Final Exam Cost Accounting
acct for rework in process costing
1. normal rework-same as common normal in job 2. abnormal rework-same as job abnormal rework
2 methods for accounting by-products
1. nrv from sale of by-products deducted from joint costs b4 allocate to main products 2. proceeds from sale of by-products are treated as other rev
3 types of budgeting
1. periodic 2. rolling 3. zero-based
4 ways of setting standards
1. stretch 2. practical 3. minimum 4. mgt by exception
variable costs are caused by:
cost drivers
actual costs
cost incurred in present or past
key feature of job-order costing
cost of one job differs from that another and must be kept track of seperatly
J job costing rev
d-a/r c-rev
J job costing cogs
d-cogs c-fg
J job costing deprecation
d-moh c-accum dep
general J for allocating overhead
d-moh control c- dep/utlities/etc payable(cash
how to close moh-control and moh-allocated
d-moh-allocated c-moh-control c-wip c-fg c-cogs
J job costing indirect materials used
d-moh-control c-materials
JOB COST j FOR ABNORMAL SPOILAGE
debit: loss on abnormal spoilage debit: marterials inventory (recovered) credit: wip-job x
J conversion costs used in production dept 1
debit=wip dept 1 credit misc accts
RELEVANT costs and benefits
decideing whether to make changes to imporve quality consider these
budget creep
demand more money than needed to make achieving goals easier
design specs and customer satisfaction difference
design quality failure
objectives
dimension of performance you want to improve
genreal plant costs cost driver
direct costs
job order cost sheet
dm+dl+applied oh=product cost
three types of costs assigned to cost objects
dm, dl, and moh aka inventoriable costs (b/c are an asset)
costs allocated for many reasons
dmaking, fin stment reporting, cost reimbursements contracts
the production report
document used in a process costing system, details all manu quantities and costs, show the computation of cost per eup indicates the cost assignment to goods produced during the period
sales value at split off
doesn't require many predictions
single driver assumes:
driver generates same amt of oh. but conceals hidden differences(use rates should be diff) and ignores other activites that may drive differences ie: hidden driver
customer support
external failure cost
warranty
external failure cost
step 1 nrv
find ratio to allocate. g1= units* sp (sep costs)=x x/total all goods=ratio
what does a focus on quality do?
generally builds expertise in producing it, lowers the cost of providing it, creates higher satisfaction for customers using it and generates higher future revenues for the company selling it.
process further template in sales value at split off
good sell @split further rev units *sp f units*fsp xtra p - (sep cost) sep s&a - (units * m cost) total < or >
2 measures of profitability
gross margin, gross margin %
gross profit margin %
gross profit/revenue
what does bsc targets get compared to?
actual
operating income is u if
actual < std income
cost is u if
actual > std costs
operating income is f
actual > std income
actual incurred costs
actual costs*actual units
nrv
assume don't know sales price at split off
how to find cost of goods manufactured
beg bal wip +dm used +direct labor used +moh -end bal wip =cogm
`cogs calc
beg fg+cogm-end fg
fg end units inventory calc
beg fg+produced-sol=end fg
cogm calc
beg wip+dm+dl+moh-end wip=cogm
slack
build in room for budget which is bigger issue in rolling budget b/c its so fast
behavioral biases
cold biases, hot biases, combo biases
constant gross margin
combat disadv of gross margin in nrv, sales, and phsycial
shapely value
combo stand alone and incremental pshop= (pshop sell price+(incremental pshop price))/#of users
where do performance measures are from
company's vision, strategy, and objectives
fifo method of process costing
computes an avg cost per eup using only current production and current costs info; units and costs in beg i are accct for seperatly
difference between actual performance and design specifications
conformance quality failure
revenue allocation
use common costing
why use weighted avg process costin
vat sort of production (paint or chemicals)
operatin expense
vc +fc
absorption costing operation income calc
vc operting income-fmoh in invetory previous years+fmoh in I deferred to future periods
J dm-x used in production in dept 1
wip-deptx debit materials inventory credit
abormal spoilage definition
would be avoided if process and people work as they are supposed to. avoidable, controllable, and is a loss not inventoriable
appraisal costs
— inspecting and checking the product (may have several inspection points)
recipricol method assumption
most realistic b/c assumes that all service depts serve each other
hot biases
motivated reasoning, fundamental attribution error
salves value at split off
nee to know split off time sales price! template p1 ptotal sv@split (units *sp)=p1 To allocate (p1/ptotal)* total cost to make total column
design and sepc costs cost driver
number of producgts
compliance costs cost driver
number of products
shipping costs cost driver
number of shipments
machine repair cost driver
number of units
4 parts of each bsc areas
objectives, measures, targets, initiatives
method 1 by products
sales value of g1-add process cost=nrv at split off subtract sales value of by product(only subtracted in by-prod column and total)-remain joint costs (only in non byprod column and total)=gm then find gm %
by-prod method 2
sales value-add process cost=nrv at split off-allocated joint costs=gm then find gm%
what does the direct method assume
service depts don't serve each other, so they don't get any of each other's costs
what does std costing mean
set up std inputs, direct materials, direct labor, oh-variable oh, fixed oh
what is price variance called in vmoh
spending variance
flexible budget
std costs*actual units
volume related activity examples
supplies, lubricating oil, machine repair
physcial measures example
good #phys units ratio* total amt good 1: (good 1 phycial units/total phsycial units) x process cost total=allocation amt
how to find normal spoilage units
good units* percent of good units(given)
coordination-facilitating
helping people coordinate their decisions often across units
decision-facilitating
helping people make better decisions, primarily through presenting relevant information in a format that is easy to understand
operation costing
hybrid of job and process. are made in batches but vary model to model such as: clothes, jewelry, shoes
labor stds
ideal, practical, and minimal stds labor rate: want real cost of the employee
when is price variance unfave
if ap >budgeted price
why using gross margin in nrv sales and physical problem still?
if don't understand joing cost allocations here and should not be used for dmaking could lead to poor decisions
allocate over/under applied oh. 2.write off cogs
if immaterial, amount closed to cogs under: debit (inc) cogs over: credit (dec) cogs
how does bsc describe and implement an orgs strategy
Provides a language that executive teams can use to discuss direction and priorities Translates vision/strategy into a coherent and linked set of performance measures
when to not include and objective?
if your organization can't or won't tie it to an initiative If you can't identify an initiative, then you can't do much to control whether you are hitting the objective If you won't identify an initiative, the objective isn't that important
typical pitfalls for bsc
Senior management not committed One senior manager tries to build the scorecard alone Scorecard responsibilities don't filter down Treating the scorecard as a one-time event Mistaking the BSC for a systems project Introducing the BSC only for compensation
ah
actual direct labor hours used
flexible budget variance
actual dl vs flexible budget at same amount of units as actual. favorable if actual <=flex
ar
actual hourly wage rate
debit side of moh
actual oh
aq
actual quantity of input used
ap
actual unit price per unit of input
static budget variance is
actual vs static budget amt, favorable if ao<=to
variance analysis framework
actual------flex----static=static budget variance actual to flex=flex budget variance flex to static=volume budget variance
cost is favorable if
acuta <std costs
job costing examples
ad campaign, audit, aircraft assembly
how to find profit line profitability
add the costs that were allocated using abc for line + cogs=total costs subtract total costs from revenue to get operating income
when is spoilage found
at inspection point- the point where units are inspected or tested. any units that have passed inspectioni share some costs of normal spoilage
at end of period normal spoilage for process costing
at period end, take normal spoilage cost and spread it over good units that passed inspection in the current period
firsm should determine its ________ and then choose ____________ to measure strategy
competitive strategy; performance measures
J product was finished
d- finished goods-control c-wip-control
J sell spoiled units on acct for job costing
d-a/r c-materials control/inv
sold goods J
d-a/r (how much sold) c-sales rev (how much sold) d- cogs (actual cost) c-finished goods (actual cost)
J job costing cogm
d-fg c-wip
j write off cogs
d-many alloc c-moh control-actual c-overr alloc cogs d-under alloc cogs
normal and specific spoilage and job costing J
d-materials inventory (recovered) aka disposal value c-wip-job x
J how to allocate indirect costs ex: rent
d-moh control c- rent payable(cash)
J job costing misc manu oh
d-moh control c-misc acct
J normal and common spoilage and job costing
d-moh control d-materials inventory(recovered) c-wip-job x
j purchase materials on account (both indirect and direct)
d-raw m c-a/p
J job costing moh allocated
d-wip c-moh-alloc
dl for std cost system, wages pay
d-wip (sp*sq*ao) c-wage pay (ap*aq*ao), if dif need to add in dl efficiency and price variance
J job costing dm used
d-wip control c-materials
J for allocate costs using actual hours and estimated moh rate
d-wip control c-moh allocate
J job costing direct labor
d-wip control d-moh c-wage/pay
J for direct and indirect labor
d-wip control (direct lab) d- moh-control (indir lab) c- wages pay (total) wip and moh control are inventoriable costs
j allocate to the 2 jobs (can do for both materials and labor, if labor use wages pay not raw m)
d-wip job 1 d-wip job 2 c-raw material I (total) d-moh-indirec materials=x c-raw m inventory =x
J for a is dm and b is indirect materials
d-wip-control (dm=a) d-moh-control (indir m=b) c-raw m (total materials)
how to find profit line profitability when comparing lines
divide operating income by revenue for line to determine which is more profitable based on ranking (higher %=better)
conversion costs
dl and oh b/c are small relative to dm
supplies cost driver
dl cost
cogs
dm +dl+voh+foh
how to allocate one support dept
dual rate system
in general think balance scorecard measures cause
each other, aka learn and grow lead to high internal bus process to high customer perform to high fin performance.
unfavorable variance
effect of dec operating income relative to the budget amt
favorable variance
effect of increasing operating income relative to the budget amt
what does product quality support?
enviromental progress
MOH Rate
estimated moh/estimated base activity=total pool/total cost driver
costs assignment weighted vs fifo
fifo: costs carried fwd from prev period are assgined directly to completed weighted: calc the avg equiv unit cost of the work done to date regardless of when the work was done
why need to allocate joint costs among joint products?
figure out inventory values and cogs
activity based costing
first assigns costs to activities then to prodcuts based on product's consumption of activities
thearoy of constraints assumes all products other than direct materials are
fixed
performance measures should be balanced among:
performance drivers and outcome measures, obj/subj measures, ext/internal measures, fin/nonfin measures
if not inventoriable costs are...
period costs, b/c they are always expensed in same period they are incurred ex: sg&a and r&d expenses
combo biases
planning fallacy, escalation biases
process costing examples
postal delivery, oil refining
burden rate
predetermined oh rate acts as a tax on cost driver. sometimes could discourage behavior
budgeted costs
predicted, estimated to occur in future
cost of new part
prevention cost
examples of what costing: flour mill
process
examples of what costing: oil refinery
process
examples of what costing: pharmaceutical company
process
examples of what costing: tire manufacturer
process
key features of process costing
process costing, the challenge is determining how much work has been done and how to spread the costs over the WIP units and the completed ones. We use some kind of averaging to do our costing. We do not try to match up particular costs with particular units. We use an idea called "equivalent units". EUs measure production in terms of how much of an input has been added to it so far.
death spiral
process that begins by attempting to inc price to meet reported product cost. can cause demand for fewer units
operations process
produces and delivers existing products and services to customers Three common objectives (with measures): Increase process quality (Quality costs, Output yields (good output/good input), % defective units) Increase process efficiency (Process cost measures, Process productivity measures) Decrease process time (Cycle time, Velocity, Manufacturing cycle effectiveness (MCE))
undercosting
product consumes high level of resoucrs but is allocated low costs per unit
overcosting
product consumes low level of resources but is allocated high costs per unit
prevention costs
product design, vendor days, training and hiring intelligent workers
material handling cost driver
production runs
why use activity based costing?
products consume activites and activities consume resources
why use fifo process costing
products made in an assemply line
joint products
products that are made from same raw material and a joint process (can't be identified until split-off point)
examples of cost objects
products, services, departments
tm
sales-dm costs(only)
abc costing in admin
same as other abc
types of stand alone
sell price, prod cost, physical units
dual rate system
seperate the two departments that use the 1 support dept. 1. for vc use budegted rate*actual use=allocated for each dept using the support 2. to allocate fc budget rate(fc/total budget hrs)*budget use b/c fc related to capacity
batch related costs examples
setup costs, material handling, shipping costs
setup costs cost driver
setup hours
what is overhead
shared resources—resources consumed to achieve multiple goals, which therefore (in the terminology of cost accounting) must be allocated and applied to multiple cost objects,
when to use plantwide
similar products using same resources
acct for scrap in process costing
similar to common scrap in job.
DEPT OH RATE
similar to plantwide expcept oh cost pools and selected base are obtained by dept
single rate system
similar to pooled method
bottleneck
something that is operating at capacity with no excess
between actual and flex is
sp*aq, actual to that is price, that to flex is efficiency
flexible budget in variance anlaysis
sp*sq*ao
static in variance analysis
sp*sq*to
to find static budget for direct labor
sp*sq/unit *ao=dl
sp in voh variance analysis
sp=estimated voh costs/estimated base activity
what does flexible budget do between actual and static budget
splits static budget variance into sales volume variance and flexible budget variance
completed units what come from and go to
started and finished in curr period units goes to finished at end of period
end wip from and goes to
started but not finished in curr period goes to remain end wip and beg wip for next period
what does beg wip come from and go to
starts in prev period finished in curr peiod and becomes finished at end of period
static v actual results issue
static can still be technically correct, but is off b/c made more product or could be per unit cost is off
static budget
std costs*expected units, is planned
sh
std direct labor hours that should have been used
sr
std hourly wage rate
sq
std quantiy of inputs allowed for actual ouput achieved
sp
std unit price per unit input
initiatives
strategy intended to help achieve target
if it has control next to account name that means it has...
subsidiary accounts like payable control account has subsidary of electric payable and utilties payable
how to get abormal spoilage units
take the spoiled untis amt- the normal spoilage units
what is target vs actual
target is standard. is target output, standard price, standard quantity
are moh control and allocated permanent or temporary accounts?
temporary so closed at year end
when you change level of output
that means the flexible budget b/c it changes ao
quanity std
the amount of input that should be used per unit of output
if make more units than planned what happens to costs
the inc in volume with same fixed costs will cause overestimate costs
how to calc spoilage units total in process costing
transferred in +beg wip-completed units-end wip=spoilage
outcome measure
lagged indicator
performance driver
lead indicators
practical capacity and dual rate system
leaves some fc unallocated b/c operating depts aren't really causing the support dept to be so big. use total service hrs of usage possible
what if can process further in sales value at split off
less units but inc. sell price and inc. cost b/c of marketing cost. so only look at relevant costs aka dif between unfinished and finished good to determine if worth it
targets
level of measure to which performance is compared
efficiency variance u or f
u-under skilled worker f-more productive ppl or better maintained machines
undercosted product in cross-subsidization
uc product is left with too little cost so seems more profitabel than really is
allocated<acutal
under-allocated
dif between static and flexible budget is
unit difference
units accounted for calc
units completed +units in end wip
how to find equiv units
units completed+units in end wip=equiv units do this for material and conversion costs
what is spoilage
units damaged/ruined during production and can't be sold as reg product and costs the firm money
calc units to account for
units in beg wip +units started=total units to acct for
J loss from abnormal spoilage PROCESS
loss abnormal spoilage-debit wip-dept(last number) credit
lubricating oil cost driver
machine hours
process costing types of costs
material costs applied at specific poiknts, conversion costs applied uniformally, transfer costs are transferred from one dept to other
to allocate moh through out year what do we need to do BEFORE the year starts?
moh rate to apply to moh costs
how to find moh allocated
moh rate* actual cost driver base activity
spoilage and process costing
need to compute spoiled units both normal and abormal. debit abormal loss and normal is inventoriable in either all completed or prorated to wip and completed.
incremental common costing
need to find primary user of good. 1. pshop(prim)=individaul sell rpice 2. wood(increm)=total package-the pshop(prim)sell rpice 3. reverse primary user to find pshop incremental cost
material stds
need to know inputs needed, qualtiy of inputs, quantities of inputs at specific quality
abnormal wip and job costing
need to take costs of those units out of wip and put in loss acct if dispose of them
scrap J @ time of sale for job costing
no J entry, put in stores, sales results in credit to wip-control (if specific) or moh (if common)
acct for scrap in job costing
no cost assigned to scrap, but difference is scrap attirbutedd to specific job or all jobs
fmoh variance analysis
no spending or efficiency variance b/c fixed. and volume variance is production variance
do you min or max something in bsc?
no you make trade-offs among bsc items while trying to make all the targets
is there a volume variance in vmoh variance analysis?
no, but flex budget is amt allocated and estimated based on cost driver
two types of spoilage
normal and abnormal
three types of rework in job costing
normal for specific jobs, normal common to all jobs, abormal rework
normal spoilage definition
normal part of production process. -unavoidable -uncontrolabe with current production capabitlies -are inventoriable
fmoh is
not allocated, treat as operating expense in income statement
joint costs and coswt drivers
not based on drivers therefore should not be used for decision making about individual products only products together
std costing and decision making
observing varainces from std costs, mgrs must weigh the costs and benefits as well as probability of each state to determine if should investigate
overcosted in cross-subsidization
oc product absorbs too much cost so seems less profitable than really is
dept allocation method
oh costs are traded to seperate depts and applied to products using a dept allocation rate
trace or allocate for auto station? oil, rent, phone bill, supervisor salary, oil filters
oil-t rent-a phone bill-a supervisor salary-allocate oil filters-t
when making a decisions it is important to consider__________ costs which are csots that ______ between alternative courses of action
relevant, differ
normal rework attributable to specific job
rework costs are charged to that job
when to use physcial quantities method
output product price are volatile, signficant processing occurs between split-off pt and first pt of marketability, product prices are not set by market. assume no processing further b/c at split off pt
by-products
outputs of joint production that are releativly minor in quantity or value
allocate>acutal
over-allocated
weighted avg method of process costing assumptions
units produced are essentially the same. produced in stages by diff departemnets. costs accum for each dept then transferred to next using avg cots of units transferred. cost determined at end of period
BROAD AVERAGING
use broad averages to allocated costs uniformally regardless of how incurred, but caused products using fewer resources to be overcosted and products using more resoruces to be undercosted
use fifo to calc value of end fg inventory
use fg e/b units (dm +dl+moh-allocated per unit price) which changes cogs balance!
cost allocation
use manufacturing overhead(moh) ex: utilities, insurance, depreciation, indirect materials/labor
physical units stand alone
use physical units within the total package to prorate. 1pshop/(1 pshop +1 wood) *sell price of package
prod cost stand alone
use production costs prorated. pshop prod cost/(pshop and wood prod cost) * package sell price=pshop costs
for direct materials variance analysis using aq of bought and used
used bought for dif in price variance, use used for efficiency variance
what is job costing
used when products identifiable in batches or "jobs". need costs for managerial decisions(pricing) and fin reporting
decision-influencing
changing the behavior of a person who is attempting to garner rewards or avoid punishments.
abnormal rework
charged to Loss from abnormal rework
normal rework common to all jobs
costs charged to moh and spread through oh allocation over jobvs
calc the cost per equiv unit of production
costs to acct for divided by equiv units cost per equiv unit
what do you assign to cost objects
costs, some easy to track, (direct), some cannot trace (indirect) so use cost allocation
how can accountants add value?
create and enable value
each budget consists of
1. # of units 2. selling or service price per unit 3. variable and fixed costs 4. if acutal vs budget, everything will be off
what are variances used to evaluate
1. effectiveness 2. efficiency
inc motivation, empowerment and alignment (measures)
% of processes with real-time feedback mechanisms % of service employees with online access to customer and product information
calc manu cost per unit
(dm+dl+oh)/units (if vmc then subtract fixed cost rate)
internal business process measures and time
-Average manufacturing time for key products. -Manufacturing cycle efficiency for key processes. -Defective units produced at bottleneck operations. -Average reduction in setup time and processing time at bottleneck operations.
advantages of coq(financial measures)
-COQ focuses managers' attention on how poor quality affects operating income. -COQ help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and appraisal costs to eliminate internal and external failure costs. -COQ measures assist in problem solving by comparing costs and benefits of different quality-improvement programs and by setting priorities for cost reduction.
balance scorecard financial persepctive
-Concerned with the global financial consequences of the other three perspectives Most emphasize profitability Three themes: Revenue growth and mix Cost reduction or productivity improvement Asset utilization Plus, consider product life cycle (growth, sustain, harvest)
learning and growth measures and time
-Employee satisfaction. -Number of employees trained in managing bottleneck operations.
learning and growth persepective for quality
-Experience and qualifications of design engineers. -Employee turnover ratio. -Employee empowerment. -Employee satisfaction. -Employee training.
job costing
-Heterogeneous products or services -Costs are assigned to a distinct unit or batch -Resources are expended to bring a distinct product or service to market for a specific customer -Spread costs over items in the job -Typically produced for sale
process costing
-Homogeneous products or services -Costs are assigned to a mass of similar units -Resources are used to mass-produce a product or service and not for any specific customer -Spread costs over # of whole units produced -Typically produced for inventory
operations
-Hybrid costing system -Costs are assigned by batch -Heterogeneous materials but homogenous conversion processes
relevant revenues and costs delays
-Manufacturing cycle times affect both revenues and costs. -Revenues are affected because customers are willing to pay a higher price for faster delivery. -Relevant costs will likely include inventory carrying costs.
Advantages of Nonfinancial Measures of Quality
-Nonfinancial measures of quality are often easy to quantify and understand. -Nonfinancial measures direct attention to physical processes and to areas that need improvement. -Nonfinancial measures provide immediate short-run feedback on whether quality-improvement efforts have succeeded. -Nonfinancial measures are useful indicators of future long-run performance.
Nonfinancial Measures of Internal-Business-Process Quality
-Percentage of defective products manufactured. -Percentage of reworked products. -Number of different types of defects analyzed using control charts, Pareto diagrams and cause-and-effect diagrams. -Number of design and process changes made to improve design quality or reduce the costs of quality.
cold biases
-availability bias, halo effect, functional fixation
what types of inventory do service companies have?
-indirect materials (office supplies) -service in process(period end in middle of job) -parts (repair companies)
flexible budget variance could be caused by
1. efficiency of dl 2. cost/price/ wage of dl 3. check sp*aq to see if q chagnes
three options to correct moh rate and close accounts at year end
1. adjust allocate rate 2. write off to cogs (easiest) 3. prorate
to stage cost allocation to dept costing
1. allocate oh costs to dept 2. allocate dept oh costs to products or services aka can use dif cost driver
what are the functions of management reporting systems?
1. attention direction 2. decision-facilitation 3. decision-influencing 4. coordination-faciliation
theory of constraints
1. bottleneck slows everything down 2. so concentrate on maximizing throughput margin (tm) when dmaking 3. aka want to max relevant revenues - relevant costs
step 1 constant gm %
1. calc gross margin % for all products put together total sales volum-joint cost(process cost)-seperable cost=gm then find gm %
6 steps to process costing
1. calc phystic units to account for 2. calc physcial units accounted for (make sure equals step 1) 3. determine equivalent units produced 4. determine total cost to acct for 5. calc the cost per equiv unit of production 6. assign costs to inventories
how to set moh rate
1. choose allocation base (cost driver) 2. estimate cost driver base activity for the year
how to allocate over/under applied overhead 1. adjust allocate rate
1. compute actual moh rate at year end benefit: timely and convenient of normal costing
three techniques for identifying and analyzing problems (internal-business-process perspective)
1. control charts 2. pareto diagrams 3. cause-and-effect diagrams
2 attributes of quality products
1. design quality 2. conformance quality(accts better at measuring this)
why do we have two ways to allocate?
1. different assumptions or cost drivers process 2. different mang incentives
how to allocate 2+ support departments
1. direct method 2. step-down method 3. recipricol method
how to focus on the bottleneck
1. eliminate idle time at bottleneck 2. only process products that inc. tm 3. don't run non-bottleneck processes at capacity b/c inc. carrying cost 4. try to shift work from non-bneck machines to bneck machines 5. focus on quality of units going through bneck and eliminate spoilage @ bottleneck
two typs of proration
1. ending inventory balances 2. moh already in accounts
purposes of joint product costing
1. fin statement reporting 2. legal purposes (cost reimbursement, insurance, rate regulation)
4 steps to activity based costing
1. id activities that consume resources and assign costs to them 2. id the cost driver of each activity 3. compute a cost rate per coswt driver unit or transaction 4. assing costs to products by multiplying the cost driver rate by the volume of cost driver units consumed by the product
for foh variance analysis:
1. identify and estimate foh 2. chose base 3. set sq per unit 4. estiamte amt of base for yr.=sq*to 5. sp=estimate foh/estimate base
three major objectives of learnig and growth
1. inc. employee capabilities 2. inc motivation, empowerment and alignment 3. inc. info systems capabilities
three main processes of internal business process perspective
1. innovation process 2. operations process 3.postsales service process
two ways to avoid info overload
1. managerial erports are brief (key perform indicators) 2. organize kpi into meaningful framework
three recurring themes
1. match reporting systems to organizational needs, 2. managerial reporting mitigate and are comprised by intra-organizational conflict 3. no system is perfect
what does cost of quality report include
1. prevention costs 2. appraisal costs 3. internal failure costs 4. external failure costs
3 decisions invovled in unit stds
1. quantity stds 2. price std 3. cost std
1. four methods of allocating joint costs
1. salve value at split off 2. nrv 3. physcial measures 4. constant gross margin %
two aspects of job costing
1. some direct traced 2. costs can't be traced so allocated
common costs
1. stand alone 2. incremental 3. shapely value method
3 concepts of budgeting
1. static budget 2. flexible budget 3. actually incurred costs
RECIPRICOL METHOD STEPS
1. write costs of service depts in equation from total Scosts=direct cost service dept+ costs allocated to service dept aka s1=800k+20%s2 2. solve equations simultaneously 3. use template
opportunity cost from poor quality
1.Contribution margin and income foregone from lost sales. 2.Lost production. 3.Lower prices. These opportunity costs are not recorded in the financial accounting systems.
cause-and-effect diagrams
1.Identifies potential causes of defects. -Problems identified by the Pareto diagram are analyzed using cause-and-effect diagrams. -Also called fishbone diagrams because they resemble the bone structure of a fish. -The large "bones" coming off the backbone represent the main categories of potential causes of failure. -The four categories are: human factors, methods and design factors, machine-related factors and materials and components factors.
two types of time drivers
1.Uncertainty about when customers will order products and services. 2.Bottlenecks due to limited capacity. A bottleneck occurs in an operation when the work to be performed approaches or exceeds the capacity available to do it. Managers should use the five-step decision-making process to exam opportunities
% of fortune 1000 using bsc
60%
failure rate of bsc implementation
70%
how to cal gross profit
rev-cogs=gross profit
minimum stds
: Level of performance that the firm can be quite certain at least meeting, probably exceeded.
gross margin%
=gross margin/rev
process costing definition
All units processed are treated as the unit of output. Costs are allocated to each unit.
periodic
Budget for some established time frame (i.e., one month, one quarter, one year)
stretch stds
Challenging levels of performance that are attainable, but more likely to be missed than exceeded. Promotes harder working employees, but could backfire
why is time a competitive tool?
Companies view time as a driver of strategy. Managers need to measure time properly to manage it. and need to measure causes and costs of delays
how control charts created
Control charts are a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time. Each observation is plotted relative to specified ranges that represent the limits within which observations are expected to fall. Only those observations that fall outside the control limits are regarded as nonrandom and worth investigating.
process costing in multi-dept setting
Costs of completed units of predecessor departments are treated as input material costs in successor departments The additional cost component is called transferred-in or prior department cost Always has a percentage completion factor of 100% Handled the same as any other cost element in the calculations of EUP and cost per EUP A successor department may add additional raw material to the units that have been transferred in or may simply provide additional labour and overhead
two operational measures of time
Customer response time: how quickly companies respond to customers' demands for their products and services. On-time performance: indicates how reliably companies meet their scheduled delivery dates.
customer measures and time
Customer-response time. On-time performance
J recording actual MOH COSTS
D-MOH-CONTROL C- rent pay c- insurance pay c- electric pay c-janitorial pay
bsc design checkpoints
Do the measures reflect the divisional strategic planks? Are they linked to the organisational strategies? Can you identify cause and effect links between the measures? For example, would you be able to construct a strategy map of your key relationships? Are your measures included within the correct perspective? Do you have an appropriate combination of financial/non-financial measures and leading/lagging measures? What difficulties did you experience deciding on the measures?
inc employee capabilites (measures)
Employee satisfaction ratings, employee turnover %, employee productivity (e.g., revenue per employee) Employee hours of training, % of critical job requirement filled
internal bus process bsc perspective
Enable business to deliver on value propositions Satisfy expectations re: financial returns Operations management processes Customer management processes Innovation processes Regulatory processes
learning and growth bsc perspectives
Enable the accomplishment of the other three perspectives' objectives Infrastructure needed to create long-term growth/improvement People Systems Organizational procedures
behavioral issues in implementing abc
Gain the support of top management and create a sense of urgency. Create a guiding coalition of managers throughout the value chain for the ABC effort. Educate and train employees in ABC as a basis for employee empowermen.t Seek small short-run success as proof that the ABC implementation is yielding results. Recognize that ABC is not perfect. (better costs but complex system)
when would the added throughput margin (tm) no longer be relevant
If the market is the same number of units don't have to fix b/c no point in increasing if at capacity in market, in this example there is unlimited demand so fix bottleneck
practial stds
Level of performance that are expected, as likely to be missed as exceeded. 50/50 could obtain
WHEN TO USE DEPT ALLOCATION
MULTIPLE PRODUCTS USING RESOURCES DIFFERENTLY
don't need to memorize just be familiar with nonfinancial measures of customer satisfaction include:
Market research information on customer preferences for and customer satisfaction with specific product features. Market share. Percentage of highly satisfied customers Number of defective units shipped to customers as a percentage of total units shipped. Number of customer complaints. Percentage of products that fail soon after delivery. Average delivery delays. On time delivery rate
customer possible objectives with measures( )
Market share (% market share) Customer retention (% repeat customers, # new customers) Customer satisfaction (customer satisfaction ratings)
5 key mgt processes important to successful strategy implementation
Mobilization - orchestrating change through leadership Strategy translation - defining SM, BSC, targets and initiatives Organization alignment - corporate, SBUs, support units, external partners, and boards of directors Employee motivation - education, communication, goal-setting, incentive compensation, and training Governance - integrating with planning, budgeting, reporting, and review
zero-based budget
Must justify budget items relative to not being funded Often used in government budgeting
pareto diagrams
Observations outside control limits serve as inputs for Pareto diagrams. Pareto diagram—a chart that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent.
cost reduction
Possible cost reduction objectives: Per unit of product Per customer Per distribution channel Measures involve calculations of cost for each of these, as well as trends in per unit costs Activity based costing useful for calculating the cost of customers, distribution channels, etc. Principal asset utilization objective is to improve asset utilization Possible measures include: ROI, EVA
revenue growth
Possible objectives (with performance measures): Increase number of new products (% of revenue from new products) Create new applications for existing products (% of revenue from new applications) Develop new customers and markets (% of revenue from new customers) Adopt a new pricing strategy (Profitability by product or customer)
quality
Quality—the total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use.
financial measures and time
Revenue gains or price increases from fewer delays. Carrying costs of inventories.
DIRECT METHOD TEMPLATE
S1 S2 P1 P2
balance score card customer perspective
Source of the revenue component of the financial objectives Identify measures important to customer/market segments Generic: customer satisfaction, retention, acquisition, profitability, and market share Value proposition: product/service attributes, customer relationship, and image/reputation
control charts
Statistical quality control (SQC) is a formal means of distinguishing between random and nonrandom variations in an operating process. Random variations occur, for example, when chance fluctuations in the speed of equipment cause defective products to be produced. Nonrandom variations occur when defective products are produced as a result of a systematic problem such as an incorrect speed setting, a flawed part design, or mishandling of a component part.
template for 2+ support dept cost allocation FOR STEP DOWN AND RECIPRICOL
TO FROM s1 s2 p1 p2 dept costs s1 s2
why ceos fail or succeed
The mistaken belief that developing the right strategy will enable a company to rocket past its competitors. In reality, strategy is less than half the battle. In the majority of cases - we estimate 70% - the real problem isn't bad strategy... it's bad execution. Foundation of strategy is the selection and executive of hundreds of activity Must be understood and executed by everyone
design quality
They are designed to provide the customer with features they want
conformance quality
They are produced in a way that conforms to the design—they are not defective.
rolling
Update information after a period—such as have a yearly budget that is updated after the first quarter aka budget creep
Weighing the costs and benefits of improving quality
When faced with a quality issue, managers should evaluate each alternative identifying the relevant costs and benefits for each alternative. Ask: How total costs and total revenues will change under each alternative.
I goes up which method has higher amt for inventory
abosoprtion b/c foh is in inventory, but not if not inventory at all or no foh
if invnetoyr goes up, which method has higher operting income
absorption b/c foh stays in invetory. sell<produce
4 dimensions of firm performance measures
aka balance scorecard 1. financial persepective 2. customer perspecctive 3. internal process perspective 4. learning and growth
greatest gap for mgt is
alignment
plant wide allocation method
all oh costs are recorded in one cost pool and applied to products using one oh allocation rate.
process costing
all units are treated as the unit of output. cost allocated to each unit. homogenous products. mass produce. spread costs over # of whole units produced. typcially produced for inventory
how to allocate indirect costs that can't be traced
allocate as actually incur and placed in MOH control account. recording ACTUAL COSTS
prorate means
allocate proportionally through wip, fg and cogs
what is another name for flexible budget in variable manufacturing oh analaysis?
allocated amt
credit side of moh
allocated overhead
cost std
amt that it should cost to manufacture a unit of output
price std
amt that should be paid for the quantity of input to be used
innovation process
anticipates emerging and potential needs of customers and creates new products and services to meet these needs Possible objectives (with measures): Increase # of new products (Actual # new products) Increase revenue from proprietary products (Revenues from proprietary products) Decrease time to develop new products (Development cycle time (time to market)
cost object
anything where measurement of cost is required
actual in variance analaysis
ap*aq
actual oh in voh variance analysis
ap*aq
quantiy variance is favorable if
aq < sq
why do we allocate costs b4 year end?
b/c need info for pricing and don't want to overstate retained earnings
why do you need standards for budgeting?
b/c not everyone's goals are aligned
why is variable costing useful for dmaking?
b/c relevant cost and prevents managerial manipulation b/c in absorption can over produce Inventory
why is the moh considered normal costing
b/c using a normalized (yearly) rate-an average
physical qunatities method
based on measure volume, weight or other measure at split off. use
how to find direct materials used
beg bal direct materials +purchases -end bal direct materials =dm used
cogs
beg bal finished goods +cogm -end bal fg =cogs
costs to account for calc
beg wip+costs incurred during first month=total costs to account for. do this seperatly for materials and conversion costs then add totals
three buckets of inventory
beg wip, completed units, end wip
costs are also classified by:
behavior when the amount of production changes 1. variable 2. fixed
above bsc in usage by companys
benchmarking, strategic planning, mission/vision statements, customer relatinshiop management, outsourcing
what measures do mgrs use along the time dimension
both fin and nonfin measures
what do do to adjust moh at year end
budget rate d/n = actual rate
allocate moh calc
budgeted moh rate * actual cost drivedr
step 2 constant gm%
cacl joint costs and gm for each product using gm% found in step 1 g1: sales volume g1*gm%. take total rev(sales volume) subtract any sep costs and subtract gross margin to get joint costs!
when abormal spoilage is expenense/noninventoriable and job costing what happens
carrying cost of inventory is lwoer
normal and common and job costing
casued by general prodcution process used for all jobs (included in estimate of OH)
normal and specific spoilage and job costing
caused by something about particular job. leave net cost in wip-job x only recognize disposal value
product related cost examples
compliance costs, design and sepc costs
if actual cost is less than standard costs aka lower than expected
cost is favorabel
actual costs > std costs therefore higher than expected
cost is unfavorabel
when inventory sold, costs become an expense on income statement called
cost of goods sold (cogs), help with matching rev and expenses
measures
data used to asses performance on the objective
quantiy variance
dif betwee aq and sq *sp
price variance
dif between ap and s price *aq
dif between flex and actual is
difference in cost
two types of direct costs
direct labor and direct materials, easy traced b/c directly related to end product
why allocating support dept costs hard?
exist to serve other departments in the firm, including operating/production departments Some of these departments have costs which we would ultimately want to allocate to our products. However, the link to product is very indirect. So, instead we will allocate to other departments—and include in them in MOH which we allocate to products.
price variance f or u
f=lower price supplier/quantity discounts u-dm prices less effeictivly used than planned
fg J
fg inventory debit and credit wip-dept (last dept)
annual fixed manu cost calc
fixed oh annualized + deprecation expense in year
static budget variance is
for operating income, actual vs static
creating value
formulation of strategies, goals, and objs, tactical involvement
allocated remaing joint costs in method 1 and 2
g1 sales value/sales value total of all but byprodcut. multiply by the total in the column to the far right
facility related cost examples
general plant costs and plant admin costs
attention-directing
inducing people to pay attention to, and talk about, one issue instead of another
rework
internal failure cost
why called absorption costing
inventory absorbs all manu costs, but can obscure which costs will actually be relavent across alt courses of action
what is a time driver
is any factor that causes a change in the speed of an activity when the factor changes.
main diff between variable and abs costing
is the acconting for Fixed OH manu costs
if a variance is favorable
its credited
if a variance is unfavorable
its debited
@ time of production scrap in job costing J
j entry to materials control assign value due to delay. sales=credit wip control if specific and moh if common
examples of what costing: ad agency
job
examples of what costing: charetered acct firm
job
examples of what costing: custom furn manufacturer
job
examples of what costing: med care facility
job
what are costs up to split point?
joint costs, after are considered seperable costs
mgt by exception
managers investigate differences between budget/standard and actual performance
cost per equiv unit calc
manufacturing cost in the period/equivalent units for the period
operation costing
on a repetitive bais used in situations where products have some common characteristics and also some individual characteristics. Shoes, for example, have some common characteristics in that all styles involve cutting and sewing that can be done sis, using the same equipment and following the same basic procedure. Shoes also have individual characteristics. Some are made of expensive leathers and others may be made using inexpensive synthetic materials. In a situation such as this, where products have some common characteristics but also must be handled individually to some extent, operation costing may be used to determine product costs. Products are typically handled in batches when operation costing is in use, with each batch charged for its own specific materials. In this sense, operation costing is similar to job order costing. However, labor and overhead costs are accumulated by operation or by department, and these costs are assigned to units as in process costing. Examples of other products for which operation costing may be used include electronic equipments (such as semi conductors), textiles, clothing, and jewelry (such as rings, bracelets, and medallions). Products of this type are typically produced in batches, but they can vary considerably from model to model or from style to style in terms of the cost of raw materials inputs. Therefore, an operation costing system is well suited for providing cost data.
foregone contribution margin
one of the opportunity costs of having low quality
cross subsidization
one product is undercosted then at least one other is overcosted
enabling value
ongoing assessment and operational participation
if actual operating income is higher than std income therefore higher than expected
operating income is favorabel
if actual < std income is lower than expected
operating income is unfavorable
problems with physcial measures, nrv, and sales
profitability for the products can vary and therefore can lead to poor dmaking
sell price stand alone
prorate costs in proportion to stand alone costs ex. (pshop cost/(pshop+wood costs)*package cost=pshop cost
postsales service process
provides services to customers after the product or service has been delivered Possible objectives (with measures): Increasing quality of postsales service (First pass yields; i.e., the % of customer requests resolved with one attempt) Increasing efficiency of postsales service (Service productivity measures) Decreasing postsales service process time (Cycle time for service requests
step 2 nrv
ratio found* process cost total
three types of inventory
raw materials, work in process, finished goods
step down method assumption
recog some service depts serve others but can't recog that service goes both ways
what happens to bad prodcut remains in job costing of normal and specific spoilage
remains part of the cost of the job
scrap
residual material
why no actual rates for fc in dual system?
responsibiltiy accounting aka people held responsible for items they control. ex. maintence costs not always maintence mgrs fault
gross margin used for nrv, (can be used for sales, nrv and physcial)
rev good 1-sep costs(if any)- joint cost found in nrv=gross margin from there can get gross margin %
gross margin
rev-cogs=gross margin
what are all units in process costing assumed to receive?
the same amt of dm, dl, and direct manu OH. b/b and e/b hard to fin
clac to assign costs to inventory
this should balacne with costs to acct for: add goods transferred out, and end wip
what does quality management and measurement practices do?
to find cost-effective ways to reduce the environmental and economic costs of air pollution, wastewater, oil spills, and hazardous waste disposal.
find cogm per unit
total cogm/total units made
budgeted moh rate
total cost poo/cost driver
allocate over/under apply oh 3. prorate
total end balances of wip, fg, and cogs then find % in each balance. take each percent against amt and if over allocate credit, under allocate debit accounts
plantwide OH rate
total estimated OH/total estim base(determine best base) use to allocated oh costs to ALL PRODUCTS
step 3 constant gm %
total joint costs found for each good=the total processing cost
plant admin costs cost driver
vaLUE ADDED
how to reconile abs and variable operating income
variabel oi-foh b/b+foh e/b=absorption oi
what is the difference between static and flexible budget?
volume(output of units)
cost hierarhcies
volume, batch, product, facility
TO FIND OUT IF better off with old or new part relevant costs
want lowest cost old: rework, customer support, warranty new: extra contribution margin, cost of new part
define quality
way to differentiate your product.
if indirect costs can't be traced
we pool costs, then allocate the pool over our jobs
two methods of process costing
weighted avg and fifo
equiv units weighted avg vs fifo
weighted avg: cost of all work done in the current period with work done in precedcin period on goods cf on wip fifo: euiv units are determined considering work done this period only
fifo method vs weghted avg unit costs
weighted avg: smoothoes out unit costs month to month fifo: assumes the work requried to finish incomplete units is done at beg of month
calc unit costs weighted vs fifo
weighted: divid total costs by total work done regardless of when the work was performed fifo: only current costs are considered in determining the cost per equiv unit
external failure costs
when defective units are shipped—costs of warranty work, lost sales' contribution margin, recalls -Some of these costs are much easier to quantify and report than others. -They could go on the balanced score card too—Cost of Quality (CoQ) is a financial measure.
internal failure costs
when units are defective and you catch it before it leaves the firm (spoilage, rework) -A few defects may not be a big deal (too expensive to get rid of them completely) -But, if there are a lot, then it will likely be worthwhile for a firm to do something to correct the problem
for process costing what does DM, DL and OH go into?
wip of each dept then to FG then cogs
completed units transfrred to other dept J
wip-dept2 Debit wip dept 1 credit