4H1CD Costs and Decisions 2024-2025 Lecture Notes PDF

4H1CD : Costs and decisions Course supervisor: Agathe Morinière Teacher: Year 2024-2025  2 Part 1: Main concepts ▪ 1.1 Introduction ▪ 1.2 Classification of costs ▪ 1.3 Costing methods 4H1CD – 2024-2025 Evaluation ▪ Quiz in sessions ▪ Final exam ▪ Behavior:...

4H1CD : Costs and decisions Course supervisor: Agathe Morinière Teacher: Year 2024-2025  2 Part 1: Main concepts ▪ 1.1 Introduction ▪ 1.2 Classification of costs ▪ 1.3 Costing methods 4H1CD – 2024-2025 Evaluation ▪ Quiz in sessions ▪ Final exam ▪ Behavior: malus for arriving late or chatting ▪ Participation: bonus points 4H1CD – 2024-2025  4 Abbreviations used − Q: quantity or volume − DVC: total direct variable cost − SPu: selling price per unit or unit − DVCu: unit direct variable cost or VC per unit selling price − IVC: total indirect variable cost − Sales: sales revenue, turnover − IVCu: unit indirect variable cost or IVC per unit − Costs − DFC: total direct fixed cost − TC: total (or full) cost − DFCu: unit direct fixed cost or DFC per unit − Cu: unit cost − IFC: total indirect fixed cost − VC: total variable cost − IFCu: unit indirect fixed cost or IFC per unit − VCu: unit variable cost or VC per unit − Margins and incomes − FC: total fixed cost − CM: total contribution margin − FCu : unit fixed cost or FC per unit − CMu: unit contribution margin or CM per unit − DC: total direct cost − ACM: total advanced contribution margin − DCu: unit direct cost or DC per unit − ACMu: unit advanced contribution margin or − IC: total indirect cost (or overhead) ACM per unit − ICu: unit indirect cost or IC per unit − Income: analytical income or profit − MC: marginal cost 4H1CD – 2024-2025  5 Part 1: Main concepts ▪ 1.1 Introduction ▪ Management accounting vs. financial accounting ▪ Objectives of cost (management) systems or management accounting ▪ Costing and costs behaviour 4H1CD – 2024-2025  6 Accounting is an information system ACCOUNTING  Recording  Estimating Financial and  Organising operational data  Summarising Financial Management accounting accounting 4H1CD – 2024-2025  7 Financial vs. Management Accounting Financial accounting Management accounting Mandatory Optional Must follow accounting standards Does not need to follow standards (uniform principles and homogeneous (information adapted to managers’ needs) information) Externally oriented (tax and financial Internally oriented (performance purposes) management and managerial decisions making) Emphasizes companywide reports Emphasizes segments reports: divisions,  Balance sheet (financial situation) and products, activities, etc. income statement (or P&L)  Costs and margins by cost object Financial information Financial as well as non-financial information Expenses sorted by nature Expenses sorted by destination Past information (over 1 year) Past and future information Frequency : year and quarters Frequency : ad hoc 4H1CD – 2024-2025  8 The organisation as a black box Materials RESOURCES Labor INCOME Transformation process (black box) Machines Etc. 4H1CD – 2024-2025  9 The organisation through the financial accounting “lenses” Materials Labour Machines Etc. Transformation PRODUCTS RESOURCES process (black /SERVICES box) Costs Revenues INCOME 4H1CD – 2024-2025  10 The organisation through the cost accounting “lenses” Product 3 Product 2 Product 1 RESOURCES Materials INCOME Purchasing Labour Production Machines Etc. Sales 4H1CD – 2024-2025  11 Costs by stage of the supply-production-sales cycle  Costs by stage (or operational/running costs): − Acquisition costs (materials and components) Manufacturing costs − Production costs Selling, General and − Selling (and distribution) costs Administrative costs (SG&A costs) or − Administrative and general costs non-manufacturing costs 4H1CD – 2024-2025  12 From purchases to expenses Supply Production Sales Price of raw material Quantity consumed Cost of raw material Cost of goods sold + Purchasing cost +Direct Labor +Selling expenses Quantity sold Acquisition cost +Manufacturing +General expenses overheads Operating expenses Quantity purchased Cost of goods Expenses are recorded Quantity in the income statement produced Inventory of raw Resources held in materials inventory are Inventory of recorded in the finished goods balance sheet (assets) 4H1CD – 2024-2025  13 From purchases to expenses (2) Supply Production Sales Acquisition cost Production cost Supplies consumed Selling and general Cost of goods expenses Inventory of raw materials Goods Sold Operating Inventory of expenses finished goods 4H1CD – 2024-2025  14 Understanding questions 1. How is the organization shown through the cost accounting “lenses”? 2. What are the main differences between financial and management accounting? 3. Quote 2 costs not included in the production of goods 4H1CD – 2024-2025  15 Costs and cost objects  Cost :  Monetary measure of the resources consumed in order to carry out an activity (e.g. product/service delivery, acquisition of an asset)  Sum/accumulation of expenses incurred to achieve a specific objective (cost object) ▪ Cost object : ▪ Any activity for which a separate measurement of costs is desired ▪ A cost object can be a product, an activity, a department, a customer, etc. 4H1CD – 2024-2025  16 Cost timing ▪ An actual cost (or historical cost or incurred cost) is a cost calculated ex-post based on the actual expenses incurred  A standard cost (or forecast(ed) cost or budgeted cost) is an estimated (computed ex- ante) cost which is carefully predetermined based on standards and which may have an objective value 4H1CD – 2024-2025  17 Costs and cost management systems (CMS) ▪ Purpose of CMS (or costing systems): 1. To collect, accumulate and classify costs into categories 2. To assign these costs to cost objects 3. In order to help managers to make decisions ▪ Costs are assembled in different ways depending on the type of managerial decision to be made 4H1CD – 2024-2025  18 Costing means choosing ▪ Management accounting is a toolbox. Choosing a costing method depends on the type of managerial decision to be made : ▪ Setting prices ▪ Assessing a product range profitability ▪ Make or Buy decision (outsourcing) ▪ Accepting a special order ▪ Keeping costs under control ▪ Assessing a project, an investment, an advertising campaign ▪ Etc. 4H1CD – 2024-2025  19 Costs and cost objects - classification Direct, variable Indirect, variable costs costs Cost object Direct, fixed Indirect, fixed costs costs 4H1CD – 2024-2025  20 Costs and cost objects - examples Flour, Water, Energy Tomato sauce, consumed by Ham, Cheese the hoven* A pizza Depreciation of Rental of the the hoven restaurant * Several pizzas are cooked in the hoven at the same time 4H1CD – 2024-2025  21 Costs and cost objects - examples Pizzas, Beverage Energy consumption Game nights with friends Subscription to the Depreciation of the sports channel house and furniture 4H1CD – 2024-2025  22 Costs and cost objects - examples Transportation, Raw material, salespeople’s direct labor commission Sneakers Design, Sport-teams Marketing and sponsoring, advertisement Shops, Website 4H1CD – 2024-2025  23 Costs and cost objects - examples Sneakers sold, Shared support salespeople services A sneakers shop Marketing and Rental fees advertisement 4H1CD – 2024-2025  24 Costs and cost objects - framework Indirect, variable: Direct, variable: Depend on the volume of Depend on the volume several cost objects, of this cost object only including this cost object Cost object Direct, fixed: Indirect, fixed: Depend on the Depend on neither the continuation of this cost continuation nor the object, but not its volume* volume of this cost object * for a given period of time and range of activity 4H1CD – 2024-2025  25 Understanding questions 1. What is a cost? 2. Why do we analyze costs? 3. What is the difference between actual and standard cost? 4. What are the 4 possible classifications of costs? 5. What is a cost object? 4H1CD – 2024-2025  26 Costs behaviour: variable vs. fixed costs (1)  A cost is said to be variable if the total amount of the cost varies in direct proportion to changes in the related level of activity or volume.  Example: cost of wood to produce desks 4H1CD – 2024-2025  27 Variable costs: examples Department Variable costs Variation factor Procurement Materials Units produced & production Inward transportation Units purchased Electricity Machine hours Sales Sales commissions Sales turnover Outward transportation Units sold 4H1CD – 2024-2025  28 Variable costs: graph Costs Costs VC VCu Q Q Unit variable cost Total variable cost remains constant increases as production increases 4H1CD – 2024-2025  29 Costs behaviour: variable vs. fixed costs (2) ▪ A cost is said to be fixed when it is not affected by changes in the level of activity or volume (remains constant), for a given period of time and range of activity. ▪ Fixed costs change by steps. ▪ Example : rent paid for the factory where desks are manufactured 4H1CD – 2024-2025  30 Fixed costs: graph Cost Cost FC FCu Q Q Total fixed cost Unit fixed cost remains constant decreases as production increases 4H1CD – 2024-2025  31 Fixed costs: examples Department Fixed costs Criterion for changing step Procurement Depreciation of Volume & production machines Products complexity Workers' fixed and diversity salaries Sales Fixed salaries of Sales volume representatives Number of Rent of stores customers 4H1CD – 2024-2025  32 Fixed and variable costs Volume 1,000 2,000 3,000 (in nb of units) Unit variable costs 10 10 10 Total variable costs (= unit variable cost * 10,000 20,000 30,000 volume) Total fixed costs 12,000 12,000 12,000 Unit fixed costs (= total fixed cost / 12 6 4 volume) Unit variable costs and Total fixed costs are both independent from the volume 4H1CD – 2024-2025  33 Understanding questions 1. How can we recognize a variable cost? 2. Provide 2 examples of variable costs 3. How can we recognize a fixed cost? 4. Provide 2 examples of fixed costs 5. Is a total fixed cost constant or decreasing? 6. Is a total variable cost constant or increasing? 7. Is a unit variable cost constant or increasing? 8. Is a unit fixed cost constant or decreasing? 4H1CD – 2024-2025  34 Cost assignment : direct vs. indirect costs (1) ▪ Direct cost (of a cost object): the total of those costs that can be specifically and exclusively identified with (or traced to) that particular cost object ▪ Specific cost of a cost object therefore directly attributable (traceable) to that cost object (without adjustment/intermediary calculation) ▪ Example: cost of wood to produce a desk 4H1CD – 2024-2025  35 Cost assignment : direct vs. indirect costs (2) ▪ Indirect cost (of a cost object): consumption of resource by several cost objects ▪ Cost not specifically and exclusively related to a cost object therefore not directly traceable to a particular cost object (adjustment/intermediary calculation needed) ▪ Cost to be assigned to the cost objects which consume it by means of allocation bases (or allocation keys) ▪ Example: salaries of supervisors in a multi product factory (desks, tables, chairs, etc.) 4H1CD – 2024-2025  36 Classification of costs: examples Direct Indirect Materials Electricity Variable Direct labour Sales commissions Depreciation of a Supervision single-product machine Depreciation of a multi- Fixed product machine Rent 4H1CD – 2024-2025  37 Exercises 1.Quiz marathon 4H1CD – 2024-2025  38 Exercises 1.Quiz marathon 2. Quiz noir 4H1CD – 2024-2025  39 Exercises 1.Quiz marathon 2. Quiz noir 3. Best Bread 4H1CD – 2024-2025  40 Exercise Deker 4H1CD – 2024-2025  41 Exercice Presto services + exercice Quel coût 4H1CD – 2024-2025  42 Reminder… 1. Differences variable/fixed costs 2. Differences direct/indirect costs 3. Cost calculation Direct Indirect Materials Electricity Variable Direct labour Sales commissions Depreciation of a Supervision single-product machine Depreciation of a multi- Fixed product machine Rent 4H1CD – 2024-2025  43 Part 1: Main concepts ▪ 1.3 Costing methods ▪ Partial costing vs. full (or absorption) costing 4H1CD – 2024-2025  44 Full and partial costing systems ▪ Full (or absorption) Direct, variable costs Indirect, variable costs costing methods: all resources consumed by Cost object a cost object are included in its cost Direct, fixed costs Indirect, fixed costs ▪ Partial costing Direct, variable Indirect, variable methods: only a portion costs costs of the resources Cost object consumed by a cost object are included in Direct, fixed costs Indirect, fixed costs its cost 4H1CD – 2024-2025  45 Income and margins (1) ▪ Main economic performance indicators produced by management accounting ▪ Precision of terms: ▪ Partial costing: we use the term margin (or contribution) ▪ Margin: difference between the sales revenue (or the selling price) of a cost object and one of its partial costs ▪ Full (or absorption) costing: we use the term (analytical) income (or profit) ▪ Income: difference between the sales revenue (or the selling price) of a cost object and its total (or full) cost 4H1CD – 2024-2025