BEC Lecture cost measurement and planning control a....ppt

1、Business, Environment & Concepts Lecture Series Four: Cost Measurement & Planning Control and Analysis,Calculation of Cost,Three Components: Direct Material + Direct Manufacturing Labor+ Manufacturing Overhead. Three Costing Systems: Job Order Process Activity Based ( can be used either in job order

2、 and process),Calculating: Cost of Goods,Cost of Goods Manufactured Cost of Goods Sold,Cost of Goods Manufactured,Formula: Beginning Work in Process +Direct Materials +Direct Manufacturing Labor +Manufacturing Overhead - Ending Work in Process = Cost of Goods Manufactured,Direct Materials,Definition

3、: cost of materials directly and conveniently traceable to a product. Formula: Beginning Inventory +Purchase -Ending Inventory = Direct Material Used,Manufacturing/Factory Overhead,Definition: Includes indirect manufacturing labor cost, supplies, utilities, depreciation and taxes, etc. NOTE: Only re

4、lated to manufacturing, nothing more!,Cost of Goods Sold,Formula: Beginning Finished Goods +Cost of Goods Manufactured -Ending Finished Goods = Cost of Goods Sold,Important Terminology related to Cost of Goods,Key Concepts: Prime Cost: Direct Manufacturing Labor +Direct Materials Conversion Cost: Di

5、rect Manufacturing Labor +Manufacturing Overhead,Job Order Costing,Suitable for customer specified products or particular services e.g. special machine, legal services. Each Job is a cost center Total unfinished jobs equal the work in process account,Important ChartWork in Process Control,Important

6、Chart 2Finished Goods Control,Accounting for Overhead,Include everything EXCEPT direct materials and direct manufacturing labor Cannot be directly traced to final product Must be applied rather than directly charged Can be fixed or variable, estimated,Predetermined Overhead Rate,Formula Denominator:

7、 Usually labor hours or machine hours, estimated for the forthcoming year Nominator: Estimated for the forthcoming year,Overapplied VS Underapplied,Overapplied: Overhead cost is overestimated (nominator factor) More than expected activities take place ( more units) Actual overhead cost were less tha

8、n expected,Overapplied VS Underapplied(Continued),Underapplied: Overhead cost is underestimated (nominator factor) Less than expected activities take place ( less units) Actual overhead cost were more than expected,Disposition of Under/Over Applied Overhead,If immaterial, simply write it off If sign

9、ificant, allocate it into three accounts (1) Work in Process (2) Finished Goods, (3) Cost of Goods Sold The prorating rate is usually based on the weights of each account.,Service Department Cost Allocation,Best allocate cost of service department to the production Methods: Direct Methods Step Metho

10、d,Direct Method,Just Locate the cost to production departments Ignore the mutual usage between service department Easiest way to compute,Step Method,Allocate Cost to both service departments and production department Select the service department with highest cost Allocate the cost of this departmen

11、t to production departments and other service departments. Repeat the above process Cost of service department are never allocated back to department whose costs have been allocated,Process Costing,Applicable to the continuous process of production of same and similar products such as oil refining a

12、nd chemical production Each processing department is a cost center Computation based on PECUA Physical flow of units Equivalent units of production Cost to allocate Unit Costs Allocate total costs,Equivalent Unit Cost,Costs must be attached to the completed units as well as to the units that are par

13、tially complete at the end of each period. Taking into account the partially completed units and by making use of equivalent units. An equivalent unit of direct material, direct labor, or conversion costs (direct labor plus factory overhead) is equal to the amount of direct material, direct labor, o

14、r conversion costs necessary to complete one unit of production Example: 10,000 actual units of DM, DL, or OH in process that are 75% complete would represent 7,500 equivalent units of (DM, DL, or OH) production.,Calculation of EUC,Using Weighted-Average The weighted-average cost method averages the

15、 cost of production during the period with the costs in the beginning work-in-process inventory. Using First-In First-Out (FIFO) the ending inventory is priced at the cost of manufacturing during the period, assuming that the beginning inventory was completed during the period.,Calculation of Equiva

16、lent Unit Costs(Average Weighted),Obtain the Total units, completed units and work-in-process units Calculate the equivalent units based on the given completion percentage, ignore the percentage done at the beginning of the process. Obtain the total manufacturing costs ( direct materials, labor and

17、overhead cost) Calculate the cost per equivalent unit Calculate the costs for completed units and equivalent units,FIFO Assumption,The calculation of cost is based on first in first out assumption Break the equivalent units into previous period and current period The completed equivalent unit is The

18、 Period Completed Unit-Beginning Inventory completed +Ending Inventory completed The cost is always current period cost,Comparison of FIFO and Weighted-Average,Unit Components Equivalent unit calculation under FIFO consists of three elements representing current period production Weighted-average me

19、thod consists of only two elements that embrace units completed and available in ending inventory. Cost Components FIFO represents only costs incurred in the current period. The weighted-average approach includes both current period units plus prior period units.,Comparison Presentation,Spoilage in

20、Process Costing,Normal Spoilage: (Inventory cost) A necessary cost and is a product cost Included in manufacturing cost Calculate the spoilage cost based on the percentage completed per unit cost is automatically increased as a result of spoilage because actual costs are spread over fewer equivalent

21、 good units rather than actual units produced. Abnormal Spoilage (Period cost) Not included in cost of goods sold the per unit cost is based on actual units. Equivalent units of production include spoiled units. The cost of abnormal spoilage is normally expensed separately on the income statement as

22、 a period expense.,Activity-Based Costing,Based on two principles Activities consume resources Resources are consumed by products, services and other cost objective Allocate overhead cost based on resources consumed by each activity. Identify appropriate cost driver and allocate cost Cost drivers ca

23、n be transaction related and volume related,Value Added Activities VS Non Value Added Activities,Value Added Activities: Increase the worth of the products or services. Non Value Added Activities: increase the cost of products but do not increase the value Make all efforts to eliminate the non value

24、 added activities.,Terminology,Activity An activity is any work performed inside a firm. Activities are identified for ABC. Resource A resource is an element that is used to perform (or applied to perform) an activity. Cost Drivers Cost drivers used in ABC are activity bases that are closely correla

25、ted with the incurrence of manufacturing overhead costs in an activity center, and they are often used as allocation bases for applying overhead costs to cost objects. Resource Cost Driver A resource cost driver is the amount of resources that will be used by an activity. Activity Cost Driver An act

26、ivity cost driver is the amount of activity that a cost object will use, and it is used to assign the costs to the cost objects. Activity Centers An operation necessary to produce a product is an activity center,Example,Basic Operations of ABC Costing,1. Analysis of Cost Drivers Identify the activit

27、y centers and the activities that drive the costs in each activity center. 2. Accumulate Costs in Cost Pools Accumulate the costs of each activity. Many small cost pools are accumulated. 3. Trace Indirect Costs to Activity Centers Trace any indirect costs to the activity centers that can be assigned

28、 without allocation. 4. Allocate Remaining Indirect Cost Pools Allocate the remaining indirect cost pools. Costs of each activity are applied to cost objects based on the most appropriate cost drivers. 5. Divide Assigned Costs by Level of Activity for the Cost Center Divide the costs assigned to the

29、 activity center by the estimated level of activity for the center to derive an application rate for that center. 6. Cost the Product Cost the product by multiplying their demand for the resources of an activity center by the rate for that activity center,ABC Costing Testing Directions,Conceptual ch

30、ecking: must be crystal clear about the ABC costing concepts, assumptions and purposes Specific Calculation Targeted ABC resource allocation: straight forward. Comparison to Standard Costing System: only relevant information is considered!,Conceptual Checking 1,Conceptual Checking 2,Specific Calcula

31、tion 1,Specific Calculation 2,Joint Products,More than two products are produced up to the split-off point Cannot be produced by themselves Split-off point: the point of production at which the joint products can be individually identified or removed from the joint or common process.,Joint Cost Allo

32、cation by Unit Volume Relations,Common costs must be allocated by some arbitrary means such as unit volume,Calculating Joint Cost,Sales Value at Split-off Based on the sales value of each products Obtain the ratio and respective costs Estimated Net Realizable Value Method Used when sales value at jo

33、int not obtainable Based on final sales value minus separate cost Obtain the ratio and respective cost,Relative Net Realizable Values at Split-off,Net realizable value equals sales value less cost of completion and disposal. Relative sales value at split-off point is used purely for inventory costin

34、g and is of little use for cost planning and control purposes. A: Sales Price Quotations Available at Split-off The relative sales value at split-off point can be used to allocate joint costs if sales price quotations are known or can be determined. The relative sales value approach assigns costs to

35、 the separate joint products in relation to their market values.,Sales after split-off can be determined,Sales Values Not Available at Split-off,If sales values at split-off are not explicitly available, computation of sales values at split-off are derived on the ultimate sales value at point of sal

36、e. Work Backwards Working backwards estimates net realizable values at the split-off point. Separable Costs Identifiable costs incurred after the split-off point (separable costs) must be subtracted from the final selling price to arrive at the net realizable value at split off.,By Products,Have lit

37、tle market value Frequently valued at market and net realizable value Accounted as contra production cost to reduce the joint costs Disclosed as ordinary sales/other income/contra to cost of sales Applied to Main Product: Any proceeds from the sale of by products are a reduction to common costs for

38、joint product costing. The revenue earned from their sale is credited to joint costs incurred either at the time of production or the time of sale. Miscellaneous Income: As an alternative, revenue from the sale of by-products may be credited to miscellaneous income.,Joint/By Product Testing Directio

39、ns,Conceptual Checking Make sure the understanding of split-off : before VS after Relevant cost related to split-off point Specific Calculation Pay great attention to allocation base! Frequently tested Decision Making Make sure what cost is relevant Make sure the cost allocation base Make sure the e

40、xternal decision VS internal decision,Conceptual Checking,Specific Calculation,Decision Making,Estimating Cost Function,A mathematic expression as to how cost changes with the activity changes The relationship is linear (straight line) within the relevant range The relevant range: the range of costs

41、 for which the relationship is predicable The relevant range is the range for which the assumptions of the cost driver (i.e., linear relationship with the costs incurred) are valid. When the cost driver activity is no longer within the relevant range, the variable and fixed cost assumptions for that

42、 cost driver cannot be used to allocate costs to cost objects.,Cost Estimation Methods,Industrial Engineering Method Conference Method Account Analysis Method Quantitative Methods Formal Mathematical Models Collect historical data for estimation,Quantitative Method,Scattergraph Method Draw dots on t

43、he charts Link the most obvious dots into a line Lack precision,Quantitative Method(Continued),High-Low Method List all observations Find the highest and lowest points for costs and activities Obtain the slope by the formula: Obtained the fixed cost via either the highest or lowest cost,Quantitative

44、 Method(Continued),Regression Analysis Linearity is the assumption Y=a+bx R2 : coefficient of determination , the closer to 1, the better fit R2 is computer generated and shown in the question. No worries! Can be several variables.,Example Continued,A Plot,Example Continued,Correlation Analysis,The

45、relationship between variables From 1 to 1 Negative means inverse relationship Positive means positive relationship,Trend Analysis,Time Series The independent variable is time period The dependent variable is the forecasted object,Trend Analysis (Example),Trend Analysis (Example),Critical Indicators

46、,Adjusted R Squared (Coefficient of Determination) : Goodness of Fit T-Statistics: The significance of relationship. The higher, the better P-value: the probability that this relationship occurs by chance, the lower, the better Formula: Sales=58933.33+1421.212*period,Multiple Regression,Using two or

47、 more variables to forecast Please refer to Textbook Page 325 and 326,Critical Indicators,Adjusted R Square Standard Error of the Estimates and Confidence Level: Forecasting the possible range of the estimate F- Statistics: test whether the relationship occurs by chance. Must be greater than signifi

48、cance F,Possible Disturbing Factors,Multicollinearity: two or more independent variables have high correlation with one another Resulting low t-stats or illogical signs Autocorrelation: Error terms are not randomly distributed and independent An indicator that indicating a major independent variable

49、 is not included.,Cost Volume Profit (CVP) Analysis,Provide profitability estimates Often estimate breakeven Profit is a function of sales, variable costs and fixed costs Profit(NI)=Sales(S)-Fixed Cost(FC)-Variable Cost(VC) NI=S-FC-VC Contribution Approach: identifies the contribution of each transa

50、ction to covering fixed-costs and in computing breakeven point in revenue dollars or units,Breakeven Analysis,Breakeven means there is no profit. NI=0 S=FC+VC Example, if widgets are sold at 2/unit, variable costs are 0.4/unit, fixed costs are 20,000, what is the breakeven units? 2X=0.4X+20,000 X=12

51、,500 Units -Breakeven Units My suggestion: if possible, always use “X” to perform the calculation.,Terminology and Calculation Shortcut,Contribution Margin(CM): Sales-Variable Cost Contribution Margin Percentage(CMP)=Contribution margin/sales Breakeven Units= FC/CM Previous question: CM=1.6 FC=20,00

52、0 Breakeven units= 20,000/1.6=12,500 Breakeven Dollar: FC/CMP Previous question: CMP=1.6/2=0.8 FC=20,000 Breakeven dollars= 20,000/0.8=25,000 My suggestion: you only need to understand what contribution margin is. If Ok with the short-cut, take it. If not ok, use X to perform calculation,More Comple

53、xes,Target Net Income: NI=S-VC-FC Example, if widgets are sold at 2/unit, variable costs are 0.4/unit, fixed costs are 20,000, desired net income is 5,000, what is the sales units? 5,000=2X-0.4X-20,000 X=15,625 Units -Profit Sales Units,More Complexes (continued),Target Net Income Percentage Sales S

54、ame Formula NI=S-VC-FC Example, if widgets are sold at 2/unit, variable costs are 0.4/unit, fixed costs are 20,000, desired net income is 30% of net sales, what is the sales units? 0.3*2X=2X-0.4X-20,000 X=20,000 Units -Profit Sales Units,More Complexes (continued),If No per unit information given Sa

55、me Formula NI=S-VC-FC Example, if variable costs are 20% of sales, fixed costs are 20,000, what is the breakeven dollars? X=0.2X+20,000 X=25,000 dollars Breakeven Or FC/CMP=20,000/0.8=25000 dollars-Breakeven,More Complexes: Decision Making,Example, if widgets are sold at 2/unit, variable costs are 0

56、.4/unit, fixed costs are 20,000, a new machine will increase fixed costs by 5,000, but variable costs will be cut by 20%. If the selling price is cut by 10%, what is breakeven sales units?,More Complexes: Decision Making(Calculation),S=VC+FC 1.8X=0.32X+25,000 X=16892 -Breakeven Units Or FC/CM=25,000

57、/(1.8-0.32)=16,892,Reminders Using X Equation,If unit price is given, x refers to the unit Calculation result is the quantity of final unit If just giving contribution margin percentage, x refer to the revenue (sales). Calculation result is the dollar amount of sales If not using equation, must memo

58、rize clearly the relationship regarding contribution margin and contribution margin percentage and fixed cost (or plus),Complexities: Changing selling price,Previously, we calculate breakeven units and breakeven dollars. They assume contribution margin is fixed. However, CPA exam could test changing

59、 selling price. Remember, the new selling price does not have relationship to the previous contribution margin Calculation Step: First, obtain the original contribution margin and find the variable cost/unit Second, set new selling price as X and the total sales would be “X*Unit” and use this to subtract fixed cost to equate targeted net income Solve the selling price through the equation.,If Tax is Involved,Breakeven analysis is pre-tax calculation If profit is based on after-tax, must convert into pre-tax profit Then follow the calculation