Solapur University, Solapur MBA Part II Syllabus (CBCS) w.e.f. ...
Mini MBA Part 2
Transcript of Mini MBA Part 2
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بسم هللا الرحمن الرحیموبھ نستعین
Welcome to
Business Administration Training Program
Trainer
Ass.Prof Dr. Omaima El Tahir Babikir Mohamed [email protected]/ [email protected]
+60163430273
Park Royal Hotels
Kuala Lumpur
18-27 March 2013
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Dr. Omaima’s Profile
Dr. Omaima El Tahir Babikir Mohamed, PhD, Received herPhD in Islamic Finance from International Centre forEducation in Islamic Finance (INCEIF) in 2012. She iscurrently a professional Consultant trainer at Salam MalaysiaSdn. Bhd. She worked at the National Bank of Sudan as anexecutive banker; also she worked as a professional trainingconsultant for the period 2005-2012 with Alibdaa Regionalconsultant (Malaysia) and Yataka Legend Sdn. Bhd. The twocompanies are providing Training and Development and bothcompanies are based in Malaysia. She presented a numberof papers at international conferences. Omaima also haspublished in International Journal of Excellence in IslamicBanking and Finance (IJEIBF), and currently she is writing abook from six Chapters in Takaful.
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Course OBJECTIVES� To provide concise, comprehensive coverage of
vital business topics & important concepts.
� To grasp the essential ingredients of:� Personal success� Management success� Business success
� To help non business-trained professionals understand fundamental business principles.
� To ensure that attendees are abreast of the latest thinking in management and leadership as well as business strategies.
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Part II: Management Accounting
� Concept of Management Accounting
� Classification of Costs
� Job costing
� Process costing
� Backflush Costing
� Planning and Techniques
� Business strategy and Management Accounting
� Excellent Strategic Thinking & Planning
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Concept of Management Accounting
Management Accounting (managerial accounting) isconcerned with the provisions and use of accountinginformation to provide the basis of making businessdecisions in order to be better equipped in managementand control functions.
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Financial accounting is used to present the financial position of an organization to: Board of directors, stockholders, financial institutions and other investors are the audience for financial accounting reports. Financial accounting presents a specific period of time in the past and enables the audience to see how the company has performed. Financial accounting reports must be filed on an annual basis, and for publically traded companies, the annual report must be made part of the public record.
Management accounting is used by managers to make decisions concerning the day-to-day operations of a business. It is based not on past performance, but on current and future trends, which does not allow for exact numbers. Because managers often have to make decisions in a short period of time in a fluctuating environment, management accounting relies heavily on forecasting of markets and trends.
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Focus
Stage
CostDetermination
Controland Financial
Transformation
Informationfor
Planning andControl
Management
Transformation
Reduction ofWaste ofResources in
ProcessesBusiness
Transformation
Creation of Value
Resource Usethrough Effective
Transformation
The Evolution of Management Accounting
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1990s
1980s
1950s
1910s
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Key Financial Players
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President and
Chief Executive Officer
Finance Vice-President (CFO)
Treasurer
Controller
ManagementAccounting
FinancialReporting
Tax Reporting
Internal Audit
OtherVice-Presidents
Part II: Management Accounting
� Concept of Management Accounting
� Classification of Costs
� Job costing
� Process costing
� Backflush Costing
� Planning and Techniques
� Business strategy and Management Accounting 1
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Information in Management Accounting
Revenue
(-) Costs
= Profit
Cash Inflow
(-) Cash Outflow
= Net Cash Flow
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Classification of Costs� Period / Products costs
� Direct / Indirect costs
� Relevant / irrelevant Costs
� Avoidable/unavoidable costs
� Sunk Cost
� Opportunity Costs
� Incremental/ Marginal Costs
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Nature of Fixed & Variable CostsVariable, Fixed Semi- variable or Semi-fixed “show ho w
cost react to changes in activity”
Variable costs - change in total as the level of activity changesThere is a definitive physical relationship to the activity measure
Fixed costs - do not change in total with changes in activity levels
Accounting concepts of variable and fixed costs are short run concepts
Apply to a particular period of time Relate to a particular level of production
Relevant range is the range of activity over which the firm expects cost behavior to be consistentOutside the relevant range, estimates of fixed and variable costs may not be
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Types of Fixed Costs Capacity costs - fixed costs that provide a firm with the
capacity to produce and/or sell its goods and servicesAlso know as committed costs and typically relate to a firm’s
ownership of facilities and its basic organizational structure
Capacity costs may cease if operations shut down, but continue in fixed amounts at any level of operations
Examples: property taxes, executive salaries
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Types of Fixed Costs Discretionary costs - need not be incurred in the short run
to operate the business, however, usually they are essential for achieving long-run goals. Also referred to as programmed or managed costs
Examples: research and development costs, advertising
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Semi-Fixed CostsSemi-fixed cost is a defined level of cost
that can increase or decrease when activity reaches upper and lower levels .Example: A quality-control inspector can
examine 1,000 units per day. Inspection costs are semi fixed with a step up for every 1,000 units per day
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Cost ObjectsA cost object is a tangible input for a
product manufactured. a.k.a. Prime Cost
Labor is a cost object as it can be directly associate cost of production.
Raw material such as cotton or threads can be another cost object
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Direct CostA cost of an activity that is used by a single cost object
Cost object = A dining room tableCost of the wood that went into the dining room table
Cost object = Line of dining room tablesA manager’s salary would be a direct cost if a manager were hired to supervise the production of dining room tables and only dining room tables
Direct cost
Direct materials Direct labor
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Indirect CostThe cost of a resource that was acquired to be used by more than
one cost object e.g indirect labor, material & expenses.
The cost of a saw used in a furniture factory to make different productsIt is used to make different products such as dining room tables, china
cabinets, and dining room chairs.
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Period and Product costsProduct costs: Identified with goods purchased or produced for resale
Manufacturing cost
Product cost
Unsold sold
Period Costs: costs not included in the inventory valuation
Non- Manufacturing cost
Period Cost:
(Recorded as exp)
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Sunk Costs (irrelevant)� Sunk costs often cause confusion for decision makers
� Costs of resources that already have been committed and no current action or decision can change
� Not relevant to the evaluation of alternatives because they cannot be influenced by any alternative the manager chooses
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Opportunity Cost� An opportunity cost is the sacrifice you make when you
use a resource for one purpose instead of another
� Opportunity costs = explicit costs + implicit costs that do not appear anywhere in the accounting records
� Machine time used to make one product cannot be used to make another, so a product that has a higher contribution margin per unit may not be more profitable if it takes longer to make.
� Management accountants often use the concept of opportunity cost for decision making
� Economic Profit vs Accounting Profit
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Types of Production Activities� The allocation of manufacturing overhead to products on
the basis of a volume metric such as direct labor hours or production machine hours.
� A new classification system, developed originally for manufacturing operations, gives a broader framework for classifying an activity and its associated costs
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Costs AllocationsCost allocation is the process of assigning costs when direct measure does not exist.
Traditional cost accounting systems assign indirect costs to products with a two-stage procedure:
� Indirect costs are assigned to production departments
� Production department costs are assigned to the products
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New Classification System� The new classification system places activities and
their associated costs into one of the following categories:� Unit related
� Batch related
� Product sustaining
� Customer sustaining
� Business sustaining
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Cost Driver Rates� A cost driver is a factor that causes or “drives” an activity’s
costs
� All costs associated with a cost driver, such as setup hours, are accumulated separately
� Each cost pool has a separate cost driver rate
� The cost driver rate is the ratio of the cost of a support activity accumulated in the cost pool to the level of the cost driver for the activity
Activity cost driver rate = Cost of support activity / Level of cost driver
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Number of Cost Pools� The number of cost pools can vary
� Some German firms use over 1,000� Henkel-Era-Tosno
� The general principle is to use separate cost pools if the cost or productivity of resources is different and if the pattern of demand varies across resources
� The increase in measurement costs required by a more detailed cost system must be traded off against the benefit of increased accuracy in estimating product costs� If cost and productivity differences between resources are small,
having more cost pools will make little difference in the accuracy of product cost estimates
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Two-Stage Cost Allocation (1)
� Conventional product costing systems assign indirect costs to jobs or products in two stages
1. In the first stage:� System identifies indirect costs with various production
and service departments
� Service department costs are then allocated to production departments
2. The system assigns the accumulated indirect costs for the production departments to individual jobs or products based on predetermined departmental cost driver rates
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Life-Cycle Costs� Life-cycle costing is a relatively new perspective that
argues, organizations should consider a product’s costs over its entire lifetime when deciding whether to introduce a new product
� There are five distinct stages in a typical product’s life cycle� Not all products will follow this pattern� Some products will fail early and have a shortened life
cycle
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Product Life Cycle (1)
Product development and planning
� The organization incurs significant research and development costs and product testing costs
� Because of the increasing costs of launching products, organizations are devoting more effort to the product development and planning phase
� The nature and magnitude of these costs should be identified so that when products are initially proposed, planners have some idea of the cost that new product development will inflict on the organization
� Shorter life cycles provide less time to recover costs
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Product Life Cycle (2)
� Introduction phase� The organization incurs significant promotional costs as
the new product is introduced to the marketplace
� At this stage the product’s revenue will often not cover the flexible and capacity-related costs that it has inflicted on the organization
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Product Life Cycle (3)
� Growth phase� The product’s revenues finally begin to cover the flexible
and capacity-related costs incurred to produce, market, and distribute the product
� There is often little or no price competition
� The focus of attention is on developing systems to deliver the product to the customer in the most effective way
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Product Life Cycle (4)
� Product maturity phase� Price competition becomes intense and product margins
begin to decline
� While the product is still profitable, profitability is declining relative to the growth phase
� The organization undertakes intense efforts to reduce costs to remain competitive and profitable
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Product Life Cycle (6)
� Product-related costs occur unevenly over the product’s lifetime
� The motivation for considering total life cycle costs before the product is introduced is to ensure that the difference between the product’s revenues and its manufacturing and distribution costs cover the other costs associated with developing, supporting, and abandoning the product
� Life-cycle costing is a good example of a costing system designed for decision making that has little or no practical relevance in external reporting
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Direct costingand short-term decisions
Cost-Volume-Profit Analysis� Decision makers often like to combine information about
flexible and capacity-related costs with revenue information to project profits for different levels of volume
� Conventional cost-volume-profit (CVP) analysis rests on the following assumptions:� All organization costs are either purely variable or fixed
� Units made equal units sold
� Revenue per unit does not change as volume changes
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CVP Model� Cost-volume-profit (CVP) model summarizes the
effects of volume changes on a firm’s costs, revenues, and profit� Analysis can be extended to determine the impact on
profit of changes in selling prices, service fees, costs, income tax rates, and the mix of products and services
� Break-even point is the volume of activity that produces equal revenues and costs for the firm� No profit or loss at this point
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-
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
Cost Volume -Profit Graph (CVP) Graph
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Fixed expenses
Units
Total Expenses
Total Sales
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-
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
Cost Volume -Profit Graph
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Break-even point
Equation Method
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Profits = Sales – (Variable expenses + Fixed expen ses)
Sales = Variable expenses + Fixed expenses + Prof its
OR
At the break-even point profits equal zero.
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Activity Based Costing (ABC)
ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” costs.
ABC is agood supplementto our traditional
cost systemI agree!
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Break-even Volume� Using the CVP profit equation, break-even volume is
determined by calculating the volume where profit = 0
� 0 = (Units sold x Contribution margin per unit) - Fixed costs
� Units sold to break even =
Fixed costs÷ Contribution margin per unit
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Target Profit� Cost Volume Profit analysis can be used to determine
the sales volume required to achieve a specified target profit� Note that the previous break-even analysis was used to
determine the unit sales required to achieve a target profit of $0
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Margin of Safety
� Margin of safety - excess of projected sales units over break-even sales level, calculated as follows:
Sales Units - Break-Even Sales Units = Margin of Safety
� Provides an estimate of the amount that sales can drop before the firm incurs a loss
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Relevant Costs and Revenues
� Whether particular costs and revenues are relevant for decision making depends on the decision context and the alternatives available
� When choosing among different alternatives, managers should concentrate only on the costs and revenues that differ across the decision alternatives� These are the relevant cost/revenues
� Opportunity costs by definition are relevant costs for any decision
� The costs that remain the same regardless of the alternative chosen are not relevant for the decision
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Replacement of A Machine (1)
� A Company purchased a new drilling machine for $180,000 on September 1, 2003� They paid $30,000 in cash and financed the remaining $150,000
with a bank loan� The loan requires a monthly payment of $5,200 for the next 36
months
� On September 27, 2003, a sales representative from another supplier of drilling machines approached the company with a newly designed machine that had only recently been introduced to the market and offered special financing arrangements� The new supplier agreed to pay $50,000 for the old machine,
which would serve as the down payment required for the new machine
� In addition, the new supplier would require monthly payments of $6,000 for the next 35 months
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Replacement of A Machine (2)
� The new design relied on innovative computer chips, which would reduce the labor required to operate the machine� The company estimated that direct labor costs would decrease by
$4,400 per month on the average if it purchased the new machine
� In addition it had fewer moving parts than the current machine� The new machine would decrease maintenance costs by $800 per
month
� The new machine has greater reliability� This would allow the company to reduce materials scrap cost by
$1,000 per month
� Should the company dispose of the machine it just purchased on September 1 and buy the new machine?
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Analysis Of Relevant Costs (1)
� If the company buys the new machine, it will still be responsible for the monthly payments of $5,200 committed to on September 1� Therefore, the $30,000 that it paid in cash for the old
machine and the $5,200 it is committed to pay each month for the next 36 months are sunk costs
� The company already has committed these resources, and regardless if it decides to buy the new machine, it cannot avoid any of these costs
� None of these sunk costs are relevant to the decision
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Analysis of Relevant Costs (2)
� What costs are relevant?
� The 35 monthly payments of $6,000 and the down payment of $50,000 are relevant costs, because they depend on the decision
� Labor, materials, and machine maintenance costs will be affected if the company acquires the new machine� The relevant expected monthly savings are:
� $4,400 in labor costs� $1,000 in materials costs� $ 800 in machine maintenance costs
� The revenue of $50,000 expected on the trade-in of the old machine is also relevant, because the old machine will be disposed of only if the company decides to acquire the new machine
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Analysis of Relevant Costs (3)
� In a comparison of the cost increases/cash outflows to cost savings/cash inflows� The down payment required for the new machine is
matched by the expected trade-in value of the old machine
� The expected savings in labor, materials, and machine maintenance costs each month ($6,200) are more than the monthly lease payments for the new machine ($6,000)
� Thus, it is apparent that the company will be better off trading in the old machine and replacing it with the new machine
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Part II: Management Accounting
� Define the basic tools of management accounting
� Classification of Costs
� Job costing
� Process costing
� Backflush Costing
� Planning and Techniques
� Business strategy and Management Accounting
� Excellent Strategic Thinking & Planning52
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Job-Costing and
Process-Costing Systems
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Job -Order Costing and Process Costing
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Job-order costing allocates costs
to products that are identified by
individual units or batches.
Process costing averages costs
over large numbers of nearly
identical products.
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Job-Order Costing Basic Records
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Job-cost records contain all costs for a particular
product, service, or batch of products.
Materials requisitions are records of
materials used in particular jobs.
Labor time cards record the time a
particular direct laborer spends on each job.
Date Started: 1/7/20X7 Job Number: 963
Date Completed: 1/14/20X7 Units completed: 12
Cost Date Ref. Quantity Amount Summary
Direct Materials:
6” Bars 1/7 N41 24 120.00
Casings 1/9 K56 12 340.00 460.00
Direct Labor:
Drill 1/8 7Z4 7.0 105.00
1/9 7Z5 5.5 82.50
Grind 1/13 9Z2 4.0 80.00 267.50
Overhead:
Applied 1/14 9.0 mach. hrs. 180.00 180.00
Total cost 907.50
Unit cost 75.625
Job-Cost Record
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Job-Costing System Example
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Beginning
Direct Materials
inventory $110,000
Purchases
$1,900,000+
=
Ending
Direct Materials
Inventory
$120,000
Direct Materials
requisitioned
$1,890,000
–
Enriquez Machine Parts Company
Beginning
WIP
inventory $0
Direct materials
used
$1,890,000
+
Direct labor
and applied
overhead
$765,000
=
Ending WIP
inventory
$155,000
Cost of goods
manufactured
$2,500,000
–
Job-Costing System Example
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Beginning
Finished Foods
inventory $12,000
Cost of Goods
Available for
Sale $2,512,000
Cost of Goods
Manufactured
$2,500,000
+
=
Ending
Finished Goods
inventory
$32,000
Cost of
Goods Sold
$2,480,000
–
Job-Costing System Example
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Materials Cost Journal Entry
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Direct-Materials Inventory 1,900,000
Accounts Payable 1,900,000
To record purchase of direct materials
Work-in-Process Inventory 1,890,000
Direct-Materials Inventory 1,890,000
To record usage of direct materials
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Actual Overhead Costs Journal Entry
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Factory Department Overhead Control 392,000
Cash, Accounts Payable, Various Accounts 392,000
To record actual factory overhead incurred
Work-in-Process Inventory 390,000
Accrued Payroll 390,000
To record actual labor costs incurred
Applying Factory Overhead to Products
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Enriquez Machine Parts Company’s
budgeted manufacturing overhead for
the assembly department is $103,200.
Budgeted direct labor cost is $206,400.
$103,200 ÷ $206,400 = 50%
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Applying Factory Overhead to Products
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Suppose that at the end of the year
Enriquez had used 70,000 machine
hours in assembly and incurred
$190,000 in direct-labor costs.
How much overhead was
applied to assembly?
Applying Factory Overhead to Products
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70,000 machine hours X $4 = $280,000
Actual direct-labor cost of $190,000 X .5 = 95,000
Total factory overhead applied $375,000
Work-in-Process Inventory 375,000
Factory Department Overhead Control 375,000
To record overhead applied
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Finished Goods, Sales, and Cost of Goods Sold
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Finished Goods Inventory 2,500,000
WIP Inventory 2,500,000
To record the cost of goods completed
Finished Goods Inventory 2,500,000
WIP Inventory 2,500,000
To record the cost of goods completed
Accounts Receivable 4,000,000
Sales 4,000,000
To record the sales on account
Accounts Receivable 4,000,000
Sales 4,000,000
To record the sales on account
Cost of Goods Sold 2,480,000
Finished Goods Inventory 2,480,000
To record the cost of goods sold
Cost of Goods Sold 2,480,000
Finished Goods Inventory 2,480,000
To record the cost of goods sold
Actual and Applied Overhead Journal Entry
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Actual overhead = $392,000
Applied overhead = $375,000
$392,000 – $375,000 = $17,000 underapplied
Cost of Goods Sold 17,000
Factory Department Overhead Control 17,000
To dispose of underapplied overhead
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Describe Cost Flow in a Job Order Cost System
�
�
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Direct Labor UsedFactory Overhead
AppliedDirect Material Used
Work-in-Process
Cost of Goods Sold
Finished Goods
Process Costing
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Process costing is more efficient
for companies that produce large
quantities of homogenous product
in a continuous process.
The cost accounting system used
by a company depends upon the
nature of its products or services.
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Process Costing Compared With Job Costing
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It accumulates costs for
a period and divides
them by quantities produced
during the period to get
broad, average unit costs.
Process costing can
be applied to non-
manufacturing and
manufacturing
activities.
Process-costing does not
distinguish among
individual units of product.
Backflush Costing
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What is backflush costing?
It is an accounting system thatapplies costs to products only
when the production is complete.
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Principles of Backflush Costing
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Backflush costing has onlytwo categories of costs:
Materials Conversion
There is no work in process account.
Backflush Costing Example
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Speaker Technology, Inc., recentlyintroduced backflush costing and JIT.
Model AX27 Standard material cost:$14Standard conversion cost: $21
Actual production for the month: 400 unitsActual materials purchased: $5,600Actual conversion costs: $8,400
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Backflush Costing Example
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Materials Inventory 5,600Accounts Payable or Cash 5,600
To record material purchases
Conversion Costs 8,400Accrued Wages 8,400
To record conversion costs incurred
Backflush Costing Example
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Finished Goods Inventory 14,000Material Inventory 5,600Conversion Costs 8,400
To record costs of completed production
Cost of Goods Sold 14,000Finished Goods Inventory 14,000
To record costs of 400 units sold
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Backflush Costing Example
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Cost of Goods Sold 14,000Material Inventory 5,600Conversion Costs 8,400
Cost of Goods Sold 200Conversion Costs 200
To recognize underapplied conversion costs
The Finished Goods Account can be eliminated.
Part II: Management Accounting
� Define the basic tools of management accounting
� Classification of Costs
� Job costing
� Process costing
� Backflush Costing
� Planning and Techniques
� Business strategy and Management Accounting76
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Cost & Management Accounting Techniques
Must for Effective Decision Making
INSTITUTE OF COST & MANAGEMENT ACCOUNTANTS OF PAKISTAN77
Cost & Management Accounting
The Process of � Identifying�Measuring�Analyzing� Interpreting�Communicating Information
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Techniques� The Make or Buy Decision
� Just-In-Time
� Inventory Management
� Budgeting
� Variance Analysis
� Const-Volume-Profit Analysis
� Activity Based Costing
� Linear Programming79
The Make or Buy DecisionA decision concerning whether an item should
be produced internally or purchased from an outside supplier is called a “Make or Buy”
decision.
E.g in computer companies some of the parts to be bought from suppliers much cheaper
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The Make or Buy Decision� XXX manufactures part 4A that is used in one
of its products.
� The unit product cost of this part is:
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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$
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$
The Make or Buy Decision� Equipment used to manufacture part 4A has no resale value.
� Total general factory overhead, which is allocated on the basis of direct labor hours, would be unaffected by this decision.
� The $30 unit product cost is based on 20,000 parts produced each year.
� An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part.
Should we accept the supplier’s offer? 82
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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 Decision
8320,000 × $9 per unit = $180,000
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 Decision
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The special equipment has no resale value and is a sunk cost.
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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 Decision
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Not avoidable; irrelevant. If the product is dropped, it will be reallocated to other products.
The Make or Buy Decision
86Should 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$
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The Make or Buy Decision
DECISION RULE
In deciding whether to accept the outside supplier’s offer, XXX isolated the relevant costs of making the part by eliminating:
� The sunk costs.� The future costs that will not differ between making or
buying the parts.
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Impact of Just in Time ( JIT)Inventory Methods
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In a JIT inventory system . . .
Productiontends to equalsales . . .
So, the difference between variable andabsorption income tends to disappear.
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Inventory Management
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Budgeting
Define goaland objectives
Uncover potentialbottlenecks
Coordinateactivities
Communicatingplans
Think about andplan for the future
Means of allocatingresources
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Part II: Management Accounting
� Define the basic tools of management accounting
� Classification of Costs
� Job costing
� Process costing
� Backflush Costing
� Planning and Techniques
� Strategic Management
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Strategic ManagementStrategic planning is a continuous andsystematic process where people makedecisions about intended future outcomes, howoutcomes are to be accomplished, and howsuccess is measured and evaluated
In essence, the strategic plan is a
company’s game plan
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93Strategic Planning Cycle
Purpose of Strategic Management
To exploit and create new and different opportunities for tomorrow
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Key Terms in Strategic Management
� Competitive advantage
� Strategists
� Vision and mission statements
� External opportunities and threats
� Internal strengths and weaknesses
� Long-term objectives
� Strategies
� Annual objectives
� Policies
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Vision & Mission
Strategy Formulation
External Opportunities & Threats
Internal Strengths & Weaknesses
Long-Term Objectives
Alternative Strategies
Strategy Selection
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Strategy Implementation
Annual Objectives
Policies
Employee Motivation
Resource Allocation
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Strategy Evaluation
Internal Review
External Review
Performance Measurement
Corrective Action
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Benefits of Strategic Management
� Nonfinancial Benefits� Enhanced awareness of threats� Improved understanding of competitors’ strategies� Increased employee productivity� Reduced resistance to change� Clearer understanding of performance-reward
relationship� Enhanced problem-prevention capabilities
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Why Some Firms Do Not have Strategic Planning
�Lack of knowledge of strategic planning
�Poor reward structures
�Fire fighting
�Waste of time
�Too expensive
�Laziness100
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Why Some Firms Do Not have Strategic Planning
� Fear of failure
� Overconfidence
� Prior bad experience
� Self-interest
� Fear of the unknown
� Honest difference of opinion
� Suspicion101
Pitfalls in Strategic Planning
Strategic planning is an involved and complex process that takes an organization into uncharted territory
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Effective Strategic Planning is:
� A people process more than a paper process
� A learning process
� Words supported by numbers
� Simple and nonroutine
� Varying assignments, team membership, meeting formats, and planning calendars
� Challenging assumptions underlying corporate strategy
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Effective Strategic Planning continued� Welcomes bad news
� Requires open-mindedness and a spirit of inquiry
� Is not a bureaucratic mechanism
� Is not ritualistic or stilted
� Is not too formal, predictable, or rigid
� Does not contain jargon or arcane language
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Effective Strategic Planning continued
� Is not a formal system for control
� Does not disregard qualitative information
� Is not controlled by “technicians”
� Does not pursue too many strategies at once
� Continually strengthens the “good ethics is good business” policy
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Comparing Business and Military Strategy
� Strategic planning started in the military
� Similarity � Both business and military organizations must
adapt to change and constantly improve
� Difference � Business strategy assumes competition� Military strategy assumes conflict
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Benefits of Strategic Management
� Nonfinancial Benefits� Enhanced awareness of threats� Improved understanding of competitors’ strategies� Increased employee productivity� Reduced resistance to change� Clearer understanding of performance-reward relationship� Enhanced problem-prevention capabilities
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End of Slides� ANY QUESTIONS PLEASE?
� Thank You Wasalam
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