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LECTURE 1: INTRO MANAGEMENT ACCOUNTING SYSTEMS Produce info to: Create value | Manage resources Types of info: Estimated COP | For planning and controlling operations |For measuring perforamance COMPETITIVE ADVANTAGE Cost leadership: EOS | Superior process technologies | Tight cost control Product differentiation: Superior quality | Customer service | Delivery performance | Product features MANAGERIAL ACCOUNTING  Process of: identifying, measuring, analysing, interpreting, communicating information  Adds value by: o Providing info for decision making and planning o Help managers direct and control activities o Motivate people towards goals o Measure performance o Assess competitive position PREDICTING COST BEHAVIOUR Cost is the measure of resources given up to achieve a particular purpose Cost behaviour: how a costs reacts to changes in level of business activity Total Variable costs ↑ when activity ↑ BUT Variable Costs per Unit does not change with activity Total Fixed Costs does not change with activity BUT Fixed Costs per Unit ↓ when activity ↑ (EOS) ASSIGNING COSTS TO COST OBJECTS Manufacturing/Product costs  to determine COGS, value inventory at hand, period costs  for decision making  Direct costs o Direct material (raw materials for product) Prime o Direct labour (labour used for product)  Indirect costs Conversion o Manufacturing overhead  Indirect labour (personnel who do not directly work on product  e.g. maintenance workers, security guards, quality checkers)  Indirect material (to support production  e.g. lubricant, cleaning supplies)  Others (e.g. property taxes, insurance, utilities, overtime premium, unavoidable idle time)  Cost of RAW MATERIAL used Raw material inventory, January 1 Add: Purchases of raw materials Raw materials available for use Deduct: Raw material inventory, December 31 Raw material used  Total MO Indirect material Indirect labour Depreciation on factory Depreciation on Equipment Utilities Insurance Total Manufacturing Overhead  Schedule of COGS Finished goods inventory, January 1 Add: COGM (above) Cost of goods available for sale Deduct Finished goods inventory, December 31 COGS

curvilinear (Relevant range: range of activity over which a particular cost behaviour pattern is assumed to be valid, pattern may not hold outside that range) COMMITTED AND DISCRETIONARY COSTS  committed o long term, cannot be significantly reduced in the short term (e.g. depreciation, taxes)  Discretionary o May be altered in the short term (e.g. advertising, R&D) SHIFTING COST STRUCTURES IN MODERN BUSINESS ENVIRONMENT  Automation = less reliance on labour + more reliance on equipment  But equipment costs do not vary with production volume  Wage and salary costs vary: o Labour regulations, contacts, customs COST ESTIMATION  Managerial judgement o Experience and knowledge, Examine past costs  Engineering method o Study process, Use time and motion studies (task analysis) o Effective if: direct relationship between input and outputs  Quantitative analysis o Formal analysis of past data  Scatter plot (total cost VS activity)  High-low method o Step 1: High minus low, divided by hours (find VC) o Step 2: Sub the VC found into either the high or low equation (to find FC)  Regression Analysis PRACTICAL ISSUES IN COST ESTIMATION  Data collection problems o Missing data, outliers, mismatched time periods for dependent and independent variables, trade-offs in choosing time period, allocated fixed costs, inflation  Effect of learning on cost behaviour o Labour per unit time decreases as experience increases  Activity-based approaches allow more complex cost behaviour to be recognised  Accuracy of cost functions in business (only approximations) o Limited time and knowledge o Data required for accurate estimation may not exist  Simplifying assumptions o Cost behaviours are linear within a relevant range o Cost behaviours depends on single/few types of activity

LECTURE 3: CVP ANALYSIS CHANGES IN ACTIVITY, CM AND NI  CM = sales – variable costs (what you use to cover fixed costs) Schedule of COGM  NI = sales – variable costs – fixed costs = CM – fixed costs Raw Material used (above) Direct labour  Breakeven point: where profit = 0 Total MO (above) o 0 = sales – VC – FC Total Manufacturing costs o 0 = ( P x Q ) – (VC x Q) – FC Add: WIP, January 1 o 0 = (Unit CM x Q) – FC Subtotal o Q = FC / Unit CM (breakeven quantity) Deduct: WIP, December 31 CVP GRAPH, PROFIT GRAPH COGM  CVP graph: x-axis unit volume, y-axis dollars Sales revenue  Profit graph: x-axis units sold, y-axis profit Less: COGS (above) o Where y = 0, profit = 0, quantity sold is the breakeven quantity Gross margin CM RATIO, NI AND VOLUME Selling and admin expenses  CM ratio Income before taxes Income Tax expense o Total CM / total sales (OR CM per unit / selling price per unit) Non-manufacturing/period costs Net income  Variable expense ratio  Selling (to secure order and o Total VC / Total sales (OR VC per unit / selling price per unit) deliver product  e.g. advertising, commission, store rental) LEVEL OF SALES NEEDED TO ATTAIN A TARGET PROFIT  Administrative (executive, organisational and clerical costs  e.g. office  Target profit = (Unit CM x Q) – FC  in unit sales salaries/janitors) Target profit = CM Ratio x Sales – FC  dollar sales Controllable/uncontrollable cost: a cost that can/cannot be significantly influenced  BREAKEVEN POINT by a manager  Profit = 0 = Unit CM x Q – FC  in unit sales LECTURE 2: COST BEHAVIOUR, COST DRIVERS AND COST ESTIMATION  Profit = 0 = CM Ratio x Sales – FC  in dollar sales DEFINITIONS MARGIN OF SAFETY  Cost estimation: process of determining cost behaviour (often historical)  Excess of budgeted (or actual) sales over the break-even volume of sales  Cost behaviour: relationship between cost and activity or cost driver  Margin of safety = Total sales – breakeven sales  Cost prediction: use cost behaviour knowledge to forecast level of cost at a  Dollars, percentage, units particular activity level (future) COST STRUCTURE AND PROFIT STABILITY COST DRIVERS  Refers to the relative proportion of fixed and variable costs  Activity or factor that causes costs to be incurred  High FC, Low VC  Types: o Higher income in good years o Unit, batch, product, facility o Lower income in bad years COST BEHAVIOUR PATTERNS o E.g. machine automation  Variable costs, Fixed costs, Step-fixed costs (Remains fixed over a range & DEGREE OF OPERATING LEVERAGE AND CHANGES IN NI Jumps beyond that range), Semi-variable costs (Fixed + variable components),

Operating leverage: measure of how sensitive NI is to percentage changes in sales o Degree of operating leverage: CM / NI o High degree for those who employ more FC o High degree also implies high breakeven point CVP ANALYSIS WITH MULTIPLE PRODUCTS  sales mix: relative proportion in which a company’s products are sold  for multiple products: o compute total sales, total VC and total CM o then calculate new CM ratio (= CM / total sales) o then calculate new breakeven ASSUMPTIONS  behaviour of total revenue is linear  behaviour of total costs is linear over a relevant range  assuming sales volume is the only cost driver  sales mix remains constant  level of inventory at beginning and ending are the same 

 Equivalent units: express partially completed products  Cost per equivalent unit: cost for period / equivalent units  Weighted-average method o No distinction between work done in prior and current period

But for transferred in units, direct materials is not counted unless ADDITIONAL direct materials are required at that stage of conversion OPERATION COSTING  Material costs (direct + indirect material)  charged like job-order costing Conversion costs (indirect labour + MO)  charged as in process costing

LECTURE 6: OVERHEAD COSTS ALLOCATING OVERHEAD COSTS  Cost pool: collection of costs that are allocated to cost objects o Have a common allocation base  Should be selected on a cause-effect basis  Cost driver  allocation base –x-> cost driver ALLOCATIG OVERHEAD COSTS TO PRODUCTS LECTURE 4: PRODUCT COSTING SYSTEMS (JOB-ORDER)  Plant-wide WHY ESTIMATE PRODUCT COSTS o Use POHR (normal costing: when OH is calculated using actual qty)  Financial accounting: o Overcost high-volume simple products, undercost low-volume complex o to value inventory & compute COGS products (applies to departmental) o only production costs included o Less costly to establish and operate (applies to departmental) Managerial accounting  Departmental o Product costs used for planning, control, directing and management o Calculate POHR for each production department decision making o (see above) o May include upstream/downstream costs  Activity-based Accurate product costing is necessary to stay competitive o Calculate POHR for cost pools  Pricing affected by: customers, competition, product costs o Multiple cost drivers and OH rates JOB ORDER COSTING o More complicated and costly to operate large, unique, high-cost items ISSUES IN ESTIMATING OVERHEAD built-to-order  Over what period should OH rates be set? Usually yearly ACCUMULATING COSTS IN A JOB-ORDER COSTING SYSTEM  Effects of capacity  direct material & direct labour  charged to each job as work is done  manufacturing overhead  allocated to all jobs, on the predetermined rate using DIFFERENCE BETWEEN AC AND VC an allocation base o impossible/difficult to trace overhead costs to particular jobs o manufacturing overhead consists of many different items o MO remains fixed even though output fluctuates over time PREDETERMINED OVERHEAD RATE AND CAPACITY  POHR = estimated total MO cost for the coming period/Estimated total units for  AC will have higher WIP and FG inventories as product costs include fixed OH the coming period  Difference between AC and VC net income o Actual overhead is not known until end of the period = (difference between qty sold and manufactured) x (fixed manufacturing OH o Use POHR to estimate total job costs sooner, before the period begins per unit produced)  Overhead applied = POHR x actual activity  Differences in net income will be reconciled by the second period when fixed  Criticisms: overhead from goods unsold from prior period is released o Results in product costs that fluctuate depending on activity level o Charge products for costs they do not use  Capacity based overhead rates: use estimated total units at capacity LECTURE 5: PROCESS CONSTING AND OPERATION COSTING DEPARTMENTAL PRODUCTION REPORT

ADVANTAGES AND DISADVANTAGES OF VC AND AC AC  assigned fixed manufacturing overhead to units produced  when units are unsold  portion of this fixed manufacturing overhead remains in inventory  results in positive operating income even if number of units sold < break even pt  VC income only affected by unit sales and not number of units produced unlike AC income which can be increased simply by producing more units even if they remain unsold VC is consistent with CVP analysis and accurately assigns VC per unit, but AC assigns fixed manufacturing costs to each unit  wrong impression that fixed costs vary with volume  JIT systems  when units produced = units sold  difference between AC and VC disappears REASONS SERVICE DEPT ARE CHARGED TO OPERATING DEPT  To encourage operating department to use service dept wisely  Provide operating dept with more complete cost data for decision making  Measure profitability of operating dept  Create an incentive for service department to operate efficiently

LECTURE 7: ACTIVITY-BASED COSTING TRADITIONAL PRODUCT COSTING FEATURES  Direct costs traced to products  MO costs allocated to products  Calculate MO rate (usually using volume-based drivers, POHR)  Does not incorporate non-manufacturing costs o Understates complex, low-volume products PROBLEMS  Small, identical, low-cost Fail to adapt to changing business environment  Mass produced o MO as a proportion of total manufacturing costs is increasing +  Costs cannot be directly traced to each item  assign same average cost per unit becoming more non-volume driven ACCUMULATING COSTS IN PROCESS COSTING o Non-MO is increasing

Changes in cost structure (e.g. automation)  cost to make = incremental cost + opportunity cost = maximum outside price INDICATORS Production managers want to drop profitable products/ wins bids for complex o qualitative factors: product quality, reliability, product strategies products and loses those for simple products/Complex products have high  accept/reject special offer profit margins/profit margins are hard to explain/Develop their own system to o incremental revenue > incremental costs (is there opportunity cost?) calculate product costs (they have lost faith)/No competitors for “profitable” o consider excess/limited capacity products / competitors have unrealistically low prices/Customers no deterred  decisions involving limited resources by price increases/Actual overhead > overhead applied o meet demand for product with highest CM per unit of constrained ACTIVITY BASED COST DRIVERS resource (to full capacity or to quantity demanded)  Facility-level: performed for the entire production process to occur (e.g. o if produced to quantity demanded, usually will have leftover resources, management salaries, insurance, property taxes, building depreciation) then use leftover resources for the other product  Product-level: performed once for each course regardless of number of classes or o managing constraints: work overtime, outsource some processing at students bottleneck step, invest in machines, shift workers to bottleneck,  Batch-level: performed once for each class regardless of number of students steamline process, reduce defects, eliminate waste  Unit-level: performed once for each student  joint products COST DRIVER o incremental revenue from further processing> incremental costs  Degree of correlation: between consumption of activity and cost driver o joint costs are incurred up to the split-off point, they are irrelevant after  Cost of measurement: more activity cost pools  more accurate  high costs that  Behavioural effects: influence behaviour of decision makers o sales value of processed product – sales value of product if it hadn’t ACTIVITY BASED COSTING been processed = incremental revenue  Methodology that can be used to measure both the cost of the cost object and o separable processing costs = incremental cost the performance of activities LECTURE 9: STANDARD COSTS Measures cost of activities/objects STANDARD COSTING Improves allocation of MO to products budgetary control system TWO STAGE PROCEDURE  #1: Identify significant activities (e.g. machinery cost pool), and assign overhead predetermined/standard cost costs to each activity (e.g. maintenance, lubrication, depreciation, electricity) standard quantity: qty allowed for actual output standard price: amt that should have been paid for input used in proportion to resources used #2: identify cost drivers (e.g. machine hours, number of runs, number of units) for STANDARD COST VARIANCES to evaluate actual performance and control costs each activity, then allocate overhead to the products direct material, direct labour and overheads TWO KEY POINTS Large proportion of non-unit level activities (e.g. batch, product, facility) that unit- SETTING STANDARDS analysis of historical data level cost drivers cannot assign costs to accurately o good basis for prediction, need adjustments to reflect Product diversity  consumption ratios differ widely between activities  each price/technological changes, minor changes can render historical cost product is made differently  some use more unit-level/batch-level/productirrelevant, may embody past inefficiencies level than others  no single cost driver can accurately assign OH costs engineering method ISSUES WITH ABC o focus is on what the product should cost Collecting ABC data perfection standard o Interviews & paper trials, storyboard, multidisciplinary proj teams o assumes peak efficiency, lowest material and labour prices, best LIMITATIONS WITH ABC quality, no idle time Substantial resources required to implement and maintain o motivation to achieve lowest costs BUT may discourage employees OR Desire to fully allocate all costs to products encourage them to sacrifice quality for low costs Does not conform to GAAP practical standard Resistance to unfamiliar numbers and reports o normal operating conditions with downtime and wastage Potential misinterpretation of unfamiliar numbers o encourage positive attitudes towards targets AND build continuous LECTURE 8: DECISION MAKING improvement into standard BUT may encourage inefficiency and waste MANAGEMENT ACCOUNTANT’S ROLE direct material  Provide relevant information to management for decision making o price: final delivered cost of materials, net discounts  Tactical decisions (resource commitments that can be easily changed) o quantity: material required for each FG, allow for normal  Long-term decisions inefficiencies RELEVANT INFORMATION direct labour Generating information is costly o rate: wages, fringe benefits, other labour costs Irrelevant data  waste managerial resources (e.g. time to read and process) o hours: labour hours required for one unit (time and motion studies) Information overload  decreases effectiveness of decision making Service organisations MODEL o May be used in any organisation with repetitive tasks 1. Recognise and define problem  2. Identify alternatives + eliminate those that o Relationship between task and output must be established are not feasible  3. Identify costs/benefits + classify them as relevant/irrelevant  o Planning budget vs Flexible Budget vs Actual 4. Total relevant costs/benefits  5. Assess qualitative factors (Static) IDENTIFYING RELEVANT COSTS AND BENEFITS Relevant cost: o one that differs between alternatives o future cost o involves cash flows DIFFERENTIAL APPROACH IS DESIRABLE rarely will there be enough information to evaluate both alternatives  Where quantity purchased =/= quantity used mixing irrelevant and relevant costs will cause confusion and distraction o price variance  use quantity purchased = AQP(AP-SP) ANALYSIS OF SPECIAL DECISIONS o quantity variance  use quantity used = SP(AQU-SQ)  add or drop service WHEN TO INVESTIGATE o Avoidable costs > revenue forgone size of variance (dollar amount/percentage), recurring variances, trends in o Contribution margin approach  CM forgone (Loss) < avoidable FC variances, controllability, favourable variances (may reveal effeciences/may (benefits) mean standard is too loose), cost (time, disruption, cost) and benefits o Comparative income approach (reduced costs when variance is eliminated, improved work practice)  when a product is dropped, the CM immediately is forgone use statistical control charts: plot standard cost variances across time + compare  what might come under differential analysis are components of FC with critical value (e.g. general factory OH, depreciation, general admin expenses RESPONSIBILITIES FOR VARIANCES REMAINS, the rest are GONE)  material variances  make or buy product o cheap but poor quality? Poor scheduling led to rushing purchase at  Advantages: smoother flow or parts, better QC, realize profits higher price?  Disadvantages: companies may fail to take adv of EOS, fail to retain control  Labour variances o cost to buy < cost to make

Production manager  Mix of skill level, employee motivation, quality participation and empowerment, simple measures, positives, timely, includes of production supervision, quality of training provided benchmarking, limited perf measures, linked to rewards Purchased cheap material so more time was needed to process it? Took BEHAVIOURAL EFFECTS Provide information rather than blame, perf reports should distinguish between more time to process it due to poorly maintained equipment? controllable/uncontrollable costs, motivate desirable actions ADVANTAGES OF STANDARD COSTING SEGMENTED INCOME STATEMENTS Management by exception, Sensible cost comparison, Performance evaluation,  Traceable fixed costs arise because of the existence of a segment Employee motivation, stable product costs  Common...