STRATEGIC

COST
MANAGEMENT
 Variable Costing

Strategic
Table of Management
Philosophies
Contents
Strategic
Management
Accounting
Variable Costing
STRATEGIC MANAGEMENT COSTING
 Absorption Costing
External reporting
Full Costing
Profit GAAP Costing

Determination
Models Variable Costing
Internal reporting
Direct Costing
Marginal Costing
 Product Period
Cost Cost
Reporting
of Product Unsold -
Asset as
Fully
expensed in
Cost and Inventory the period
Period incurred

Cost Sold -
Expense as
Cost of
Goods Sold
 Product Cost
Direct Material
Direct Labor
Overhead (Variable, Fixed)

Absorption
Costing Period Cost
Selling Expense
(Variable, Fixed)
Administrative Expense
(Variable, Fixed)
 Product Cost
Direct Material
Direct Labor
Overhead (Variable)

Variable
Costing Period Cost
Selling Expense
(Variable, Fixed)
Administrative Expense
(Variable, Fixed)
Overhead (Fixed)
 Comparison of Income
Statement Format
Absorption Costing Variable Costing

Sales xxx Sales xxx

Less: Cost of Goods Sold xxx Less: Variable Costs xxx
Gross Profit xxx Contribution Margin xxx
Less: Operating Expenses xxx Less: Fixed Costs xxx
Net Income xxx Net Income xxx
Difference of Net Income
Relationship between Production (P)
& Sales (S) and Beginning Inventory NET INCOME
(B) & Ending Inventory (E)

P=S
AC = VC
B=E

P>S
AC > VC
B>E

P<S
AC < VC
B<E
Difference of AC and VC
how the fixed overhead is treated.
o Under the absorption costing, fixed
overhead is treated as a product cost
o Under the variable costing fixed overhead
is treated as a period cost.
 Selling Price P20.00 per unit
Units 30,000 produced
20,000 sold
0 beg. inventory

SAMPLE
Variable Unit Cost
Manufacturing P9.00 (P5.00 DM,
PROBLEM P3.00 DL & P1.00 Overhead)
Selling & Administrative P2.00
Fixed Costs
Manufacturing P120,000
Selling & Administratuve P15,000
SOLUTION
AC VC

DM P5.00 P5.00

DL P3.00 P3.00

VARIABLE OH P1.00 P1.00

FIXED OH
P4.00 -
(120,000/30,000)

TOTAL P13.00 P9.00

SOLUTION Absorption Costing

Sales (20,000 x 20) 400,000

Less: Cost of Goods Sold (260,000)
Beg Inv 0
COGM(30,000 x P13) 390,000
Less: End Inv(10,000 x P13) (130,000)
COGS 260,000
Gross Profit 140,000
Less: Operating Expenses
Variable S & D (20,000 x P2) (40,000)
Fixed S & AD (15,000)
Net Income P85,000
 Variable Costing

SOLUTION Sales (20,000 x 20) 400,000

Less: Variable Cost (220,000)
Beg Inv 0
Variable COGM(30,000 x P9) 270,000
Less: End Inv(10,000 x P9) (90,000)
COGS 180,000
Variable S & AD (20,000 x P2) 40,000
Total Variable COGM 220,000
Contribution Margin 180,000
Less: Fixed Costs
Fixed OH (120,000)
Fixed S & AD (15,000)
Net Income P45,000
Strategic
Management
Philosophies and
Accounting
STRATEGIC MANAGEMENT COSTING
Management
Philosophy
Set of beliefs or rules used by
managers to help them make
decisions.
 QUALITY IS WHAT CUSTOMER
SAYS!
Total
Quality a management approach to

Management long-term success through customer

satisfaction.

(TQM)
THE ELEMENTS OF TQM
Management Philosophies
and its Cost Techniques
JUST IN TIME the trigger point is
traced from the
an inventory management
date a customer made
system which aims at procuring
an order.
raw material and labor and when
require without investing in
storing it.
BACKFLUSH TRIGGER POINTS

COSTING SALE OF GOODS

COMPLETION OF
·record costs until after the events
PRODUCTION
have taken place, then costs are
PURCHASE OF
worked backwards to “flush” out
the manufacturing costs. MATERIALS
 TOC COSTS

1. THROUGHPUT CONTRIBUTION – SALES –

VARIABLE COST (CONTRIBUTION MARGIN)

THEORY OF VARIABLE COST – REFERS TO DIRECT

MATERIALS ONLY
CONSTRAINTS -DL – FIXED COST

The theory focuses on constraints 2.CONVERSION COST – ALL MANUFACTURING

or bottlenecks which hinder COSTS (DL AND FOH) EXCEPT DM

speedy production.
3. OPERATING EXPENSES – all costs of business
operations (selling and administrative) except DM.

4. INVESTMENTS – all stock, raw material, WIP, FG,

R&D COSTS, EQUIPMENT
PROFIT = THROUGHPUT – OPERATING EXPENSES
PROFIT = (SALES – DM) – OPERATING EXPESES

The emphasis to throughput is analyzed in

relation to the bottlenecks
THROUGHPUT
ACCOUNTING
RETURN PER BOTTLENECK TIME = (SALES –
MATERIALS COST) / TIME PERIOD
This ratio measures the profitability of a
throughput per time of a bottleneck
ACTIVITY-BASED GOALS

MANAGEMENT Identify and improve

activities that add value.
Identify the activities that
helps a business to analyze and don't add value and then
evaluate cost of business activity based reduce or eliminate them.
on value addition that activity brings Re-plan the processes to
boost the efficiency and
profitability.
ACTIVITY-BASED THE ABC Process

COSTING 1. Set-Up ABC System

2. Identify the
The issue of activity-based costing (ABC) resource drivers
lies on how factory overhead and other indirect
3. Identify the activity
expenses are allocated among two or more
products.
drivers
 the correlation between a learner’s
performance on a task or activity and
the number of attempts or time
required to complete the activity.

LEARNING productivity
increases as
rate marginally
employees gain
CURVE experience in his work.

THEORY Advantages of Learning Curve Theory

Understand employee progress
Strategic Planning
Create a learning culture
Decision-making
 Wright's Model (Cumulative Average
Model)
each time the cumulative quantity LEARNING
of output doubles, the cumulative (or
moving) average time to produce per CURVE
unit decreases by a certain percentage.
ANALYSIS
Crawford Model (Incremental Unit
Time Model)
Each time the production doubles,
percentage
the incremental time to produce one labor hours
unit declines by a set of percentage
BALANCE
SCORECARD Four Different
Perspective on
accounting report
the concept of balance captures the intent of
1. Financial performance
broad coverage, financial and non-financial,
2. Customer satisfaction
of all factors that contribute to the firm's
3. Internal processes
success in achieving its strategic goals.
4. Learning and Growth
STRATEGIC PROFITABILITY ANALYSIS
evaluating the success
of a strategy involves
the use of the
Strategic Profitability
Analysis (SPA). It
dissects the change in
profit into growth
factor, price recovery
factory, and
productivity factor
 LIFE CYCLE
ANALYSIS
method used to identify and
monitor the costs of a product
throughout its life cycle
 Life-cycle costing gets the
average unit cost over the entire
life span of a product.
LIFE CYCLE LIFE CYCLE COST = TOTAL
COSTING PRODUCT COST/ TOTAL
ESTIMATED UNIT IN
PRODUCTION
KAIZEN
COSTING
5S PRINCIPLE
SEIRI - SORT OUT
SEITION - TO ORGANIZE
SEISO - SHINE
SEIKETSU - STANDARDIZATION
SHITSUKE - SELF-DISCIPLINE
BUSINESS
PROCESS
REENGINEERING
the fundamental rethinking and radical
redesign of business processes enabled by
information technology to achieve dramatic
improvements in business performance
 addresses the management
information needs of managers
ENVIRONMENTAL for corporate activities
MANAGEMENT that affect the environment, as

ACCOUNTING well as environment-related

impacts on the corporation.
THANK
YOU