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Study Note Akt MGT CPA Review HT
Study Note Akt MGT CPA Review HT
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Financial accounting system
follows established rules and conventions to provide
information (financial statements) to external users
such as investors, government agencies, and banks.
Cost management system
identifies, collects, measures, classifies, and reports
information that is useful to managers in costing
(determining what something costs), planning,
controlling, and decision making.
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Cost accounting system
assigns costs to individual products and services and
other cost objects as specified by management;
satisfies financial reporting and management
decision-making needs
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Total Quality Management
◦ Continual improvement and elimination of waste
are the two foundation principles that govern a
state of manufacturing excellence.
◦ A philosophy of total quality management, in which
managers strive to create an environment that will
enable organizations to manufacture perfect
products, has replaced the acceptable quality
attitudes of the past.
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Advances in Management Environment
◦ Theory Of Constraints is used to continuously
improve manufacturing activities and
nonmanufacturing activities.
◦ Just-in-Time Manufacturing is a demand-pull
system that strives to produce a product only when
it is needed and only in the quantities demanded by
customers.
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Responsible for generating financial
information required by the firm for
◦ Internal reporting
◦ External reporting
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Planning
◦ Detailed formulation of future actions to achieve a
particular end.
◦ Requires setting objectives and identifying methods
to achieve those objectives.
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Controlling
◦ The managerial activity of monitoring a plan’s
implementation and taking corrective action as
needed.
◦ Feedback is information that can be used to
evaluate or correct the steps being taken to
implement a plan.
Performance reports compare budgeted and actual
data
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Continuous Improvement
◦ Required in a dynamic environment if a firm is to
remain competitive or to establish a competitive
advantage.
◦ Searching for ways to increase overall efficiency
through
Reduction of waste
Quality improvement
Cost reduction
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Decision Making
◦ The process of choosing among competing
alternatives.
◦ Decisions are based on information provided by the
accounting system
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Direct materials: those materials directly
traceable to the goods or services being
produced.
◦ Example: The cost of wood in furniture.
Direct labor: labor that is directly traceable
to the goods or services being produced.
◦ Example: Wages of assembly-line workers.
Overhead: all other manufacturing costs.
◦ Example: Plant depreciation, utilities,
property taxes, indirect materials, indirect
labor, etc.
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Direct + Direct = Prime
Materials Labor Costs
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Amount and timing of benefit cannot be
reasonably estimated
Period costs
◦ Not inventoried
◦ Expensed as incurred
Examples
◦ Research and development
◦ Marketing costs
◦ Administrative costs
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A system of accounting for costs in which
both fixed and variable production costs are
considered product costs.
Fixed
Costs
Product
Variable
Costs
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A system of cost accounting that only assigns
the variable cost of production to products.
Fixed
Costs
Product
Variable
Costs
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Example
Advantages
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Management finds it Consistent with
easy to understand. CVP analysis.
Emphasizes contribution in
Advantages
short-run pricing decisions.
External reporting
and income tax law
require absorption costing.
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In a JIT inventory system . . .
Production tends
to equal sales . . .
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UNIT-LEVEL ACTIVITES
Resources acquired and activities performed for individual units.
BATCH-LEVEL ACTIVITES
Resources acquired and activities performed for a group or batch
of similar products or services.
PRODUCT-LEVEL ACTIVITES
Resources acquired and activities performed to produce and sell a
specific product or service.
CUSTOMER-LEVEL ACTIVITES
Resources acquired and activities performed to serve specific
customers.
FACILITY-LEVEL ACTIVITIES
Resources acquired and activities performed to provide general
capacity to produce goods or services.
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When estimating the cost
of an activity, only the EXAMPLE
costs associated with the Suppose we rent a 1,000 square foot
product should be used warehouse for $1,000 per month. Only
(practical capacity). The 800 sq. ft. are used to store Product A.
cost of “unused capacity” The rest of the warehouse is “unused”.
should not be applied to How much rent cost should be
products. allocated to Product A?
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Theoretical Capacity
} Planned or
unavoidable
downtime
Practical Capacity
} Excess
capacity
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More accurate and informative
product costs lead to better
decisions.
More accurate measurements of
the activities driving costs.
Provides managers with easier
access to relevant costs.
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Evaluates the costs . . . To identify
and values of process opportunities to
activities . . . improve
efficiency.
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ABC ABM adds:
Identification of value-
Understanding the way added and non-value-
resources are used in the added activities.
current processes.
More accurately measures
?
product costs by analyzing Identifies the customer
costs associated with perceived value of each
identified activities in the activity.
processes.
Identifies opportunities to
enhance value-added
activities and reduce or
eliminate non-value-added
activities.
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Study closely all the customer-related
activities that drive costs.
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Conflict between TQM and ROQ
exists only at very high levels of
quality.
Most organizations operate
below the optimum quality level
in the ROQ model, so improving
quality results in higher profits
just as in the TQM model.
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W. Edwards Deming proposed that
improving quality reduces cost and Quality can be and should
improves profitability. be improved continuously.
Revenues
Total Revenues & Costs
Max Profit
Cost
Max Quality
Quality
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There is a trade-off between the costs and benefits of quality.
Profit is maximized at The optimum quality level is always achieved
the optimum quality before maximum quality level is reached.
level.
Cost
Total Revenues & Costs
Revenues
Max Profit
Optimum Quality
Quality
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Out-of-pocket costs associated with quality
generally fall into two categories:
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Prevention Appraisal
Activities that seek to prevent Activities for inspecting inputs
defects in the products or and attributes of individual
services being produced. units of product and service.
•Certifying Suppliers •Inspecting Materials
•Designing for •Inspecting Machines
Manufacturability •Inspecting Processes
•Quality Training •Statistical Process Control
•Quality Evaluations
•Sampling and Testing
•Process Improvements
Value Added
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Internal Failure External Failure
Costs associated with defects Costs associated with defects
in processes and products that in processes and products that
are found prior to delivery to are detected after delivery to
customers. customers.
•Disposing of Scrap •Warranty Repairs
•Rework •Field Replacements
•Product Liability
•Reinspecting/Retesting
•Customer Complaints
•Delaying Processes •Restoring Reputation
•Lost Sales
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A number of products are produced
from a single raw material input.
Product 1
Product 3
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Concept: in some industries, a number of products are
produced from a single raw material input.
Key terms:
◦ Joint products – products resulting from a process
with a common input.
◦ Split-off point – the stage of processing where joint
products are separated.
◦ Joint cost – costs of processing joint products prior to
the split-off point.
◦ Final product – ready for sale without further
processing.
◦ Intermediate product – requires further processing
before sale.
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Intermediate Final
products products
Joint
Costs Separate Final
Oil
Processing Sale
Common Separate
Joint Processing Costs
Production
Input
Process
Separate Final
Gasoline
Processing Sale
Split-Off Separate
Point Processing Costs
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Identify final Forecast the
products possible sales price of
from the joint each final
process. product.
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Joint product costs incurred prior to the split-
off point are sunk costs — not affected by a
decision to process further after the split-off
point.
A product should be processed beyond the
split-off point only if if the incremental revenue
exceeds the incremental processing costs.
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Product
Oil Gasoline Total
Output quantities in gallons 240,000 360,000 600,000
Proportionate share:
240,000 ÷ 600,000 40%
360,000 ÷ 600,000 60%
Allocated joint costs:
?
?
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Product
Oil Gasoline Total
Output quantities in gallons 240,000 360,000 600,000
Proportionate share:
240,000 ÷ 600,000 40%
360,000 ÷ 600,000 60%
Allocated joint costs:
$500,000 × 40% $ 200,000
$500,000 × 60% $ 300,000
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Joint conversion
cost = $225,000 Sales
Separate Value
Oil
Processing $500,000
Common Separate
Joint material Processing Costs
Production
cost = $275,000 Process $200,000
Sales
Separate Value
Gasoline
Processing $1,200,000
Split-Off Separate
Point Processing Costs
$500,000
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Product
Oil Gasoline Total
Estimated NRV at split-off point $ 300,000 $ 700,000 $ 1,000,000
Less allocated joint costs 150,000 350,000 500,000
Gross margin $ 150,000 $ 350,000 $ 500,000
Gross margin as a percent of sales
$150,000 ÷ $300,000 50.0%
$350,000 ÷ $700,000 50.0%
$500,000 ÷ $1,000,000 50.0%
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Summary of Variable and Fixed Cost Behavior
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains the Fixed cost per unit goes
same even when the activity down as activity level goes up.
level changes.
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The Scattergraph
The slope of this line is the variable unit cost. (Slope is the change in total
cost for a one-unit change in activity).
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* ** *
1,000s of Dollars
Vertical
Total Cost in
* * distance
** is the
10 * * change
in cost.
Horizontal distance is
the change in activity.
0
0 1 2 3 4
Activity, 1,000s of Units Produced
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The high-low method uses two points to estimate the general
cost equation TC = F VX
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The High-Low Method
Units Cost
High activity level 9,000 $ 9,700
Low activity level 5,000 6,100
Change 4,000 $ 3,600
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A statistical method used to create an
equation relating dependent (or Y) variables
to independent (or X) variables.
Past data is used to estimate relationships
between costs and activities.
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Regression Analysis
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The correlation coefficient, r, is a measure of the linear
relationship between variables such as cost and activity.
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* ** *
* * **
Total Cost
10 *
*The correlation coefficient is highly positive (close
to 1.0) if the data points are close to the regression
line.
0
0 1 2 3 4
Activity
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Terms in the equation have the same
meaning as in simple regression with
only one independent variable.
TC = F + V1X1 + V2X2
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Here is the proof!
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Calculate the break-even point in sales dollars
rather than units by using the contribution
margin ratio.
Contribution margin
= CM Ratio
Sales
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We can determine the number of
surfboards that Curl must sell to earn a
profit of $100,000 using the contribution
margin approach.
$80,000 + $100,000
$200 per surf board
=900 surf boards
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Operating leverage Contribution margin
factor = Net income
Actual sales
500 Board
Sales $ 250,000
Less: variable expenses 150,000
Contribution margin 100,000
Less: fixed expenses 80,000
Net income $ 20,000
$100,000
= 5
$20,000
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Let’s use the concepts
of the general model to
calculate standard cost
variances, starting with
direct material.
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Sensible Cost Management by
Comparisons Exception
Performance Employee
Evaluation Motivation
Advantages
Stable Product
Costs
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Too aggregate, Not specific
too late
Focus on cost
minimization
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Standard Cost Variances
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Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price
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Actual Quantity Actual Quantity
Purchased Purchased
× ×
Actual Price Standard Price
We should compute the
40,000 sqm. 40,000 sqm. price variance using the
× × actual quantity purchased.
$8.15 per sqm. $8.00 per sqm.
$326,000 $320,000
Price variance
$6,000 Unfavorable
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SQ = 3,000 tents × 12 sqm. per tent
SQ = 36,000 sqm.
Actual Quantity
Used Standard Quantity
× ×
Standard Price Standard Price
We should compute the
quantity variance using the
actual quantity used. 36,400 sqm. 36,000 sqm.
× ×
$8.00 per sqm. $8.00 per sqm.
$291,200 $288,000
Quantity variance
$3,200 Unfavorable
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SH = 3,000 tents × 2 hours per tent
SH = 6,000 hours
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Total budgeted Budgeted variable Total Budgeted fixed
monthly = overhead cost per activity + overhead cost
×
overhead cost activity unit units per month
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Variable-Overhead Variances
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard
Rate
AH × AR AH × SR SH × SR
Variable-overhead Variable-overhead
spending variance efficiency variance
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Variable-Overhead Variances
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard
Rate
AH × AR AH × SR SH × SR
1,550 1,000 tents 1,550
× 1.5 hours 1,500
× × ×
$13.20 $13.00 $13.00
_
$550 Favorable = $8,450 $9,000
Budget Variance
Results from paying more or less
than expected for overhead items.
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1. Cost centers - responsible for the cost of a
well defined activity.
2. Discretionary cost centers – responsible for
the cost of an activity that is not well defined.
3. Revenue center – responsible for revenue
attributed to the subunit.
4. Profit center – responsible for profit of a
subunit.
5. Investment center – responsible for profit and
the invested capital of a subunit.
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Income
ROI
Invested capital
=
or
Income Sales revenue
ROI = ×
Sales revenue Invested capital
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Income
ROI =
Invested Capital
Sales Capital
Margin Turnover
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As division manager at Winston, Inc., your
compensation package includes a salary plus
bonus based on your division’s ROI -- the
higher your ROI, the bigger your bonus.
The company requires an ROI of 15% on all
new investments -- your division has been
producing an ROI of 30%.
You have an opportunity to invest in a new
project that will produce an ROI of 25%.
As division manager would you
invest in this project?
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Investment center profit
– Investment charge
= Residual income
Investment capital
× Imputed interest rate
= Investment charge
Investment center’s
minimum required
rate of return
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Flower Co. has an opportunity to invest
$100,000 in a project that will return
$25,000.
Flower Co. has a 20 percent required rate of
return and a 30 percent ROI on existing
business.
Investment center’s
minimum required
rate of return
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Investment center’s after-tax operating income
– Investment charge
= Economic Value Added
( Investment
center’s
total assets
–
Investment
center’s
current liabilities
)
Weighted
average
cost of capital
(
After-tax Market
cost of value
debt of debt
) (
Cost of
capital
Market
equity value
of equity
)
Market Market
value value
of debt of equity
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The value placed on transfer goods is used
to make it possible to transfer goods
between divisions while allowing them to
retain their autonomy.
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In a decentralized organization, the
managers of profit centers and investment
centers often have considerable autonomy
in deciding whether to accept or reject
orders and whether to buy from inside or
outside the organization.
The goal in setting the transfer price is to provide
incentives for each division manager to act in the
company’s best interests.
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The ideal transfer price allows
each division manager to make
decisions that maximize the
company’s profit, while
attempting to maximize his/her
own division’s profit.
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Additional outlay Opportunity cost per
cost per unit unit to the
Transfer incurred because organization because
Price = goods are + of the transfer
transferred
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Let’s consider two different
examples of setting transfer
prices.
1. The company has no excess capacity.
2. The company has excess capacity.
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General Rule When Producing Division Has
No Excess Capacity and Perfect
Competition Prevails
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Financial performance
How should we appear to
our shareholders?
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Financial
Vision
and Internal
Customer
Strategy Operations
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Information is relevant to a decision
problem when . . .
1. It has a bearing on the future,
2. It differs among competing alternatives.
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Budget
1. Planning
a detailed plan,
expressed in 2. Facilitating
quantitative terms, that Communication and
specifies how resources Coordination
will be acquired and 3. Allocating Resources
used during a specified
4. Controlling Profit and
period of time.
Operations
5. Evaluating Performance
and Providing
Incentives
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Sales of Services or Goods
Ending
Inventory Production
Budget Budget
Work in Process
and Finished
Goods
Cash Budget
Budgeted Income
Statement
Budgeted
Balance Sheet
Budgeted Statement
of Cash Flows
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Budgetary Slack: Padding the Budget
People often perceive that their performance will look
better in their superiors’ eyes if they can “beat the
budget.”
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Top Management
Middle Middle
Management Management
A higher transfer
price for batteries
means . . .
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Additional outlay Opportunity cost
cost per unit per unit to the
Transfer incurred because organization
price = goods are
transferred
+ because of
the transfer
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