Chapter 9 Planning and Controlling Expenses: … 09, 2014 · Planning and Controlling Expenses: Manufacturing Overhead, Product ... •A primary problem in planning and controlling

Chapter 9

Planning and Controlling Expenses: Manufacturing Overhead, Product Quality Costs, and distribution and

Administrative Expenses

Omar Maguiña Rivero

Learning Objectives

After studying this chapter, the student will be able to explain the following concepts:

1. Cost versus expense

2. Planning expenses

3. Control of manufacturing overhead

4. Product costing

5. Developing overhead budgets


Learning Objectives (cont.)

6. Planned cost of goods manufacture

7. Product quality costing

8. Planning distribution (selling) expenses

9. Preparing Distribution (selling) expense budget

10. Planning administrative expenses


Introduction

• Expense planning and control should focus on the

relationship between expenditures and the

benefits derived from those expenditures

• Cost control should be firmly tied to:

1. Future goals and planned operations

2. Organizational responsibility


Introduction (cont.)

• The essence of expense control is the concept of a

standard

• Standard is the amount that an expense should be

under a given set of conditions (such as work

programs, products, management policies, and

environmental variables).


1. Cost Versus Expense

Cost is defined as an expenditure that is entirely recorded as an asset and becomes an expense when it is “used up” in the future.

Expense is defined as an expenditure that is currently consumed or a cost that has been “used up”.


Cost Behavior

Cost behavior is the response of a cost to different

volumes of output.


Cost Behavior (cont.)

Determination of the relationship of expense to output or volume is necessary to apply techniques such as:

• Flexible expense budgets

• Cost-volume-profit analysis

• Marginal cost analysis

• Direct costing and

• Differential cost analysis.


Cost Reduction and Cost Control

• Cost (or expense) reduction programs are directed

toward specific efforts to reduce costs by

improving methods, work arrangement, and

products.

• Cost control may be thought of as managerial

effort to attain cost goals within a particular

operation environment. Omar Maguiña Rivero

2. Planning Expenses

• In planning expenses for a responsibility center, the output or activity for that center must be planned.

• To develop the manufacturing plans to be incorporated into a short-term profit plan, the following sequence is typical:

1. Direct material and labor cost budget

2. Manufacturing or factory overhead budgets

3. Distribution budgets

4. Administrative expense budget


Planning Manufacturing or Factory Overhead

• Manufacturing overhead is part of total production cost

not directly identifiable with specific products or jobs

• Manufacturing overhead consist of:

1. Indirect material

2. Indirect labor (including salaries)

3. All other miscellaneous factory expenses; such as taxes, insurance, depreciation, supplies, utilities, and repairs


Planning Manufacturing or Factory Overhead (cont.)

For both budgeting and cost accounting purposes,

manufacturing overhead involves the following two

problems:

1. Control of manufacturing of factoring overhead

2. Allocation of manufacturing of factory overhead to

products manufactured (product costing)


3. Control of Manufacturing Overhead

No controllable costs should not be identified as a

responsibility of the manager of the center. Thus, to

control manufacturing overhead, ”clean” expenses

must be considered, that is direct expenses only,

exclusive of any allocated expenses.


4. Product Costing

To plan the cost of goods manufactured by product;

it is necessary that all factory overhead be allocated

to production.


Selecting the Activity Based

• A primary problem in planning and controlling expenses is the selection of an appropriate measure of output or activity for each responsibility center.

• The measure of output or activity selected is called the activity base, or output factory, or simply the “output”.


Frequently Used Activity Based Measures

1. Producing departments

a. Units of output (if only one output)

b. Direct labor hours

c. Direct machine hours

d. Direct labor dollars

e. Raw material units consumed

f. Process time

2. Service departments

a. Repair and maintenance – direct repair hours

b. Power department – kilowatt hour delivered

c. Purchase department – net purchase dollars

d. General factory administration – total direct labor hours or number of employees in the factory


5. Developing Factory Overhead Budgets

PRODUCT A

(7,000 units)

PRODUCT B

(4,000 units)

Activity Base Units of product (Product A) Direct Machine Hours (DMH) Direct Repair Hours (DRH)

Standard DMH Product A: 4 Standard DRH Product A: 0.20 x product unit

Standard DMH Product B: 3 Standard DRH Product B: 0.07 x DMH

units 28,000 DMH 1,400 DRH

12,000 DMH 2,800 DRH

40,000 DMH 4,200 DRH

Repair and Maintenance

Department

Department 2Department 1

(Taken directly from the

production plan)

7,000

Product A: (7,000 product units x 4

Standard DMH)

Product B: (4,000 product unit x 3

Standard DHM)

Product A: (7,000 product units x 0.20

Standard DRH)

Product B: (40,000 DMH x 0.07 Standard

DRH)

Planned Department Output Activity

6. Planned Cost of Goods Manufactured


16,000.00$

4,000.00$

20,000.00$

Dept. 1 - units of product A

Dept. 2 - DMH 40,000

Dept. 1 - units of product A

Dept. 2 - DMH 0.50$

Planned Cost of Goods Manufactured

Producing

department

overhead Allocation of

repair and

maintenance cost

on the basis of Total Overhead

Allocated to

Planned output

(Activity base):

Overheads rates:

26,000.00$

2,000.00$

28,000.00$

7,000

4.00$

Department 1 Department 2

Planned Cost of Goods Manufactured (cont.)


COMPUTATIONS Total Cost Unit

Cost

Total Cost Unit

Cost

Direct material cost (planned) 10.00$ 60,000.00$ 15.00$

Direct labor cost (planned) 5.00$ 14,000.00$ 3.50$

74,000.00$

Factory overhead costs applied:

Product A

Dept. 1: 7,000 units x $ 4.00 28,000.00$

Dept. 2: 7,000 units x 4 DMH x $ 0.50 14,000.00$ 42,000.00$ 6.00$

Product B

Dept. 2: 4,000 units x 3 DMH x $ 0.50 6,000.00$ 1.50$

Planned cost of goods manufactured 147,000.00$ 21.00$ 80,000.00$ 20.00$

70,000.00$

35,000.00$

105,000.00$

PRODUCT A PRODUCT B7,000 UNITS 4,000 UNITS

7. Product Quality Costing

• The quality cost discussed here deals with cost associated with quality of conformance as opposed to costs associated with quality of design

• Quality of conformance refers to the degree with the final product meets its specifications


Types of Quality Cost

The costs associated with quality of conformance generally can be associated into four types:

a. Prevention cost

b. Appraisal cost

c. Internal failure

d. External failure costs


8. Planning Distribution (Selling) Expenses

• Include all costs related to selling, distribution, and delivery of products to customers.

• Two primary aspect are:

1. Planning and coordination balance between sales effort and sales results

2. Control of distribution expenses

• Types of distribution expenses:

1. Home-office expenses

2. Feld expenses


9. Preparing Distribution (Selling) Expense Budget

Distribution expenses are not product costs and are not allocated to specific products

A separate distribution expense plan should be developed for each responsibility center in the distribution function

Typically, this would encompass home-office and field centers


Approaches Used to Determine the Promotion and Advertising Appropriation

a. Arbitrary appropriation

b. All available funds

c. Competitive parity

d. Percentage of sales

e. Fixed sum per unit

f. Previous year’s profits

g. Return on investment

h. Task method


10. Planning Administrative Expenses

• Include those expenses other than manufacturing and distribution

• They are incurred in the responsibility center that provide supervision of and service to all functions of the enterprise

• Large portion of administrative expenses are fixed

• Notion persists that they cannot be controlled

• Analysis of historical record provide a sound basis for budgeting them



Documents

Chapter 9 Planning and Controlling Expenses: … 09, 2014 · Planning and Controlling Expenses: Manufacturing Overhead, Product ... •A primary problem in planning and controlling