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BAFS Elective Part
Accounting Module –
Cost Accounting
Topic A09:
Cost Accounting for Decision Making –
Application of Costing Concepts and
Techniques in Decision Making
Technology Education Section
Curriculum Development Institute
Education Bureau, HKSARG
April 2009
1
Lesson 1
Prepare marginal costing statement
to make drop out decision of a
product
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Recall your memory …
z
z
What is marginal costing?
How can costs of a manufacturing
business be classified under marginal
costing?
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Classification of costs
under marginal costing
z
Two categories of costs:
z
Variable costs – costs that vary in direct
proportion to units manufactured.
z
Fixed costs – costs that are fixed in short
term no matter the number of units
manufactured.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Further Classification of Fixed Costs
Specific Fixed Costs
General Fixed Costs
Specific fixed costs are those
fixed costs existing for a
particular product, department or
segment of the business.
General fixed costs are those
fixed costs general to the operation
of the whole business rather than
the operation of a particular
product, department or segment.
Examples:
•Salary of production supervisor
of a particular product line
•Insurance in relation to machines
of producing a particular
product
Topic A09
Cost Accounting for Decision-making
Examples:
•Salary of the production director
•Insurance of the factory building
5
BAFS Elective Part
Learning and Teaching Example
Case Study – The Lunar New
Year Stall
z
Refer Student Worksheet P.1 and 2
z
z
Your class rented a stall during the Lunar
New Year Fair
Draft income statement shows total net
profit of $4,200 with two models earning a
profit and one model making a loss
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 1: Discussion
z
Refer Student Worksheet P.3
z
Can any cost item of Model B be
eliminated if it is dropped in the Lunar New
Year Fair?
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 1: Answer
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Calculation of Net Profit under
Marginal Costing
Sales at $100 per unit (100 units)
$10,000
Less: Variable cost at $80 per unit
8,000
Contribution
2,000
Less: Fixed cost
5,000
Net Profit / (Loss)
Topic A09
Cost Accounting for Decision-making
(3,000)
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BAFS Elective Part
Learning and Teaching Example
Activity 2: Discussion
z
Refer Student
Worksheet P.4 and 5
z
Which one of the two income
statements can facilitate the
drop out decision of Model B?
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 2: Answer
z
z
Topic A09
Cost Accounting for Decision-making
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Format 2 should
be chosen.
It shows
contribution and
specific fixed cost
for each model.
BAFS Elective Part
Learning and Teaching Example
Activity 3: Preparation of income statement
to recommend on the drop out decision of
Model B
Task 1
z
Refer Student Worksheet P.6
z
Classify costs into variable cost, specific fixed
cost and general fixed cost
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Task 1: Answer
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 3: Preparation of income statement
to recommend on the drop out decision of
Model B
Task 2
z
Refer Student Worksheet P.7
z
z
Prepare a revised income statement
Give your recommendation
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Task 2: Answer
z
Topic A09
Cost Accounting for Decision-making
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Model B
should
NOT be
dropped.
BAFS Elective Part
Learning and Teaching Example
Conclusion
z Variable
and specific fixed costs
are
z
relevant to drop out decisions because
they change due to the decision.
z General
z
fixed costs are
irrelevant to drop out decisions
because they remain unchanged by
the decision.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Lesson 2
Distinguish sunk costs from future
costs for decisions involving the
production and selling of additional
products
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Recall your memory …
z
z
What are variable costs? Any examples?
What are general fixed costs and specific
fixed costs? Any examples?
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Recall your memory …
z
z
Variable costs and specific fixed costs are
relevant to drop out decisions and the
production of new products
General fixed costs are not relevant for
drop out decisions for producing new
products
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Are all variable costs relevant for
decision making?
z‘Variable
costs’ are relevant for decision
making if they are ‘future costs’.
zFuture costs are costs that will be
changed by a decision.
zExamples:
Materials to be purchased for
a product, workers to be hired for
manufacturing a product
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
z
Variable costs will be irrelevant for decision
making if they are sunk costs.
z
Sunk costs are those costs that will not be
changed by a decision.
z
Examples: Materials already purchased to
be used for manufacturing a product,
workers already hired to be transferred to
manufacture a product
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Case Study
Further discussion about The Lunar
New Year Sales – the selling of
additional product, Model D
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 4 – Costs of Material X and
Material Y for Model D
1.
Material X left from last year’s Lunar New Year
Fair was purchased at $20,000. It has no other
use.
2.
Material Y left from last year’s Lunar New Year
Fair was purchased at $22,000. It is a popular
material. If used up, it has to be replaced at
$23,000.
z
Required: Identify the material costs which are
relevant for the decision of selling Model D.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 4 – For Material X
Material X was purchased at
$20,000 in last year.
Purchasing cost of $20,000 remains
unchanged no matter whether
Model D will be made for Lunar
New Year sales.
It is a sunk cost which is irrelevant
for the decision to sell Model D.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 4 – For Material Y
Material Y was purchased at
$22,000 in last year. This cost is a
‘sunk cost’
cost which is irrelevant for
sales decision making for Model D.
The replenishment cost of Material
Y, $23,000 is a ‘future cost’. This
cost is relevant for decision of
selling Model D.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Are all general fixed costs
irrelevant for decision making?
If general fixed costs remain
unchanged by making a choice over
alternatives, they will be irrelevant for
decision making.
z
z
Examples: Rent of a factory,
Insurance of a factory
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
z
z
z
If general fixed costs are changed
by making a choice over
alternatives, these costs will be
relevant for decision making.
If general fixed costs increase as a
result of a decision, this increase
represents an incremental cost.
Example: extra rent for a bigger
factory to producing an
additional product
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 5 – Additional charges of general
fixed costs arising from the sales of Model D
1. Material costs for decorating the stall, $3,000
-Following
the sales of Model D, the costs of new decoration materials
will be $4,000.
2. Transportation expense, $4,800
-The
other class offers to transport free of charge Model D from school
to the stall. The hiring fee of a van to be paid by the other class
amounts $7,000.
Required: Identify the incremental costs of decoration
materials and transportation expenses.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 5 – answer
1. Incremental costs of decoration materials is
$1,000
Due to the sales of Model D, special decoration
materials will be purchased. Additional costs of
$1,000 ($4,000 - $3,000) will then be incurred.
2. Incremental costs of transportation: Zero
The hiring charge of the transportation van remains
unchanged.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 6 – Selling of Model D in Lunar New
Year Fair?
Hints for discussion:
- Model D will be sold if a profit is made.
- Sales revenue of Model D is estimated to be
$22,500.
- Refer to the cost estimations in Activity 4 and
Activity 5
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Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 6 – Answer
Model D
$
22,500
Sales
Less: Costs
0
-Material X
23,000
-Material Y
1,000
-Incremental costs
on decoration materials
0
-Incremental costs on
transportation expense
Net loss
Topic A09
Cost Accounting for Decision-making
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24,000
1,500
BAFS Elective Part
Learning and Teaching Example
Conclusion
z
z
z
‘Variable costs’ which are future
costs are relevant for decision
making.
‘Variable costs’ which are sunk
costs are irrelevant for decision
making.
‘Incremental fixed costs’ are
relevant for decision making.
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Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Lesson 3
Apply the concept opportunity costs for
sales decisions
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Recall your memory …
z
z
What are incremental costs?
Why do we need to consider when using
incremental costs for decision making?
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Recall your memory …
z
Incremental costs are relevant for
decision making .
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Opportunity costs
z
z
z
Opportunity costs is the value of best
alternative foregone.
Examples of opportunity costs: the profit
foregone on producing an alternative
product
Opportunity costs should be considered
for decision making e.g. use material A to
make Product X or Product Y.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Case study – Summer Clearance Sales
Activity 7: Set the prices of folders and pencil cases
in summer sales
Sales Items which are kept in stock:
1. Batches of folders with SU logo are to sold at the
coming Easter Carnival. The sales revenue would be
$2,000.
2. Batches of pencil cases are to be sold at the coming
Christmas Fun Fair or Easter Carnival. Their sales
revenue would be $3,000 or $3,500 respectively.
Required:
Identify the opportunity costs of the folders and the
pencil cases to be sold in the summer sales as to fix
the selling price at a mark-up.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 7 - answer
$
Folders
Pencil
cases
Explanation
2,000 the revenue to be earned in an
alternative function i.e. Easter
Carnival is foregone. The value
of an alternative foregone is an
opportunity cost.
3,500 the greater revenue to be
earned in Easter Carnival is
foregone. The value for the best
alternative foregone is an
opportunity costs.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 8
The selling of soft toys in Summer
Clearance Sales?
Soft toys which are kept in stock:
z
z
z
If the soft toys are sold at Christmas Fun Fair, a
revenue of $20,000 will be earned.
The rent of storing the soft toys during the summer
vacation will be $12,000.
If the soft toys are sold in the summer sales, a
revenue of $10,000 will be earned.
Required:
Shall we support that the soft toys would not be sold
at the Summer Clearance Sales?
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 8 - answer
$
1. Revenue of soft toys to 10,000
be earned at Summer
Clearance Sales
8,000
2. Opportunity costs i.e.
net revenue of soft toys
to be earned at
Christmas Fun Fair sales
Topic A09
Cost Accounting for Decision-making
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Explanation
Net revenue to be
earned at
Christmas Fun
Fair of soft toys is
the deduction
of …
BAFS Elective Part
Learning and Teaching Example
Activity 8 - answer
$
Net profit (1-2)
Topic A09
Cost Accounting for Decision-making
Explanation
the incremental costs
$12,000 from its revenue.
This net amount is the
value of Christmas sales
foregone. It is an
opportunity cost of
summer sales of soft toys.
2,000
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BAFS Elective Part
Learning and Teaching Example
Costs relevant for decision making
z
Incremental costs as well as opportunity
costs are relevant for decision making.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 9
Will the SU members be paid for their extra
work in Summer Clearance Sales?
z
z
z
A salary of $300 will be paid to each SU members for their
extra work in summer sales.
The sales revenue in Summer Clearance is estimated to
be $16,000.
The Secretary argues that a loss will be suffered following
the additional costs on salaries paid to the committee
members. Thus, the proposal of salaries payment should
be rejected.
Required:
Is the Secretary’s argument acceptable?
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
Activity 9 - answer
Relevant costs
$
Opportunity costs
Folders
Pencil cases
Soft toys
2. Incremental costs
- Salaries to SU members for their extra work
1.
Less: Sales revenue
Profit
Topic A09
Cost Accounting for Decision-making
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2,000
3,500
8,000
1,500
15,000
16,000
1,000
BAFS Elective Part
Learning and Teaching Example
Conclusion
z
Opportunity costs and
incremental costs are relevant for
decision making.
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example
The End
Topic A09
Cost Accounting for Decision-making
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BAFS Elective Part
Learning and Teaching Example