Materials From HBS and Text

Book – Summary of
Management Accounting
Management Accounting
Managerial Accounting
• What is managerial accounting
• How managerial accounting differs with financial accounting
• Scorekeeper
• Attention Directer
• Problem Solver
• Evaluating decision alternatives
• Evaluating business performance
• Evaluation managers and employees to achieve goal congruence
Cost Information
• Performance Measurement

• Product Cost and Cost and Services

- Inventory Cost
- Profitability Analysis
- Product Mix
- Pricing
- Cost of Services
Management Accounting Information
• Full Cost Accounting Information

• Differential Accounting Information

• Responsibility Accounting Information

Cost Behavior
• Relation of Cost to Volume
• Variable Cost, Fixed Cost, Semi Variable Cost, Chuncky Cost
• Direct Cost
• Indirect Cost
• Two Stage system, assigning cost to cost object in the cost center
• Then, assigning cost to each pool using a cost drivers
The Flows
Prime Cost and Conversion Cost
• Prime Cost
= Direct Material Cost + Direct Manufacturing Labor Cost

• Conversion Cost
= Direct Manufacturing Labor Cost + Manufacturing Overhead Cost
Cost Classifications
SCHEMATIC OF CONTRIBUTION

Revenues

Contribution

Fixed Costs Profit

copyright by Wiwiek M.Daryanto 28

 Cost-Volume-Profit (CVP)- Analysis

Cost/unit Price/unit
+Expected Profit

Demand /
Fixed Cost / Supply
unit
Production Volume Sales Volume

copyright by Wiwiek M.Daryanto 29

What Do You Think
Operating Leverage
• Operating leverage (OL) is the effect that fixed costs
have on changes in operating income as changes
occur in units sold, expressed as changes in
contribution margin.
• OL = Contribution Margin
Operating Income

• Notice these two items are identical, except for fixed

costs.
Degree Of Operating Leverage
Cost Accounting System
• Recognize, measure, record and report cost and associated
nonfinancial information related to coy’s activities, products, services,
processes, functions and units.
• Job Order cost system
• Process cost
• Standard cost
• ABC
Under/Over Costing
• Cost Hierarchy:
• - Output Unit Level in each individual unit of product/service
• - Batch Level Cost in group of units
• - Product/Service Sustaining Cost
• - Facility Sustaining Cost
Plastim and ABC Product Costs
 OPERATING BUDGET

Sales Budget Production Budgets Other Budgets Capital Budgets

Revenue Direct Labor General & Adm. Project A

Sales Adm. Direct Material General & Adm. Project B

Advertising Overhead Controller Etc. for Each Major

Project
Expenses Region Production Staff Treasure
A Minor Capital
Project
Expenses Region Department A Etc. for other staff
B
Flexible Budget R&D Personnel
Budget
Department B
Inventory Purchases
Budget Budget
Flexible Budget

Cost & Sales

Etc. for each Production Department
Budget

Budgeted Income Statement

CASH BUDGET

BUDGETED BALANCE SHEET

Variances
• Price variance formula:
Price
Variance = { Actual Price
Of Input - Budgeted Price
Of Input } X Actual Quantity
Of Input

• Efficiency variance formula:

Efficiency
Variance = { Actual Quantity
Of Input Used -
Budgeted Quantity of Input
Allowed for Actual Output }X Budgeted Price
Of Input

(c) 2012 Pearson Education. All rights reserved.

Accounting for Decision Making
Accounting for Decision Making
Make or Buy Decision
Evaluating Management
Control Systems

Motivation Goal congruence Effort

Lead to rewards

Monetary Nonmonetary
Organization Structure

Total decentralization

Total centralization
Responsibility Centers

Cost Revenue
center center

Profit Investment
center center
Transfer Pricing

A transfer price is the price one subunit charges

for a product or service supplied to another
subunit of the same organization.
Intermediate products are the products
transferred between subunits of an organization.
Transfer Pricing

Transfer pricing should help achieve

a company’s strategies and goals.
– fit the organization’s structure
– promote goal congruence
– promote a sustained high level
of management effort
Transfer-Pricing Methods

Market-based transfer prices

Cost-based transfer prices

Negotiated transfer prices

Transfer-Pricing
Methods Example

Lomas & Co. has two divisions:

Transportation and Refining.
Transportation purchases Refining processes
crude oil in Alaska and crude oil
sends it to Seattle. into gasoline.
Transfer-Pricing
Methods Example

External market price for supplying

crude oil per barrel: $13
Transportation Division:
Variable cost per barrel of crude oil $ 2
Fixed cost per barrel of crude oil 3
Total $ 5
The pipeline can carry 35,000 barrels per day.
Transfer-Pricing
Methods Example

External purchase price for

crude oil per barrel: $23
Refining Division:
Variable cost per barrel of gasoline $ 8
Fixed cost per barrel of gasoline 4
Total $12
The division is buying 20,000 barrels per day.
Transfer-Pricing
Methods Example

The external market price to outside

parties is $60 per barrel.
The Refining Division is operating
at 30,000 barrels capacity per day.
Transfer-Pricing
Methods Example

What is the market-based transfer price

from Transportation to Refining?

$23 per barrel

What is the cost-based transfer price

at 112% of full costs?
Transfer-Pricing
Methods Example

Purchase price of crude oil $13

Variable costs per barrel of crude oil 2
Fixed costs per barrel of crude oil 3
Total $18
1.12 × $18 = $20.16
What is the negotiated price?
Between $20.16 and $23.00 per barrel.
Transfer-Pricing
Methods Example
Assume that the Refining Division buys
1,000 barrels of crude oil from the
Transportation Division.
The Refining Division converts these 1,000
barrels of crude oil into 500 gallons of
gasoline and sells them.
What is the Transportation Division operating
income using the market-based price?
Transfer-Pricing
Methods Example

Transportation Division:
Revenues: ($23 × 1,000) $23,000
Deduct costs: ($18 × 1,000) 18,000
Operating income $ 5,000
What is the Refining Division’s operating
income using the market-based price?
Transfer-Pricing
Methods Example

Refining Division:
Revenues: ($60 × 500) $30,000
Deduct costs:
Transferred-in ($23 × 1,000) 23,000
Division variable ($8 × 500) 4,000
Division fixed ($4 × 500) 2,000
Operating income $ 1,000
Transfer-Pricing
Methods Example

What is the operating income of both

divisions together?
Transportation Division $5,000
Refining Division 1,000
Total $6,000
Transfer-Pricing
Methods Example
What is the Transportation Division’s operating
income using the 112% of full cost price?
Transportation Division:
Revenues: ($20.16 × 1,000) $20,160
Deduct costs: ($18.00 × 1,000) 18,000
Operating income $ 2,160
What is the Refining Division operating
income using the full cost price?
Transfer-Pricing
Methods Example

Refining Division:
Revenues ($60 × 500) $30,000
Deduct costs:
Transferred-in ($20.16 × 1,000) 20,160
Division variable ($8.00 × 500) 4,000
Division fixed ($4.00 × 500) 2,000
Operating income $ 3,840
Transfer-Pricing
Methods Example

What is the operating income of both

divisions together?
Transportation Division $2,160
Refining Division 3,840
Total $6,000
Transfer Pricing : The effect of Decentralization
 Facts of the Case
(controlled) transaction Associated
Champagne Transfer Price? 12.50 Retailer
Wholesaler
Producer EUR Costa
France Costa Rica Rica

Independent (uncontrolled) transaction

Sales Price 6 EUR Independent
Wholesaler 15 EUR
Champagne Retailer
Producer Costa
Costa Rica
France Rica

The associated wholesaler (subsidiary) incurs transportation costs

of 1.50 EUR.

The independent wholesaler incurs no transportation costs.

107
 RESALE PRICE METHOD
Tested Party

Transfer Sales Price to

Price Third Party Third Party
Manufacturer Distributor
Customer
Multinational
Enterprise Group Sales Price to 3rd Party
- Gross Profit Margin
Transfer Price

• Calculate gross margin for distributor/reseller

• Easiest to apply if reseller does not add
substantially to value of product
108
 RESALE PRICE METHOD

P&L Account • Gross profit level indicator

Sales
• Looks at gross profit relative to sales
Costs of Goods Sold

Gross Profit

Operating Expenses

Net Operating Income

109
 RESALE PRICE METHOD

Calculation of Arm’s length price (ALP):

ALP = Resale Price - (Resale Price Margin x Resale Price)

Resale Price Margin = Sales Price - Purchase Price

Sales Price

110
 RESALE PRICE METHOD

Sale Price to Third Parties $ 100 Determined

from
Resale Price margin 20% comparable
companies
Arm’s length price = $ 100 - (20% x $100)
= $ 80

111
 Example
(controlled) transaction Associated 12.50 € Retailer
Champagne Transfer Price? Wholesaler
Producer France Costa
Costa Rica Rica

Independent (uncontrolled) transaction

Sales Price 6 EUR Independent
Champagne Wholesaler 15 € Retailer
Producer France Costa
Costa Rica
Rica

The associated wholesaler incurs transportation costs of 1.50 €.

The independent wholesaler incurs no transportation costs.

112
 Example
Solution
Retail price charged by independent wholesaler 15.00 100%
Purchase price paid by independent wholesaler - 6.00 - 40%

Gross profit / margin of the independent wholesaler 9.00 60%

Retail price charged by independent wholesaler 15.00 100%

Purchase price paid by independent wholesaler - 6.00 - 40%

Adjustment for CIF – FOB12% of sales price +1.80 +12%
Gross profit / margin of the independent wholesaler 10.80 72%
113
EXAMPLE: Don’t forget a functional
analysis!

P manufactures X

imports and distributes X

S

independent retailers
A B C

114
Financial data Company S

2009 2010 2011

Sales 80000 88000 105000
COGS -65000 -71500 -88000
Operating
Expenses -10000 -11250 -14500
Operating
Income 5000 5250 2500

Margin 6.25% 5.97% 2.38%

115
 Return on sales (net profit margin)
of comparables

2009 2010 2011

Company 1 5.80% 5.60% 5.70%
Company 2 8.30% 8.15% 8.20%
Company 3 3.90% 4.25% 4.05%
Company 4 4.50% 4.65% 4.60%
Company 5 6.70% 6.45% 6.55%
Range 3.90% - 8.30% 4,25% - 8,15% 4,05% - 8,20%
Company S 6,25% 5,97% 2,38%
In/Out Range IN IN OUT

116
Performance Measurement : Are you Happy
With the Result
Indicator
Indicator
Indicator Conclusion
Balanced Score Card