Cost & Management Accounting Techniques
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Transcript of Cost & Management Accounting Techniques
Cost & Management Cost & Management Accounting TechniquesAccounting TechniquesMust for Effective Decision Must for Effective Decision MakingMaking
BY:BY:
AAAMIRAMIR
INSTITUTE OF COST & MANAGEMENT ACCOUNTANTS OF PAKISTAN
CONTENTSCONTENTS
Cost & Management AccountingCost & Management Accounting
Cost & Management Accounting Cost & Management Accounting TechniquesTechniques
ConclusionConclusion
Cost & Management AccountingCost & Management Accounting
The Process of IdentifyingMeasuringAnalyzingInterpretingCommunicating Information
TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Enterprise Cost ManagementEnterprise Cost Management
The Make or Buy DecisionThe Make or Buy Decision
A decision concerning whether an item A decision concerning whether an item should be produced internally or should be produced internally or
purchased from an outside supplier is purchased from an outside supplier is called a “Make or Buy” decision.called a “Make or Buy” decision.
Let’s look at the Astech Company example.Let’s look at the Astech Company example.
The Make or Buy DecisionThe Make or Buy Decision Astech manufactures part 4A that is Astech manufactures part 4A that is
used in one of its products.used in one of its products. The unit product cost of this part is: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$
The Make or Buy DecisionThe Make or Buy Decision Equipment used to manufacture part 4A has no resale Equipment used to manufacture part 4A has no resale
value.value.
Total general factory overhead, which is allocated on Total general factory overhead, which is allocated on the basis of direct labor hours, would be unaffected by the basis of direct labor hours, would be unaffected by this decision.this decision.
The $30 unit product cost is based on 20,000 parts The $30 unit product cost is based on 20,000 parts produced each year.produced each year.
An outside supplier has offered to provide the 20,000 An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part.parts at a cost of $25 per part.
Should we accept the supplier’s offer?Should we accept the supplier’s offer?
Cost Per Unit Cost of 20,000 Units
Make BuyOutside 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 DecisionThe Make or Buy Decision
20,000 × $9 per unit = $180,00020,000 × $9 per unit = $180,000
Cost Per Unit Cost of 20,000 Units
Make BuyOutside 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 DecisionThe Make or Buy Decision
The special equipment has no resale The special equipment has no resale value and is a sunk cost.value and is a sunk cost.
Cost Per Unit Cost of 20,000 Units
Make BuyOutside 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 DecisionThe Make or Buy Decision
Not avoidable; irrelevant. If the product is dropped, Not avoidable; irrelevant. If the product is dropped, it will be reallocated to other products.it will be reallocated to other products.
The Make or Buy DecisionThe Make or Buy Decision
Should we make or buy part 4A?Should we make or buy part 4A?
Cost Per Unit Cost of 20,000 Units
Make BuyOutside 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 DecisionThe Make or Buy Decision
DECISION RULEDECISION RULEIn deciding whether to accept the outside In deciding whether to accept the outside
supplier’s offer, Astech isolated the supplier’s offer, Astech isolated the relevant costs of making the part by relevant costs of making the part by
eliminatingeliminating:: The sunk costs.The sunk costs. The future costs that will not differ The future costs that will not differ
between making or buying the parts.between making or buying the parts.
TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Enterprise Cost ManagementEnterprise Cost Management
Impact of JIT Inventory MethodsImpact of JIT Inventory Methods
In a JIT inventory system . . .
Productiontends to equalsales . . .
So, the difference between variable andabsorption income tends to disappear.
TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Enterprise Cost ManagementEnterprise Cost Management
Inventory ManagementInventory Management
Qunatity DiscountsAvoid DisturbanceReduce number of ordering / setup Hedge against inflationMeet Unexpected DemandsQuantity Discounts
When to orderHow much to orderBuffer StockMaximum InventoryHow often to review stock
E O QR O P
TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Enterprise Cost ManagementEnterprise Cost Management
BudgetinBudgetingg
Define goalDefine goaland objectivesand objectives
Uncover potentialUncover potentialbottlenecksbottlenecks
CoordinateCoordinateactivitiesactivities
CommunicatingCommunicatingplansplans
Think about andThink about andplan for the futureplan for the future
Means of allocatingMeans of allocatingresourcesresources
TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Investment DecisionInvestment Decision Robust DecisionRobust Decision Enterprise Cost ManagementEnterprise Cost Management
Variance AnalysisVariance Analysis
Material VariancesMaterial Variances
Labor VariancesLabor Variances
Factory Overhead VariancesFactory Overhead Variances
TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Investment DecisionInvestment Decision Robust DecisionRobust Decision Enterprise Cost ManagementEnterprise 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 GraphCVP Graph
Fixed expenses
Units
Dol
lars 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
Dol
lars
CVP GraphCVP Graph
Break-even point
Profit Area
Loss Area
Equation MethodEquation Method
Profits = Sales – (Variable expenses + Fixed expenses)
Sales = Variable expenses + Fixed expenses + Profits
OR
At the break-even point profits equal zero.
TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Investment DecisionInvestment Decision Robust DecisionRobust Decision Enterprise Cost ManagementEnterprise Cost Management
Activity Based Costing (ABC)Activity Based Costing (ABC)ABC is designed to ABC is designed to provide managers provide managers
with cost with cost information for information for
strategic and other strategic and other decisions that decisions that
potentially affect potentially affect capacity and capacity and
therefore “fixed” therefore “fixed” costs.costs.
ABC is agood supplement to our traditional
cost systemI agree!
TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Investment DecisionInvestment Decision Robust DecisionRobust Decision Enterprise Cost ManagementEnterprise Cost Management
LP ApplicationsLP Applications1.1. Development of a production schedule Development of a production schedule
that will that will
satisfy future demands for a firm’s satisfy future demands for a firm’s production production
while while minimizingminimizing total production total production and inventory costsand inventory costs
2.2. Selection of product mix in a factory to Selection of product mix in a factory to make best use of machine-hours and make best use of machine-hours and
labor-hours available labor-hours available while while maximizingmaximizing the firm’s products the firm’s products
LP ApplicationsLP Applications3.3. Determination of grades of petroleum products Determination of grades of petroleum products
to yield the to yield the maximummaximum profit profit
4.4. Selection of different blends of raw materials to Selection of different blends of raw materials to feed mills to produce finished feed feed mills to produce finished feed combinations at combinations at minimumminimum cost cost
5.5. Determination of a distribution system that will Determination of a distribution system that will minimizeminimize total shipping cost from several total shipping cost from several warehouses to various market locationswarehouses to various market locations
TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Enterprise Cost ManagementEnterprise Cost Management
ECMECM
CONCLUSIONCONCLUSION
Corporate Decision-Makers Rely Corporate Decision-Makers Rely on on
Cost & Management AccountantsCost & Management Accountants
Thank you.