Accounting Seminar #11 Management Accounting Part the Second

[black_samvara]

Short(er) seminar than usual, we had an alternate lecturer and whizzed through the material at speed.

Test#4 was 90% / 92.5% and that concludes the in class testing, one peer evaluation, one participation/debate and one exam to go.

Costs!

• Relationship to product or activity
  • Direct Cost
  • Indirect Cost
• Relationship between total cost and volume of activity
  • Variable Cost
  • Fixed Cost
  • Mixed Cost
• For other analytical purposes
  • Differential Cost - differences in costs and benefits between alternative opportunities; relevant to future decisions
  • Allocated Cost - assigned to a product or activity via some mathematical or arbitrary method; important to get right
  • Sunk Cost - already paid for or owed by the entity; not relevant to future decisions
  • Opportunity Cost - maximum benefit that could be obtained from a resource if it was used for some other purpose; cost of using resources for alternative opportunities.

Relevant Costs and Benefits are those that relate to the future and are additional costs and income that will be incurred or result from a decision. Other costs that may be relevant include the cost of replacing a resource that was originally purchased for some other purpose.

Exercise: Three products are produced, fixed costs are going to happen no matter what and are allocated evenly across products, variable costs are specific to product. Should we discontinue a product and if so, which product?

ProductABCTotal with ATotal without ASales income32,00050,00045,000127,00095,000Fixed Costs-12,000-12,667-11,333-25,000-25,000Variable Costs-24,000-25,333-24,667-74,000-50,000Total-4,00012,0009,00028,00020,000
Product A is not profitable in itself, but it is soaking up $8,000 of the fixed costs and is thus useful. A wide variety of ways to do the maths - this is a long way. Another way is to focus on A, utterly ignore the Fixed Costs and just say 32k - 24k = 8k which is an example of only bothering to use the Relevant Costs.

Constraints on decision making - not just maths about cash, also things like availability of raw materials, relationships with suppliers, staff, legal constraints etc.

Break for snacks and chatting where we all compare what we're enrolled in next.

Contribution Approach

1. Determine contribution in dollars
2. Establish contribution in dollars per unit of constraint
3. Rank opportunities

Example: Constraint is number of cartons produced per hour

ProductCola
Ginger

Beer
Sales Price18.0021.00Variable: Direct Material-4.00-5.00Variable: Direct Labour-1.00-1.00Variable: Overhead-3.00-3.00Total Variable Cost-8.00-9.00Contribution Margin per carton10.0012.00Ability to produce cartons per hour8060Contribution margin per machine hour800,000720,000
Analysis: Ginger beer is worth more per item (Contribution Margin per carton) but in terms of how many that can be produced (Contribution margin per machine hour) Cola is going to be more profitable.

Make or Buy decisions are when you choose between making a product or carrying out a service using your own resources, or pay an external entity to make a product or carry out a service.

• Is there spare capacity? (must include costs of any revenue forgone)
• If no spare capacity, must include costs of displaced production
• 'make' option gives organisation more control over work

Example: SA currently makes all in flight meals including bread rolls and other pastries at $0.60 per item. FB will supply at $0.50 per item. Please note; Inspector's Salaries will still be paid at 3/4 of previous rate due to food inspection being mandatory. Make or buy?

SA Pastry SourcingCost to MakeCost to Buy
DifferenceVariable: Direct Material0.110.000.11Variable: Direct Labour0.200.000.20Variable: Overhead0.070.000.07Fixed: Inspector's Salaries0.080.060.02Fixed: Depreciation of kitchen equipment0.140.140.00Cost to buy0.000.500.50Total cost per item0.600.700.10
Analysis: Pastries are cheaper (0.50) per item to buy on face value (0.60) but since we have fixed costs in equipment (0.14) and Inspectors (0.60) it's cheaper to make.

Example demonstrating Opportunity Cost: Can make 10,000 units of A which costs $29 per item or buy it for $25 per item. If we buy it, we can make $10,000 making B as well by using our capacity freed up by not making A.

Random ProductCost to Make ACost to Buy A
Making B with spare capacityVariable: Direct Material50?Variable: Direct Labour100?Variable: Overhead60?Fixed:86?Cost to buy025?Total cost per item2931?Profit based on 10,000 units29,000
31,000
10,000
Analysis: A is cheaper (25.00) per item to buy on face value (29.00) but we still have fixed costs (6) and even the extra $10,000 (opportunity) won't absorb them. Still cheaper to make even with opportunity cost factored in.

Then we ran away.
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