cost & management accounting techniques

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Cost & Management Cost & Management Accounting Techniques Accounting Techniques Must for Effective Decision Making Must for Effective Decision Making BY: BY: A A AMIR AMIR INSTITUTE OF COST & MANAGEMENT ACCOUNTANTS OF PAKISTAN

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COST AND MANAGEMENT ACCOUNTING TECHNIQUES: MUST FOR EFFECTIVE DECISION MAKING

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Page 1: Cost & Management Accounting Techniques

Cost & Management Cost & Management Accounting TechniquesAccounting TechniquesMust for Effective Decision Must for Effective Decision MakingMaking

BY:BY:

AAAMIRAMIR

INSTITUTE OF COST & MANAGEMENT ACCOUNTANTS OF PAKISTAN

Page 2: Cost & Management Accounting Techniques

CONTENTSCONTENTS

Cost & Management AccountingCost & Management Accounting

Cost & Management Accounting Cost & Management Accounting TechniquesTechniques

ConclusionConclusion

Page 3: Cost & Management Accounting Techniques

Cost & Management AccountingCost & Management Accounting

The Process of IdentifyingMeasuringAnalyzingInterpretingCommunicating Information

Page 4: Cost & Management Accounting Techniques

TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Enterprise Cost ManagementEnterprise Cost Management

Page 5: Cost & Management Accounting Techniques

The Make or Buy DecisionThe Make or Buy Decision

A decision concerning whether an item A decision concerning whether an item should be produced internally or should be produced internally or

purchased from an outside supplier is purchased from an outside supplier is called a “Make or Buy” decision.called a “Make or Buy” decision.

Let’s look at the Astech Company example.Let’s look at the Astech Company example.

Page 6: Cost & Management Accounting Techniques

The Make or Buy DecisionThe Make or Buy Decision Astech manufactures part 4A that is Astech manufactures part 4A that is

used in one of its products.used in one of its products. The unit product cost of this part is:The unit product cost of this part is:

Direct materials $ 9 Direct labor 5 Variable overhead 1 Depreciation of special equip. 3 Supervisor's salary 2 General factory overhead 10 Unit product cost 30$

Page 7: Cost & Management Accounting Techniques

The Make or Buy DecisionThe Make or Buy Decision Equipment used to manufacture part 4A has no resale Equipment used to manufacture part 4A has no resale

value.value.

Total general factory overhead, which is allocated on Total general factory overhead, which is allocated on the basis of direct labor hours, would be unaffected by the basis of direct labor hours, would be unaffected by this decision.this decision.

The $30 unit product cost is based on 20,000 parts The $30 unit product cost is based on 20,000 parts produced each year.produced each year.

An outside supplier has offered to provide the 20,000 An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part.parts at a cost of $25 per part.

Should we accept the supplier’s offer?Should we accept the supplier’s offer?

Page 8: Cost & Management Accounting Techniques

Cost Per Unit Cost of 20,000 Units

Make BuyOutside purchase price $ 25 $ 500,000

Direct materials 9$ 180,000 Direct labor 5 100,000 Variable overhead 1 20,000 Depreciation of equip. 3 - Supervisor's salary 2 40,000 General factory overhead 10 - Total cost 30$ 340,000$ 500,000$

The Make or Buy DecisionThe Make or Buy Decision

20,000 × $9 per unit = $180,00020,000 × $9 per unit = $180,000

Page 9: Cost & Management Accounting Techniques

Cost Per Unit Cost of 20,000 Units

Make BuyOutside purchase price $ 25 $ 500,000

Direct materials 9$ 180,000 Direct labor 5 100,000 Variable overhead 1 20,000 Depreciation of equip. 3 - Supervisor's salary 2 40,000 General factory overhead 10 - Total cost 30$ 340,000$ 500,000$

The Make or Buy DecisionThe Make or Buy Decision

The special equipment has no resale The special equipment has no resale value and is a sunk cost.value and is a sunk cost.

Page 10: Cost & Management Accounting Techniques

Cost Per Unit Cost of 20,000 Units

Make BuyOutside purchase price $ 25 $ 500,000

Direct materials 9$ 180,000 Direct labor 5 100,000 Variable overhead 1 20,000 Depreciation of equip. 3 - Supervisor's salary 2 40,000 General factory overhead 10 - Total cost 30$ 340,000$ 500,000$

The Make or Buy DecisionThe Make or Buy Decision

Not avoidable; irrelevant. If the product is dropped, Not avoidable; irrelevant. If the product is dropped, it will be reallocated to other products.it will be reallocated to other products.

Page 11: Cost & Management Accounting Techniques

The Make or Buy DecisionThe Make or Buy Decision

Should we make or buy part 4A?Should we make or buy part 4A?

Cost Per Unit Cost of 20,000 Units

Make BuyOutside purchase price $ 25 $ 500,000

Direct materials 9$ 180,000 Direct labor 5 100,000 Variable overhead 1 20,000 Depreciation of equip. 3 - Supervisor's salary 2 40,000 General factory overhead 10 - Total cost 30$ 340,000$ 500,000$

Page 12: Cost & Management Accounting Techniques

The Make or Buy DecisionThe Make or Buy Decision

DECISION RULEDECISION RULEIn deciding whether to accept the outside In deciding whether to accept the outside

supplier’s offer, Astech isolated the supplier’s offer, Astech isolated the relevant costs of making the part by relevant costs of making the part by

eliminatingeliminating:: The sunk costs.The sunk costs. The future costs that will not differ The future costs that will not differ

between making or buying the parts.between making or buying the parts.

Page 13: Cost & Management Accounting Techniques

TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Enterprise Cost ManagementEnterprise Cost Management

Page 14: Cost & Management Accounting Techniques

Impact of JIT Inventory MethodsImpact of JIT Inventory Methods

In a JIT inventory system . . .

Productiontends to equalsales . . .

So, the difference between variable andabsorption income tends to disappear.

Page 15: Cost & Management Accounting Techniques

TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Enterprise Cost ManagementEnterprise Cost Management

Page 16: Cost & Management Accounting Techniques

Inventory ManagementInventory Management

Page 17: Cost & Management Accounting Techniques

Qunatity DiscountsAvoid DisturbanceReduce number of ordering / setup Hedge against inflationMeet Unexpected DemandsQuantity Discounts

When to orderHow much to orderBuffer StockMaximum InventoryHow often to review stock

E O QR O P

Page 18: Cost & Management Accounting Techniques

TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Enterprise Cost ManagementEnterprise Cost Management

Page 19: Cost & Management Accounting Techniques

BudgetinBudgetingg

Define goalDefine goaland objectivesand objectives

Uncover potentialUncover potentialbottlenecksbottlenecks

CoordinateCoordinateactivitiesactivities

CommunicatingCommunicatingplansplans

Think about andThink about andplan for the futureplan for the future

Means of allocatingMeans of allocatingresourcesresources

Page 20: Cost & Management Accounting Techniques

TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Investment DecisionInvestment Decision Robust DecisionRobust Decision Enterprise Cost ManagementEnterprise Cost Management

Page 21: Cost & Management Accounting Techniques

Variance AnalysisVariance Analysis

Material VariancesMaterial Variances

Labor VariancesLabor Variances

Factory Overhead VariancesFactory Overhead Variances

Page 22: Cost & Management Accounting Techniques

TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Investment DecisionInvestment Decision Robust DecisionRobust Decision Enterprise Cost ManagementEnterprise Cost Management

Page 23: Cost & Management Accounting Techniques

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

- 100 200 300 400 500 600 700 800

CVP GraphCVP Graph

Fixed expenses

Units

Dol

lars Total Expenses

Total Sales

Page 24: Cost & Management Accounting Techniques

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

- 100 200 300 400 500 600 700 800

Units

Dol

lars

CVP GraphCVP Graph

Break-even point

Profit Area

Loss Area

Page 25: Cost & Management Accounting Techniques

Equation MethodEquation Method

Profits = Sales – (Variable expenses + Fixed expenses)

Sales = Variable expenses + Fixed expenses + Profits

OR

At the break-even point profits equal zero.

Page 26: Cost & Management Accounting Techniques

TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Investment DecisionInvestment Decision Robust DecisionRobust Decision Enterprise Cost ManagementEnterprise Cost Management

Page 27: Cost & Management Accounting Techniques

Activity Based Costing (ABC)Activity Based Costing (ABC)ABC is designed to ABC is designed to provide managers provide managers

with cost with cost information for information for

strategic and other strategic and other decisions that decisions that

potentially affect potentially affect capacity and capacity and

therefore “fixed” therefore “fixed” costs.costs.

ABC is agood supplement to our traditional

cost systemI agree!

Page 28: Cost & Management Accounting Techniques
Page 29: Cost & Management Accounting Techniques

TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Investment DecisionInvestment Decision Robust DecisionRobust Decision Enterprise Cost ManagementEnterprise Cost Management

Page 30: Cost & Management Accounting Techniques

LP ApplicationsLP Applications1.1. Development of a production schedule Development of a production schedule

that will that will

satisfy future demands for a firm’s satisfy future demands for a firm’s production production

while while minimizingminimizing total production total production and inventory costsand inventory costs

2.2. Selection of product mix in a factory to Selection of product mix in a factory to make best use of machine-hours and make best use of machine-hours and

labor-hours available labor-hours available while while maximizingmaximizing the firm’s products the firm’s products

Page 31: Cost & Management Accounting Techniques

LP ApplicationsLP Applications3.3. Determination of grades of petroleum products Determination of grades of petroleum products

to yield the to yield the maximummaximum profit profit

4.4. Selection of different blends of raw materials to Selection of different blends of raw materials to feed mills to produce finished feed feed mills to produce finished feed combinations at combinations at minimumminimum cost cost

5.5. Determination of a distribution system that will Determination of a distribution system that will minimizeminimize total shipping cost from several total shipping cost from several warehouses to various market locationswarehouses to various market locations

Page 32: Cost & Management Accounting Techniques

TechniquesTechniques The Make or Buy DecisionThe Make or Buy Decision Just-In-TimeJust-In-Time Inventory ManagementInventory Management BudgetingBudgeting Variance AnalysisVariance Analysis Const-Volume-Profit AnalysisConst-Volume-Profit Analysis Activity Based CostingActivity Based Costing Linear ProgrammingLinear Programming Enterprise Cost ManagementEnterprise Cost Management

Page 34: Cost & Management Accounting Techniques
Page 35: Cost & Management Accounting Techniques

CONCLUSIONCONCLUSION

Corporate Decision-Makers Rely Corporate Decision-Makers Rely on on

Cost & Management AccountantsCost & Management Accountants

Thank you.