QUIZ 1
developing, manufacturing, selling, and
•
servicing a product is not true.
Throughput time - the time required to
make a completed unit of product starting
•
short-term in nature - The key difference
with raw materials. Also known as cycle
between strategic goals and tactical goals
time.
is that tactical goals are
•
Throughput – the key concept of TOC.
•
Earn a desired profit - Target costing
on improving cycle time, the rate at which
determines the desired cost for a product
raw materials are converted to finished
upon the basis of a given competitive price,
product. This strategic management
such that the product will.
technique is primarily concerned with the
Plan-Do-Check-Act cycle - This is a
critical success factor of
•
systematic, fact-based approach to
•
•
•
•
firm to become more competitive, like
•
Process Reengineering - An approach to
improvement that involves completely
workers to systematically identify and solve
redesigning business processes in order to
problems.
eliminate unnecessary steps, reduce
Benchmarking - This involves studying the
errors, and reduce costs.
•
target costing - determines the desired
considered among the best in the world in
cost for a product based upon a given
performing a particular task.
competitive price
It does not focus on improving the entire
•
non-value-added activities - In Process
production process - A traditional quality
Reengineering, two objectives are to
control process in manufacturing consists of
simplify and to eliminate
mass inspection of goods only at the end of
a production process. A major deficiency of
the traditional control process is that.
•
benchmarking - Target costing forces the
customers and using teams of front-line
business processes of companies that are
•
•
Total quality Management - An approach
to continuous improvement that focuses on
purchasing and receiving - not one of the
steps in the life cycle of a product
continuous improvement that resembles
the scientific method.
speed - The Theory of Constraints focuses
A simple design causes higher upstream
costs but reduces downstream costs statements regarding "Life-cycle" costs of
CHAPTER 1
•
Strategy – set of policies, procedures and
•
Interpreting and reporting of Information
•
Problem-solving
approaches to business that produce long•
term success.
Relationship between Cost Accounting and Cost
Strategic Management – development of a
Management
sustainable competitive position.
•
Cost Accounting – systematic set of
Strategic cost management – development
procedures for recording and reporting
of cost management information to
measurements of the cost of manufacturing
facilitate the principal management
goods and performing services in the
function which is strategic management.
aggregate and in detail.
Uses of Cost Management Information
1. Strategic Management – development of a
sustainable competitive position in which
the firm’s competitive advantage spells
continued success.
2. Planning and Decision-Making – involves
budgeting and profit planning, cash flow
management and other decision related to
the firm’s operation.
3. Management and Operational Control –
operational control, mid-level managers
monitor the activities of operating-level
managers and employees. Management
control, evaluation of mid-level manager by
upper-level manager.
4. Reportorial and Compliance to Legal
Requirements – to comply with the
financial reporting requirements to
regulatory agencies.
Management accountants do the following tasks:
•
•
Scorekeeping or data accumulation
•
Cost Management – needs the output of
cost accounting.
o is the financial executive primarily
responsible for management
accounting and financial accounting
o he or she exerts force or influence
for better-informed decisions
o an integral part of top management
CHAPTER 2 THE PROFESSIONAL ENVIRONMENT OF
COST MANAGEMENT
Organization Structure
a. Line Authority- to command action or give
orders to subordinates
b. Staff Authority- to advise but not command
others
c. Functional Authority- right to command
action, laterally or downward with regard to
a specific function or specialty
The Controller as the Top Management
Accountant
Controllership- the practice of the
established science of control which assures
the resources are procured and utilized
according to plans
Basic Functions of Controllership
THE CFO, THE CONTROLLER AND THE TREASURER
•
The CFO
o also called the finance director
o is the executive responsible for
overseeing the financial operations
of an organization
o 3rd highest position in a company
o highest position in Financial Position
o can become CEO, COO, or President
o similar to controller and treasurer
Responsibilities
1. Controllership- providing financial
information to managers, shareholders
2. Treasury- banking and short and longterm financing
3. Risk Management- managing the
financial risk
4. Taxation- income taxes, sales taxes and
int’l tax planning
5. Internal Audit- reviewing and analyzing
financial and other records
•
The Controller
o also called the Chief Accounting
Officer (CAO)
1. Planning
2. Control
3. Reporting
4. Accounting
5. Other Primary Responsibilities
•
Treasurership
o Is concerned with the acquisition,
financing and management of assets
of a business concern to maximize
the wealth of the firm
o Treasurer- has custody of cash and
funds invested. Generally
responsible for maintaining
relationships with investors, banks,
and other creditors.
o Both CONTROLLER and THE
TREASURER report to the CFO
Responsibilities
1. Funds Procurement- raising of funds
2. Banking and Custody of Funds- direct
management of cash and cash
equivalents and maintenance of good
relations with banks and other non-bank
institution
3. Investment of Funds- management of
the company’s placements and
securities or purchase of debt or equity
instruments
4. Operating Responsibilities related to
-credit and collection
-inventory management
-corporate pension and retirement fund
-investor relations
-insurance
-compliance with legal provisions
Ethical Standards for Management Accountants
a. Competence- skills, duties, relevant and
reliable reports
b. Confidentiality- disclose confidential
information
c. Integrity- avoid conflicts, refrain prejudice,
refuse gift in exchange of favors
d. Objectivity- fairly and objectivity, disclose
fully all relevant information
Code of International Level (IFAC issued the
“Guidelines on Ethics for Professional
Accountants”)
International Certifications
•
•
•
Certificate of Management Accountant
(CMA) granted by Institute of Accountants
(IMA) USA
Certificate of Public Accounting (CPA)
granted by PRC in the Philippines
Certificate of Internal Auditing (CIA)
Granted by Institute of Internal Auditors
(IAA) in UK
CHAPTER 3
Changes in Contemporary Business Environment
1. Increase in global competition
2. Advances in manufacturing technologies
3. Advances in information technologies, the
internet, and e-commerce
4. Greater focus on the customer
5. New forms of management organization
6. Changes in social, political and cultural
environment of business
Phases of the development of cost management
systems should consider the following:
Stage 1: basic transaction reporting systems.
Stage 2: external financial reporting
Stage 3: track key operating data and develop
more accurate and relevant cost information for
decision making.
Stage 4: cost management information is an
integral part of the system.
CHAPTER 4 DEVELOPING A COMPETITIVE
STRATEGY AND CONTEMPORARY COST
MANAGEMENT TECHNIQUES
•
service at low prices.
Product Differentiation strategy – compete
on their ability to offer unique products or
services that are often priced higher than
the products or services of competitors.
Strategic measure of Success
Financial performance – shows the impact of the
firm’s policies and procedures in the firm’s current
financial position.
•
Growth in sales and earnings
•
Cash flow
•
Stock price
Non-financial – shows the firm’s current and
potential competitive position.
•
Market share
•
Product quality
•
Customer satisfaction
•
Growth opportunity
Contemporary Cost Management Techniques
•
A formal effort to improve quality
throughout an organization’s value
chain.
Cost Leadership strategy – compete on the
basis of providing a quality product or
•
-
Total quality Management – ensures the
products are the highest quality and that
production processes are efficient.
-
Develops policies and practices to
ensure that the firm’s products and
services exceed customer’s
expectations.
-
2 major characteristics are focus on
serving customers and systematic
problem-solving.
Developing a Competitive Strategy
-finding strategy begins with determining the
purpose and long-range direction (mission of the
company)
-firm succeeds by implementing strategy
-strategy specifies how an organization matches its
own capabilities with the opportunities in the
market place to accomplish its objectives
-management accountants work closely with
managers in formulating strategy
Strategic Measures of Success
-firm use cost management to support their
strategic goals
-includes both financial and non-financial
information
Strategic Financial and Non-Financial Measures of
Success (CSFs)
1. Financial Measures of Success
a. Sales
b. Profitability
c. Liquidity
d. Market Value
2. Non-Financial Measures of Success
Customer Factors
a. Customer Satisfaction
b. Dealer and Distributor
c. Market and Selling
d. Timeliness of Delivery
3. Internal Business Process
a. Quality
b. Productivity
c. Flexibility
d. Equipment Readiness
e. Safety
4. Learning and Innovation
a. Product Innovation
b. Timeliness of new product
c. Skills development
d. Employee morale
e. Competence
COMPETITIVE STRATEGIES
1. Cost Leadership
-producing products or services at lower cost in the
industry
-cost leader: makes sustainable profit at lower
prices (price wars)
2. Product Differentiation
-creating a perception among consumers that
product or service is unique in some important way
-charge higher prices and outperform the
competition in profits without reducing cost
significantly
CONTEMPORARY COST MANAGEMENT
TECHNIQUES
a. Total Quality Management
-to ensure that their products are of the highest
quality and that production processes are efficient
-develops policies and practices to exceed
customer satisfaction
-affects product costing by reducing the need to
track the cost of scrap and rework related to each
job
b. Just-in-time (JIT)
-the philosophy that activities are undertaken only as
needed or demanded
-aka pull it through approach: materials are purchased
and units are produced only as needed to meet actual
customer demand
-focused broadly on manufacturing costs
c. Process Reengineering
• Reengineering- firm recognizes its operating
and management functions
• Process Reengineering- a more radical approach
to improvement than TQM, is an approach
•
where business process is diagrammed in detail,
questioned and completely design
Business Process- any series of steps that are
followed in order to carry out some task in a
business
d. Benchmarking
- determines CSF
-studies the best practices of other firms
-then implements improvements in the firm processes
to match competitors
e. Mass Customization
-management technique in which marketing and
production processes are designed to handle the
increased variety that results from delivering
customized products and services
f. Balanced Scorecard
-an accounting report that includes the firm’s CSFs
g. Activity-Based Costing and Management
-used to improve the accuracy of cost analysis by
improving the tracing of costs to products or to
individual customers
• Activity-Based Management- uses activity
analysis to improve operational control and
management control
h. Theory of Constraints
-is a sequential process of identifying and removing
constraints in a system constraints-barriers that hinder
or impede progress toward an objective
i. Life Cycle Costing
-is a management technique to identify and monitor the
costs of a product throughout its life cycle
j. Target Costing
-the determination of the desired cost of a product
-Market Price minus Desired Profit
k. Computer-Aided Design and Manufacturing
-to respond to changing consumer tastes more quickly
-allows companies to significantly reduce the time to
bring products from the design to distribution
• Computer Aided Design (CAD)- the use of
computers in product development,
improvement of product
• Computer Aided Manufacturing (CAM)- the use
of computers to plan, implement, control
production
l. Automation
-large investment in computers, computer
programming, machines and equipment
• Flexible Manufacturing Systems (FMs)computerized network of automated
equipment that procures one or more groups of
parts or variation of product
• Computer Integrated Manufacturing (CIM)totally integrates all office and factory functions
m. E-commerce
-Amazon.com and Ebay
n. The Value Chain
-sequence of business functions in which usefulness is
added to the products or services of company
-an analysis tool that firms use to identify the specific
steps required to provide product or service to
customer
•
CHAPTER 5
Top Management Involvement – good
•
Budget – financial plan of the resources
balance of top management involvement
•
Budgeting – act of preparing a budget
with lower-level managers. They ensure the
•
Budgetary control – use of budgets to
budget guidelines are being followed
control a firm’s activities.
through the budget review and approval
process.
•
Formulation of Strategy
Organization for Budget Preparation
o Budget committee – with
External factors – can identify opportunities,
representation from the different
limitations and threats.
•
Competition
functional areas is generally
•
Technical, economic political,
considered an effective body to
regulatory, social and environmental
oversee preparation and
factors.
administration of the budget.
▪
Internal factors – can identify opportunities,
Decides how budgets shall be
prepared, passes on the final
resources and threats
•
Financial strength
budget, and settles disputes
•
Managerial talent and expertise
in one segment of the
•
Functional structure
business and another when
•
Organizational culture
differences of opinion arise.
o Controller – may be selected to
•
•
•
Long range planning – a process of
serve as head of the committee for
evaluating proposed major projects.
two major reasons: (1) independent
Capital budget – prepared to bring an
from the operating parts of the
organization’s capabilities into line with the
organization (2) has the skills and
needs of its long-range plan and forecast.
experiences in coping with the
intricacies of setting up a budget.
Short-term objectives – goals for the
▪
coming period, which can be month, a
budgeting operation.
quarter, a year or any length of time desired
by the organization for planning purposes.
Act as a coordinator in the
•
Budget Guidelines – done by budget
The Management Process of Preparing the Master
committee that provides initial budget
Budget
guidelines that set the tone for the budget
and govern budget preparation.
•
The Budget Period – period cover by a
quantities at what prices, is the
budget should be long enough to show the
foundation on which all other short-
effect of managerial policies but short
term budgets are built.
o Production budget – key factor in
enough so that estimates can be made with
the determination of other budgets,
reasonable accuracy.
o Master budget – overall financial
including the direct materials
and operating plan for a coming
budget, the direct labor budget and
fiscal period and coordinated
the manufacturing overhead budget.
o Raw materials budget
program for achieving the plan.
o Direct labor budget
o Capital budget – incorporate plans
for major expenditures for plant
o Overhead cost budget
and equipment or the addition of
o Budgeted costs of sales
product lines.
o Marketing and administrative
o Responsibility budget – segments
expense budget
o Cash budget
of the master budget relating to
o Cash receipts – comes from
the aspect of the business that is
customers
the responsibility of a particular
o Cash disbursement –
manager are often prepared
o Budgeted income statement – net
monthly.
o Cash budgets – prepared on day-
income that is to be expected during
the budget period.
to-day or monthly basis.
o Budgeted statement of financial
o Continuous budgeting plan –
budgets are constantly reviewed
position - developed by beginning
and updated.
with the current statement of
financial position and adjusting it for
•
The initial budget proposal
the data contained in the other
•
Budget, negotiation, review and approval,
budgets.
revision
•
The master budget – a comprehensive
budget for a specific period.
o Sales budget – showing what
products will be sold in what
Alternative Approaches in Budgeting
•
Zero-based budgeting – budgeting process
that requires managers to prepare budgets
from a zero base. It allows no activities or
functions to be included in the budget
unless managers can justify their needs.
•
Activity-based budgeting (ABC) – budgeting
Provides better-decision making
process based on activities and cost drivers
control.
of operations.
•
Kaizen (Continuous improvement)
approach that involves the people
budgeting – budgeting approach that
affected by the budget, including
explicitly demands continuous
lower-level employees, in preparing
improvement in operation processes and
the budget. A good communication
incorporates the improvements in the
device.
budget. It us used in preparing budgets
based in their desired future operating
processes for the budget period.
•
Ethical issues in budgeting – it includes
preventing concealment of information,
avoidance of having a higher budget goal,
inclusion of budget slack, and spending the
budget to avoid having it cut back.
o Spending the budget – to avoid cuts
in their budgets, managers may
resort to wasteful spending to
exhaust the remaining budgeted
amount before the end of the period
•
Goal congruence – consistency between
goals of the firm and goals of its employees.
•
o Participative budgeting - bottom-up
Authoritative or participative budgeting –
budgeting processes are either top down or
bottom up.
o Authoritative budgeting – a topdown budgeting process top
management prepares budgets for
the entire organization, including
those for lower-level operations.
CHAPTER 6 ORGANIZATIONAL INNOVATIONS:
TOTAL QUALITY MANAGEMENT; JUST-IN-TIME
PRODUCTION SYSTEM
TOTAL QUALITY MANAGEMENT
Quality- ultimate test of a quality product or
service is whether the product or service meets or
exceeds customers’ expectations
Core Principles of TQM
“Total Quality Management is the unyielding and
continually improving effort by everyone in an
organization to understand, meet and exceed the
expectation of customers” –Procter and Gamble. It
points out processes that:
1. Focus on the Costumer
- External customers, are the ultimate
recipients of the firm’s products or services
- Internal Customers, are individuals or
subunits within the firm involved in
manufacturing the product or providing the
services
- a firm can serve its ultimate, external
customers better if the firm fully meets all
requirements of each internal customer
2. Strive for Continuous Improvement
(Kaizen)
- are necessary to remain competitive in
today’s global marketplace
- firms need to continuously update
specifications for both internal
customers/suppliers and external suppliers
to better serve external customers
3. Full Involvement of the Entire Workplace
- quality (control) circles or quality circles
(QCs for short)
- is a small group of employees from the
same work area that meets regularly to
identify and solve work-related problems
4.
-
5.
6.
-
7.
-
and to implement and monitor solutions to
the problems
Active Support and Involvement of Top
Management
Only with support from all managers in the
top echelon can TQM attain the most
desirable results
Use Clear and Measurable Objectives
Forge efforts towards the common goal
Can help to ensure and facilitate quality
improvements and supporting systems
Timely Recognition of Quality Achievement
Best way to emphasize the firm’s
continuous struggle for better quality and
to ensure efforts toward total quality at
every level
Continuing Education and Training
Necessary to achieve the culture change
and continuous focus required in a TQM
environment
TQM Implementation Guidelines
-
-
The Institute of Management Accountants
believes that a typical organization takes 3
to 5 years to make from traditional
management to TQM
IMA has devised an 11-phase process
spanning 3 years to establish TQM
Year One – Preparation and Planning
Year Two – Training and Implementation
Year Three – Assessment, Review & Revise
TYPES OF CONFORMANCE
-
-
Conformance to a quality specification
expressed as a specified range around the
target
Target is the ideal or desired outcome of
the operations
1. Goalpost Conformance (Zero-defects
Conformance)
- Management expects all outputs to be
within specified range of variations
2. Absolute Quality Conformance (Robust
Quality Approach)
- Requires that all products or services meet
the target value exactly with no variation
- For firms desiring to attain long term
profitability and customer satisfaction
COSTS OF QUALITY
1. Prevention Costs
- Incurred to avoid poor-quality goods or
services or reduce the number of defects in
products or services
2. Appraisal Costs
- Also called inspection costs
- Incurred to identify products before
shipped to customers
3. Internal Failure Costs
- Result from identification of defects during
the appraisal process
4. External Failure Costs
- Incurred when poor-quality goods or
services are detected after delivery to
customers
Prevention and Appraisal Costs are Costs of
Conformance as they incurred to ensure that
products and services meet customers’
expectations
Internal Failure and External Failure Costs are
Costs of Non Conformance as they are costs
incurred and opportunity costs because of
rejection of products or services
Cost of Quality is the sum of conformance and non
conformance costs
Uses of Quality Cost Information
1. Provides a basis for establishing budgets for
quality costs to reduce the total costs
involved
2. Helps managers see the financial
significance of quality
3. Helps managers identify the relative
importance of the quality problems faced
by the firm
4. Helps managers see whether their quality
costs are poorly distributed, it helps them
distribute the costs better
Limitations of Quality Cost Information
1. Typically omitted from the quality cost
report
2. Does not solve quality programs
3. A log may exist between when quality
improvement programs are put into effect
and when the results are seen
Reporting Quality Costs
-
-
To make management aware of the
magnitude of quality costs and to provide a
baseline against which the impact of quality
improvement activities could be measured
Include data definitions, identification of
data resources, data collection, and
preparation and distribution of quality costs
reports
Nonfinancial Measures of Quality and Customer
Satisfaction
-
-
Indicate the future needs and preferences
of customers, as well as specific areas that
need improvement
Are leading indicators of future long-run
performance
TIME AS A COMPETITIVE TOOL
-Many companies consider “time” as a driver of
strategy
-Managing customer-response time and on-time
performance required understanding the causes
and costs of delays
1. Customer-Response Time
-duration from the time a customer places an order
for a product or service to the time the product it is
delivered to the customer
Manufacturing Lead time- duration between the
time an order received by manufacturing to the time
it becomes a finished good. It is the sum of waiting
time and manufacturing time for an order
2. On-Time Performance
-the product or service is actually delivered by the
time it was scheduled to be delivered. It increases
customer satisfaction
JUST-IN-TIME PRODUCTION SYSTEM
-
-
Just-in-time Production, also called lean
production
Is a demand-pull manufacturing system
because each component in a production
line is produced as soon as and only when
needed by the next step in the production
line
It aims to
o Meet customer demand in a timely
way
o With high quality products
o At the lowest possible total cost
Key Features
1. Manufacturing a limited number of
suppliers
- Willing to make frequent deliveries in small
lots
2. Improving plant layout
- All machines needed to make a particular
product are often brought together in one
location
3. Reducing Set up Time
4. Improving Production Scheduling
5. Targeting Zero Defects
6. Maintaining Flexible Workforce
JIT Effects on Costing System
-
-
Reduced overhead costs through the
reduction of materials handling,
warehousing, and inspection costs. I
It also facilitates direct tracing of some costs
usually classified as indirect
CHAPTER 7
•
•
summarize the results of past actions.
Balanced scorecard – translates an
organization’s mission and strategy into a
set of performance, measures that provides
the framework for implementing the
strategy. Highlights the nonfinancial
Financial performance measures
•
Nonfinancial performance measures
concentrate on current activities.
Features of a good balanced scorecard
1. The balanced scorecard should tell the story
objectives.
of a company’s strategy by articulating a
- consists of an integrated system of
sequence of cause-and-effect relationships.
performance measures that are derived
from and support the company’s strategy.
- it balances the use of financial and
2. It helps to communicate the strategy to all
members of the organization.
3. Places strong emphasis om financial
nonfinancial performance measures to
objectives and measures of profit
evaluate short-run and long-run
companies.
performance in a single report.
4. Focus only on key measures to be used by
Scorecard measures an organization’s
identifying only the most critical ones.
performance from four perspectives:
5. The scorecard should highlight suboptimal
1. Financial perspective – measures
profitability and market value among
others. Shows the impact of the firm’s
policies and procedures on the firm’s
current financial position and therefore its
current return to the shareholders.
2. Customer satisfaction – measures of quality
tradeoffs.
Pitfalls in implementing a balanced scorecard
1. Don’t assume the cause-and-effect linkages
are precise.
2. Don’t seek improvements across all of the
measures all of the time.
3. Don’t use only objective measures in the
service and low cost. How well the firm
balanced scorecard.it should include both
satisfies its customers.
objective and subjective features.
3. Internal business processes – measures of
the efficiency and effectiveness with which
the firm produces the product or service.
4. Learning and growth/innovation –
measures of the firm’s ability to develop
and utilize human resources.
4. Don’t fail to consider both costs and
benefits of initiatives.
5. Don’t ignore nonfinancial measures when
evaluating managers and employees.
6. Don’t use too many measures.
Evaluating the success of a strategy
If less than 1, then non-value-added time is
The following analytical relationships may be
present in the production process.
used:
1. Growth component
2. Price-recovery component
3. Productivity component
•
Delivery cycle time – amount of time from
when an order is received from a customer
to when the completed order is shipped.
•
Throughput (manufacturing cycle) time –
amount of time required to turn raw
materials into completed products.
o Process time – amount of time work
is actually done on the product.
o Inspection time – amount of time
spent ensuring that the product is
not defective.
o Move time – time required to move
materials or partially completed
products from workstation to
workstation.
o Queue time – amount of time a
product spends waiting to be
worked on, to be moved, to be
inspected or to be shipped.
•
Value-added time – process time
•
Non-value-added time – wait, inspection,
move and queue time.
•
Manufacturing cycle efficiency (MCE) =
value-added time / throughput time
•
CHAPTER 8
manufacturing to develop a deign from
Life cycle costing
specific plans and specifications.
o Cost life cycle – sequence of
(2) Prototyping – functional models of the
product are developed and tested.
activities within the firm that begins
with research and development,
(3) Templating – fit the specifications of the
desired new product.
followed by design, manufacturing,
marketing/distribution and
(4) Concurrent engineering – product
design is integrated with manufacturing
customer service.
o Sales life cycle – sequence of phases
and marketing throughout the product’s
in the product’s or service’s life in
life cycle.
the market – from the introduction
b) Manufacturing costs
of the product/service to growth in
i) Purchasing
sales and finally maturity, decline
ii) Direct manufacturing costs
and withdrawal from the market.
iii) Indirect manufacturing costs
c) Downstream costs – industries with high
Methods Helpful in Analyzing the Cost Life Cycle
downstream costs include pharmacratic,
1) Life Cycle Costing – used throughout the cost
performer, cosmetics and toiletries.
life cycle to minimize overall cost.
i) Marketing and distribution
a) Upstream costs – industries with high
ii) Service and warranty
upstream costs include computer software,
specialized industrial and medical
Phases of the Life Cycle
equipment.
Phase 1: product introduction – little competition,
i) Research and development
and sales rise slowly. Costs and process are
ii) Design
relatively high.
Critical success factors at the design stage
Phase 2: growth – sales begin to grow rapidly and
(1) Reduced time-to-market
product variety increases. There is also increase in
(2) Reduced expected service cost
competition and prices begin to soften.
(3) Improved ease-of-manufacture
Phase 3: maturity – sales continue to increase but
(4) Process planning and design
at a decreasing rate. Reduction in the number of
Common design models
competitors. Prices soften further and competition
(1) Basic engineering – product designers
is based on cost.
work independently from marketing and
Phase 4: decline - sales begin to decline. Prices
stabilize.
Phase
1
2
3&4
Management
focus
Design,
differentiation
and marketing
Focus shifts to
new product
development
and pricing
strategy
Cost control,
quality and
service
Strategic
pricing
strategy
Set relatively
high
Pricing is
likely to stay
relatively
high
Pricing
becomes
more
competitive,
and target
costing and
life cycle
costing
methods are
used
Cost
management
system
The primary
need is for
value chain
analysis, to
guide the
design of
products in
cost-efficient
manner
The primary
need is for
value chain
analysis, to
guide the
design of
products in
cost-efficient
manner
Provide
detailed
budgets and
activity-based
costing tools
for accurate
cost
information
•
Use value engineering to identify ways to
reduce product cost
•
Use kaizen costing and operational control
to further reduce costs.
a) Role of value engineering - used in target
costing to reduce cost by analyzing tradeoffs between (1) different types and levels
of products functionality (2) total product
cost.
i) Benchmarking - used to determine
which features give the firm a
competitive advantage. Its objective is
to come up with an overall bundle of
features for the product that achieve
ii) the desired balance of meeting
consumer preferences while keeping
the cost below targeted level.
iii) Design analysis – common form of
value engineering for products in group
two, industrial and specialized products.
iv) Cost tables – computer-based database
that include comprehensive information
2) Target costing – used for managing costs
primarily in the design activity. Can help a firm
reduce total cost.
= competitive price – desired profit
about firm’s drivers.
v) Group technology – method of
identifying similarities in the parts of
products a firm manufactures, so the
same parts can be used in two or more
Steps in Implementing a target cost approach
products, thereby reducing costs.
•
Determine the market price
•
Determine the desired profit
further reduce costs. To develop new
•
Calculate the target cost at market price
manufacturing methods and to use new
less desired profit
management techniques such as
b) Target costing and Kaizen costing – used to
operational control, total quality
management and the theory of constraints.
c) Theory of constraints – process of
identifying and managing constraint in the
making of products or in the providing of
services. It also describes methods to
maximize operating income when faced
with some bottleneck and some
nonbottleneck operations. It focuses on
manufacturing activities.
Three measurements of TOC:
i) Throughput contribution
ii) Investments
iii) Operating costs
Steps in TOC analysis
Step 1: identify the binding constraints
Step 2: determine the most efficient
utilization for each binding constraint
Step 3: manage the flows through the
binding constraint
Step 4: add capacity to the constraint
Step 5: redesign the manufacturing process
for flexibility and fast cycle time
CHAPTER 9 DECENTRALIZED OPERATIONS AND
SEGMENT REPORTING
Decentralized Operations
-
-
The process of delegating the decisionmaking authority throughout an
organization is called decentralization
Top management cannot effectively
manage the operations at a very detailed
level; it lacks the necessary knowledge
2. Manager’s attention may be focused only
on the subunit rather than the organization
as a whole
3. Cost to gather information is increased
4. Activities may be duplicated
Segment Reporting
•
•
Advantages of Decentralization
1. Creates greater responsiveness to local
needs
2. Leads to gains from quicker decision making
3. Increases motivation of subunit managers
4. Aids management development and
learning
5. Sharpens the focus of subunits managers
6. Decisions are best made at that level in an
organization where problems and
opportunities arise
7. Management is relieved of much day-to-day
problem solving and is left free to
concentrate long-range planning and on
coordination of efforts
8. Segment managers obtain more job
satisfaction and are encouraged to put forth
their best efforts by giving them added
responsibility and decision-making
authority.
9. It provides excellent training to managers
by giving them greater decision-making
control over their segments
10. Better and faster performance evaluation
Statements of income designed to focus on
various segments of the company
Segment- is any part or activity of an
organization about which manager seeks
costs, revenue or profit data
Purpose of segment reporting- to provide
information needed by the manager to
determine profitability of product lines,
divisions, sales territories, and other
segments of a company
Sales and Contribution Margin
-
Variable expenses are deducted from sales
to arrive at CM
CM is particularly useful in determining
what happens to profit as volume changes,
assuming that the segment’s capacity and
fixed costs are constant
Traceable and Common Fixed Costs
-
-
Only the traceable or direct fixed costs are
charged to segments
Traceable fixed costs – fixed cost incurred
as a consequence of the existence of the
segment
Segment margin – represents the margin
available after a segment has covered all of
its own cost and the best gauge of the longrun profitability of a segment
Limitations of Decentralizations
1. Dysfunctional decision making may result to
suboptimal or incongruent decision making
Omission of Costs
-
If companies omit from their profitability
analysis part or all of the “upstream costs”
and “downstream costs”, then the product
is undercosted and management may
unintentionally develop and maintain
products that in the long run result in losses
rather than profits for the company
Inappropriate Method for Allocating Costs Among
Segments
-
Cost distortion or Cross-subsidization occur
when costs are improperly assigned the
company’s segments
Arbitrarily Dividing Costs Among Segments
-
The practice of assigning nontraceable or
common costs to segments is another
business practice that leads to distorted
segment costs
CHAPTER 10 VARIABLE COSTING: A TOOL FOR
EVALUATING MANAGEMENT PERFORMANCE
INVENTORY COSTING AND CAPACITY ANALYSIS
1. Absorption Costing
2. Variable Costing
3. Throughput Costing
•
For manufacturing companies, 2 common
methods are absorption costing & variable
costing
Absorption Costing
-
All fixed and variable costs are treated as
product inventoriable costs
Required method for external and internal
reporting in PH
Comparison between Variable Costing and
Absorption Costing
1. Various Operating Costs
a. Absorption Costing
i. Product Costs – DM, DL,
Variable costs, Fixed Costs
ii. Period Costs – Variable
selling and administrative
expenses and Fixed Selling
and Administrative expenses
b. Variable Costing
i. Product Costs – DM, DL,
Variable Costs
ii. Period Costs – Fixed costs,
Variable selling and ad
expenses, fixed selling and ad
expenses
Variable Costing
-
All variable costs are included as
inventoriable costs
All fixed costs are excluded from
inventoriable costs
2. As to Net Operating Income
Relationship between Production (P) and
Sales (S)
a. P = S
b. P > S
c. P < S
Underlying Concept of Variable Costing
-
-
-
Fixed part of factory overhead is more
closely related to the capacity to produce
than to the production of specific units
Therefore, should be charged off as
expense in the period incurred
It permit construction of an income
statement which highlights the contribution
margin that facilitates managerial decisionmaking process
it is contended that assets are being
understated and not accepted in accounting
practice
Net Income
a. AC = VC
b. AC > VC
c. AC < VC
3. As to amount of inventory
-
-
Inventory value under absorption costing
would be higher in amount than under
variable costing
The inventory amount would carry a portion
of fixed overhead incurred during the
period under absorption costing
Why Managers Prefer Direct Costing to
Absorption Costing?
-
-
It separates fixed from variable costs as in
CVP analysis therefore it is easier to
compare accrual operating income to
planned operating income
Income is more closely associated with sales
while AC is influenced by units produced
and units sold
Segmented Reporting: Variable-Costing Basis
-
Fixed expenses are broken down into two
categories
1. Direct Fixed Expenses
o directly traceable to
segment
o sometimes referred to as
avoidable fixed expenses or
traceable fixed expenses
o they vanish if the segment is
eliminated
2. Common Fixed Expenses
o Jointly caused by two or
more segments
o Expenses persist even if one
of the segments to which
they are common is
eliminated