Entrep-seminar PDF

Management Accounting in Business Practice – Product Costing Prepared by: Jordan M. Tangonan, CFMA, CIAS, CHRP®, MBA Faculty - Department of Accountancy, Business Laws and Taxation School of Accountancy, Management, Computing, and Information Studies Saint Louis University (for e...

Management Accounting in Business Practice – Product Costing Prepared by: Jordan M. Tangonan, CFMA, CIAS, CHRP®, MBA Faculty - Department of Accountancy, Business Laws and Taxation School of Accountancy, Management, Computing, and Information Studies Saint Louis University (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Management Accounting vs Cost Accounting (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Direct Costs – Baseline costs (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Direct Materials Direct materials are the Nike shoes: Leather, threads, raw materials or fabric, foam, and rubber. components that are an integral part of a finished product and can be directly traced to it during the manufacturing process. Jollibee Chicken Joy: Chicken, These materials are Rice, Flour, Seasonings, Gravy physically incorporated mixture. into the product and are a major factor in determining the cost of sales in manufacturing. (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Direct Labor Direct labor refers to the Nike shoes: Factory worker, wages and other Assembly personnel, Designer compensation paid to workers who are directly involved in the production of goods or services (Not selling/marketing). Jollibee Chicken Joy: Storage These workers actively house dresser, sorter and contribute to creating the packer. Kitchen crew – finished product, and Cooking, packing, and sorting. their labor can be specifically traced to individual units of production. (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Direct Labor Fact: A griller/grill- man in Mang Inasal receives 20% more wage than other crew members because they are directly involved in cooking the final product. This concept is the same with cooks/chefs working in restaurants. (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Factory Overhead Factory overhead Nike shoes: Paint, laces, refers to all the plastics, accessories, boxes, general costs paper insides associated with the production process that cannot be directly traced to a specific product. Jollibee Chicken Joy: Meal box, These costs are spoon and fork, gravy necessary for the packaging, rice paper, operation of the accessories. production facility but do not directly contribute to the creation of a finished product. (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Gross profit computation Take the following figures as an example: James Coffee operations for their first opening month of September 2024. Assuming that the direct costs for 10,000 units: Direct materials (Coffee beans, additives, preservatives) – PHP 500,000 Direct labor (Employee assigned for grinding, sorting, and packing) PHP 350,000 Factory Overhead (Paper bag with print, stickers, packing tape, packaging) PHP 150,000 Total production/manufacturing/cost of goods sold/Cost of sales – PHP 1,000,000 Cost per unit = PHP 1,000,000 divide by 10,000 units = PHP 100 per unit Management decided to impose a mark-up percentage of 50% then the selling price per unit is PHP 150. Total sales: (PHP 150 x 10,000 units ) PHP 1,500,000 Less: Cost of sales (PHP 100 x 10,000 units) PHP 1,000,000 Gross profit – September 2024 PHP 500,000 (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Operating expenses Operating expenses (OPEX) are the costs associated with running a business's day-to- day operations that are not directly tied to the production of goods or services. These expenses are necessary for the business to function but do not include the costs of production itself, such as direct materials or direct labor. Examples: Rent or lease payments for office space Salaries and wages for administrative staff (plus SSS/Philhealth/Pag-ibig) Utilities (electricity, water, etc.) for office or non-manufacturing facilities Marketing and advertising costs Office supplies Legal, consultation and professional fees (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Operating expenses for Nike and Jollibee Let’s go back to James Coffee’s operations, again assuming the following figures: Gross Profit – September 2024 PHP 500,000 Less: Operating expenses Wages of 3 staffs (P430 + P125 per employee x 26 days) PHP 43, 290 Rent – September 2024 PHP 25,000 Utilities expense (Electricity, Water, Internet) PHP 7,000 Marketing and advertising costs PHP 15,000 Office supplies (Pens, receipts, order forms, inks) PHP 5,000 Business permits/legal documents PHP 5,000 Professional fees (Accounting/Business Professional) PHP 10,000 Other operating expenses (Employee meals, bonuses) PHP 10,000 Total operating expenses PHP 120,290 Operating Income (Earnings before taxes): PHP 379,710 (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Taxes for MSMEs A. Percentage Tax: For businesses not subject to Value Added Tax (VAT) and earning annual gross sales or receipts not exceeding PHP 3 million, a 3% percentage tax applies on gross sales or receipts. Starting from 2023, under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, this rate was reduced to 1% until June 30, 2023, and may revert to 3% thereafter. B. Value Added Tax (VAT): Businesses with gross annual sales exceeding PHP 3 million must register for VAT. The VAT rate is 12% on the sale of goods, services, and imports. (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Net Income REMEMBER: THE BASIS FOR TAX COMPUTATION IS SALES! Going back to James Coffee’s September 2024 operations: Sales PHP 1,500,000 Less: Cost of Sales PHP 1,000,000 Gross profit PHP 500,000 Less: Operating expenses PHP 120,290 Operating income PHP 379,710 Less: Tax (P1,500,000 x 3%) PHP 45,000 Net income for September 2024 PHP 334,710 Net income is the total amount of money a business has left after paying all its expenses. It’s the profit the company keeps after covering all costs and expenses. In simpler terms, it’s what’s left of the money a business makes after subtracting all the bills. If it's positive, the business made a profit; if it's negative, the business had a loss. (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Cost management practices A. Expense Tracking and Analysis/Detailed Monitoring: Continuously track all manufacturing costs and operational expenses, including the smallest ones. Use accounting software or dashboards to monitor spending trends. If the company grows, hire a bookkeeper or an accountant. B. Automation: Use technology and automation tools to reduce manual labor, speed up repetitive tasks, and minimize human error. This can be done in areas like invoicing, payroll, packing and customer service. This will be costly at first because of the initial purchase of automation software/hardware but will save a lot of money in the long run. (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Cost management practices C. Supplier Negotiation: Negotiate better terms with suppliers, such as discounts for bulk purchases, cash payments, early payment if on credit, or long-term contracts. D. Supplier Diversification: Avoid relying on a single supplier to prevent price increases due to lack of competition. Having multiple suppliers can help drive down costs. (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) Cost management practices E. Sustainability Practices: Adopt environmentally friendly practices such as using renewable energy sources or implementing energy-saving programs, which can reduce long- term costs. (Examples: Solar panel usage for indoor and outdoor lightings, LED instead of traditional bulbs, going paperless) F. Going for Biodegradable, reusable or minimal packaging: Spending less on packaging and focusing more on product quality. If the product requires excessive packaging, make sure to use biodegradable and or reusable products to reduce costs and encourage recycling. (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines) FINAL REMINDERS: 1. INCREASING SELLING PRICE OF PRODUCTS/SERVICES MAY CAUSE CUSTOMER DISSATISFACTION. THE ONLY VALID REASONS TO INCREASE SELLING PRICES ARE DURING INFLATION MOVEMENTS, INDUSTRY TRENDS, AND HAVING COMPETITIVE ADVANTAGES. 2. TOO MUCH COST REDUCTION MIGHT COMPROMISE PRODUCT AND SERVICE QUALITY. TOO MUCH COST REDUCTION MAY ALSO DETER RELATIONSHIPS WITH EMPLOYEES AND SUPPLIERS. BE CAREFUL. THANK YOU FOR LISTENING! (for exclusive use by the Department of Accountancy, Business Laws and Taxation, Saint Louis University, 2600 Baguio City, Philippines)