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Transcript of Cost Management Accounting Techniques 1204758241780170 2
7/31/2019 Cost Management Accounting Techniques 1204758241780170 2
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Cost & Management
Accounting Techniques Must for Effective Decision Making
BY:
A AMIR
INSTITUTE OF COST & MANAGEMENT ACCOUNTANTS OF PAKISTAN
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CONTENTS
Cost & Management Accounting
Cost & Management Accounting Techniques
Conclusion
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Cost & Management Accounting
The Process of
Identifying
Measuring Analyzing
Interpreting
Communicating Information
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Techniques
The Make or Buy Decision Just-In-Time
Inventory Management
Budgeting
Variance Analysis
Const-Volume-Profit Analysis
Activity Based Costing
Linear Programming
Enterprise Cost Management
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The Make or Buy Decision
A decision concerning whether an item shouldbe produced internally or purchased from an
outside supplier is called a “Make or Buy” decision.
Let’s look at the Astech Company example.
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The Make or Buy Decision
Astech manufactures part 4A that is used inone of its products.
The unit product cost of this part is:
Direct materials $ 9
Direct labor 5
Variable overhead 1
Depreciation of special equip. 3 Supervisor's salary 2
General factory overhead 10 Unit product cost 30$
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The Make or Buy Decision Equipment used to manufacture part 4A has no resale value.
Total general factory overhead, which is allocated on thebasis of direct labor hours, would be unaffected by thisdecision.
The $30 unit product cost is based on 20,000 parts producedeach year.
An outside supplier has offered to provide the 20,000 parts at
a cost of $25 per part.
Should we accept the supplier’s offer?
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Cost
Per Unit Cost of 20,000 UnitsMake Buy
Outside purchase price $ 25 $ 500,000
Direct materials 9$ 180,000
Direct labor 5 100,000
Variable overhead 1 20,000
Depreciation of equip. 3 -
Supervisor's salary 2 40,000
General factory overhead 10 - Total cost 30$ 340,000$ 500,000$
The Make or Buy Decision
20,000 × $9 per unit = $180,000
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Cost
Per Unit Cost of 20,000 UnitsMake Buy
Outside purchase price $ 25 $ 500,000
Direct materials 9$ 180,000
Direct labor 5 100,000
Variable overhead 1 20,000
Depreciation of equip. 3 -
Supervisor's salary 2 40,000
General factory overhead 10 - Total cost 30$ 340,000$ 500,000$
The Make or Buy Decision
The special equipment has no resalevalue and is a sunk cost.
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Cost
Per Unit Cost of 20,000 UnitsMake Buy
Outside purchase price $ 25 $ 500,000
Direct materials 9$ 180,000
Direct labor 5 100,000
Variable overhead 1 20,000
Depreciation of equip. 3 -
Supervisor's salary 2 40,000
General factory overhead 10 - Total cost 30$ 340,000$ 500,000$
The Make or Buy Decision
Not avoidable; irrelevant. If the product is dropped,it will be reallocated to other products.
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The Make or Buy Decision
Should we make or buy part 4A?
Cost
Per Unit Cost of 20,000 UnitsMake Buy
Outside purchase price $ 25 $ 500,000
Direct materials 9$ 180,000
Direct labor 5 100,000
Variable overhead 1 20,000
Depreciation of equip. 3 -
Supervisor's salary 2 40,000
General factory overhead 10 - Total cost 30$ 340,000$ 500,000$
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The Make or Buy Decision
DECISION RULE
In deciding whether to accept the outsidesupplier’s offer, Astech isolated the relevant
costs of making the part by eliminating: The sunk costs.
The future costs that will not differ betweenmaking or buying the parts.
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Techniques
The Make or Buy Decision Just-In-Time
Inventory Management
Budgeting
Variance Analysis
Const-Volume-Profit Analysis
Activity Based Costing
Linear Programming
Enterprise Cost Management
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Impact of JIT Inventory Methods
In a JIT inventory system . . .
Productiontends to equalsales . . .
So, the difference between variable andabsorption income tends to disappear.
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Techniques
The Make or Buy Decision
Just-In-Time
Inventory Management
Budgeting
Variance Analysis
Const-Volume-Profit Analysis
Activity Based Costing
Linear Programming
Enterprise Cost Management
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Inventory Management
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Qunatity Discounts
Avoid DisturbanceReduce number of ordering / setupHedge against inflationMeet Unexpected Demands
Quantity Discounts
When to order
How much to orderBuffer Stock Maximum InventoryHow often to review stock
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Techniques
The Make or Buy Decision Just-In-Time
Inventory Management
Budgeting
Variance Analysis
Const-Volume-Profit Analysis
Activity Based Costing
Linear Programming
Enterprise Cost Management
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Budgeting
Define goaland objectives
Uncover potentialbottlenecks
Coordinateactivities
Communicatingplans
Think about andplan for the future
Means of allocatingresources
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Techniques
The Make or Buy Decision Just-In-Time
Inventory Management
Budgeting
Variance Analysis
Const-Volume-Profit Analysis
Activity Based Costing
Linear Programming Investment Decision
Robust Decision
Enterprise Cost Management
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Variance Analysis
Material Variances
Labor Variances
Factory Overhead Variances
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Techniques
The Make or Buy Decision Just-In-Time
Inventory Management
Budgeting
Variance Analysis
Const-Volume-Profit Analysis
Activity Based Costing
Linear Programming Investment Decision
Robust Decision
Enterprise Cost Management
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50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
- 100 200 300 400 500 600 700 800
CVP Graph
Fixed expenses
Units
Total Expenses
Total Sales
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-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
- 100 200 300 400 500 600 700 800
Units
CVP Graph
Break-even point
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Equation Method
Profits = Sales – (Variable expenses + Fixed expenses)
Sales = Variable expenses + Fixed expenses + Profits
OR
At the break-even point
profits equal zero.
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Techniques
The Make or Buy Decision Just-In-Time
Inventory Management
Budgeting
Variance Analysis
Const-Volume-Profit Analysis
Activity Based Costing
Linear Programming Investment Decision
Robust Decision
Enterprise Cost Management
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Activity Based Costing (ABC)
ABC is designed toprovide managers
with cost informationfor strategic and
other decisions thatpotentially affect
capacity andtherefore “fixed”
costs.
ABC is agood supplement to our traditional
cost system
I agree!
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Techniques
The Make or Buy Decision Just-In-Time
Inventory Management
Budgeting
Variance Analysis
Const-Volume-Profit Analysis
Activity Based Costing
Linear Programming Investment Decision
Robust Decision
Enterprise Cost Management
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LP Applications
1. Development of a production schedule thatwill
satisfy future demands for a firm’s
production while minimizing total production and
inventory costs
2. Selection of product mix in a factory to make best use of machine-hours and
labor-hours available
while maximizing the firm’s products
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LP Applications
3.
Determination of grades of petroleumproducts to yield the maximum profit
4. Selection of different blends of raw
materials to feed mills to produce finishedfeed combinations at minimum cost
5. Determination of a distribution systemthat will minimize total shipping cost fromseveral warehouses to various marketlocations
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Techniques
The Make or Buy Decision Just-In-Time
Inventory Management
Budgeting
Variance Analysis
Const-Volume-Profit Analysis
Activity Based Costing
Linear Programming
Enterprise Cost Management
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ECM
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