CIA Test Preparation
Part III
Study Unit Six:
Managerial Accounting
March 2012
©2012 Deloitte Touche Tohmatsu Jaiyos
Agenda:
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Cost Management Terminology
Cost Behavior and Relevant Range
Absorption (Full) vs. Variable (Direct) Costing
Capital Budgeting
Budget Systems
Operating Budget Components
Transfer Pricing
Cost-Volume-Profit (CVP) Analysis
Relevant Costs
Cost Accumulation Systems
Process Costing
Activity-Based Costing
Responsibility Accounting
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6.1 Cost Management Terminology
Basic Definition
a)A cost is the measure of a resource used up for some purpose
b)A cost object is any entity to which costs can be attached.
c)A cost driver is the basis used to assign costs to a cost object
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6.1 Cost Management Terminology
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6.1 Cost Management Terminology
Product Cost
1.
2.
3.
4.
Inventory costs
Capitalized as part of finished goods inventory
A component of cost of goods sold
All manufacturing costs (DM, DL, VOH, FOH)
Period Cost
1.Expensed as incurred
2.Not capitalized in finished costs
3.Exclude from cost of goods sold
4.All selling and administrative (S&A)
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6.1 Cost Management Terminology
Absorption Costing (Full costing)
DM+DL+VOH+FOH
Variable Costing
Only Variable Manufacturing Costs*
*For internal reporting purposes only
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6.1 Cost Management Terminology
Direct Cost
1. Associated with a particular cost object
2. Can be traced to that object
3. DM and DL
Indirect Cost
1. Cannot be associated with a particular cost object
2. Must be allocated to that object
3. Indirect Material and Indirect Labor
Common Cost
1. Indirect costs shared by two or more users
2. Allocated on a systematic and rational basis
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Key Concept:
• A cost object is any entity to which costs can be attached. A cost driver is the
basis used to assign cost object.
• The costs of manufacturing a product can be classified as one of three types:
DM, DL, and MOH (indirect material, indirect labor, and factory operating costs)
• Product costs (inventoriable costs) are capitalized as part of finished goods
inventory. They eventually become a component of cost of goods sold.
• Period costs are expensed as incurred. They are not capitalized in finished
goods inventory and are thus excluded from cost of goods sold.
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STOP! Review
1. Using absorption costing, fixed manufacturing overhead costs are best
described as:
a) Direct period costs
b) Indirect period costs
c) Direct product costs
d) Indirect product costs
Answer (D): Fixed manufacturing overhead costs are indirect costs
because they cannot be directly traced to specific units produced.
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6.2 Cost Behavior and relevant Range
The Relevant Range defines the normal limits within which pre-unit variable costs
remain constant and fixed costs are not changeable. It is valid for specified time
span.
Variable Costs
Variable cost per unit remains constant in the short-run
regardless of the level of production
Variable cost in total vary directly and proportionally with
changes in volume
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6.2 Cost Behavior and relevant Range
Fixed Costs
Fixed Costs in Total remain unchanged in the short
run regardless of production level.
Fixed Cost per unit vary indirectly with the activity
level.
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6.2 Cost Behavior and relevant Range
Mixed (semivariable) Costs
Mixed (semi variable) costs combine fixed and
variable elements.
Method of estimating mixed costs:
1.
2.
The High-Low Method
The Regression (scatter graph) method
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6.2 Cost Behavior and relevant Range
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6.2 Cost Behavior and relevant Range
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Key Concept:
• The relevant range defines the normal limits within per-unit variable costs
remain constant and fixed costs are not changeable.
• Variable cost per unit remains constant in the short-run regardless of the level
of production. But variable costs in total vary directly and proportionally with
changes in volume.
• Fixed costs in total remain unchanged in the short-run regardless of the
production level. But fixed cost per unit varies indirectly with the activity level.
• Mixed (semi variable) costs combine fixed and variable elements.
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
1. An assembly plant accumulates its variable and fixed manufacturing overhead costs in a
single cost pool, which is then applied to work in process using a single application base.
The assembly plant management wants to estimate the magnitude of the total
manufacturing overhead costs for different volume levels of the application activity base
using a flexible budget formula. If there is an increase in the application activity base that
is within the relevant range of activity for the assembly plant, which one of the following
relationships regarding variable and fixed costs is true.
a) The variable cost per unit is constant, and the total fixed costs decrease
b) The variable cost per unit is constant, and the total fixed costs increase.
c) The variable cost per unit and the total fixed costs remain constant
d) The variable cost per unit increases, and the total fixed costs remain constant
Answer (C): Total variable cost changes when changes in the activity level occur within the
relevant range. The cost per unit for a variable cost is constant for all activity levels within the
relevant range. Thus, if the activity volume increases within the relevant range, total variable
costs will increase. A fixed cost does not change when volume changes occur in the activity
level within the relevant range. If the activity volume increases within the relevant range, total
fixed costs will remain unchanged.
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6.3 Absorption (Full) vs. Variable (Direct) Costing
Absorption Costing
1.
Product cost thus includes all manufacturing costs, both fixed and variable.
Sales
- (COGS)
Gross Margin
- (S&A)
Operating Income
2.
This method is required under U.S. GAAP and IFRs for external reporting
purposes.
©2012 Deloitte Touche Tohmatsu Jaiyos
6.3 Absorption (Full) vs. Variable (Direct) Costing
Variable Costing
1.
Product cost includes only variable manufacturing cost.
Sales
- (Variable COGS)
- (Variable S&A)
Contribution Margin
2.
This method is also called contribution margin reporting.
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6.3 Absorption (Full) vs. Variable (Direct) Costing
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Key Concept:
• Under absorption costing, the fixed portion of manufacturing overhead is
included in the cost of each product. Product cost thus includes all
manufacturing costs, both fixed and variable. Absorption-basis cost of goods
sold is subtracted from sales to arrive at gross margin.
• Variable costing is more appropriate for internal reporting. Product cost includes
only variable manufacturing costs. Variable-basis cost of goods sold and the
variable portion of S&A expenses are subtracted from gross margin to arrive at
contribution margin.
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
1. A company manufactures and sells a single product. Planned and actual production in its
first year of operation was 100,000 units. Planned and actual costs for that year were as
follows:
Variable
Fixed
Manufacturing
Nonmanufacturing
US $600,000
US $500,000
400,000
300,000
The company sold 85,000 units of product at a selling price of US $ 30 per unit.
Using absorption costing, the company’s operating profit was:
a)
b)
c)
d)
US $750,000
US $900,000
US $975,000
US $1,020,000
Answer (B): Revenue (85,000*30) – COGS (85,000*10) – Nonmanufacturing costs
(500,000+300,000) = Operating Profit 900,000
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6.4 Capital Budgeting
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6.4 Capital Budgeting
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6.4 Capital Budgeting
6.
An investment opportunity schedule (IOS) is a graph useful in
determining the optimal capital budgets.
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6.4 Capital Budgeting
a.
The marginal cost of capital (MCC) function can be combined with the
IOS to identify the projects to be accepted
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Key Concept:
• Capital budgeting is the process of planning and controlling investments for
long-term projects. A capital project should only be undertaken if management
expects it will increase shareholder value.
• The NPV method for projecting the profitability of an investment expresses a
project’s return in dollar terms. NPV nets the expected cash inflows and
outflows related to a project, then discount them at the hurdle rate, also called
the desired rate of return.
• The IRR method express a project’s return in percentage terms. The IRR of an
investment if the discount rate at which the investment’s NPV equals zero.
• The payback period is the number of years required to recover the original
investment.
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
1. Everything else being equal, the internal rate of return (IRR) of an investment project will
be lower if:
a) The investment cost is lower
b) Cash inflows are received later in the life of the project
c) Cash inflows are larger
d) The project has a shorter payback period.
Answer (B): The IRR is the discount rate at which the NPV of a capital project is zero.
Because the PV of a dollar is higher the sooner it is received, projects with later CF will have
lower NPV for any given discount rate than will projects with earlier CF, if other factors are
constant. Hence, projects with later CF will have a lower IRR.
©2012 Deloitte Touche Tohmatsu Jaiyos
6.5 Budget Systems
Purposes of a Budget
1.
A formal management plan stated in monetary terms:
• A planning tools
• A control tool
• A motivational tool
• A means of communication and coordination
Master Budget
2. The master budget, also called comprehensive budget or annual profit
plan, consists of the organization’s operating and financial plans for a
specified period
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6.5 Budget Systems
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6.5 Budget Systems
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6.5 Budget Systems
Kaizen
7.
Kaizen means continuous improvement, and kaizen budgeting assumes the
continuous improvement of products and processes.
Static and Flexible Budgeting
8.
A Static Budget is based on only one level of sales or production. A
Flexible Budget is a series of budgets prepared for various levels of activity
within the relevant range.
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Key Concept:
• The master budget consists of the operating and financial budgets
• Budget systems include
(1) project budgeting
(2) activity-based budgeting
(3) zero-based budgeting
(4) continuous budgeting
(5) kaizen budgeting
(6) static budgeting
(7) flexible budgeting
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
1. The major appeal of zero-based budgeting is that it
a) Solves the problem of measuring program effectiveness.
b) Relates performance to resource inputs by an integrated planning and resourceallocation process.
c) Reduces significantly the time required to review a budget.
d) Deals with some of the problems of the incremental approach to budgeting
Answer (D): The traditional approach to budgeting is the merely increase last year’s
amounts by a given percentage or increment. Zero-based budgeting divides programs into
packages of goals, activities, and required resources. The cost of each package is then
recalculated, without regard to previous performance.
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6.6 Operating Budget Components
Sales budget
1.
2.
3.
Sales budget is the starting point for the master budget
The sales budget is based on the sales forecast.
The sales budget must specify both projected unit sales and revenues
Production budget
1.
2.
Production budget follows directly from the sales budget
The production budget is concerned with units only
©2012 Deloitte Touche Tohmatsu Jaiyos
6.6 Operating Budget Components
Direct material and direct labor budgets
1.
2.
3.
Follow directly from the production budget
The direct materials budget is concerned with both units and input prices
The direct labor budget depends on wage rates, amounts, and types of
production, numbers and skill levels of employees, fringe benefits.
Cost of fringe benefits
1.
Must be derived once the cost of wages has been determined
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6.6 Operating Budget Components
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6.6 Operating Budget Components
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6.6 Operating Budget Components
Pro forma budgeted income statement
1.
2.
Pro forma budgeted income statement is the result of the operating budget
process
It is used to decide whether the budgeted activities will result in a loss or an
unacceptable level of income.
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Key Concept:
• In the operating budget, the emphasis is on obtaining and using current
resources.
• It contains the following budgets*:
1. Sales
2. Production
3. Direct Materials
4. Direct Labor
5. Manufacturing Overhead
6. Ending finished goods inventory
7. Cost of goods sold
8. Nonmanufacturing
*These budgets are used to prepare the pro forma income statement.
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
Finished Units
DM (Pounds)
Beginning Inventory
14,000
44,000
Target ending inventory
12,000
48,000
Answer (C): Required production of finished units is 22,000 (target ending invt 12,000 +
sales of 24,000 – beginning invt 14,000). Thus, 88,000 lb. of DM (22,000x4 lb. per unit) must
be available. Required purchase of DM equal 92,000 lb. (target ending invt of 48,000 +
usage of 88,000 – beginning invt of 44,000)
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6.7 Transfer Pricing
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6.7 Transfer Pricing
Methods
1.
Cost plus pricing: sets price at the selling segment’s full cost of production
plus a reasonable markup
2.
Market pricing: uses the price the selling segment could obtain on the
open market.
3.
Negotiated pricing: gives the segments the freedom to bargain among
themselves to agree on price
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6.7 Transfer Pricing
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6.7 Transfer Pricing
Multinational Considerations
1.
When segments are located in different countries, taxes and tariffs may
override any other considerations when setting transfer pricing
2.
Exchange rate fluctuations, threats of expropriation and limits on transfers of
profits outside the host country are additional concerns.
©2012 Deloitte Touche Tohmatsu Jaiyos
Key Concept:
• Transfer prices are the amounts charged by one segment of an organization for
goods and services it provides to another segment of the same organization.
• Three basic methods for determining transfer prices are: cost plus pricing,
market pricing, and negotiated pricing
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
Answer (B): The optimal transfer price of a selling division should be set at a point that will
have the most desirable economic effect on the firm as a whole while at the same time
continuing to motivate the management of every division to perform efficiently. Setting the
transfer price based on actual costs rather than standard costs would give the selling division
little incentive to control costs.
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6.8 Cost-Volume-Profit (CVP) Analysis
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6.8 Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit Analysis
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Key Concept:
• Cost-volume-profit analysis (breakeven analysis) is a tool for understanding the
interaction of revenues with fixed and variable costs
• The breakeven point is the level of output at which total revenues equal total
expenses (operating income is zero)
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
Sales (150,000 Units)
US $9,000,000
Variable costs:
DM
US $1,800,000
DL
720,000
MOH
Selling expenses
1,080,000
450,000
Fixed costs:
MOH
US $600,000
Administrative exp
567,840
Selling Expenses
352,800
Income tax rate
40%
Answer (C): The breakeven (unit) = total fixed costs/unit contribution margin (4,950,000 total
contribution margin/150,000 units sold). The breakeven point in unit sales is 46,080 (US
$1,520,640 fixed costs/US $33 UCM)
©2012 Deloitte Touche Tohmatsu Jaiyos
6.9 Relevant Costs
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6.9 Relevant Costs
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6.9 Relevant Costs
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6.9 Relevant Costs
Sell-or-Proccess Further Decisions
1.
The sell-or-process decision should be based on the relationship between
the incremental costs (the cost of additional processing) and the incremental
revenues (the benefits received)
Incremental cost < Incremental revenue = Process!
©2012 Deloitte Touche Tohmatsu Jaiyos
Key Concept:
• The typical problem for which marginal (differential or incremental) analysis can
be used involves choices among courses of action. The focus is on incremental
revenues and costs.
• Applications of marginal analysis include make-or-buy decisions, special
orders, disinvestment, and sell-or-process decisions.
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
Variable costs:
DM
US $3.00
DL
1.00
MOH
Selling expenses
0.8
2.00
Fixed costs:
MOH
Selling Expenses
US $90,000
60,000
Answer (B): The revenue will increase by US $76,000 (10,000 units x 7.6). The cost will
increase by US $60,000 [10,000 units x (3.0+1.0+0.8+1.2)]. Thus, acceptance of the special
order will increase profit by US $16,000 ($76,000 - $60,000).
©2012 Deloitte Touche Tohmatsu Jaiyos
6.10 Cost Accumulation Systems
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6.10 Cost Accumulation Systems
Cost Accumulation systems
1. Job costing: appropriate when producing products with individual
characteristics or when identifiable groupings are possible.
2. Process costing: use when similar products are mass produced
3. Activity-based costing (ABC): attaches costs to activities rather than to
physical goods.
4. Life-Cycle costing: emphasizes the need to price products to cover all the
costs incurred over the life of a product
5. Operating cost: a hybrid of job-order and process costing and is used by
entities whose manufacturing processes involve some dissimilar operations.
6. Backflush costing: delays the assignment of costs until the goods are
finished
©2012 Deloitte Touche Tohmatsu Jaiyos
Key Concept:
• Job-order costing is concerned with accumulating costs by specific job.
• Process cost accounting is used to assign costs to relatively homogeneous
products that are mass produced on a continuous basis
• Activity-based costing (ABC) attaches costs to activities rather than to physical
goods
• Life-cycle costing emphasizes the need to price products to cover all the costs
incurred over the life of a product.
• Operating costing is a hybrid of job-order costing and process costing that
emphasizes physical processes for cost management and control purposes.
• Backflush costing delays the assignment of costs until the goods are finished
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
Answer (A): Job-order costing is used by organizations whose products or services are
readily identified by individual units or batches. The advertising agency accumulates its costs
by client. Job-order costing is the most appropriate system for this type of manufacturing
firm.
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6.11 Process Costing
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6.11 Process Costing
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6.11 Process Costing
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Key Concept:
• Process cost accounting is used to assign costs to similar products or service
units that are mass produced on a continuous basis
• Equivalent units of production (EUP) are calculated to facilitate cost allocation
when some units of output are not complete at the end of the period
• The weighted-average method of calculating EUP and unit costs essentially
treats the work done on beginning work-in-process as if it had been done in the
current period.
• The FIFO method calculates EUP and unit costs only for the work done and
costs incurred in the current period
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
Answer (C): Abnormal spoilage is spoilage that is not expected to occur under normal,
efficient operating conditions. Because of its unusual nature, abnormal spoilage is typically
treated as a loss in the period in which it is incurred.
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6.12 Activity-based costing (ABC)
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6.12 Activity-based costing (ABC)
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6.12 Activity-based costing (ABC)
Volume-based system
1. Accumulated costs in general
ledger accounts
Activity-based system
1. Identifies organizational activities
that constitute overhead
2. Uses a single cost pool to combine 2. Assigns the costs of resources
the costs in all the related
consumed by the activities
accounts
3. Assigns the costs of the activities
3. Selects a single driver to use for
to final cost objects
the entire indirect cost pool
4. Allocates the indirect cost pool to
final cost objects
©2012 Deloitte Touche Tohmatsu Jaiyos
6.12 Activity-based costing (ABC)
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6.12 Activity-based costing (ABC)
©2012 Deloitte Touche Tohmatsu Jaiyos
6.12 Activity-based costing (ABC)
©2012 Deloitte Touche Tohmatsu Jaiyos
Key Concept:
• Under ABC, indirect costs are attached to activities that are then rationally
allocated to end products.
• An ABC system identifies organizational activities that constitute overhead,
assigns the costs of resources consumed by the activities, and assigns the
costs of the activities to final cost objects.
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
Answer (B): An essential element of activity-based costing is driver analysis, which
identifies the cause-and-effect relationship between an activity and its consumption of
resources and for an activity and the demands made on it by a cost object. There is a direct
causal relationship between the number of components in a finished product and the amount
of material handling cost incurred.
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6.13 Responsibility Accounting
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6.13 Responsibility Accounting
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6.13 Responsibility Accounting
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Key Concept:
• A well-designed responsibility accounting system establishes responsibility
centers (also called strategic business units).
• A cost center is responsible for costs only. A revenue center is responsible for
revenues only. A profit center is responsible for revenues and expenses. An
investment center is responsible for revenues, expenses, and invested capital.
• Performance measures are means of revealing how efficiently an investment
center is deploying the capital that has been invested in it to produce income for
the owners.
• ROI is the key performance measure of an investment center
• Residual income is a dollar measure
• The target rate is ordinarily the weighted-average cost of capital
©2012 Deloitte Touche Tohmatsu Jaiyos
STOP! Review
Answer (D): A cost center is a responsibility center that is responsible for costs only. Of the
alternatives given, variance analysis is the only one that can be used in a cost center.
Variance analysis involves comparing actual costs with predicted or standard costs
©2012 Deloitte Touche Tohmatsu Jaiyos
Thank you
Alisa Glankwamdee, CIA
E-mail : pangalisa@gmail.com
Mobile: 081-949-4638
©2012 Deloitte Touche Tohmatsu Jaiyos