Management Accounting Made Easy.doc

8/14/2019 Management Accounting Made Easy.doc

1/61

Managerial Accounting and Control MadeEasy (MACME) Prof. K.S.Ranjani

Session Plan for MAC II

Module 1 C S! ACC "#!I#$ %ASICS

Session 1 IntroductionReading(s) 1. Basics of Cost Accounting (MACME) 2. Breezy Boat Company(MAC)

Session 2 Cost terms purpose! approac"Reading(s) C#assification of Cost(MACME)Case Cost c#assification e$ercise (IIMA%&!A ' )

Session ' Brea E*en Ana#ysis


2/61

[MACME]

Reading(s) Brea E*en Ana#ysis(MACME)+,o you no- -"ere your /rea e*en point is0 By o"n 3. 4ardozzi C5A+6sing Brea 7E*en Ana#ysis to ,etermine 8our Company9s &inancia# 3ea#t" Art"ur &. Rot"/ergManaging ,irector C&: Edge ;;CCase< ="e Craddoc Cup(MAC)

Module & C S!I#$ S'S!EMS ME! *S

Session > A/sorption CostingReading(s) A/sorption Costing(MACME)Case C#ass E$ercise(MACME)

Session ? o/ Costing and 5rocess CostingReading(s) o/ Costing and 5rocess Costing(MACME)@endy9s C"i#i< A costing Conundrum(MAC)

Session Acti*ity Based CostingReadings< Acti*ity Based Costing(MACME)Case< C#assic 5en Company< ,e*e#oping an ABC Mode# (3BS% 71 711 )

Session Acti*ity Based Management and use of ABC in ser*ice industriesReading(s) ABM (MACME)

Acti*ity Based Costing at 65S2. Acti*ity Based Costing ! Capacity (3BS% 71D?7D? )Case @i# erson Co (3BS% 71D17D 2)

Session Cost a##ocation and Customer 5rofita/i#ityReading(s) Acti*ity Based Costing(MACME)

Case ,a ota :ffice 5roducts(3BS% 71D27D21)

Module + C S! A#A,'SIS - R *ECISI # MAKI#$

Session In7sourcing and :utsourcing decision ana#ysisReading(s) Margina# Costing and ,ecision Ana#ysis(MACME)Case &ine print Company(A) (B) and (C)

Session 1D 5roduct mi$ decisions -it" capacity constraintsReadings(s) Margina# Costing and ,ecision Ana#ysis(MACME)Case Moti 3eera (5) ;td (A) ! (B) (IIMA% MDDD'(A ! B))

Session 11 5ricing and cost managementReading(s) 5ricing and Cost Management(MACME)

This material is prepared by Prof.K.S.Ranjani for PGP/RAK MAC-II at IIM Indore Pa e !


3/61


4/61

[MACME]

1. %ASICS - C S! ACC "#!I#$

Cost DDDD

Contri/ution L Sa#es Faria/#e cost

L 1DDDDDD ?DDDDD

This material is prepared by Prof.K.S.Ranjani for PGP/RAK MAC-II at IIM Indore Pa e)*


11/61

[MACME]

L ?DDDDD

5rofit L contri/ution &i$ed cost

5rofit L ?DDDDD DDDD

L >2DDDD

E$p#anation< ="e /rea e*en point in sa#es margin of safety and profit ca#cu#ation depends upont"e num/er of units fi$ed cost and *aria/#e cost.

="e /rea e*en point in sa#es margin of safety and profit -i## c"ange if t"ere is a c"ange in anyof t"ese *aria/#es.

Readings

* ' " K# : : ERE ' "R ;%REAK E/E#; P I#! IS>i? CPA4ardozzi Consu#ting ;;C

Is your /usiness profita/#e0 Most oi#"eat dea#ers can ans-er t"at Guestion -it" a fair degree of accuracy7for #ast year. 8ou no- "o- t"e num/ers added up and -"et"er or not t"e in on t"e/oo s -as /#ac or red. But -"at a/out t"is year0 Are you ma ing money no-0 3o- manyga##ons -i## you "a*e to se## t"is year /efore you turn a profit0 At -"at price0 Ono-ing your/rea e*en point is a re#ati*e#y uncomp#icated yet important /usiness p#anning too#. 3a*ing anidea of -"en your costs -i## /e co*ered and profits /egin can "e#p you ma e /etter purc"asingdecisions and is a *ita# part of t"e price setting process. ="ere is a -ay to determine your /reae*en point -it"out consu#ting a crysta# /a## or pa#m reader.="roug" a simp#e ana#ysis of t"reeey factors you can no- -"at it -i## ta e t"is year for your company to ma e money. ="e firstfactor is t"e num/er of ga##ons you e$pect to se## t"is season. Ana#yzing your companyPs past"istory and factoring in predicted -eat"er patterns -i## pro*ide a fair#y accurate gauge of -"atyouP## /e de#i*ering t"is year. 8our state oi#"eat dea#ers association can "e#p you -it" degreeday estimates and -eat"er "istory. By determining "o- many customers you e$pect to "a*et"is year and t"e a*erage use per customer you can come up -it" a tota# ga##ons figure.="e ne$t factor is your margin per ga##on. ;i e a## retai#ers oi#"eat dea#ers continua##y strugg#e

-it" pricing. ="e o/ ect is to price your product 7 in t"is case a ga##on of "eating oi# 7 #o- enoug"to /e competiti*e yet as "ig" as possi/#e to ma e t"e ma$imum profit. =oo often t"is /ecomesan e$ercise in "and -ringing guess-or and gut reaction. @orse many oi#"eat dea#ers simp#ycopy t"e ne$t guy up t"e 8e##o- 5ages #ist -it"out regard to t"e differences in t"e t-o/usinesses. It need not /e t"at -ay. :ur /rea e*en ana#ysis can "e#p ma e t"is decision morec#ear cut.

This material is prepared by Prof.K.S.Ranjani for PGP/RAK MAC-II at IIM Indore Pa e))


12/61

[MACME]

="e t"ird factor in our /rea e*en eGuation is o*er"ead (administration) costs. Again ane$amination of your o*er"ead costs (inc#uding payro## rent eGuipment interest paymentsinsurance ta$es etc.) from pre*ious years -i## pro*ide an indication of -"at your e$pectedo*er"ead -i## /e for t"e upcoming season. @e do not inc#ude t"e cost of product (oi#) or o-nerPssa#ary in t"is ana#ysis.

At t"is point you "a*e t"e information a*ai#a/#e to esta/#is" your /rea e*en point for t-o critica#areas< gross margin and minimum ga##ons. 8our /rea e*en point comes -"en tota# o*er"eadcost is met /y tota# gross margin. 3o- -ou#d t"is -or in practice0 @"at are you trying toesta/#is"0 &irst you -ant to no- "o- many ga##ons you need to se## at your e$pected margin in order to/rea e*en.Second you -ant to determine t"e minimum margin you need to ac"ie*e -"en you se## t"ee$pected ga##ons so t"at you -i## co*er costs.;etPs ta e a simp#e set of facts. 8our company e$pects to se## fi*e mi##ion ga##ons and yourgross

margin (sa#e price #ess t"e cost of product and de#i*ery) is targeted at 'DQ per ga##on. &ina##yyour o*er"ead%administrati*e e$penses run a/out 1 mi##ion.

BREAO EFE4 KA;;:4S 7 If you di*ide your o*er"ead e$penses ( 1 mi##ion) /y your targetedmargin ( D.'D) you esta/#is" t"e minimum num/er of ga##ons you need to se## /efore you s"o-any profit. In our e$amp#e t"is -ou#d /e ' ''' DDD ga##ons ( 1 mi##ion D.'D). ="is te##s yout"at t"e margin on e*ery ga##on after ' ''' DDD goes direct#y to t"e /ottom #ine of t"e company.

BREAO EFE4 MARKI4 7 3ere -e are trying to esta/#is" t"e sma##est margin you can get a-ay-it" for a## fi*e mi##ion ga##ons you e$pect to se##. :nce t"is #e*e# is set youP## no- t"at e*erypenny added to t"e margin goes direct#y to t"e /ottom #ine. If you di*ide youro*er"ead%administrati*e e$penses ( 1 mi##ion) /y your tota# e$pected ga##ons (? mi##ion) yous"o- t"at your minimum margin per ga##on is D.2D.In our ana#ysis -e do not inc#ude t"e o-nerPs sa#ary in t"e o*er"ead e$penses as -e consider company profit and any sa#ary dra-n /y t"e o-ner to /e part of t"e o*era## /enefit of o-ners"ip.In your ana#ysis you mig"t decide to inc#ude some part of your sa#ary in t"e ca#cu#ation.="is /rea e*en ana#ysis is not comp#e$. =o /e more accurate -e factor in degree days andmar et trends. But e*en in its simp#est form a /rea e*en ana#ysis can /e a po-erfu# too# to"e#p you p#an your seasonPs /uying and in determining a se##ing price for your product. 8ou"a*e t"e information on "and to ma e t"is ana#ysis and s"ou#d ta e t"e time to sit do-n -it"your financia# officer or accountant to #ocate your o-n /rea e*en point.

"SI#$ %REAK@E/E# A#A,'SIS ! *E!ERMI#E ' "R C MPA#' S -I#A#CIA,EA,!

Art5ur -. Rot54erg? Managing *irector? C- Edge? ,,C

This material is prepared by Prof.K.S.Ranjani for PGP/RAK MAC-II at IIM Indore Pa e)!


13/61

[MACME]

,etermining t"e /rea 7e*en point is crucia# to determining margins -"ic" in turn aid infinancia#p#anning for t"e ne$t year. Brea 7e*en ana#ysis determines /ot" t"e minimum amount of sa#esreGuired to a*oid a #oss or to +/rea 7e*en at t"e end of t"e fisca# year and permits you to ad ustsa#es estimates according#y. @"i#e t"ere are a num/er of different *ariations on /rea 7e*enana#ysis t"ey are a## usefu# in determining t"e #o-er #imits of profits for ca#cu#ating margins.="ese *ariations are a## dependent on a num/er of cost factors -"ic" s"ou#d /e determined/efore attempting any ind of /rea 7e*en ana#ysis.Cost Co 2onents of %rea9@E3en AnalysisBrea 7e*en ana#ysis is primari#y dependent on a fe- ey factors. &irst and foremost it isnecessary to "a*e t"e capacity to accurate#y forecast your company9s costs and sa#es. ="eresu#t -i## t"en /edependent on fi$ed costs a*erage per7unit *aria/#e costs and per7unit re*enue as a##ocatedacross t"e -"o#e /usiness. @it" t"ese num/ers /rea 7e*en ana#ysis /ecomes a matter of

simp#e mat"< Brea 7E*en 5oint L &i$ed Costs % (6nit Se##ing 5rice 7 Faria/#e Costs). As mentioned t"ere are se*era# types of costs t"at must /e considered -"en conducting /rea 7e*en ana#ysis. Among t"ese t"e most re#e*ant are fi$ed costs -"ic" are t"ose e$penses t"atare t"e same regard#ess of t"e num/er of items so#d. &i$ed costs a#so genera##y -ou#d remaint"e same e*en if t"e company discontinued a## sa#es. ="e most common fi$ed costs are rentand insurance. ="e cost of maintaining corporate property -ou#d /e t"e same no matter t"eamount of product so#d. 3o-e*er #a/or s"ou#d a#so /e considered as a fi$ed cost sincerep#acing a s i##ed #a/or force is e$treme#y difficu#t to do. In7p#ace #a/or -i## usua##y not *ary -it"moderate c"anges in *o#ume.="e ot"er main category of cost to /e considered -"i#e conducting /rea 7e*en ana#ysis is*aria/#ecosts. ="ese are e$penses t"at are /ased on t"e num/er of units processed. As suc" t"ey -i##f#uctuate depending on t"e *o#ume of t"e /usiness. As t"e /usiness and sa#es gro- *aria/#ecosts -i## a#so increase. ="e most common *aria/#e costs are t"ose pertaining to ra- materia#snecessary for manufacturing products.!5e Margin of Safety="e margin of safety is a nota/#e outcome of /rea 7e*en ana#ysis as it is indicati*e of t"estrengt" of t"e /usiness. &or any #e*e# of sa#es t"e margin of safety indicates specifica##y t"eamount of sa#es do##ars a/o*e or /e#o- t"e /rea 7e*en point. In essence t"is num/er ma es itpossi/#e for t"e company to determine t"e e$act amount of money it may "a*e gained or #ostduring t"e period in Guestion.

@"en sa#es are a/o*e t"e /rea 7e*en point t"en t"e margin of safety is positi*e typica##yindicatingo*era## gains. 3o-e*er -"en sa#es are /e#o- t"e /rea 7e*en point t"en t"e margin of safety isconsidered negati*e -"ic" indicates an o*era## #oss for t"e period.

This material is prepared by Prof.K.S.Ranjani for PGP/RAK MAC-II at IIM Indore Pa e)"


14/61

[MACME]

Contri4ution Margin Analysis@"en conducting a /rea 7e*en ana#ysis it is "e#pfu# to eep in mind t"e concept of Contri/utionMargin -"ic" is defined as re*enue #ess *aria/#e costs. Contri/ution margin differs from grossprofit as on#y *aria/#e costs are ta en into account -"ereas in gross profit ana#ysis a## costs ofsa#es are considered.=ypica##y a company9s optima# output #ies -"ere t"e contri/ution margin e$ceeds *aria/#emargina# cost meaning t"at t"e re*enue from se##ing a product e$ceeds t"e *aria/#e cost ofproduction. 3o-e*er if a #o-er price t"an norma# is offered a## ot"er factors /eing eGua# t"atoffer oug"t to /e considered so #ong as t"e price sti## e$ceeds *aria/#e costs. Suc" a price-"ic" sti## co*ers a## *aria/#e costs may yet /e considered profita/#e since it -i## "e#p to a/sor/any fi$ed costs. :n#y -"en t"e contri/ution margin is positi*e -i## any #osses im/ued t"roug"t"e acceptance of a #o-er offer /e compensated t"roug" increases in t"e *o#ume of sa#es.In Su aryBrea 7e*en ana#ysis is an e$ceptiona##y usefu# too# for assessing t"e state of t"e company9sfinances. 3o-e*er in order to successfu##y conduct /rea 7e*en ana#ysis t"ere are a fe- figures

t"at must first /eascertained

Fa#ue of c#osing stoc L > X?DDDLRs.2'D DDD%7

Fa#ue of c#osing stoc using margina# costDDDDD

o/ 1D' 77777777777 ?DDDDD 'DDDDD

o/ 1D> 77777777777 22DDDD 2>DDDD

o/ 1D? 77777777777 2>DDDD 2 DDDD

5roduction :*er"eads c"arged to o/ is ?DN of #a/or cost and administration o*er"ead c"argedto o/s is ?DN of materia#.

This material is prepared by Prof.K.S.Ranjani for PGP/RAK MAC-II at IIM Indore Pa e!"


24/61

[MACME]

Administration o*er"eads are c"arged after comp#etion of o/.

,uring Marc" o/ 1D1 1D2 and 1D? -ere comp#ete. o/ no 1D' and 1D> -ere sti## in process.

Se##ing price is determined after mar ing up ''.''N profit on Cost.

Ca#cu#ate t"e fo##o-ingDDDD;a/or 1 DDDD >DDDDD 2 DDDD5roduction :*er"eads DDDD 2DDDDD 1'DDDD@or s Cost DDDD DDDD 'DDDD

Administration:*er"eads 2DDDDD 1?DDDD 12DDDD=ota# Cost 1D DDDD 11>DDDD ?DDDD

(2) Fa#ue of c#osing -or in process.

5articu#ars 1D' 1D>:pening @I5 D DMateria# ?DDDDD 22DDDD;a/or 'DDDDD 2>DDDD5roduction :*er"eads 1?DDDD 12DDDD

C#osing @I5 ?DDDD ? DDDD

(') 6nder a/sorption%:*er a/sorption of production o*er"eads assuming t"at actua#o*er"eads incurred during t"e period is Rs.?DDDDD%7

This material is prepared by Prof.K.S.Ranjani for PGP/RAK MAC-II at IIM Indore Pa e!#


25/61

[MACME]

Budgeted :*er"ead ' 2 2> ?S5 1>' > 1?1 2 ?

PR CESS C S!I#$ @ ME! * A#* !EC #IG"ES

5rocess costing is a costing met"odo#ogy t"at arri*es at an indi*idua# product cost t"roug" t"eca#cu#ation of a*erage costs for #arge Guantities of identica# products.

A process costing system is used -"en a /usiness is producing a #arge num/er of identica#products. In t"is situation it is most efficient to accumu#ate costs at an aggregate #e*e# for a#arge /atc" of products and t"en a##ocate t"em to t"e indi*idua# units produced .

5rocess Costing may /e adopted using any of t"e tec"niGues of costing. ="e tec"niGue adopted-ou#d decide t"e procedure adopted in re#ation to *arious accounting aspects. &or e$amp#e for

t"e purpose of *a#uation of stoc s?DD ?2?D

This material is prepared by Prof.K.S.Ranjani for PGP/RAK MAC-II at IIM Indore Pa e!&


28/61

[MACME]

Assume t"at t"ere -as no -or in process eit"er at t"e /eginning or at t"e end. S"o- t"e

process costs for eac" cost of t"e finis"ed product. ="e production is 1DDD tones at t"e end ofprocess.

5rocess A A%c5articu#ars Amt 5articu#ars Amt=o materia# 'DDD By transferred out DDD=o ;a/or 1?DD=o Mfg E$penses 1?DD

=ota# DDD =ota# DDD 5rocess B A%C5articu#ars Amt 5articu#ars Amt=o materia# 1?DD By transferred out DDD=o ;a/or 'DDD=o Mfg E$penses >?DD

=ota# DDD =ota# DDD 5rocess C A%C5articu#ars Amt 5articu#ars Amt=o materia# 1?DD By C:KS 12DDD=o ;a/or ?2?D=o Mfg E$penses ?2?D

=ota# 12DDD =ota# 12DDD

o7 Process Cost is A22lied in %usiness

If you "a*e e*er spi##ed mi# t"ere is a good c"ance t"at you used Bounty paper to-e#s to c#eanup t"e mess. 5rocter ! Kam/#e (5!K) manufactures Bounty in t-o main processingdepartments\5aper ma ing and 5aper Con*erting. In t"e 5aper Ma ing ,epartment -oodpu#p is con*erted into paper and t"en spoo#ed into 2 DDD pound ro##s. In t"e 5aper Con*erting,epartment t-o of t"e 2 DDD pound ro##s of paper are simu#taneous#y un-ound into a mac"ine

This material is prepared by Prof.K.S.Ranjani for PGP/RAK MAC-II at IIM Indore Pa e!'


29/61

[MACME]

t"at creates a t-o7p#y paper to-e# t"at is decorated perforated and em/ossed to createte$ture. ="e #arge s"eets of paper to-e#s t"at emerge from t"is process are -rapped around acy#indrica# card/oard core measuring eig"t feet in #engt". :nce enoug" s"eets -rap around t"ecore t"e eig"t foot ro## is cut into indi*idua# ro##s of Bounty t"at are sent do-n a con*eyor to /e-rapped pac ed and s"ipped. In t"is type of manufacturing en*ironment costs cannot /ereadi#y traced to indi*idua# ro##s of BountyU "o-e*er gi*en t"e "omogeneous nature of t"eproduct t"e tota# costs incurred in t"e 5aper Ma ing ,epartment can /e spread uniform#yacross its output of 2 DDD pound ro##s of paper. Simi#ar#y t"e tota# costs incurred in t"e 5aperCon*erting ,epartment (inc#uding t"e cost of t"e 2 DDD pound ro##s t"at are transferred in fromt"e 5aper Ma ing ,epartment) can /e spread uniform#y across t"e num/er of cases of Bountyproduced. 5!K uses a simi#ar costing approac" for many of its products suc" as =ide Cresttoot"paste and 5ring#es

oint 2roducts and %y@2roducts

@"en a production process yie#ds t-o or more products simu#taneous#y out of common ra-materia# t"e output products are termed as oint products.

="e oint products -"ic" arise out of common ra- materia# may "a*e -anted or un-anted*a#ue. ="ose -"ic" "a*e insignificant *a#ue are termed as /y7product. By7 products aresecondary products. &or e$amp#e from crude oi# -e get petro# and diese# -"ic" "as "ig"significant *a#ue and t"erefore no-n as oint products. At t"e same time -e a#so get some#u/ricant -"ic" is un-anted so it is termed as /y7product.

CIMA(C"artered Institute of Management Accountants) defines oint product as Jt-o or moreproduct separated in processing eac" "a*ing a sufficient#y "ig" sa#e *a#ue to merit recognitionas a main product and /y product as +output of some *a#ue produce incidenta##y inmanufacturing somet"ing e#se (main product) .

Some e$amp#es of oints products are as fo##o-s. Co e industry < ;ino#eum

=oint 2roduct costing 7 oint product is defined as a costing of a production process t"at yie#dsmu#tip#e products simu#taneous#y.

%y@2roducts costing 7 By product costing is defined as costing of products in t"e ointproduction process -it" #o- sa#es *a#ue. ="e costing is done at t"e time of production or at t"etime of sa#es.

Co on costs8 ="ese costs cannot /e identified -it" a particu#ar oint product. By definition oint products incur common costs unti# t"ey reac" t"e sp#it7off point. S2lit@off 2oint8 At t"is stage t"e oint products acGuire separate identities. Costs incurred priorto t"is point are common costs and any costs incurred after t"is point are separa/#e costs.

Se2ara4le costs8 ="ese costs can /e identified -it" a particu#ar oint product. ="ese costs areincurred for a specific product after t"e sp#it7off point.

At or /eyond t"e sp#it off point decisions re#ating to t"e sa#e or furt"er processing of eac"identifia/#e product can /e made independent#y of decisions a/out t"e ot"er products. ="ec"aracteristic feature of oint products is t"at a## costs incurred prior to t"e sp#it7off point arecommon costs and cannot /e identified -it" indi*idua# products t"at are deri*ed at sp#it7off.,istinction among main products oint products and /yproducts are not so definite inpractice. &or e$amp#e some companies may c#assify erosene o/tained -"en refining crude oi#as a /yproduct /ecause t"ey /e#ie*e erosene "as a #o- tota# sa#es *a#ue re#ati*e to t"e tota#sa#es *a#ues of gaso#ine and ot"er products. :t"er companies may consider t"e *ice *ersa.Moreo*er t"e c#assification of products can c"ange o*er time depending on t"e price of t"eproduct in t"at year.

Illustration H

@or out t"e estimated pre separation cost per ton of /y 7 products 8 ! ] from t"e fo##o-ingdata?

5re Separation Cost 2'D ' ?

I##ustration

=-o products 5 ! are o/tained in a crude form and reGuire furt"er processing at a cost ofRs.? for 5 and Rs. > for unit /efore sa#e. Assuming a net margin of 2?N on cost t"eir sa#esare fi$ed ^ Rs.1'. ? and Rs. . ? per unit respecti*e#y. ,uring t"e process oint cost incurred-as Rs. DDD and t"e outputs -ere per mac"ine"our. &i$ed capacity costs -"ic" -i## not /e affected /y any ma e or /uy decisionrepresent DN of t"e app#ied o*er"ead.ReGuired)

Rs.2 DDD Y (Rs.>DD $ 1? $D. >)

,I-E C'C,E C S! Rs.> 2D Rs.? >D


51/61

[MACME]

As t"e a/o*e comparison demonstrates t"e #o-est initia# cost does not #ead to t"e #o-est costo*era##. 5ro ect A is t"e more cost effecti*e option to pursue.

:5en is life cycle costing useful

Documents

Management Accounting Made Easy.doc