Introduc)on Over)me and Idle Time

• Management Accoun-ng Measures/ reports financial and non-financial informa)on: helps managers make • Over-me Premium wage rate paid to workers (direct & indirect labor) in excess of straight-)me wage rates
decisions; Need not be GAAP-compliant • Idle -me wages paid for unproduc)ve )me caused by lack of orders, machine or computer breakdowns
• Financial Accoun-ng focuss on repor)ng to external par)es; Must be based on GAP
• Cost accoun-ng provides informa)on for both management accoun)ng/ financial accoun)ng Time Horizon of cost measures
• No regula)on in Management/ Cost accoun)ng vs. regula)on in FA • Actual Cos-ng Uses costs and quan))es as incurred; Cannot be used for planning
• MA mistakes only affect the firm internally (mis-investments/ external par)es remain unharmed) • Normal Cos-ng Uses actual quan))es but budgeted cost rates for cost alloca)on
• FA standardized/ comparable à published to external par)es and investors • Standard Cos-ng predetermined (budgeted) costs & quan))e; Used for annual profit plan
• Target Cos-ng es)mated long-run cost per unit; achieve target profit w/ target price
Cost Terminology and Cost Structure
• Planning Org Goals; predic)ng results; deciding among alterna)ves à looking forward Cos)ng Systems
• Budget Quant. expression of proposed plan for future; helps coordinate/ implement the plan • Job cos-ng: Cost object is a unit(s) of a dis)nct product or service
• Control Deciding and taking ac)ons to implement the plans à looking backwards o 1. Iden)fy cost object 2. Iden)fy direct costs 3. Select alloc. Bases 4. Iden)fy indirect cost 5. Compute rate
• Performance report compares actual results with budgeted amounts à control systems p. unit 6. Compute Job cost
• Frequency of repor)ng à most report monthly o Direct costs are a frequently used cost alloca)on base in a job cos)ng system
total indirect cost
• Roles of MGMT ACC Scorekeeping; ASen)on direc)ng; Problem Solving o Cost alloca)on rate per unit (rate per unit) = ∗ 100(%)
Total direct cost
o Allocated indirect cost = Direct cost of job * Cost alloca)on rate
Cost and Cost Terminology
• Process Cos-ng: Cost object is masses of iden)cal (similar) units of a product or services
• Cost is a resource sacrificed or foregone to achieve a specific objec)ve à measured as monetary amount that
o 1. Summarize flow of physical units 2. Compute output in terms of equivalent units (EU) 3. Compute EU
must be paid to acquire goods/ services
costs 4. summarize TC 5. Assign TC to units completed & units in process
• Cost object anything for which a separate measurement of costs is desired
• Cost accumula-on collec)on of cost data in organized way by means of an accoun)ng system
Equivalent Units
• Cost assignment tracing accumulated costs to cost obj.; alloca)ng accumulated costs to cost obj.
• Equivalent units (of work done) =
• Direct costs related to given cost object; can be traced in an economically feasible way o Completed and transferred out units
• Indirect costs related to par)cular cost object but cannot be traced in economically feasible way o plus: Comple)on% * WiP, closing
• Cost alloca-on describes the assigning of indirect costs to the par)cular cost object o minus: Comple)on% WiP, opening
o Indirect costs are allocated propor)onal to a cost alloca)on base (e.g., space usage) • EU (opening balance) = Opening WiP * Comple)on%
• Product costs are aSributable to individual product units à When incurred, first capitalized (on the balance • EU (closing balance) = Completed + Closing WiP * Comple)on%
sheet); Enter into the income statement once the product generates revenues • LIFO, EU of Opening WiP in CU = Completed – EU (work done)
• Period costs recorded as expenses when incurred à Relate to revenues of period not a product • FIFO, EU of Opening WiP in CU = EU (Opening balance)
o Difference lays in when they are incurred! In the Period vs. when the good is sold à Account for WA, or LIFO, FIFO
• Journal entry Period costs (HR department): Dr. Personal Cost à Cr. Cash/ Bank • Accoun-ng
• Journal entry Product cost
o Dr. Inv (WIP) w produced à Cr. Cash/ Bank; Dr. finished G when produc)on finished; Cr. Inventory (WIP)
o Dr. COGS when sold à Cr. Finished goods
• Variable costs change in total in propor)on to changes in related level of total ac)vity or volume
o Total cost remain unaffected by a change in a cost driver (produc)on volume)
o Cost per unit mechanically decrease when produc)on quan)ty increases
• Fixed costs don’t change in total for )me period despite changing level of total ac)vity/vol. • Assignment to Completed out and Closing
o Total cost change in response to a cost driver (produc)on volume)
o Cost per unit o\en remain constant (not always!)
• Variable costs and changes in produc)on quan)ty
o Propor-onal (linear) à Increase at the same rate as the produc)on quan)ty
o Increasing marginal costs à Increase at a higher rate than the produc)on quan)ty
Over and Underalloca)on of indirect costs à End of Period Adjustments
o Decreasing marginal costs à Increase at a lower rate than the produc)on quan)ty
• Under (Over)- allocated Indirect Costs = allocated indirect Costs (based on budgeted rates) – Actual Indirect
Costs à 𝑈 (𝑂 −)𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝐼𝐶 = 𝑏𝐼𝐶 − 𝑎𝐼𝐶
Opera)ng Leverage
o Budgeted indirect costs deviate (numerator reason)
• Opera-ng leverage: rela)onship between company’s variable and fixed cost à measure of risk-return trade-off
o Budgeted quan))es deviate (denominator reason)
in cost structure choice (similar financial leverage in capital structure choice)
• Adjusted alloca-on rate approach à Recalcula)on with the actual indirect cost rate
• Opera)ng leverage is greatest in organiza)ons that have high fixed cost +low unit variable cost
• With higher opera)ng leverage, profit responds more strongly to volume changes o
Total contribu-on margin • Prora-on approach à Realloca)on of devia)on amount to cogs and closing stocks
o Degree of opera*ng leverage =
!"#$% "'()$#*+, ')"-*# o based on the total amount of indirect costs allocated (before prora)on)
o contribu)on margin per unit = sales price − variable cost o based on total closing balances
o Total contribu-on margin = margin per unit ∗ units // or Total rev – Total VC
o Total opera)ng profit = Total contibution margin − 6ixed costs
1.
Cost func)ons 2. 𝑃𝑟𝑜𝑟𝑎𝑡𝑖𝑜𝑛 = 𝑤𝑒𝑖𝑔ℎ𝑡𝑠 ∗ 𝑈 (𝑂 −) 𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛
• Cost func-on math. expression describing how costs change with changes in level of an ac)vity 3. 𝐴𝑑𝑗. 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑏𝐼𝐶 𝑝𝑒𝑟 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 + 𝑃𝑟𝑜𝑟𝑎𝑡𝑖𝑜𝑛
• Linear: Mixed costs fixed & variable components; Upper & lower limits: par)ally variable costs, par)ally fixed • Bookentry Underalloca-on à (Adjusted Rates & Prora)on) à reverse for overalloca)on
costs à wage bonus (minimum granted, than variable part, but also upper limit o Dr. FG; Dr. WiP; Dr. COGS; Cr. Manufacturing Overhead
• Step-variable: Large capacity range: Fixed costs within poten)ally plausible range; Narrow capacity range: • Write-off approach à en)re difference is directly wriSen off to cost of goods sold
Quasi-variable costs à the larger the steps à the closer to classical FC func)on o Example Overalloca)on: Dr. Manufacturing Overhead; Cr. COGS
• Aggregated book-entry à underalloca)on
o Dr. COGS; Dr. Manufacturing Overhead Allocated; Cr. Manufacturing Overhead (Control)

Joint Cos)ng
• Split-off point juncture in produc)on process where one or more products in a joint-cost sepng become
separately iden)fiable
o Before à Joint costs = single produc)on process yielding mul)ple products simultaneously
o A\er à Separable costs = all costs incurred beyond the split-off point that are assignable to one or more
individual products
• Non-Linear: S-shaped: Low capacity levels: Decreasing • Main product joint produc)on pr. yields only 1 product with a rela)vely high sales value
marginal costs (economies of scale); High capacity • By-product rela)vely low sales value compared with the sales value of a joint or main product
levels: Increasing marginal costs (inefficiencies); • Scrap negligible sales value compared with the sales value of a by-product
Relevant range: Costs are non-linear outside relevant • Sales value at split-off method à rela)ve sales value at the split-off point of total produc)on
range: Low output: inefficiencies; High output:
conges)on in a plant

Asymmetric cost behavior: Cost s)ckiness

• S-cky costs fall less in response to sales decreases than rise for equivalent sales increase • Es-mated net realizable value (NRV) à expected sales value - expected separable costs
o Main drivers: Adjustment costs; Past resource levels; MGMT expecta)ons for sales develop.
• Cost asymmetry is based on the direc)on of change in sales vs. Cost Symmetry

Consump)on tracking Methods

• Permanent LIFO – adjusted for most recently sale/ purchase • Constant gross-margin percentage method à Deduct overall gross margin from the final sales values to
o Periodic FIFO: first items in are first out, matched to every sale. Permanent FIFo anyway obtain the total costs that each product should bear, then deduct the expected separable costs from the total
• Periodic LIFO – LIFO backwards global at the end of the period costs to obtain the joint-cost alloca)on.
• Permanent WA – WA previous to recent sale
• Periodic WA – Global WA for the en)re period for each sale

Deprecia)on à à à
• Physical measure method à rela)ve weight, volume, physical measure, at the split-off point

PP=Purchase Price
Ac)vity-based Cos)ng (ABC) o Adjusted market assessment à Star)ng point = prices from firms compe)tors
• Product undercos-ng à consumes many resources, reported low total costs o Expected cost plus a margin à Star)ng point = costs plus average profit margin
o Company generates losses from the product, wrongly assuming that the sales are profitable o Residual approach à Star)ng point = price of other components
• Product overcos-ng: à consumes liSle resources, reported rela)vely high total costs
o Firm loses market share as product cost (thus price) assumed to be higher than it really is Defini)on and Presenta)on of Profit
• Pro: +Accurate +Improved profitability Con: -Complexity • Net Income = Opera)ng revenues – opera)ng costs + non-opera)ng revenues – non-opera)ng costs +
• Red Flags: No C Reports for MKT; Margins complex; DC small % of Total C; Man. Believe reported Product C; financial result – income taxes à Income from all business transac)ons
Product with high theor. margins are not sold by compe)tors • Comprehensive Income = Net income + other comprehensive income à Purpose: All changes in equity
• ABC system: Indirect costs allocated based on individual ac)vi)es (A) & cost drivers (Nr. of X) except those resul)ng from transac)ons with owners
• EBIT = Net income + net interest expense + income taxes à Purpose: Income from all business transac)ons
adjusted for differences in tax burden and capital structure
• EBITDA = Net income + net interest expense + income taxes + deprecia)on and amor)za)on expense à
Purpose: Measure earnings poten)al, valua)on ra)os proxy for opera)ng CF
1.Direct cost tracing: classify as many of the total costs as direct costs as feasible • Net Opera-ng Profit A[er Taxes (NOPAT) = Opera)ng revenues – opera)ng costs – income taxes à Purpose:
2.Indirect cost pools: all costs with same (very similar) ac)vity with the cost alloca)on base Measures recurring income from a company’s regular opera)ons
3.Cost-alloca-on bases: use rela)on between cost driver (cause) & indirect cost pool (effect) • Total Cost method vs. Cost of Sales Method; Variable vs. Absorp-on cos-ng
4.Compute the product costs based on ac)vi)es
• Pro ABC implementa-on: top management support, link to compe))ve strategies, link to performance
evalua)on and compensa)on, training, ownership by nonaccountants,
• Time-driven ac-vity based cos-ng
1. Determine the )me it takes to carry out one unit of each kind of ac)vity
2. Calculate the cost per )me of supplying capacity à Es)mate prac)cal capacity of the resources supplied as
well as to accumulate the cost of supplying capacity (overhead costs)
3. Computed Cost-driver rates by mul)plying 2 input variables (cost per )me & )me per unit)
4. The cost per cost object can now be calculated with the cost-driver rates

Cost centers
• Cost center is the smallest unit of a company at which • ± Volume variance = 𝐹𝑀𝐶 * (Budgeted – Produced)/ Budgeted
o costs are accumulated, monitored, and planned • Fixed man. C in COGS = 𝐹𝑀𝐶* Sold/ Budgeted
o manager bears responsibility for these costs (i.e., cost centers typically have budget targets) • Fixed man. C in Inv = 𝐹𝑀𝐶 ∗ (Produced – Sold)/ Budgeted
o Manager can be responsible for revenues/ investments à profit/ investment centers
• Cost pool is a grouping of individual cost items à can be very broad (company-wide total-cost pool for
so\ware) or very narrow (costs of opera)ng a car used by a travelling salesperson)
• Cost center Design
o Per Business func)on: HR Administra)on/ Material Supply/ Material Handling/ Sales…
o Role in Cost alloca)on: Support Departments (Primary Cost Centers) à Cost accumula)on; No direct
alloca)on to final cost object à Cost alloca)on to other cost centers (support departments or opera)ng
departments); Opera-ng Departments (Final Cost Centers) à Cost accumula)on & cost alloca)on from SD
à Direct alloca)on to final cost object
o No ambiguity; Completeness; Homogeneity; Clear responsibili)es; Cost-benefit

Transfer Prices
• Market-based; Cost-based transfer prices à Our Focus; Nego)ated transfer
• Direct Alloca-on method à allocates costs of support departments (primary cost centers) directly to the
opera)ng departments (final cost centers)
1. Calculate Alloca)on Rates (IC/supplied Capacity)
2. Allocate IC of Support centers • Abs. Cos-ng OP – Var Cos-ng OP = Fix man. C in closing stock – Fix man C in opening stock
• Step-down alloca-on method allocates costs of support departments (primary cost centers) to other support • COGS ßà Inventory
departments and to opera)ng departments (final cost centers ) o AC > VC, Sales < Produc)on (inv increase) AC < VC, Sales > Produc)on (inv decrease)
o Exact transfer prices if only one-sided rela)onships between support departments exist o AC = VC, Sales = Produc)on VC lowest in lowest sales period (ceteris paribus)
1. Determine order of Support centers
o AC lowest with beginning INV (Fixed man. C in INV) OI und VC iden-cal (FIFO, LIFO)
a) Greatest %
b) Greatest $
Contribu)on Margin at mul)ple stages
2. Calculate Alloca)on Rates (IC/supplied Capacity)
• CM1 = Sales – VC, CM2 = CM1 – Regional FC, CM3 = CM2 – Product FC , Profit = CM3 - FC
3. Step-down…
• Reciprocal alloca-on method Balanced Scorecard
allocates costs by including the
• Why need? à Company’s return metric declines when spending for these ac)vi)es increases
mutual services provided among all
• Financial: performance shareholders care; Customer: values customers expect; Process: achieve value for
support departments (primary cost
customers; Learning & growth: mo)va)on employees/ enhance skills
centers) à Always exact transfer
• Non-Financial Performance: Shareholder: Social responsibility of business is to increase profits; Revised
prices
Shareholder: Pursuing environmental & social objec)ves may maximize long-run performance; Stakeholder:
Company & Managers must pursue environmental and social objec)ves beyond what is required in addi)on
From Support to Primary
to long-run financial goals
• Actual Usage Actual Costs à 𝐹𝐶 + 𝑎𝑉𝐶/𝑎𝑐𝑡𝑢𝑎𝑙 𝑈𝑠𝑎𝑔𝑒 𝑜𝑓 𝑆1 + 𝑂𝑡ℎ𝑒𝑟 𝑎𝑐𝑢𝑡𝑎𝑙 𝑈𝑠𝑎𝑔𝑒 𝑜𝑓 𝑆
• Actual Usage Budgeted Costs à 𝐹𝐶 + 𝑏𝑉𝐶⁄𝑎𝑐𝑡𝑢𝑎𝑙 𝑈𝑠𝑎𝑔𝑒 𝑆1 + 𝑎𝑐𝑡𝑢𝑎𝑙 𝑅𝑒𝑠𝑡
• Budgeted Usage Actual Costs à 𝐹𝐶 + 𝑎𝑉𝐶⁄𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑈𝑠𝑎𝑔𝑒 𝑜𝑓 𝑆1 + 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑅𝑒𝑠𝑡
Performance Analysis: KPIs and Ra5o Analysis
• Budgeted Usage Budgeted Costs à 𝐹𝐶 + 𝑏𝑉𝐶⁄𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑈𝑠𝑎𝑔𝑒 + 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑅𝑒𝑠𝑡 • ROI = Income/ Investment; (Revenue/ Investment) * (Income/Revenues)
• Budgeted: +Man. Know in advance +Support dept. must be eff. -Strong assumpt. o +Simple +Comparable +Manageable +Aggregated
• Actual: +More precise +Complicated cost behaviors -Difficult o ROA = (Ni + aDer Tax interest exp + Non-controlling interest)/ Avg Total Assets = Ni/A
§ lower (higher) profit per dollar of A, the more (less) asset-intensive business is. ROA <5%
Single- vs. Dual-Rate Alloca)on Method asset-intensive (airline); ROA > 20% asset-light (soDware, adver5sing, service, pharma)
• Single-rate all costs in a cost pool and allocates these costs to cost objects using the same rate per unit of the
o ROE = (Ni excl non-contr. interest)/Avg shareholder E excl non-contr. interest) = Ni/ E
single alloca)on base. No FC & VC
o Common equity excludes: non contr. Interest (Min interest); preferred stocks; ADer-tax
interest expense = Interest Expense * (1- tax rate)
o ROCE = Ebit/ (Total asset – Current Liabili5es)à Depended on capital intensity; capital
o +Low implem. cost -Treats VC & FC iden)cal -Incen)ves for Manager to act against org. intense lower ROCE, as more inv. in fixed Asset
• Dual-rate classifies costs in cost pool into VC and FC à Uses different cost-alloca)on base à The choice § Capital employed (invested capital): por5on of opera5ng assets not financed for free
between budgeted and actual input can be made independently! • ROS = Ni/ Sales
• Basic Dupont rela5ng ROA to ROE ROA=ROS*Asset turnover
o ROE (Ni/E) = Ni/ TA * Total Leverage TL (TA/E)
o +Signal diff. behavior +Align Manager decision that benefit en)re organiza)on -More effort
o ROE = ROS (Ni/Sales) * Asset Turnover AT (Sales/ TA) * TL (TA/E)
• aU for FC does not make sense. FC stays equal, but M1 is influenced by M2 • Advanced Dupont decomposi@on
• Companies face efficiency-precision trade-offs regarding fix costs, incen)ves to improve efficiency are o ROE (Ni/E)=RNOA (NOI/ NOA)+Spread (RNOA (NOI/NOA)-NBC)*Financial Leverage (NFO/E)
probably more important, whereas vc require rather precise informa)on o Ni = NOI-NFE; ROE = (NOI/E)-(NFE/E); NOA = E + NFO
• FC alloca)on is beSer based on bU; VC alloca)on is beSer based on the aU o à ROE = NOI/NOA + (NOI/NOA)*(NFO/E) - (NFE/NFO)*(NFO/E) = RNOA + Spread * Fin Lev
o NBC = NFE/ NFO = Net finance expense – Net financial Obliga5ons
Performance Measurement
• Residual Income = Ni – (required return (IRR)*Investment)
• Common Revenue Alloca-on Base
o Stand-alone Price = Stand-alone price/ sum of s-a-p * Revenue o +Add. Persp. +Value crea5on above IRR -Difficult +Can be managed
o Unit Costs = product produc)on cost/ sum of produc)on costs * Revenue • EVA = ADer-tax opera5ng profit – (WACCbook * (TA values
– CL))
o Physical Units = Unit/ Sum of all physical units * Revenue o AGer T OP = (1-tax rate)*OP; Tax rate = tax on opera5ng income / opera5ng income
• How to get at a stand-alone price if the product is not sold separately Days PayablesOutstanding (DPO): o WACC = (Cost of debt x (1 – tax rate) x Debt + Cost of equity x Equity) / (Debt + Equity)
Trade Payables(Avg): Cost of Sales per Day market values!!!
Days Inventories Outstanding (DIO):
Inventories (Avg):Cost of Sales per Day
Days SalesOutstanding (DSO):
Trade Receivables(Avg):(Credit) Sales per Day