AGENDA

Course Introduction & Administration

AF 3112
Overview on Management Accounting
MANAGEMENT ACCOUNTING 2 Ethics and resolution of ethical conflict
Course Introduction Review on Basic Cost Concepts
& Job Order Costing Re-visited
Basic Cost Concepts and Job Costing
Review

AF3112 - 2017 1 AF3112 - 2017 2

3 4

Introduction to Strategy Cost Management Information

A firm succeeds by implementing a set of policies, Serves all management functions

procedures, and approaches to business called
strategy
Strategy must have a long-term focus and adapt to
the changing environment
Cost management information should be used to
develop and monitor strategic information
l Management accountants can help a company be successful
by providing decision-relevant information
As the environment changed, the role of cost management
information has expended to serve all management function
Information a manager needs to manage
effectively
l Financial and nonfinancial
l Financial information alone shows a short-term focus
l Developed under the direction of the controller for the
Chief Financial Officer (CFO) of the organization

AF3112 - 2017 3 AF3112 - 2017 4

 5 6

Typical Organization Chart Cost Management vs Financial Reporting

Chief Executive Officer (CEO)

Financial reporting
Chief Financial Vice President Vice President l External users
Officer (CFO) for Marketing for Operations l Emphasis on accuracy and compliance
Cost management
Controller Treasurer
Chief Information l Internal users
Officer (CIO)
l Emphasis on usefulness and timeliness, key
Cost Management characteristics of decision-relevant information
Financial Systems Challenge for controller to reconcile these
Financial Reporting potentially conflicting roles
Other Reporting Obligations (e.g., tax)
AF3112 - 2017 5 AF3112 - 2017 6

7 8

Four Functions of
Management Functions
Management
Strategic management
Cost management information is l Most important management function
assembled to aid management in Planning and decision-making
l Information needed to support financial decisions on
the following functions: short-run planning, production and pricing, etc
l Strategic management Management and operational control
l Planning and decision-making l Information needed to identify inefficient operations
and reward effective management practices
l Management and operational control
Preparation of financial statements
l Preparation of financial statements l compliance with regulations (GAAP) and regulatory
reporting requirements

AF3112 - 2017 7 AF3112 - 2017 8

 9 10

Changes in the Contemporary

Changes in the Contemporary
Business Environment
1. Shift to a global business environment
l Economic interdependence and increased
competition
2. New manufacturing technologies stemming
from the global business environment
l Just-in-time (JIT) inventory methods and quality
control
3. Importance of information technology
l Increased use of the internet has reduced processing
time and facilitated information exchange
AF3112 - 2017
Business Environment (continued)
4. Focus on the customer
l Consumers expect functionality, quality and
customization
5. Shifts in management organization
l The focus has shifted from hierarchal command-and-
control organizations to flexible organizational
structures
6. Social, political, and cultural considerations
l Changes include a more diverse workforce, a renewed
sense of ethical responsibility, increased deregulation of
business, etc.
9 AF3112 - 2017 10

11

How do these changes affect IMA Code of Ethics - Competence

management accounting?
Follow applicable laws,
regulations and
The management accountant’s role:
standards.
l Provide cost-management information
at a timely pace to keep up with the
Recognize and
ever-changing environment
communicate
l The information provided should professional Competence
include as many nonfinancial measures limitations that
as possible – a variety of operating and preclude
financial measures
responsible Prepare complete and clear
l The reports should be applicable to judgment.
cross- functional teams and conducive reports after appropriate
with a flexible management structure analysis.
AF3112 - 2017 11 AF3112 - 2017 12
 IMA Guidelines for Ethical
IMA Code of Ethics - Confidentiality Behavior
Do not disclose confidential
information unless legally Mitigate conflicts of
obligated to do so. interest of potential
conflicts.
Do not use Refrain from
confidential conduct that
information for Confidentiality would prejudice Integrity
personal carrying out
advantage. duties ethically.
Ensure that subordinates do Abstain from activities that
not disclose confidential might discredit the
information. profession.
AF3112 - 2017 13 AF3112 - 2017 14

IMA Code of Ethics - Credibility Resolution of Ethical Conflict

Communicate information
Follow established policies.
fairly and objectively.
For unresolved ethical conflicts:
l Discuss the conflict with immediate superior.
Credibility l If immediate superior is the CEO, consider the board of
directors or the audit committee.
l Consult an attorney as to legal obligations.
Disclose all information l Except where legally prescribed, maintain confidentiality.
that could influence a
user’s understanding of
reports and
recommendations.
AF3112 - 2017 15 AF3112 - 2017 16
 Basic Cost Concepts
Cost Object
Cost Concepts and Job Order l Any item, such as products, departments, projects,
activities, and so on, for which costs are measured
Costing Review and assigned.
l e.g. A bicycle is a cost object when you are
determining the cost to produce a bicycle.
Cost Driver
l A factor which causes the cost to produce or change
proportionately.
l e.g. machine hours, labor hours
AF3112 - 2017 17 AF3112 - 2017 18

Basic Cost Concepts Basic Cost Concepts

Activity Indirect costs
l A basic unit of work performed within an l Costs that cannot be traced easily and accurately to a
organization. product or cost object.
l e.g. Setting up equipment, moving materials, l e.g.: The cost of heating and cooling a plant that
maintaining equipment, designing products, etc. manufactures five products.
Direct costs Traceability
l Costs that can be easily and accurately traced to a l The ability to assign a cost to a cost object in an
product or cost object. economically feasible way by means of a causal
l e.g.: The salary of a department supervisor, where relationship.
the department is defined as the cost object.
AF3112 - 2017 19 AF3112 - 2017 20
 Basic Cost Concepts Basic Cost Concepts
Product costs (inventoriable costs)
l Related to cost of making the product or providing the service Behavior of Cost (within the relevant range)
(e.g. DM, DL, MOH) Cost In Total Per Unit
Period costs Variable Total variable cost changes Variable cost per unit remains
l Nonmanufacturing cost related to other business functions as activity level changes. the same over wide ranges
of activity.
(e.g. marketing costs and administrative costs, distribution
costs, etc.) Fixed Total fixed cost remains Fixed cost per unit goes
the same even when the down as activity level goes up.
Prime Costs activity level changes.
l All direct manufacturing costs (i.e. DM + DL)
Conversion Costs Relevant Range
l All manufacturing costs other than DM (i.e. DL + MOH) l The range of normal activity/volume within which the
assumptions about variable and fixed costs are valid.
AF3112 - 2017 21 AF3112 - 2017 22

General Costing Framework Cost Assignment in Job Costing

Cost Object
Process Job-order
Cost Costing Costing
Accumulation Cost Object

Cost Object
v Many different products are produced each period.
v Products are manufactured to order.
Cost
Assignment v The unique nature of each order requires tracing or
allocating costs to each job, and maintaining cost
records for each job.
Tracing Allocating
24
AF3112 - 2017 23 AF3112 - 2017 24
Cost Assignment in Job Costing Cost Assignment in Job Costing

Process Job-order Direct Costs (DM, DL)

Costing Costing l Charge to jobs as they incurred (actual costs).
Indirect Costs (MOH)
l Allocate to jobs by using an allocation base.
l Reasons:
Example companies: l It is impossible or difficult to trace overhead costs to
1. Boeing particular jobs.
2. Walt Disney Studios l MOH consists of many different items ranging from
glue to the production manager’s salary.
l Many types of MOH are fixed costs even though

25 output fluctuates during the period.

AF3112 - 2017 25 AF3112 - 2017 26

MOH Allocation Rate MOH Computation

Two approaches:
Two Types:
l Actual overhead
l Actual overhead rate =
l Applied overhead
Actual Sum of Overhead Costs Incurred Actual Overhead
Actual Quantity of Allocation Base l Actual OH Rate x Actual quantity of allocation base
l Product costs with actual overhead = Actual Costing

l Predetermined overhead rate (POHR) = Applied Overhead

Budgeted Sum of Overhead Costs Incurred l POHR x Actual quantity of allocation base
l Product costs with applied overhead = Normal Costing
Estimated Quantity of Allocation Base
Using a predetermined rate makes it possible to estimate total
job costs earlier

AF3112 - 2017 27 AF3112 - 2017 28

 Actual vs. Normal Costing Issues in Estimating POHR
Estimation Period
Actual Normal l Monthly? Quarterly? Weekly? Annually?
l Choose a period which represents a “normal” production
Costing Costing period (e.g. non cyclical period)

Direct Materials ACTUAL ACTUAL Choice of Allocation Base

l Machine Hours?
l Direct Labor Hours?
Direct Labor ACTUAL ACTUAL l Direct Labor Dollars?
l Units Produced?
Manufacturing
ACTUAL APPLIED l Ideally, a COST DRIVER that causes the OVERHEAD
Overhead

AF3112 - 2017 29 AF3112 - 2017 30

Treatment of Over/Under applied

Remarks on Applied Overhead MOH
Applied MOH is the basis for computing per- Two approaches:
unit overhead cost under the normal costing l Adjusted allocation rate approach
approach. l Direct write off approach
Predetermined overhead rate is based on l “Dump” the entire over/under applied overhead to
estimated inputs COGS
l E.g. (see next page)
l Applied overhead RARELY equals to the period’s
COGS 3,100
actual overhead. MOH allocated 62,000
l Consequence: OVER/UNDER APPLIED MOH control 65,100
OVERHEAD

AF3112 - 2017 31 AF3112 - 2017 32

 Example Adjusted Allocation Rate Approach

Manufacturing The manufacturing company could increase

Overhead Control
$ 65,100 $62,000
Q: Over/Under applied Overhead?
A: Under applied by $3,100.
Actual manufacturing overhead $65,100
exceeds manufacturing overhead allocated
$62,000 by 5% =(65,100 - $62,000) ÷ 62,000.
AF3112 - 2017
the manufacturing overhead allocated to
each job by 5%.
Suppose manufacturing overhead allocated to
Job 650 under normal costing is $12,500. Then the
Company can increase the MOH allocated to this
job by 5%, or $625(=$12,500*5%).
The actual manufacturing overhead will be
$12,500 + $625 = $13,125
33 AF3112 - 2017 34

The Issue of Spoilage Normal Spoilage

Spoilage Spoilage inherent in a particular production
l Fully or partially completed production units that do process that arises under efficient operating
not meet the specifications required by customers. conditions
Accounting Objective l Management determines the normal spoilage rate;
viewed as unavoidable
l To manage, control, and reduce spoilage costs, they
l Costs of normal spoilage are typically included as a
should be highlighted, not simply folded into
component of the costs of good units manufactured
production costs
l Rationale:
Treatment depends on the type of spoilage l Good units cannot be made without also making
l Normal Spoilage some units that are spoiled
l Abnormal Spoilage
AF3112 - 2017 35 AF3112 - 2017 36
 Abnormal Spoilage
Spoilage that is not inherent in a particular
production process and would not arise
under normal operating conditions
l Considered avoidable and controllable
l Units of abnormal spoilage are calculated and
recorded in the Loss from Abnormal Spoilage A/C
l A separate line item on the income statement
Job Costing and Spoilage
Job costing distinguishes between normal
spoilage attributable to a specific job or
common to all jobs
l Attributable to a particular job
l Treatment: The job bears the cost of the spoilage
minus the disposal value of the spoilage
l Common to all jobs
l Treatment: Consider as MOH because it is common
to all jobs

r
ro
Er
Err
or

AF3112 - 2017 37 AF3112 - 2017 38

Example: Normal spoilage

Example attributable to a specific job
Normal Spoilage
Hull Machine Shop: l Cost of Spoilage:

5 units x $2,000 / unit = $10,000

• 5 aircraft parts out of a job lot of 50 aircraft l

l Net Disposal Value of Spoilage:

parts are spoiled l 5 units x $600 / unit = $3,000

Effect: Increase job cost by:

• Cost assigned prior to the inspection point l

l ($2,000 - $600) x 5 = $7,000

are $2,000 per part Journal Entries
• When spoilage is detected, the spoiled Dr. Materials Control $3,000
Cr. WIP Control – specific job $3,000
goods are inventoried at $600 per part (net The cost of good units for the job
disposal value) l (45 x $2,000+ 5 x $1,400) / 45= (50*$2000–$3000)/45=$2,155.56

AF3112 - 2017 39 AF3112 - 2017 40

 Example: Normal spoilage
Example: Abnormal Spoilage
common to all jobs
Accounting Treatment Treat as a separate Loss item in the I/S.
l Increase the overhead cost by $7,000
Journal Entry:
Journal Entry:
l Dr. Materials Control $3,000
Dr. Materials Control $3,000
l Dr. Loss from Abnormal Spoilage $7,000
Dr. MOH Control $7,000
Cr. WIP Control $10,000 l Cr. WIP Control $10,000
Cost of good units=
l $2,000 + overhead assigned
l Suppose the firm produces 45 good units finally, the MOH
allocated to the aircraft components is 2,250. So the MOH
rate will be $2250/45=$50 per good unit => Cost per good
unit = $2,000+50 = $2,050
AF3112 - 2017 41 AF3112 - 2017 42

Job Costing and Rework Job Costing and Rework

3 Types: Journal Entries
l Normal rework attributable to a specific job l Rework Attributable to Specific Job
l Dr. WIP (Specific Job)
l Accounting Treatment
l The rework costs are charged to that job
l Rework Common to All Jobs
l Dr. MOH
l Normal rework common to all jobs
l Abnormal Rework
l Accounting Treatment
l Dr. Loss from Abnormal Rework
l The costs are charged to MOH
l The credit entries for all cases depends on whether the
l Abnormal rework
rework involved direct labor, material or overhead
l Accounting Treatment
l Cr. Direct Materials
l Charged to the Loss from Abnormal Rework A/C in the I/S
l Cr. Wages Payable (Labor)

l Cr. MOH Allocated

AF3112 - 2017 43 AF3112 - 2017 44
 End of Topic

AF3112 - 2017 45