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Notes in Strategic Cost Management (SLPO)
Notes in Strategic Cost Management (SLPO)
Notes in Strategic Cost Management (SLPO)
1. Management Functions
1. Planning – mapping out exactly how to achieve a particular goal.
2. Organizing – Assigning work and granting authority
3. Directing / Leading – involves motivating, communicating, guiding, and encouraging.
4. Controlling / Evaluating –to continuously check results against goals and take any corrective actions.
2. Controller Vs Treasurer
• Controller / Comptroller – chief accountant (record, report, taxation and protection of asset.
• Treasurer – are primarily responsible for obtaining investment capital and managing the cash flow of
the business. Also, in charge of obtaining loans and credit from outside sources
3. Line vs Staff Position
• Line position – directly involved in the day-to-day operations (downward authority)
• Staff position – serve the organization by indirectly supporting line functions (upward authority)
4. Ethical Principles of a CMA
1) Confidentiality
2) Integrity
3) Credibility
• Cost – monetary amount that must be paid to acquire goods and services
• Cost object – anything for which a separate measurement of costs is needed/desired
• Cost pool - an account in which a variety of similar costs are accumulated prior to allocation to cost objects.
• Cost driver - a factor that causes a change in the cost pool for a particular activity. It is used as a basis for cost
allocation
b. Non-manufacturing costs – all costs that are not part of manufacturing costs. Includes selling Exp and
administrative exp.
II. According to Timing of Charge Against Revenue
a. Product costs / Inventoriable costs
b. Period costs
Sales xx
Cost of sales (xx) Product Cost Manufacturing Cost DM, DL, MOH
Gross profit xx
Operating expenses (xx) Period Cost Non-Manufacturing Cost Selling And Administrative Expenses
Operating income xx
V. According to Controllability
a. Controllable costs – refer to costs that can be influenced by the managers.
b. Uncontrollable costs – refer to costs that cannot be influenced by the managers.
VI. According to Relevance to Decision Making
a. Relevant cost – cost that will differ among alternative courses and will affect the future
b. Standard cost – predetermined cost based on some reasonable bases such as experiences, budgeted
amounts, industry standards, etc.
c. Opportunity cost – benefit forgone or given up when an alternative is chosen over the other/s
d. Sunk cost – historical costs or costs that are incurred in the past and will not make any difference in
making a decision
e. Out-of-pocket costs – those that require the payment of cash or other asset as a result of their
incurrence
f. Differential cost – the amount by which the costs differ under alternative actions. eg. The difference in
the cost of two vehicles.
g. Marginal cost – extra cost incurred when one additional unit is produced.
h. Incremental cost – total additional cost associated with the decision to expand output or to add a new
variety of product etc.
i. Avoidable cost – cost that is not incurred if the activity is not performed.
j. Unavoidable cost – cost that is still incurred even if the activity is not performed. For example, if a
manufacturing plant shuts down, it still needs to incur depreciation for for idle equipment, property taxes, lease
payments, etc
SLPO
Notes in Strategic Cost Management P1
k. Committed cost – costs that result from an organization’s ownership or use of facilities and its basic
organization structure. Example: property taxes and depreciation of building and equipment
l. Discretionary cost – arises as a result of management decision to spend particular amount of money for
some purpose.
m. Average cost per unit – total cost, for whatever quantity is manufactured, divided by the number of
units manufactured. Example: advertising, research and development
Flow of Costs
SLPO
Notes in Strategic Cost Management P1
SAS #4 #5 Splitting Mixed Cost – High-Low, Scatter Graph and Least Squares Regression Method
1.4 Solve the cost of any volume using the cost function: y = a + bx
y = FC + VC (x)
2. Statistical Scatter Graph Method –various costs (the dependent variable) are plotted on a vertical line (y-axis)
and measurement figures (cost drivers or activity levels) are plotted on a horizontal line (x-axis)
Formula: a. Fixed Cost = y-intercept @ x=0 = a
b. Variable cost per unit = b = y2 – y1 / x2 – x1
3. Method of Least Squares (Regression Analysis) - mathematically determines a line of best fit or a linear
regression line
o Σy = na + b Σx
Σxy = a Σx + b Σx2 = b
o Σy = na + b Σx = a
o y = a + bx
SLPO
Notes in Strategic Cost Management P1
SAS #6 Cost Volume Profit Analysis Part 1
• Cost-Volume-Profit (CVP) Analysis – the systematic examination of the relationships among costs, cost driver
(activity level – volume) and profit.
• Factors Affecting Profit:
1. Sales price
2. Variable cost/unit
3. Activity level
4. Total Fixed Cost
5. Sales Mix
• Simplifying Assumptions (Limitations) of CVP Analysis
1. Variable costs change at a linear rate
2. Fixed costs remain unchanged within the relevant range
3. Costs are classified as variable or fixed
4. Selling prices do not change as sales volume change.
5. For multiple product companies, sales mixed usually constant
6. Inventory level remain constant and is not focus in the CVP analysis
7. Volume is the greater factor affecting costs
• Break-even Point (BEP) - the level of sales (in pesos or in units) where total revenue equals total costs, that is,
there is neither profit nor loss.
o Under break-even point:
Profit = 0
Sales = VC + FC
CM = FC
Formula (BEP):
1. BEPu = FC / CMu
2. BEPp = FC / CMR or BEPu * SP
Formula for Required Sales to Earn Desired Profit:
1. RSu – desired profit before tax: RSu = (FC + DP) / CMu
RSp – desired profit before tax: RSp = (FC + DP) / CMR or RSp = RSu * SP
2. RSu – desired profit after tax: RSu = FC + (DP / 1-TR) / CMu
RSp – desired profit after tax: RSu = FC + (DP / 1-TR) / CMR or RSp = RSu * SP
3. RSu – desired profit as % of sales = RSu = FC / CMu – Pu or RSu = FC / CMR – PR
RSp – desired profit as % of sales = RSp = FC / CMR – PR
Note
o Profit per unit (Pu) is computed as Selling Price multiplied by Profit ratio (25 x 20% = 5).
SLPO
Notes in Strategic Cost Management P1
Legend:
o RSu = Required sales in units CMu = Contribution margin per unit TR = Tax rate
o FC = Fixed cost RSp = Required sales in pesos PR = Profit ratio
o DP = Desired profit / Target profit CMR = Contribution margin ratio Pu = Profit per unit
• Margin of safety (MOS) - the level of sales (in pesos or in units) by which actual or budgeted sales may be
decreased without resulting into a loss.
Analysis:
o change in sales (volume) = change in VC, but FC remain constant
o change in selling price = no effect in VC
o
• Degree of Operating Leverage: measures the extent of change in profit before tax resulting from change in
sales.
Formula: DOL = CM / OI or DOL = % change in OI / % change in sales
• Indifference Point – the level of volume at which total costs, and hence profits, are the same under both cost
structures.
Legend:
SP = Selling Price x = number of units
VCu1 = Variable cost per unit at alternative 1 FC1 = Fixed cost at alternative 1
VCu2 = Variable cost per unit at alternative 2 FC2 = Fixed cost at alternative 2
SLPO
Notes in Strategic Cost Management P1
SAS #8 Cost Volume Profit Analysis Part 3
Break-even Point for Multiple Products:
Formula: BEPu = FC / waCMu**
BEPp = FC / waCMR***
** To get the waCMu, identify the sales mix ratio and contribution margin
o SMR * CMu = waCMu
a) Sales mix ratio (SMR): either given or (P1 unit sales +P2 unit sales + P3 units sales / Total unit sales)
b) Contribution Margin per unit (CMu) = SP – VC
o BEPu = FC / waCMu
SLPO