L02 Resp. Acc, variable costing and full costing S224(1).pptx

Module 02: Accounting, Behaviour and Control Responsibility Accounting , Variable and...

Module 02: Accounting, Behaviour and Control Responsibility Accounting , Variable and Absorption Costing Prepared by Yuni Yuningsih Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  ELECTRONIC WARNING NOTICE FOR COPYRIGHT STATUTORY LICENCES Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Learning Objectives After studying this module, you should be able to: Define and provide examples of responsibility centres Prepare contribution Income Statements Prepare an income statement under variable costing. Explain the accounting treatment of fixed manufacturing overhead under absorption and variable costing Understand the difference between variable costing income statement and absorption costing income statement Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Centralisation vs. decentralisation When in slideshow mode, use the arrow keys or space bar on your keyboard to reveal more Decentralis Decentralis Centralised Centralised ed ed Organisatio Organisatio Organisatio Organisatio ns ns ns ns Decisions Decisions are are handed handed down down form form the the top top Decisions Decisions are are made made at at echelon echelon of of divisional divisional and and management management and and departmental departmental levels levels subordinates subordinates carry carry them them out out Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Decision making delegation When in slideshow mode, use the arrow keys or space bar on your keyboard to reveal more Decision making is Top Top Management Management pushed down. Middle Middle Management Management Middle Middle Management Management Supervisor Supervisor Supervisor Supervisor Supervisor Supervisor Supervisor Supervisor Decentralisation often occurs as an organisation grows. Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Benefits and costs of a decentralized organization Benefits Costs Delegating = Time Relief Lack of big picture view Empowering Employees = Knowledge & Expertise Lack of coordination Delegating = Timely Responses to Opportunities & Narrow focus Problems Transferring of knowledge Decision Making Autonomy = Managerial Training difficult Decision Making Authority = Greater Motivation Source: Langfield-Smith, K., Smith, D., Andon, P. Hilton, R., and Thorne, H. (2018) Management Accounting: Information for creating and managing value, 8th edition, McGraw-Hill. Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  What is responsibility accounting? Responsibility accounting refers to the concepts used to measure the performance of people and departments in order to foster goal congruence The basis of a responsibility accounting system is the designation of each subunit in the organization as a particular type of responsibility centre Source: Langfield-Smith, K., Smith, D., Andon, P. Hilton, R., and Thorne, H. (2021) Management Accounting: Information for creating and managing value, 9th edition, McGraw-Hill. Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Types of responsibility centres When in slideshow mode, use the arrow keys or space bar on your keyboard to reveal more A responsibility centre is a subunit in an organization whose manager is held accountable for specified results Investme Investme Cost Cost RESPONSIBILITY RESPONSIBILITY nt nt Center Center CENTERS CENTERS Center Center Revenue Revenue Profit Profit Center Center Center Center Source: Langfield-Smith, K., Smith, D., Andon, P. Hilton, R., and Thorne, H. (2021) Management Accounting: Information for creating and managing value, 9th edition, McGraw-Hill. Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Responsibility and controllability Controllability is the degree of influence that a manager has over costs, revenues, or related items for which he is being held responsible Segregation of controllable and non-controllable costs in a responsibility accounting system is important for performance evaluation Source: Langfield-Smith, K., Smith, D., Andon, P. Hilton, R., and Thorne, H. (2021) Management Accounting: information for creating and managing value, 9th edition, McGraw-Hill. Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Responsibility centres and financial performance Source: Langfield-Smith, K., Smith, D., Andon, P. Hilton, R., and Thorne, H. (2021) Management Accounting: Information for creating and managing value, 9th edition, McGraw-Hill. Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Contribution Income Statement A common form of profit center evaluation is the contribution income statement, which is based on the contribution margin developed for each profit center and for each relevant group of profit centers Detail of the statement varies based on management’s needs Contribution by Profit Center (CPC) measures all costs traceable to, and therefore controllable by, the individual profit center, including traceable fixed costs Source: Blocher, Juras, and Smith, Cost Management: a Strategic Emphasis, 9e, Mc.Graw-Hill, 2022. Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  The contribution income statement has an important role in performance evaluation: it distinguishes controllable and non-controllable costs it is not subject to the “inventory effect” of full costing. Blocher, Juras, and Smith, Cost Management: a Strategic Emphasis, 9e, Mc.Graw-Hill, 2022. Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Controllable and Noncontrollable Fixed Costs Fixed costs can be either controllable or noncontrollable from the perspective of each profit center: Controllable fixed costs are fixed costs that the profit center manager can influence in approximately a year or less, such as advertising, data processing, and management consulting expenses Noncontrollable fixed costs are those that are not controllable within a year’s time, such as depreciation and taxes Blocher, Juras, and Smith, Cost Management: a Strategic Emphasis, 9e, Mc.Graw-Hill, 2022. Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Variable Costing vs. Full Costing The use of the contribution income statement is often called variable costing because it separates variable and fixed costs Full costing is the conventional costing system that includes fixed manufacturing cost as part of product cost Full costing, also called absorption costing, is required by GAAP for financial reporting and by the IRS for computing taxable income Full costing satisfies the matching principle while variable costing meets the three objectives of management control systems Blocher, Juras, and Smith, Cost Management: a Strategic Emphasis, 9e, Mc.Graw-Hill, 2022. Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Absorption Costing A system of accounting for costs in which both fixed and variable production costs are considered product costs. Fixed Costs Product Variable Costs Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-15 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Variable Costing A system of cost accounting that only assigns the variable cost of production to products. Fixed Costs Product Variable Costs Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-16 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Absorption costing vs Variable costing (cont’d) Source: Horngren, Sundem, Burgstahler & Schatzberg, 2014 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Absorption and Variable Costing (1/3) Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-18 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Absorption and Variable Costing (2/3) The difference between absorption and variable costing is the treatment of fixed manufacturing overhead. 8-19 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Absorption and Variable Costing Mellon Co. produces a single product with the following information available: Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-20 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Absorption and Variable Costing – Unit Cost Unit product cost is determined as follows: Selling and administrative expenses are always treated as period expenses and deducted from revenue. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-21 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Absorption Costing Income Statements Mellon Co. had no beginning inventory, produced 25,000 units, and sold 20,000 units this year at $30 each. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-22 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Absorption Costing Income Statements (2/3) Mellon Co. had no beginning inventory, produced 25,000 units, and sold 20,000 units this year at $30 each. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-23 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Absorption Costing Income Statements (3/3) Mellon Co. had no beginning inventory, produced 25,000 units, and sold 20,000 units this year at $30 each. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-24 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Variable Costing Income Statements Now let’s look at variable costing by Mellon Co. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-25 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Variable Costing Income Statements Now let’s look at variable costing by Mellon Co. We exclude the fixed manufacturing overhead. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-26 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Variable Costing Income Statements Now let’s look at variable costing by Mellon Co. 8-27 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Comparing Absorption and Variable Costing Let’s compare the methods. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-28 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Comparing Absorption and Variable Costing (2/3) Let’s compare the methods. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-29 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Comparing Absorption and Variable Costing (3/3) Let’s compare the methods. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-30 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Reconciling Income Under Absorption and Variable Costing We can reconcile the difference between absorption and variable net income as follows: Fixed mfg. overhead $150,000 = = $6.00 per unit Units produced 25,000 Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-31 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Evaluation of Variable Costing Management finds it Consistent with easy to understand. CVP analysis. Emphasizes contribution in Advantages short-run pricing decisions. Profit for period not Impact of fixed affected by changes costs on profits emphasized. in fixed mfg. overhead. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-32 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  Evaluation of Absorption Costing Fixed manufacturing overhead is treated the same as the other product costs, direct material and direct labor. Consistent with long-run Advantages pricing decisions that must cover full cost. External reporting and income tax law require absorption costing. Source: Hilton and Platt, Managerial Accounting: Creating Value in a Dynamic Business Environment, ed 13, McGraw-Hill, 2023. 8-33 Faculty of Business and Law | Accounting CRICOS Provider Code 00301J  THANK YOU! Next week – Relevant Costing Faculty of Business and Law | Accounting CRICOS Provider Code 00301J