Introduction to Managerial Accounting* MA system used to: choose long-term strategy, define scale and scope of operations, plan/organize

use of resources, implement plans and change, evaluate results, motivate and evaluate performance, communicate plans and results, evaluate success of decision making and make improvements. * Origins: New England textile mills (1812 controlled rate that resources were converted to intermediate product), Shift in emphasis to financial actg (1925-1985): high cost-to-benefit ratio for detailed cost figures, increasing demand for FA, increasing influence of auditors, academic focus on FA. * Origins: New England textile mills (1812 controlled rate that resources were converted to intermediate product), After about six decades of stagnation, significant advances in management accounting techniques began again in 1985. This was most likely due to: increased global competition. * Budgeting process: strategic planning (long term express specific steps to achieve goals), financial planning (short and long term, express resources needed to support operations, investments, and special projects), budgeting (detailed plans using #s to specify how an organization will acquire and use resources during a short term period). * Purpose: planning (forced to), communication and coordination (pulls together plans of each manager), allocating resources (allocate scarce resources among competing uses), managing operational performance (evaluate), providing incentives (evaluate and motivate individuals)* Master budget (comprehensive set of budgets): 1 sales budget (based on demand forecast generated from sales staff, market researchers, or statistical models), 2 operational budgets (develops from sales budget to meet the demand; includes budgets for all activities of value chain), 3 budgeted financial statements (pro forma). It is a static budget in that it is based on one level of budgeted sales; it doesnt flex. * [Cost accountants, division managers, regional managers, controller, CFO, board (Budgets and information ; Feedback and strategy )] *Understanding cost behavior: cost (sacrifice made, usually measured by resources given up, to achieve a particular purpose), product cost (assigned to goods that were either purchased or manufactured for resale, expense (cost that appears on income statement and can result from periodic cost), periodic cost (or an asset or unexpired cost that has been used or sold for the purpose of generating revenue). *Committed (fixed) cost (cost that doesnt vary with changes in production or sale), flexible (variable) cost (cost that varies with changes in production/sales volume), opportunity cost (foregone benefit that couldve been realized from best alt ernative use of resources), sunk cost (past pymts for resources that chant be changed by any current/future decision; irrelevant in decision making), direct cost (cost that is traceable to a given cost object), cost object (any category or end to which a cost is assigned), indirect cost (not feasibly traceable to a given cost object). * Cost function (used to estimate costs) * High-low method: uses fixed and variable costs using highest and lowest recorded values of cost driver (CD). TC = F + VX* Regression analysis Method: estimates fixed and variable cost using all data. Used to derive avg change in total cost associated with a unit change in 1/+ CD. TC = F + VX or TC = F + V1X1 + V2X2 + V3X3. *Account analysis method: separates total cost into categories that tie to various cost drivers, requires more data. * Engineering method: generates cost estimates based on measurement and pricing of work involved in activities that go into product. Uses cost and activity projections for new products. * Cost-Volume Profit (CVP) Analysis: demonstrates effects of volume changes on organizations costs, revenues, and income. Used fo r s-t decisions. The key assumptions underlying this CVP model are: (1) total costs can be divided into variable and fixed costs, (2) total revenues and total costs are linear within the relevant range, (3) there is no uncertainty in revenue, cost, and output, (4) the organization has either a single product or constant sales mix, and (5) the value of money is constant (no time value of money). - EQUATION METHOD: OI = Sales Revenue Variable Costs Fixed Costs (To compute BE, set OI to 0 and solve for Q) = (SP x Q) - (VC x Q) - Fixed Costs - CONTRIBUTION MARGIN METHOD: Quantity (Q) BE = Fixed cost per period / contribution margin (CM) per unit [CM = sales price (SP) variable cost (VC). To compute dollar break even (BE), state CM as a percentage of SP.] [ Add any gross profit goals to fixed cost per period. If including tax, goal has to increase tax too.] - ADDING TAX TO CVP MODEL: NI = OI Income Tax Before-income tax (OI) = OI (OI x r) After-tax income (NI) = OI (1 r) or OI = NI / (1 r) - ADDING MULTIPLE PRODUCTS: QBE = Fixed cost per period / WAUCM (weighed avg unit CM). EX. Sells 4 wallets for every 1 key case w/ 180,000 FC. 0 = 4(Q) + 1(2Q) 180,000 180,000 = 6Q; Q = 30,000 30,000(4) = 120,000 wallets 120,000(8) 30,000 keys + 30,000(5) = $1,110,000 in sales * Code Blue refers to a cardiac arrest victim. I think this is an appropriate title for this novel. It implies that the hospitals situation is much like that of a patient with cardiac arrest. The hospital is in need of immediate attention if it is to survive. * In business, the traditional role for the Board of Directors is to establish policy, raise capital, and hire and fire the CEO. I think that Wes was definitely justified in his concern that Wycoff was becoming too involved in operations. This is not the role of the board and it is important for employees to have a clear idea of who to go to with problems. If the board is overstepping its role, then this will cause confusion for employees and disorganization within the agency. What incentives did system provide hospital? How did the hospital make money under this system? What cost information did the hospital need? * Increase costs *Encouraged over-utilization and *Reimbursed actual costs plus a markup for profit *Admit pts *To determine cost of primary products (ex. changing a dressing), hospital needs cost of direct labor, direct waste *Few incentives for cost control *Admit *Make more $ by increasing services or cost *Lose $ by not materials, and overhead. *To determine cost of intermediate products (ex. surgical procedures), the hospital needs patients, keep long time, provide most services . knowing costs or submitting pymts cost of all primary products. *To determine cost of patient day, the hospital needs the cost of all intermediate products. *Decrease length of stay *Control cost *Provide *Fixed payment per diagnosis-related group admitted to the * Same as 1 except dont include pt day *To determine cost of DRG, hospital needs the cost of all intermediate only those services necessary to cure patient and hospital *Admit pts for services where costs are less than fixed products. *Detailed cost per diagnostic code to make sure cost is below fixed pymt discharge them as quickly as possible price. *Decrease cost and efficiencies *Lose $ by offering services with higher costs than pymts * To keep the patient well. *Prevention *Use most *Receives a fixed amount per patient per month to provide a set of * Same as 1 except dont include pt day *To determine cost of capitation, the hospital needs cost of all cost-effective resources *Make cost-effective specified services. The doctor and hospital receive this amount, intermediate products. *Ensure cost is lower than fixed pymt decisions *Control cost regardless of whether pt uses services*Dont admit pts *Keep costs low *Lose $ by admitting/having unhealthy pts Cost Accounting Systems: Traditional and ABC systems* Predetermined Overhead Rates (established at beg of yr): 1 identify costs to be included in manufacturing overhead (MOH), 2 establish an estimate or budget for annual MOH, 3 select a cost driver highly correlated with costs such as direct labor hours or machine hours, 4 establish a budget for annual CD units, 5 compute predetermined overhead rate by dividing budgeted MOH from Step 2 by budgeted CD units from Step 4. * Overhead Variances: MOH rate = budgeted manufacturing OH/budgeted units of CD; MOH allocated = direct labor incurred x MOH rate. * MOH is a temporary acct that must be closed or reduced to 0 at end of period. Actual overhead recorded on left is unlikely to equal applied OH on right side of acct. - Underapplied overhead: Actual OH > Applied OH. When actual OH costs are above budget or when actual CD units are below budget. - Overapplied overhead: Actual OH < Applied OH. To find if overapplied or underapplied, create T-account for all entries. Left (under), Right (over). Actual costing Normal Costing Standard costing Definition Only actual direct & indirect Predetermined overhead rates normalize Predetermined/std rates are used to apply costs applied to production application of MOH to production both direct and indirect costs to production Direct Costs Actual rate x actual inputs Actual rate x actual inputs Std rate x std inputs Indirect costs Actual rate x actual inputs Pred. rate x actual inputs Std rate x std inputs *Suggest mispricing in traditional cost systems: std high-volume products show losses or small profits while complex low-volume products show significant profits, diff dpts within company believe that costs identified for producing products arent accurate, company loses bids it thought were priced relatively low and wins it thought were priced relatively high. *Activity-Based Cost (ABC) systems: use activities in value chain to track and apply costs. Improve accuracy of product costs (cost objective)and provides management with useful info to answer key operational Qs (control objective) such as such as (1) what resources and activities are needed to accomplish an objective?, (2) does an activity result in a profitable outcome?, (3) does the organization have the capacity to successfully complete the activity being considered?, and (4) if capacity is not adequate should the company rearrange other activities, increase capacity, or outsource?. * Redefining traditional cost system: Step 1 (trace as many costs directly to product/service as possible), Step 2 (categorize indirect costs not easily traced into cost pools; ABC differs from traditional in that is uses multiple cost pools traced to activities that consume resources), Step 3 (assign indirect costs to good or service; ABC differs in that is uses multiple CDs to develop CD rates that better reflect how goods or services consume resources. * Determining Costs Using ABC: 1 (identify and classify activities related to companys products), 2 (estimate cost of activities in step 1), 3 (calculate a C D rate for each activity), 4 (assign activity costs to products). * Level of organizational activities for CDs: Unit (activities that result inindividual units of production), batch (groups of similar products), product (an entire product line), custome r (meet needs of specific customers), facility (all of organizations processes). * An effective CD should: logically have a cause/effect relationship with activity and its costs, be measurable, predict or explain the activitys use of resources with reasonable accuracy, be based on resources practical capacity to support activities. *Types of activity CDs: transaction, duration, and intensity/direct charging drivers. *Optimal system (balances cost of errors made from inaccurate estimates with cost of measurement): trdl cost system may be better than ABC where products are fairly uniform in use of resources, ABC system that uses 5-10 CDs may be better than 50-100 CDs, ABC that uses exclusively transaction cost drivers better than ABC that also uses duration and intensity CDs, ABC that uses estimated CD rates better than uses detailed CD rates out to 4 decimal pts, ABC is better than trdl when overhead is a large part of product costs. *ABC = Cost: more complex vs. Benefit :heterogeneous products, high competition, high-risk environment)] * ABC system: (1) Add in any direct supply costs that are traceable to direct costs section, reducing overhead. Multiply totals by percentage used for each type. Then breakdown new overhead costs. (2) Calculate CD rate by dividing cost by number of CD units. (3) Multiply CD rates by consumption of overhead cost drivers for both types to determine overhead costs. (5) Add total costs and divide by # of treatments to find avg cost per treatment. (6) Subtract average cost from revenue per treatment to find avg profit per treatment. (7) Divide avg profit by revenue per treatment to find avg profit % per treatment. *ABC system could improve product mix decisions and market mix decisions. Could also use to negotiate new reimbursement rates. If cant negotiate new rates, need to cut costs. Specialty clinics dont need complex ABC costing system. Just have 1 product, so can use traditional.* The inadequacies of the existing financial accounting costing systems contributed to the financial difficulties of PBCH. Without accurate information on the costs, PBCH was bidding on contracts without the proper knowledge. This resulted in them often time getting paid less for services than it actually cost them to provide the services. Ex. pricing, cost control, strategic planning (none), nothing to compare efficiency (benchmarking), no budgeting, poor resource allocation, no accountability, fraud, competitive bidding problems, Matt (quality control), internal control (poor), conflicts of interest, poor employee morale, no product mix info on profitability to make decisions. *PBCH used its financial accounting system for both financial reporting and managerial control, contributing to the financial difficulties of the hospital because the financial accounting system only tracked aggregate costs by department, followed GAAP requirements rather than the needs of management, and failed to provide cost information for specific cost objects such as products, procedures, and patients. *Historically, hospitals were formed as not-for-profit organizations and reimbursed by Medicare and Medicaid on a cost plus basis. The need for a detailed cost accounting system became necessary for PBCH when Medicare, Medicaid, and HMOs began to use prospective reimbursement systems. *The board fired Roger Selman bc as controller he was responsible for the lack of an effective cost accounting system. Cost Accounting Systems: Balanced Scorecard & Corporate Social Responsibility (CSR) Reporting * Traditional financial control systems: use financial measures to evaluate effectiveness and efficiency by which operating divisions use fincanical and physical capital to create value for shareholders, use scientific mgmt techniques such as standard costs, budgets, and variances to improve the operating process, focus on the processes of delivering existing products and services to existing customers.* The balanced scorecard: must mobilize and exploit their intangible and tangible assets to: deveop effective customer relations to retain loyalty and reach out to customers, intoduce innovative products and services desired, produce customized high-quality products and services at low costs quickly, mobilize employee skills and motivate improvement, deploy information technology, data bases, and systems. Financial perspective alone is backwards looking. Balanced Scorecard indicates a need for change. * 4 Perspectives: 1 Financial Perspective (financial measures are still used to summarize the economic outcome of activities already taken). * Return on Investment = net income/investment. Shortcomings of ROI: can be manipulated by over-investing in inventory or underinvesting in operating assets; motivates division manager to refuse any project or asset whose return is below the average ROI of the division (or dispose of such), even if they yield more than the division cost-of-capital. * Residual income = Net Income (investment x a flexible required Rate) RI overcomes shortcomings of ROI. Subtracts a capital charge from net income, and always increases when the division manager adds investments that earn above cost of capital. Capital charge = Investment (cost of capital) * Economic Value Added: improves upon RI by deriving a cost of capital based on the industry and risk characteristics of individual divisions and making adjustment for distortions introduced by GAAP financial reporting.- 2 Customer Perspective (Customer-related measures are used to evaluate a business units success at penetrating and serving targeted market segments). Market and Account Share: measured in terms of number of customers, dollars spent, or unit volume sold. Customer Retention: measured by the rate at which a business unit retains or maintains ongoing relationships with its customers. Customer Acquisition: measured by either the number of new customers or the total sales to new customers. Customer Satisfaction: questionnaire measures of attitudes, which should be coupled with more objective outcome measures. Customer Profitability: financial measures of individual and aggregate customer profitability. Product and Service Attributes: the functionality of the product or service, including uniqueness, functionality, quality, price, and time. Customer Relationship: how the customer feels about the experience of purchasing from the company, including convenience, trust, and responsiveness. Image and Reputation: how the customer feels about herself or himself after the experience of purchasing from the company, which can be manipulated by how a company defines itself for its customers. Time: major competitive weapon in information age; focus on customer lead times, time reliability. Quality: excellent quality offers opportunities to distinguish self. Price: always concerns customers.- 3 Internal Business Process Perspective (process-related measures are used to evaluate a business units ability to create value for customers and produce financial results). (A) Operating Process (short wave): Process Time Measurement: Because customers value short lead times, reducing cycle or throughput times has become a critical internal business process objective. Companies have increasingly abandoned EOQ in favor of JIT. Process Quality Measurement: Measurement is a central part of quality initiatives and programs. Measures include PPM defect rates, Yields, First-pass yields, Waste, Scrap, Rework, Returns, etc. Process Cost Measurement: ABC analysis enables organizations to obtain process cost measurements that provide data on whether the goals of improvement programs (such as TQM, reengineering, or business process redesign) are being achieved. (B) Innovation process (long-wave): Value created during this process may be even more important than in operating process. Specific objectives and measures related to innovation are an important part. - 4 Learning and Growth Perspective (Growth-related measures are used to evaluate a business units abil ity to build its infrastructure: people, systems, and organizational procedures). Increasingly, employees are valued more for their ideas and problem-solving abilities than for their manual labor. Training and education must include objectives and measures to focus management on employee learning and growth. Employee measurement groups: Employee satisfaction, retention, and productivity. Static job coverage ratio: strategically critical jobs filled with qualified employees; motivates mgmt to fill the gap bw present competencies and future needs. *A balanced scorecard would have benefitted PBCH in that : it would have required the hospital to develop a clearly defined vision and business strategy, it would have required the hospital to develop and track multiple measures that maximize the probability of success in the future, and it would have required management to look beyond financial performance to the main drivers of that financial performance.* Variance Analysis: any control system has a standard performance level, a measure of actual performance, and a comparison of standard and actual performance (variance analysis). Setting standards: analyzing historical data/by task analysis; should be attainable to facilitate planning/ideal to facilitate continuous improvement. Management by exception: considers trends and recurring variances. *A favorable DM price variance may be caused by purchasing manager buying substandard material. Would require more material, creating an unfavorable DM quantity variance. Would make workers less efficient