Post on 25-Jun-2015
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Professor-Jose Cintron, MBA-CPCJosecintron.mba@gmail.com
Managerial Accounting 2
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Decision Making Process
1 Identify the various alternatives for a given type of decision. 2. Obtain data necessary to evaluate the various alternatives. 3. Analyze and determine the consequences of each alternative. 4. Select the alternative that appears to best achieve the desired goals. 5. Implement the chosen alternative. 6. Evaluate the results of the decisions against standards
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Managerial Accounting
Managerial accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization's goals. Managerial accounting is an integral part of the management process, and managerial accountants are important strategic partners in an organization's management team.
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Managerial Accounting
Examples of activities performed by managerial accountants are:
1. Determining the cost of providing a service or making a product 2. Assist management in profit planning and formalizing the plans into budgets 3. Determine the behavior of costs and how profit will change as sales and production volumes change 4. Compare actual costs and financial results with budgeted costs and results 5. Providing cost and sales information necessary for management to use to make a decision.
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MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING:
Does not follow GAAP and there are no reporting regulations Prepares reports only for management’s internal use Provides information to make decisions regarding the future Relevance of data is emphasized over reliability Focuses on timeliness of information Nothing is required to be reported Reports what management needs to see Reporting is focused on parts of the organization such as departments or divisions and not on the organization as a whole.
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FINANCIAL ACCOUNTING
Reports are provided outside the organization – external reports Reports past activities – based on a historical perspective Reliability of data is emphasized – reports take more time to provide focus on precise information since they are used outside the company Summarized data for entire company as a whole. Must follow GAAP which has specific required external reports
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Internal vs. External
Internal User Managerial Accounting
OwnersManagersEmployees
External User Financial Accounting
InvestorsCreditorsGovernment
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Product Costing-Why?
A product-costing accumulates the costs incurred in a production process and assigns those costs to the organization's final products.
Product costs are needed for a variety of purposes in financial accounting, managerial accounting, and cost management.
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Product costing in Financial Accounting
Use in Financial Accounting In financial accounting, product costs are needed to value inventory on the balance sheet and to compute cost-of-goods-sold expense on the income statement. Under generally accepted accounting principles, inventory is valued at its cost until it is sold. Then the cost of the inventory becomes an expense of the period in which it is sold.
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Product costing in Managerial Accounting
Use in Managerial Accounting In managerial accounting, product costs are needed to help managers with planning and to provide them with data for decision making. Decisions about product prices, the mix of products to be produced, and the quantity of output to be manufactured are among those for which product cost information is needed.
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Product costing in Use in Cost Management
Use in Cost Management It is hard to imagine how management can control or reduce production costs if management does not have a clear idea of how much it costs to make its product. Thus, product costs provide crucial data for a variety of cost management purposes. Many of the cost management uses of product-costing information will be covered throughout this book.
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Product Costing in Nonmanufacturing
Product Costing in Nonmanufacturing Firms
The need for product costs is not limited to manufacturing firms. Merchandising companies include the costs of buying and transporting merchandise in their product costs. Producers of inventoriable goods, such as mining products, petroleum, and agricultural products, also record the costs of producing their goods.
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Service Firms
The production output of service firms and nonprofit organizations consists of services that are consumed as they are produced. Since services cannot be stored and sold later like manufactured goods, there are no inventoriable. Service businesses record the costs of producing various services for the purposes of planning, cost control, and decision making.
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Job order vs. Process
POR ÓRDENES:
• Objeto de costos:
ordenes • Producción concreta y
variada.• Producción por lotes.• Control analítico.• Producción flexible.• Costos específicos.• Costos unitarios
cambiantes, calculados
al finalizar la orden.
POR PROCESO:
• Objeto de costos:
procesos• Producción uniforme.• Producción masiva
continua.• Control global.• Producción rígida.• Costos promedios.• Costos unitarios
uniformes, calculados
al finalizar el período.
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Job Order Costing Systems
Job-order costing is used by companies with job-shop operations or batch-production operations. In a job-shop environment, products are manufactured in very low volumes or one at a time. Examples of a job-shop environment include feature film production, custom house building, ship building, aircraft manufacture, and custom machining operations. In a batch-production environment, multiple products are produced in batches of relatively small quantity. Examples include furniture manufacture, printing, agricultural equipment, and pleasure boat production.
Job-Order Costing Systems
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Job-order costingIn job-order costing A product-costing system in which costs are assigned to batches or job orders of production. Used by firms that produce relatively small numbers of dissimilar products. , each distinct batch of production is called a job or job order. The cost-accounting procedures are designed to assign costs to each job. Then the costs assigned to each job are averaged over the units of production in the job to obtain an average cost per unit.
Generally speaking, companies prefer doing business with customers who order large quantities rather than small quantities.
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Job order costing
The flow of costs through the manufacturing accounts is essentially the same in both process costing and job-order costing.
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Job Order Cost Record
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Process-Costing SystemsProcess costing is used by companies that produce large numbers of identical units. Firms that produce chemicals, microchips, gasoline, beer, fertilizer, textiles, processed food, and electricity are among those using process costing. In these kinds of firms, there is no need to trace costs to specific batches of production, because the products in the different batches are identical.
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Process Costing
Pag.112 3-23 Job order or process costing
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Cost Flow Process Costing
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Manufacturing
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Income Statement Manufacturing
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Flow of Costs through Manufacturing Accounts page 84
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Job order costing
Purchase MaterialRaw mat. Inventory 10,000 Acct. payable 10,000Use direct material Work in process inv. 34,000 Raw material inventory 34,000Use direct laborWork in process inventory 21,000 Wages payable 21,000Use indirect labor Manufacturing overhead 14,000 Wages payable 14,000
*Last two entries can be combine in one. Continue
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Job order costing
Recording manufacturing overhead. Manufacturing overhead 15,000 Prepaid rent 3,000 Accom. Depreciation Equip. 5,000 Account payable (utilities) 6,000 Prepaid insurance 1,000
Recording selling and adm. Exp. Selling and Adm. Exp. 14,800 wages payable 12,000 account payable 1,000 Prepaid rent 1,500 Other supplies inventory 300
*continue
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Job order costing
Completion of production jobFinish good inventory 48,000 Work in process 48,000
Sales of goods Accot. Receivable 54,000Sales revenue 54,000
Cost of good sold 36,000Finish good inventory 36,000
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Income Statement in retail
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Process CostingFor example, suppose the Silicon Valley Company produced 40,000 microchips during November. The following manufacturing costs were incurred in November.
The cost per microchip is $.15 (total manufacturing cost of $6,000 ÷ 40,000 units produced).
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Job-Order and Process Costing
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What costing system???
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What costing system???
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What Costing System???
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Pag.112 3-23 Job order or process costing?
Manufacturing swimming pool chemicals.Manufacturing custom spas.Architectural firm (building)Manufacturing ceramic tilesManufacturing Yogurt-cheesse Consulting firmCustom emergency vehicles
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Raw materialsAs raw materials are needed for the production process, they are transferred from the warehouse to the production department.
To authorize the release of materials, the production department supervisor completes a material requisition form-A document used by the production department supervisor to request the release of raw materials for production. and presents it to the warehouse supervisor. A copy of the material requisition form goes to the cost accounting department.
There it is used as the basis for transferring the cost of the requisitioned material from the Raw-Material Inventory account to the Work-in-Process Inventory account,
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Material Requisition form
Companies that use a process-cost accounting system would establish a separate Work-in-Process Inventory account for each manufacturing department.
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Direct-Labor Costs
The assignment of direct-labor costs to jobs is based on time records filled out by employees.
A time recordA document that records the amount of time an employee spends on each production job.- is a form that records the amount of time an employee spends on each production job. The time record is the source document used in the cost-accounting department as the basis for adding direct-labor costs to Work-in-Process Inventory and to the job-cost records for the various jobs in process.
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Time Record
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Manufacturing-Overhead Costs
Manufacturing-Overhead CostsIt is relatively simple to trace direct-material and direct-labor costs to production jobs, but manufacturing overhead is not easily traced to Indirect production costs are such as indirect material, indirect labor, utility costs, and depreciation. These costs often bear no obvious relationship to individual jobs or units of product, but they must be incurred for production to take place.
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Predetermined Overhead Rate
The solution to this problem is to apply overhead to products on the basis of estimates made at the beginning of the accounting period. The accounting department chooses some measure of productive activity to use as the basis for overhead application. In traditional product-costing systems, this measure is usually some volume-based cost driver or acivity base.
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Cost driver
A cost driver that is closely associated with production volume, such as direct-labor hours or machine hours. (or activity base A measure of an organizations activity that is used as a basis for specifying cost behavior. The activity base also is used to compute a predetermined overhead rate. The current trend is to refer to the activity base as a volume-based cost driver.), such as direct-labor hours, direct-labor cost, or machine hours. An estimate is made of such as direct-labor hours, direct-labor cost, or machine hours.
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What are cost driver?
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Cost Drivers
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Estimate is made M/O to work in process
An estimate is made of (1) the amount of manufacturing overhead that will be incurred during a specified period of time and (2) the amount of the cost driver (or activity base) that will be used or incurred during the same time period.
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Predetermined Overhead rate
Adirondack Outfitters has chosen machine hours as its cost driver (or activity base). For the year 20x1, the firm estimates that overhead cost will amount to $360,000 and that total machine hours used will be 40,000 hours. The 40,000 budgeted machine hours represent the company's practical capacity for production. This means that 40,000 machine hours are expected to be available for production under normal operating conditions.
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Process or Job Order 3-23
Manu. Household Cleaning Solutions Custom hot tubs/spasArchitectural firmManuf. Ceramic tileProducer of yogurt
Manu. Custom tools sheds.Manu. paper clipsBusiness consultantManu. BalloonsCustom sailboat
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Equivalent Units Supposes there are 1,000 physical units in process at the end of an accounting period. Each of the physical units is 75 percent complete with respect to conversion (direct labor and manufacturing overhead). How much conversion activity has been applied to these partially completed units?
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Term equivalent units
The term equivalent units also is used to measure the amount of direct materials represented by the partially completed goods. Since direct materials are incorporated at the beginning of the production process, the 1,000 physical units represent 1,000 equivalent units of direct material (1,000 physical units × 100% complete with respect to direct materials).
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Products vs. Period Cost
Representing the service industry is Southwest Airlines, a major airline based in the southwestern United States.
Caterpillar is a heavy equipment manufacturer.
Walmart Stores is a large retail firm with merchandising operations throughout most of the nation.
Selling and administrative costs are always period costs on any type of company's income statement.
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Product vs. Period cost
Operating expenses are treated as period costs and are expensed during the period in which they are incurred.
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The distinction between product costs and period costs
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Activity vs. Cost DriverOne of the most important cost classifications involves the way a cost changes in relation to changes in the activity of the organization.
Activity- A measure of an organization’s output of goods or services. The number of automobiles manufactured by General Motors, the number of days of patient care provided by Massachusetts General Hospital, and the number of insurance claims settled by Allstate are all measures of activity.
The activities that cause costs to be incurred are also called cost drivers.
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Variable/Fixed cost
Discuss Variable cost-Fixed cost- ExamplesRelation of cost with variable/fixed cost product per units.
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Variable and Fixed Costs
Variable and Fixed Costs The costs incurred in the Midas service shop that vary directly with activity are variable costs. For example, the cost of lubricant, engine oil, and oil filters is a variable cost, because it varies in proportion to the number of lube-oil-filter (LOF) jobs the shop provides. Thus, a likely cost driver for this cost would be the number of LOF jobs performed. In contrast, any costs that do not tend to vary with service activity are fixed costs. Examples include the Midas shop's managerial salaries, depreciation on equipment and facilities, insurance, and property taxes.
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Controlable vs. Non Controlable Cost
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Opportunity Costs
An Opportunity CostsThe potential benefit given up when the choice of one action precludes selection of a different action. is defined as the benefit that is sacrificed when the choice of one action precludes taking an alternative course of action. If beef and fish are the available choices for dinner, the opportunity cost of eating beef is the forgone pleasure associated with eating fish. Ex. Full time student and P. Job
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Opportunity costs arise in many business decisions
Suppose a baseball manufacturer receives a special order for softballs from the city of Boston. If the firm accepts the softball order, it will not have enough productive capacity (labor and machine time) to produce its usual output of baseballs for sale to a large chain of sporting-goods stores. The opportunity cost of accepting the softball order is the forgone benefit from the baseball production that cannot be achieved. This forgone benefit is measured by the potential revenue from the baseball sales minus the cost of manufacturing the baseballs.
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Sunk Costs
Costs that were incurred in the past and cannot be altered by any current or future decision. are costs that have been incurred in the past. Consequently, they do not affect future costs and cannot be changed by any current or future action. Examples of such costs include the acquisition cost of equipment previously purchased and the manufacturing cost of inventory on hand. Regardless of the current usefulness of the equipment or the inventory, the costs of acquiring them cannot be changed by any prospective action. Hence, these costs are irrelevant to all future decisions.
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Marginal Costs and Average Costs
A special case of the differential-cost concept is the marginal cost-The extra cost incurred in producing one additional unit of output., which is the extra cost incurred when one additional unit is produced.
Marginal costs typically differ across different ranges of production quantities because the efficiency of the production process changes.
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Marginal Cost
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Product and Period Costs
Product and Period Costs Midas purchases auto parts and supplies, such as exhaust pipes, brake pads, oil filters, and engine oil, from vendors. These costs are stored in inventory as product costs until the time period when they are consumed in the repair process. At that time, these product costs become part of cost of goods sold, an expense.
All of Midas' other costs are period costs, and they are expensed as operating expenses during the period they are incurred. Examples of these period costs include employee salaries and wages, utilities, and depreciation on equipment and facilities.
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Direct Costs vs. indirect costs
The direct costs of this service and repair job (the cost object) include the parts and supplies used (lubricant, engine oil, oil filter, and a new muffler) and the wages of the automotive service technician for the time spent on this job.
The many indirect costs of this service job include the shop manager's salary, the depreciation on the building, and national media advertising purchased nationwide by Midas, Inc.
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Controllable and Uncontrollable Costs
Controllable and Uncontrollable Costs Costs that are controllable by the manager include local advertising. A cost that is partially controllable by the manager might include heating costs.
Many of the shop's costs are largely uncontrollable by the shop manager. The depreciation, insurance, and property taxes on the building, for example, are the result of decisions made higher up in the Midas organization
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Opportunity /Sunk Cost
Opportunity and Sunk Costs These cost types all are represented in the Midas auto service business. Suppose the Midas shop manager decides to shut down one of the service bays on a particular day to inspect and maintain the lift and other equipment. Any customer business that is lost that day due to a shortage of service bays would be an opportunity cost of the shut-down decision.
The money spent last year to replace an auto lift is an example of a sunk cost.
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Differential, Marginal, and Average Costs
Differential, Marginal, and Average Costs Suppose the Midas shop owns a small van to make short runs to pick up auto parts needed on short notice. The van needs to be replaced, and two vehicles are under consideration. The difference in the cost of these two alternative vehicles is a differential cost of the vehicle replacement decision. The cost of performing one additional lube-oil-filter (LOF) job in a given time period is the marginal cost of that type of service. The total cost of all LOF jobs in a time period, divided by the number of jobs, is the average cost of an LOF job.
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Flow of Costs through Manufacturing Accounts
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Example of Manufacturing Cost Flows
Suppose that the Bradley Paper Company incurred the following manufacturing costs during 2011. Direct Material 30,000Direct Labor 20,000Factory Overhead 40,000
During 2011, products costing $60,000 were finished and products costing $25,000 were sold for $32,000. Flow of costs through the Bradley Paper Company's manufacturing accounts and the effect of the firm's product costs on its balance sheet and income statement.
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Example of Manufacturing Cost Flows for Bradley Paper Company
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Activity Based Costing 3
(ABC) systems- A two-stage procedure used to assign overhead costs to products or services produced. In the first stage, significant activities are identified, and overhead costs are assigned to activity cost pools in accordance with the way resources are consumed by the activities. In the second stage, the overhead costs are allocated from each activity cost pool to each product line in proportion to the amount of the cost driver consumed by the product line.,
Activity Based Costing often reveal products that were under- or over-costed by traditional costing systems.
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Activity-Based Costing
Some of the cost classification category typically used in activity-based costing unit- level, batch-level, product-sustaining level & facility-level. Activity Based Costing often reveal products that were under- or over-costed by traditional costing systems.
Activity-Based Costing (ABC) can be used in any business or industry.
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Target and actual selling Prices
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ABC costing system
The two-stage cost-assignment process of activity-based costing
We identified eight activity cost pools,which fall into four broad categories.
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Activity Costing System
As a part of the activities for ABC costing system this are some of the tasks associated with an activity-based costing system:
1— Assignment of cost to products2— Calculation of pool rates3— Identification of cost drivers4— Identification of cost pools
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ABC Four Broad Categories
2. Batch level. An activity that must be accomplished for each batch of products rather than for each unit include the setup, purchasing, material handling, quality assurance, and packing/shipping
1.Unit level. Activity An activity that must be done for each unit of production.
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ABC Four Broad Categories
3. Product-sustaining level. This category includes activities that are needed to support an entire product line but are not performed every time a new unit or batch of products is produced.
4. Facility-level-An activity that is required for an entire production process to occur are required in order for the entire production process to occur. Examples of such activity costs include plant management salaries, plant depreciation, property taxes, plant maintenance
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We identified eight activity cost pools
Notice total overhead cost for all eight activity cost pools, $4,896,000
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ABC stage Two
In stage two of the activity-based costing project, Burger and Cook identified cost drivers for each activity cost pool. Then they used a three-step process to compute unit activity costs for each of Patio Grill Company's three product lines, and for each of the eight activity cost pools
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Machine-Related Cost Pool
Machine-Related Cost Pool The machine-related cost pool, a unit-level activity, totals $1,242,000 and includes the costs of machine maintenance, depreciation, computer support, lubrication, electricity, and calibration. Burger and Cook selected machine hours for the cost driver, since a product that uses more machine hours should bear a larger share of machine-related costs
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ABC
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ABCAmounts Computed During ABC Calculations
A key number computed in (column E) is the pool rateThe cost per unit of the cost driver for a particular activity cost pool , which is defined as the cost per unit of the cost driver for a particular activity cost pool. The pool rate for the machine-related cost pool is $5.40, which means that Patio Grill Company's machine-related cost is $5.40 per machine hour. Each activity cost pool will have its own pool rate
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ABC
Now we have seen the type of data that the ABC project team must supply for the machine-related cost pool. In addition, we have studied how the ABC calculations are carried out in order to determine the machine-related activity cost per unit of each type of product (STD, DEL, and ULT). The final conclusion of the ABC analysis for the machine-related cost pool only is given in column J. Thus, under activity-based costing, the following machine-related costs per product unit should be assigned to each of the three product lines.
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We can complete the ABC calculations by including all eight of the activity cost pools. The entire Excel spreadsheet for Patio Grill Company's activity-based costing project is displayed below.
ABC
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Now that we have the activity cost per unit of product for each activity cost pool and each product line, it is straightforward to compute the total unit product cost for each type of grill. To do so, we need only add the direct-material and direct-labor costs for each grill type
Activity cost
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Product Costs from Activity-Based Costing System: Patio Grill Company
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After ABC Costing Comparison of Product Costs and Target Prices from Alternative Product-Costing Systems: Patio Grill Company
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Cost Distortion under Patio Grill Company's Traditional Product-Costing System
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Just in Time Inventory System
Just in time (JIT) is a production strategy that strives to improve a business return on investment by reducing inventory and associated carrying costs.
The philosophy of JIT is simple: inventory is waste. JIT inventory systems expose hidden cost of keeping inventory.
The JIT inventory philosophy defines how inventory is viewed and how it relates to management.Wiki
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ABC Four Broad Categories
2. Batch level. An activity that must be accomplished for each batch of products rather than for each unit include the setup, purchasing, material handling, quality assurance, and packing/shipping
1.Unit level. Activity An activity that must be done for each unit of production.
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ABC Four Broad Categories
3. Product-sustaining level. This category includes activities that are needed to support an entire product line but are not performed every time a new unit or batch of products is produced.
4. Facility-level-An activity that is required for an entire production process to occur are required in order for the entire production process to occur. Examples of such activity costs include plant management salaries, plant depreciation, property taxes, plant maintenance
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Activity Costing System
As a part of the activities for ABC costing system this are some of the tasks associated with an activity-based costing system:
1— Assignment of cost to products2— Calculation of pool rates3— Identification of cost drivers4— Identification of cost pools
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Review- Participation
List 5 manufacturers would most likely use job-order costing?
List 5 manufacturers would most likely use process costing?
The following are a broad, cost classification category typically used in activity-based costing and not in conventional costing. (4)
Sandy's Oil change shop consist of two bays. During the year, the bays complete 11,000 Oil changes and incurred costs of $140,000. If 4,700 of these oil changes were made from bay#1 (the remainder were for the bay#2), costs allocated to the bay one will be???:
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Team Practice-Participation
Eduardo Corporation had 10K units of work in process on April 1. During April, 20k units were completed and as of April 30, 5k units remained in production. How many units were started during April?
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Team Practice-Participation
Enidio Co., had 3,000 units of work in process on April 1 that were 60% complete. During April, 11,000 units were started and as of April 30, 4,000 units that were 40% complete remained in production. How many units were completed during April?