Escolar Documentos
Profissional Documentos
Cultura Documentos
Management Accounting
MANAGEMENT ACCOUNTING
Factory Overhead
Used
Financial Reports Raw Materials Goods in Process Finished Goods Cost of Goods
Ending Inv. Ending Inv. Ending Inv. Sold (income
statement)
(balance sheet) (balance sheet) (balance sheet)
COST SYSTEM
• A costing system accounts for costs in two basic
stages – Accumulation & then assignment/ allocation.
Stage 1
Machining Assembly
Department Department
Stage 2
Indirect
Direct Indirect Direct Indirect
OVERHEADS
• Relevant
– If costs influence a decision
• Costs that are applicable to a particular decision.
• Costs that should have a bearing on which
alternative a manager selects.
• Costs that are avoidable.
• Future costs that differ between alternatives.
• Irrelevant
– If costs do not influence a decision
Costs Classification by Relevance
• Sunk Costs
– All costs incurred in the past that cannot be changed by
any decision made now or in the future.
– should not be considered in decisions.
– Irrelevant
– Example: You bought an automobile that cost
Rs.30,000 two years ago. The Rs.30,000 cost is sunk
because whether you drive it, park it, trade it, or sell it,
you cannot change the Rs.30,000 cost.
Costs Classification by Relevance
• Out-of-pocket costs
– require future outlays of cash
– associated with a particular decision
– relevant for future decisions
– Example: Considering the decision to take a
vacation or stay at home, if you choose a
vacation, you will only have travel costs (out-
of-pocket costs).
Costs Classification by Relevance
• Opportunity Costs
– The potential benefit that is given up when one
alternative is selected over another.
– Example: If you were not attending college or
university, you could be earning Rs.25,000 per
year. Your opportunity cost of attending
college or university for one year is Rs.25,000.
Costs Classification by Behavior
• Fixed costs
– Do not change when activity changes. Remains fixed in total for a
given period of time despite wide changes in the related level of
total activity or volume (within the relevant range).
These are period costs i.e. Lease rental, Insurance of
factory buildings etc.
• Variable costs
– Change in proportion to changes in the volume of activity. These
are basically product costs i.e. Direct Material Cost, Direct Labour
Costs, power, repair etc.
Variable Costs
Total variable costs change when activity changes.
Variable costs per unit do not change as activity
increases.
Rs240 –
Rs180 –
Rs120 –
) 000’ 00(
Rs60 –
bai r a Vl at o T
–
–
0 1 2 3 4 5
Volume
(Thousands Swift cars)
Fixed Cost
• Total fixed costs remain unchanged
when activity changes within a relevant range.
• Fixed costs per unit decline as activity increases.
Rs400 –
Rs300 –
Rs200 –
) 000’ 00(
Rs100 –
C de xi Fl at o T
–
–
0 1 2 3 4 5
Volume
(Thousands of vehicles)
Relevant Range...
– is a band of volume in which a specific
relationship exists between cost and
volume.
• Outside the relevant range, the cost either
increases or decreases.
• A fixed cost is fixed only within a given
relevant range and a given time span.
Relevant Range
160,000 –
40,000
–
–
0 5,000 10,000 15,000 20,000 25,000
Volume in Units
Relevant Range – Step Cost
• Step-Wise Costs
– remain fixed over limited ranges of volumes but
increase by a lump sum when volume increases beyond
maximum amounts.
– Example: additional production supervisors must be
added when another shift is added.
Supervisory Salaries
Production Volume
Mixed Cost
• Semi- fixed/ Semi-variable costs
– contain a combination of fixed and variable costs.
Total Compensation
ost
d c
xe Variable
mi
tal Sales Commissions
To
Fixed
Monthly salary
Sales
Mixed Costs Example
Rs2,475 –
Rs2,100 –
Variable
Rs1,350 – Cost
st s o Cl at o T
Rs600 – Fixed
Cost
–
–
–
–
• TC = TFC + (UVC * X)
1. Judgment Method
• Using judgment in deciding how much of cost of each
item or category will vary with volume & what will be the
amount of fixed cost.
• Appropriate where;
• Cost estimation for a situation where historical data are
irrelevant viz, a proposal to introduce a new product with
a new process.
• The reliability of the results depends on the experience &
skill of the estimator.
• Also known as ‘Account-by-Account Method’ as the
analyst considers each account in the cost structure &
judges whether the costs in that account are variable,
fixed or semi-variable.
2. High – Low Method
1. Estimate total costs at each two volume levels, which
identifies two points on the line – the upper & lower limits
of the relevant range are selected for the purpose.
2. Subtract total cost at lower volume from the higher one &
also subtract the corresponding lower volume from the
higher.
3. Divide the difference in cost by difference in volume to
arrive at the Unit Variable Cost (UVC).
4. Multiply either of the volumes by UVC & subtract the
result from the total cost at that volume to arrive at the
Fixed Cost.
3. Scatter Diagram
• Make a diagram in which actual costs recorded in past
periods are plotted (on the vertical axis) against the
volume of levels in those periods ( on the horizontal
axis).
• Data on costs & volumes for each of the preceding
several months may be used for the purpose.
• Draw a line that best fits the observation by visual
inspection of the plotted points.
• The FC & TVC values are then determined by reading
the values for any two points on the line and using the
High-Low Method discussed previously.
Scatter diagram with High-Low Method of
Cost Estimation
x
Indirect 1,456 x x
x x Cost function =
Labour x x
Costs 710 x Rs(23.68 + 14.92)
per machine hour
Rs.
46 96
Machine Hours
• Σy = na + b Σx…………..(1)
• Σxy = a Σx + b Σx2 ……..(2)
Time
Nonlinear
Cost Function
(Learning Curve)
Cumulative
Total Volume
Nonlinear Cost Functions
1. Economies of Scale
2. Quantity Discounts
3. Step Cost Functions – resources increase in
“lot-sizes,” not individual units
4. Learning Curves – labor hours consumed
decrease as workers learn their jobs and
become better at them
5. Experience Curve – broader application of
learning curve that includes downstream
activities including marketing and distribution
Types of Learning Curves
• Cumulative Average-Time Learning Model –
cumulative average time per unit declines by a
constant percentage each time the cumulative
quantity of units produced doubles
• Incremental Unit-Time Learning Model –
incremental time needed to produce the last unit
declines by a constant percentage each time the
cumulative quantity of units produced doubles
Data “Problems”
1. Some “variable” costs are actually allocated fixed
costs
2. Missing data points
3. Errors in recording data points
4. Lack of a homogeneous relationship between
the dependent variable pool and cost driver
5. Collection periods for variables differ
6. Relationship between cost and cost driver is
unstable
7. Impact of inflation on data points over time