salary; share of corp
of complex product – Consumption ratios by different products often differ greatly
> Facility level costs of pdn facilities i.e. council rates/tax/building insurance
Normal Spoilage: inherent in production process, occurs even under efficient among activities, no single cost driver will accurately assign costs for all activities.
– support
operating conditions (unavoidable) • Costs of ABC: Complexity; More time and financial resources to maintain
business as a
- treatment: included as part of the cost of good completed & transferred out, accuracy of data and product costs
whole
included in inventory valuation • Benefits of ABC: More accurate product costs; Better decisions about pdt mix
- Dr. WIP inventory – finishing | Cr. WIP inventory – mixing @ $690,150 and pricing
Abnormal Spoilage: should not occur under efficient ops condition – not part of Terminology:
normal pdn cost Activity: A unit of work performed within the organisation
- treatment: expensed in current period of P&L as “loss on abnormal spoilage” Activity driver: A cost driver used to estimate the cost of an activity consumed by the
- Dr. WIP inventory – finishing $630,900, Dr. Loss on abnormal spoilage $59,250 | cost object
Cr. WIP inventory – mixing @ $690,150 Cost driver: A factor or activity that causes a cost to be incurred
Other issues Resource driver: A cost driver used to estimate the cost of resources consumed by
- % completion is just rough estimates an activity
- POHR may be used in product costing – smooths out effects of fluctuations in Root cause cost driver: The underlying factors that cause activities to be performed
actual cost & cost drivers, but may have over/underapplied costs and their costs to be incurred
- such over/underapplication of cost could also provide useful info for control Simple ABC Comprehensive ABC
(management pov)
Hybrid Costing (Operating Costing): Allocate MOH to pdts Allocates all pdt-related costs (except
- for business with repetitive product process but have a range of products that differ - only analyse MOH cost & activities DM) to pdts & for activity 3gmt.. [DL,
in some significant aspects i.e. batch manufacturing process (with a mix of indiv - DL & DM directly traced MOH, Non-manu] (pdt cost on cause-
inputs & repetitive process) - Non-manu expensed off as period effect basis)
- Treatment: exp - DM alr had accurate est, dunnid
\
- DM: traced to individual batches (like job costing) allocated
- Acc. Conversion costs: traced by department, allocated to all units passing 1) Identify major MOH activities + 1) Identify major MOH activities centres,
through that department (like process costing). Applied to products using: determine total budgeted cost of then its activity & resource drivers
predetermined application rate = budgeted conv. Cost ÷ budgeted level of cost each activities within each centre + determine total est
driver (qty) 2) Identify activity drivers of each cost of each activities within activity
- Assuming no beg & end WIP inventory (no partially completed batches existed at activity + est cost per unit of activity centre
beg/end of accounting period (so don’t need to calculate for EU): driver = budget activity cost/budget 2) Assign activity cost to product: select
activity driver qty suitable activity driver for each activity,
3) MOHactual per activity = Activity estimate cost per unit of activity driver,
rate^ * actual qty of activity driver assign actual activity cost to pdts based
consumed on qty of activity driver consumed
Comprehensive ABC system:
• More detailed and accurate assignment of DL&MOH; Incl of non-manu product
related costs
• More detailed identification and analysis of activities across the business that
may be useful for activity-based management – but More costly to implement
due to its complexity
 Job costing Target sales (Units) = (FC + TNP)/unit CM
- DL traceable Target sales ($) = (FC + TNP b4T)/unit CM ratio
- Job billing used *Tax WILL affect this: TNP (aft tax) = TNP b4 Tax*(1-t), where
TNPb4T = T.sales-T.costs
Hybrid costing Margin of safety: The excess of sales over the breakeven volume of sales, can be
in units/$.
Process costing *Note = Tax wouldn’t affect this.
- diff svc consue MOS ($) = T.Sales – Breakeven Sales
similar resources MOS (%) = MOS($)/Actual Sales = 1 – Breakeven(%)
- cost tracked MOS (units) = MOS($) / Selling.P or Sales in units – Breakeven sales in units
directly/allocated Implications – What can be done
to pdn process [incremental approach - focus on difference in T.CM; FC; Profits]
o ∆ income = ∆in CM – ∆ in FC
Job costing (Svc):
Changes in FC: Changes in CM per Multiple changes in key
- Hourly labour rate = Total annual salary / Total billable hours (after leave, PH, non-
•↑FC - ↑BE point (both unit variables:
client h)
U/$) •Impact on Profit, •↓unitVC; ↑selling P; New
- OH cost (i.e. IT, comms, electricity, rent)
•Impact on Profit & BE point, Safety advertising campaigns; Lease
- cost driver usually professional labour hours/dollars
Safety Margin Margin new office
- POHR = budgeted (IT/rent..) overheads / budgeted professional labour costs
- Billing system – Svc charge-out rates
Operating Leverage & Cost Structures
- Charge-out rate = hourly labour cost + OH cost per hour * (req PM + 100%)
Then use rate and actual qty (using bill of material) to find actual cost: Process costing (Svc): Operating Leverage: relative proportion of fixed and variable costs: ratio of fixed and
Insignificant direct cost | Substantial equipment costs; initial IT costs | backend (IT, variable costs
comms) • High Op Leverage (high fixed costs):
>Estimate cost per transaction: info for cost control & fee settings + assess txn P&L o Heavy capital investments; High breakeven point & low MOS(%); High risk
- Degree of completion & txf-in costs not relevant of loss in adverse market condition; High income when demand high
- Cost per txn incl high proportion of indirect cost, not variable manner – careful (have capacity)
Hybrid Costing (Svc): o Disadvantage of high fixed cost: income will be lower in bad years; unable
Assign cost of customised elements directly + Avg cost of standardised process to make use of the excess capacity
• Low FC (DOL) structure: greater stability in income across good & bad years
Flow of costs in svc: OL Factor = CM/Net Profit = 1/MOS (%)
- costs shown as operating expense (not COGS / cost of sales) as no inventory % increase in Net Profit = OL Factor * % ↑ in sales
- indiv svc costs not accumulated separately Degree of operating leverage: measure, at a given level of sales, how sensitive net
- svc costing system support 4gmt. needs > financial reporting which no need to est operating income/profits is to percentage changes in sales.
cost - Directly proportion of fixed costs in the cost structure, the higher the fixed cost,
higher the DOL
Est cost of service to: set fees; assess service profitability; determine which - OL factor>1: % increase in net profit > % increase in sales revenue
svc/client to promote/refine/withdraw; plan & control costs - With an operating leverage of 5, if sales increase by 10%, net operating income ↑
50%
Cons of ABC for service: - The lower the number of units sold, the higher the operating leverage
- indiv activities difficult to identify if non-reptitive (onetime/customised)
- Svc output diff from each client Sales mix of different products:
- Signficant proportion of facility costs - OL/unit CM/CM Ratio weighted by proportion of unit/$ sales
5B – Service Costing
- Possible to implement in airline & logs - Different products have different selling prices, cost structures, and contribution
Org that deliver help, utility or care; provide an experience, infor/other intellectual
margins
content
Ch6 – Cost-Volume Profit (CVP) Breakeven pt (Units) = FC/weighted avg unit CM
- DL cost are substantial – producing & delivery services (simultaeneously)
- All other cost (upstream-R&D, design; downstream-mkt, customer) classified as 6.1 CVP Analysis Breakeven pt ($) = FC/weighted avg CM ratio
indirect/OH cost Total Per unit Breakeven for each pdt (Units/$)
- no inventory cost Sales [QTY x Selling P] 250k 500 = sales mix ratio (units) x total breakeven points (units/$)
A. Professional Service Firms: Less: Variable Exp [QTY x unit 150k 300 > unit selling P
- Staff > Equipment; Front office main activity Variable C] > unit variable costs Usefulness of CVP Analysis
B. Mass Service Entities (i.e. bus): CM 100k 200 > unit contribution margin • Fin planning models: Goal seek approach – outcome specified, software find
- Many customers, limited contact time/customisation; Staff non-professional; Less: Fixed Exp 80k variable; What-if analysis – specify changes in assumptions & data to examine
- Focus: final delivery, not how things are delivered -> back office is key – incl Net Ops Income (Profit) 20k effect on outcome
equipment & infrastructures [more sophisticated models]
C. Service Shops (in btw professional & mass services) i..e F&B, insurance CM Ratio [unit CM / unit sales] or [CM/T.Sales] • CVP analysis: ST/tactical decision tool; More useful in less complex, smaller
Gross Margin ($) = T.Sales – Pdn Costs firms, standalone projects, startups. OR decision tool for planning stages of
Gross Margin (%) = (T.Sales – Pdn Costs) / T.Sales new projects/ventures for larger more complex firms
Variable expense ratio = variable exp / T.sales = u.variable exp / unit sales • Assumptions underlying CVP analysis: Behaviour of total revenue is linear,
Breakeven point: Unit sales/dollar sales to recover all FC + VC. Behaviour of total cost is linear over a relevant range, for both variable and
Target Net Profit = 0 fixed cost, the only cost driver is sales volume, the sales mix remains constant
↑increase in CM = CM Ratio x↑increase in sales vol over the relevant range, in manufacturing firms, the levels of inventory at the
*Tax will NOT affect this: NOI/Profit = UCM*additional units CM past breakeven beginning and end of the period are the same
Breakeven sales (units) = FC / Unit CM
6.2 Absorption & Variable Costing
 Absorption Variable
Pdt Cost DM, DL, Variable & Fixed Pdt Costs: DM, DL, Variable
(used to MOH MOH
determine unit
product cost) A. Special Order
Period SGA Fixed MOH (expensed off) + - Determined by whether spare (idle) capacity can be used to meet special order
SGA - Spare Capacity: inputs to pdn not being utilised, avail for other purpose
Treatment ✔ Spare Capacity ╳ Spare Capacity
Sales - Dont include allocated FC - Using resources usually used for regular
Less: COGS Less: Less: - CM = Incr Rev – Incr Cost + pdts
(F+V) DM + DL + V.MOH + F.MOH DM + DL + MOH (V) Savings/ Other Relevant Costs - → Consider opp. Costs
Less: SGA (V) - Accept when Incr rev > Incr cost - CM = Incr Rev – Incr Cost + Savings –
= Gross Profit (Gross = Contribution Margin Opp. Costs +/- Other Relevant Costs
Margin) Other Considerations:
Less: Less: >> One-off decision or LT potential → Facility costs if it Is not one-off
SGA (F + V) MOH (F) + SGA (F) >> Limited capacity → price need to be increased to ensure all profitable
Net Operating Income business can be accommodated
Comparison btw 2 methods >> Any adverse effects on regular business
C. Add or Delete Product
>> Any impact on reputation/ relationships with current customers
• 1st year Difference = Fixed MOH deferred in inventory (expensed off in Considerations: - Which costs/benefits will change based on decisions
Variable but not expensed off in Absoption): NOIA > NOIV [lower exp, - Traditional accounting data contains cost allocations to note
higher net profit] [Strategic – LT implications on other areas of org, or customers/staff morale]
• 2nd year difference = Fixed MOH released in inventory to expense off:
NOIA < NOIV
Production vs Sales Effect on Inventory Variable vs Absorption
Units Produced = Sold No change A=V
Units Produced > Sold Inv ⬆ A>V
Units Produced < Sold Inv ⬇ A<V

Absorption Variable
(for disclosure, better cost matching) (for decisions making)
• Fixed MOH treated same as other V.pdt cost • Emphasizes contribution
• Consistent with LT pricing decisions based on in SR pricing decisions
pdt cost – price must cover full cost of • Cannot be used for fin
production in the lR reporting under GAAP &
• Required by Financial Reporting & Income tax IFRS
law
• Better match costs with rev
• Profit affected by inventory level fluctuations

Ch8 – Relevant Costs & Benefits, Pricing & Product Mix Decisions
8.1 Decision Making
Relevant Information:
- Differs btw alternatives + Relates to future
[Importance: timeliness; accuracy; save managerial resources; improve efficiency]
✅Incremental rev & costs; Opp costs; Avoidable costs (not incurred in the future if
particular decision made) B. Make or Buy a Product
❌Sunk costs; Unavoidable costs (cost incurred no matter what decision made i.e. Considerations:
Allocated FC) - Avoidable/Unavoidable costs (i.e. fixed costs); Opp costs are relevant;
- Outsource decisions: manufacturing process/a function contracted out -> LT
decision, difficult & costly to reverse
- Quality of purchased pdt compared to in-house; Delivery responsiveness; Technical
capabilities; Labour; Financial stability of supplier; Respect of confidential info;
Reliability & trustworthiness
2 Approach: TOTAL vs INCREMENTAL
TOTAL approach INCREMENTAL approach
- Classify into avoidable & unavoidable Incr cost = Cost of purchase –
costs Savings of avoidable costs from
- VC usually avoidable purchase
- FC typically unavoidable (w - only consider relevant info: that
exceptions) differs between 2 alternatives & gives
you decisions faster
 • Consider: -ve LT impacts; ST positive effects – profitability - Budgeted Inc Stmt: exp rev & planned exp | Budgeted BS: exp A&L @ end budget
D. Joint Product: Sell or Process Further period
Joint Product: 2 or more products that are produced simultaneously from 1 8.2 Pricing
production process A. Cost-plus Pricing 9.2 Behavioural Consequences of Budgeting
Split off Point: Stage in production process where the 2 products are separately Price = cost + (markup Top-down: senior impose budget targets;
identifiable percentage x cost) Bottom-up: lower managerial/ops level set own budget
Joint Cost: Manu costs incurred in joint production process where costs could be i) Participative Budgeting
based on: [managers develop own initial budget est for their own ops]
- Absorption costs: Total + : coordination, communication btw managers & wider org • more accurate budget
manu cost, VC + FC est w more knowledge abt mkt demand & ops • employee empowerment
- Broader product costs: -- : negotiations & revisions are expensive & time consuming (delays &
manu costs + upstream + downstream costs (i.e R&D, Mkt..) indecisiveness) • Conflicts & disagreements • Opportunities for padding budgets
- Variable costs: V. manu costs or TVC (incl SGA) ii) Budgetary Slack / Budget Padding [diff btw budgeted rev/cost & realistic est.]
Reasons for considering product costs when setting prices managers intentionally understate budgeted rev, overstate budgeted costs (KPI/cope
- Difficult to do a thorough market analysis if selling a range of products w uncertainty/guard against initial budget requests cut back)
- Provides a starting point Reasons for padding the budget: Manager’s performance looks better when they
- Provides a floor below which prices cannot fall in the long run exceed their budget; A way of coping with uncertainty; To guard against initial budget
requests being cut back by senior management
If price too high, consider: iii) Budget Difficulty [goal congruence – org goals coincide w indiv goals]
• Joint Cost is allocated to cocoa butter and powder based on relative sales - Whether there is spare capacity – to lower price budget targets shld be challenging but achievable to motivate (if too hard,
vales/physical units/ constant gross margin/net realisable value @ split off point - If want to lower price, does the lowered price cover fixed costs (CM >0?) unrealistic). Should:
– but irrelevant (sunk) cost [Relative Sales Value Method] - Effects on existing customers • targets developed with participation of employees • achievable targets • frequent
• Incr Rev = Sales aft processing – Sales at splitoff - One-off order or not feedback • employees have control over activities • achievement accompanied by
valued rewards
B. Product Mix Decisions
Choosing most appropriate range of products w limited resources Controlling costs: when plans & objectives are achieved
- Pricing influence profitability → influence pdt mix All control system: predetermined performance level; measure actual performance;
- Limiting resources: floor space; machine time; RM; labour hours compare standard & actual performance
→ Maximise CM per unit of constrained resource: o
CM per constrained resource = CM per unit / constrained resource req per unit 9.3 Calculating Standard Cost Variances
Standard cost: predetermined/budgeted developed (planning phase); Actual cost
measured
Standard cost variance: Actual cost – Standard costs [if significant must investigate]
• to evaluate actual performance, control cost • to calc for DM/DL/MOH
Definitions
Std Material Qty: total amt of DM normally req to produce 1 unit of pdt
Std Material Price: total delivered cost (incl transport aft discounts) of DM
Std DL Qty: # labour hours normally needed to manufacture 1 unit of pdt
Profit Reporting Format: Std Labour Rate: total hourly wages (incl on-cost: extra salary-related i.e. leave
provision; payroll tax; contributions)
[Actual > Budget > Flexible: unfavourable]
{Material} DM Price Var = Actual – Budget = PQty * (AP – SP) [--ve:F]
*AQ for price var is the qty PURCHASED
DM Qty Var = Budget – Flexi = SP * (AQ – SQ) [--ve:F]
* AQ for qty variance is qty USED
- SQ: std qty allowed, given actual output = Actual qty output * Std DM Qty
Ch9 – Budgeting & Standard Costs
9.1 Budgeting System
Annual budget: Purpose: planning, communication & coordination; allocating
resources; controlling profit & ops; evaluating & provided incentives
(a) Operating budgets –
- Sales Budget: estimated sales units, revenue (using mkt research to estimate sales
vol & price)
>> Internal factors: past sales level; new pdt planned; intended pricing policy; {Labour} DL Rate Var = Actual – Budget = AH(h) * ($AR/h – $SR/h) [--ve:F]
Incentives for Decision Makers
planned ads & promotions; sales volume and sales mix DL Efficiency Var = Budget – Flexi = $SR/h * (AH – SH) [--ve:F]
• Want to maximise reported performance & rewards but system ideally should
encourage for decisions to be consistent with organisation’s goals & strategies >> External factors: general economic trends; specific industry trends; political legal
events; expected activities of competitors & customers
- Costs Budget: [Manufacturing] Pdn budget (see no. of units to manufacture);
DM/DL/MOH budget (sufficient stock to meet demand); SGA budgets
>> Units produced = Pdn budget + buffer (end inv) – beg inv

(b) Financial – budgeted income stmt; budgeted BS; cash budgets; capex budgets
- SH: std hrs allowed, given actual output = Actual qty output * Std hrs allowed/u
- Cash Budget: expected cash receipts & planned cash p5068mts for budget period
>>Total DL Variance = DL Rate Var + DL Efficiency Var = (AH(h)*$AR/h) –
- Capex Budget: acquisition of LT assets (LT CF)
(SH(h)*$SR/h)
= Diff between Flexible & Actual Budget
Cost Control through Assigning Responsibilities
• Purchasing Manager: RM purchase (buying) – DM Price Var; DL Rate Var Planned pdn unit
>> may be incentivised to cut costs (buy cheaper) – impair quality Flexible budget variance x std DLH per
(VOH) = Actual - Flexible unit x
• Production Manager: Qty of RM used (usage) – DM Qty Var; DL Eff Var
F.POHR($)
>> accountable for labour variance: can influence mix of skill level assigned to work
tasks; level of employee motivation; quality of pdn supervision; quality of training
provided to employees
Investigating variance – which dept more problem?
Spending Var: Efficiency Var: Budget Var - ‘real control Vol Var (pdt costing)
Ø By exceptions: only significant cost var reported & investigated (maybe random Results aft adj actual Cost effect of using var for FOH’: Diff between budgeted
fluctuations) qty of cost driver diff qty of cost driver - Actual FOH & FOH applied to
Ø Size of variance, Recurring variances, Trends, Controllability of variance -> ‘real control info given actual output; FOH/expenditures vs pdn
Ø Favourable & Unfavourable Variances for VOH does not measure budgeted FOH - shows if std cost
– need similar investigation: not all favourable = desirable i.e. paying higher efficiency of non-cost (benchmark) driver allowed for
-- may reveal efficiencies & new improved practices / standard too lose than expected prices driver OH items - assume no activity level actual output >/<
/unit for VOH items; i.e. more/less use of change planned
i.e. Rate variance favourable, efficiency variance unfavourable – using lower or used more VOH DLH than std qty, -no cost control
rate workers than norm -> spend more hours on the job, but lack training/skills items than std amt given actual output implication
HOW? Statistical control charts: compare std cost var across time, against critical allowed
value (1+mean) Actual > Budget > Flexi: U Actual > Budget > Applied: U
FLEXIBLE budget variance = Actual - Flexi - Actual pdn unit < planned pdn unit is bad
Favourable var: Credit (savings in pdn costs)
Unfavourable var: Debit (excess pdn cost) | Var closed to COGS
Reconciliation (std costing):
Unfav – underapplied OH
Fav – overapplied OH → Sum of OH var = overall under/overapplied OH cost

Unfavourable Favourable
- Variance = underapplied OH - Variance = overapplied OH
- Applied (std cost) < Actual - Applied (std cost) > Actual
- Recorded applied lower than actual - Recorded applied > actual incurred
incurred

9.4 Standard Costs for Product Costing Sales P Var = (Actual sales P – Budgeted sales P) * Actual Sales Vol
• All inv recorded at std cost incl DM/DL/MOH Sales Vol Var = (Actual Sales Val – Budgeted Sales Val) * Budgeted Unit
• Variance: favourable (Cr) unfavourable (Dr) → closed off to COGS at end of period Contribution Margin
Recording DM Var & DL Var
DM purchase + P variance: DL purchase + variance: Closing of variance to Adv of Std Costing Criticisms
Dr. RM Inv = PQty*SP Dr. WIP Inv =SH*$SR/h COGS • Provide a good basis for • Variances are too aggregated and concentrate
Dr. DM P. Var = calc Dr. DL Rate Var = calc Dr. COGS cost comparisons on consequences rather than the causes of
Cr. A/P = PQty*AP Cr. DL Eff Var = calc Dr. DL Eff Var (fav) • Enable managers to use problems. Limited information for cost control.
DM use + QTY variance: Cr. Wages/P = AH*AR Cr. DL Rate Var (unfav) ‘management by exception’ • Variance reports are produced too late to be
Dr. WIP Inv = SQ*SP Cr. DM P. Var (unfab) • Provide a basis for useful
Dr. DM QTY Var = calc Cr. DM Qty Var managerial performance • Focus too heavily on cost minimisation and
Cr. A/P = PQty*AP evaluation and determining departmental perspective
bonuses – Controlling one department’s costs may
• Participation in setting adversely affect other areas or increase
Ch10 – Flexible Budgets & Standard Costs
standards and assigning costs in other departments
10.1 Flexible budgets vs Static budgets
responsibility for certain • Too much emphasis is placed on volume-based
Static budget (based on fixed activity) difficult to evaluate performance when activity
variances can motivate cost drivers (e.g., DLHs)
level differs
employees • Do not explicitly encourage continuous
Flexible budget (range of activity levels) allows selection of most appropriate
• May lead to more stable improvement
benchmark for cost control + basis of comparison between budgeted & actual costs
product costs compared to • Standard costs quickly become outdated due to
for actual level fo activity using actual costs shorter product life cycles
è Tool to control manu OH cost (OH cost that should be incurred vs actual)
• Can be used for external • Standard costs are not defined broadly enough
POHR = budgeted OH / Budgeted activity of cost driver (QTY) financial reporting to capture the full costs of materials
B.FOH = POHR_F
* budgeted
activity level

10.2 Overhead Application in std costing system

- allocate OH to products (applied using POHR; std qty based on actual out)-> WIP
inventory
 - X distracted: employees more involved as they are shareholder values instead
given more responsibilities & freedom to make of their own
decisions
Qualities of managerial accounting – information system to provide necessary info
& feedback to team; assist team in implementing own budget/system; assist in
developing & interpreting appropriate performance measures
Should head office intervene?
Although top management wants to introduce the positioning system, it should not lower the price to
make the transfer attractive to North Island. Silver Fern Technology Ltd (SFTL) uses a responsibility
accounting system, awarding bonuses based on divisional performance. Top management’s
intervention and price-lowering decision would undermine the authority and autonomy of South
Island’s and North Island’s divisional managers. Ideally, the two divisional managers (or their
representatives) should negotiate a mutually agreeable price.

Responsibility centres – unit in an organization where manager is held accountable

for the unit’s activities & performance
- measure performance of people & dept to foster goal congruence
- reinforce advantage of decentralization while minimizing costs of decentralization
Types of RCs: invmt (aka strategic business unit); profit; revenue (seldom); cost
centre (common)
RCs E.g. Financial responsibility Fin performance
measures
Invt Subsi co, Profit & invested capital (assets) ROI
centre Divisions used to generate profit
Profit Subsi, Divisions, Profit (all rev & costs) of centre Profit
centre Pdn plants measurements
Rev Sales Dept Rev of that dept – maximise rev Rev measurement
centre
Cost Admin; Pdn Cost of running that dept – Cost, cost var
centre teams/line minimise cost

Ch11 – Managing & Reporting Performance

11.1 Performance Management Systems
- control performance by tracking performance indicators against target indicator;
evaluate & reward subordinates’ performance; guide future development of business
strategies/operations
Characteristics of effective performance measurement systems
- links to strategies & goals; recognizes controllability; embraces participation &
empowerment; simple & understandable measures; emphasizes positives (not too
difficult to achieve); reported in timely manner; includes benchmarking; limited
measures; link to rewards
Structuring for control – decentralisation (medium & large org)
• Dividing the organization into smaller
units
• Decision-making is delegated down
• Each unit assigned particular
operational & decision-making power & 11.2 Financial Performance Reports 11.3 Transfer Pricing – internal selling P within decentralized organisation
responsibilities - key financial result appropriate for type of RC - Is revenue for supplying unit, cost for buying unit
Promoting goal congruence – ensure goals - highlight variances btw budget & actual - should result in unit profit that are reliable & accurate; preserve & encourage
are aligned w org; assign responsibility to managers to run units; managers held - Segmented profit statements: show profit by major RC & entire org (aggregated autonomy; encourage goal-congruent behaviour
accountable for performance data) - there may be general policies to govern transfer pricing practices: i.e.
• contribution format seperates FC & VC + calc contribution margin; corporate/head office dictate specific txf price (but contrary to decentralization
Benefits Costs policy)
• traceable FC separated from common FC to calc segment margin
- local managers have more accurate & complete local - narrow focus on own unit’s
info abt mkts & ops goal (lack of big picture) • distinguish btw Profit Margin controllable by manager & attributable to unit Market- Cost-plus Prices Negotiated Price
- training for future higher-level managers - some tasks/services may • include allocated costs (traditional/ABC method) based No reliable ext mkt Upper limit determined by buying unit,
- greater motivation & job satisfaction, self-worth be duplicated Traceable Costs Common costs Prices price Lower limit determined by selling unit
- corporate top management has more time for - goal incongruence: Arise because of existence of Arise because of overall operations of company, There is TP = Std VC + - market price form starting point (if any)
strategic issues behavioural challenge – particular segment, disappear over not disappear if any segment disappears competitive Markup or - incr cost of producing & supplying product form
- allow co to respond more quickly to market need performance time if segment disappears ext market Std absorption lower bound
opportunities & customer requirements: allow work measures & reward systems cost (VC+FC) + - consider spare capacity of supplying unit
teams to pursue this goal of the company (goal to incentivize broader Markup +ve:
congruence) organizational goal (std cost used to • preserve autonomy of supplying & buying unit –
- empower employees to respond to customer congruence prevent cost consistent w decentralization spirit;
requirements, respond quickly to equipment failures or i.e. give them company inefficiencies being
other problems within pdn/delivery/ their unit shares – maximise
 passed on to • managers negotiating the txf have better info abt
buying unit) potential cost & benefits compared to the
NOT good: company, give them power
• provide little • ensourage management to be more conscious
incentive for about cost control
selling division • Lower cost than market for buying unit
to control • More realistic & fair measure of divisional
manu costs as performance due to autonomy given to each
all costs will be division
recovered • Promote goal congruence as it beenfits company
• Often lead to as a whole (where buying unit incur less costs
suboptimal from txf price)
decisions for Issues: time consuming for management in
the company 12.3 Profit Measures
negotiation process; negotiated price may not be in
as a whole A – Profit Margin controllable: assess manager performance; encourage focus on
best interest of overall co operations
controllable profits; motivate + goal-congruent
B – Profit Margin attributable: assess investment centre performance
General Rule: (min price to cover cost)

Aggregate: accessing whether the entire organisation would benefit:

- Incremental Revenue (sale from buying unit)
- Incremental Costs = VC/add outlay cost of Supplying unit & Buying unit (excl FC)
Upper limit / Buying unit max willing P: ≤ - Incremental Contribution >0: accept project
* If aggregate calculations conflict with individual division calculations – show no
or goal congruence: indiv division wouldn’t accept the project even if it is beneficial to
(to at least the company overall
break even) How to improve ROI?
Lower limit / Supplying unit min willing P ≥ Ch12 – Performance Measures & Systems • Increase return on sales: ↑ selling P/sales vol/↓exp
12.1 Financial Measures - Return on Investment (ROI) • Increase Invt turnover: ↑sales rev/↓invt capital
Invested Capital: assets that generate • ST actions may have adverse effect on LT performance (i.e ↓R&D exp)
profits ROI ➕: ROI ➖:
Return on sales/sales margin: profit on Focus on profits & assets Encourage ST improvement (LT ☹)
*Additional outlay cost could be manu cost of producing good by supplying $1 revenue (%) needed to generate profit. Encourage deferring of asset replacement to main
*Additional cost would not include fixed costs Invt Turnover/Capital turnover: Evaluate relative high ROI
revenue for every $1 invested assets performance of invt Disincentive to invest in new projects that is gd for
Invested Capital: centres/BU of diff org but decrease invt centre ROI (no goal
(i) Total Assets; size/managers
** congruence)
(ii) Total Assets less Current liabilities;
Not suitable to compare performance of different
(iii) Total Productive / Operating Asset: excl non-productive/non-operating (I.e.
Scenario 1: External market & Spare capacity in the supplying unit industries – diff degree of dependence on assets
land/constructions in progress/investments in other co) [AVG of Beg & End]
- supplying unit have additional profit Analysis:
→ Additional cost outlay (w/o opp cost) ≤ TP ≤ market price 12.2 Asset Measures • Compare profit
Scenario 2: External market & NO/LIMITED spare capacity in the supplying unit (i) Carrying amt/net book value; or (ii) Acquisition cost; or (iii) Mkt value • Can compare ROI with WACC: if ROI>WACC → good for company, likely
- supplying unit has opportunity cost of lost contribution margin Carrying also leads to positive EVA55.decrease
Carrying Amount➖:
→ Additional cost outlay + Opp cost (lost CM) ≤ TP ≤ market price Mitigation: use multiple performance measures w ST & LT; alternative measurement
Amount➕: – choice of a depr method is arbitrary & the resulting
Scenario 3: NO external market & Spare capacity in the supplying unit of invested capital to minimise dysfunctional decisions;
- supplying unit has no opp cost; use cost-plus pricing consistent with the carrying amount may not provide a reliable measure for
12.4 Alternative financial measures – residual income/economic value add:
→ Additional cost outlay (w/o opp cost) ≤ TP ≤ Profit to be earned per unit sold BS and definition ROI or RI
of profit (used in – depr non-current assets may result in a misleading A – Residual Income = Profit – (Invested Capital x Imputed Interest Rate (given))
Scenario 4: NO external market & NO spare capacity in the supplying unit • Invest if RI is +ve: profitable even if project ROI < existing biz ROI
- supplying unit has opp cost; use cost-plus pricing ROI & residual increase in ROI & residual income across time - provides a
income calc) disincentive to invest in new equipment • Invested capital here is the cost of new project, not total assets
→ Additional cost outlay + Opp cost (lost CM) ≤ TP ≤ Profit to be earned/unit sold
(can have an additional small amount of profit margin to provide incentive for ROI By carrying amt RI ➕: RI ➖:
supplying unit to manufacture and txf to buying unit) • More likely to promote • X compare performance of biz w diff size (abs
goal congruence than amt) (compared to ROI)
ROI • Formula more biased toward larger biz
• Takes into acc company (compared to ROI)
Req ReturnEncourage • Encourage ST focus (same as ROI)
invt in profitable projects
B – EVA = Net Operating Profit Aft Tax – (Capital Employed x WACC) when ROI of northern if calculated the same way as others (since it is leased
Measure value created over analysin now)
g ROI Lease pmt vs depreciation effects
single accounting period;
Spread between return Different industry less useful to compare ROI
generated & cost of capital Differnet
EVA ➖: Potential for mthds
manipulation & for taking
ST orientation

Profits Ctrs
Div Plants Profit

Invt Ctrs Corp div ROI

Dept; Pdn processRev/cost/

Problems with traditional
Rev/cost ctrs financial performance
Cost var
measures➖:
Work teams
- emphasize on 1 perspective of performance
- focus on consequence, not cause
TO SOLVE:
- limited guidance on future actions
- encourage decrease of both shareholder/customer value (ST >LT)
Adv of non financial➕:
- emphasize strategy
- drive future financial
performance
Failure of non-financial performance helping financial: - actionable & timelier
- more understandable & easier
- wrong strategic priorities to relate to (ops)
- fail to utilise freed-up resources from improvement on non-fin measures Limitations ➖:
- lag btw fin & non-fin - wide choice; incl of non-fin
- incentives for dysfunctional behaviours (manipulation/maximising perf) measures can be
More Performance measures example: adhoc/undirected; tradeoffs of
diff performance measures;
some lack integrity (not audited)
– diff to verify, potential to be
inaccurate, incomplete,
Balanced Scorecard (BSC) manipulated; Some not easy to
translate to financial outcomes
>Tool that translates an organisation’s mission, objectives, strategies into an
integrated set of performance measures for each key strategic area of the business
-> to implement strategies & monitor/manage perform
> Financial; Customer; Internal business; Learning & growth (efficiency)
(i) Stages of development & use – PLANNING & CONTROLLING
Lag: summarise results of past actionsLead: action guide now to improve
(monitor progress) – not timely future perf – actionable info
Aka KPI Aka KPD
(driver)

Analysis:

Adjustm
ent to
data for
compa-
rison

Consider Expected ROI

ation Fully depreciated assets