Samenvatting Accounting 2

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Summary Accounting 2

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Chapter 1: The accountants role in the organization

Management accounting measures and reports financial information as well as other types of

information that are intended primarily to assist managers in fulfilling the goals of the organization.

Financial accounting focuses on external reporting that is directed by authoritatie guidelines.

The broad differences between management and financial accounting are in! regulations" range and detail

of information" reporting interal" time period.

Cost accounting measures and reports financial and non#financial information related to the

organization$s ac%uisition or consumption of resources. &t proides information for both management

accounting and financial accounting.

Cost managementare the actions that managers underta'e in the short#run and long#run planning and

control of costs that increase alue for customers and lower the costs of products and serices.

The accounting system is among the most significant %uantitatie information systems in almost eery

organization. This system aims to proide information for fie broad purposes!

#

(ormulating oerall strategic and long#range plans"

# )esource allocation decisions such as product and customer emphasis and pricing"

#

*ost planning and cost control of operations and actiities"

#

+erformance measurement and ealuation of people"

#

,eeting external regulatory and legal reporting re%uirements where they exist.

Planning! The choosing of goals- predicting results under arious ways of achieing those goals- and then

deciding how to attain the desired goals.

Control: This coers both the action that implements the planning decision and deciding on performance

ealuation and the related feedbac' that will help future decision ma'ing.

Budget: The %uantitatie expression of a plan of action and an aid to the coordination andimplementation of the plan.

nderstanding the reasons for any difference between actual results and budgeted results is an important

part of management by exception- which is the practice of concentrating on areas not operating as

expected and placing less attention on areas operating as expected. The term ariance refers to the

difference between the actual results and the budgeted amounts.

,anagement accountants can be considered to perform three important functions! scorekeeping /data

accumulation0- attention directing/isualizing opportunities and problems0- andproblem solving.

ey themes in management decision ma'ing are!

#

*ustomer focus"

#

alue#chain and supply#chain analysis"

#

ey success factors! *ost and efficiency- %uality- time- and innoation"

# *ontinuous improement and benchmar'ing.

These themes are all interrelated.

&mportant management themes are shaping the design and uses of management accounting systems. A

ariety of global forces are affecting management accounting thin'ing and practices- including

organizational structure changes- digitization- the need to assess intellectual capital and recognize thesignificance of 'nowledge management.
http://www.studeersnel.nl/


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Chapter 2: An introduction to cost terms and purposes

Cost: A resource sacrificed or forgone to achiee a specific ob3ectie. ,ost people consider costs as

monetary amounts that must be paid to ac%uire goods and serices. A cost ob3ect is an item for which

cost information is needed.

A costing system typically accounts costs for costs in two basic stages!

# Cost accumulation: The collection of costs data in some organized way through an accounting

system"

# Cost assignment:A general term that encompasses both! tracing accumulated costs to a cost object

/such as a new machine- employee- etc.0- and allocating accumulated costs to a cost ob3ect.

Actual costs: The costs incurred /historical costs0- as distinguished from budgeted or forecasted costs"

Normal costs:4udgeted rather than actual amounts are used to calculate indirect#cost rates.

Direct costs o a cost o!"ect are costs that are related to the particular cost ob3ect and that can be tracedto it in an economically feasible /cost#effectie0 way.

#ndirect costs o a cost o!"ect are costs that are related to the particular cost ob3ect but cannot be traced

to it in an economically feasible /cost#effectie0 way. &ndirect costs are allocated to the cost ob3ect using a

cost#allocation method.

Seeral factors will affect the classification of a cost as direct or indirect! the materiality of the cost in

%uestion" aailable information#gathering technology" design of operations.

Cost tracing is the assigning of direct costs to the chosen cost ob3ect"

Cost allocationis the assigning of indirect costs to the chosen ob3ect.

Cost assignmentencompasses both cost tracing and cost allocation.

*ost reduction efforts fre%uently identify two 'ey areas!

#

(ocusing on alue#added actiities"

#

5fficiently managing the use of the cost driers in those alue#added actiities.

A cost dri$er % cost generator % cost determinant is any factor that affects total costs.

&aria!le cost: A cost that does change in total in proportion to total demand

Fi'ed cost: A cost that does not change in total in proportion to total demand.

The definitions of ariable costs and fixed costs hae important underlying assumptions!

#

*osts are defined as ariable or fixed with respect to a specific cost ob3ect"#

The time span must be specified"

#

Total costs are linear"

#

There is only one cost drier"

#

ariations in the leel of the cost drier are within a releant range! the range of the cost drier in

which a specific relationship between cost and the leel of actiity or olume is alid

(nit cost % a$erage cost: This is calculated by diiding some amount of total cost by the related number of

units- whether this is in monetary terms or not. 6oweer- while unit costs are often useful- they must be

interpreted with extreme caution if they include fixed costs per unit.


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Capitalized costs are first recorded as an asset /capital0 when they are incurred. These costs are presumed

to proide future benefits to the company.

)e$enue costs are recorded as expenses of the accounting period when they are incurred.

The capitalized and reenue costs apply to companies in all three sectors of the economy!

#

*er$ice+sector companiesproide serices or intangible products to their customers"

# Merchandising+sector companies proide tangible products they hae preiously purchased in

the same basic form from suppliers"

# Manuacturing+sector companies proide tangible products that hae been conerted to a

different form from that of the products purchased from suppliers.

&n the manufacturing sector three main types of costs are used!

# Direct material costsare the ac%uisition costs of all materials that eentually become part of the

cost ob3ect and that can be traced to the cost ob3ect in an economically feasible way"

# Direct manufacturing labor costs include the compensation of all manufacturing labor that is

specifically identified with the cost ob3ect and that can be traced to the cost ob3ect in an

economically feasible way"

#

Indirect manufacturing costs / manufacturing overhead costs / factory overhead costs are all

manufacturing costs considered to be part of the cost ob3ect- but that cannot be indiidually

traced to that cost ob3ect in an economically feasible way.

The three categories of stoc' found in many manufacturing#sector companies depict stages in the

conersion process! direct materials- wor' in progress and finished goods.

Prime costs are all direct manufacturing costs"

Con$ersion costs are all manufacturing costs other than direct materials costs.Product costis the sum of the costs assigned to a product for a specific purpose- such as!

#

+roduct pricing and product emphasis"

#

*ontracting with goernment agencies"

#

(inancial statements.


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Chapter ,: -o!+costing s.stems

Check numerical methods and examples in book!

Cost object! Anything for which a separate measurement of costs is desired"

Direct costs of a cost object! *osts that are related to the particular cost ob3ect and can be traced to it in

an economically feasible /cost#effectie0 way"

Indirect costs of a cost object! *osts that are related to the particular cost ob3ect but cannot be traced to it

in an economically feasible /cost#effectie0 way. &ndirect costs are allocated to the cost ob3ect using a

cost#allocation method.

Cost pool: A grouping of indiidual cost items"

Cost+allocation !ase: A factor that is the common denominator for systematically lin'ing an indirect cost

or group of indirect costs to a cost ob3ect.

These fie terms constitute the building bloc's that are considered releant in the design of costing

systems. There are two extremes of costing systems- but note that most companies use a mix!

#

-o!+costing s.stem: *osts are assigned to a distinct unit- batch or lot of a product or serice"# Process+costing s.stem: The cost ob3ect is masses of identical or similar units.

The general approach to 3ob#costing in serice# and manufacturing organizations is!

Step 1! &dentify the 3ob that is the chosen cost ob3ect"

Step 2! &dentify the direct costs for the 3ob"

Step 7! &dentify the indirect#cost pools associated with the 3ob"

Step 8! Select the cost#allocation base to use in allocating each indirect#cost pool to the 3ob"

Step 9! :eelop the rate per unit of the cost#allocation base used to allocate indirect costs to the 3ob"

Step ;! Assign the costs to the cost ob3ect by adding all direct costs and all indirect costs.

,anagers and accountants gather the information that goes into their cost systems through source

documents- which are the original records that support 3ournal entries in an accounting system.

Actual costs: The costs incurred /historical costs0- as distinguished from budgeted or forecasted costs"

Normal costing traces direct costs to a cost ob3ect by using the actual direct#cost rate times the actual

%uantity of the direct#cost input and allocates indirect costs based on the budgeted indirect#cost rate

times the actual %uantity of the cost#allocation base.

Actual costing Normal costing

Direct-cost rates Actual rates Actual ratesIndirect-cost rates Actual rates 4udgeted rates

(ndera!sor!ed % underapplied % underallocated indirect costs occur when the allocated amount of

indirect costs in an accounting period is less thanthe actual /incurred0 amount in that period.

/$era!sor!ed % o$erapplied % o$erallocated indirect costs occur when the allocated amount of indirect

costs in an accounting period exceedsthe actual /incurred0 amount in that period.

Three 'ey source documents in a 3ob#costing system are a 3ob cost record- a materials re%uisition record

and a labor time record.


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There are two main approaches to dispose of underallocation < oerallocation oerhead costs!

# Ad"usted+allocation rate approach: This restates all entries in the general ledger by using actual

cost rather than budgeted cost rates. (irst- the actual indirect#cost rate is calculated at the end of

each period. Then- eery 3ob to which indirect costs were allocated during the period has its

amount recalculated using the actual indirect#cost rate /rather than the budgeted indirect#cost

rate0. (inally- end#of#period closing entries are made. The result is that eery single 3ob cost

record = as well as the closing stoc' and cost of goods sold accounts = accurately represents

actual indirect costs incurred"

# Proration approach:Spreading of under# or oer#allocated oerhead among closing stoc's and

cost of goods sold.


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Chapter 0: Process+costing s.stems


Process+costing s.stem: The unit cost of a product or serice is obtained by assigning total costs to many

identical or similar units. The principal difference between process costing and 3ob costing is the extent of

aeraging used to calculate unit costs of products or serices. &n a 3ob#costing system- indiiduals 3obs use

different %uantities of production resources.

Con$ersion costs: All manufacturing costs other than direct material costs- such as oerhead and direct

labor.

>ften- only two cost classifications- direct materials and conersion costsare necessary to assign costs to

products. Why? 4ecause all direct materials are added to the process at one time and all conersion costs

are generally added to the process uniformly through time. &f- howeer- two different direct materials are

added to the process at different times- two different direct material categories would be needed to

assign these costs in products. We can now illustrate the process costing in three cases!

Case 1: Process costing ith zero opening and zero closing or+in+progress stoc

This case shows that in a process#costing system- unit costs can be aeraged by diiding total costs in a

gien accounting period by total units produced in that period"

Case 2:Process costing ith no opening !ut a closing or+in+progress stoc

(or this- we need a fie#step procedure to calculate the costs"

1. Summarize the flow of physical units of output"

2. *ompute output in terms of e%uialent units /focus on %uantities0"

7. *ompute e%uialent unit costs /focus on monetary %uantities0"

8.

Summarize total costs to account for"9.

Assign total costs to units completed and to units in closing wor' in progress.

34ui$alent units is a deried amount of output units that ta'es the %uantity of each input /factor of

production0 in units completed or in wor' in progress- and conerts it into the amount of completed

output units that could be made with that %uantity of input.

Case ,: Process costing ith !oth some opening and some closing or+in+progress stoc

To assign costs to each category- we need to choose a stoc' cost#flow method. We can use two stoc' cost#

flow methods- namely!

#

5eighted+a$erage process+costing method: This calculates the e%uialent#unit cost of the wor'done to date and assigns this cost to e%uialent units completed and transferred of the process

and to e%uialent units in closing wor'#in#progress stoc'. The weighted#aerage cost is the total

of all costs entering the Wor' in +rogress account diided by total e%uialent units of wor' done

to date"

# First+in6 irst+out 7F#F/8 method: This assigns the cost of the preious period$s e%uialent units in

opening wor'#in#progress stoc' to the first units completed and transferred out of the process-

and assigns the cost of e%uialent units wor'ed on during the current period first to complete

beginning stoc'- then to start and complete new units- and finally to units in closing wor'#in#

progress. A distinctie feature of the (&(> process#costing method is that wor' done on opening

stoc' before the current period is 'ept separate from wor' done in that current period.The weighted#aerage method yields higher W&+#closing- but lower finished goods inentory than (&(>.


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*tandard+costing method separates standard or e%uialent#unit costs on the basis of the different

technical processing specifications for each product. &dentifying standard costs for each product

oercomes the disadantage of costing all products at a single aerage amount- as under actual costing.

Transerred+in costs % Pre$ious department costsare the costs incurred in a preious department that

are carried forward as the products$ cost when it moes to a subse%uent process in the production cycle.

Transferred#in costs are treated as if they are a separate type of direct material added at the opening of

the process. Some points to remember when reiewing transferred#in costs!

# &nclude transferred#in costs from preious departments in your calculations"

#

&n calculating costs to be transferred on a (&(> basis- do not oerloo' the costs assigned at the

opening of the period to units that were in process but are now included in the units transferred"

#

nit costs may fluctuate between periods. Therefore- transferred units may contain batches

accumulated at different unit costs"

# nits may be measured in different terms in different departments. *onsider each department

separately.

9.!rid+costing s.stem blends characteristics from both 3ob#costing systems and process#costing systems.Job#costing and process#costing systems are best seen as the ends of a continuum.


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We now examine three methods of allocating the costs of support departments!

# Direct allocation method % Direct method allocates each support department$s costs directly to

the operating departments"

# *tep+don allocation method % *tep+allocation method % *e4uential allocation methodallows

for partial recognition of the serices rendered by support departments to other support

departments"

# )eciprocal allocation method allocates costs by explicitly including the mutual serices proided

among all support departments. The reciprocal allocation method enables us to incorporate

interdepartmental relationships fully into the support department cost allocations.

We next consider two methods used to allocated common costs. A common cost is a cost of operating a

facility- operation- actiity or other cost ob3ect that is shared by two or more users. Two methods of

allocating common costs are!

# *tand+alone cost+allocation method: This uses information pertaining to each cost ob3ect as a

separate operating entity to determine the cost#allocation weights"

#

#ncremental cost+allocation method ran's the indiidual cost ob3ects and then uses this ran'ingto allocate costs among those cost ob3ects.

;a!or+paced operations:Wor'er dexterity and productiity determine the speed of production"

Machine+paced operations: ,achines conduct most phases of production- such as moement of

materials to the production line- assembly and other actiities on the production line and shipment of

finished goods to the deliery bay areas.

The use of an inappropriate cost allocation base can cause products to be manufactured less efficiently-

management to be misfocused and products to be mispriced in the mar'etplace. There is growing interest

in cost hierarchies- which are categorizations of costs into different cost pools based on either differentclasses of cost driers or different degrees of difficulty in determining cause#and#effect relationships.


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Chapter =: #ncome eects o alternati$e stoc+costing methods


The reported profit number of manufacturing companies is affected by cost accounting choices related to

stoc'. &n this chapter we examine two such choices!

#

Stoc'#costing choices! The choices here relate which costs are to be recorded as stoc' when they

are incurred"

# :enominator#leel choices! The choices here relate to the preselected leel of the cost allocation

base used to set budgeted fixed manufacturing cost rates.

*toc+costing choices

Stoc'#costing choices can be subdiided into!

# &aria!le costing: A method of stoc' costing in which all ariable manufacturing costs are included

as inentoriable costs. All fixed manufacturing costs are excluded from inentoriable costs" they

are costs of the period in which they are incurred. The ariable costing income statement is based

on the contribution margin format"

# A!sorption costing:A method of stoc' costing in which all ariable manufacturing costs and all

fixed manufacturing costs are included as inentoriable costs. That is- stoc' Eabsorbs$ all

manufacturing costs. The absorption costing income statement is based on the gross margin

format.

The heart of the difference between ariable and absorption costing for financial reporting is accounting

for fixed manufacturing costs!

Direct #ndirect

Same under both

methods

&aria!le :irect manufacturing cost &ndirect manufacturing

costDiffers under both

methods

Fi'ed :irect manufacturing cost &ndirect manufacturing

cost

&f the stoc' leel increases during an accounting period- ariable costing will generally report less

operating profit than absorption costing" when the stoc' leel decreases- ariable costing will generally

report more operating profit than absorption costing. These differences in operating profit are due solely

to moing fixed manufacturing costs into stoc' increase and out of stoc' as they decrease.

The difference between operating profit under absorption costing and ariable costing can be calculated

using the following formula!

/bsorption-costing operating profit " #variable-costing operating profit $ #fixed manufacturing

costs in closing stock " #fixed manufacturing costs in opening stock


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Two alternatie formulae can be used if we assume that all manufacturing ariances are written off as

period costs- that no change occurs in wor'#in#progress stoc' and that no change occurs in the budgeted

fixed manufacturing oerhead rate between accounting periods!

#absorption-costing operating income " #variable-costing operating income $ #units produced "

units sold x #budget fixed manufacturing cost rate $ #closing stock in units " opening stock in

units x #budget fixed manufacturing cost rate

A!sorptioncosting

Actual costing Normal costing *tandard costing

&aria!le

costing

ariable direct

conersion costs

Actual prices x

actual inputs

used

Actual prices x

actual inputs

used

Standard prices x

standard inputs

allowed for actual

output achieed

ariable indirect

manufacturing

costs

Actual ariable

indirect rates x

actual inputs

used

4udgeted

ariable

indirect rates x

actual inputs

used

Standard ariable

indirect rates x

standard inputs

allowed for actual

output achieed(ixed

manufacturing

costs

Actual prices x

actual inputs

used

Actual prices x

actual inputs

used

Standard prices x

standard inputs

allowed for actual

output achieed

(ixed indirect

manufacturing

costs

Actual ariable

indirect rates x

actual inputs

used

4udgeted

ariable

indirect rates x

actual inputs

used

Standard ariable

indirect rates x

standard inputs

allowed for actual

output achieed

*ritics of absorption costing hae made a ariety of proposals for reising how managers are ealuated.

Their proposals include the following!# *hange the accounting system"

#

*hange the time period used to ealuate performance"

#

*areful budgeting and stoc' planning to reduce management$s freedom to build excess stoc'"

#

&nclude non#financial as well as financial ariables in the measure used to ealuate performance.

Denominator+le$el choices

:enominator#leel choices can be narrowed down to!

# Theoretical capacit.: The denominator#leel concept that is based on the product of output at

full efficiency for all of the time"

#

Practical capacit.: The denominator#leel concepts that reduces theoretical capacity forunaoidable operating interruptions such as scheduled maintenance time- shut#downs for

holidays- and so on"

# Normal utilization:The denominator#leel concept based on the leel of capacity utilization that

satisfies aerage customer demand oer a period that includes seasonal- cyclical or other trend

factors"

# Master+!udget utilization: The denominator#leel concept based on the anticipated leel of

capacity utilization for the next budget period.

5ach denominator#leel concept will result in a different production#olume ariance!

%roduction-volume variance $ #denominator level in output units " actual output units x #budget

fixed manufacturing overhead rate per output unit


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Chapter >: Cost+$olume+proit relationships

Cost+$olume+proit 7C&P8 analysis examines the behaior of total reenues- total costs and operating

profit as changes occur in the output leel- selling price- ariable costs or fixed costs.

)e$enues are inflows of assets receied in exchange for products or serices proided to customers. A

re$enue dri$er is a factor that affects reenues. Costs are resources sacrificed or forgone to achiee a

specific ob3ectie. A cost dri$er is a factor that affect costs.

The straightforward relationship between cost and reenue proide an excellent base for understanding

the more complex relationships that exist with multiple reenues and multiple cost driers.

/perating proitis total reenues from operations minus total costs from operations /excluding taxes0"

Net proit is operating profit plus non#operating reenues minus non#operating costs minus income taxes.

The !rea+e$en point is that %uantity of output where total reenues and total costs are e%ual- that is-

where the operating profit is zero. We examine three methods for determining the brea'#een point- and

one method for calculating with a budgeted profit!

# 34uation method: )eenues = ariable costs = fixed costs F operating profit"

# Contri!ution margin method:/(ixed costs0 < /nit selling price = nit ariable costs0

o Contri!ution income statement: This lines items by cost behaior pattern to highlight

the contribution margin.

# ?raph method: &n the graph method- we plot the total costs line and the total reenues line.

Their point of intersection is the brea'een point"

# Target operating proit 7T/P8:)eenues = ariable costs = fixed costs F target operating profit.

,oreoer- /fixed costs G target operating profit0 < /nit selling price = unit ariable costs0.

A proit+$olume 7P&8 graph shows the impact on operating profit of changes in the output leel.

We can also introduce income tax effects- which account as follows!

&evenues " variable costs " fixed costs $ 'perating profit $ #target net profit / #( " tax rate

The presence of income taxes will not change the brea'een point- since by definition the operating profit

will be zero at the brea'een point.

*ensiti$it. anal.sis is a what#if techni%ue that examines how a result will change if the original predicted

data are not achieed or if an underlying assumption changes. >ne aspect of sensitiity analysis is the

margin o saet.- which is the excess of budgeted reenues oer the brea'een reenues. Sensitiity

analysis is one approach to recognizing uncertaint.6which is the possibility that an actual amount willdeiate from an expected amount. Another approach is to calculate expected alues using probability

distributions.

The ris'#return trade#off across alternatie cost structures is usefully summarized in a measure called

operating leverage. /perating le$erage describes the effects that fixed costs hae on changes in

operating profit as changes occur in units sold and hence in contribution margin. At any gien leel of

sales- the degree of operating leerage e%uals the contribution margin diided by operating profit.

&n brief- whether costs really are fixed depends heaily on the releant range- the length of the time

horizon in %uestion- and the specific decision situation.


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)e$enue mi' % sales mi' is the relatie combination of %uantities of products or serices that constitutes

total reenues.

Some formulas to remember!

Contribution margin $ revenues " all variable costs

)ross margin $ revenues in cost of goods sold

Contribution margin percentage $ #total contribution margin / #revenues

*ariable-cost percentage $ #total variable costs / #revenues

)ross-margin percentage $ #gross margin / #revenues


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Chapter @: Determining ho costs !eha$e

A cost function is a mathematical function describing cost behaior patterns = how cost change with

changes in the cost drier. *osts are either linear or non#linear. *+#analysis re%uires linear cost

functions. We write the linear cost function as!

+ $ constant / intercept , slope x variable $ a , b

There are seeral types of linear cost functions!

# ariable cost function! = 0, 0

#

(ixed cost function! 0, = 0

#

,ixed < semiariable cost function! 0, 0

Cost estimation is the attempt to measure past cost relationships between total costs and the driers of

those costs. ,anagers are interested in estimating past cost#behaior patterns primarily because these

estimates can help them ma'e more accurate cost predictions- or forecasts- about future costs. *hapter 2

outlined three other specifications necessary to classify costs into their fixed and ariable cost

components! choice of cost ob3ect" time span" releant range.

The most important issue in estimating a cost function is to determine whether a cause#and#effect

relationships exists between the cost drier and the resulting costs. 4e careful not to interpret a high

correlation- between two ariables to mean that either ariable causes the other.

There are four approaches to cost estimation. These approaches differ in the costs of conducting the

analysis- the assumptions they ma'e- and the eidence they proide about the accuracy of the estimated

cost function. They are not mutually exclusie. ,any organizations use a combination of the approaches!

# #ndustrial engineering method % 5or+measurement method: This estimates cost functions by

analyzing the relationship between inputs and outputs in physical terms"# The conerence method:This estimates cost functions on the basis of analysis and opinions about

costs and their driers gathered from arious departments of an organization"

# The account anal.sis method: This estimates cost functions by classifying cost accounts in the

ledger as ariable- fixed- or mixed with respect to the identified cost drier.

#

uantitati$e anal.sis o current or past cost relationships: There are six steps in estimating a

cost function on the basis of an analysis of current or past cost relationships!

o Step 1! *hoose the dependent ariable /the cost ariable to be predicted0"

o Step 2! &dentify the independent ariable /leel of actiity or cost drier0"

o Step 7! *ollect data on the dependent ariable and the cost drier"

o

Step 8! +lot the data in a graph"o

Step 9! 5stimate the cost function"

o

Step ;! 5aluate the estimated cost function.


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,anagers at times- use ery simple methods to estimate cost functions- such as!

#

The high+lo method- which entails using only the highest and lowest obsered alues of the

cost drier within the releant range. The line connection these two points becomes the

estimated cost function. Since the slope coefficient b $ #difference bet.een costs associated .ith

highest and lo.est observations of the cost driver / #difference bet.een highest and lo.est

observations of the cost driver0- we can sole for a $ y " b"

# )egression anal.sis is a statistical method that measures the aerage amount of change in the

dependent ariable that is associated with a unit change in one or more independent ariable.

*imple regression anal.sis estimates the relationship between the dependent ariable and one

independent ariable. Multiple regression anal.sis estimates the relationship between the

dependent ariable and multiple independent ariables.

Three criteria for ealuating and choosing cost driers are! /a0 economic plausibility- /b0 goodness of fit-

and /c0 the slope of the regression line.

So far we hae assumed linear cost functions. &n practice- cost functions are not always linear!

# Non+linear cost unctions are cost functions where- within the releant range- the graph of total

costs ersus the leel of a single actiity is not a straight line"

# A step+cost unction is a cost function in which the cost is constant oer arious ranges of the

cost drier- but the cost increases by discrete amounts as the cost drier moes from one range

to the next- such as the step#ariable cost function and the step#fixed cost function.

Hearning cures also result in cost functions being non#linear. A learning cur$e is a function that shows

how labor#hours per unit decline as units of production increase and wor'ers learn and become better at

what they do. An e'perience cur$e is a function that shows how full product costs per unit decline as unit

of output increase. We now describe two learning#cure models!# Cumulati$e a$erage+time learning model: The cumulatie aerage time per unit declines by a

constant percentage each time the cumulatie %uantity of units produced doubles"

# #ncremental unit+time learning model: The incremental unit time /the time needed to produce

the last unit0 declines by a constant percentage each time the cumulatie %uantity of units

produced doubles.


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Chapter 1: )ele$ant inormation or decision maing

A decision model is a formal method for ma'ing a choice- fre%uently inoling %uantitatie and %ualitatie

analyses. )ele$ant costs are those expected future costs that differ among alternatie courses of action.

The two 'ey aspects to this definition are that the costs must occur in the future and that they must differ

among the alternatie courses of action. )ele$ant re$enues are those expected future reenues that

differ among alternatie courses of action. The difference in total cost between two alternaties is a

dierential cost.

We diide the conse%uences of alternaties into two broad categories!

#

uantitati$e actors are outcomes that are measured in numerical terms"

# ualitati$e actors are outcomes that cannot be measured in numerical terms.

,anagers often ma'e decisions that affect output leels. When changes in the output leel occur-

managers are interested in the effect it has on the organization and on operating profit. Why? 4ecause

maximizing organizational ob3ecties also increase managers$ rewards. ,anagement is sometimes faced

with the decision of accepting or re3ecting one#off special orders when there is idle production capacity

and where the order has no long#run implications.

&ncremental costs are additional costs to obtain an additional %uantity- oer and aboe existing or

planned %uantities- of a cost ob3ect. There are two common problems in releant#cost analysis! /a0

assuming all ariable costs are releant- and /b0 assuming all fixed costs are irreleant.

/utsourcing is the process of purchasing goods and serices from outside endors rather than producing

the same goods or proiding the same serices within the organization- which is called insourcing.

:ecisions about whether a producer of goods or serices will insource or outsource are also called mae+or+!u. decisions.

>pportunity cost is the maximum aailable contribution to income that is forgone /re3ected0 by not using

a limited resource in its next#best alternatie use. The idea of an opportunity cost arises when there are

multiple uses for resources and some alternaties are not selected. >pportunity cost is often included in

decision ma'ing because it represents the best alternatie way in which an organization may hae used it

resources had it not made the decision it did.

When a multiple#product plant operates at full capacity- managers must often ma'e decisions regarding

which products to emphasize. These decisions fre%uently hae short#run focus. ,anagers should aim forthe highest contribution margin per unit of the constraining factor= that is- the scarce- limiting or critical

factor. The constraining factor restricts or limits the production or sale of a gien product.

5xpected future reenues and costs are the only reenues and costs releant in any decision model. The

boo' alue of existing e%uipment in e%uipment#replacement decisions represents past /historical0 cost

and therefore is irreleant.


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Chapter 11: Acti$it.+!ased costing


Cost smoothingis a costing approach that uses broad aerages to uniformly assign the cost of resources

to cost ob3ects when the indiidual products- serices or customers in fact use those resources in a non#

uniform way. *ost smoothing can lead to!

# Product undercosting: A product consumer a relatiely high leel of resources but is reported to

hae a relatiely low total cost"

# Product o$ercosting:A product consumers a relatiely low leel of resources but is reported to

hae a relatiely high total cost.

Product+cost cross+su!sidization means that at least one miscosted product is resulting in the miscosting

of other products in the organization.

A 3ob


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A cost hierarch. categorizes costs into different cost pools on the basis of the different types of cost

drier or different degrees of difficulty in determining cause#and#effect relationships. A4* systems

commonly use a four#part cost hierarchy- namely!

# /utput+unit+le$el costs are resources sacrificed on actiities performed on each indiidual unit of a

product or serice"

#

Batch+le$el costs are resources sacrificed on actiities that are related to a group of units of products

or serices rather than to each indiidual unit of product or serice"

# Product+sustaining % ser$ice+sustaining costs are resources sacrificed on actiities underta'en to

support indiidual products or serices"

# Facilit.+sustaining costs are resources sacrificed on actiities that cannot be traced to indiidual

products or serices but which support the organization as a whole.

Acti$it.+!ased management 7ABM8 describes management decisions that use actiity#based costing

information to satisfy customers and manage profitability. Although A4, has many definitions- we define

it broadly to include pricing and product#mix decisions- cost reduction and process improement

decisions- and product design decisions.

sing department indirect#cost rates to allocate costs to products results in the same product costs as

actiity#cost rates if!

#

A single actiity accounts for a sizeable fraction of the department$s costs"

#

Significant costs are incurred on different actiities within a department but each actiity has the

same cost#allocation base"

# Significant costs are incurred on different actiities with different cost#allocation bases within a

department but different products use resources from the different actiity areas in the same

proportions.

Where any one of these three conditions holds- using department indirect#cost rates rather than actiityrates is often ade%uate. &n companies where none of these conditions hold- department costing systems

can be refined using A4* systems.

>rganizational context influences the decision to adopt A4* as well as its conse%uences. Dational

contextual factors are also li'ely to hae an effect.


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Chapter 12: Pricing6 target costing and customer proita!ilit. anal.sis

There are three ma3or influences on pricing decisions! customers- competitors and costs. ,ost pricing

decisions are either short run /less than one year0 or long run /more than one year0. Short#run decisions

include /10 pricing for a one#off special order with no long#term implications- and /20 ad3usting product

mix and output olume in a competitie mar'et. Hong#run decisions include pricing a product in a ma3or

mar'et where price setting has considerable leeway.

*hort+run pricing decisions

#

>ne#off special order! 5xisting fixed manufacturing oerhead costs are irreleant- since these

costs do not change if the special one#off order is accepted. >nly releant costs should be ta'en

into account.

;ong+run pricing decisions

,any pricing decisions are made for the long run. 4uyers prefer stable prices oer an extended time

horizon. A stable price reduces the need for continuous monitoring of suppliers$ prices. Ireater prices

stability also improes planning and build long#run buyer#seller relationships. Short#run pricing focuses on

coering ariable costs- while long#run pricing focuses on coering both ariable and fixed costs. >btaining

appropriate product#cost information is useful to a manager ma'ing a pricing decision.

The starting point for pricing decisions can be!

#

,ar'et#based! Iien what our customers want and how our competitors will react to what we

do- what price should we charge?

# *ost#based < *ost#plus! What does it cost us to ma'e this product- and hence what price should

we charge that will recoup our costs and produce a desired profit?

arket-based approach0 1arget costing and target pricingAn important form of mar'et#based price is the target price. A target price is the estimated price for a

product or serice that potential customers will be willing to pay. A target operating proit per unit is the

operating profit that a company wants to earn each unit of a product or serice sold. The target price

leads to a target cost. A target cost per unitis the estimated long#run cost per unit of a product or serice

that- when sold at the target price- enables the company to achiee the target operating profit per unit.

We need to include allcosts in the target cost calculations- both fixed and ariable.

:eeloping target prices and target costs typically entails the following steps!

# Step 1! :eelop a product that satisfies the needs of potential customers"

# Step 2! *hoose a target price based on customers$ perceied alue for the product and the prices

competitors charge- and a target operating profit per unit"#

Step 7! :erie a target cost per unit by subtracting the target operating profit per unit from the

target price"

#

Step 8! +erform alue engineering to achiee target costs.


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&alue engineering is a systematic ealuation of all aspects of the alue#chain business function- with the

ob3ectie of reducing costs while satisfying customer needs. alue engineering can result in

improements in product designs- changes in materials specifications or modifications in process

methods. Two 'ey concepts in alue engineering and in managing alue#added and non#alue#added costs

are cost incurrence and loc'ed#in costs. Cost incurrence occurs when a resource is sacrificed or used up.

;oced+in costs % Designed+in costs are those costs that hae not yet been incurred but that will be

incurred in the future on the basis of decisions that hae already been made.

The best way to ealuate the effect of alternatie design decisions on the target cost per unit is to

organize a cross#functional alue#engineering team- because only a cross#functional team can ealuate

the impact of design decisions on all alue#chain functions. nless managed properly- alue engineering

and target costing can hae undesired conse%uences!

# The cross#functional team may add too many features in an attempt to accommodate the

different wishes of team members"

# Hong deelopment times may result as alternatie designs are ealuated endlessly"

# >rganizational conflicts may deelop as the burden of cutting costs falls une%ually on different

parts of the organization.

To aoid these pitfalls- target#costing efforts should always focus on the customer- pay attention to

schedules- and build a culture of teamwor' and cooperation across business functions.

Cost-plus approach0 Cost-plus costing2 life-cycle costing

The general formula for setting a price adds a mar'#up to the cost base- but how is the mar'#up

percentage determined? >ne approach is to choose a mar'#up to earn a target rate o return on

in$estment /F the target operating profit that an organization must earn diided by inested capital0.

,any different costs can sere as the cost base in applying the cost#plus formula. +rices are then modified

on the basis of customers$ reactions and competitors$ responses.

The product lie c.cle spans the time from initial ): to the time at which support to customers is

withdrawn. sing lie+c.cle !udgeting- managers estimate the reenues and costs attributable to each

product from its initial ): to its final customer sericing and support in the mar'etplace. ;ie+c.cle

costing trac's and accumulates the actual costs attributable to each product from start to finish. A

product life#cycle reporting format offers at least three important benefits!

# The full set of reenues and costs associated with each product becomes isible"

# :ifferences among products in the percentage of their total costs incurred at early stages in the

life cycle are highlighted"

# &nterrelationships among business function cost categories are highlighted.

Price discrimination is charging different prices to different customers.

Pea+load pricing is charging a higher price when demand approaches physical capacity.

Customer+proita!ilit. anal.sis refers to the reporting and analysis of customer reenues and customer

costs. The reenues of customers purchasing the same product can differ due to differences in the

%uantity of units purchased and discounts from list price. *ustomer#cost hierarchies highlight how some

costs can be reliably assigned to indiidual customers while other costs can be reliably assigned only to

distribution channels or to corporate#wide efforts. *ustomer#profitability reports- shown in a cumulatie

form- often reeal that a small percentage of customers contribute a large percentage of profits. &t is

important that companies deote sufficient resources to maintaining and expanding relationships withthese 'ey contributors to profitability.


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Chapter 10: Moti$ation6 !udgets6 and responsi!ilit. accounting

A !udget is a %uantitatie expression of a proposed plan of action by management for a future time

period and is an aid to the coordination and implementation of the plan. ,any companies adopt the

following budgeting cycle!

>rganizations use budgets- because budgets can!#

*ompel strategic planning including the implementation of plans!

o

Short#run planningshort#run budgets"

o

Hong#run planninglong#run budgets"

o

(orward#loo'ing budgets

#

+roide performance criteria!

o Actual ersus budgeted results"

o (eedbac' to managers"

o +erformance ealuation attached to budgets

# +romote communication and coordination within the organization!

o

A budget puts all the employees in the same direction"o

:epartment#goals are deried from the firm#goal"

o

A budget ma'es the lin's between departments salient and instigates communication

#

Affect motiating and wider organizational processes!

o

A budget proides people with a specific target"

o Targets should be challenging but attainable"

o +rocess in which the target is established should be considered as fair by the employee

)olling !udget: A budget or plan that is always aailable for a specified future period by adding a month-

%uarter or year in the future as the month- %uarter or year 3ust ended is dropped.

Fi'ed !udget: A budget or plan that is aailable per year- from January until :ecember.


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Top+don !udgeting: A budget in which the targets are set by the top management. &n this case- the

dangers are that targets are either too difficult or too easy- and targets are perceied as more unfair"

Bottom+up !udgeting: A budget in which the targets are set in accordance with lower management. The

danger is that lower#leel management may propose a target that is too low- but that can easily be met.

arious alternaties of budgeting are!

# Computer+!ased !udgeting: ,athematical statements of the relationships among operating

actiities- financial actiities and other factors that affect the budget. These models allow

management to conduct what#if /sensitiity0 analyses of the effects on the master budget of

changes in the original predicted data or changes in budget assumptions"

#

aizen !udgeting:This captures the continuous improement notion that is a 'ey management

concern. *osts in 'aizen budgeting are based on future improement that are yet to be

implemented rather than on current practices or methods"

# Acti$it.+!ased !udgeting: This focuses on the costs of actiities necessary to produce and sell

products and serices. &t is inherently lin'ed to actiity#based costing- but differs in its emphases

on future costs and future usage of actiity areas.

/rganizational structure is an arrangement of lines of responsibility within the entity. To attain the goals

described in the master budget- an organization must coordinate the efforts of all its employees = from

the top executie through all leels of management to eery superised wor'er. 5ach manager- regardless

of leel- is in charge of a responsibility centre. A responsi!ilit. centre is a part- segment or subunit of an

organization whose manager is accountable for a specified set of actiities. )esponsi!ilit. accounting is a

system that measures the plans /by budgets0 and actions /by actual results0 of each responsibility centre.

(our ma3or types of responsibility center are!

# Cost centre: ,anager accountable for costs only"

#

)e$enue centre:,anager accountable for reenues only"# Proit centre:,anager accountable for reenues and costs"

# #n$estment centre:,anager accountable for inestments- reenues and costs.

The responsibility accounting approach traces costs to either the indiidual who has the best 'nowledge

about why the costs arose- or the actiity that caused the costs.

Controlla!ilit. is the degree of influence that a specific manager has oer costs- reenues or other items

in %uestion. A controlla!le cost is any cost that is primarily sub3ect to the influence of a gien manager of

a gien responsibility centre for a gien time span.


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Chapter 1: Fle'i!le !udget6 $ariances and management control: #

A static !udget is a budget that is based on one leel of output" it is not ad3usted or altered after it is set-

regardless of ensuing changes in actual output /or actual reenue and cost driers0- it is calculated at the

start of the budget period.

Static-budget variance $ ctual results " static-budget amount of operating profit

A le'i!le !udget is ad3usted in accordance with ensuing changes in actual output /or actual reenue and

cost driers0- it is calculated at the end of the period.

#

Step 1! :etermine the budgeted selling price per unit- the budgeted ariable costs per unit and

the budgeted fixed costs"

# Step 2! :etermine the actual %uantity of the reenue drier"

# Step 7! :etermine the flexible budget for reenue based on the budgeted unit reenue and the

actual %uantity of the reenue drier"

# Step 8! :etermine the actual %uantity of the cost driers"

#

Step 9! :etermine the flexible budget for costs based on the budgeted unit ariable costs and

fixed costs and the actual %uantity of the cost driers

A a$ora!le $ariance /(0 is a ariance that increases operating income relatie to the budgeted amount.

An una$ora!le $ariance /0 is a ariance that decreases operating income relatie to the budgeted

amount.

3lexible-budget variance $ actual

results " flexible-budget amount $

price variance , efficiency variance

Sales-volume variance $ 3lexible-

budget amount " static-budget

amount

Static-budget variance $ flexible-

budget variance , sales-volume

variance

Price $ariance % #nput+price $ariance % )ate $ariances /actual price of input = budgeted price of input0 x

actual %uantity of input3icienc. $ariance % #nput+eicienc. $ariance % (sage $ariances /actual %uantity of input used =

budgeted %uantity of input allowed for actual output units achieed0 x budgeted price of input

A standard input is a carefully predetermined %uantity of input re%uired for one unit of output. A

standard cost is a carefully predetermined cost. We determine the standard %uantities and prices with

help of" past experience" obseration" benchmar'ing- either internal or external" continuous improement

by lowering standards continuously.

We use ariance analysis! to promote organizational learning" performance ealuation" and management

by exception! focus on areas that do not operate as expected.

Static#budget

ariance

(lexible#budget

ariance

+rice ariance5fficiency

ariance

Sales#2olume

ariance


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Chapter 1


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Fi'ed+o$erhead costs

Static-budget variance $ actual results "

static-budget amount

Sales-volume variance $ flexible-budget

amount " static-budget amount $ 5

3lexible-budget variance $ actual results

" flexible-budget amount $ spending

variance , efficiency variance

Spending variance $ #actual overhead rate " standard overhead rate x actual units of cost driver used

4fficiency variance $ #actual units of cost driver used " budgeted units of cost driver x standard overhead

rate $ 5

The production+$olume $ariance % denominator+le$el $ariance % output+le$el o$erhead $ariance is the

difference between budgeted fixed oerhead and the fixed oerhead allocated. (ixed oerhead is

allocated based on the budgeted fixed oerhead rate times the budgeted %uantity of the fixed#oerhead

allocation base for the actual output units achieed.

%roduction-volume variance $ budgeted fixed overhead " #fixed overhead allocated using

budgeted input allo.ed for actual output units achieved x budgeted fixed overhead rate

A 8#ariance analysis measures the spending- efficiency and production#olume ariance in relation to the

ariable and fixed manufacturing oerhead.

A 7#ariance analysis < combined ariance analysis measures the spending- efficiency and production#

olume ariance in relation to the total manufacturing oerhead

A 2#ariance analysis measures the flexible#budget ariance and production#olume ariance in relation to

the total manufacturing oerhead.

A 1#ariance analysis measures the total oerhead ariance in relation to the total manufacturing

oerhead.

(rom a planning and control standpoint- managers often find it useful to classify costs in general- andoerhead costs in particular- into three main categories!

# 3ngineered costs result specifically from clear cause#and#effect relationship between costs and output"

# Discretionar. costs arise from period decisions regarding the maximum outlay to be incurred- and they

hae no clearly measurable cause#and#effect relationship between costs and the outputs"

# #nrastructure costs arise from haing property- plant and e%uipment- and a functioning organization.

The separate analysis of ariable# and fixed#oerhead costs re%uires the use of separate ariable# and

fixed#oerhead control accounts and separate ariable# and fixed#oerhead allocated accounts. At the end

of each accounting period- any ariances for ariable# or fixed#oerhead costs can be disposed. (lexible

budgeting in A4*#systems enables insight into why actiity costs differ from those budgeted.

Static#budget

ariance

(lexible#budget

ariance

Spending arianceDo efficiency

ariance

Do sales#2olume

ariance


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Chapter 1=: Measuring .ield6 mi'6 and 4uantit. eects

This chapter focuses on ariance analysis with multiple inputs- as well as substitutable inputs. When

inputs are substitutable- mix refers to the relatie proportion or combination of the different inputs used

within an input category such as direct materials or direct manufacturing labor to produce a %uantity of

finished output. +ield refers to the %uantity of finished output units produced from a budgeted or

standard mix of inputs within an input category.

Static-budget variance$ flexible-budget variance , sales-volume variance $ actual results " static-budget

amount

Flexible-budget variance$ actual results " flexible-budget amount $ price variance , efficiency variance

Price variance$ /actual price of input " budgeted price of input x actual 6uantity of input

Efficiency variance$ #actual units of cost driver used " budgeted units of cost driver x standard

overhead rate $ yield variance , mix variance

Yield variance $ #actual total output " budgeted total output x budgeted mix 7 x

budgeted price

Mix variance$ #actual mix 7 - budgeted mix 7 x actual total output x budgeted price

Sales-volume variance $ flexible-budget amount " static-budget amount $ sales-mix variance , sales-

6uantity variance

Sales-mix variance$ total actual output x #actual mix 7 - budgeted mix 7 x budgeted price

Sales-quantity variance $ #total actual output " budgeted actual output x budgeted mix 7 x

budgeted price $ market-share variance , market-si8e variance

Market-share variance$ actual market output x #actual market 7 - budgeted market 7 x

budgeted price

Market-size variance $ #actual market output " budgeted market output x budgeted

market share x budgeted average selling price per unit

Static#budget ariance

(lexible#budget

ariance

+rice ariance 5fficiencyariance

Kield

ariance

,ix

ariance

Sales#2olume ariance

Sales#mix

ariance

Sales#%uantity

ariance

,ar'et#share

ariance ,ar'et#size

ariance


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Chapter 1>: Control s.stems and transer pricing

A management control s.stemis a means of gathering and using information to aid and coordinate the

process of ma'ing planning and control decisions throughout the organization and to guide employee

behaior. The goal of the system is to improe the collectie decisions within an organization. &nformation

for management control is gathered and reported at arious leels!

# Total#organization leel"

# *ustomer


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Chapter 1@: Control s.stems and perormance measurement

&ncreasingly- companies are supplementing internal financial measures with measures based on external

financial information- internal non#financial information- and external non#financial information. Some

companies present financial and non#financial performance measures for arious organization subunits in

a single report called the balanced scorecard. ,ost scorecards include /10 profitability measures" /20

customer#satisfaction measures" /70 internal measures of efficiency" /80 innoation measures.

The design of an accounting#based performance measure might entail the following general steps!

#

Step 1! *hoosing the ariable/s0 that represents top management$s financial goal/s0!

o )eturn on in$estment 7)/#8 income / investment

o

)esidual income income " #re6uire rate of return in 7 x investment

o 3conomic $alue added 73&A8 after-tax operating profit " 9:CC x #total assets "

current liabilities;

o )eturn on sales 7)/*8 operating profit / revenues

# Step 2! *hoosing definitions of the items included in the ariables in step 1- such as! total assets

aailable" total assets employed" wor'ing capital /current assets minus current liabilities0 plus

long#term assets" shareholders$ e%uity"

#

Step 7! *hoosing measures for the items included in the ariables in step 1!

o Current cost is the cost of purchasing an asset today identical to the one currently held.

4ecause historical#cost inestment measures are used often in practice- there has been

much discussion about the relatie merits of using gross boo' alue or net boo' alue.

# Step 8! *hoosing a target against which to gauge performance! We need to create a budget that

is carefully negotiated with full 'nowledge of historical#cost accounting pitfalls. The desirability of

tailoring a budget to a particular subunit and a particular accounting system cannot be

oeremphasized.

#

Step 9! *hoosing the timing feedbac'! Timing of feedbac' depends largely on how critical theinformation is for the success of the organization- the specific leel of management that is

receiing the feedbac'- and the sophistication of the organization$s information technology.

>rganizations create incenties by rewarding managers on the basis of performance. 4ut managers may

face ris's because random factors beyond their control may also affect performance. >wners choose a

mix of salary and incentie compensation to trade off the incentie benefit against the cost of imposing

ris'.

>btaining measures of employee performance that are superior is critical for implementing strong

incenties. ,any management accounting practices- such as the design of responsibility centers and the

establishment of financial and non#financial measures- hae as their goal better performance ealuation.,ost employees perform multiple tas's as part of their 3obs. &n some situations- one aspect of a 3ob is

easily measures- while another aspect is not. *reating incenties to promote the %uantitatie aspect may

cause a wor'er to ignore an %ualitatie aspect of the 3ob.

To aoid unethical behaior- companies need to balance the push for performance resulting from

diagnostic control systems- the first of four leers of control- with three other leers!

# Boundar. s.stems describe standards of behaior and codes of conduct expected of all

employees- especially action that are off#limits"

# Belie s.stems articulate the mission- purpose and core alues of a company"

#

#nteracti$e control s.stems are formal information systems that managers use to focusorganization attention and learning on 'ey strategic issues.


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Chapter 2: ualit. and throughput concerns in managing costs

,any companies throughout the world iew total %uality management as proiding an important

competitie edge. This is because %uality focus reduces costs and increases customer satisfaction.

&nternational %uality standards hae emerged- such that certification and an emphasis on %uality has

rapidly become conditions for competing in the global mar'et. Luality improement also has non#

financial and %ualitatie effects- such as enironmental aspects- that improe a company$s long#run

performance. &n this chapter we discuss two basic aspects of %uality!

# ualit. o design: This measures how closely the characteristics of products or serices match

the needs and wants of customers"

#

Conormance 4ualit.:The performance of a product or serice according to design and product

specifications.

The costs o 4ualit. 7C/8 are costs incurred to preent- or costs arising as a result of the production of a

low#%uality product. *osts of %uality are classified into four categories!

#

Pre$ention costs: *osts incurred in precluding the production of products that do not conform tospecifications"

# Appraisal costs: *osts incurred in detecting which of the indiidual units of products do not

conform to specifications"

# #nternal ailure costs: *osts incurred when a non#confirming product is detected before it is

shipped to customers"

# 3'ternal ailure costs: *osts incurred when a non#confirming product is detected after it is

shipped to customers.

There are seeral techni%ues to identify %uality problems- such as!

#

Control charts: A graph of a series of successie obserations of a particular step- procedure oroperation ta'en at regular interals of time. 5ach obseration is plotted relatie to specified

ranges that represent the expected distribution. >nly those obserations outside the specific

limits are ordinarily regarded as non#random and worth inestigating"

#

Pareto diagrams:This indicates how fre%uently each type of failure /defect0 occurs"

#

Cause+and+eect diagrams % Fish!one diagrams: This identifies potential causes of failures or

defects.

The releant costs of %uality improement are the incremental costs incurred to implement the %uality

program. The releant benefits are the saings in total costs and the estimated increase in contribution

margin from the higher sales that will result from the %uality improements.

Non+inancial measures o 4ualit. and customer satisaction

Customer satisfaction Internal performance

,ar'et research information

:efectie units shipped < total units shipped

Dumber of customer complaints

>n time deliery rate

Dumber of defects

5mployee turnoer

5mployee satisfaction

(inancial measures are helpful to ealuate trade#offs among preention and failure costs. They focus

attention on how costly poor %uality can be. Don#financial measures help focus attention on the precise

problem areas that need attention.


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The theor. o constraints 7T/C8 describes methods to maximize operating profit when faced with some

bottlenec's and some non#bottlenec' operations. &t defines three measurements!

# Throughput contri!ution- e%ual to sales reenue minus direct materials costs"

# &nestment /stoc'0- e%ual to the sum of materials of direct materials stoc'- wor'#in#progress stoc'

and finished goods stoc'" ): costs" and costs of e%uipment and buildings"

#

>perating costs- e%ual to all operating costs /other than direct materials0 incurred to earn

throughput contribution. >perating costs include salaries and wages- rent- utilities and

depreciation.

The ob3ectie of T>* is to increase throughput contribution while decreasing inestments and operating

costs. The theory of constraints considers short#run time horizons and assumes other current operating

costs to be fixed costs. The 'ey steps in managing bottlenec' resources are as follows!

# Step 1! )ecognize that the bottlenec' resource determines throughput contribution of the plant

as whole"

# Step 2! Search and find the bottlenec' resource by identifying resources with large %uantities of

stoc' waiting to be wor'ed on"

#

Step 7! eep the bottlenec' operation busy and subordinate all non#bottlenec' resources to the

bottlenec' resource. That is- the needs of the bottlenec' resource determine the production

schedule of non#bottlenec' resources"

#

Step 8! Ta'e actions to increase bottlenec' efficiency and capacity = the ob3ectie is to increase

throughput contribution minus the incremental costs of ta'ing such actions. These actions can

be!

o 5liminating idle time"

o +rocessing only those parts or products that increase sales and throughput contribution"

o Shifts products that do not hae to be made on the bottlenec' machine to non#

bottlenec' machines or to outside facilities"

o

)educe set#up times and processing time at bottlenec' operations"o

&mproe the %uality of parts or products manufactured at the bottlenec' operation.

Throughput accounting 7TA8is a management tool which is partly informed by the theory of constraints.

The primary concern of TA is the rate at which a business can generate profits. A 'ey point of focus is

return per bottlenec'- which underscores an important management accounting concern to maximize

contribution per unit of a gien limiting factor.


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Chapter 21: Accounting or "ust+in+time 7-#T8 s.stems

Just#in#time /J&T0 refers to a system in which materials arrie exactly as they are needed. Just#in#time

production is a system in which each component on a production line is produced immediately as needed

by the next step in the production line. There fie main features in a J&T#production system!

#

+roduction is organized in manufacturing cells"

# ,ulti#s'illed wor'ers"

# Total %uality management /TL,0"

#

)educing manufacturing lead time and set#up time"

#

Strong supplier relationships.

The financial benefits of J&T include! lower inestment in stoc's" reductions in paperwor'" reductions in

ris' of obsolescence of stoc's- etc.

A uni%ue production system such as J&T leads to its own uni%ue costing system. Traditional normal and

standard costing systems use se%uential trac'ing < synchronous trac'ing- which is any product#costing

method in which the accounting system entries occur in the same order as actual purchases and

production. The term !aclush costing % dela.ed costing % endpoint costing % post+deduct costing

describes a costing system that delays recording changes in the status of a product being produced until

good finished units appear" it then uses budgeted or standard costs to wor' bac'wards to flush out

manufacturing costs for the units produced.

Accounting information can play a 'ey role in stoc management. The following costs are important when

managing stoc's and goods for sale!

# %urchasing costs consists of the costs of goods ac%uired from suppliers including incoming freight

or transportation costs"

#

'rdering costs consist of the costs of preparing and issuing a purchase order"#

Carrying costs arise when a business holds stoc's of goods for sale"

#

Stock-out costs or no-sales#costs"

#

L. &t is used as a buffer againstunexpected increases in demand or lead time and unaailability of stoc' from suppliers.

J&T#purchasing is the purchase of goods or materials such that deliery immediately precedes demand or

use. 5>L models support smaller and more fre%uent purchase orders as releant carrying costs increase

and releant ordering costs per order decrease.

A releant cost#benefit analysis of J&T purchasing includes releant costs of purchasing- carrying stoc'-

ordering and stoc'#out- %uality#related costs of inspection and customer returns and lost contribution

margins due to late delieries. The releant benefits and releant costs of J&T production include releant

costs of set#up and carrying stoc'- better %uality and faster deliery. +erformance measurement and

control in J&T production systems emphasize personal obseration and non#financial performancemeasures.


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Chapter 22: *trategic management accounting and emerging issues

Strategy is an elusie concept. ,any definitions and notions of strategy exist in the management

literature. ,ost popular are %orters five forces modeland the notions ofproduct differentiation and cost

leadership. +roduct differentiation refers to offering products and serices that are perceied by

customers as being superior and uni%ue. *ost leadership refers to the pursuit of low costs relatie to

those of competitors.

Strategic management accounting /S,A0 places particular emphasis on blending external with internal

organizational information. S,A encompasses both financial and non#financial information.

The !alanced scorecard translates an organization$s mission and strategy into a comprehensie set of

performance measures that proides the framewor' for implementing its strategy. The balanced

scorecard measures an organization$s performance from four 'ey perspecties!

# 3inancial perspective0 This perspectie ealuates the profitability of strategy"

#

Customer perspective0 This perspectie identifies the targeted mar'et segments and measures

the company$s success in these segments"

#

Internal business process perspective0This perspectie focuses on internal operations that further

both the customer perspectie by creating alue for customers and the financial perspectie by

increasing shareholder wealth. The internal business process perspectie comprises three

principal sub processes!

o 1he innovation process " creating products- serices and processes that will meet the

needs of customers"

o 1he operations process " producing and deliering existing products and serices to

customers"

o

fter-sales service " proiding serice and support to the customer after the sale ordeliery of a product or serice.

#

=earning and gro.th perspective0 This perspectie identifies the capabilities in which the

organization must excel in order to achiee superior internal processes that create alue for

customers and shareholders.

Features o a good !alanced scorecard Pitalls hen creating a !alanced scorecard

Shows cause#and#effect relationships

*ommunicates strategy throughout the company

+laces strong emphasis on financial ob3ecties

>nly identifies the most critical measures

6ighlights suboptimal trade#offs

*ause#and#effect lin'ages are not precise

See'ing improement of measures all the time

sing only ob3ectie measures

(ailing to consider both costs and benefits

&gnoring non#financial measures when ealuating

managers and employees

A ta!leau de !ord 7TdB8 is a customized multidimensional control system encompassing both financial

and non#financial information to identify and measure organizational ob3ecties and 'ey ariables.

5nterprise goernance is about both corporate goernance and business goernance. The strategic

scorecard aims to assist boards of directors achiee effectie business goernance.

A ariety of emerging issues has recently made a growing impact on management accounting systems.

5nironmental management accounting and 'nowledge management and intellectual capital alue

creation practices are discussed for the future.

Documents

Samenvatting Accounting 2