Management: Organizational Structure & Cost Concepts

• Management Services (MS) encompasses both Management Accounting (MA) and Financial Management.
• Management Accounting (MA) furnishes useful, relevant information to managers for decision-making.
• Financial Accounting (FA) caters to external users, adhering to accounting standards.
• Line positions are directly involved in revenue-generating activities
• Staff positions support the line positions via IT, payroll, and legal departments

Organizational Structure

• Stockholders are at the top, followed by the Board of Directors (BOD), and then the CEO.
• Reporting to the CEO are various Vice Presidents (VPs).
• Line VPs include Marketing, Finance (often as VP/CFO), and Operations.
• Staff VPs include Human Resources (HR).
• Managers operate below VPs
• Internal Audit, Treasurer and Controller report to the the VP/CFO- Finance

Cost Concepts

• Costs influence selling price (SP), demand, net income, and stock price.
• Product costs are incurred to manufacture a product and are considered manufacturing/inventoriable costs.
• Period Costs (Non-manufacturing) are operating expenses, expensed as incurred
• Direct costs, such as direct materials (DM) and direct labor (DL), are traceable
• Indirect costs, like overhead (OH), are not directly traceable.
• Overhead includes rent, utilities, taxes, depreciation, and insurance of the factory.
• Cost segregation techniques include the High-Low Method, Scattergraph, and Least Squares/Regression.

Cost Segregation Techniques

• The High-Low Method uses cost drivers to segregate costs, using the formula VC/u = (ΔY/ΔX).
• Scattergraphs plot data points to visualize cost behavior
• Least Squares / Regression is the most accurate method, following the formula Y = a + bx.
• Correlation analysis measures the strength of linear relationships between variables
• Drawing a scatter diagram illustrates the correlation between two variables.
• Forming a straight line indicates a high correlation.
• Forming a random pattern indicates a low or no correlation.
• The coefficient of correlation (r) measures relationship degree.
• There is negative correlation at -1
• There is no correlation at 0
• There is positive correlation at 1
• The coefficient of determination (r²) indicates the strength of cost function, in which closer to one is better

Formula

• DM used + DL + OH = TMC
• Beginning Work in Process (WIP) - Ending WIP = COGM
• Beginning Finished Goods (FG) - Ending FG = COGS

Cost-Volume-Profit (CVP) Analysis

• CVP Analysis studies cost and volume changes on profits and is important for profit planning;
• Considers interrelationships among activity volume, unit selling prices, variable cost per unit, total fixed costs, and sales mix.
• Contribution Margin (I/S) focuses on cost behavior.
• Contribution Margin = Sales - Variable Cost
• Profit/NI/OI = Contribution Margin - Fixed Cost
• Unit contribution margin is CM/u
• Contribution margin ratio is CMR

Break-even Point

• Units = Fixed Costs / CM per unit.
• Sales = Total Costs.
• Find break even point by dividing total fixed costs by the contribution margin ratio.
• Profit is zero at the break-even point.
• Break-even point in sales is equal to variable costs plus fixed costs.

Target / Desired Profits (TP)

• To calculate units, add fixed costs and profit, then divide by CM per unit.
• The lower the break even point, the better
• The higher the margin of safety, the better

Margin of Safety

• Extent to which sales can decrease before incurring a loss.
• Margin of Safety in Units is calculated as Salesunits (actual/planned) - BEP in units.
• Margin of Safety Ratio = MOS / Sales

Degree of Operating Leverage (DOL)

• Indicates the effects of sales changes on profit.
• % change in sales multiplied by DOL equals the % change in profit before tax.
• CM / Profit = DOL

Sensitivity Analysis

• "What if" technique that examines the impact of changes on any variables.
• Change in SP, VC, or FC will affect on profit.
• Both costs and revenues have linear behaviors throughout the relevant range of the activity index.
• Costs can be accurately classified as variable or fixed.
• Activity changes are the only factors affecting costs.
• All units that are produced are sold.
• When selling more than one product type, sales mix remains constant

Absorption Costing (AC) vs. Variable Costing (VC)

• Absorption Costing is for external reporting and complies with GAAP/PFRS
• Variable costing is for internal use only for management purposes
• Absorption Costing includes all manufacturing costs in the cost of a unit.
• Variable costing includes only variable manufacturing costs in the cost of a unit.
• Absorption costing treats fixed manufacturing overhead as a product cost.
• Variable costing treats fixed manufacturing overhead as a period cost.
• Product costs are part of the finished product
• Period Costs are matched with revenue of a specific time period
• Selling and administrative expenses are period costs under both Absorption and variable costing
• If Production equals Sales, then AC NI equals VC NI.
• If Production is greater than Sales, than AC NI > VC NI
• If Production is less than Sales, than AC NI < VC NI
• Subtract (Change in inventory x FOH/unit) to reconcile VC NI to AC NI

Absorption Costing

• Product Cost increases inventory on the Balance Sheet and later moves to COGS on the Income Statement.

Variable Costing

• Period Cost goes directly to Operating Expenses on the Income Statement.

Potential Advantages of Variable Costing

• Variable costing has several potential advantages relative to absorption costing.
• Net income computed under variable costing is unaffected by changes in production levels.
• Use of variable costing is consistent with cost-volume-profit analysis and incremental analysis.
• Net income computed under variable costing is closely tied to changes in sales and provides a more realistic assessment of the company's success or failure.
• Presentation of fixed and variable cost components on the variable costing income statement makes it easier to identify these costs and understand their effect on the company's results

Standard Costing and Variance Analysis

• Standard costs should be cost
• Standard costing is the best estimate of management
• Standard costing is the planned unit cost of the product and a comparison between actual and standard
• A standard is a measure of acceptable performance established as a guide for decisions
• A standard cost is a determined unit cost which is used as a measure of performance.
• A standard is the budgeted cost per unit of product
• A standard is a unit amount, whereas a budget is a total amount.

Advantages of Standard Cost

• Standard Cost facilitates management planning and is used in setting selling prices
• Standard costs promote greater economy by making employees more "cost-conscious
• Standard costs contribute to management control by providing a basis for evaluation of cost control.
• Standard costs highlight variances in management by exception.
• Standard costs simplify the costing of inventories and reduce clerical costs.

Two levels of Standard

• Ideal standards represent optimum levels of performance under perfect operating conditions.
• Normal standards represent efficient performance levels attainable under expected operating conditions.

Direct Materials (DM) Variance

• Analyze variance at the point of purchase
• Materials Price Variance (MPV) - Point of purchase; AP x AQ - SP x AQ
• Materials Usage/Quantity Variance (MUV) Point of Production; SP x AQ - SP x SQ

Accountability

• The purchasing agent is generally responsible for the price variance.
• The production manager is generally responsible for the quantity variance.

Variance keypoints

• actual > Standard = unfavorable
• actual < Standard = favorable

Direct Labor (DL) Variance

• Labor Rate Variance (LRV) - AR x AH- SR x AH
• Labor Efficiency Variance (LEV) - SR x AH- SR x SH

Labor JEs

• WIP Inventory uses SH x SP
• Accountability for the labor rate variance generally belongs to the production manager to see labor rates are kept under control.
• Accountability for efficiency variance relies on production manager, because the staff are directly are involved in the production..

Overhead (OH) Variance (short-cut)

• -Two types of overhead, Variable and Fixed

• Variable Spending

• Fixed Spending

• Effeciency

• Volume

• There's no such thing as Fixed Effeciency Variance

Mix and Yield

• Two types of Materials and Labor, applicable to DM and DL ONLY
• Total Materials Price Variance = AP x AQ x AM - SP x AQ x AM
• Materials Mix Variance = SP x AQ x AM- SP x SQ x SM
• Materials Yield Variance = SP x AQ x SM - SP x SQ x SM

Factor Overhead Variances

• two way
• three way
• four way

Factor Overhead Variances Details

• Two-way- Controllable/Volume
• Three way Spending /Effeciency/Volume
• Four way- Variable Spending/ Fix Spending/ Effeciency/ Volume

Reporting Variances

• All variances should be reported ASAP
• Variance reports facilitate the principle of "management by exception" by highlighting significant differences.
• Management watches for those greater than 10% of the standard.

Reporting Points

• In income statements, cost of goods sold is stated at standard cost
• If no significant differences between actual costs and standard costs
• Report if there are significant differences between actual and standard costs, the financial statements must report inventories and cost of goods sold at actual costs.

Budgeting

• Budgeting is a planning tool used to achieve goals
• Spearheaded by the Budget Committee overall responsible: Budget preparation
• Types of Budgets: Short-term → 1 year; Long-term → >1 year (Capital Budgeting)
• Responsibility assignment: Budget Committee

Benefits of budgetting

• Requires all levels of management to plan ahead.
• Provides definite objectives for evaluating performance.
• Creates an early warning system for potential problems.
• Facilitates coordination of activities within the entity's overall operations.
• Results in greater management awareness of the entity's overall operations.
• Motivates personnel throughout the organization.

Essentials of Effective Budgeting

• A sound organizational structure
• Management acceptance
• A continuous twelve-month budget
• Zero-based budgeting
• Life-cycle budget
• Kaizen budgeting
• A budget committee: president, treasurer, chief accountant, and all major area of the company management

Budget Techniques

• Master budget end goal: cash
• Set of interrelated budgets → constitutes a plan of action for a specified time period
• Two Budget types: Operating budgets/ Financial budget

Management

• Management by Exception means that top management reviews budget reports, focusing on differences between actual results and planned objectives.
• Use of T-accounts

Sales Budget

• the starting point in preparing the master budget
• • Cash Budget shows anticipates cash flows.
• The cash budget contains three sections, (a) Cash receipts, (b) Cash disbursements and (c) Financing.

Incremental Analysis/Relevant Costing

• Method of choosing the best option involving alternatives/ future
• Relevant, Incremental, different

General Incremental Rules

• variable cost are relevant
• fixed cost (if it its avoidable)

Make/Buy

• Choose the option with the lower cost/ consideration for opportunities given

Accept/Reject Special Order

• Follow excess /no excess capacity formula

Retain/Replace

• Relevant items to be considered

Continue/ Eliminate product

• If segment's avoidable income> avoidable cost ,than KEEP

Sell now/ Later

• Process further if additional revenue > incremental cost

Responsibility Accounting

• Objective: Proper evaluation of responsibility centers
• Cost over which a manager has control is called a controllable cost
• Responsibility measures can be divided into 4 centers: cost, revenus, profit, and investment

DEcentralization

• Refers to the separation or division of the organization into more manageable units-- goal congrous Types of Responsibility Centers: Cost Center Revenue Center Sales Department, Marketing Department Profit Center SM Department Store, supermarket, cinema Investment Center Head office of SM

Performance Measure: the higher, the better- investopedia IBID InvestmentReturn: Operating Income/Average Oper Assets Residual Income (RI) = Operating IncomeRequired/acceptable Return-Op incomeAve Op Assets +

Balance Scorecard

Balance Scorecard - financial & non-financial

Transfer Pricing

• objective to set transfer price to maximize NI- to achieve goal congruence transfer to facilitate decision-making = motivation for performance

Max vs minimum prices

• to minimize the effect of sub-optimization, a range for transfer price must be set based on the following limits: Maximum transfer price = Cost of buying from outside suppliers Minimum transfer price = Variable cost per unit + Lost Contribution Margin per unit on outside sales cost+markup Variable Cost Full production cost Negotiated Price Market-based Price-

Capital Budgeting

• Capital Budgeting involves choosing among various projects to find the one(s) that will maximize a company's return on its financial investment.
• Top management/BOD are involved in accepting/rejecting

The capital budgeting factors include:

• Funds, Relationships among proposed projects, Company's basic decision-making approach, Particular project risks
• Payback Periods
• Accounting Rate Of Return
• Net Present Value

Discounting

Use discounted CF to consider TVM,

Formula

• The Higher TVM the better
• Net PV
• Prot Index

Capital budgeting-

use net present value always true that IIr Post audit achiave accurate estimates a for, aaluation prodecure Intangiale Benifits Cost of Capital→ Discount rate

Balance Shhet

Liquidity RAtIos: Current Ratios quick Recable tun over Average receivable Inventory turn over Average age acoutns and cash convo Profitility

Financial statements

• financial statements are used for comparison

Statement patterns

• ratio
• evaluate relationship

evaluate items Evaluate

• Disclaimer:

The study notes generated are based solely on the provided text OCR. Always refer to original lecture materials and consult with instructors for clarifications*