UNIVERSITY OF MINDANAO

College of Accounting Education

Program: BSA, BSIA, BSMA, BSAIS

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for

Self-Directed Learning (SDL)

Course/Subject: ACC 213 – Strategic Cost Management

Name of Teacher: ____________________

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT

FOR REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS
INTENDED USE. THIS IS INTENDED ONLY FOR THE USE OF
THE STUDENTS WHO ARE OFFICIALLY ENROLLED IN THE
COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

TABLE OF CONTENTS
Page No.
Course Outline 5
Course Outline Policy 5
Course Information 9

Big Picture Week 1-3: Unit Learning Outcomes 10

Big Picture in Focus: Unit Learning Outcome A 10
Metalanguage 10
Essential Knowledge 11
Self-Help 16
Let’s Check 17
Let’s Analyze 18
In A Nutshell 20
QA List 21
Keywords Index 21
Big Picture in Focus: Unit Learning Outcome B 22
Metalanguage 22
Essential Knowledge 22
Research Work 23
Self-Help 29
Let’s Check 29
Let’s Analyze 31
In A Nutshell 32
QA List 33
Keywords Index 33
Big Picture in Focus: Unit Learning Outcome C 34
Metalanguage 34
Essential Knowledge 34
Self-Help 50
Let’s Check 50
Let’s Analyze 52
In A Nutshell 55
QA List 57
Keywords Index 57
Big Picture in Focus: Unit Learning Outcome D 58
Metalanguage 58
Essential Knowledge 58
Exercise: Developing a Master Budget 62
Self-Help 66
Let’s Check 66
Let’s Analyze 68
In A Nutshell 70
QA List 71
Keywords Index 71
Course Schedule Weeks 1-3 72

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Big Picture Week 4-5: Unit Learning Outcomes 73

Big Picture in Focus: Unit Learning Outcome A 73
Metalanguage 73
Essential Knowledge 74
Self-Help 88
Let’s Check 88
Let’s Analyze 91
In A Nutshell 94
Q&A List 95
Keywords Index 95
Big Picture in Focus: Unit Learning Outcome B 96
Metalanguage 96
Essential Knowledge 97
Self-Help 103
Let’s Check 104
Let’s Analyze 106
In A Nutshell 107
Q&A List 108
Keywords Index 108
Course Schedule Weeks 4-5 109

Big Picture Weeks 6-7: Unit Learning Outcomes 110

Big Picture in Focus: Unit Learning Outcome A 110
Metalanguage 110
Essential Knowledge 111
Self-Help 114
Let’s Check 115
Let’s Analyze 116
In A Nutshell 118
QA List 119
Keywords Index 119
Big Picture in Focus: Unit Learning Outcome B 120
Metalanguage 120
Essential Knowledge 120
Self-Help 125
Let’s Check 126
Let’s Analyze 127
In A Nutshell 128
QA List 129
Keywords Index 129
Big Picture in Focus: Unit Learning Outcome C 130
Metalanguage 130
Essential Knowledge 130
Self-Help 134
Let’s Check 134

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Let’s Analyze 135

In A Nutshell 136
QA List 137
Keywords Index 137
Course Schedule Weeks 6-7 138

Big Picture Weeks 8-9: Unit Learning Outcomes 139

Big Picture in Focus: Unit Learning Outcome A 139
Metalanguage 139
Essential Knowledge 140
Self-Help 146
Let’s Check 146
Let’s Analyze 147
In A Nutshell 148
QA List 149
Keywords Index 149
Big Picture in Focus: Unit Learning Outcome B 150
Metalanguage 150
Essential Knowledge 150
Self-Help 152
Let’s Analyze 152
In A Nutshell 153
QA List 154
Keywords Index 154
Course Schedule Weeks 8-9 155
Online Code of Conduct 156

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Course Outline: MAS 1 – Management Accounting, Part 1

Course Coordinator: Myra T. Miraflores

Email: myra_miraflores@umindanao.edu.ph
Student Consultation: By appointment
Mobile: 0917-8135633
Phone: (082) 300-5456 loc. 137
Effectivity Date: May 25, 2020
Mode of Delivery: Blended (On-Line with face to face or virtual
sessions)
Time Frame: 54 Hours
Student Workload: Expected Self-Directed Learning
Pre-requisite: ACCTG 10a – Cost Accounting and Cost
Management, Part 2
Credit: 3
Attendance Requirements: A minimum of 95% attendance is required at all
scheduled Virtual or face to face sessions.

Course Outline Policy

Areas of Concern Details

Contact and Non-contact This 3-unit course self-instructional manual is designed for blended
Hours learning mode of instructional delivery with scheduled face to face
or virtual sessions. The expected number of hours will be 54
including the face to face or virtual sessions. The face to face
sessions shall include the summative assessment tasks (exams)
since this course is crucial in the Certified Public Accountant
Licensure Examination (CPALE).

Assessment Task Submission of assessment tasks shall be on 3 rd, 5th, 7th and 9th
Submission week of the term. The assessment paper shall be attached with a
cover page indicating the title of the assessment task (if the task
is performance), the name of the course coordinator, date of
submission and name of the student. The document should be
emailed to the course coordinator. It is also expected that you
already paid your tuition and other fees before the submission of
the assessment task.

If the assessment task is done in real time through the features in

the Blackboard Learning Management System, the schedule shall
be arranged ahead of time by the course coordinator.

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Since this course is included in the CPALE, you will be required to

take the Multiple Choice Question exam inside the University. This
should be scheduled ahead of time by your course coordinator.

This is non-negotiable for all licensure-based programs.

Turnitin To ensure honesty and authenticity, all assessment tasks are

Submission required to be submitted through Turnitin with a maximum
(if necessary) similarity index of 30% allowed. This means that if your paper goes
beyond 30%, the students will either opt to redo her/his paper or
explain in writing addressed to the course coordinator the reasons
for the similarity. In addition, if the paper has reached more than
30% similarity index, the student may be called for a disciplinary
action in accordance with the University’s OPM on Intellectual and
Academic Honesty.

Please note that academic dishonesty such as cheating and

commissioning other students or people to complete the task for
you have severe punishments (reprimand, warning, expulsion).

Penalties for Late The score for an assessment item submitted after the designated
Assignments/Assessments time on the due date, without an approved extension of time, will
be reduced by 5% of the possible maximum score for that
assessment item for each day or part day that the assessment item
is late.

However, if the late submission of assessment paper has a valid

reason, a letter of explanation should be submitted and approved
by the course coordinator. If necessary, you will also be required to
present/attach evidences.

Return of Assignments/ Assessment tasks will be returned to you two (2) weeks after the
Assessments submission. This will be returned by email or via Blackboard portal.

For group assessment tasks, the course coordinator will require

some or few of the students for online or virtual sessions to ask
clarificatory questions to validate the originality of the assessment
task submitted and to ensure that all the group members are
involved.

Assignment Resubmission You should request in writing addressed to the course coordinator
his/her intention to resubmit an assessment task. The
resubmission is premised on the student’s failure to comply with
the similarity index and other reasonable grounds such as
academic literacy standards or other reasonable circumstances
e.g. illness, accidents financial constraints.

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Re-marking of You should request in writing addressed to the program

Assessment Papers and coordinator your intention to appeal or contest the score given to
Appeal an assessment task. The letter should explicitly explain the
reasons/points to contest the grade. The program coordinator shall
communicate with the students on the approval and disapproval of
the request.

If disapproved by the course coordinator, you can elevate your

case to the program head or the dean with the original letter of
request. The final decision will come from the dean of the college.

Grading System All culled from BlackBoard sessions and traditional contact
Course discussions/exercises – 30%
1st formative assessment – 10%
2nd formative assessment – 10%
3rd formative assessment – 10%

All culled from on-campus/onsite sessions (TBA):

Final exam – 40%

Submission of the final grades shall follow the usual University

system and procedures.

Preferred Referencing Depends on the discipline; if uncertain or inadequate, use the

Style general practice of the APA 6 th Edition.

Student Communication You are required to create a umindanao email account which is a
requirement to access the BlackBoard portal. Then, the course
coordinator shall enroll the students to have access to the
materials and resources of the course. All communication formats:
chat, submission of assessment tasks, requests etc. shall be
through the portal and other university recognized platforms.

You can also meet the course coordinator in person through the
scheduled face to face sessions to raise your issues and concerns.

For students who have not created their student email, please
contact the course coordinator or program head.

Contact Details of the Lord Eddie I. Aguilar

Dean Dean
Email: aguilar_lordeddie@umindanao.edu.ph
Phone: (082) 3050645 local 137

Contact Details of the Mary Grace S. Sombilon

Assist. Dean and Program Assistant Dean
Heads Email: sombilon_marygrace@umindanao.edu.ph
Phone: (082) 3050645 local 137

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Jade Solana CPA, MBA

Program Head – BSA, BSMA
Email: jd_solana@umindanao.edu.ph
Phone: 082-3050647 local 137

Devzon U. Porras
Program Head - BSIA, BSAIS
Email: dporras@umindanao.edu.ph
Phone: (082) 3050645 local 137

Students with Special Students with special needs shall communicate with the course
Needs coordinator about the nature of his or her special needs.
Depending on the nature of the need, the course coordinator with
the approval of the program coordinator may provide alternative
assessment tasks or extension of the deadline of submission of
assessment tasks. However, the alternative assessment tasks
should still be in the service of achieving the desired course
learning outcomes.

Library Contact Brigida E. Bacani

Email: library@umindanao.edu.ph
Phone: 09513766681

for inquiries, you can email at umlic.eresources@gmail.com,

raphael_digal@umindanao.edu.ph or
chat with us here http://library.umindanao.edu.ph/
Facebook page: https://www.facebook.com/UM-Learning-and-
Information-Center-Davao-City-962331877193048/

Well-being Welfare Ronadora E. Deala

Support Help Desk GSTC Head
Contact Email: Ronadora_deala@umindanao.edu.ph
Phone: 09212122846

Zerdszen P. Rañises
GSTC Facilitator
Emai: gstcmain@umindanao.edu.ph
Phone: 09058924090

GSTC Facebook Page:

https://facebook.com/UM-GSTC-Main-CAE-
111901303784349/?modal=admin_todo_tour

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Course Information – see/download course syllabus in the Black Board LMS

CC’s Voice: Hello student! Welcome to this course ACC 213: Strategic Cost
Management. One of the areas that a competent accounting
practitioner must be adept with is cost accounting and management. At
this point in your journey as an accounting student, you have already
been oriented on the basics of cost accounting and management, the
cost behavior and the different methods of cost accumulation and
allocation.

CO The course ACC 213 is designed to deepen your knowledge on cost

management. It aims to acquaint the students with the impact of
changes in costs and volume to a company’s profit; advances in cost
management, such as activity-based cost management system;
concepts related to management control systems such as
decentralization, responsibility accounting, divisional performance
evaluation and transfer pricing; advances in inventory and production
management and accounting principles and practices such as
economic order quantity, Just-In-Time manufacturing, backflush
costing, lean accounting and productivity measurement. This course
also covers relevant concepts in budgetary systems, business planning
and control. At the end of this course, you are expected to be able to
explain the basic concepts and practices in cost management, apply
knowledge in problem solving using relevant managerial tools in
decision-making and prepare a Master Budget.

Let us begin!

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Big Picture

Weeks 4-5: Unit Learning Outcomes (ULO): At the end of the unit, you are
expected to

a. Apply the concepts of responsibility accounting, performance evaluation and

transfer pricing.
b. Explain what strategic cost management is and how it can be used to help a
firm create a competitive advantage.

Big Picture in Focus: ULOa. Apply the concepts of responsibility

accounting, performance evaluation and transfer pricing.

Metalanguage

In this section, the most essential terms relevant to the study of decentralization
and to demonstrate ULOa will be operationally defined to establish a common frame
of reference as to how the texts work in your chosen field or career. You will
encounter these terms as we go through this new lesson. Please refer to these
definitions in case you will encounter difficulty in understanding concepts.

1. Decentralization. It refers to the practice of delegating or decentralizing

decision-making authority to the lower levels.
2. Decentralized organization. It is one in which decision making is not confined
to a few top executives but rather is spread throughout the organization, with
managers at various levels making key operating decisions relating to their
sphere of responsibility.
3. Responsibility center. It is a segment of the business whose manager is
accountable for specified sets of activities.
4. Responsibility accounting. It is a system that measures the results of each
responsibility center and compares those results with some measures of
expected or budgeted outcome.
5. Autonomy. This refers to independence, the power to decide on a unit’s own
affairs without being operationally subservient to the influences of the mother
unit.
6. Alliance. This refers to interdependence or relation among independent entities
or units.
7. Authority. This is the power to give orders, to give commands, to give
instructions, or to make decisions.
8. Responsibility. This refers to the duty to do or not to do an activity, the
obligation to produce or not to produce results.
9. Accountability. This refers to the answerability on the consequences of what
has been done or not done.

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

10. Responsibility report. This refers to the information used in responsibility

accounting used as a tool for effective management control system.
11. Controllable costs. This refer to costs which can be regulated at a given level
of managerial authority. These are the only costs included in a responsibility
report.
12. Controllability. This is a principle that reflects the extent to which a manager
can influence activities producing certain results. When used for control
purposes, managers should only be held accountable for results that they can
control.
13. Managerial performance. This refers to the subject of responsibility accounting
which is evaluated only on the basis of those factors controllable by the
manager.
14. Managerial effort. The extent to which a manager attempts to accomplish a
goal.
15. Performance measures. These are tools used in evaluating managerial
performance at controlling the responsibility center such as return on investment,
residual income, economic value added, among others.
16. Goal congruence (optimization). This situation is attained when overall goal of
the organization prevails over that of the divisional goals or
17. Sub-optimization. The opposite of goal congruence, a result when the
individual goal of investment managers prevail over that of the overall
organization goals.
18. Transfer pricing. This occurs when two or more affiliated companies transact
with one another in an arm’s length nature involving goods or services in the
ordinary course of business operations.

Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes) for Weeks 4-5 of
the course, you need to fully understand the following essential knowledge that will
be laid down in the succeeding pages. Please note that you are not limited to
exclusively refer to these resources. Thus, you are expected to utilize other books,
research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc.

MANAGING BUSINESS ORGANIZATION

Men are best managed when motivated, when there is a clear definition of:
a. Structure–open coordination flows and avoid communication problems w/
defined scope of authority, responsibility, and accountability
b. Standards–set of expectations, order, discipline, normalcy
c. Plans–form an effective and efficient utilization of resources, develop blueprint,
guideposts, compass
d. Controls–make on-line monitoring, end-of-line monitoring, variance
investigation, corrective measures, feedback analysis, adjustments

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

e. Performance Evaluation–give recognition, rewards, adjustments, merits,

promotions and the like
Organizational Structure
-as the basic foundation of managing organizations
-should be developed based on the best organizational plan
Organizational Design
-is affected by the environment:
a. External–governance, practices, socio-cultural dynamics
b. Internal–aspirations, cravings, philosophies, objectives, goals, credo, culture
-objectives may include the following: channel of motivational activities, clarity,
openness (transparency), speed, trust and responsibility

Models of Management
As a firm grows, duties are divided, and spheres of responsibility are created
that eventually become centers of responsibility. Closely allied to the subject of
responsibility is decision-making authority. Firms with multiple responsibility centers
usually choose one of two approaches to manage their diverse and complex
activities: centralization or decentralization.
Centralization Decentralization
Decisions rests exclusively to top management. Power to make decisions is entrusted to
operating managers.
Lower-level managers are charged with
implementing these decisions. Allows managers at lower levels to make and
implement key decisions pertaining to their
areas of responsibility (autonomous
responsibility centers).
Disadvantage Advantage
Responsibility center managers are not Responsibility center managers are authorized
empowered to decide on operational matters to decide on operational matters within their
within their technical expertise. technical expertise and control.
Infrequent interaction with and feedback from Constant interaction with and feedback from
customers with lower managers may lead to an customers with lower managers would lead to
inferior service. an excellent service.
Slow decisions can be made. Quick decisions can be made.
Employees are less involved, and perhaps, less Employees are more involved, and perhaps,
committed in their work. committed in their work (job satisfaction).
People are treated as irresponsible individuals People are treated as responsible individuals
who do not care much about their potentials and who have the chance to unfold their potentials
future which may lead to a less motivated group
of individuals.
Top management decisions are geared towards May lead to lack of coordination among
presenting a favorable overall corporate autonomous managers and may create difficulty
performance that leads to goal congruence. in spreading innovative ideas within the
organization.

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Lower managers may not have the required Lower managers who have the required skills in
skills in making excellent decisions. making excellent decisions are unused.
Additional Disadvantage: Operating managers may be inclined to decide
Decisions are less guided by the invaluable in favor of presenting favorable results of their
worth of technical expertise of and hands-on responsibility center’s performance over that of
experience. the organizational performance which leads to
sub-optimization.

Organizations range from highly centralized to strongly decentralized. Most fall

somewhere between the two extremes, with the majority of these tending toward a
decentralized approach.
Reasons for Decentralization
1. Better access to local information. Decisions are normally affected by the
quality of the available information. Since lower-level managers are the ones in
contact with immediate operating conditions, therefore, they are often in the best
position to make better decisions.
2. More timely response. In a centralized setting, transmitting local information to
decision makes and transmitting the decisions to the local units take a lot of time
which may cause delay and increase the potential for miscommunication. In a
decentralized organization, where the local manager both makes and
implements the decision, related problem may be avoided. Local managers are
able to respond quickly to whatever situation may arise.
3. Focusing of central management. By decentralizing the operating decisions,
central management can focus more on strategic planning and decision making
which is important in the long-run survival of the organization.
4. Training and evaluation of segment managers. An organization always has a
need for well-trained managers to replace higher-level managers who retire or
move to take advantage of other opportunities. By decentralizing, lower-level
managers are trained to take on higher responsibilities.
5. Motivation of segment managers. Greater responsibility can produce more job
satisfaction and motivate the local manager to exert greater effort. More initiative
and more creativity can be expected.
6. Enhanced competition. In a highly centralized company, a large overall profit
margin could mask inefficiencies within the various subdivisions. A decentralized
approach allows the company to determine each division’s contribution to profit
and identify which is not performing well.

RESPONSIBILITY ACCOUNTING
A company is normally organized along the lines of responsibility. The
traditional organizational chart presents the lines of responsibility flowing from the
CEO through the vice presidents to middle- and lower-level managers. As
organizations increase in size, these lines of responsibility elongates and multiplies.
A strong link exists between the structure of an organization and its responsibility
accounting system. The responsibility accounting system is a reflection of the
organizational structure.

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Objective: managers will be compelled to set managerial targets and formulate

strategies to attain the firm’s overall objectives with control mechanism that will serve
as the basis in evaluating actual results or performance

Advantages of Responsibility Accounting

1. It facilitates delegation of decision-making.
2. It helps management promote the concept of management by objective wherein
managers agree on a common set of goals and their performance evaluated on
the basis of their attainment of goals.
3. It aids in establishing standards of performance which are used in evaluating the
efficiency and effectiveness of the different units in the organization.
4. It permits effective use of management by exception which provides that the
manager will maximize his efficiency by concentrating on those operational
factors which are deviations from plans.

Responsibility Centers
–any segment, department, unit, section or division in a business organization
headed by a manager who has been delegated authority, responsibility, and
accountability to manage a business segment

In decentralized operations, organizational segments are classified into

responsibility centers headed by a manager who is assigned a corresponding
authority, responsibility, and accountability in business operations.

When companies decentralize decision making, they maintain control by

organizing responsibility centers, developing performance measures, and designing
reward system for excellent performance at controlling the responsibility center.

Different performance measures may be utilized in evaluating each

responsibility center. The basics are the cost variance analysis covered by standard
costing for cost centers and the gross profit variance analysis for revenue centers.
The segment margin analysis is common for profit centers while the three
performance evaluation measures, return on investment, residual income, and
economic value added fit investment centers. For our purpose, we will concentrate
on the measures applicable to investment centers.

Types of Responsibility Centers

Classification Description Performance Evaluation Model
Cost center a segment whose manager is cost variance analysis
(ex. maintenance responsible for costs, but not for (standard costing)
dept.) revenues
Revenue center a segment whose manager is revenue variance analysis
(ex. a specialty responsible for earning revenues, but (gross profit variation)
clothing dept.) not for the costs of generating
revenues
Profit center a segment whose manager is segment margin analysis
(ex. appliance dept. responsible for revenues as well as

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 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

in a retail store) costs

Investment center a segment whose manager is ROI
(ex. a branch responsible for revenues and costs, Residual income
office) but also for the investment required to EVA (economic value added)
generate profits
Service center exists to provide specialized support cost variance analysis
(ex. accounting to other centers; usually operated as a
dept., HR dept.) cost center

Segment Margin Analysis

The performance of a profit center is measured by preparing an income
statement using the contribution approach illustrating actual results versus budgeted
amounts. The statement shows comparatively the revenue, direct costs and the
profit center’s contribution to indirect costs. In general, the operating performance of
the profit center is regarded as satisfactory if it is able to produce or even exceed
contribution to indirect or common costs of the company.

To better understand the concept of segment margin, below is an equation

used in segment margin analysis:
Contribution Margin xx
Less: Controllable direct fixed costs & exp xx
Controllable Margin xx
Less: Noncontrollable direct fixed costs & exp xx
Segment Margin xx
Less : Common fixed costs & exp xx
Segment Operating Income xx

Return on Investment (ROI)

-sometimes referred to Return on Asset (ROA)
-expressed on percentage and has an inherent limitation of disregarding the peso
value performance of a business segment and its manager

Here are some relevant equations:

ROI = Segment Income

Investment
ROI = (Segment Income / Net Sales)
(Net Sales / Investment)
DuPont Formula
ROI = Return on Sales (ROS) x Asset Turnover (ATO)
ROS = Operating Income / Sales
ATO = Sales / Investment
-------------
ROS-a measure of operating efficiency or the organization’s ability to control costs
ATO-a measure of productivity (ratio of output to input)

Increase in ROI = Increase in Segment Income

Decrease in
15Investment
Increase in ROI = Increase in ROS x Increase in ATO
 COLLEGE OF ACCOUNTING EDUCATION
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Advantages of ROI
1. can be easily understood, thus, has gained wide usage
2. comparable to interest rates of returns of alternative investments

Limitations of ROI
1. tends to emphasize short-run performance rather than long-run profitability
2. may not be fully controllable by the division manager due to the presence of
committed costs

Residual Income
-considered superior than the ROI because it is determined in absolute peso
amount, not in rate, computed as follows:

Segment Income xx
Less: Minimum Income xx
Residual Income (RI) xx
Segment Income–income before income tax

Minimum Income = investment x imputed income rate

Investment–those resources assigned and operationally used by a business
segment
Imputed Income Rate–desired income rate; implied income rate; minimum income
rate; prevailing market rate from which the business can generate income w/o
accepting a high risk
-----------------------
Sometimes: imputed rate = cost of capital
Positive RI = above performance standard, therefore, favorable

Economic Value Added (EVA)

-a more specific version of residual income
-represents the business unit’s true economic profit
-measures the marginal benefit obtained by using resources in relation to the
business of increasing shareholders value
EBIT (1-Tax) xx
Less: Minimum Return on long-term equity
(TA – CL) x WACOC xx
Economic Value Added (EVA) xx

WACOC – weighted average of cost of capital computed as follows:

Sources of Capital Market Values Financing Mix Ratio Cost of Capital WACOC = c x d
(a) (b) (c) (d) (e)
Bonds Payable P xxx x/x EIR (1-tax) x.x%
Preferred Equity xxx x/x DPS / MPPS (net) x.x%
Common Equity xxx x/x [DPS / MPPS (net)] + x.x%
g

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Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

TOTAL P xxx x.x%

Illustration (4-1): Performance Evaluation (Investment Center)
(adapted)
Supposing you are presented with the following information:
Division V Division W
Operating Assets P5,000 P12,500
Operating Income P1,000 P 2,250
ROI 19% 17%
Required:
a. Which is the more successful division in terms of ROI?
b. Using 15 percent as the minimum required rate of return, compute the
residual income for each division. Which division is more successful under
this rate?

Solution:
a. Based on the information above, the more successful division in terms of ROI is
division V (19% > 17%).
b. Division W is more successful in terms of residual income (P375 > P250).
Division V Division W
Operating Income P1,000 P2,250
Less: Min. Required Return
(15% x P5,000) 750
(15% x P12,500) 1,875
Residual Income P 250 P 375

Illustration (4-2): Performance Evaluation (Investment Center)

(adapted)
The following data were taken from the records of Tekla Inc., a division of Booba
Foods Corp. for the year ended December 31, 2019:
Sales P12,000,000
Less: Variable Costs and Expenses 8,000,000
Contribution Margin P 4,000,000
Less: Direct Fixed Costs and Expenses 1,000,000
Segment Income P 3,000,000
The company uses an average asset of P8M in 2019. The cost of capital is 12%.
Required:
a. Determine: 1) ROS 2) ATO 3) ROI 4) Residual Income
b. The president of Combo Corporation wants to double its ROI in 2020 by
increasing its return on sales by 80%. What is the expected assets turnover
in 2020?

Solution:
a. 1) ROS = Segment Income/Net Sales = P3M/P12M = 25%
2) ATO = Net Sales/Average Assets = P12M/P8M = 1.5x

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3) ROI = Segment Income/Average Assets = P3M/P8M = 37.5%

ROI = ROS x ATO = 25% x 1.5 = 37.5%
Segment Income P3,000,000
Less: Min. Required Return
(12% x P8) 960,000
4) Residual Income P2,040,000

b. Desired ROI = 37.5% x 2 = 75%

New ROS = 25% x 180% = 45%
if ROI = ROS x ATO, then,
ATO = ROI/ROS = 75%/45% = 1.67x

To immediately apply your new knowledge, proceed to answering ULOa Let’s

Analyze Activity 1 Problems 1 to 3.

Illustration (4-3): Performance Evaluation (Investment Center)

(adapted)
An excerpt from the records of WishKoLang Corporation revealed the following
information:
EBIT P 30,000,000
Interest Expense 2,000,000
Average Total Assets 100,000,000
Average Current Liabilities 20,000,000
Weighted Average Cost of Capital 18%
Tax Rate 32%
Required: Economic value added
Solution:
EBIT (1-Tax) actually means Earnings before interest but after tax
EBIT P30,000,000
Less: Interest Expense 2,000,000
Earnings before tax P28,000,000
Income Tax P28,000,000 x .32 8,960,000

EBIT (1-.32) 30,000,000 – 8,960,000 P21,040,000

Less: Minimum Retun on long-term equity
(TA – CL) x WACOC (100M-20M) x 18% 14,400,000
Economic Value Added (EVA) P 6,640,000

BUT IF THERE IS NO MENTION OF INTEREST EXPENSE THEN

EBIT (1-Tax) 30M (1-.32) P20,400,000
Less: Minimum Retun on long-term equity
(TA – CL) x WACOC (100M-20M) x 18% 14,400,000
Economic Value Added (EVA) P 6,000,000

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To immediately apply your new knowledge, proceed to answering ULOa Let’s

Analyze Activity 1 Problem 4.

Allocation of Service Cost To Operating Departments

Service departments are regarded cost centers. The costs they accumulate are
common costs that should be allocated to different operating units they provide
service to. The three methods of allocating common costs are as follows:
1. Direct Method-allocation of cost directly to the operating departments
2. Step-down Method-allocation of cost to recipient departments
3. Reciprocal Method-highly mathematical allocation method; allocation made to
all recipients
Illustration (4-4): Cost Allocation Methods (adapted)
Following are data about Claudine Company’s two service departments and two
operating departments.
Service Depts. Operating Depts.
A B X Y
Direct Costs P400 P600 P2,000 P3,000
Service Performed
by Dept. A 30% 30% 40%
by Dept. B 20% 70% 10%
Required:
1. Find the total cost that will be allocated to each of the operating departments
using: a. Direct Method b. Step Down Method c. Reciprocal Method

Solution:
Direct Method – allocation of cost directly to the operating dept.
Operating Depts.
X Y
by Dept. A 400 x 3/7 171
x 4/7 229
by Dept. B 600 x 7/8 525
x 1/8 75
P1,000 P696 P304
Step-Down Method – allocation of cost to recipient dept.
(first highest) Service Depts. Operating Depts.
A B X Y
400 600
Reciprocal
by Dept. A Method – highly mathematical
(400) allocation
120 method;
120allocation made
160 to all recipients
-0- Service Depts.
720 Operating Depts.
by Dept. B A B
(720) X
630 Y
90
400 600
-0- P750 P250
by Dept. A (553) 166 166 221
(153) 766
by Dept. B 153 (766) 536 77
-0- -0- P702 P298
19 By using substitution:
A = 400 + .2B A = 553
B = 600 + .3A B = 766
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2. Find the total cost for each of the operating departments using:
a. Direct Method b. Step Down Method c. Reciprocal Method

Solution:
Direct Method – allocation of cost directly to the operating dept.
Operating Depts.
X Y
by Dept. A 400 x 3/7 171
x 4/7 229
by Dept. B 600 x 7/8 525
x 1/8 75
P1,000 696 304
Direct Costs 2,000 3,000
TOTAL COST P2,696 P3,304
Step-Down Method – allocation of cost to recipient dept.
(first highest) Service Depts. Operating Depts.
A B X Y
400 600
by Dept. A (400) 120 120 160
-0- 720
by Dept. B (720) 630 90
-0- 750 250
Direct Costs 2,000 3,000
TOTAL COST P2,750 P3,250
Reciprocal Method – highly mathematical allocation method; allocation made to all recipients
Service Depts. Operating Depts.
A B X Y
400 600
by Dept. A (553) 166 166 221
(153) 766
by Dept. B 153 (766) 536 77
-0- -0- 702 298
Direct Costs 2,000 3,000
TOTAL COST P2,702 P3,298
By using substitution:
A = 400 + .2B A = 553
B = 600 + .3A B = 766

To immediately apply your new knowledge, proceed to answering ULOa Let’s

Analyze Activity 2.

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Encouraging Goal Congruence

Decentralized firms may encourage goal congruence by developing
management compensation programs that reward managers for taking actions that
benefit the firm. Possible reward systems include cash compensation, stock options,
and noncash benefits.

TRANSFER PRICING
Transfer pricing exists when one division produces a product that is utilized by
another division in a company. In intercompany transactions, a transfer price must
be set that is mutually satisfactory to both the buying division and the selling division
and that is also compatible with the company’s goals which are as follows:
Objectives:
1. accurate performance evaluation-no divisional manager should benefit at the
expense of another
2. preservation of divisional autonomy-central management should not interfere with
the decision-making freedom of divisional managers
3. goal congruence-divisional managers select actions that maximize firmwide profits

Opportunity Cost Approach

-can be used to describe a wide variety of transfer pricing practices
-identifies the minimum price that a selling division would be willing to accept and the
maximum price that the buying division would be willing to pay

Opportunity Costs of transferring internally are as follows:

1. minimum transfer price (floor)-the transfer price that would leave the selling
division no worse off if the good is sold to an internal division
2. maximum transfer price (ceiling)-the transfer price that would leave the buying
division no worse off if an input is purchased from an internal division.

Setting Transfer Prices

Commonly used approaches are as follows: 1) Market-based Transfer Pricing 2)
Negotiated Transfer Pricing 3) Cost-based Transfer Pricing 4) Minimum Transfer
Pricing

Market-based Transfer Pricing

Useful in highly decentralized organizations. If there is an outside market for
the product and the outside market is perfectly competitive, the correct transfer price
is the market price. Supposing the selling division can sell all its produce at the
market price, thus, transferring internally at a lower price would make it worse off.
The buying division, on the other hand, would not be willing to pay more than the
market price for an internally transferred good.

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UPPER LIMIT (set by buyer)

- price at which goods are sold on the open market
- best transfer price (profit center concept)

Transfer Price = price used for outside customer

If selling division has no idle capacity, there is opportunity cost

In using market price as transfer price,

-selling division manager will not lose anything
-buying division manager will get correct signal how much it really costs the
company for the transfer to take place

As a general rule, this policy should contain the following guidelines:

a. The buying division must purchase internally so long as the selling division
meets all bona fide outside prices and wants to sell internally.
b. The selling division must be free to reject internal business if it prefers to sell
outside.
c. If the selling division does not meet all bona fide outside prices, then buying
division is free to purchase outside.
d. An independent and impartial body must be established to settle disagreements
between divisions over transfer prices.

Negotiated Transfer Pricing

Managers are permitted to negotiate the price for internally transferred goods
and services. The various units are free to determine the prices at which they buy
and sell internally. This is appropriate when market prices are subject to rapid
fluctuations.

This produces the best bargain price acceptable to the selling and buying
divisions without adversely sacrificing respective interests. The negotiated price
should be one where the opportunity cost of the selling division is less than that of
the buying divisions.

This transfer pricing scheme is an attempt to simulate an arm’s length

transaction between supplying and buying segments.

Major advantage: preserve the autonomy of the division managers

Disadvantage: very time consuming and require frequent reexamination and revision of prices

Cost-based Transfer Pricing

Cost may either be:
a. standard (has the advantage of isolating variances) or
b. actual (gives little incentive to control costs; may not promote long-term
efficiencies)

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To avoid passing on the inefficiencies of one division to another, standard costs is best to
use in determining the transfer price.

Forms of Cost-Based Transfer Pricing:

a. Full-Cost Transfer Pricing-the least desirable type; only rarely will full cost
provide accurate information about opportunity costs; not suitable for companies
with decentralized structures that measure the profitability of autonomous units;
departs from goal congruence

Transfer Price
= Variable Costs per unit + Fixed Costs per unit
plus portions of marketing and administrative costs

b. Full-Cost plus Markup Transfer Pricing-better if the markup can be negotiated;

simply another example of negotiated transfer pricing

c. Variable Cost plus Fixed Fee-like full cost plus markup, variable cost plus fixed
fee can be a useful transfer pricing approach (equivalent to negotiated transfer
pricing) provided that the fixed fee is negotiable

Transfer Price
= Variable Costs per unit + Differential Costs per unit

-----------------------
advantage over full cost plus markup: If the selling division is operating below
capacity, variable cost is its opportunity cost.

Variable Costs–usually approximate differential costs

but when fixed costs increase because of a transfer of goods between

segments,
they are differential costs and therefore, should be included

Minimum Transfer Pricing

LOWER LIMIT (set by seller)

Transfer Price = Differential Costs per unit + Lost CM per unit

(usually VC)

If selling division has sufficient idle capacity, no opportunity cost

Lowest acceptable transfer price = VC

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To immediately apply your new knowledge, proceed to answering ULOa Let’s

Check Activity 1.

Illustration (4-5): Avoidable Distribution Costs (adapted)

The circuit boards produce by one of the divisions of CBEG Corp. can be sold
to the outside market at P1,100 per unit. Selling each unit would require a
distribution cost of P100. Alternatively, the circuit board can be sold internally to the
company’s recently acquired e-games division. The distribution cost is avoidable if
the board is sold internally.
The following pertains to the sales and production data for each division:
Circuit Board Division E-Games Division
Unit sold:
Per day 1,000 350
Per year 260,000 91,000
Unit data:
Selling price P1,100 P2,250
Variable costs:
Manufacturing P600 P1,600
Selling P100 P150
Annual fixed costs P74M P30.5M

Required:
How could the Circuit Board division and the E-Games division set a transfer price?

Solution:
a. Establish the maximum price and the minimum price to determine the bargaining price
range.
Buying Division: E-Games maximum price P1,100
Selling Division: Circuit Board minimum price (P1,100-P100) P1,000
bargaining price range P1,100 to
P1,000

b. Suppose E-Games offers a transfer price of P1,000.

E-Games division would be better off by P100 per circuit board, since it had previously paid
P1,000 per board. Its profits would increase by P35,000 per day (P100 × 350 units per day).
The Circuit Board Division, on the other hand, would be no better, or worse, off than before.
This will have be no effect on the division’s profit. While a transfer price of P1,000 per circuit
board is possible, it is likely that the Circuit Board manager would try to negotiate a better
price.

To immediately apply your new knowledge, proceed to answering ULOa Let’s

Analyze Activity 3 Problem 1.

Transfer Price for Services

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Steps in setting transfer price for services:

1. Identify the different departments contributing various services.
2. Evaluate the corresponding skill and expertise of personnel involved in
delivering services.
3. Estimate the cost involved in providing the service. Factors such as time
requirements, qualifications, cost of the facilities needed to provide the service
should be considered.
4. Adopt one or any the principles applied to the transfer of products discussed.

Self-Help: You can also refer to the sources below to help you further
understand the lesson. You can also use other materials.
Hansen, D., Mowen, M., & Liming, G. 2009, Cost Management Accounting & Control, 6th
Edition, Cengage Learning, Mason, OH.
Horngren, C., Datar, S. & Rajan, M. 2015, Cost Accounting A Managerial Emphasis, 15th
Edition, Pearson Education Limited, England.

Let’s Check
Activity 1. Please encircle the letter under each item that best reflects your answer.

1. Which of the following is not an example of a responsibility center?

a. investment center c. contribution center
b. cost center d. revenue center

2. A manufacturer’s raw-material purchasing department would likely be classified

as a
a. cost center c. contribution center
b. profit center d. investment center

3. The telemarketing department of a residential remodeling company would most

likely be evaluated as a
a. investment center c. profit center
b. cost center d. revenue center

4. If the head of a hotel’s food and beverage operation is held accountable for
revenues and costs, the food and beverage operation would be considered a(n)
a. cost center c. profit center
b. revenue center d. contribution center

5. Decentralized firms can delegate authority by structuring an organization into

responsibility centers. Which of the following organizational segments is most
likely a totally independent, standalone business where managers are expected
to “make it on their own”?
a. investment center c. contribution center
b. profit center d. revenue center

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6. A responsibility center in which the manager is held accountable for the

profitable use of assets or capital is commonly known as a(n)
a. cost center c. profit center
b. revenue center d. investment center

7. The Asian Division of a multinational organization would likely be classified as

a(n)
a. contribution center c. revenue center
b. investment center d. profit center

8. Which of the following would have a low likelihood of being organized as a profit
center?
a. A movie theater of a company that operates a chain of theaters.
b. A maintenance department that charges a chain of theaters.
c. The billing department of an Internet Service Provider (ISP).
d. The mayor’s office in a large city.
e. Both c and d above.

9. Which of the following types of responsibility centers has accountability for

revenues
a. cost center and investment center
b. investment center and profit center
c. profit center and cost center
d. revenue center and cost center

10. Responsibility accounting systems strive to

a. provide information to managers.
b. place blame on guilty individuals.
c. hold managers accountable for both controllable and noncontrollable costs.
d. provide information so that managers can make decisions that are in the best
interest of their individual centers rather than in the best interests of the firm
as a whole.

11. The basic purpose of responsibility accounting system is

a. budgeting c. authority
b. motivation d. variance analysis

12. When managers of subunits throughout an organization strive to achieve the

goals set by top management, the result is
a. planning and control c. responsibility accounting
b. goal congruence d. strategic control

13. Which of the following is most likely to be a disadvantage of decentralization?

a. Lower-level employees will develop less rapidly than in a centralized
organization.
b. Lower-level employees will complain of not having enough to do.

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c. Top management will have less time available to devote to unique problems.
d. Lower-level managers may make conflicting decisions.

14. The CEO of a rapidly growing high-technology firm has exercised centralized
authority over all corporate functions. Because the company now operates in
four states, the CEO is considering the advisability of decentralizing operational
control over production and sales. Which of the following conditions probably will
result from and be a valid reason for decentralizing?
a. Greater local control over compliance with federal regulations
b. More efficient use of headquarters staff officials and specialist
c. Quicker and better operating decisions
d. Greater economies in purchasing

15. A successful responsibility accounting reporting system is dependent upon

a. the correct allocation of controllable variable costs.
b. identification of the management level at which all costs are controllable.
c. the proper delegation of responsibility and authority.
d. a reasonable separation of costs into their fixed and variable components
since fixed costs are not controllable and must be eliminated from the
responsibility report.

Let’s Check
Activity 2. Read each statement. On the space provided, write T if you believe the
statement is true or F if false.
_____1. Transfer prices can be used to promote goal congruence among operating
segments of an organization.
_____2. In computing a transfer price, the maximum price should be no higher than
the highest market price at which the buying segment can obtain the good
or service externally.
_____3. In computing a transfer price, the minimum price should be no lower than
the incremental costs associated with the goods plus the opportunity cost of
the facilities used.
_____4. One of the main factors to consider when using a cost-based transfer price
is whether to use actual or standard costs.
_____5. When using a negotiated transfer price, a determination must be made if
comparable substitutes are available externally.
_____6. Market based transfer prices are most effective for common high-cost and
high-volume standardized services.
_____7. Cost-based transfer prices are most effective for common high-cost and
high-volume standardized services.
_____8. Market based transfer prices are most appropriate customized high-volume
and high-cost services.
_____9. Negotiated transfer prices are most appropriate for low cost and low
volume services.

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____10. Sub-optimization occurs when a manager of a cost center focuses on the

goals of the cost center rather than on the goals of the organization as a
whole.
Let’s Analyze
Activity 1. Now, it’s your turn to apply concepts on performance evaluation of an
Investment Center.

Problem 1 (adapted)
Elion, a division of Elton Manufacturing, has assets of P450,000 and an operating
income of P110,000.
Required:
a. What is the division’s ROI?
b. If the minimum rate of return is 12%, what is the division’s residual income?

Problem 2 (adapted)
Shapes Corporation operates two (2) autonomous divisions: Circle Company and
Square Company. The divisions reported the following data with respect to their
2019 operations:
Circle Square
Net sales P 40M P400M
Segment income 5M 30M
Average assets 25M 160M
Average assets life (years) 5 5
Cost of capital 12% 12%
Required:
1. Return on investment.
2. Residual income.

Problem 3 (adapted)
City Recreation Corporation operates allows its divisions to operate as autonomous
units. The operating data for 2019 follow, in thousands:
Hotel Beach Spa
Revenue P2,250 P500 P4,800
Accounts receivable 800 152 1,435
Operating assets 1,000 400 1,750
Net operating income 220 60 480
Taxable income 165 90 385
Required:
1. Compute the asset turnover for each division.
2. Compute the return on sales for each division.
3. Compute the return on investment for each division.

Problem 4 (adapted)
The following data pertain to Jumar Manufacturing:

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Interest rate on debt capital 9%

Cost of equity capital 12%
Before-tax operating income P35M
Market value of debt capital P60M
Market value of equity capital P120M
Total assets P150M
Income tax rate 30%
Total current liabilities P15M
Required:
1. Compute the weighted-average cost of capital.
2. Compute the economic value added.

Let’s Analyze
Activity 2. Now, let’s apply concepts on allocation of service cost and transfer
pricing.

Problem 1 (adapted)
Technicolor Company has two service departments (Black and White) and two
producing departments (Red and Yellow). Data provided are as follows:
Service Depts. Operating Depts.
Black White Red Yellow
Direct Costs P150 P300 P5,000 P6,000
Service Performed
by Dept. Black 40% 40% 20%
by Dept. White 20% 70% 10%
Required:
If Technicolor Company uses the direct method to allocate service costs,
1. What amount of the service cost is allocated to Department Yellow?
2. What is the total cost for Department Red?
If Technicolor Company uses the step-down method to allocate service costs,
3. What amount of the service cost is allocated to Department Red?
4. What is the total cost for Department Yellow?
If Technicolor Company uses the reciprocal method to allocate service costs,
5. What amount of the service cost is allocated to Department Yellow?
6. What is the total cost for Department Red?

Problem 2 (adapted)
YMP Tool has three service departments that support the production area.
Outlined below is the estimated overhead by department for the upcoming year.

Service Departments Estimated Overhead Number of

Employees
Receiving P25,000 2
Repair 35,000 2

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Tool 10,000 1
Production Departments
Assembly 25
Bottling 12

The Repair Department supports the greatest number of departments, followed by

the Tool Department. Overhead cost is allocated to departments based upon the
number of employees.
Required:
a. Using the direct method of allocation, how much of the Repair
Department’s overhead will be allocated to the Tool Department?
b. Using the step-down method of allocation, the allocation from the Repair
Department’s overhead to the Tool Department would be __________.

Problem 3 (adapted)
A hospital has a P100,000 expected utility bill this year. The janitorial, accounting
and orderlies departments are service functions to the operating, hospital rooms and
laboratories departments. Floor space assigned to each department is
Department Square Footage
Janitorial 1,000
Accounting 2,000
Orderlies 7,000
Operating 4,000
Hospital Rooms 30,000
Laboratories 6,000
Required:
How much of the P100,000 utility bill will eventually become the hospital rooms
department total costs, assuming a direct allocation based on square footage is
used?

Let’s Analyze
Activity 3. Now, let’s apply concepts on transfer pricing.

Problem 1 (adapted)
The Quarantine Company has two divisions, ECQ and MECQ. Production
manufactures pants, which it sells to both the Marketing Division and to the outside
market under a different brand name. Marketing operates numerous pants stores,
and it sells both Quarantine pants and other brands. The following facts also pertain
to Quarantine:
o Sales price to retailers if sold by Production: P380 per pair
o Variable Cost to produce: P190 per pair
o Fixed Costs: P2,000,000 per month
o Production is operating far below its capacity.
o Sales price to customers if sold by Marketing: P500 per pair
o Variable marketing costs: 5% of sales price

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Marketing has decided to reduce the sales price of Quarantine pants. The
company’s variable manufacturing and marketing costs are differential to this
decision, whereas fixed manufacturing and marketing costs are not.

Required:
a. What is the minimum price that can be charged for the pants and still cover
differential manufacturing and marketing costs?
b. What is the appropriate transfer price for this decision?
c. What if the transfer price were set at P380? What effect would this have on
the minimum price set by the marketing manager?
d. How would you answer to questions a and b change if the Production Division
had been operating at full capacity?

In a Nutshell
Activity 1. Responsibility accounting is closely linked to the organizational structure
and the lines of authority the structure defines. In order to increase overall efficiency,
many companies choose to decentralize.

In this portion of the module, you were taught the concepts related to
decentralization, specifically, responsibility accounting, performance evaluation and
transfer pricing. After knowing essential terms and doing the exercises, please feel
free to write your arguments or lessons learned. Like before, I will supply the first two
items and you continue the rest.

1. Decentralization means freedom in decision-making.

2. This freedom, however, must be matched with a performance that is aimed at
attaining goal congruence within.

Your Turn

3. _____________________________________________________________

_____________________________________________________________

_____________________________________________________________

4. _____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

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5. _____________________________________________________________

_____________________________________________________________

_____________________________________________________________

Q&A LIST
Do you have any question/issue/concern for clarification? Please list them down
below and raise them formally by posting the list in the designated forum section.
Your teacher or any of your classmates may provide the answer or clarification you
need. Once satisfied, you return to this list and write the corresponding answers in
your own words. This list will help you in the review of the concepts and essential
knowledge.

Questions / Issues / Concerns Answers

1.

2.

3.

4.

5.

KEYWORDS INDEX
In this section, keywords are listed down to help you recall the lesson. The list may
include concepts, ideas, theories, names of people and other vital terms to
remember that may or may not necessarily be found in the Metalanguage section.
You may refer to this list as you review the lesson.

Controllable Costs Market-based Transfer Pricing Responsibility Center

Cost Allocation Maximum Transfer Price Return on Investment

Cost Center Minimum Income Return on Asset

Cost-based Transfer Pricing Minimum Transfer Price Return on Sales

Decentralization Negotiated Transfer Pricing Revenue Center

Differential Cost Operating Departments Segment Margin

Direct Method Performance Evaluation Service Center

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DuPont Formula Performance Measures Step-Down Method

Economic Value Added Profit Center Sub-optimization

Goal Congruence Residual Income Transfer Pricing

Investment Center Responsibility Accounting WACOC

Big Picture in Focus: ULOb. Explain what strategic cost management is

and how it can be used to help a firm create a competitive advantage.

Metalanguage

In this section, the most essential terms relevant to the study of strategic cost
management and to demonstrate ULOb will be operationally defined to establish a
common frame of reference as to how the texts work in your chosen field or career.
You will encounter these terms as we go through this new lesson. Please refer to
these definitions in case you will encounter difficulty in understanding concepts.

1. Strategic cost management. This refers to the use of cost data to develop and
identify superior strategies that will produce a sustainable competitive
advantage.
2. Strategic decision making. This is choosing among alternative strategic with
the goal of selecting a strategy that provides a company with reasonable
assurance of long-term growth and survival.
3. Competitive advantage. It is creating better customer value for the same or
lower cost than offered by competitors, or creating equivalent or better value for
lower cost than offered by competitors.
4. Customer value. This is the difference between what a customer receives
(customer realization) and what a customer gives up (customer sacrifice).
5. Total product. This is what the customer receives, also known as customer
realization. The complete range of tangible and intangible benefits received out
of purchasing a product includes basic and special product features, service,
quality, instructions for use, reputation, brand name, and any other factors
deemed important by customers.
6. Customer sacrifice. This includes the cost of purchasing the product, the time
and effort spent in acquiring and learning to use the product, and after-purchase
costs, which are costs of using, maintaining, and disposing of the product.
7. Value chain. This pertains to the linked set of value-creating activities from basic
raw materials to the disposal of the finished product by end-use customers.
8. Supply chain. This is the sequence of processes involved in the production and
distribution of a commodity describing the relationship between a supplier and a
customer.

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9. Organizational activities. These are actions taken to sustain the operations of

the organization.
10. Operational activities. These are activities directly related to the production of
goods or services.
11. Cost driver. It is anything that causes the incurrence of a cost. It may be an
object, event or activity, depending on the cost management approach used.
12. Product life cycle. In this section, this is regarded as the producer’s viewpoint
on the product life cycle which has two versions.
13. Consumable life cycle. This is the consumer’s viewpoint on the product’s life-
cycle.
Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes) for Weeks 4-5 of
the course, you need to fully understand the following essential knowledge that will
be laid down in the succeeding pages. Please note that you are not limited to
exclusively refer to these resources. Thus, you are expected to utilize other books,
research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc.

There are three general strategies in increasing customer value to achieve a

competitive advantage. These are: cost leadership, product differentiation, and
focusing.

Cost Leadership Strategy

Objective: To provide the same or better value to customers at a lower cost than
offered by competitors.

If
customer value = customer realization – customer sacrifice

then, a low-cost strategy

increases customer value
by minimizing customer sacrifice

Examples: redesigning a product so that fewer parts are needed, lowering

production costs and the costs of maintaining the product after purchase

Differentiation Strategy

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Objective: To increase customer value by increasing what the customer receives

(customer realization).

If
customer value = customer realization – customer sacrifice

then, a differentiation strategy

increases customer value
by providing something to customers that is not provided by competitors
creating product characteristics (functional, aesthetic, or stylistic)
that set the product apart from its competitors

Examples: a food provider offering free delivery service unusual to competitors, a

retailer offering on-site repair service not offered by rivals, a producer of personal
computers, laptops and cellular phones such as Apple Inc. using an exclusive
operating system not compatible with other brands

There is competitive advantage if the following are achieved:

a. Customers must see the variations as important.
b. The value added to the customer by differentiation must exceed the firm’s costs
of providing the differentiation.

Focusing Strategy
Objective: To establish competitive advantage by selecting or emphasizing a market
or customer segment in which to compete.

If
customer value = customer realization – customer sacrifice

then, a focusing strategy

increases customer value
thru the following ways:
a. Select the markets and customers that appear attractive and then develop the
capabilities to serve these targeted segments.
b. Select specific segments (e.g. customers and geographic regions) where the
firm’s core competencies in the segments are superior to those of competitors.

Firms may choose not just one general strategy, but a combination of strategies.

Strategic Positioning
-the process of selecting the optimal mix of these three general strategic approaches
with the end view of creating a sustainable competitive advantage

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Strategy may include the following:

a. choosing the market and customer segments the business unit intends to serve,
b. identifying the critical internal business processes that the unit must excel at to
deliver the value propositions to customers in the targeted market segments,
c. selecting the individual and organizational capabilities required for the internal,
customer, and
d. financial objectives.

What is the role of cost management in strategic positioning?

objective of strategic cost management is to reduce costs while simultaneously
strengthening the selected strategic position

Remember that competitive advantage is tied to costs.

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VALUE-CHAIN ANALYSIS
-basic to successful implementation of cost leadership and differentiation strategies
Companies add value through the following events and activities:
1. Research and Development–the generation of, and experimentation with, ideas
related to new products, services or processes
2. Design of products, services, or processes–the detailed planning and
engineering of products, services, or processes
3. Production–the acquisition, coordination, and assembly of resources to produce
a product or deliver a service
4. Marketing–the manner by which companies promote and sell their products or
services to customers or perspective customers
5. Distribution–the delivery of products or services to customers
6. Customer Service–the after-sale support provided to customers

Value-chain analysis relies on identifying and exploiting internal and external

linkages.
Internal linkages-relationships among activities that are performed within a firm’s
portion of the value chain
External linkages-describe the relationship of a firm’s value-chain activities that are
performed with its suppliers and customers

To exploit these linkages,

a. identify activities and select those that can be used to produce (or sustain) a
competitive advantage
b. classify as organizational activities and operational activities
c. determine the costs of these activities with the use of organizational and
operational cost drivers; refer to examples below
Organizational Activities and Drivers
Structural Activities Drivers
Building plants number of plants, scale, degree of
centralization
Management structuring management style and philosophy
Grouping employees number and type of work units
Having complexity number of product lines, number of unique
processes, number of unique parts, degree
of complexity
Vertical integrating scope, buying power, selling power
Selecting and using process technologies types of process technologies, experience
Executional Activities Drivers
Using employees degree of involvement
Providing quality quality management approach
Providing plant layout plant layout efficiency
Designing and producing products product configuration

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Providing capacity capacity utilization

Operational Activities and Drivers
Unit-Level Activities Drivers
Grinding parts Grinding machine hours
Assembling parts Assembly labor hours
Drilling holes Drilling machine hours
Using materials Pounds of material
Using power Number of kilowatt-hours
Batch-Level Activities Drivers
Setting up equipment Number of setups
Moving batches Number of moves
Inspecting batches Inspection hours
Reworking products Number of defective units
Product-Level Activities Drivers
Redesigning products Number of change orders
Expediting Number of late orders
Scheduling Number of different products
Testing products Number of procedures

Activity Drivers
-explain changes in activity costs by measuring changes in activity output (usage)
2 major categories:
1. Unit-level drivers – explain changes in cost as units produced changes (ex.
pounds of DM. kilowatt-hours used to run production machinery, and DLH
2. Non-unit-level drivers – explain how costs change as factors other than the
number of units produced changes (ex. number of set-ups, work orders,
engineering change orders, inspection hours and material moves)

In a traditional cost management system-cost behavior is assumed to be

described by unit-based drivers only
In activity-based cost management system-both unit and non-unit-based drivers
are used; thus, provides much richer view of cost behavior

LIFE-CYCLE COST MANAGEMENT

Life-cycle cost management is considered a type of strategic cost analysis. It
requires an understanding of the three types of life-cycle viewpoints: the marketing
viewpoint, the production viewpoint, and the consumable life viewpoint. By
considering the interrelationships among the three viewpoints, managers develop
insights that help maximize life-cycle profits.

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Product Life-Cycle
(Producer Viewpoint)
In life cycle, product may refer to a class (i.e. automobiles) or specific form (i.e.
station wagon) or specific brand or model (i.e. Subaru Outback).

There are two viewpoints concerning product life cycle: the marketing viewpoint
and the production viewpoint.

Marketing Viewpoint
-describes the general sales pattern of a product

General Pattern of Product Life Cycle: Marketing Viewpoint

Units of Sales

Introduction Growth Maturity Decline

Figure 5. Product Life Cycle: Marketing Viewpoint

Product Life-Cycle Stages

1. Introduction stage-characterized by preproduction and startup activities; focused
on obtaining a foothold in the market; no sales for a period of time (the
preproduction period); and, then slow sales growth as the product is introduced
2. Growth stage-a period of time when sales increase more quickly
3. Maturity stage-is a period of time when sales increase more slowly. Eventually,
the slope (of the sales curve) in the maturity stage becomes neutral and then
turns negative
4. Decline stage-when the product loses market acceptance and sales begin to
decrease

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Production Viewpoint
-defines stages of the life cycle by changes in the type of activities performed

Product Life Cycle: Production Viewpoint

Life-Cycle Cost %

Research Planning Design Testing Production Logistics

Figure 6. Product Life Cycle: Production Viewpoint

Product Life-Cycle Activities

1. Research activities (product conception)
2. Development activities (planning, design, and testing)
3. Production activities (conversion activities), and
4. Logistical activities (advertising, distribution, warranty, customer service, product
servicing, and so on)

Difference between viewpoints:

production viewpoint emphasizes life-cycle costs
market viewpoint emphasizes sales revenue behavior

Life-cycle costs-all costs associated with the product for its entire life cycle
90% or more are committed during the development stage of the product’s life cycle
Committed-most of the costs that will be incurred are predetermined, set by the
nature of the product design and the processes needed to produce the design

Consumable Life-Cycle
(Consumer Viewpoint)
-emphasizes product performance for a given price (costs of ownership)
-costs of ownership includes costs related to the consumption life-cycle activities
-total customer satisfaction is affected by both purchase price and post-purchase
costs
Consumption Life-Cycle activities:
(1) purchasing; (2) operating; (3) maintaining; and (4) disposal

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Life-Cycle Cost Management

(Interactive Viewpoint)
-an integration of the three life-cycle viewpoints that can be useful to producers of
goods and services
-consists of actions taken that cause a product to be designed, developed, produced,
marketed, distributed, operated, maintained, serviced, and disposed of so that life-
cycle profits are maximized

Ways of maximizing profits

(1) revenue enhancement
(2) cost reduction opportunities

Life-cycle cost management emphasizes cost reduction, not cost control.

Role of Target Costing

-plays an essential role in life-cycle cost management by providing a method for
reducing costs in the design stage by considering and exploiting both customer
and supplier linkages

target = sales price needed to capture - desired per-unit

cost predetermined market share profit

sales price-reflects the product specifications or functions valued by the customer

(referred to as product functionality)

If the target cost is less than what is currently achievable, then management must
find cost reductions that move the actual cost toward the target cost.

Three cost reduction methods:

(1) reverse engineering-a “tear down” analysis whereby the competitors’ products
are closely analyzed to discover more design features that create cost
reductions
(2) value analysis-attempts to assess the value placed on various product functions
by customers
(3) process improvement-redesigning processes to improve efficiency and achieve
needed cost reductions

Self-Help: You can also refer to the sources below to help you further
understand the lesson. You can also use other materials.
Hansen, D., Mowen, M., & Liming, G. 2009, Cost Management Accounting & Control, 6th
Edition, Cengage Learning, Mason, OH.

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Horngren, C., Datar, S. & Rajan, M. 2015, Cost Accounting A Managerial Emphasis, 15th
Edition, Pearson Education Limited, England.

Let’s Check
Activity 1. Now that you know the most essential terms in the study of strategic cost
management system, let us try to check your recollection of these terms. In the
spaces provided below, write the missing terms to complete the following
statements:

1. _______________ is the use of cost data to develop and identify superior

strategies that will produce a sustainable competitive advantage.
2. _______________ is creating better customer value for the same or a lower
cost than offered by competitors, or creating equivalent or better value for lower
cost than offered by competitors.
3. _______________ is the difference between what a customer receives and
what he parts with.
4. _______________ is what the customer gives up that includes the cost of
purchasing the product, the time and effort spent in acquiring and learning to
use the product, and after-purchase costs.
5. _______________ involves choosing among alternative strategic with the goal of
selecting a strategy that provides a company with reasonable assurance of long-
term growth and survival.
6. _______________ is the process of selecting the optimal mix of strategic
approaches in creating a sustainable competitive advantage.
7. _______________ is the linked set of value-creating activities from basic raw
materials to the disposal of the finished product by end-use customers.
8. _______________ describe the relationship of a firm’s value-chain activities that
are performed with its suppliers and customers.
9. _______________ is the pre-production phase in the product life-cycle that
specifically includes product conception, planning, design and testing.
10. _______________ are costs associated with the product for its entire life cycle.
11. _______________ describes the general sales pattern of a product.
12. _______________ is a period of time when sales increase more slowly and
eventually evens out.
13. _______________ is a life-cycle that emphasizes product performance for a
given price.
14. _______________ is a cost management tool that provides a method of
reducing costs in the design stage.
15. _______________ is a cost reduction method whereby the competitors’ products
are closely analyzed to discover more design features that can reduce cost.

Let’s Check
Activity 2. Please encircle the letter under each item that best reflects your answer.

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1. Which of the following does not represent a main focus of cost management
information?
a. Strategic management c. Internal auditing and control
b. Performance evaluation d. Planning and decision making

2. Strategic management can be defined as the development of a sustainable

a. Chain of command c. Cash flow
b. Competitive advantage d. Company reputation

3. When managers produce customer value, their orientation consists of all the
following, except
a. State of the art manufacturing facilities
b. The ability to respond to customers’ desire for specific features
c. Quality and service
d. Timely delivery

4. Target costing determines the desired cost for a product upon the basis of a
given competitive price such that the product will
a. earn at least a small profit. c. earn a desired profit.
b. earn the maximum profit. d. break-even.

5. Which of the following aspects of a company would not be considered a critical

success factor, for a company that competes on differentiation?
a. Cutting edge research and development
b. Excellent customer service
c. Award-winning product quality
d. High level of production efficiency

6. In keeping with the current trend of increased strategic planning, how have
management accountants changed their use of life-cycle costing?
a. They have shifted their focus from R&D costs to marketing and promotion
costs.
b. They have turned from a sole focus on manufacturing costs to a much wider
outlook, taking into account costs from the entire product life-cycle.
c. They stopped looking at the entire life-cycle, and now focus their attention on
product design costs.
d. Accountants do not use life-cycle costing. That task is left to the operations
manager.

7. The steps in strategic decision making include all of the following except
a. Gather, summarize and report accounting information
b. Identify alternative courses of action then implement the desired alternative.
c. Determine the strategic issues surrounding the problem
d. Provide an ongoing evaluation

8. The competitive strategy of cost leadership allows a firm to outperform

competitors by producing products or services

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a. With lowered quality standards, thus, reducing overall costs.

b. In smaller operational units.
c. At lower cost achieved by increased productivity.
d. That are heavily promoted and warranted.

9. The competitive strategy in which the firm succeeds by developing and

maintaining a unique value for the product, as perceived by the customer, is
termed
a. Differentiation c. Design strategy
b. Product specialization d. Benchmarking

10. A strategy can be best defined as

a. An effective use of the organization’s resources.
b. A plan for using a firm’s resources to achieve sustainable goals within a
competitive environment.
c. A clear and detailed statement of an organization’s mission and vision.
d. A plan for developing a firm’s mission and vision statements.

Let’s Analyze
Activity 1. In your own words of not less than two hundred, explain what strategic
cost management is and how it can be used to help a firm create a competitive
advantage.

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

___________________________________________________________________

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___________________________________________________________________

___________________________________________________________________

In a Nutshell
Activity 1. Strategic cost management is vital to the long-term survival of an
organization. Its concept is anchored on the premise that in order to stay on the
playing field, the organization has to establish a competitive advantage.

In this portion of the module, you were introduced to the concept of strategic cost
management. Now, you will be required to state your arguments or synthesis
relevant to the topics presented. I will supply the first two items and you will continue
the rest.

1. There is no single best strategy. A firm can mix the three general strategies to
define its strategic position.
2. The objective of strategic cost management is reduction of cost while building
the firm’s strategic position.

Your Turn

3. _____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

4. _____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

_____________________________________________________________

5. _____________________________________________________________

_____________________________________________________________

_____________________________________________________________

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_____________________________________________________________

_____________________________________________________________

Q&A LIST
Do you have any question/issue/concern for clarification? Please list them down
below and raise them formally by posting the list in the designated forum section.
Your teacher or any of your classmates may provide the answer or clarification you
need. Once satisfied, you return to this list and write the corresponding answers in
your own words. This list will help you in the review of the concepts and essential
knowledge.

Questions / Issues / Concerns Answers

1.

2.

3.

4.

5.

KEYWORDS INDEX
In this section, keywords are listed down to help you recall the lesson. The list may
include concepts, ideas, theories, names of people and other vital terms to
remember that may or may not necessarily be found in the Metalanguage section.
You may refer to this list as you review the lesson.

Activity-Based Cost Mgmt. Differentiation Strategy Research and Development

Batch-Level Driver Distribution Strategic Cost Management

Competitive Advantage External Linkages Strategic Decision Making

Cost Driver Internal Linkages Strategic Positioning

Cost Leadership Strategy Focusing Strategy Strategy

Consumable Life-Cycle Life-Cycle Cost Management Supply Chain Analysis

Customer Realization Marketing Target Costing

Customer Sacrifice Operational Activities Total Product

Customer Service Organizational Activities Traditional Cost Mgmt.

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Customer Value Product-Level Driver Unit-Level Driver

Design Product Life-Cycle Value Chain Analysis

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Course Schedule

Please be guided by this calendar of activities (partial list).

Activity Date Where to submit
Weeks 4-5 ULO A Let’s Check Activity 1 & 2 BB Weeks 4-5 ULO A
Weeks 4-5 ULO A Let’s Analyze Activity 1 BB Weeks 4-5 ULO A
Weeks 4-5 ULO A Let’s Analyze Activity 2 & 3 BB Weeks 4-5 ULO A
Weeks 4-5 ULO A In a Nutshell Activity 1 BB Weeks 4-5 Forum A
Weeks 4-5 ULO A Q&A List BB discussion feature
Weeks 4-5 ULO B Let’s Check Activity 1 & 2 BB Weeks 4-5 ULO B
Weeks 4-5 ULO B Let’s Analyze Activity 1 BB Weeks 4-5 ULO B
Weeks 4-5 ULO B In a Nutshell Activity 1 BB Weeks 4-5 Forum B
Weeks 4-5 ULO B Q&A List BB discussion feature
Practice Set BB Practice Set
Second Exam
Third Exam
Competency Assessment
Final Exam
Special Instructions: Sample Filename Formats:
STUDENT’S SURNAME_4-5 ULO_A_Check_1
1. All online submissions must be in PDF file. STUDENT’S SURNAME_4-5 ULO_B_Check_2
2. Follow sample filename format. Filename will STUDENT’S SURNAME_4-5 ULO_B_ Analyze_1
serve as your guide in your submission. STUDENT’S SURNAME_4-5 ULO_A_ Analyze_2

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Online Code of Conduct

1. Students are expected to abide by and honor code of conduct, and thus everyone and all are
exhorted to exercise self-management and self-regulation.
2. All students are guided by professional conduct as learners in attending On-Line Blended
Delivery (OBD) course. Any breach and violation shall be dealt with properly under existing
guidelines, specifically in Section 7 (Student Discipline) in the Student Handbook.
3. Professional conduct refers to the embodiment and exercise of the University’s Core Values,
specifically in the adherence to intellectual honesty and integrity; academic excellence by giving
due diligence in virtual class participation in all lectures and activities, as well as fidelity in doing
and submitting performance tasks and assignments; personal discipline in complying with all
deadlines; and observance of data privacy.
4. Plagiarism is a serious intellectual crime and shall be dealt with accordingly. The University shall
institute monitoring mechanisms online to detect and penalize plagiarism.
5. Students shall independently and honestly take examinations and do assignments, unless
collaboration is clearly required or permitted. Students shall not resort to dishonesty to
improve the result of their assessments (e.g. examinations, assignments).
6. Students shall not allow anyone else to access their personal LMS account. Students shall not
post or share their answers, assignment or examinations to others to further academic
fraudulence online.
7. By enrolling in OBD course, students agree and abide by all the provisions of the Online Code of
Conduct, as well as all the requirements and protocols in handling online courses.

Prepared by:

Myra T. Miraflores, CPA

Course Coordinator

Reviewed by:

Jade D. Solaña, CPA, MBA Devzon U. Porras, CPA, MSA

Program Head – BSA and BSMA Program Head – BSIA and BSAIS

Mary Grace S. Sombilon, CPA, MSA

Assistant Dean

Approved by:

Lord Eddie I. Aguilar, MBA, CPA

Dean

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