Management Accounting
ACCT 481
Michael Dimond
Managing & Allocating Costs
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Pricing Decisions
Cost Management & Allocation
Customer-profitability Analysis
Sales-variance Analysis
Support-department Cost Allocation
Common-cost Allocation
Revenue Allocation
Joint-cost Allocation
Byproducts
Spoilage, Rework & Scrap
Michael Dimond
School of Business Administration
Pricing Decisions
• Major influences on pricing decisions: Customers,
competitors & costs.
• How companies make long-run pricing decisions.
• Target-costing approach for product pricing.
• Cost-plus approach for product pricing.
• Antitrust laws & pricing.
Michael Dimond
School of Business Administration
Cost Management & Allocation
• A company’s revenues and costs differ across customers.
• Customer-profitability analysis examines revenues earned
from customers and the direct costs incurred.
• This helps management determine which customers are the
most profitable and strategically beneficial.
Michael Dimond
School of Business Administration
Consideration in customer-cost analysis
• Customer output unit-level costs – these are per unit
• Customer batch-level costs – cost per customer order, for
example, or per delivery
• Customer-sustaining costs – cost to support individual
customers regardless of number of units or batches
• Distribution-channel costs – these costs relate to the
distribution channel rather than to each unit or customer. For
example, we might have a wholesale distribution manager’s
salary and a retail distribution manager’s salary.
• Division-sustaining costs – costs that cannot be traced to a
product, customer or even a distribution channel. An
example would be the division manager’s salary.
Michael Dimond
School of Business Administration
Data for analysis
Michael Dimond
School of Business Administration
Analysis of four different customers
Michael Dimond
School of Business Administration
Sales-variance Analysis
• We can subdivide the sales-volume variance into the salesmix variance and the sales-quantity variance.
Sales-Mix
Variance =
Actual
Actual
Units of
Sales-Mix
X
All
Percentage
Products
Sold
Budgeted
Sales-Mix X
Percentage
Budgeted
Contribution
Margin per Unit
SalesQuantity =
Variance
Actual
Units of All
Products
Sold
Budgeted
Units of all
Products X
Sold
Budgeted
Sales-Mix
Percentage
X
Budgeted
Contribution
Margin per Unit
• We can subdivide the sales-quantity variance into the
market-share variance and the market-size variance.
Michael Dimond
School of Business Administration
Flexible-Budget and Sales-Volume Variances
Michael Dimond
School of Business Administration
Sales-Mix and Sales–Quantity Variances
Michael Dimond
School of Business Administration
Support-department Cost Allocation
• Two methods: single-rate method vs the dual-rate method.
• The single-rate method makes no distinction between fixed and variable
costs. It allocates costs in each cost pool to cost objects using the same rate
per unit of a single allocation base.
• The dual-rate method divides the costs of each support department into two
pools—a variable-cost pool and a fixed-cost pool.
• Divisional incentives are affected by the choice between
allocation based on budgeted and actual rates and budgeted
and actual usage.
• Costs of multiple support-departments can be allocated using
the direct method, the step-down method, and the reciprocal
method.
Michael Dimond
School of Business Administration
Direct vs Step-down Allocation
Michael Dimond
School of Business Administration
Common-cost Allocation
• Common-costs (costs shared by two or more users) are
allocated using the stand-alone method and the incremental
method.
• The stand-alone cost-allocation method determines the weights for cost
allocation by considering each user of the cost as a separate entity. The cost
is allocated among the users based upon the total cost for each separately.
• The incremental cost-allocation method ranks the individual users of the
cost object in the order of users most responsible for the common cost and
uses this ranking to allocate cost among those users. The first ranked user is
the primary user and is assigned allocated costs up to the cost as a standalone user. The second ranked user is the first incremental user and is
assigned cost equal to the additional cost that arises from having two users.
This continues until costs have been assigned to all users.
Michael Dimond
School of Business Administration
Joint-cost Allocation
• Joint costs are costs of a production process that yields
multiple products simultaneously. Joint costs are incurred
prior to the splitoff point.
• The splitoff point is defined as the point in the production process at which two
or more products become separately identifiable.
• Separable costs are costs incurred beyond the splitoff point and include
manufacturing, marketing, distribution, and other costs.
• Joint costs can be allocated using two approaches: marketbased data (sales revenue) or by using physical measures
(weight, quantity, or volume).
• There are three methods that use the market-based data
approach: Sales-value at splitoff method, net-realizable value
(NRV) method, and constant gross-margin percentage NRV
method
Michael Dimond
School of Business Administration
Byproducts
• a byproduct is a product emerging from a joint process that
has relatively little sales value.
• Due to its inconsequential value, it is not beneficial to expend
a large amount of resources accounting for byproducts. Two
methods are utilized to account for byproducts.
• The production method recognizes byproducts at the time production is
completed. The NRV of the byproduct is offset against the costs of the main
product.
• The sales method recognizes the byproduct at the time of sale. No entries are
made until the byproduct is sold. Revenues from the sale are reported as a
revenue item in the period sold. These revenues can be grouped with sales,
treated as other income, or deducted from cost of goods sold.
Michael Dimond
School of Business Administration
Spoilage, Rework & Scrap
• Three distinct categories of costs that result from defects in
the manufacturing process are spoilage, rework, and scrap.
• Spoilage, rework, and scrap have different definitions in cost
accounting than in common usage. Each receives a different
accounting treatment.
• Scrap is residual material that results from manufacturing a product. It has low
or zero sales value.
• Spoilage is units of production that do not meet the specifications required by
customers for good units and are discarded or sold at reduced prices.
Spoilage is further divided into two types: normal spoilage inherent in the
production process and abnormal spoilage that is not considered a part of
the production process.
• Rework is units of production that do not meet the specifications required by
customers but are repaired and sold as good finished units.
Michael Dimond
School of Business Administration