advanced management accounting - week 3 slide

8/12/2019 Advanced Management Accounting - Week 3 Slide

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4AA3

Management Accounting II

Week 3 Managing Costs


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Do you really love accounting?

So I know DM, DL, MOH, WIP, finished goodsand CGS, CM, GM, variable costs, fixed costs,

period costs, blah blah blah. What more do I

need to know?


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Managing Costs

We have now learned that Costs can be

reported using different logics:

Laypersons logic:

=

GAAP:

+ . = .


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Managing Costs

Other Logics: . + = .

1 + 2 + + = .

. + . + .= .

( + )= .


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Managing Costs

Managing Costs starting point is proper costreporting.

Therefore, cost management does not take the form

of universally cut cost in every cost pools. Costs can be benchmarked, evaluated, monitored,

managed by how we chose to logically process theraw accounting data.

Once costs are properly reported according to thelogics that users (management) specifies, costmanagement can then start.


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Managing Costs

SO Remember! If the reporting logic is FLAWED, the

ensuing cost management efforts will be faulty or

misleading!

For example: To manage and benchmark the HR

costs, your manager has requested you to produce a

report separating all MALE employee related costs

and all FEMALE employee related costs

What is the problem with this logic??


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Managing Costs

To proper manage costs, we have to firstunderstand cost functions.

By understanding the causality of costfunctions, and matching the benefits withcosts, management may make betterdecisions how to reduce costs and assignresponsibilities to control costs

So your job as an accountant is NOT JUSTreporting the costs, you need to understand it.


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Survey of Costing Systems

Job costing (ch.4)

Process costing (ch.17)

Hybrids: Project costing, batch costing, (eachbatch may involve different processes)

ABC costing (ch.5)


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Job Costing

Job Costing:

The cost object is a distinct product or service.

A JOB may also mean a special-made customproduct / service.

Bombardier: a JOB to manufacture 10 C-series jets

a JOB to promote the jet in an airshow

a JOB to ship completed C-Series Jet in China

a JOB repair / service the jet(s)


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Job Costing

Looking at the value chain:

Job costing may looks at the entire value chain

from start to finish.

Or a single value-added activity.

A job has a defined START and FINISH point.


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Job Costing

In job costing, the cost object identified is the JOB

itself.

the definition of the JOB greatly depends on the

reporting needs of the users.

a small job may refer to a work order within the

production process, or a big job may encompass

value-added activities that include costs incurred

throughout the entire value chain of a company.


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Job Costing

For a big job that encompasses other value-adding

activities, in other words, costs that are reported as

the operating expenses, the cost of thejob would be:

=[

+ ]

+[

+ ]

So, how does a job break-even?


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Direct Cost and Indirect Costs

What would be an example of direct non-

manufacturing costs?

For example: special insurance to account for

risks, special shipping directive, additional

certification and accreditation requirements.

Direct Costs are fairly easy to identify. Howabout Indirect costs?


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Direct Cost and Indirect Costs

The main problem in Job Costing is how to

divide up the indirect cost pool (shared

resources used) among jobs.

Many different types of indirect costs are

aggregated into one big Indirect Cost Pool.

So the challenge is to find a common allocation

base that would explain the causal relationshipof the resources used.


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Indirect Costs

Problem of allocating shared costs:

5 guys walked into a restaurant


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Job Costing

The focus of JOB costing is therefore:

Properly account for the Indirect Costs.


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Process Costing


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Process Costing

Process Costing:

The cost object is masses of identical units

Bombardier: The cockpit assembly process. Costing for Plant A, Plant B, Plant C


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Process Costing

Process Costing:

Process costing is NOT limited to ONLY the

manufacturing industry!

Can you think of some other industry that would

also use process costing?

(hint, think of the keyword masses & identical


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Process Costing


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Process Costing


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Process Costing

Based on the illustration, find the following:

Under FIFO method, what is the equivalent unitsfor Direct Material?

Under FIFO method, what is the equivalent unitsfor Direct labour?

Under weighted-average method, what is theequivalent units for Direct Material?

Under weighted-average method, what is theequivalent units for Direct labour?


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Process Costing

Example:

Chewbacca Lemonade Inc.


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Process Costing

In professional exams, this type of question

can take the form of a multiple-choice

question.

It can be quite nerve-wrecking to see this type

of question.


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Process Costing

Step 2: EQUIVALENT UNITS

Use T-Account to account for the EQUIVALENT

UNITS DO NOT FORGET! FIFO method and weighted

average method have different treatment on

equivalent units!


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Process Costing

Step 3: ACCOUNT FOR COST FLOW

Use T-Account to account for the cost flow

REMEMBER! FIFO method: ONLY current costs needed to

be accounted for!

Weighted Average method: (work-done to-date) BEGINNING inventory value is

considered!


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Activity-Based Costing (ABC)


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Activity An event, task or unit or work with a specified

purpose

Activity-based costing (ABC) Assignment of indirect, mixed cost pools to distinct

output where the outputs produced consume costsdifferently during the production process

Activity cost pool

Accumulation of all costs required to pay for a definedactivity that indirectly supports the production ofoutputs


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Jonahs ABC System

Jonah, the Accounting Student

Jonahs Telephone Bill:

Voice-Call: $52

Long-Distance Voice Call: 73

Text: 42Data: 94

Subtotal: $261


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Activity cost driver

Measures the benefits from using support

activities common to all outputs

Activity cost rate

Result of dividing the total cost pool by the total

quantity of the cost driver


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Cost Hierarchy

Output unit-level costs Costs relating to individual units of output, such as material costs

Batch-level costs

Costs relating to batches of output, such as set-up charges Product-sustaining costs

Costs relating to the support of a particular product, such as productdesign costs

Facility-sustaining costs Costs relating to the organization as a whole

This hierarchy is used to identify the activity costdrivers of costs in each activity cost pool


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Cost Hierarchy

Activity Cost hierarchy Indirect cost to

allocate

allocation base Allocation rate

1 2 3 4 5 = 3/4

Design Product xxx xxx product lines

Shipment Batch xxx xxx shipments

Setup machine Batch xxx xxx setup hour xxx per hour

Manu. operations Unit xxx xxx machine hours xxx per machine hour


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Step 1: Determine activities pools

Step 2: A survey of current indirect expenses

Step 3: Mapping of the indirect expenses toactivities

Step 4: Determine activity cost allocation base

Step 5: Calculate the activity allocation rate

Step 6: Activity cost driver * allocation rate =

activity cost


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Activity-Based Management (ABM)

Five areas of consideration for your professional exams:

(1) identify value-added and non value-added activities,

(2) BPR - reengineer the enterprise,

(3) benchmark value-added and non-value-addedactivities,

(4) develop a performance measurement system forcontinuous improvement.

(5) Cost and risks of implementing ABC (employeeresistance, cost of data collection, causality of costfunctions.

advanced management accounting - week 3 slide

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