Higher School of Management Sciences - Annaba

S P E C I A L T Y: M A N A G E M E N T A N D
MANAGEMENT CONTROL.
2nd Master
2023-2024

COST ANALYSIS AND CONTROL

B Y : M E R I E M N A I T AT T I A
MCA
CHAPTER 2: COMPLETE COSTS AND THEIR
MANAGERIAL USE
COURSE 4: THE FULL COST METHOD: THE ANALYSIS
CENTER METHOD (2)
LESSON PLAN

1 –The analysis center method: Cross-services

2-TAKING STOCKS INTO ACCOUNT
The analysis center method: Cross-
services
 CROSSED SERVICES

Secondary distribution can be complicated by the existence of cross-

benefits. For example :
the “maintenance” center transfers loads to the “transport” center (the
employees of the maintenance department ensure the maintenance of the
vehicles) but also receives them (the transport department ensures the
supply of spare parts necessary for repairs).
In this case, it is not possible to distribute the loads of one center
independently of the other because each time an auxiliary center is
emptied, another is filled.
maintenance transportation
 EXAMPLE:
At the end of the primary distribution, the charges for the “maintenance” and “transport”
centers amount to 20,000 da and 15,000 da respectively.
Secondary distribution is done by allocating 10% of the transport cost to the
“maintenance” center and 5% of the maintenance cost to the “transport” center
If we start by emptying the “maintenance” center, we charge 1,000 da (= 5% * 20,000) to
the “transport” center.
We then empty the transport center, but we then dump 10% * (15000 + 1000) = 1600 da
into the maintenance center which is no longer emptied.
We must therefore start by resolving the problem of cross-benefits. This resolution can
be done in two ways: either iteratively, or by posing a system of equations.
 SOLVING BY ITERATIONS

This method consists of alternately emptying the auxiliary centers until the amounts
remaining to be transferred are negligible.
In the previous example, if we empty the maintenance center again, we transfer 80 DA
(= 5% * 1600) to the transport center.
We then empty the transport center again by transferring 8 DA to the maintenance
center (10% * 80).
We then empty the maintenance center again by transferring 0.4 DA to the transport
center (5% * 8).
It is possible to stop at this step because the residual amount (at 0.40DA) is negligible
In total, the following amounts will have passed through the
auxiliary centers:
- “maintenance” center: 20,000 + 1,600 + 8 = 21,608DA
- “transport” center: 15,000 + 1,000 + 80 = 16,080DA
 SOLVED BY A SYSTEM OF EQUATIONS

It is possible to arrive directly at the same result by posing a

system of equations of the type:
X = a.Y + b
Y = c.X + d
In the previous example, if we set M = maintenance center cost
and T = transport center cost we have:
M = 20 000 + 0,1 T
T = 15 000 + 0,05 M
We then solve this system
M = 20 000 + 0,1 T = 20 000 + 0,1 (15 000 + 0,05 M) = 20 000 + 1 500 +
0,005 M = 21 500 + 0,005 M
M – 0,005 M = 21 500
0,995 M = 21 500
M = 21 500 / 0,995 = 21 608 DA
et T = 15 000 + 0,05 * 21 608 = 16 080 DA
We can then proceed with the secondary distribution, the calculation of
the cost of the OUs and the distribution of indirect costs as studied
TAKING STOCKS INTO ACCOUNT
 DIFFICULTIES POSED BY THE EXISTENCE OF INTERMEDIATE
STOCKS

Until now, we have calculated the full cost of a product by allocating to it the expenses
for the period studied. Equivalently, we can say that we have distributed all the expenses of
the period studied over the products of the period.
By doing this, we implicitly assumed that the products sold during the period had been
manufactured during this same period and from materials also purchased during this
period.
This way of proceeding is correct in a company that works to order, without having
stocks. On the other hand, in the - more common - case where the company has stocks,
this calculation is no longer valid.
Indeed, a product sold in December may very well have been
manufactured in November from materials purchased in October. In
this case, it is therefore necessary to allocate to the cost of products sold,
not all of the expenses for the month of December, but:
- October supply costs;
- November manufacturing costs;
- December distribution costs.
Manufacturing and supply costs for December will be included in the cost
of end-of-period inventories.
 COST CALCULATION METHOD WITH INTERMEDIATE STOCKS

the purchase cost of the materials purchased = purchase

price + supply costs for the period

the production cost of the products manufactured = purchase cost of materials

consumed + manufacturing costs for the period
 the cost price of products sold = production cost of products sold +
distribution costs for the period

To move from the cost of materials purchased to the cost of materials consumed, we use the
raw material stock accounts:

initial stock + cost of materials purchased = cost of materials consumed +

finale stock
 starting inventory + cost of finished goods manufactured = cost of goods
sold + finale inventory

The valuation of stock movements can be done according to the methods

accepted in general accounting: WAUC (weighted average unit cost) or FIFO
(first in, first out). It is also possible to use other methods: LIFO (last in, first
out) or replacement cost. At each stage, the calculations are carried out in the
classic way:
-direct allocation of direct charges: purchase price for the supply cost, MOD for the
manufacturing cost, etc.
- use of a distribution key for indirect charges: supply, manufacturing, distribution,
administration, etc.
EXAMPLE