ACCT3104 COMPLETE REVISION. Topic 1 Costing systems, CVP analysis, allocation of indirect costs and PVV

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1 ACCT3104 COMPLETE REVISION Tpic 1 Csting systems, CVP analysis, allcatin f indirect csts and PVV 1.0 Management Accunting (MA) and Thery f the Firm Firm Intermediary between factr and prduct market Adds value transfrming resurces frm ne frm t anther (gds and services) Can cmpare value f factr inputs with value f utputs Rle f MA infrmatin = help managers frmulate strategy t create value Definitin f MA...is a prfessin that invlves partnering in management decisin making, devising planning and perfrmance measurement systems, and prviding expertise in financial reprting and cntrl t assist management in the frmulatin and implementatin f an rganisatin s strategy. The US Institute f MA (IMA) MA vs. Financial Accunting MA FA Purpse Decisin making Cmmunicate financial psitin t utsiders Primary Users Internal managers External users Fcus/Emphasis Future-riented; emphasis n relevance fr planning and Past-riented; verifiability emphasis cntrl Rules D nt have t fllw GAAP; cst GAAP cmpliant; CPA/CA audited vs. benefit Time Orientatin Ultra current t very lng time hrizns Histrical mnthly, quarterly and annual reprts Behaviural Issues Designed t influence emplyee behaviur Purpses f cst infrmatin External reprting Inventry valuatin and COGS Internal reprting Decisin making Pricing Prduct mix Cst management (reductin/cntrl) Encurage desired behaviurs Perfrmance measurement Calculating unit cst f each prduct Depends n csting system: Treatment f fixed MOH csts Absrptin csting (Financial reprting) Variable csting (Managerial decisin making) Thrughput csting Characteristics f manufacturing prcess and prducts Jb csting ABC Prcess Jint Indirect effects n emplyee behaviur

2 vs. (budgeted) OH rate and allcatin base csting (n variance) Nrmal csting csting (bth = variance with end f year adjustment) Depends n hw csts are classified Can be traced r nt Direct csts (DM and DL) Indirect csts (OH) Cst t btain and transfrm materials int finished prducts Manufacturing/prduct/inventriable csts (affect inventry balance sheet, COGS incme statement) DM, DL, OH DM and DL = Prime csts DL and OH = Cnversin csts Nn-manufacturing/perid/expensed csts (expensed in the incme statement) Cst behaviur related t changes in the cst driver Variable csts Fixed csts Variable csting CVP analysis Shws hw alternative actins affect prfit Fcuses n relatinship between cst, vlume and prfit Enables us t: Determine break even pint f prductin (BEP) Graphical methd Equatin methd (q = F + Prfit / (p - VC) Predict hw changes in the level f prductin, selling price r csts will affect prfit CVP is useful fr planning and bserving the sensitivity f prfit t changes in csts and vlume CVP Analysis The assumptins It is pssible t divide csts int FC and VC elements VC are prprtinal t vlume/activity FC are cnstant ver the utput range Sales prices remain unchanged Expected levels f efficiency and prductivity are unchanged Vlume is the nly factr affecting csts Only single prduct OR cnstant sales mix Prductin = sales Tracing and allcating csts Nrmal DM DL OH (AQ x AP) (AH x AR) (AQ x AOHR) (AQ x AP) (SQ x SP) (AH x AR) (SH x SR) Nrmal (AQ x BOHR) (SQA/O x AQ x SOHR) End f perid adjustments (when OH allcated des nt equal actual) Tw appraches:

3 Prratin Prratin f under r ver allcated verhead amng ending WIP, FG and COGS Basis t prrate: A) Ttal amunt f MOH allcated (befre prratin) t WIP, FG and COGS B) Ending balance (befre prratin) f WIP, FG and COGS Write ff t COGS Use OH Cntrl and OH allcated t clse OH accunts t COGS Nrmal csting system OH csts can be variable r fixed VOH csts increase in ttal as utput increases VOH allcated = AQ x HVOHR Under/ver allcated VOH = spending variance FOH csts remain the same even thugh the prductin increase r decrease FOH = AQ x BFOHR Under/ver allcated FOH = Spending Variance + PVV Spending variance = AFOH-BFOH PVV = BFOH FOH allcated Allcating verhead Plant-wide MOH = indirect labur + indirect materials + ther OH MOH allcated t prducts based n an allcatin base ABC Attempts t cst prducts n the basis f the resurces actually cnsumed by the utput Uses activities t link the cst f resurces cnsumed t prducts Resurces have csts Activities cnsume resurces Prducts (r cst bjects) cnsume activities Tpic 2 Absrptin, Variable and Thrughput Csting. Capacity Analysis and Breakeven Classificatin f Csting Systems Inventry valuatin methd Absrptin Variable Thrughput Cst flw assumptin FIFO Weighted average 1.0 Inventry Valuatin Methds Absrptin vs. Variable vs. Thrughput csting The differences between absrptin csting and variable csting methds are based n the treatment f fixed manufacturing verhead Under variable csting, FMOH csts are excluded frm inventriable csts and are a cst f the perid in which they are incurred Under absrptin csting, FMOH csts are inventriable (asset) and becme expenses (COGS) nly when a sale ccurs (required under AASB102) Under bth methds, all nn-mc (such as R&D and marketing), whether variable r fixed, are recrded as expenses when incurred The differences between variable csting and thrughput csting are based n the definitin f variable csts

4 Thrughput csting Super variable csting nly DM csts are included as inventriable csts All ther csts are perid csts Nt widely adpted What is the difference between AC and VC Treatment f FMOH AC required absrptin f all MC int unit prduct cst VC emphasises cst behaviur 2.0 Cmparing Incme Statements Absrptin vs. Variable Csting When prductin exceeds sales: AC > VC (lwer cst f inventry and higher COGS) and visa versa General rule t calculate AC given VC: Add FOH in ending inventry Subtract FOH in beginning inventry r visa versa Relatin between prductin and sales Effect n Inventry Relatin between variable and absrptin incme Prductin > Sales Inventry increases Absrptin > variable Prductin < Sales Inventry decreases Absrptin < variable If Prductin = sales N change Absrptin = variable Advantages f VC vs AC It highlights the Cntributin Margin (CM) and is cmpatible with techniques used fr management decisin marking (particularly shrt term e.g. CVP analysis) Classifying csts accrding t cst behaviur (as ccurs in VC) is mre useful fr management decisin making Eliminates prblems with allcatin f FOH and calculatin f fixed OH rates It avids the prblem f manipulatin f prductin in rder t increase prfit (IMPORTANT) BUT nt allwed in AASB 102 Advantages f AC AC better reflects the cst f inventries Inventries shuld carry a FC cmpnent because bth FC and VC are necessary t prduce the gds. The FOH cmpnent f inventry represents a future ecnmic benefit in the same way as the variable cmpnent sale f inventry will generate revenue in future perids AC satisfied the matching principle. It expenses csts related nly t units sld. It avids fictitius lsses being reprted e.g. in firms with seasnal prductin activities Under VC if yu prduce this perid and sell next perid yu can shw a large lss in the perid when yu are prducing because yu expense all FOH but have n revenue t match it with Wrks better fr firms with higher FC f prductin 3.0 Capacity cncepts and analysis Budgeting fr the size f the allcatin base (BQ) BFOHR = BOH Csts / BQ BQ Budgeted quantity f utput r units prduced depends n different cncepts f capacity The apprpriate level f capacity is a strategic management decisin T much capacity = incur csts f unused capacity T little capacity = demand may g unfilled The capacity level chsen will affect the BFOHR

5 Capacity levels 1) Supply side available capacity (hw much can I prduce) Theretical capacity Practical capacity 2) Demand side custmer demand (hw much can I sell/hw much shuld I prduce) Nrmal capacity utilizatin Master-Budget capacity utilizatin Theretical capacity The abslute maximum prductin capacity (utput) at full efficiency all the time (365 days a year) e.g. n maintenance, interruptins Ideal target, but unattainable Highest denminatr level unrealistically small FOH csts/unit Practical capacity The maximum utput that culd be realised if everything perates efficiently allwing fr unavidable interruptins Theretical capacity less planned dwn-time (lwer units/day, lwer days per year) Prvides supplying capacity (max units that can be prduced) -> FOH csts/unit f supplying capacity The cst f capacity can be divided int cst f capacity used and unused Useful fr managing unused capacity: leasing excess, new prducts, etc. Nrmal Capacity The capacity that a firm uses t satisfy lng-run average custmer demand Cmputed ver mre than ne year and includes seasnal, cyclical and trend factrs Master-Budget Capacity The capacity that a firm expects t use t meet demand fr the current budget perid (year) Useful t evaluate marketing manager s perfrmance (master budget is the principal shrt-run planning and cntrl tl It can cause a dwnward demand spiral the cntinuus reductin in the demand fr prducts when cmpetitr prices are nt met capacity The actual prductin activity Key factrs in chsing a capacity level Managers must chse a different capacity level fr different purpses including Prduct csting and capacity management Pricing Perfrmance evaluatin External reprting and tax requirements Fr external reprting chice will affect size f PVV and h this is dispsed f will impact incme Theretical capacity is rarely used nt real Practical capacity is frequently used highlights the cst f capacity acquired but nt used and may direct manager s attentin twards mre effective capacity management Nrmal and master-budget capacity hide unused capacity (unused capacity csts are included in the FOH cst/unit) Master budget capacity can lead t a dwnward demand spiral 4.0 The effect f capacity n Operating Incme PVV = BFOH FOH csts allcated PVV = BFOH Aq x BFOH rate PVV = BFOH Aq x (BFOH csts/denminatr level)

6 Hw is PVV dispsed at the end f the year? Adjusted allcatin rate apprach Prratin apprach Write-ff t COGS apprach 5.0 Sme issues in planning and cntrl f capacity csts 1) Dwnward demand spiral Fixed markup will cause price t cntinue t rise in perids n increased cmpetitin 2) Breakeven pints BEP under VC Q BEP = F + 0 CM BEP under AC (accunts fr the difference between prductin/sales) F [BFOHR (Q BEP AQ) Q BEP = CM Tpic 3 Inventry Management, EOQ and JIT 1.0 Intrductin Managing inventry Mst rganisatins are fcused n managing activities and csts acrss the supply chain f the business t imprve perfrmance Management f inventry is a key cnsideratin in dealing with suppliers and in imprving rganisatinal perfrmance. The curse cnsiders tw appraches fr inventry management: 1) EOQ apprach t determine ptimum rder quantities fr inventry 2) JIT inventry management systems that allw businesses t manage inventry and prductin mre effectively The supply chain f a business Supply chain management can invlve creating clse relatinships with suppliers and custmers, managing csts, measuring the perfrmance f activities, suppliers and custmers and accelerating the time-t-market f new prducts Managing inventry Purchased material and cmpnents can make up a large prprtin f the cst f prducing a prduct Many rganisatinal activities and csts are driven by the purchasing activity, e.g. Selecting a supplier Cmmunicating with supplier Inspecting materials delivered Strng inventry Cst reductins d nt equal using suppliers with cheapest materials r cmpnents, r rdering in mst cst effective quantities Cst reductins = reliable suppliers that can meet desired criteria (quality; n-time delivery, time ) Cnsider the fllwing criteria fr selecting suppliers Price Quality Delivery Perfrmance histry Capacity Cmmunicatin systems Gegraphical lcatin