B3
Allocation of Joint Costs by Volume
Product Volume Joint Cost Percentage Joint Cost Allocation Sneaker 10,000 pair 10,000 / 30,000 = 1/3 $2,000 Shoe 20,000 pair 20,000 / 30,000 = 2/3 $4,000 Total 30,000 pair 100% $6,000
ROI Flowchart (Return on Investment)
Profit Margin Investment Turnover NI / Sales Sales / Invested Capital
ROA
ROA = Net Income / Average Total Assets (CY + PY/ 2) All mgt. efficiency
Dupont Analysis
ROE = (NI / Sales) X (Sales / Assets) X (Assets / Equity) Net Profit Margin Asset Turnover Financial Leverage Dupont ROE = ROA x Financial Leverage (Amplifier)
Financial Leverage = Dependent on mgt. level of risk aversion (ERM)
Risk /\ Potential ROE /\ 1 + D/E = DFL NI/ E \/ = ROE /\ but debt /\
FIFO vs Weighted Average
FIFO: Current Cost Only / Equivalent Units Weighted Average: Beginning Cost + Current Cost / Equivalent Units
In its April Year 1 production, Hern Corp., which does not use a standard cost system, incurred total production costs of $900,000, of which Hern attributed $60,000 to normal spoilage and $30,000 to abnormal spoilage. Hern should account for this spoilage as:
Inventoriable cost of $60,000 and period cost of $30,000
Which of the following alternatives correctly classifies the business application to the appropriate costing system?
Job Costing System Process Costing Print Shop Glass Manufacturer
Separable Costs
Joint Costs are the first costs in a manufacturing process, before the split off. If there are further processing costs given, they must be subtracted from the selling price to determine net realizable value
Normal/Abnormal Spoilage
Normal: is included in the standard cost of the manufactured product - part of inventory. Abnormal: is excluded from the standard cost - it is a period expense; listed separately on the income statement.
Cost Accounting Venn Diagram
Prime Costs = DM + DL Conversion Costs = DL + FO
Job-Order Costing Example: Jonathon Manufacturing adopted a job-costing system. For the current year, budgeted cost driver activity levels for direct labor hours and direct labor costs were $20,000 and $100,000, respectively. In addition, budgeted variable and fixed factory overhead were $50,000 and $25,000, respectively. Actual Costs and Hours for the year were as follows: Direct Labor Hours: 21,000 Direct Labor Costs: $110,000 Machine Hours: 35,000 For a particular job, 1,500 direct labor hours were used. Using direct-labor hours as the cost driver, what amount of overhead should be applied to this job?
Step 1 = Total Manufacturing. O/H Estimated / Total Estimated DL Hours = O/H per D/L Hours Step 2 = Actual DL Hours X O/H Rate per DL hour = O/H Applied Step 1: $50,000 + $25,000 / 20,000 hours = 3.75 Step 2: 1,500 * 3.75 = 5,625
Internal Benchmarks:
Techniques to find and analyze problems or measure performance
Methods of Assigning the Common Costs to the Main Products
There are several methods of assigning joint costs to the main products: Product Volume Joint Cost Percentage Joint Cost Allocation Sneaker 10,000 pair Shoe 20,000 pair Total 30,000 pair
Traditional Costing vs ABC Costing Example
Traditional Costing - use one overhead rate. Example. Budgeted Overhead Costs / Total Budgeted Machine Hours Rate Per Machine Hour = $40 Multiply the rate by the machine hours = total overhead applied to that product Activity-Based Costing - use multiple cost drivers. Example. Same thing, but multiple cost drivers....example: Machine Hours AND Pounds of Materials
Traditional Overhead Allocation vs Activity Based Costing
Traditional Overhead - All overhead cost in the factory is treated alike, added together and then divided by a single cost driver such as machine hours, to get one rate to apply overhead. Weakness, not all overhead fluctuates with volume/ Activity Based Overhead - Activity-based costing is used when a company produces a product in a long series of automated steps that requires a lot of overhead and little direct material and a little direct labor in comparison to much overhead. ABC is more precise way to assign overhead to all products produced in the factory.
Pareto Diagram
are displayed in order of most to least frequent with a line graph that displays the cumulative occurrence of the problems.
Fishbone Diagram
cause and effect
Advantages of Residual Income
ease of measurement of actual dollars earned by an investment above is required rate of return. 1) Realistic Target Rates 2) Focus on Target Return and Amount Residual Income encourages managers to invest in projects that simply generate income in excess of a total of a target hurdle. There is not that disincentive to invest. Divisions with high rates of return are not worried about diluting it. They are not looking to avoid investments like they are with ROI and ROA
Balanced Scorecard: "FICA"
gathers information on multiple dimensions of performance defined by critical success factors necessary to accomplish a strategy. Critical Success Factors include: -Financial -Internal Business Processes -Customer Satisfaction -Advancement of innovation and human resource development
Split Off Point
is the point where the individual main products become identifiable. The point where the joint products can be recognized. Here is the shit, and here is the sweater. Here is the sneaker, here is the shoe.
Residual Income
measures value added for stockholders in dollars. The residual income measures the excess of actual earned by an investment over the return required by the company. WACC, Cost of Equity, Return established by management as a target rate.
Equivalent Unit
When every unit is identical to every other, golf balls etc. The costs must be attached to the completed units as well as to the units that are partially complete at the end of each period. The calculation of total cost is made by taking into account partially completed units and by making use of "equivalent" units 100 units, 75% complete, 75 "equivalent units"
Cost of Goods Manufactured
Work-in-process inventory, beginning + DM + DL + Overhead Applied = Total Manufacturing Costs Incurred Less: Work-in-process inventory, ending = Cost of goods manufactured OR COGM = COGS + Ending FG inventory - Beginning FG inventory
Processing costing is
a method of allocating production costs to products and services by averaging the cost over the total units produced. Costs are usually accumulated by department rather than by job. Processing costing is used instead of job order costing when all the units manufactured look the same.
3 Methods of allocating joint costs:
1. Allocation by unit volume 2. Relative net realizable values at split-off point (1). Sales price available at split-off (2). Sales values not available at split-off to find sales values:
Two Methods to Calculate "Equivalent Units"
1. FIFO 2. Weighted Average The goal under process costing is to get a cost per unit: Cost / Equivalent Units = Cost per equivalent units
Activity based costing focuses on multiple activities and then assigns costs to them; focuses management on cost/benefit of activities. Steps:
1. Identify the cost drivers 2. Accumulate the costs in cost pools 3. Trace the indirect costs to activity centers 4. Allocate the remaining indirect cost pools 5. Divide assigned costs by level of activity for the cost center 6. Cost the product ABC Costing removes cost distortion.
Process Costing Steps
1. Summarize the flow of physical units 2. Calculate the "equivalent unit" output 3. Accumulate total costs 4. Calculate the average unit cots based on total costs and equivalent units 5. Apply the average costs to the completed units and the units in work-in-process
Allocation Method #3 - Net Realizable Value
1. You subtract the separable costs. 2. You do the percentage allocation.
Cost Accounting - Activity Based Costing
Activity - any work performed inside a firm. Resource - An element that is used to perform an activity. Cost Drivers - bases that are closely correlated with the incurrence of manufacturing overhead costs. Resource cost drive - the amount of resources that will be used by an activity. Activity cost driver - The amount of activity that a cost object will use and it is used to assign the costs to the cost objects. Activity centers - An operation necessary to produce a product. Cost pool - a group of costs in which costs are grouped, assigned, or collected
Costs of Quality
Costs associated with activities related to conformance with quality standards and opportunity costs or activities associated with correcting nonconformance with quality standards. > Costs of ensuring conformance with quality standards are classified as prevention and appraisal (detection) costs, and the costs of nonconformance with quality standards are classified as internal and external costs.
When to use Process Cost
process cost accumulation system when the goal is to get an average cost. Average cost is beneficial when what is produced. Use the Process Cost accumulation system when the goal is to get an average cost. Average cost is beneficial when what is produced is a large number of homogenous units. Use process costing when every unit is the same. Apply the average cost to the large number of homogenous units. Process costing is used where the product is composed of mass produced homogenous units such as: -Gasoline and oil, Chemicals Steel, Textiles (wallpaper), Plastics, Paints, Flour, Meatpacking, Canneries, Rubber, Lumber, Food processing (beverage drink manufacturing), Glass, Mining, Cement, Fast Food.
Below are data from the income statement of Brown Inc: Beginning Inventory, Finished Goods $16,000 Ending Inventory, Finished Goods $21,000 Cost of Goods Sold $43,000 Gross Margin from Sales $39,000 Operating Expenses - Marketing and Selling $20,000 Net Income $19,000 What was Brown's cost of goods manufactured?
$43,000 + $21,000 - $16,000 = $48,000
Asset Turnover = All about mgt. efficiency.
---Assets too low, sales \/, ROE \/ ---Assets too high, TO \/, ROE \/
Net Profit Margin =
---Competition \/ PM /\ ---Costs \/ NI /\ PM /\
B3 -M4 (Performance Management) Part 1
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B3 -M5 (Performance Management) Part 2
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B3 Operations Management: Cost Accounting and Performance Management -M1 (Cost Accounting) Part 1
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Residual Income
= NI (Income Statement) - Required Return /\ Required Return = Net Book Value (Equity) X Hurdle Rate $ $ RR as a %
Cost Drivers to Apply Overhead
A cost driver is the cause of a cost rather than the cost itself - If we use machine hours as our cost driver, we are assuming that overhead th
Joint vs Separable Costs
All the costs up to the split off point are called joint costs. The separable costs are costs incurred after the split off. Joint costs are only applicable to the main products. By products do NOT receive an allocation of Joint Costs.
A processing department produced joint products Atlas and Boas, each of which incurs separable production costs after split-off. The following details pertain to a batch produced at a $40,000 joint cost before split-off: Product Sales Revenue at Split Off Separable Costs Atlas $90,000 $10,000 Boas $36,000 $16,000 What is the joint cost assigned to Product "Boas" if costs are assigned using the net realizable value?
Answer = $8,000
APIE (Appraisal, Prevention, Internal Failure, External Failure)
Conformance Costs: Appraisal Costs = detection actions: .......statistical quality checks, inspections, testing, and maintenance of lab. Prevention Costs: employee training, maintenance cost, inspection, redesign of processes. Nonconformance Costs: Internal Failure (before product assembled): the company noticed stuff is messed up: Rework costs, Scrap, Tooling changes, Costs to Dispose, and Cost of the Lost Unit. External Failure (after product assembled): the customers noticed the products are messed up: are the costs to cure a defect discovered after the product is sent to the customer.
Cost Accounting Terms
Cost Objects - Resources of Objectives. Product Costs - all costs related to the manufacture of the product. Period Costs - expensed in the period in which they are incurred and not inventoriable. Prime Costs - Direct Material + Direct Labor Conversion Costs - Direct labor + Manufacturing overhead Variable Costs - Changes proportionally with the cost driver. Fixed Cost - Cost does not change when the cost driver changes. Relevant Range - The range for which the assumptions of the cost driver are valid.
job order costing vs process costing
Heterogeneous vs. Homogeneous Job-order costing: (ex. VIN or Cars) identifies the job as the cost objective; used when few units are produced and when each unit is unique or easily identifiable. Process costing: (ex. Cornflakes) averages costs and applies them to a large number of similar products using steps
Disadvantages of Residual Income
How do we estimate the required rate of return on equity? CAPM, buildup, DDM Reliance on computing a target rate of return may sometimes be difficult to establish.
ROI/ROA issues:
How to measure the value of assets Net Book Value: Historical cost less accumulated depreciation Skewed by Age and Method of Deprecation Gross Book Value: Historical Cost Skewed by only Age Replacement Cost: Costs to replace assets at current price. Not Skewed Value /\ ROI \/ Liquidation: Selling Price Bankruptcy 1) Short term focus: Inadvertently focus managers purely on maximizing short-tern returns aka investment myopia. 2) Disincentive to invest: Profitable units are reluctant to invest in additional productive resources because they could reduce ROI in the short-term A \/ ROA /\
10,000 units of Product RAM and 40,000 units of Product Eagle are produced from a single process. In producing both Ram and Eagle a joint cost of $1,000,000 is incurred for Year 14, While neither product can be sold and must be processed further, a by-product known as Tee is produced out of the same $1,000,000 of joint cost. By product Tee can be sold for $2 per unit immediately. If 100,000 units of By Product Tee are sold in Year 14, how much joint cost should then be allocated to both Ram and Eagle assuming the physical volume method is used?
If 100,00 units of by product Tee are sold for $2, the revenue of $200,000 serves to reduce the $1,000,000 of joint cost down to $800,000. Next step is to allocate the $800,000 of joint cost to the two main products, Ram and Eagle. Ram 10,000/50,000 = 20% Eagle 40,000 / 50,000 = 80% $800,000 X .20 = $160,000 Ram $800,000 X .80 = $640,000 Eagle 1) YOU SUBTRACT THE BY PRODUCT 2) YOU APPLY THE PERCENTAGE
Joint Costing / Products
Joint products come from the same starting point, and then eventually "split off" and become different products. The goal is to allocate the early cost of that one process, to the final products if two or more final products are produced from the same raw material or input. Goal is to take the joint costs, whether from materials, labor or overhead and logically apply it to Product A and Product B.
By - products
Minor products of relatively small value that incidentally result from the manufacture of the main product. Proceeds are reduce the common costs or credited to miscellaneous income If there is a by-product produced from a joint costing process, the by product can sometimes be sold. The proceeds from the sale of the by-product can be used to reduce the joint cost OR the revenue from the sale of the by-product can be recorded as miscellaneous income.
Economic Valued Added (EVA)
NOPAT - $WACC -> Invested Capital WACC is hurdle rate EVA measures the excess of income after taxes (not counting interest expense) earned by an investment over the return rate defined by the company's overall cost of capital (WACC) EVA = Net Operating profit After Taxes (NOPAT) (EBIT X (1-T)) - Required Return (Invested Capital X WACC) Positive EVA = Stock Price /\ Negative EVA = Stock Price \/
