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departments 2 In step-down method of allocation of overheads allocate that service department cost first that gives the most charge to other service departments Marginal & Absorbtion Costing 1 In MC we distinguish between Fixed and Variable Cost In AC we distinguish between Production and Non Production Cost 2 In MC we distinguish between Fixed costs are period cost & are written off in the same period In AC we distinguish between Fixed costs are production cost & become part of the values of the stock 3 MC is used for decision making AC is used for external reporting 4 MC avoids capitalization of fixed overheads through stocks 5 MC rewards sales MC rewards production 6 MC values stock at variable production cost 7 AC avoids understatement of importance of fixed overheads 8 MC avoids fictitious Profit / loss from being recorded 9 We take the element of over / under-absorbtion of fixed overheads in AC statement after Cost of Goods sold 10 Under MC variable selling , distribution & admin costs are taken in CM and not used for stock valuation that is while reporting units produced we do not include such costs we take only DM, DL & VOH (Production) 11 To compute Over / under absorbtion of fixed production OH we multiply the fixed production OH rate with the units extra produced or less produced than budget
12 For reconciliation of profits take the difference between opening and closing inventory of the period in question & multiply with the Fixed production OH absorbtion rate
Management Accounting-Summary
XXX XXX
12 To allocate a service department cost using algebraic functions the cost of a service department is own cost + allocated other service department cost Maintenance = 100+ 1/4 of Canteen Canteen = 125+ 1/2 of Maintenance where; 50% of Maintenance is that of Canteen 25% of Canteen is that of Maintenance
13 Profit Statement Under Marginal Costing Rs. Sales Less:Opening Stock Produced Closing Stock Gross CM Less:Variable Selling, distribution or admin cost Net CM Less Fixed Costs Production Costs Selling Costs Net profit as per MC 14 Profit Statement Under Absorbtion Costing Rs. Sales Less:CoGS Opening Stock Produced Over / Under Absorbtion GP Less Non Production costs ( Fixed & Variable) Net profit as per AC Rs. xxx xxx xxx xxx Rs. xxx xxx xxx (xxx)
xxx xxx
(xxx) xxx
Management Accounting-Summary
Job Order Costing 1 Material & Labor are part of the Job's direct Cost 2 Overtime if Incurred on the customer's request is direct cost otherwise it's Overhead 3 Rectification costs are Over head if the same is request occurrence otherwise it's direct cost of the job 4 Profit / Loss is to be recognized as follows Value of work certified Total Contract Value / Sale x Profit / (loss) anticipated at time of contract
Process Costing 1 Unit Opening WIP DM CC Abnormal Gain xxx xxx Rs. xxx xxx xxx xxx xxx xxx xxx FG N.Loss (Scrap Value) A.Loss WIP-Closing Process Account Unit Rs. xxx xxx xxx xxx xxx xxx xxx xxx
xxx xxx
2 Normal Loss is a foreseeable loss & is borne by the customer that is why we do not include the same in EPU computation to automatically inflate the rates 3 Ab normal Loss is borne by the organization and hence is part of the P n L & outside the CoGS or CoGP 4 If the normal loss is not to be borne by the WIP and A.Loss than we include N.Loss in EPU computation & spread it's cost over WIP, FG & A.Loss in EPU ratio 5 Rs. Process (11,000 Units) xxx Scrap (11,000 x 5) P/L Process Account Rs. 5,000 xxx xxx
xxx
Management Accounting-Summary
xxx
7 If point of inspection is after WIP stage of Completion then N Loss is not borne by the WIP-CL . We therefore do add N Loss in EPU computation, determine the N Loss amount & apportion the same in FG, A Loss in EPU ratio 8 If N Loss has a realizable or a salvage value we give the normal loss cost to FG along with it's RV in EPU ratio even if N Loss is not included in EPU Computation .
9 Opening WIP cost when using average method may be divided in it's DM, DL & OH components, which is then added to the similar cost of the current period 10 If N.Loss is in the beginning of the period or in the early stages than WIP will get it's share hence we will not include N.Loss in EPU 11 EPU Computation Under FIFO DM FG Less: Opening Units started & Completed in the current period in the current period Work on opening Closing WIP Ab Loss / Ab Gain N Loss (If Necessary) EPU xxx (xxx) CC xxx (xxx)
12 Cost Accounted for Under FIFO Opening WIP Units started and Completed Work on opening stock N Loss allocation (RV) Ab Normal Loss C WIP RV of N Loss xxx xxx xxx xxx xxx xxx xxx xxx xxx By Products - Incidentally produced - Insignificant sales value
13
14 Treatment of By Products Either adopt the same treatment as that of N Loss that is reduce costs or take the sale value directly to P n L
Management Accounting-Summary
15 i ii iii iv
Treatment of Joint Products Apportion using Physical QTY method Apportion using Sale Value method Apportion using NRV method ( NRV = Sales - Further Processing Costs) Apportion using Constant GP Method Product Sales GP @20% FPC Pre Sep Costs X 300 (60) 240 (80) Y 500 (100) 400 (100) Z 200 (40) 160 (20)
160
300
140
v Apportion using Weighted Average Method When all the products are in a different physical state X Y Solid Liquid
1 KG = 0.215 Liter 16 If there is any rework cost we will take that of only N Loss units
Management Accounting-Summary
Decision Making 1 Types of Decisions i Type A : Accept or Reject Decisions Decision taken on the basis of the merit of one decision only without comparing the same to other decisions ii Type B : Ranking Decisions These decisions involve a choice between two or more competing opportunities as sufficient resources are not available to pursue all available opportunities as opportunities offer different means to the same end hence we must choose the better ones
2 Relevant Costs Costs appropriate to a specific management decision only. They are future cash flows We do not include here the following past, sunk notional, allocated, absorbed costs)
3 Opportunity Costs Benefits of the next best alternative foregone - VC is always relevant - FC is relevant when changed due to decision and vice versa 4 Revenues - Revenue received in Past is irrelevant - Revenue that will be in future irrespective of the decision is irrelevant - They are always cash flows 5 Relevant Cost Of Material
In Stock
Not Replaced
No Other Use
Management Accounting-Summary
6 i ii iii iv 7
Relevant Cost of Machinery Repair cost is relevant Fall in sale value is relevant Hiring charges is relevant Depreciation is irrelevant Relevant Cost Of Labor
Freely Available Hire cost / hour unless the project does not effect hiring decision in which case incremental cost as a consequence of the project
8 Accepting or Rejecting a Special Order A special order will only be accepted if it increases the total contribution from the new project is contribution lost 9 Make or Buy decisions If the entity has a choice o whether to make or buy & there are no resource restrictions than the relevant cost will be the differential costs between the two decisions However certain non financial / qualitative factors need to be considered - supplier reliability - usage of the resulting spare capacity - control over operations If there are resource restrictions we will compute the differential cost / Limiting factor. The job with the least result should be subcontracted 10 Shadow Price The Shadow Price of a Limiting Factor is the increase in total contribution by the availability of one additional unit of the Limiting factor 11 i ii iii iv v vi Linear programming steps Define the variables Determine the objective function Establish Constraint lines Plot Constraint lines Determine Feasible Area Determine Optimal Solution
Management Accounting-Summary
CVP (Break Even Analysis ) 1 Break Even Point = FC CM PU Profit Volume FC C/S Ratio Budgeted Sales Break Even Sales = Contribution for BE CM PU
4 Margin of Safety
Management Accounting-Summary
Learning Curve y where; y a b x = = = = Cumulative average time per unit Time taken for first unit Log of learning rate / Log of 2 = Number of units = ax
b
Log .8 / Log 2
Limitations of Learning Curves 1 For all new employees learning curve starts form "0" 2 Does not account for employee motivation 3 Does not account for machinery breakdowns 4 Does not account to highly mechanized industries
Management Accounting-Summary
Qd 0
Elastic Demand
in case of increase in sales price the qty demanded will drop by a larger %age resulting in loss of value in case of increase in sales price the qty demanded will drop by a smaller %age resulting in loss of value hence revenue will increase
Inelastic Demand
To stabilize the prices sales volume must be related with elements other than cost such as advertising Price Equation p = a bQ Change in Qty
Management Accounting-Summary
Variances 1 Sales Volume Variance = 2 Sales Price Variance = 3 (S.QTY - A.Q) Standard Profit (S.price - A.Price) A.Q Total DM Variances AC - SC AC - SQA x SR
Material Price / Rate Variance (AR - SR) A.Q When SC Purchased Qty When AC Consumed Qty
Material Mix Variance SR ( AQA Mix - AQ S Mix) 4 Category I Total DL Variances AC - SC AC - SQA x SR
Labor Rate Variance (AR - SR) AH Paid for When SC Purchased Qty When AC Consumed Qty
Management Accounting-Summary
Category II
Labor Rate Variance (AR - SR) AH Paid for When SC Purchased Qty When AC Consumed Qty
FC Expenditure Variance BFC- AFC BFC = Budgeted Fixed Cost AFC = Actual Fixed Cost
Real Eff. Variance SR (BH / Capacity Available- AH) = Budgeted Units Budgeted Days x Extra Days x Standard Rate
8 Calendar Variance
9 When stock is valued at Standard Cost and not at Absorbed Cost i Sales Volume = (SQ - AQ) Standard CM ii No volume related FOH variance 10 Debit Variances = Adverse Variances
Management Accounting-Summary
Budgeting 1 Prepare Constraint Budget (Usually Sales) 2 Prepare Sales Budget (QTY and Value) 3 Prepare Closing Stock budget (QTY) 4 Prepare Production budget (QTY) 5 Prepare Production resource requirement budget i Material Usage Budget (Units) ii Machine Utilization Budget (Hours) iii Labor Budget (Hours & Cost) 6 Prepare Raw Material Stock Budget (Units) 7 Prepare Raw Material Purchase Budget (Units) 8 Prepare OH Cost Budget i Production OH ii Admin OH iii Selling & Distribution OH iv R n D OH 9 Calculation of OH absorbtion rate 10 Prepare Cash Budget ( Balancing figure of the entire balance Sheet) 11 Prepare Master Budget 12 If Stated that 1 KG of final product X requires 1 kg of RM Z & yield of Z is 80% RM Z required per I KG of X is 1 / 80% = 1.25 13 If Stated that 1 KG of final product X requires 1 kg of RM Z & yield of Z is 80% and 5& B is disposed off RM Z required per I KG of X is 1 / 80% x 1.05 Material FG Yield Loss
Management Accounting-Summary
Through Put Accounting 1 Total Profit / Day = Total Contribution Conversion Cost
Sales PU - DM Cost PU Usage of bottleneck resource in hours # of units produced x CC per time taken to produce one unit Return / Factory Hour Total CC / Factory Hour Throughput cost / day Total CC / Day
= =
Management Accounting-Summary
Regression Analysis y = a + bx where; x : independent variable y : dependent variable a b = = Units cost = = Fixed cost Variable Cost
Average y - b x average X nxy-xy nx2 - (x)2 Correlation coefficient Number of pairs of data
r n
= =
Management Accounting-Summary
Working Capital Management 1 Business suffers from over capitalization when CA exceed CL by such large amounts implying idle CA and the fact that CA are being funded by long term obligations 2 Business suffers from over trading when CL exceed CA by such large amounts implying that the entity is funding CA and Long Term assets by Long term obligations 3 Working Capital Cycle / Operating Cycle It is the period of time in which working Capital Rolls Over i ii iii iv v FG turnover period RM turnover period WIP turnover period Debtors payment period Creditors payment period WC Cycle xxx xxx xxx xxx (xxx) xxx
4 If annual Credit sales is 9 million Debtors Payment period is 90 days Then debtors pay 360 / 90 = 4 times a year Average Debtors 9 m / 4 = 2.25 Million 5 RM Stock turnover = average stock Cost of production average stock Cost of production average stock CoGS average debtors credit sales x 365
365
7 FG Stock turnover
365
365
average creditors credit purchases 10 If the question asks to compute working capital average FG = average RM = average debtors = average WIP = average creditors = Working Capital 11 If WIP is 50 % of I month of goods reduced & FG 100 Therefore WIP = 50% x 100 / 12
365
4.167
Debtor Management 12 Debtor management factors i Administrative cost of debt collection ii Procedure of debt collection iii Extra Finance iv Extra Finance Cost v Any Savings vi Ways of Implementation vii Bad Debts viii Early Payment Discounts
Management Accounting-Summary
13 To solve questions compute residual Income Current Sales Cost of sales Bad Debts CA funding expenditure RI xxx (xxx) (xxx) (xxx) xxx
or compute incremental profit ( without accounting for debtor funding expense) and divide by increase in capital and compare with the cost of capital Increased Profit Increased Capital greater than Rate of return required
14 If you get advance from factor than you will fund only differential debtors If the factor advances 80% Debtors 1.5 m x 20 % 12 x a%
2 x Annual demand x Ordering Cost Stock Holding cost max. consumption x max lead time or Safety stock + (Average Consumption x average lead time)
16 Reorder Level
19 # of Orders 20 Frequency
= =
365 / ( A / EOQ)
21 When a possibility of a stock out exists ROL at 90 % chance ROL = average weekly demand + SD of demand x value from normal distribution table
= =
Management Accounting-Summary
Lower limit + 1/3 spread 3 3/4 x Transaction Cost x variance of cash flows Interest rate Spread
1/3
rd
Return Point
Bameles Model Limitation i You can't predict annual demand with certainty ii There may be additional cost associated with scarcity of cash iii Only works for entities using cash at a steady rate
= 4xrd h + c ( 1 - T/S)
where; r d H C T S = = = = = = Set up cost / batch annual consumption annual storage cost annual carrying cost daily demand production rate