Principles of Mgmt Accounting_class1 PDF

Principles of MANAGEMENT ACCOUNTING Prof. Dr. Xavier Gabriëls ([email protected]) 1 Introduction Financial accounting & analysis provides information on the financial situation of the company Cost accounting is concerned...

Principles of MANAGEMENT ACCOUNTING Prof. Dr. Xavier Gabriëls ([email protected]) 1 Introduction Financial accounting & analysis provides information on the financial situation of the company Cost accounting is concerned with providing adequate information (based on calculations) for efficient decision making and management control 2  Introduction (2) Accounting System (accumulates financial and managerial accounting data) Cost accounting Financial reporting Information for decision Published financial making, and control statements and other of an organization’s financial reports. operations. Internal External Users Users 3  Introduction (3) An organization... Directing Acquires Resources Decision Organized set Making of activities Controlling Planning Hires People 4 Introduction (4) However, resources are not inexhaustibly available Therefore, necessary to make cost savings as much as possible => Cost calculation and analysis ! 5  Suggested reading & Exam Managerial Accounting: Creating Value in a Dynamic Business Environment, International edition, R.W. Hilton, McGraw-Hill, 13th edition, 2022. Management Accounting for Business, C. Drury, Thomson Learning Exam : Written, closed book, 2h, exercises with multiple choice theory 6  1. Costs : What is a ‘cost’ ? A ‘Cost’ is the measure of resources given up to achieve a particular purpose. Example : make a product or provide a service 7 1. Costs : Cost classification Direct vs Indirect Variable vs Fixed Semi-variable vs Semi-fixed Opportunity cost Sunk cost Production vs non-production costs 8  1. Direct vs Indirect Costs Direct costs Indirect costs Costs that can be Costs that must be easily and conveniently allocated in order to be traced to a product or assigned to a product or department. department. Example: cost of Example: cost of strings national advertising for for the production of an airline is indirect to a tennis rackets particular flight. 9  1. Variable vs Fixed Costs Variable costs Fixed costs Costs that vary with the Costs that stay the same activity level when changes occur to Example: cost of meals the activity level (in for a certain flight between certain boundaries). Example: cost of airplane, pilot, … for a certain flight 10  1. Variable Costs Total variable costs Variable costs per unit Activity level Activity level 11  1. Fixed costs Total fixed costs Fixed costs per unit Activity level Activity level 12  1. Variable vs Fixed Costs Summary of Variable and Fixed Cost Behavior Cost In Total Per Unit Total variable cost changes Variable cost per unit Variable as activity level changes. remains the same over wide ranges of activity. Total fixed cost remains Fixed cost per unit Fixed the same even when the goes down as activity activity level changes. level goes up. Note : In the long term, all costs are variable 13  1. Semi-variable vs Semi-fixed costs Semi-variable costs Semi-fixed costs include both a fixed and Costs are fixed within a variable component specified activity levels, but change ‘stepwise’ Example: Telephone bill - subscription : fixed outside this range - call charges : variable Examples: Wages, nurses in hospitals, rent, … 14  1. Semi-fixed vs semi-variable costs (2) Semi-variable costs Semi-fixed costs Activity level Activity level 15 Standard vs. Actual costs Standard Actual cost cost Comparison between standard and actual performance level Cost variance 16  Standard Costs and Product Costing Standard material and labour costs are entered into Work-in-Process inventory instead of actual costs. Standard cost variances are closed directly to Cost of Goods Sold. 17  Advantages of Standard Costing Sensible Cost Management by Comparisons Exception Performance Employee Evaluation Motivation Advantages Stable Product Less Costs Expensive 18  Criticisms of Standard Costing Too aggregate, Not specific too late Too much focus Disadvantages Stable production on direct-labour required Shorter life Narrow cycles definition Focus on cost Consistency due to minimization automation 19  1. Costs : Opportunity Cost The potential benefit that is given up when one alternative is selected over another. Example: If a student were not attending college, he could be earning f.in. 20.000 € per year. His opportunity cost of attending college for one year is 20.000 € 20  1. Costs : Sunk Costs All costs incurred in the past that cannot be changed by any decision made now or in the future. Sunk costs should not be considered in decisions. Example: You bought an automobile that cost $12,000 two years ago. The $12,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $12,000 cost. 21 1. Production vs non-production costs Production or manufacturing costs are costs that are made in order to produce a product or deliver a service : raw material, labor, indirect Non-production costs relate to general administrative expenses as well as pre- (R&D) and post-production (distribution, …) costs => are treated as period costs and are not included in inventory valuation 22 1. Production or manufacturing costs Direct Direct Production Labor Material Overhead The Product 23 1. Production costs : Direct Material Cost of raw material that is used to make, and can be conveniently traced, to the finished product. Example: Steel used to manufacture the automobile. 24 1. Production costs : Direct Labor Cost of salaries, wages, and fringe benefits for personnel who work directly on manufactured products. Example: Wages paid to an automobile assembly worker. 25  1. Production costs : Production overhead All other production costs Indirect Indirect Other Material Labor Costs Materials used to support the production process. Examples: lubricants and cleaning supplies used in an automobile assembly plant. 26  1. Production costs : Production overhead (2) All other production costs Indirect Indirect Other Material Labor Costs Cost of personnel who do not work directly on the product. Examples: maintenance workers, janitors and security guards. 27  1. Production costs : Production overhead (3) All other production costs Indirect Indirect Other Material Labor Costs Examples: depreciation on plant and equipment, property taxes, insurance, utilities, overtime premium, and unavoidable idle time. 28  1. (Production) overhead One of the most difficult tasks in Assigning overhead is computing accurate sure difficult. (unit) costs lies in I agree! determining the proper amount of indirect costs to assign to each cost object. 29 1. Production overhead (2) Direct costs COST OBJECT Indirect costs Cost allocations  Difficult 30  1. Production overhead (3) Examples :  Direct labor  # units … Traditionally companies tend to use volume-based overhead allocation.. 31  1. (Production) overhead (4) Changing environment entails however changing information needs One single allocation base may have become outdated for your company Think about WHAT actually DRIVES COSTS (# inspections, m², time spent, …) Only then you will gain insight in the actual cost of a cost object Incorrect cost allocation leads to suboptimal decisions !!! 32  1. (Production) overhead : cost drivers Cost Driver Examples Activity Cost Driver Machining operations Machine hours Setup Setup hours Production scheduling Manufacturing orders Inspection Pieces inspected Purchasing Purchase orders Shop order handling Shop orders 33  2. Break-even analysis (2) How many units to become “break-even” ? Income Income Income 300 units ?? units 500 units Sales $ 150.000 $ ?? $ 250.000 Less: variable expenses 90.000 ?? 150.000 Contribution margin $ 60.000 ?? $ 100.000 Less: fixed expenses 80.000 80.000 80.000 Net income (loss) $ (20.000) $ - $ 20.000 34  2. BE-analysis : The Break-Even Point The break-even point is the point in the volume of activity where the organization’s revenues and expenses are equal. Sales $ 250,000 Less: variable expenses 150,000 Contribution margin 100,000 Less: fixed expenses 100,000 Net income $ - 35  2. Break-even analysis (3) Example : Total Per Unit Percent Sales (500 handsets) $ 250.000 $ 500 100% Less: variable expenses 150.000 300 60% Contribution margin $ 100.000 $ 200 40% Less: fixed expenses 80.000 Net income $ 20.000 36  12. Break-even analysis (4) For each additional handset sold, $200 in contribution margin is gained. Total Per Unit Percent Sales (500 handsets) $ 250.000 $ 500 100% Less: variable expenses 150.000 300 60% Contribution margin $ 100.000 $ 200 40% Less: fixed expenses 80.000 Net income $ 20.000 37  2. Break-even analysis (5) Fixed expenses Break-even point = Unit contribution margin (in units) Total Per Unit Percent Sales (500 handsets) $ 250.000 $ 500 100% Less: variable expenses 150.000 300 60% Contribution margin $ 100.000 $ 200 40% Less: fixed expenses 80.000 Net income $ 20.000 $80,000 = 400 handsets $200 38  2. Break-even analysis (6) Sales revenue – Variable expenses – Fixed expenses = 0 Unit Sales Unit Sales sales × volume variable × volume price in units expense in units ($500 × X) – ($300 × X) – $80,000 = $0 ($200X) – $80,000 = $0 X = 400 handsets 39  2. Break-even analysis (7) Here is the proof! Total Per Unit Percent Sales (400 handsets) $ 200.000 $ 500 100% Less: variable expenses 120.000 300 60% Contribution margin $ 80.000 $ 200 40% Less: fixed expenses 80.000 Net income $ - 400 × $500 = $200,000 400 × $300 = $120,000 OR Break-even point (in units) x unit price = Break-even point in sales 40  2. Break-even analysis (8) Summary overview : When sales level > BE-level : PROFIT When sales level < BE-level : LOSS Income Income Income 300 units 400 units 500 units Sales $ 150.000 $ 200.000 $ 250.000 Less: variable expenses 90.000 120.000 150.000 Contribution margin $ 60.000 $ 80.000 $ 100.000 Less: fixed expenses 80.000 80.000 80.000 Net income (loss) $ (20.000) $ - $ 20.000 41  2. Break-even analysis (9) 450.000 400.000 Break-even Total sales 350.000 point 300.000 250.000 Total expenses 200.000 150.000 Fixed expenses 100.000 50.000 - - 100 200 300 400 500 600 700 800 Units Sold 42  2. Break-even analysis (10) Some managers like the profit-volume $100.000 graph because it focuses on profits and volume. $80.000 $60.000 $40.000 $20.000 $- $- $50 $100 $150 $200 $250 $300 $350 $400 $(20.000) $(40.000) $(60.000) Break-even $(80.000) point $(100.000) 1 2 3 4 5 6 7 8 Units sold (00s) 43  2. BE-analysis : Target Net Profit We can determine the number of handsets that we must sell to earn a profit of $100,000. Fixed expenses + Target profit Units sold to earn = Unit contribution margin the target profit $80,000 + $100,000 = 900 handsets $200 44 2. Break-even analysis : Assumptions  Selling price is constant throughout the entire relevant range.  Costs are linear over the relevant range.  Fixed costs are known  In manufacturing firms, inventories do not change (units produced = units sold) 45 2. Break-even analysis (11) Break-even analysis allows to make various simulations with regard to : Pricing decisions Investment policies Actions affecting variable costs Launch or suspend new products or services Marketing campaigns 46