Download Lecture 7_Management accounting in SMEs

15/11/2016
Lecture 7
Management accounting in SMEs:
an introduction
ACCOUNTING AND GOVERNANCE IN SMES
PROF. ENRICO BRACCI
Managerial Accounting
Managerial accounting is designed for internal users
The goal of Managerial Accounting is to provide the information
managers need for
Planning
Control
Decision making
Overall it steers/influence organizational and individual behavior
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Planning
Budgets for planning
Profit budget
- Indicates planned income
Cash flow budget
- Indicates planned cash inflows and outflows
Production budget
- Indicates the planned quantity of production and
expected costs
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Control
Organizations achieve control by:
Evaluating managers to determine how their performance
should be rewarded or not
Evaluating operations to provide information as to whether
they should be changed or not
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Planning and Control Process
Strategic
Operational
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Managerial vs Financial Accounting
Unlike Financial Accounting, Managerial Accounting:
Is directed at internal users
May
deviate
from
accounting
standards
OIC/IFRS/GAAP)
Presents more detailed information
May present more nonmonetary information
Places more emphasis on the future
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(ex.
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Cost Terminology
Variable Costs
- Change in proportion to changes in volume or activity
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Cost Terminology
Fixed Costs
- Do not change in response to changes in volume or activity
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Cost Terminology
Direct and indirect costs
- Direct costs are directly traceable to a product, activity, or
department
- Indirect costs are not traceable and are allocated through
certain criteria
Controllable & noncontrollable costs
- A manager can influence controllable costs but cannot
influence non- controllable costs
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Direct and Indirect Cost
But, how and
through which
criteria?
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Purposes of Cost Allocation
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Cost Terminology
Differential cost: is the difference between the cost of two
alternative decisions, or of a change in output levels. The concept
is used when there are multiple possible options to pursue, and a
choice must be made to select one option and drop the others.
Within this category:
a) Sunk Costs
- Costs incurred in the past, not modifiable in the short term
- Not relevant to present decisions
b) Opportunity Costs
- Values of benefits foregone when selecting one alternative over another
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In the past year, Williams Mold & Machine had sales of
$8,000,000 and total production costs of $6,000,000. In
the coming year, the company believes that production
can be increased by 30%, but this will require adding a
second shift to work from 4:00 pm to 1:00 am.
1. Indicate three production costs that are likely
to increase because of adding a second
production shift.
Material costs, workers’ salaries, and
benefits are all likely to increase.
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In the past year, Williams Mold & Machine had sales of
$8,000,000 and total production costs of $6,000,000. In
the coming year, the company believes that production
can be increased by 30%, but this will require adding a
second shift to work from 4:00 pm to 1:00 am.
2. What production cost most likely will not
increase when the second shift is added?
Depreciation of the building will not
increase. It can be considered a sunk
cost
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Differential/Incremental Analysis
Incremental analysis:
Differences in revenues and costs between
alternatives are incremental
Incremental revenue minus incremental cost
equals incremental profit
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Control is important but…
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You Get What you Measure
Performance measures greatly influence the
behavior of managers
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You Get What you Measure
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Control is important but……
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Production types and
consequences on cost of
product/service
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Merchandising and Manufacturing Firms
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Manufacturing Costs
Direct Materials
- Cost of materials directly traceable to items produced
-Materials not directly traceable are indirect materials
Direct Labor
- Cost of labor directly traceable to items produced
- Labor costs not directly traceable are indirect labor
Manufacturing Overhead
- Cost of manufacturing activities other than direct
materials and direct labor
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Common Manufacturing Overhead Costs
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Non-manufacturing Costs
Selling Costs
- Costs associated with securing and filing customer orders
e.g. advertising, sales salaries, depreciation of sales
equipment
General and Administrative Costs
- Costs associated with the firm’s general management e.g.
Human resources, accounting, corporate headquarters and
other support costs
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Product and Period Costs
Product Costs
- Costs assigned to goods produced (i.e. direct materials, direct
labor, and manufacturing OH)
- Included in inventory until goods sold
Period Costs
- Costs identified with accounting periods (i.e selling and
administrative expenses)
- Expensed in period incurred
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Relationships among Cost Categories
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Balance Sheet Presentation of Product Costs
Eastlake Motorboat Company
Partial Balance Sheet
As of December 31, 2009
Assets
Cash
Accounts receivable
Inventory
Raw Material
Work in Process
Finished Goods
Equipment(net)
Total assets
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$20,000
40,000
Raw materials inventory includes
cost of materials on hand
Work in
includes
completed
$50,000
100,000
60,000
210,000
$480,000
process
goods
inventory
partially
Finished goods inventory includes
cost of items ready for sale
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Income Statement Presentation of Product Costs
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Income Statement Presentation of Product Costs
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Beginning work-in-process plus total manufacturing
costs minus ending work-in-process equals?
a.
b.
c.
d.
Cost of materials used
Finished goods inventory
Cost of goods manufactured
Cost of goods sold
Answer:
d. Cost of goods manufactured
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Cost of Goods Manufactured is $200,000, beginning
Finished Goods is $50,000, ending Finished Goods is
$100,000, and ending Work in Process is $10,000. What is
the Cost of Goods Sold?
a. $100,000
b. $250,000
c. $50,000
d. $150,000
Answer:
d. $150,000 (50,000 + 200,000 – 100,000)
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Job-Order Costing
Job Order Costing
Companies produce goods to a customer’s unique specifications
e.g. construction, shipping
The cost of job is unique
Cost of job accumulated on job cost sheet
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Job-Order Costing System
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Job Costs – Manufacturing Overhead
Apply manufacturing overhead to jobs:
• Choose an allocation base e.g. direct labor hours or
direct labor cost
• Calculate overhead allocation rate as:
Estimated overhead /estimated quantity of the allocation base
•
Use rate to apply overhead to jobs based on actual
quantity of base used
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Lollah Mfg Company expects annual mfg. overhead to be
$800,000, 50,000 direct labor hours costing $1,600,000 and
machine run time of 25,000 hours. Calculate overhead
allocation rates based on direct labor hours, direct labor cost,
and machine time.
OH allocation rate (Direct labor):
$800,000/ 50,000 = $16 per direct labor hour
OH allocation rate (Direct labor cost):
$800,000 / $1,600,000 = 50% of direct labor cost
OH allocation rate (MH):
$800,000 / 25,000 = $32 per machine hour
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Job Cost Sheet
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Allocating Overhead to Jobs
Most firms use a single overhead rate
Activity Based Costing (ABC) assigns overhead costs to
products using a number of allocation bases:
-The major activities which create overhead costs are identified
and grouped (pools)
-Multiple rates calculated by dividing each pool by its
corresponding activity (driver)
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Allocating Overhead to Jobs
Predetermined Overhead Rates:
• Utilize estimates rather than actual costs and quantities
• Allows decisions to be made based on budgeted amounts
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Process Costing
• Companies produce large quantities of identical items e.g.
producers of paints and plastics
• Cost accumulated by each production operation, not for a single
unit
• Unit cost of items determined dividing costs of production by
number of units produced
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Process Costing System
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Cost Flows through Departments
Manufacturing operations typically pass through two
or more production departments
Costs are accumulated in each department
Easy to identify when materials are added
Harder to identify when labor and overhead are added
-Often grouped together as conversion costs
-Assumed to be added evenly
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Flow of Costs Between Processing Departments
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Calculating Unit Cost
Equivalent Units
Equivalent units is the result of:
Units completed + Ending work in process
Ending work in process units need to be converted to a
comparable number of completed units, called equivalent units
e.g. 100 units that are 50% complete are equivalent to 50
complete units (100 x 50%)
Equivalent units may be different for material and conversion
costs if materials and conversion costs enter production at
different times.
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Equivalent Units – Material and Conversion Costs
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Calculating Unit Cost
Cost Per Equivalent Unit:
The average unit cost is referred to as cost per equivalent
unit
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Beginning Work in Process 500 units
% complete = 65% materials, 45% conversion
Units started: 2,300
Units finished: 2,500
Ending Work in Process 300 units
% complete = 85% materials, 50% conversion
1. Calculate equivalent units for materials
Units finished
Ending Work in Process
Equivalent Units - Materials
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2,500 X 100%
300 X 85%
2,500
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2,755
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Beginning Work in Process 500 units
% complete = 65% materials, 45% conversion
Units started: 2,300
Units finished: 2,500
Ending Work in Process 300 units
% complete = 85% materials, 50% conversion
2. Calculate equivalent units conversion
Units finished
2,500 X 100%
Ending Work in Process
300 X 50%
Equivalent Units - Conversion Costs
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2,500
150
2,650
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Equivalent units(EU):
Materials =2,755EU, conversion=2,650EU
Costs in beginning Work in Process
Materials = $3,180, conversion = $3,306
Costs incurred:
Materials = $18,020, conversion = $13,224
1. Calculate materials cost/equivalent unit
Costs in beginning WIP
3.180
Materials costs incurred
18.020
Total materials cost
21.200
$21,200 / 2,755 EU
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7,695 per EU
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Equivalent units(EU):
Materials =2,755EU, conversion=2,650EU
Costs in beginning Work in Process
Materials = $3,180, conversion = $3,306
Costs incurred:
Materials = $18,020, conversion = $13,224
2. Calculate conversion cost/equivalent unit
Costs in beginning WIP
Conversion costs incurred
Total materials cost
$21,200 / 2,650 EU
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3.306
13.224
16.530
6,238
per EU
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Equivalent units(EU):
Materials =2,755EU, conversion=2,650EU
Costs in beginning Work in Process
Materials = $3,180, conversion = $3,306
Costs incurred:
Materials = $18,020, conversion = $13,224
3. Calculate total manufacturing cost per unit
Material unit cost
Conversion unit costs
Total Unit cost
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7,695
6,238
13,93
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Calculating Cost per Equivalent Unit
Mixing Department
Beginning Work in Process: 80% complete
-Direct material costs = $18,000
-Direct labor =$7,800
-Overhead = $23,400
60,000 gallons completed, 20,000 ending work in process (100%
complete for Direct material, 50% complete Direct labor and overhead).
-Direct material costs = $142,000
-Direct labor cost = $62,200
- Overhead cost = $186,600
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Cost per EU – Mixing Department
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Costs Transferred Out
• 60,000 gallons completed by the Mixing Department
• Unit cost is $6 per gallon
• $360,000 (60,000 X $6) of cost transferred to the Packaging
Department
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Ending Work in Process
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Summary of Cost Activity – Mixing Department
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Basic Steps in Process Costing
Step 1: Account for the number of physical units
Step 2: Calculate the cost per equivalent unit for
materials, labor, and overhead
Step 3: Assign cost to items completed and items in
ending Work in Process
Step 4: Account for the amount of product cost
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Readings
Jiambalvo, J. (2015), Management accounting, Wiley&Sons, parts of Ch 2 and 3
Additional Reading
Jiambalvo, J. (2015), Management accounting, Wiley&Sons, Ch 1
Prof.
Prof. Enrico
Enrico Bracci
Bracci
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