Management Accounting Chp2

Chapter 2

Cost Management Concepts and Cost Behavior

Cost Management Concepts and Cost Behavior

Cost and Cost Management Concepts Cost Behavior AnalysisVariable costingActivity-based CostingCost – Volume – Profit Analysis

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Learning Objectives :Explain why the appropriate derivation of a cost

depends on how the cost will be used State the difference between variable costs and

fixed costs and why the difference is important State what opportunity cost is and how opportunity

cost relates to convention costs Analyze cost behaviorLearn the variable costingUnderstand the difference between variable costing

and absorption full costing Learn the basic concept of activity-based cost

management system


§2.1 Cost and Cost Management Concepts

What does costs mean?

Cost is the monetary value of goods and services expended to obtain current or future benefits

Cost objects

Product , service, project, customer, activities, department, planning …

Cost calculation

Cost collection：

Cost assignment：According to category of the cost to collect…

tracing or allocate to cost object…

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Cost concept – Different costs for different purposes

There is no universal way to compute the cost of something

External purposes : GAAPInternal purposes

Planning: …

Control: …


Cost concept: Flexible costs & Capacity-related costs

Organizing costs based on the why they are created

Flexible costs

Flexible resources

Variable costs

Capacity-related costs

Capacity-related resources

depend on how much of the capacity is acquired, rather than on how much is used

Fixed costs


Cost concept: Opportunity Cost

An opportunity cost is the sacrifice you make when you use a resource for one purpose instead of another.

Nature of Opportunity Costs

Opportunity costs are not necessarily as payments.

Opportunity costs are the estimated foregone benefits from actions that could, but will not, be undertaken.

Opportunity costs is the sacrifice of the best alternative for a given action


Cost concept: Short -run Costs and Long -run Costs

Short-run costs

Short run is the period over which a decision maker can not adjust capacity

Short-run costs are actually flexible costsLong-run costs are the sum of flexible costs

and capacity-related costs associated with a cost object, which is most often a product


§2.2 Cost Behavior Analysis

Cost Behavior is referred to the relationship between costs and cost driver, such as volume or activity .

Fixed Costs ( Nonvariable Costs )– the total costs remain unchanged despite changes

of activity (output), Fig. ...– Capacity-related costs, e.g., with respect to net

sale, property taxes expense, depreciation expense on a sales showroom, based on the straight-line method of depreciation, advertisement expense ect.


Variable Costs

Variable Costs – the total amount of costs vary proportionately

with changes in the volume of activity (output)– Flexible costs, e.g., with respect to net sale,

income taxes expense, a commission on all sales to salespeople ect.


Semivariable Costs

Semivariable Costs– the total amounts of costs have both a fixed and

variable portion , i.e., costs that respond to changes in activity volume by less than a proportionate amount. Fig. …

– Mixed Costs


Cost Behavior Analysis

Cost Behavior Analysis Process

Step1: determine cost drivers

cost driver is that measure of physical activity most highly associated with variations in cost. ( high relevant, concise,easy ).


Cost Behavior Analysis – Cost Behavior Analysis Process

Step2: collect data of costs and cost drivers

Step3: mark data

Step4: determine costs functionCost Behavior Analysis

– to estimate the fixed and variable elements of semivariable costs

– Cost Behavior Patterns are Linear – Cost Behavior Patterns are Stair-Step – Cost Behavior Patterns are Curvilinear


Cost Behavior Patterns are Linear

Assumption: there is one important primary cost driver, i.e., y = a + bx

Account Classification

according to the account character,each account in the accounting system is classify as being either fixed or variable

Industrial Engineering Approach

Industrial engineers study the relationship between costs and volume with the goal of determining the optimal work method , considering the raw materials, the design of the product or process, the process or order of work ,the tools, the activity of each step etc.


Cost Behavior Patterns are Linear – High-Low Method

Determining the fixed and variable elements of semivariable costs only by the highest and the lowest costs during a period

Formula: b = (Y2 – Y1 ) / (X2 – X1 ) a = Y1 – bX1 = Y2 – Bx2


Cost Behavior Patterns are Linear – Scatter-diagram Method

Step1: establishing the reference frame - the vertical axis represents the total costs, the horizontal axis is the total units produced

Step2: plotted the costs incurred with the relative output as the points;

Step3: using theses data points, a straight line can be estimated by analysts’ eyes and it is shown in the following figure…


Cost Behavior Patterns are Linear – Least Squares Method

A kind of mathematical technique called as Regression Analysis

Y = a + bx + u

y = n·a + b x ······ (1)

xy = a x +b x² ······ (2)

a = (

y - b x ) / n

b = ( n

xy - x y ) / [ nx² - ( x )² ]

Correlation test


Least Squares Method – Correlation Test

Coefficient of correlation – r – Coefficient of determination – r²– r = ( n

xy - x y ) ÷

{ [ nx² - ( x )² ]. [ ny² - ( y )² ]} ½Standard error of estimate – s

– s = { 1/(n-2)×

( y-ye )² } ½


Cost Behavior Analysis Example 1

e.g.2.1 Fresno Processing company’s total overhead is fixed and that some portion may varies with the changes of following factors: direct labor hours or direct labor expense or machine hours. Now Hreny Lee, manager of the business, is considering using one of above factors as the primary cost driver. Information pertaining to overhead and direct labor hour, direct labor costs, machine hour for the first six months of the year is shown below:


Jan.Feb.

Mar.

Apr.May

June

¥60,000¥80,000

¥90,000¥110,000¥70,000¥110,000

2,000

4,0003,5004,500

4,5002,500

3,0005,0002,0003,000

4,5006,000

¥11,000¥15,000¥14,000¥20,000¥11,000¥18,000

Overhead Direct labor hour

Direct labor expense

Machine hour

Instruction :

1) Using the Scatter - diagram Method to determine the primary cost driver

2) Using the Least Squares Method to determine the primary cost driver

3) What else should be considered except the high relevant when choosing the cost driver?


Cost Behavior Analysis Example 2

e.g.2.2 Shown below are the monthly high and low level of machine hours and of total manufacturing overhead for Westinghouse Company:

the highest (Sept.) the lowest (Feb.)

Machine hours 75,000 50,000Overhead ¥176,250 ¥ 142,500Assume that the total overhead consists of fixed

portion, variable portion and semivariable portion. Each portion of the overhead is classified in detail at the highest point as below:


the amount of variable cost ¥ 75,000the amount of fixed cost ¥ 60,000the amount of semivariable cost ¥ 41,250

the total amount of overhead ¥ 176,250Instruction:1) Using the given data, try to find the semivariable portion behavior pattern of overhead by means of High - Low Method;2) In a month in which 65,000 or 85,000 machine hours are used, try to estimate the amount of overhead.


e.g.2.3 雷蒙公司在几个不同工厂制造多种产品,富兰克林工厂制造电器零件。由于富兰克林工厂目前每月制造费用波动,因而难以估计其未来各月发生的制造费用。

为了更好地制定业务及财务计划,管理人员希望能准确地估计制造费用.雷蒙所订购的同业公会杂志指出制造电器零件公司的制造费用与直接人工小时成正比。因此，某一会计员建议确定该公司制造费用成本习性模型,

根据预计的直接人工预测制造费用。估计未来制造费用习性模型的方法有：高低点法、散布图法、简直线、复回归及指数修匀法(exponential smoothing)。在这些方法中,雷蒙公司决定采用高法、散布图法及简直线回归法,

收集的过去两年有关直接人工小时及制造费用资料如下:

Cost Behavior Analysis Example 3HUST 管理学院岳爱真

试作：

1) 利用高低点法、回归分析,确定富兰克林工厂制造费用的成本习性模型。

2) 利用回归分析结果,估计当直接人工22500小时时的制造费用。利用上列成本公式计算本月份预计的制造费

用：

a)高低点法, (b)最小平方法, (c)散布图法

3) 3 种方法(高低点法、散布图法及直线回归)中,雷蒙公司应选用哪一种方法来确定富兰克林工厂制造费用的历

史成本习性模型?试说明之,并说明不能采用其他方法的理由。

4) 相对大多数公司而言，相关范围的观念对于富兰克林工厂是较为重要或还是较为不重要?


Cost Behavior Is Stair-Step & Cost Behavior Is Curvilinear

Cost Behavior Is Stair-StepCost Behavior Is CurvilinearComment on Cost Behavior Analysis


§2.3 Variable Costing

Variable Costing is a costing method in which only variable manufacturing costs are included in product costs.

Traditional form of product costing known as full absorption costing include both job order costing and process costing .

These system are designed to absorb all manufacturing costs into product costs.


Costs Flow of Absorption Full CostingExpenditures

Product Costs (Manufacturing Costs)

Period Expenses(Nonmanufacturing Costs)

Direct Materials

Selling Expense

Work in Process Goods

Finished Goods

Cost of Goods sold

Net Profit or Loss

Direct Labor

Manufacturing Overhead

Administration Expense

Selling


Criticisms of Absorption full Costing

Absorption full costing create incentive to overproduce !


Variable Costing ( Direct Costing )

Under the variable costing, product costs contain only the variable components, fixed manufacturing costs are treated as period costs and are written off against income in the year they are incurred.


Costs Flow of Variable Cost System

Expenditures

Manufacturing Costs Nonmanufacturing Costs

Dir.

Mat.Selling

Expense

Work in Process Goods

Finished Goods

Cost of Goods Sold

Net Profit

or Loss

Dir.

Lab.

Variable Man.

Overhead

Adm. Expense

Selling

Fixed Man.

Overhead

Dir.

Mat.

Dir.

Lab.

Variable Man.

Overhead

Adm. Expense

Selling Expense

Fixed Man.

Overhead


SalesLess: Cost of goods sold

Gross profit on sales Less: Administrative &

Selling expense

Profit

SalesLess: Variable manufacturing cost

Manufacturing marginLess: Variable administrative &

selling expense

Contribution marginLess: Fixed manufacturing costLess: Fixed administrative &

selling expense

Profit

* Profit Evaluation

Gross profit on sales

Contribution margin


Contribution Margin

Contribution Margin is the amount by which the sales revenue earned exceeds the relative variable costs incurred, i.e.,

Contribution Margin = Sales -Variable CostsUnit Contribution Margin is the difference

between the price and the variable cost per unit, i.e., Unit Contribution Margin

= Unit Selling Price -Variable Cost per Unit


Example on Variable & Absorption full Costing

e.g.2.4 A single homogeneous product is produced in Allegheny Co. , and variable cost per unit does not increase as production is expended. To simplify the example, assume there are not beginning inventories. Shown below are the data about costs, price , sales and produce volume.

Price ¥11/ unitDirect materials and labor ¥2/ unitVariable manufacturing overhead ¥3/ unit Fixed manufacturing overhead ¥40,000 Fixed selling and administrative expense ¥5,000Variable selling and administrative expense ¥ 1/ unit


Example on Variable & Absorption Costing

Year1 Year2 Year3 Sales 10,000 units 10,000 units 10,000 unit Production 10,000 units 11,000 units 9,000 unit

Required:Prepare the absorption costing and variable

costing income statements.


Profit Rule

when the number of units finished= the number of units sold,

the profit of variable costing = the profit of full costing

when the number of units finished >the number of units sold

the profit of variable costing < the profit of full costing

when the number of units finished < the number of units sold,

the profit of variable costing > the profit of full costing Comments on Variable Costing……


Criticisms of Absorption Full Costing

Absorption full costing create incentive to overproduce !

Absorption full costing provide inaccurate product costs. Why ?

It’s because of cost structures today…®the composition of manufacturing costs and

each cost item represented proportion of total manufacturing costs



e.g.2.5 Nanticoke Electric has three groups of customers: industrial, commercial, and residential (both single-unit and multiple-unit dwellings). It sells about 1,000,000,000 units of electricity each month to its 455,000 customers. The selling price of the electricity is about $0.50 per unit. A recent costing study has determined that the full manufacturing and distribution cost is about $0.30 per unit.


The only other major costs are meter reading costs, which amount to $5 per reading, and billing and processing costs, which amount to $8 per bill.Each customer’s meter is read monthly and bills are prepared monthly. There are two ways to compute the costs for each group shown as follow (e.g.3.1- 2).

Do you think which one accurate is?



ProductDesign

ProductProductDesignDesign

Researchand

Development

ResearchResearchandand

DevelopmentDevelopment

§2.4 Activity-Based Costing

Securing rawmaterials and

other resources

Securing rawSecuring rawmaterials andmaterials and

other resourcesother resources

ProductionProductionProduction

MarketingMarketingMarketing

DistributionDistributionDistribution

CustomerService

CustomerCustomerServiceServiceStartStart 研究计划的数量

研究所费时间研究技术复杂性

需设计产品数量产品零部件数量设计时间

广告次数销售员人数销售额

送配产品的数量送配对象的数量送配产品的重量

服务电话次数检修产品数目产品检修时间

…

Business running as a sequence of activities

Types of Production ActivitiesABC: Business running as a sequence of

activities , activities create costs® activity : a unit of work or task with specific goal

Types of Production Activities Unit-related activities

Those activities whose volume or level is proportional to the number of units produced or to other measures, such as…

Unit-related activities apply to more just production activities, such as…

Unit level costs

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Types of Production Activities

Batch-related activities

Those activities triggered by the number of batches produced rather than by the number of units manufactured.

Machine setups, issue purchase orders,...

Batch level costs


Types of Production Activities Product-sustaining activities

Those activities that support the production and sale of individual products but are independent of actual production production and batches.

Administrative efforts to maintain drawings and labor and machine routings for each part

Product engineering efforts to maintain coherent specification, such as…

Product level costs



Business-sustaining activities

Those activities required for the basic functioning of the business, independent of production or sales volumes and mix.

Business-sustaining costs

Facility-sustaining costs



Customer-sustaining activities

Those activities that enable the company to sell to an individual customer but are independent of the volume and mix of products sold and delivered to the customer

Sales calls and technical support provided to individual customers

Customer costs


Costs Flow of Activity-Based Cost SystemExpenditures

Unit level costs

Batch level costs

Product levelcosts

Facility-sustainingcosts

Product 1 Product 2

activity cost drivers

quantity required of each activity by each

product


§2.5 Cost – Volume – Profit Analysis

CVP Analysis – Break – even analysis – a discussion to the relationships among cost,

revenue and profit based on classifying cost into fixed/variable categories

Profit

Revenue -Variable Costs -Fixed Costs

Contribution Margin - Fixed Costs


Supposed: Π – profit, p – price x – volume a – fixed costs

b – per-unit variable costs , thenΠ = px – bx – a = ( p – b ) x - a

the term profit in CVP analysis refers to operating income, which is pretax ; costs including manufacturing costs and operating expenses

Basic CVP Analysis Formulas


Supposed: Π = 0 Break – even analysis Supposed: Π > 0 Target profit - even

analysis

Volume

Sales & Costs Sales line

Costs line

A

B

D

Break-even point

Π = px – ( bx + a ) = ( p – b ) • x- a

Loss area

Profit area

x0D’B’

A’

( p – b )


Unit Contribution Margin & Contribution Margin Ratio

Unit Contribution Margin is the difference between the price and the variable cost per unit, i.e., Unit Contribution Margin = p - b

Unit Selling Price -Variable Cost per UnitContribution Margin Ratio is either dividing the

total contribution margin for the period by total revenue or on a per-unit basis, i.e.,

Contribution Margin Ratio

Contribution margin / Revenue = ( p – b )/p


Useful CVP Analysis Formulas

∵Π = ( p – b ) • x- a ，∴ at the even point ( i.e., Π

0 ) ,

x = ( a + Π ) / (p – b) ······（2）

Variable costs

- Unit Contribution Margin Model

Sales & Costs

Loss area

Volume

Profit areaA

B

C

D

Sales line

Costs lineBreak-even point

x0


Useful CVP Analysis Formulas

∵Π = ( p – b ) • x- a ，∴ at the even point ( i.e., Π

0 ) ,

px = ( a + Π ) / [ ( p – b ) / p ] ······（3）

- Contribution Margin Ratio Model

Loss area

Profit area

Costs line

Sales lineSales & Costs

Volumex0

Break-even pointpx0


e.g.2.6 A single homogeneous product is produced in Allegheny Co. , and variable cost per unit does not increase as production is expended. To simplify the example, assume there are not beginning inventories. Actual sales volume is equal to Production volume and is 10,000 unit. The projected profit is ¥ 40000 . Shown below are the data about costs, price

Example of Cost- Volume - Profit Analysis


Price ¥11/unit Direct materials and labor ¥2/ unit Variable manufacturing overhead ¥3/ unit Fixed manufacturing overhead ¥40,000 Selling and administrative expense :– Fixed, ¥5000– Variable, ¥ 1/ unit

Instruction: compute the break-even point and the target profit -even point.


Margin of Safety

The dollar amount by which the actual sales volume exceeds the break-even sales volume, i.e., Margin Safety in dollar

(actual revenue - break-even revenue)Sometimes margin of safety is defined in

unit , i.e. , Margin Safety

Actual volume - Break-even volume


Example of CVP Analysis

e.g.2.7 柏来及怀特分别是现代加工公司与欧威制造公司的老板,这两家公司制造和销售相同的产

品,两人之间的竞争极为友善,其成本及利润资料彼此公开,产品售价则由市场决定。柏来与怀特

的管理理念显然不同：现代公司的生产是高度机械化作业,直接人工以固定薪资支付;且其推销员

支领固定薪水。而欧威公司则是用手工制造,大部分是按时支付,并支付奖金,且其推销员支领低薪加上佣金。怀特对其公司所具有的成本随销售量变动而变动的能力而深感自豪,并常取笑柏来

的公司 “成本及费用缺乏弹性”。


2007年度两家公司销售额¥100,000 时的净利相等,然而2008年底比较经营业绩时,怀特对下列

结果感到惊讶: 现代加工公司

欧威制造公司

2007年

2008年 2007年

2008年

销售收入

¥ 100000 ¥ 120000 ¥100000 ¥150000成本及费用 ¥ 90000 ¥ 94000 ¥ 90000 ¥ 130000净利

¥10000 ¥26000 ¥10000 ¥ 20000

占销额比重

10% 21.67% 10% 13.33%怀特怀疑其拥有的欧威公司在2008年的营业中

存在效率不高的问题, 因而责令其会计员对本公司2008年的成本作彻底调查。


然而调查并未发现任何成本不当的事实。对于销量大量增加而利润增加不大,怀特深感困惑，故请求专家说明原因。专家发现这两年帐上记录的固定成本及费用如下: 现代－¥70 000/年；欧威－¥10 000/年。要求：

a. 试为怀特说明为何2008年虽然欧威的销货较高, 但其净利却比现代的低的理由,试通过有关的计算来说明问题；

b. 若要获得现代公司2008年所实现的利润 ¥26 000 ，欧威公司需要的销货量是多少。

c. 试评论当销货量减少时，两公司未来的相对地位。


Profit & Change of ProfitProfit = Margin of Safety in dollar

×Contribution Margin Ratio = Margin of Safety in unit × Unit Contribution Margin

Change in Profit = Change in Sales Revenue × Contribution Margin Ratio

= Change in Sales unit × Unit Contribution Margin

Operating Leverage


CVP Analysis for Sales Mix

∏ = ∑( pi – bi )xi - aAverage Contribution Margin Ratio

is the ratio computed by weighting the contribution margin ratios of each product line by the percentage of total sales which that product represents.


® Average Contribution Margin Ratio

Supposed: (∏+a) allocating rate is βi , then ∑βi = 1,

Average Contribution Margin Ratio of the firm= ∑βi × [ ( pi – bi ) / pi ]Assumption:

βi is the percentage ,which each product’s sales accounting for total sales.

βi is defined as sales mix


CVP Analysis for Sales Mix

step1: Calculating the average contribution margin ratio;

step2: Determining the break-even point of the company;

step3: Determining the the break-even point of each product.


Example of Sales Mix CVP Analysis

e.g.2.8 White Co. makes and sells three products: G, R, E. Fixed costs incurred last year was ¥144,000, the data about costs, prices and volume of each product are shown as below: G R E

Price per unit ¥4 ¥8 ¥10Variable costs per unit ¥3 ¥4 ¥7Volume of sales (unit) 20,000 40,000 60,000


Instructions:

1) compute the break-even point of White Co. and each product ;

2) compute the profit of White Co. How about break-even point when sales

mix changes?

In generally, break-even point will be changed with sales mix , no matter in unit or in dollar .


Profitability & Sales Mix

Profitability can be improved by shifting sales mix to include more products with high contribution margin ratios and less products with low contribution margin ratios.

When the sales mix remains unchanged,Change in Profit

Change in Sales Revenue of the Co.

× Average Contribution Margin Ratio

Change in Sales unit of the Co.

× Average Unit Contribution Margin


® CVP Sensitive Analysis

CVP sensitive analysis studies on the fluctuating degree of profit according to its relative factors.

What-if analysis

∏

is sensitive to price, costs and volume, furthermore, each sensitivity is different:

d ∏ / dp = x

d ∏ / dx = p - b

d ∏ / db = - x

d ∏ / da = -1


Assumptions Underlying Cost – Volume – Profit Analysis

CVP analysis is a single-period analysisSales price per unit is assumed to remain

constantCosts can be classified into fixed and variable

portionThe number of units produced is assumed to equal

the number of units sold during each period.The sales mix is assumed to remain constant


Example of CVP Analysis

e.g.2.9许先生从2006年开始，租赁一栋房屋用于开办脆饼餐厅，房屋租金每月 $400。此外，他还雇佣专职女职员二名及大学生六名端送脆饼,每周工作时间为30

小时；以月薪

$300聘用一名会计记帐及报税。餐厅所需设备及运输卡车都是许先生用现金购买的,据许先生观察餐厅的水电费及用品费用相当固定。餐厅自开业以来，营业额逐年增加,利润也已经翻倍,令许先生不解的是为什么他餐厅的利润增加的速度比营业额增加的

速度快。现已知每一块脆饼平均售价为 $2.50，许先生应付的所得税为餐厅净利的30%，由会计编制的2008

年预计损益表如下:


预计损益表 2008年度

销售收入

$95,000 销售成本

$28,500

餐厅助理员工资及福利 8,150

服务员工资及福利

17,300 租金

4,800

会计服务

3,600 运输设备折旧

5,000

餐厅设备折旧

3,000 水电费

2,325

用品费用（肥皂、地板蜡等） 1,200 $73,875

税前净利

$21,125 所得税

$6,338

净利

$14,787


试作:(a)餐厅若欲达到损益平衡点,则必须出售多少脆饼?(b)餐厅若欲达到现金流量平衡点,则需出售多少脆饼?(c)如果许先生准备2008年从餐厅提取 $4800作为私人用途,

那么，在2008年的营业中至少需产生多少现金?(d)如果许先生希望获得税后净利 $20000,则餐厅必须销售

多少脆饼?(e)试说明为什么餐厅净利增长的速度会超过销货增加的

速度。

(f)试说明为什么2008年的现金流量超过其净利润。


Review（for 5th edition）Reading:

Chapter 2,3

Self-study: – p70, Exercises 2-22,2-25;– p75,Problems 2-36

Assignment：– p73,Problems 2-33, 2-35;2-44– P76, Problems 2-39


Documents

Management Accounting Chp2