Managerial accounting applications
-
Upload
khalid-aziz -
Category
Technology
-
view
5.228 -
download
0
Transcript of Managerial accounting applications
Managerial Accounting:Applications
Khalid Aziz-0322-3385752
OutlineSegmented Reporting and Responsibility A
ccounting SystemCost-Volume-Profit AnalysisBudgeting and Budgetary Control Standard Costs and Variance AnalysisManagerial Decision Making
Khalid Aziz-0322-3385752
IntroductionLet’s look at the XYZ Company example.
A manager at XYZ Company wants to replace an old machine with a new, more efficient machine.
New machine: List price 900000 Annual variable expenses 800000 Expected life in years 5Old machine: Original cost 720000 Remaining book value 600000 Disposal value now 150000 Annual variable expenses 1000000 Remaining life in years 5
Khalid Aziz-0322-3385752
IntroductionXYZ’s sales are Rs2000000 per year.Fixed expenses, other than amortization, are
Rs700000 per year.Should the manager purchase the new machine?
Khalid Aziz-0322-3385752
IntroductionThe manager recommends that the
company not purchase the new machine since disposal of the old machine would result in a loss:
Remaining book value 600000Disposal value -150000Loss from disposal 450000
Khalid Aziz-0322-3385752
IntroductionIs it correct?What’s your comment to the
manager’s decision? After learning this chapter,
you will know how to employ the tools of managerial accounting and make decisions correctly.
Khalid Aziz-0322-3385752
Segmented ReportingOrganizations may break down their
operations into various segments divisions, stores, services, or departments.
Management needs reports on each segment for cost management performance evaluation
Khalid Aziz-0322-3385752
Segmented ReportingSegments may be evaluated as
a cost centre a profit centre→Profit centre reports include information on a
segment’s revenues and costs. an investment centre.
Some costs are direct and some are indirect. Indirect costs may be allocated to various
departments.
Khalid Aziz-0322-3385752
Service Department Common Allocation BasesGeneral Office Number of employeesPersonnel Number of employeesPayroll Number of employeesAdvertising SalesPurchasing Number of Purchase OrdersCleaning Floor space occupiedMaintenance Floor space occupied
Segmented ReportingService department costs are shared indirect Service department costs are shared indirect
expenses of operation departments.expenses of operation departments.They may be allocated using a variety of bases.They may be allocated using a variety of bases.
Khalid Aziz-0322-3385752
Responsibility Accounting SystemResponsibility Accounting System
Responsibility Accounting System Responsibility Accounting System An accounting system An accounting system assigns managers the responsibility for assigns managers the responsibility for
costs and expenses under their control.costs and expenses under their control.
Khalid Aziz-0322-3385752
Responsibility Accounting System
Responsibility accounting budgets Responsibility accounting budgets are prepared prior to each accounting periodare prepared prior to each accounting period
Responsibility accounting performance Responsibility accounting performance reports reports compare actual costs and expenses to budgeted compare actual costs and expenses to budgeted
amountsamounts
Khalid Aziz-0322-3385752
Cost-Volume-Profit Analysis (CVP)
CVP analysis is used to answer: How much must I sell to earn my desired
income? How will income be affected if I reduce selling
prices to increase sales volume? How will income be affected if I change the
sales mix of my products? ……?
Khalid Aziz-0322-3385752
Assumptions of CVP Analysis
CVP analysis assumes relations can be CVP analysis assumes relations can be expressed as straight lines within the expressed as straight lines within the relevant range. relevant range.
Unit selling price remains constant.Unit selling price remains constant. Unit variable costs remain constant.Unit variable costs remain constant. Total fixed cost remain constant.Total fixed cost remain constant.
If the expected cost and revenue behaviour is If the expected cost and revenue behaviour is different from the assumptions, then the results of different from the assumptions, then the results of CVP analysis are of limited use.CVP analysis are of limited use.
Khalid Aziz-0322-3385752
Scatter Diagram
Vertical Vertical distance distance
is the is the change in change in
cost.cost.Horizontal distance is the change in activity.
0 1 2 3 4
*
Tota
l Cos
t in
Tota
l Cos
t in
1,00
0’s
of D
olla
rs1,
000’
s of
Dol
lars
10
20
0
***
**
* **
*
Activity, 1,000’s of Units ProducedActivity, 1,000’s of Units Produced
Unit Variable Cost = Slope = Change in costChange in units
Khalid Aziz-0322-3385752
High-Low Method
0 1 2 3 4 5
*
Tota
l Cos
t in
Tota
l Cos
t in
1,00
0’s
of D
olla
rs1,
000’
s of
Dol
lars
10
20
0
***
**
* **
*
Activity, 1,000’s of Units SoldActivity, 1,000’s of Units Sold
30 Vertical Vertical distance distance
is the is the change change in cost. in cost. (30 - 20)(30 - 20)
Horizontal distance is the change in activity.
(5 - 1)
Unit Variable Cost =Unit Variable Cost = 30 - 2030 - 20 5 - 1 5 - 1 = =
Rs2.50/unitRs2.50/unit
Khalid Aziz-0322-3385752
Least-Squares RegressionLeast-squares regression
is usually covered in advanced cost accounting courses.
is commonly used with computer software because of the large number of calculations required.
The objective of the cost analysis remains the same: determination of total fixed cost and the variable unit cost.
Khalid Aziz-0322-3385752
Break-Even AnalysisThe break-even point
is the unique sales level at which a company neither earns a profit nor incurs a loss.
SalesSales
Total costsTotal costs
Volume in UnitsVolume in Units
Cos
ts a
nd R
even
ueC
osts
and
Rev
enue
in D
olla
rsin
Dol
lars
Khalid Aziz-0322-3385752
Break-Even AnalysisThe break-even point may be expressed in
units or in dollars of sales.
Break-even point in units = Contribution margin per unit
Unit sales price less unit variable costUnit sales price less unit variable cost
Fixed Costs
Khalid Aziz-0322-3385752
Break-Even AnalysisThe break-even formula may also be
expressed in sales dollars.
Unit sales price Unit sales price Unit variable costUnit variable cost
Break-even point in dollars = Break-even point in dollars = Contribution margin ratioContribution margin ratioFixed CostsFixed Costs
Khalid Aziz-0322-3385752
Computing Income from Expected Sales
What is the income given a predicted level of sales?
Pre-taxPre-taxIncomeIncome = Sales – [Fixed costs + Variable costs]= Sales – [Fixed costs + Variable costs]
Pre-taxPre-taxIncomeIncome = Sales –Fixed costs - Variable costs= Sales –Fixed costs - Variable costs
oror
Khalid Aziz-0322-3385752
Contribution margin ratio
Contribution margin per unitUnit sales = Fixed costs + Target incomeTarget income
Dollar sales = Fixed costs + Target incomeTarget income
Sales Volume Needed toEarn a Target Income
Break-even formulas can be adjusted to show the sales volume needed to earn any amount of income.
Khalid Aziz-0322-3385752
Margin of SafetyMargin of safety
How much sales can decrease before the company incurs a loss?
Expected salesExpected sales
Margin of Margin of safety, safety, percentpercent
Expected sales - Break-even salesExpected sales - Break-even sales==
Khalid Aziz-0322-3385752
New contribution margin ratio
New break-even point in dollars
New fixed costs
Sensitivity AnalysisThe effects of changes in variables such as
sales price, variable costs, and fixed costs.CVP analysis can be used to show the
effects of such changes.
=
Khalid Aziz-0322-3385752
BudgetsBudgetsBudgetsBudgets
formal statements of a company’s plans formal statements of a company’s plans expressed in monetary termsexpressed in monetary terms
attempt to capture the future activities of an attempt to capture the future activities of an organizationorganization
are used by businesses, not-for-profit, are used by businesses, not-for-profit, government, educational, and other types of government, educational, and other types of organizations.organizations.
Khalid Aziz-0322-3385752
Advantages
Communicates plansCommunicates plansand instructionsand instructions
Promotes analysis andPromotes analysis anda focus on the futurea focus on the future
Motivates employeesMotivates employees
Provides a basis forProvides a basis forevaluating performanceevaluating performance
CoordinatesCoordinatesbusiness activitiesbusiness activities
Defines goalsDefines goalsand objectivesand objectives
Importance of Budgeting
Khalid Aziz-0322-3385752
Budget CommitteeBudget Committee
Consists of managers from all departmentsof the organization
Provides central guidance→to insure that individual budgets submitted from all
departments are realistic and coordinated.
Khalid Aziz-0322-3385752
Flow of budget data isFlow of budget data is a a bottom-upbottom-up process. process.
S u p erviso r S u p erviso r
M id d leM an ag em en t
S u p ervis o r S u p ervis or
M id d leM an ag em en t
Top M an ag em en t
Budget Committee
Khalid Aziz-0322-3385752
2005 2006 2007 2008
Operating Budget
The annual operating budget may be divided into quarterly
or monthly budgets.
Budget CycleBudget horizons are usually for one year
but may extend for several years.
Khalid Aziz-0322-3385752
Continuous or Rolling Budget
The budget may be a twelve-month The budget may be a twelve-month budget that rolls forward one month budget that rolls forward one month as the current month is completed.as the current month is completed.
2005 2006 2007 2008
Rolling Budgets
Khalid Aziz-0322-3385752
Master BudgetMaster BudgetMaster Budget
A formal, comprehensive planA formal, comprehensive plan→for the future of a companyfor the future of a company
consists of several budgets linked togetherconsists of several budgets linked together→to form a coordinated plan for the organizationto form a coordinated plan for the organization
Khalid Aziz-0322-3385752
Preparesales
budget
Developproduction
budget
Prepare financial budgets: cash income balance sheet
Preparecapital
expenditurebudget
Prepareselling and
generaladministrative
budgets
Prepare manufacturing budgets: material labour overhead
Master Budget
Khalid Aziz-0322-3385752
Sales Budget
Sales budgetSales budget the starting point in the budgeting process.the starting point in the budgeting process. Most of the other budgets are linked to the sales Most of the other budgets are linked to the sales
budget. budget. Sales personnel are often involved in developing Sales personnel are often involved in developing
the sales budgets.the sales budgets.
Khalid Aziz-0322-3385752
Sales Budget
Sales BudgetSales Budget
Estimated Unit SalesEstimated Unit SalesEstimated Unit PriceEstimated Unit Price
Analysis of economic and market conditionsAnalysis of economic and market conditions++
Forecasts of customer needs from marketing personnelForecasts of customer needs from marketing personnel
Khalid Aziz-0322-3385752
Merchandise Purchases Budget
Merchandise Purchases Budget Provides detailed information about the
purchases necessary to fulfill the sales budget and provide
adequate inventories.
Merchandise Merchandise inventory to inventory to
be purchasedbe purchased
Budgeted Budgeted ending ending
inventoryinventory
Budgeted Budgeted sales for the sales for the
periodperiod
Budgeted Budgeted beginning beginning inventoryinventory= + _
Khalid Aziz-0322-3385752
Merchandise Purchases Budget
The quantity purchased is affected by:The quantity purchased is affected by: Just-in-time inventory systemsJust-in-time inventory systems→enable purchases of smaller, frequently delivered enable purchases of smaller, frequently delivered
quantities. quantities. Safety stock inventory systemsSafety stock inventory systems→provide protection against lost sales caused by provide protection against lost sales caused by
delays in supplier shipments.delays in supplier shipments.
Khalid Aziz-0322-3385752
Selling Expense BudgetSelling Expense Budget
lists the types and amounts of selling expenses Predictions of expenses are based on the sales
budget and past experience.
Khalid Aziz-0322-3385752
General and Administrative Expense Budget
General and Administrative Expense Budget lists the predicted operating expenses not listed
in the sales budget Includes both cash and non-cash expenses Often prepared by the office
manager or person responsiblefor general administration
Khalid Aziz-0322-3385752
Capital Expenditures BudgetCapital Expenditures BudgetCapital Expenditures Budget
lists the cash inflows or outflows lists the cash inflows or outflows pertaining to the disposal or acquisition pertaining to the disposal or acquisition of capital equipment.of capital equipment.
is usually affected by the organization’s is usually affected by the organization’s long-term plans.long-term plans.
Khalid Aziz-0322-3385752
Cash BudgetCash Budget Cash Budget
lists the expected cash inflows andlists the expected cash inflows andoutflows for the periodoutflows for the period
a tool used by management toa tool used by management toavoid excess cash balances oravoid excess cash balances orcash shortagescash shortages
Information from other budgets is used in its Information from other budgets is used in its preparationpreparation
Information from the cash budget is used to Information from the cash budget is used to prepare the budgeted income statement and prepare the budgeted income statement and balance sheetbalance sheet
Khalid Aziz-0322-3385752
Manufacturing companies need to prepare Manufacturing companies need to prepare additional budgets that include:additional budgets that include: Production budgetsProduction budgets Direct materials purchase budgetsDirect materials purchase budgets Direct labour budgetsDirect labour budgets Manufacturing overhead budgetsManufacturing overhead budgets
Production and Manufacturing BudgetsProduction and Manufacturing Budgets
Khalid Aziz-0322-3385752
Production and Manufacturing Budgets
Production and Manufacturing Budgets Provides detailed information about the
production necessary to fulfill the sales budget and provide adequate inventories.
Number of Number of units to be units to be producedproduced
Budgeted Budgeted ending ending
inventoryinventory
Budgeted Budgeted sales for sales for
the periodthe period
Budgeted Budgeted beginning beginning inventoryinventory
== ++ __
Khalid Aziz-0322-3385752
Production and Manufacturing Budgets
Direct Materials Budget Provides detailed information about the purchases of
raw materials necessary to fulfill the production budget and provide adequate inventories.
Units of raw Units of raw materials to materials to
be purchased be purchased
Materials Materials needed for needed for productionproduction
Budgeted Budgeted ending ending
inventoryinventory
Budgeted Budgeted beginning beginning inventoryinventory
== ++ __
Cost of raw Cost of raw materials to materials to
be purchased be purchased
Units of raw Units of raw materials to materials to
be purchasedbe purchased
Material price Material price per unit of per unit of
raw materialraw material== ××
Khalid Aziz-0322-3385752
Production and Manufacturing Budgets
Direct Labour and Manufacturing Overhead Direct Labour and Manufacturing Overhead BudgetsBudgets Provides information about the labour and Provides information about the labour and
manufacturing overhead costs given the level of manufacturing overhead costs given the level of production for the period.production for the period.
Khalid Aziz-0322-3385752
CashCashBudgetBudget
ExpectedExpectedReceiptsReceipts
andandDisbursementsDisbursements
BudgetedBudgetedIncomeIncome
StatementStatement
BudgetedBudgetedBalanceBalance
SheetSheet
Preparing Financial Budgets
Khalid Aziz-0322-3385752
Take corrective andTake corrective andstrategic actions.strategic actions.
This is an ongoingThis is an ongoing process.process.
Develop the budgetDevelop the budgetfrom planned objectives.from planned objectives.
CompareCompareactual withactual with budget and budget andanalyze anyanalyze anydifferences.differences.
ReviseReviseobjectivesobjectives
and prepareand preparea newa new
budget.budget.
Budgetary Control
Khalid Aziz-0322-3385752
Capital BudgetingCapital BudgetingCapital Budgeting
Analyzing alternative long-term investments Analyzing alternative long-term investments and deciding which assets to acquire or sell.and deciding which assets to acquire or sell.
These decisions require careful analysis since:These decisions require careful analysis since:→ The outcome is uncertain.The outcome is uncertain.→ Large amounts of money are usually Large amounts of money are usually
involved.involved.→ Investment involves a long-term Investment involves a long-term
commitment.commitment.→ Any decision may be difficult or Any decision may be difficult or
impossible to reverse.impossible to reverse.
Khalid Aziz-0322-3385752
Zero-based BudgetingZero-based Budgeting Zero-based Budgeting
are prepared assuming no previousare prepared assuming no previousactivities for the activities beingactivities for the activities beingplannedplanned
Managers must justify the amounts budgeted Managers must justify the amounts budgeted for each activityfor each activity
is popular among government and non-profit is popular among government and non-profit organizations.organizations.
Khalid Aziz-0322-3385752
Fixed BudgetFixed budgetsFixed budgets
are prepared for a single, predicted level of are prepared for a single, predicted level of activityactivity
Performance evaluation is difficult when actual Performance evaluation is difficult when actual activity differs from the predicted level of activity differs from the predicted level of activity.activity.→Example: How much of the unfavourable costExample: How much of the unfavourable cost
variance is due to higher activity, and how much is variance is due to higher activity, and how much is due to poor cost control?due to poor cost control?
→To answer these questions, we must flex the budget To answer these questions, we must flex the budget to the actual level of activity.to the actual level of activity.
Khalid Aziz-0322-3385752
Flexible (Variable) Budgets
Flexible budgetsFlexible budgets are prepared after a period’s activities are are prepared after a period’s activities are
complete. complete. Show revenues and expenses that should have Show revenues and expenses that should have
occurred at the actual level of activity. occurred at the actual level of activity. Reveal cost variances due to good cost control or Reveal cost variances due to good cost control or
lack of cost control. lack of cost control. Improve performance evaluation.Improve performance evaluation.
Khalid Aziz-0322-3385752
Flexible budgets To prepare a budget for different activity levels
→we must know how costs behave with changes in activity levels Total variable costs change in
direct proportion tochanges in activity.
Total fixed costs remainunchanged within therelevant range. FixedFixed
VariableVariable
Flexible (Variable) Budgets
Khalid Aziz-0322-3385752
Standard Costs Standard Costs Standard Costs Standard Costs
are preset costs for delivering a are preset costs for delivering a product or service under normal product or service under normal conditions.conditions.
are established through personnel, are established through personnel, engineering, and accounting studies engineering, and accounting studies using past experience.using past experience.
are benchmarks used in evaluating are benchmarks used in evaluating performance.performance.
are often used in setting budgets.are often used in setting budgets.
Khalid Aziz-0322-3385752
Example: A standard cost cardExample: A standard cost card
Standard StandardQuantity Price Standard
Cost factor or Hours or Rate Cost
Direct materials 1 kg 25$ per kg 25.00$ Direct labour 2 hours 20$ per hour 40.00 Variable mfg. overhead 2 hours 10$ per hour 20.00 Total standard unit cost 85.00$
Standard Costs
Khalid Aziz-0322-3385752
Variance Analysis
Take actionTake action
Prepare standard Prepare standard cost performance cost performance
reportsreports
Analyze Analyze variancesvariances
Investigate Investigate causescauses
Khalid Aziz-0322-3385752
Variance AnalysisManagement By ExceptionManagement By Exception
Standard cost accounting provides management Standard cost accounting provides management with information about costs that differ from with information about costs that differ from budgeted amounts (variances). budgeted amounts (variances).
Management may choose to focus only on Management may choose to focus only on variances that are significant. variances that are significant.
This approach is referred to asThis approach is referred to asManagement by Exception.Management by Exception.
Khalid Aziz-0322-3385752
AActual ctual QQuantity uantity AActual ctual QQuantityuantity SStandardtandard QQuantityuantity × × × × × × AActualctual PPrice rice SStandardtandard PPrice rice SStandardtandard PPricerice
Price VariancePrice Variance Quantity VarianceQuantity Variance AQAQ((APAP - - SPSP) ) SPSP((AQAQ - - SQSQ))
AQAQ = Actual Quantity = Actual Quantity SPSP = Standard Price = Standard Price APAP = Actual Price = Actual Price SQSQ = Standard Quantity = Standard Quantity
Variance AnalysisMaterial VariancesMaterial Variances
Khalid Aziz-0322-3385752
Actual Hours Actual HoursActual Hours Actual Hours Standard Hours Standard Hours × × × × × × Actual Rate Standard Rate Standard Rate Actual Rate Standard Rate Standard Rate
Rate VarianceRate Variance Efficiency VarianceEfficiency Variance
AH(AR - SR) SR(AH - SH)AH(AR - SR) SR(AH - SH)
AH = Actual HoursAH = Actual Hours SR = Standard Rate SR = Standard Rate AR = Actual RateAR = Actual Rate SH = Standard Hours SH = Standard Hours
Variance AnalysisLabour VariancesLabour Variances
Khalid Aziz-0322-3385752
Spending Spending VarianceVariance
EfficiencyEfficiencyVarianceVariance
AH × SVR AH × SVR
AH × AVRAH × AVR
AHAH = Actual Hours of Activity = Actual Hours of Activity AVR AVR = Actual Variable Overhead Rate = Actual Variable Overhead Rate SVR SVR = Standard Variable Overhead Rate = Standard Variable Overhead Rate SH SH = Standard Hours Allowed = Standard Hours Allowed
SH × SVR SH × SVR
Actual Flexible Budget AppliedActual Flexible Budget Applied Variable for Variable Variable for Variable Variable Variable Overhead Overhead at Overhead at Overhead Overhead at Overhead at Incurred Actual Hours Standard Incurred Actual Hours Standard Hours Hours
Variance AnalysisVariable Overhead VariancesVariable Overhead Variances
Khalid Aziz-0322-3385752
Spending Spending VarianceVariance
VolumeVolumeVarianceVariance
SFRSFR = Standard Fixed Overhead Rate= Standard Fixed Overhead Rate SH SH = Standard Hours Allowed= Standard Hours Allowed
SH × SFR SH × SFR
Actual Fixed Fixed FixedActual Fixed Fixed Fixed Overhead Overhead Overhead Overhead Overhead Overhead Incurred Budget Applied Incurred Budget Applied
Variance AnalysisFixed Overhead VariancesFixed Overhead Variances
Khalid Aziz-0322-3385752
Standard CostsStandard Costs Standard cost accounting systemsStandard cost accounting systems
record variances in the accountsrecord variances in the accounts simplify recordkeeping and help in the simplify recordkeeping and help in the
preparation of reportspreparation of reports
Khalid Aziz-0322-3385752
ABC Company has the following direct material standard to manufacture one unit product:
3.0 kilograms per unit at Rs8.00 per kilogram
Last week 6600 kilograms of material were purchased and used to make 2000 units. The material cost a total of Rs53000.
Discussions
Khalid Aziz-0322-3385752
Discussions
What is the actual price per kilogramWhat is the actual price per kilogrampaid for the material? paid for the material? a.a. Rs7.26 per kilogram.Rs7.26 per kilogram.b.b. Rs8.13 per kilogram.Rs8.13 per kilogram.c.c. Rs8.03 per kilogram.Rs8.03 per kilogram.d.d. Rs8.00 per kilogram.Rs8.00 per kilogram.
Khalid Aziz-0322-3385752
What is the actual price per kilogramWhat is the actual price per kilogrampaid for the material? paid for the material? a.a. Rs7.26 per kilogram.Rs7.26 per kilogram.b.b. Rs8.13 per kilogram.Rs8.13 per kilogram.c.c. Rs8.03 per kilogram.Rs8.03 per kilogram.d.d. Rs8.00 per kilogram.Rs8.00 per kilogram.
Discussions
AP = Rs53000 ÷ 6600 kgAP = Rs53000 ÷ 6600 kgAP = Rs8.03 per kg AP = Rs8.03 per kg
Khalid Aziz-0322-3385752
ABC’s material price variance (MPV)ABC’s material price variance (MPV)for the week was:for the week was:a.a. Rs198 favourable.Rs198 favourable.b.b. Rs198 unfavourable.Rs198 unfavourable.c.c. Rs189 favourable.Rs189 favourable.d.d. Rs189 unfavourable.Rs189 unfavourable.
Discussions
Khalid Aziz-0322-3385752
ABC’s material price variance (MPV)for the week was:a. Rs198 favourable.b. Rs198 unfavourable.c. Rs189 favourable.d. Rs189 unfavourable.
MPV = AQ(AP - SP)MPV = AQ(AP - SP) MPV =6600 kg × (Rs8.03 - 8.00) MPV =6600 kg × (Rs8.03 - 8.00) MPV = Rs198 Rs MPV = Rs198 Rs
Discussions
Khalid Aziz-0322-3385752
The standard quantity of material thatThe standard quantity of material thatshould have been used to produceshould have been used to produce2000 units is:2000 units is:a.a. 6500 kilograms.6500 kilograms.b.b. 6000 kilograms.6000 kilograms.c.c. 7000 kilograms.7000 kilograms.d.d. 5000 kilograms.5000 kilograms.
Discussions
Khalid Aziz-0322-3385752
The standard quantity of material thatshould have been used to produce2000 units is:a. 6500 kilograms.b. 6000 kilograms.c. 7000 kilograms.d. 5000 kilograms.
SQ = 2000 units × 3 kg per unitSQ = 2000 units × 3 kg per unit SQ = 6000 kg SQ = 6000 kg
Discussions
Khalid Aziz-0322-3385752
ABC’s material quantity variance (MQV)ABC’s material quantity variance (MQV)for the week was:for the week was:a.a. Rs4300 unfavourable.Rs4300 unfavourable.b.b. Rs4300 favourable.Rs4300 favourable.c.c. Rs4800 unfavourable.Rs4800 unfavourable.d.d. Rs4800 favourable.Rs4800 favourable.
Discussions
Khalid Aziz-0322-3385752
ABC’s material quantity variance (MQV)ABC’s material quantity variance (MQV)for the week was:for the week was:a.a. Rs4300 unfavourable.Rs4300 unfavourable.b.b. Rs4300 favourable.Rs4300 favourable.c.c. Rs4800 unfavourable.Rs4800 unfavourable.d.d. Rs4800 favourable.Rs4800 favourable.
MQV = SP(AQ - SQ)MQV = SP(AQ - SQ) MQV = Rs8.00(6600 kg - 6000 kg) MQV = Rs8.00(6600 kg - 6000 kg) MQV = Rs4800 unfavourable MQV = Rs4800 unfavourable
Discussions
Khalid Aziz-0322-3385752
Managerial Decision Making
Managerial Decision Making Cost accounting information is often used by
management for short-term decisions. Decision making involves five steps:
→ Define the problem.→ Identify alternatives.→ Collect relevant information on alternatives.→ Select the preferred alternative.→ Analyze decisions made.
Khalid Aziz-0322-3385752
Managerial Decision MakingAccepting additional business Accepting additional business
should be based on should be based on incremental costsincremental costs and and incremental revenuesincremental revenues
Incremental amountsIncremental amounts are those that occur if the are those that occur if the company decides to accept the new businesscompany decides to accept the new business
Khalid Aziz-0322-3385752
Managerial Decision MakingMake or Buy DecisionsMake or Buy Decisions
IncrementalIncremental costs also are important in the costs also are important in the decision to make a product or purchase it from decision to make a product or purchase it from a suppliera supplier→The cost to produce an item mustThe cost to produce an item must
includeincludedirect materialsdirect materialsdirect labourdirect labour incremental overheadincremental overhead
→We should We should notnot use the predetermined overhead rate use the predetermined overhead rate to determine product costto determine product cost
Khalid Aziz-0322-3385752
Managerial Decision MakingScrap or Rework DefectsScrap or Rework Defects
Costs incurred in manufacturing units of Costs incurred in manufacturing units of product that do not meet quality standards are product that do not meet quality standards are sunk costs and cannot be recovered.sunk costs and cannot be recovered.
As long as rework costs are recovered through As long as rework costs are recovered through sale of the product and rework does not sale of the product and rework does not interfere with normal production, we should interfere with normal production, we should rework rather than scrap. rework rather than scrap.
Khalid Aziz-0322-3385752
Managerial Decision MakingSell or Process Further Sell or Process Further
sell partially completed products vs. process sell partially completed products vs. process them to completionthem to completion
As a general rule, process further only if As a general rule, process further only if incremental revenues exceed incremental costsincremental revenues exceed incremental costs
Khalid Aziz-0322-3385752
Managerial Decision MakingSelecting Sales Mix Selecting Sales Mix
When a company sells a variety of products,When a company sells a variety of products,some are likely to be more profitable thansome are likely to be more profitable thanothers. To make an informed decision others. To make an informed decision regarding sales mix, management must consider regarding sales mix, management must consider . . .. . .→The The contribution margincontribution margin of each product, of each product,→TheThe facilitiesfacilities required to produce each required to produce each
product and any constraints on the facilities, andproduct and any constraints on the facilities, and→The The demanddemand for each product. for each product.
Khalid Aziz-0322-3385752
Managerial Decision MakingEliminating a SegmentEliminating a Segment
A segment is a candidate for A segment is a candidate for elimination if its elimination if its
revenues are less than itsrevenues are less than its avoidableavoidable expensesexpenses
Khalid Aziz-0322-3385752
Managerial Decision MakingQualitative factors in decisions
Qualitative factors are involved in most all managerial decisions→Quality→Delivery schedule→Supplier reputation→Employee morale→Customer opinions→……
Khalid Aziz-0322-3385752
Summary Segments may be evaluated as a cost centre, a profit centre,Segments may be evaluated as a cost centre, a profit centre,
and an investment centre. and an investment centre. CVP Analysis: CVP Analysis: break-even analysis, computing income frobreak-even analysis, computing income fro
m expected sales, sales volume needed to earn a target incom expected sales, sales volume needed to earn a target income, margin of safety, and sensitivity analysis.me, margin of safety, and sensitivity analysis.
Importance of budgeting, master budget, and Importance of budgeting, master budget, and budgetary budgetary control control
Standard costs, variance analysis and standard cost accounStandard costs, variance analysis and standard cost accounting systemsting systems
Managerial decision making: accepting additional business,Managerial decision making: accepting additional business, make or buy decisions, scrap or rework defects, sell or pro make or buy decisions, scrap or rework defects, sell or process further, selecting sales mix, eliminating a segment cess further, selecting sales mix, eliminating a segment
Khalid Aziz-0322-3385752
DiscussionsConsider the beginning XYZ case
Khalid Aziz-0322-3385752
DiscussionsRelevant Cost Analysis
Savings in variable expenses provided by the new machine ($200000 × 5 yrs.) 1000000
Net effect
Rs1000000 - Rs800000 = Rs200000 variable cost savingsRs1000000 - Rs800000 = Rs200000 variable cost savings
Khalid Aziz-0322-3385752
Discussions
Relevant Cost AnalysisSavings in variable expenses provided by the new machine ($200000 × 5 yrs.) 1000000Cost of the new machine (900000)Disposal value of old machine 150000Net effect 250000
ATTENTION COMMERCE STUDENTS ACCOUNTING(FINANCIAL & COST) OFACCOUNTING(FINANCIAL & COST) OF
ICMAP STAGE 1,2,3,4 (CRASH CLASSES)ICMAP STAGE 1,2,3,4 (CRASH CLASSES)CA..MODULE A,B,C,DCA..MODULE A,B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)PIPFA (FOUNDATION,INTERMEDIATE,FINAL)ACCA-F1,F2,F3ACCA-F1,F2,F3
BBA,MBABBA,MBAB.COM(FRESH),M.COMB.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELSMA-ECONOMICS..O/A LEVELSKHALID AZIZ…..0322-3385752KHALID AZIZ…..0322-3385752
http://finance.groups.yahoo.com/group/cost-http://finance.groups.yahoo.com/group/cost-accountantsaccountants