Macn 201 Management Acc 201 Own Notes

MACN 101 Management Accounting Notes Page |1

Management Accounting. own notes Book: Management and cost accounting Collin Drury 6 edition Timetable :Mon 17h00, fri 13h00 ,sat 10H00 ,Tests sat 08h00 Lecturer:Mr Ngomane office 2020 k block 015-268-3297

CONTENTS Contents....................................................................................................................................................................1 QUESTIONS:...............................................................................................................................................................6 Reconcilliation of Absorbtion profit to absorbtion profit(pg 142 viggio)..................................................................6 LAST QUESTION PLACE...........................................................................................................................................7 To scan in/do still:......................................................................................................................................................9 Rem: Notes special things to remember..................................................................................................................10 2-TERMS:(vig ch 1+2)..............................................................................................................................................11 Intro:....................................................................................................................................................................11 Cost Objects:........................................................................................................................................................11 Direct and Indirect Costs......................................................................................................................................11 the production point of indifference, :...............................................................................................................11 analysis of the companies cost structure: ........................................................................................................11 inventory valuation:(note)................................................................................................................................11 DIRECT COSTS : ...............................................................................................................................................12 INDIRECT COSTS :.............................................................................................................................................12 Categories of manufacturing costs. – with direct/indirect costs........................................................................12 DIRECT MATERIALS :.........................................................................................................................................12 INDIRECT MATERIALS :......................................................................................................................................12 DIRECT LABOUR :..............................................................................................................................................12 INDIRECT LABOUR ..........................................................................................................................................12 DIRECT EXPENSE :............................................................................................................................................12 PRIME COST .....................................................................................................................................................12 MANUFACTURING OVERHEAD :.........................................................................................................................12 COST ALLOCATIONS :........................................................................................................................................12 TOTAL MANUFATURING COST :.........................................................................................................................12 Period and Product Costs..................................................................................................................................13 PRODUCT COSTS :............................................................................................................................................13 PERIOD COSTS :................................................................................................................................................13 Relevant and Irrelevant Costs:.............................................................................................................................13 RELEVANT COSTS AND REVENUES :.................................................................................................................13 IRRELEVANT COSTS AND REVENUES: ..............................................................................................................13 Avoidable or Unavoidable costs:..........................................................................................................................13 AVOIDABLE=....................................................................................................................................................13 UNAVOIDABLE..................................................................................................................................................13 Opportunity Costs:...............................................................................................................................................14 -Incremental /or Differential- and Marginal Costs.................................................................................................14 INCREMENTAL or DIFFERENTIAL COSTS :..........................................................................................................14 MARGINAL COSTS :...........................................................................................................................................14 Job Costing and Process Costing systems:............................................................................................................14 JOB COSTING SYSTEMS:....................................................................................................................................14 PROCESS COSTING SYSTEMS:...........................................................................................................................14 ABSORPTION COSTING AND VARIABLE COSTING:and STANDARD COSTING.........................................................14

MACN 101 Management Accounting Notes Page |2 inventory valuation:(note)................................................................................................................................14 IAS 2 on INVENTORIES States the Following.:...................................................................................................14 Absorbtion costing :..........................................................................................................................................15 Cost Absorbtion Rate :......................................................................................................................................15 Fully Integrated Absorbtion costing System ( or “full” absorb. costing system)................................................15 Variable Costing (or Marginal or Direct Costing)...............................................................................................16 Direct Costing...................................................................................................................................................16 Marginal Costing...............................................................................................................................................16 Standard Costing:.............................................................................................................................................16 Sunk Costs:..........................................................................................................................................................16 SUNK COSTS : ..................................................................................................................................................16 Responsibility Accounting :..................................................................................................................................16 RESPONSIBILITY ACCOUNTING :........................................................................................................................16 PROFIT CENTRE :..............................................................................................................................................16 COST CENTRE:..................................................................................................................................................17 INVESTMENT CENTRE:......................................................................................................................................17 Maintaining a cost database:................................................................................................................................17 Fixed and Variable Production Overheads : and Cost Behaviour of......................................................................17 VARIABLE COSTS :............................................................................................................................................17 FIXED PRODUCTION COSTS :............................................................................................................................18 SEMI-FIXED (or STEP-FIXED COSTS) : ...............................................................................................................19 SEMI-VARIABLE (or MIXED COSTS) :..................................................................................................................19 Relevant Range....................................................................................................................................................19 Relevant Range: ..............................................................................................................................................19 Selling Costs.........................................................................................................................................................19 Selling Costs :...................................................................................................................................................19 Conversion Costs:.................................................................................................................................................20 Conversion Costs :............................................................................................................................................20 HIGH-LOW COST ANALYSIS:..............................................................................................................................20 contribution:.....................................................................................................................................................20 budget:.............................................................................................................................................................20 “Standard Hours Produced”:.............................................................................................................................20 “Standard PROFIT STATEMENT”: ......................................................................................................................20 STATIC BUDGET ...............................................................................................................................................20 FLEXED BUDGET ..............................................................................................................................................21 BILL OF MATERIALS ..........................................................................................................................................21 STANDARD COST CARD ...................................................................................................................................21 3-Own notes reconcilliations : any and all types possible........................................................................................22 1-Chapter 1 :INTRODUCTION(drury ch1)..................................................................................................................23 Definition of Accounting ( USA acc. Association)..................................................................................................23 Users of Acc info:..................................................................................................................................................23 Difference between Mngmt and Fin Acc.:.............................................................................................................23 The Decision Making Process:..............................................................................................................................23 Influence of Changing Competitive environment on Mngmnt Acc. Practice..........................................................24 Impact of I.T./Computers Mngmt Acc...................................................................................................................25 International Convergance of Mngmnt Acc...........................................................................................................25 FUNCTIONS OF MANAGEMENT ACCOUNTING:......................................................................................................25 HISTORY OF MANAGEMENT ACCOUNTING............................................................................................................25 Ch6-CHAPTER : COST CLASSIFICATION AND ESTIMATION :ch6 viggario book ................................................................................................................................................................................26 rem/ Note for exams : cost classification chapter.................................................................................................26 1)COST CLASSIFICATION .........................................................................................................................................26 Fixed and Variable Production Overheads : and Cost Behaviour of......................................................................26

MACN 101 Management Accounting Notes Page |3 VARIABLE COSTS :............................................................................................................................................26 FIXED PRODUCTION COSTS :( or ‘long term variable costs’).............................................................................27 SEMI-FIXED (or STEP-FIXED COSTS) : ...............................................................................................................27 mixed costs (ofted referred to as semi-variable costs ,but we call it mixed)....................................................27 SEMI-VARIABLE COSTS (NOT ALLWAYS SAME AS MIXED COSTS,BUT VISA VERSA TRUE)..................................28 how to separate the fixed and variable part of mixed costs : normal method......................................................28 HIGH-low analysis -method :identification of fixed & variable components......................................................29 THE learning curve:..............................................................................................................................................30 1-CUMULATIVE AVERAGE TIME-LEARNING MODEL............................................................................................30 B-INCREMENTAL UNIT-TIME LEARNING MODEL:................................................................................................32 c-use of models................................................................................................................................................32 4 Chapter :COST –VOLUME PROFIT ANALYSIS ch. 7 in vigario book........................................................................33 1.ECONOMIST VS ACCOUNTANTS VIEW...................................................................................................................33 Economists VS Accountants COST-VOLUME-PROFIT graph. :................................................................................33 ECONOMISTS GRAPH:.......................................................................................................................................33 Accountants graph............................................................................................................................................33 C.v.p. analysis. (cost-volume-profit.).......................................................................................................................34 assumptions of cvp analysis:................................................................................................................................34 Break-even analysis:............................................................................................................................................34 target profit:.........................................................................................................................................................34 Contribution : ......................................................................................................................................................34 margin of safety:..................................................................................................................................................34 key ratios for cvp.................................................................................................................................................35 (PV ratio) Profit Volume ratio: ( or also called ‘contribution margin %’ )...........................................................35 profit ratio.........................................................................................................................................................35 (B/E sales) break-even sales revenue:( not a ratio)..........................................................................................35 break-even sales volume:( not a ratio).............................................................................................................35 margin of safety ratio ......................................................................................................................................35 OTHER TYPES:...................................................................................................................................................35 abbreviations for ratio’s etc: ...............................................................................................................................35 analysis of cost structure USING CVP PRINCIPLES : (of a company).....................................................................35 METHOD: fORMAT OF SPREADSHEET FOR: full year FINAL ANALYSIS viggario page 247...............................36 Income statement (or budget) showing contribution separately.........................................................................37 cost –volume –profit chart/diagram.....................................................................................................................37 LABELS:...........................................................................................................................................................38 Income statement showing manufacturing costs separately (or also called income &expenditure statement showing...)............................................................................................................................................................38 1+2 CHAPTER :ABSORBTION COSTING : sYSTEMS FOR RECORDING AND CONTROLLING COSTS :vigario ch-1+2. . .40 To remember for exam/ tricky stuff......................................................................................................................40 from ch1 vigario:the meaning of management accounting.....................................................................................40 Financial accounting.............................................................................................................................................40 Objective of Financial Accounting:....................................................................................................................40 Management accounting......................................................................................................................................41 Variable Costing (or Marginal or Direct Costing)...............................................................................................42 1.from ch 2 vig. systems for recording and controlling product costs. : ..................................................................42 Rem: use 4 decimal places for hourly labour/machine rates for products.........................................................42 DEFINITION: Absorbtion costing :......................................................................................................................42 DEFINITION :Cost Absorbtion Rate :..................................................................................................................43 DEFINITION :Fully Integrated Absorbtion costing System .................................................................................43 IAS 2 on INVENTORIES States the Following.:...................................................................................................43 METHOD TO DO ABSORBTION COSTING...............................................................................................................44

MACN 101 Management Accounting Notes Page |4 INtRO : ALLOCATING SERVICE COSTS TO PRODUCTION DEPTS:........................................................................44 Cost allocation procedure.................................................................................................................................44 OVERHEAD and MANUFACTURING ACCOUNTS IN LEDGER:...............................................................................46 overhead recovery rates:.....................................................................................................................................46 Purposes of allocating mnftring Overhead to a product...................................................................................46 pre-determined overhead rates........................................................................................................................46 job costing accounting treatment........................................................................................................................49 REM: notes to remember .....................................................................................................................................51 cost CLASSIFICATION FOR SHORT TERM /LONG TERM DECISIONS........................................................................51 5 Chapter abc (activity based costing)

vig ch 5....................................................................................................52

Special Notes to watch out for:............................................................................................................................52 ACTIVITY BASED COSTING: GENERAL...................................................................................................................52 abc: Methodogy ...................................................................................................................................................53 ACTIVITIES – COST DRIVERS. : Examples of.....................................................................................................53 VALUATION OF CLOSING STOCK:......................................................................................................................54 ABRIDGED(shortened) INCOME STATEMENTS FOR ABC COSTING:...................................................................54 The Logical error of ABC costing.......................................................................................................................54 How relevant is abc costing?............................................................................................................................54 ch 4 vig VARIABLE AND ABSORBTION COSTING.......................................................................................................57 Special Notes to watch out for:............................................................................................................................57 ARGUMENTS FOR VARIABLE VS ABSORBTION COSTING.......................................................................................57 aRGUMENTS IN FAVOUR OF VARIABLE COSTING:.............................................................................................57 Arguments in favour of absorbtion costing:......................................................................................................57 viewpoint: any system which reports inconsistent profits if sales remain same should be discarded...............58 Accounting Statement on inventories:-ias 2.....................................................................................................58 effect on profit (Income) of variable .vs. absorbtion costing...............................................................................58 EXACT only difference between 2 Types of variable costing and 3 types of absorbtion costing...........................59 What is variable costing.(or marginal or direct costing).......................................................................................60 METHOD : VARIABLE COSTING (CALCULATING VARIABLE PROFIT )..................................................................61 What is absorbtion costing:..................................................................................................................................62 Calculating Absorbtion Profit : 3 METHODS.......................................................................................................62 reconcilliation : standard absorbtion costing : budget profit to actual. ............................................................66 Reconcilliation of Absorbtion profit to variable profit(pg 141 viggio)....................................................................71 Reconcilliation of Absorbtion profit to absorbtion profit(pg 142 viggio)................................................................71 income statements formats:................................................................................................................................73 ............................................................................................................................................................................74 RECONCILLIATIONS:.................................................................................................................................................75 For over/under recovery in fully integrated absorbtion costing( just copied , must still sort it all out).................75 ch 9 standard costing (Pg 325 vig)..........................................................................................................................76 purpose of standard costing:................................................................................................................................76 Method of Standard costing:................................................................................................................................76 raw MATERIAL variance....................................................................................................................................77 reconcilliation budget profit to actual profit. ......................................................................................................77 1-Chapter 8 :BUDGETS(ch8Viggio book)..................................................................................................................82 Principles of Budgeting:........................................................................................................................................82 Define Budgeting:.............................................................................................................................................82 3 categories of budgets:...................................................................................................................................82 Reasons for budgeting:.....................................................................................................................................82 financial & management budgeting:.................................................................................................................82 Long term planning:.........................................................................................................................................82

MACN 101 Management Accounting Notes Page |5 Positive factors of budgeting............................................................................................................................83 Budgeting & the human factor.........................................................................................................................83 Method for Budgets:.............................................................................................................................................84 Master Budget:.................................................................................................................................................84 Financial budget...............................................................................................................................................85 Operating budget.............................................................................................................................................85 Cash Budget: (or cash flow statement).............................................................................................................85 sales Budget:....................................................................................................................................................87 Purchases Budget : for raw materials / or retail stock /or any..........................................................................89 opening stock (finished goods or raw materials etc) Budget:...........................................................................90 Production Budget:...........................................................................................................................................90 Opening stock -Raw / direct materials- Budget:................................................................................................91 Labour Budget:.................................................................................................................................................92 Budget income Statement/ statement of inc&expenditure:..............................................................................92 chapter 11 relevant costs (vig ch11)......................................................................................................................96 Context of relevant costs:....................................................................................................................................96 terms: Definitions ................................................................................................................................................96 adding a new product...........................................................................................................................................97 Dropping a product or division.............................................................................................................................97 Make or buy decision............................................................................................................................................97 special orders.......................................................................................................................................................98 IMPortant : use the relevant costing decision model as an aid in choosing among competing alternatives.........99

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QUESTIONS: (1) See page 19 vigario – no ii roman figures at bottom –is there a printing error 'budget' should read 'actual" (i) Same place no -4- last sentence – how is no fixed cost carried to balance sheet, or where are fixed costs ever carried to balance sheet??? By not going and subtracting over/under recovery or how? (2) Semi-variable NOT the same as mixed costs – vigio and drury books different. (3) Google search for different learning curves for different industries/ mnftr. Types e.g. electr.etc. (4) See page 224 viggio- how does example work- not include fixed costs? Why? Also is answer 268 or -268? (5) Pg 246-example1- what means 'Other Costs are 20% VAR WITH PRODUCTION UNITS."? (6) Differential cost driver ???? what's this mean? (7) Absorption costing : (i) The IAS statement on inventories states that ALL overheads,eg management salaries and depreciation and administration MUST BE INCLUDED IN COST OF INVENTORIES on page 1 ch 1.But PAGE 27 CH2 it says any costs that come after PRESENT CONDITION should not be included eg: selling costs. BUT WE learn to do a COST OF SALES analysis in the INCOME statement where SALARIES ARE NOT INCLUED nor admin nor depreciation, but opening and closing inventory is included in the calculation.SO how do you use the figure above to do this calc. which needs opening - closing inventories + purchases ? where does one get these figures then, or where do you use the IAS inventory rate then? ( the rest of income statement has salaries, depreciation etc- you cannot charge it twice/double!! In income statement.!!) I MEAN : DOES ONE SUBTTRACT/ADJUST THE COSTS CHARGED TO CLOSING STOCK --OUT OF THE NORMAL SALARIES & OVERHEADS IN THE INCOME STATEMENT SO IT DOSNT GET SUBTRACTED TWICE? (ii) WHO MAY USE LIFO method of stock valuation?? (iii) STEP COST ALLOCATION METHOD This tequnique does account for inter-service dept. cost allocation. The method used here is to allocate the cost for the service dept. which services the greatest no. of other service depts. first. Or if you get a situation where some service depts. service each other,as in example here, then first to be allocated is the one with highest cost. SO WHICH GOES FIRST IF ONE GETS BOTH TYPES AT SAME TIME? (8) METHOD OF DOING OVERHEAD ACCOUNT AND OVER/UNDER RECOVERY INCOME STATEMENT. (i) Overhead account CONTRA WIP account. : All estimated/charged overheads to CR , Actual overheads to DR , Balancing amount as Over/Under recovery to Income Statement. (ii) REM: ???????just remember the over/under recover amount that goes to income statement or comes from this account , WILL NOT INCLUDE ANY OVER/UNDER RECOVERY FOR CLOSING STOCK????????? SO FOR (8) WHAT IS THE ANSWER TO BETWEEN ????? QUEST. MARKS. YES/NO ? HOW 7) RECONCILLIATION of BUDGET to ACTUAL PROFIT. a) When a STANDARD COSTING SYSTEM is used, the under/over recovery is shown as : i) Volume Variance (difference between budget –actual) ii) AND Expenditure Variance. (difference between budget –actual) EXAMPLE: Example 1 on left and 2 on right are completely different exercises, both are Reconcilliations.The one on the right seems the more correct one.-includes units- but not sure if both are equally correct- ASK. 8) Is marketing costs part of mnftring overheads for absorbtion costing? Delivery costs, packaging, etc? 9) On page 52 viggio, why does it say contribution instead of gross profit,3rd row from bottom far left, because fixed manufacturing costs do and must get included in the the box above- to calc gross profit! 10)

Next Qusetion – read the yellow carefully –there are 2 questions here!

RECONCILLIATION OF ABSORBTION PROFIT TO ABSORBTION PROFIT(PG 142 VIGGIO)

1) METHOD :Whether it is a year to year or month to month recon . for the 1 company or whatever : a) No units on left needed. b) Start with 1st profit AFTER over/under adjustment, end with last profit after over/under adjustment. c) Add any Variable Non-mnftr costs (eg:selling costs) subtracted before for net profit.(yes or no or what – not shown in exercise) d) Any non-mnftr fixed costs : Add them back in.{or maybe ; not sure but do other one rather- it seems you want to see the gross profit somewhere)) if different you must do a separate item line to recon it : just subtract one from the other then put difference in recon ( highly unlikely to happen anyway!) what do you do? And dothey want to see the gross profit for both somewhere or not?

MACN 101 Management Accounting Notes Page |7 e) 1st :Do opposite to over/under to bring to first period gross profit( if added in income stat, -then subtract it and visa-versa) f) Now you have next periods Gross Profit. g) Now add/minus previous months over/under- same as you would in income stat,(not add if subtracted etc but add again – you are going toward getting NEXT PERIODS NET PROFIT now as if it is a normal income stat.) h) Now add next periods Variable and Fixed non-mnftr overheads in. Next question: Part (a) For a Variable Standard Costing recon, in the” Volume Variance Part” at top top,,(ask : 1-but what do you do with closing stock – or 2- opening stock with different fixed cost to this year?) you will also leave out fixedmnftring costs here, because you don’t do a special “Overheads Volume –variance subtraction” in the expenditure section below, because you don’t have any fixed costs in the closing stock to wheedle out (if the numbers are right it could cause a error, If You don’t do all this I think) Part (b) And for same issue as above : what do you do wuth the variable and fixed manufacturing costs whem yopu get a closing stock for this year, or also Opening stock for this year from last year with different fixed costs to this year.????? 11) For high –low costing, book vig and drury say you use activities as the one to choose for the HIGH-LOW method- not price, but in test for last question in the 2nd CVP test, the memorandum uses the price to choose the high + low one?? Which do we use? 12) What do you do with a closing stock in the budget – if you are doing a recon for budget to actual profit in absorption or variable or standard costing?????? How do you handle this closing stock in the recon itself. 13) What does ‘full costing mean?test 3 14) What does constant price level terms mean? In test 3 15) In job costing for manufacturing accounts : where do you get wages from? (ALL WRITTEN OUT?) a) You must pay taxes on all all wages in WIP, as asset or asset increase, esp. in closing stock- how does that work?ie add the wages then subtract them again fior profit, but for plain retail they only use wages as tax deductable( msut a stremans wages go to closing inventory?) but for mnftring it is not tax deductable. 16) For overhead account; for 1st month could you CR transfer wages to WIP before any DR it all- so you have a CR but not a DR in WIP? 17) For fixed costs in variable costing, must fixed go to cost of sales before gross profit or NOT?????/VERY IMPORTANT: ie in vigg textbook it does both! See drury exercise 7.16: here it is NOT included –fixed costs in cost of sales- also this was a test question and we got marked wrong for having fixed costs in cost of salesBUT in Viggio pg 137 he DOES put fixed costs in Cost of Sales! So what do we do???? 18) Do you get a fully integrated STANDARD absorbtion costing system? 19) What for mat does one do the profit statements and income statements for variable costing, and also absorbtion – drury and viggario each have 2 or 3 methods each , so 6 or more methods. I mean with cost of sales , or using ccontribution as a heading or putting some stuff at the top first then others below- general mixup each has his own method – spo what is a standard accepted format one should use consistently???BIG MESS!!!!!!!also with including fixed mnftring costs in variable cost of sales figure - or not - etc etc.

20) 21) 22) 23)

INDIFFERENCE POINT -Don’t know –try find out INCREMENTAL ANALYSIS Don’t know –try find out

LAST QUESTION PLACE

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| 9) For reciprocal allocation (algebra method) of allocating costs to production depts., what happens if you get a fraction at the end – like R0.345543 - how do you allocate these last fractions between depts.? On page 35 viggio at bottom of page.35 viggio 10) RECON OF PROFITS or also overheads : start at Budget and end at Actual.( or maybe any way you want?) 11) For a JOB COSTING system , part of fully integrated absorbtion costing ,on page 49 viggio , what is contra for "JOB 1-5" accounts, ie:where does "Job completed" on cr side get posted to? Do these acc's go to trial balance and Fin Stats? Where in fin stats do they go? 12) Fully integrated absorbtion : do you use budget or actual overheads for closing stock ?- if budget , then if over/under –recovery is for all of production (incl closing stock) then why is it only added to sold production – this will give a wrong value for 1-closing stock and 2-profit.OR is the overheads charged to incomplete jobs already "actual' and not "budget"? a) TRY PUT sales as only 1 for example pg 130 vig ? then this all becomes clear! (see pg 129 2nd paragraph from bottom for rule to use budget.. in closing stock only!Also?? before it was said one could use actual or budget) b) Fully integrated absorbtion :On page 130 vig highlighted : if over –recovery is for all of production (incl closing stock) then why is it only added to sold production – this will give a wrong value for 1-closing stock and 2-profit.OR is the overheads charged to incomplete jobs already "actual' and not "budget"? c) Over/Under recovery is only applied to sales,not closing stock, but at the full total for closing stock +sales , so there is a mistake where sales takes ov/und recovery away from closing stock and visa versa, and Opening stock dilutes it all a bit too wrongly.(say sales was only 1, then apply this to any example) d) Pg 150 viggio blu highlight,: for variable costing , if asked for the GROSS PFOFIT, or COST OF SALES BREAKDOWN, do you include fixed mnft costs or EXCLUDE them then?????

Chapter 9 standard costing : a) Pg 345 vig – bottom o page, how do they get Standard = R165 000, shouldn’t it be 1.875X 110000?

b) If you have closing stock in a budget ,how do you do the recon for : sales variance: is it mnftr profit less ‘sales variable costs” or [contribution less closing stock less fixed mnftrcosts] .-before you div by units and X by difference in sales volume.? c) From variable &

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TO SCAN IN/DO STILL: (1) Pg 53/54 example 1 of absorbtion costing. (2) Go through all the 'accountant will recomend ' stuff and summarise well : pg 199 vig top,175/176 vig,180 vig bottom, (3) Scan pg 177 for abc costing + opdrag page before (4) Scan Pg 181 for format of a "costing statement " (5) Limiting factors calculations for abc costing : pg 186 + 187 vig scan + re-study (6) See page 194 vig and put it all together with the rest of the verbal abc vs absorbtion costing notes in abc costing chapeter in notes.(get 1 good answer to learn – not 100's) (7) CHAPTER 4 variable costing: pg 144 to end of book- do the last 2 headings didn’t finish. (8) Learning curves: scan in some good examples and the text out of textbook to explain better- your explain is not very clear esp. example 1 page 218 viggio (9) Fully integ absorb- get examples & exaplain rught pg 35 vig (10) In RECONCILLIATIONS: do a over/under recovery of fixed overheads for Fully Integrated Absorbtion Costing

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 10

REM: NOTES SPECIAL THINGS TO REMEMBER I) (1)SEE PAGE 244 in Viggario book for Quest. + Answers. II) (3)REM: if they ask :the company gets an order for an extra 100 units, what will a profitable price be for this –it means ONLY FOR THE LAST 100 – not all units,ie the differential/ price.

III) If asked to get the profit for extra hundred(not just 'last' –but 'extra') DONT FORGET TO LEAVE OUT FIXED COSTS PER UNIT in your calculations!!!!! It is supposedly already paid by the first few –see pg 244 viggio. IE:IN MANAGEMENT ACC. IF FIXED COSTS ARE GIVEN IN A BUDGET AS A PER UNIT WORKED OUT COST – IT MEANS THAT THE TOTAL FIXED COSTS HAS ALREADY BEEN DIVIDED UP BETWEEN THE NUMBER OF UNITS IN THAT BUDGET- ANY EXTRA UNITS WOULD NOT SIMPLY INCUR THESE COSTS WITHOUT IT BEING STATED HOW-IE: IF PRODUCTION WOULD THEN AN EXTRA MONTHS RENT UP ETC.SO YOU IGNORE THESE FIXED COSTS FOR ANY EXTRA UNITS PRODUCED.unless told otherwise. 2) REM: NOTE: if you have to find out the fixed costs for a very large units- ONLY first convert variable costs to single/per unit(because lecturer/book/everyone does this) ,but do not first convert total costs and fixed costs to :per unit- use straight from large amounts because otherwise any- 0.33333 so R0.33 -recurRing fractions will give you wrong ANSWERS.(becuase you cannot get all the recurring parts in) 3) If asked to redraft a budget for a learning curve question, do a full total profit/ costs/fixed/var/ budget and also a per unit one next to it ,just to show, not just a per unit one even if the first budget was not even shown on paper. a) Also , if they say fixed costs of R50 each for 300 units, thyen for an extra 100 units the fixed costs will not apply, it has already been paid.- so leave fixed out in any calc. for the last 100 units.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 11

2-TERMS:(VIG CH 1+2) The Correct Method To Adopt When Looking At Product Decision-Making Is As Follows: 1.1. Identify the main or flag-ship product that the company manufactures. 1.2. Maximise the profit on the main product by maximising production ,sales and contribution. 1.3. Sell other products manufactured by the company only if there is spare capacity. 1.4. Sell other products at a price higher than variable cost. 1.5. One can only Max contribution( using Variable costing) per limiting factor, not max profitability by using ABC or Absorption costing unless you work it out from the start {incl. total activities/total cost drivers=to get cost driver rate} for each price & production level.) 1) COST RECOVERY RATE.: the rate or basis eg machine hours. at which costs are recovered to a specific eg production dept. 2) BASIS : the rate/basis is the measurement used to allocate costs eg: labour hours or machine hours. 3) COST PLUS BASIS :means you work out the final figure by starting with the cost price and then adding a certain amount or % to it. 4) LIMITING FACTORS OF PRODUCTION: like a bottleneck at the machine dept – because machines only produce a maximum amount each , or one cannot get more than a certain amount of some raw input product per month etc

INTRO: 1) Management accounting is primarily concerned with producing budgets, setting performance standards, and evaluating performance 2) Acc sys used for measure costs for profit measurement,inventory valuation ,decision making,performance measurement, control.

COST OBJECTS: 1. COST OBJECT :Definition: ANY ACTIVITY for which a SEPARATE MEASUREMENT of COSTS is desired. a) Eg; cost of a product , of rendering a service to a bank customer ,of operating a particular sales territory or dept. The Cost Collection System works as such ; it accumulates costs-by assign into categories-eg labour,materials ,overheads.( or by fixed & variable).THEN assigns these costs to cost objects.

DIRECT AND INDIRECT COSTS THE PRODUCTION POINT OF INDIFFERENCE, : Where the total cost of a capital-intensive company = the total cost of a labour-intensive company.

ANALYSIS OF THE COMPANIES COST STRUCTURE: Its fixed costs and contribution per unit.

INVENTORY VALUATION:(NOTE) IAS 2 : INTERNATIONAL STATEMENT ON INVENTORIES states that : Firstly, closing stock – work completed but unsold- (??? What About inventories & work in progress???) must be valued at the lower of cost and net realisable value.Inventories are valued at : all costs incurred in bringing to current state – ONLY manufacturing direct and indirect costs-The Costs of conversion of inventories include costs directly related to the units of production,such as direct labour.They also include a systematic allocation of fixed & variable overheads that are incurred in converting material into finished goods.Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation ,maintenance of factory buildings and equipment,and the cost of factory management and administration. However FIXED OVERHEADS are only allocated at the normal production capacity(over anumber of seasons or periods under normal circumstances,taking into account the loss of activity relating to planned maintenance) .If idle plant /low production inventory costs are ONLY allocated at normal prod. Capacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to each product unit is decreased so inventories are not valued at below cost.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 12 As a result of this accounting definition ,the valuation of stock is carried out on a FIFO or weighted average basis.LIFO is strictly prohibited.

DIRECT COSTS : Costs that can be specifically and exclusively identified with a particular cost object. . .. Eg:wood in a desk, maintenance labour in -(cost object maintenance dept)-but NOT Maint.Labour in a –(cost object desk produced).The more direct cost and less indirect costs =the more accurate the estimate.

INDIRECT COSTS : Costs that cannot be identified specifically and exclusively with a particular cost object, but can only be identified with a a number of depts.. /cost objects.

CATEGORIES OF MANUFACTURING COSTS. – WITH DIRECT/INDIRECT COSTS. Direct Materials Direct Labour Prime Cost Manufacturing Overhead Total Manufacturing Cost

Xx Xx Xx Xx Xx

i) In manufacturing organisations traditional product costs accumulated as follows – ( developed esp. from/for ext. accounting requirements.

DIRECT MATERIALS : Cost of all materials that can be identified with a specific product.eg wood for desk is, but maintenance materials on machine to produce with is not,that is an indirect materials cost.

INDIRECT MATERIALS : cannot be identified with any one product, eg:because used for all.eg maintenance materials spares.

DIRECT LABOUR : can be specifically traced to or identified with product eg:labour assemble product

INDIRECT LABOUR can not be specifically traced to or identified with product eg:labour maintenance of many different product lines machines.

DIRECT EXPENSE : NOT labour/materials/overheads/ can be specifically traced to or identified with product eg hiring of machine to produce a specific quantity of a product is a direct expense. (other than /not labour/materials-in this context) anything else in this category would be classed as 'OVERHEADS' –see below.

PRIME COST = Direct materials+Direct Labour +Direct Expenses.

MANUFACTURING OVERHEAD : All manufacturing costs exept : Direct materials+Direct Labour +Direct Expenses eg:rent of factory.

COST ALLOCATIONS : process of assigning indirect costs(overheads) to products- using surrogate ,not direct measures.ALSO – the assigning of eg: rent between mnftring and / non-mnftring depts.

TOTAL MANUFATURING COST : Direct materials+Direct Labour +Direct Expenses+Mnfctring overheads

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PERIOD AND PRODUCT COSTS. 1) Because of external fin acc rules in most countries that require that for inventory evaluation ONLY MANUFACTURING COSTS /or RETAILER = PURCHASE COSTS + FREIGHT IN -should be included in the calculation of product costs AS WELL AS ONLY costs related directly to the units of production- accountants therefore classify costs as product costs and period costs. a) BECAUSE OF THIS ONLY the FIFO or weidghted average methods may be used to calc. inventory- NOT L.I.F.O.-ie. Costs must relate directly to units of production. REASONS CITED FOR THIS: b) Inventories represent a future probable inflow of revenue , period costs(overheads) do not c) Many non-manufacturing costs are NOT incurred when the product is being stored-thus inappropriate to include them in inventory valuation. INTERNATIONAL STATEMENT ON INVENTORIES states that :Inventories are valued at : all costs incurred in bringing to current state – ????ONLY manufacturing direct and indirect costs- ie:COSTS OF CONVERSION ???????YES OR NO. Includes systematic allocation of fixed & variable overheads. However FIXED OVERHEADS are only allocated at the normal production capacity.If idle plant /low production inventory costs are ONLY allocated at normal prod. Capacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to each product unit is decreased so inventories are not valued at below cost.

PRODUCT COSTS : costs identified with goods purchased or produced for resale.-in mnftring is costs attached to product for inventory valuation of finished goods ,work in progress, matched against sales for recording profits. ONLY MANUFACTURING OVERHEADS may be INCLUDED as part of absorbtion costing in the valuation of closing stock.Variable costing would treat it as a period cost and write it off in period it occoured.(IFRS/etc) =recorded as an ASSET until sold ,then as an expense.(when you 'write out' last inventory count and write in new inventory in the profit & loss statement at year end I THINK? ) ! Product costs= TOTAL MANUFACTURING COSTS =direct labour+dir.material+direct expenses +Mnftring overheads( from last section) NOT eg: distribution+telephone for telesales .as per book exactly: Admin Overheads or selling overheads may never be assosiated with production.

PERIOD COSTS : costs treated as expenses in the period in which they occoured, BUT NOT included in the cost calc. of inventory valuation.(or /sales/work in progress.)recorded as an expense ONLY,never as an asset! Period costs= eg: sales expenses+ admin +distribution expenses.

RELEVANT AND IRRELEVANT COSTS: RELEVANT COSTS AND REVENUES : Those Future costs and Revenues that will be changed by any specific decision relating to production volume or selling volume.eg: material costs change if choose to produce more

IRRELEVANT COSTS AND REVENUES: Those Future costs and Revenues that will NOT be changed by any specific decision relating to production volume or selling volume.. Eg: rent for factory will not change if higher production or selling volume.

AVOIDABLE OR UNAVOIDABLE COSTS: AVOIDABLE= relevant costs (sometimes used in place of other name)

UNAVOIDABLE irrelevant costs (sometimes used in place of other name)

INDIFFERENCE POINT -Don’t know –try find out INCREMENTAL ANALYSIS Don’t know –try find out

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OPPORTUNITY COSTS: 1) OPPORTUNITY COST =The cost of a foregone opportunity in favour of having chosen another one :eg . if the cost of selling a new product is to stop selling another one , the opportunity cost is the rvenue one used to receive from the old one.

-INCREMENTAL /OR DIFFERENTIAL- AND MARGINAL COSTS INCREMENTAL OR DIFFERENTIAL COSTS : Accountants use this : means the different in total costs for ALL THE EXTRA PRODUCTS WHEREBY the PRODUCTION HAS BEEN INCREASED.

MARGINAL COSTS : Economists use this : means difference in costs for ONLY ONE extra product –ie. For each separate new whereby production has been increased.

product

JOB COSTING AND PROCESS COSTING SYSTEMS: JOB COSTING SYSTEMS: Relates to a costing system where all the costs associated with each job could be different for each job completed and , so direct materials and labour are allocated at actual cost and fixed overheads are allocated on a pre-determined cost rate for each separate job.This is also known as a fully integrated absorption costing system. eg. In constructiion industry –where each house could be unique and have a completely different set of costs to other houses.

PROCESS COSTING SYSTEMS: The method used to value stock in mnftring where at end of period some of the closing stock is partially manufactured-not all finished yet.

ABSORPTION COSTING AND VARIABLE COSTING:AND STANDARD COSTING. INVENTORY VALUATION:(NOTE) IAS 2 ON INVENTORIES STATES THE FOLLOWING.: IAS 2 : INTERNATIONAL STATEMENT ON INVENTORIES states that : Firstly, closing stock – work completed but unsold- (??? What About inventories & work in progress???) must be valued at the lower of cost and net realisable value.Inventories are valued at : all costs incurred in bringing to current state – ONLY manufacturing direct and indirect costs-The Costs of conversion of inventories include costs directly related to the units of production,such as direct labour.They also include a systematic allocation of fixed & variable overheads that are incurred in converting material into finished goods.Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation ,maintenance of factory buildings and equipment,and the cost of factory management and administration. However FIXED OVERHEADS are only allocated at the normal production capacity(over anumber of seasons or periods under normal circumstances,taking into account the loss of activity relating to planned maintenance) .If idle plant /low production inventory costs are ONLY allocated at normal prod. Capacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to each product unit is decreased so inventories are not valued at below cost. Variable Production overheads are those indirect costs of production that vary directly,or nearly directly,with the volume of production,such as indirect materials and indirect labour. As a result of this accounting definition ,the valuation of stock is carried out on a FIFO or weighted average basis.LIFO is strictly prohibited. Cost accounting grew out of the need that financial accountants have for financial information ,and gathers and analyses costs for the purposes of :product costing,job costing,stock valuation.

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ABSORBTION COSTING : IN EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED USING ABSORBTION COSTING, ONE MUST QUICKLY CALCULATE THE SAME FIGURES USING VARIABLE COSTING – OR YOU WILL NOT BE ABLE TO DO PROPER COMPARISONS AND WORK THINGS OUT! Due to fixed costs being in there- always take them out and convert to CONTRIBUTION .. Method used to VALUE CLOSING STOCK that includes ALL MANUFACTURING COSTS-VARIABLE AND FIXED-NOT any NON-MNFTRING COSTS AT ALL!!!!!! ((WHICH DOES/can INCL. RENT AND MAINTENANCE per book)– The fixed cost element can be determined by budget or by actual,and is added to all variable mnftring costs(eg direct material) to get the total per unit product cost for inventory valuation per the IAS definition ( which says ALL MNFTRING COSTS must be included in Inventory Valuation incl. fixed mnftring costs eg: Maintenance etc.) .ONLY Financial Accounting uses it. NOTE: every time production volume changes ,the cost per unit will change because fixed costs get divided by a larger /or smaller number now.So it is an inconvenient method requiring constant raising of under/over recovery charges to balance the figures.The 2 reasons for this is: 1-Actual volume is different to budget volume. 2-Actual manufacturing overhead being different to budget overhead. That is why Management Accounting uses a different method –: called "Variable Costing". FOR ABSORBTION COSTING THRE ARE 2 WAYS OF VALUING STOCK:1-BUDGET AND 2ACTUALVARIABLE PLUS FIXED COST OF PRODUCTION. But for variable costing ther are also these 2 ways , exept there it is only VARIABLE COSTS OF PRODUCTION, not fixed and variable in the stock valuation(per book vigario pg14-concl. ALSO, FOR ABSORBTION COSTING THERE ARE 3 POSSIBLE WAYS OF PRESENTING THE INFORMATION IN THE FINANCIAL STATEMENTS. 1-FULLY INTEGRATED ABSORBTION COSTING (BUDGET COST) 2-NON-INTEGRATED ABSORBTION COSTING (BUDGET COST) 3-ACTUAL COST ABSORBTION COSTING. (all exactly per vig. Pg 14 book!) IS ABSORBTION COSTING ACCEPTABLE:? NO, because it will distort true company profits due to showing fixed costs as closing inventory costs –you cannot compare 2 periods properly,or budget properly if you use include rent at a pre-determined rate eh R300 per product it will not be accurate if production rises or falls.- it will eg show excessive profits when stock holding is rising ? per book vig pg14. HOW DO YOU MAKE IT ACCEPTABLE: You explain on any budget that the Per Unit cost can vary by the TOTAL FIXED COSTS AMOUNT included in the costing eg R500 –at any level above or below the no. of units that the budget was calculated at. However ,for calculating costs of products in a Job Costing environment, where the costs are used to quote on future jobs eg: Printers , when using absorbtion costing, one must remember that one company allocates fixed costs differently to another one,and there is no right or wrong method to allocate fixed costs really, ie some allocate all overheads, some only admin + management , some only maintenance and depreciation etc.

COST ABSORBTION RATE : the cost rate at which a group of costs or fixed costs or overheads are charged to a specific product eg: machine hours divided between no. of products.(it is used by fin . accountants to calculate absorbtion costing system.

FULLY INTEGRATED ABSORBTION COSTING SYSTEM ( OR “FULL” ABSORB. COSTING SYSTEM) If the fixed element is pre-determined .So when fixed elements eg: rent+maintenance ,are pre-calculated in the previous years as a per unit cost, from per average normal production levels,so eg R1000 rent / 500products made per mnth= R2 rent per product ;and these amounts are added to normal vriable costseg direct material, to get a (estimated/ avg)total cost per product unit . (NOTE: not all fixed costs need to be allocated as such ONLY mnftring costs MUST BE(WHICH DOES INCL. RENT AND MAINTENANCE per book), other fixed costs eg admin and computer,marketing costs(more 'sales costs' types get left out)can be left out and the system would still be called Fully Integrated absorbtion Costing) ONLY where the fixed cost element is predetermined though and not based on actual fixed costs ,which is another type of absorbtion costing.The actual amount will differ from the allocated amount though and OVER or UNDER recovery of fixed overhead will occour, which must be balanced by a BALANCING AMOUNT known as the over/under –recovered fixed

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 16 overhead.This amount is included by 'raising a charge' (possibly it's very own ledger account-CRJ/CPjournal) and including it in the Cost of sales breakdown in Income statement for Gross Profit calc. Do NOT ASSUME every company uses fully integrated abs.cost. to allocate costs in order to arrive at the cost of a product.Only companies that have a JOB COSTING environment , require a pre-determined FIXED COST to allocate to FUTURE production.Very few companies will allocate costs to production and service depts. , followed by re-allocation from service depts. to production depts. However , when using absorbtion costing, one must remember that one comapny allocates fixed costs differently to another one,and there is no right or wrong method to allocate fixed costs really, ie some allocate all overheads, some only admin + management , some only maintenance and depreciation etc.

VARIABLE COSTING (OR MARGINAL OR DIRECT COSTING) IN EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED USING ABSORBTION COSTING, ONE MUST QUICKLY CACULATE THE SAME FIGURES USING VARIABLE COSTING – OR YOU WILL NOT BE ABLE TO DO PRPER COMPARISONS AND WORK THINGS OUT! Due to fixed costs being in there- always take them out and convert to CONTRIBUTION .. The method used to VALUE CLOSING STOCK using variable manufacturing costs only- fixed costs are written off as period costs.(as per book- fixed mnfrtring costs are charged to the Income statement as an expense for the period.So closing stock is valued on manufacturing variable costs only. Ie: the valuation excludes all mnfring fixed costs.The System is representative of managerial accounting for decision making. Variable costing is consistent with CVP analysis,ie fixed costs are treated as period costs.(per book exactly) FOR VARIABLE COSTING ,THERE ARE 2 WAYS OF VALUING STOCK – 1-BUDGET OR 2-ACTUAL.

DIRECT COSTING. MARGINAL COSTING. STANDARD COSTING: Another method of VALUEING CLOSING STOCK – but at a pre-determined rate for BOTH VARIABLE AND FIXED COSTS.

(1)

STANDARD VARIABLE COSTING:

(a) when only pre-determined variable costs are used.

(2)

STANDARD FIXED COSTING:

(b) when only pre-determined fixed costs are used.

SUNK COSTS: SUNK COSTS : These are COSTS created by a decision in the PAST that cannot be changed by any future decision – or which has a zero value when making future decision: eg:depreciation,or money spent on material that is no longer required/ or sellable.-OR buy a car for 10000, when you sell it the 10000 is sunk cost because selling price depends on what the buyer will pay –it can be above or below 10000 .

RESPONSIBILITY ACCOUNTING : RESPONSIBILITY ACCOUNTING : accounting for a RESPONSIBILITY UNIT -an organisation unit or part of a business for which a manager is reponsible.Revenues & Costs so deviations from performance budget can be attributed to resposible individual.

PROFIT CENTRE : same as above :Accountability for profitability of assets placed under a managers control.

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COST CENTRE: SAME AS above but AREA or DEPT. for which a manager is responsible.

INVESTMENT CENTRE: term defines accountability for profit generation AS WELL AS choices in what will or will not be purchased by way of capital expenditure in running a business.

MAINTAINING A COST DATABASE: 1) Database to be maintained so relevant cost info can be extracted easily. 2) Need eg: By products, responsibility centres,depts.,distribution channels, + categ. of expense eg direct labour + categ. of cost behaviour eg fixed and variable. 3) For cost control and performance measurement: a) Reports by resposibility centre per week/ etc b) Future reports for eg: possible price changes. c) Standards costs stored & used to evaluate

FIXED AND VARIABLE PRODUCTION OVERHEADS : AND COST BEHAVIOUR OF a) Measurements of volume needed to :patients seen-one more patient/day?=costs/revenue/(or units sold ? reduce price to sell more?,or units produced ,guests booked etc)

VARIABLE COSTS : vary directly or very nearly directly according to incr./decr. in volume(eg:of production).See chart below : total variable costs are linear/direct and Unit var. cost is constant.

UNITS vs VARIABLE COSTS GRAPH

TOTAL Variable Cost

5000 4000 3000 2000 1000 0

0 0

1000 100

2000

200

3000

300

ActivityLevel

5000 4000

400

500

UNIT Variable Cost

Variable Costs:(b)Per Unit (cost =R10 per unit)

VARIABLECOSTS: (a)TOTAL

40 30 20 10 0

10 0

10 100

10 200

10 300

10 400

ActivityLevel (unitsofoutput)

PROFIT vs VARIABLE COSTS GRAPH.

10 500

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FIXED PRODUCTION COSTS : basicaly stay constant regardless of volume of production –OVER a specific period of time- (before inflation pushes up input prices etc),but also called ‘long term variable costs’ because over the long term ALL costs are seen a variable-due to inflation etc. eg:rent, municipal rates

UNITS vs FIXED COSTS GRAPH

FIXED COSTS:(b) unit (supposed hyperbolic!)

50

0 0

100

200

300

ActivityLevel (no.ofunits)

400

500

Unit Fixed Cost

Total Fixed Costs

FIXEDCOSTS:(a) Total

1000 500 0 0

2

4

ActivityLevel : Output -no ofunitsproduced

PROFIT vs FIXED COSTS GRAPH

6

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SEMI-FIXED (OR STEP-FIXED COSTS) : They are fixed in (Relevant Ranges )at specific activity levels :eg at 100 – 5000 products ,-within a specific time period (same as fixed –to exclude inflation etc)- but if production goes above that they change to the next level etc.– usually in steps-

Total Fixed Costs

STEPFIXEDCOSTS 300 250 200 150 100 50 0 0

100

200

300

400

500

ActivityLevel

SEMI-VARIABLE (OR MIXED COSTS) : These include both a FIXED and a VARIABLE component eg:maintenance = fixed cost + a variable cost according to amount of activity ; or sales rep. costs =salary + commission per amount of sales. Eg rent= rent +10%gross revenue

RELEVANT RANGE RELEVANT RANGE: A limited level of activity under which costs are analysed as either fixed or variable,eg for production of 1-1000 units, over that another costing structure is used,or another range.

SELLING COSTS SELLING COSTS : relate to sales, written off in period incurred. Eg :commission costs,etc.

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CONVERSION COSTS: CONVERSION COSTS : All costs other than Direct Material costs that are incurred in manufacturing a product.The word conversion is normally associated with process costing and refers to all costs exept direct material directly related to the manufacturing process. ADMINISTRATION Costs: Administration Costs: treated as a manufacturing overhead only if relate to work being carried out in mnftring process – but in most instances they are written off as a period cost- not mnftr. Cost. Eg: cost of accountant= period cost , cost of person who records all manufacturing processes number produced, materials used etc only in mnftring = manftring admin cost .

HIGH-LOW COST ANALYSIS: REFERS TO ANALYSIS OF SEMI-VARIABLE COSTS where the var. & fixed. Elements are calc. by analysing incr. in cost in comparison to incr. in prod. Volume.

CONTRIBUTION: CONTRIBUTION is the SELLING PRICE of a product LESS all VARIABLE COSTS.The term used by Management accountants to describe the incremental profit that a company will make as the company sells one more unit of production.(DOES NOT include FIXED COSTS, ONLY SELLING PRICE – VARIABLE COSTS = contribution, then after that ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Variable costs would include selling,marketing,distribution costs etc,so ALLl variable costs,none are left out. Mngmn acc only concerned with contribution,not profit since incr. sales = incr.contribution where fixed costs stay constant. Means ' Profit contributed toward total profit of firm before fixed costs' so.This happens because fixed costs do not change , but production volume does, so once all fixed costs have been paid by current production volume, any increase in production volume above this results in a higher profit than before the fixed costs were paid for.Thus before fixed profit is paid for , PART OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for, ALL OF THE CONTRIBUTION goes toward profit.

= -

SALES Variable Costs (incl.marketing,selling,distrib ution ie: ALL. CONTRIBUTION Fixed Costs

=

PROFIT

-

BUDGET: A budget is a quantitative analysis of a plan or corporate action.It is intended that production/sales etc be coordinated by various depts. to achieve expectations about future income/cash flows/fin pos , fin perf and supportin plans.

“STANDARD HOURS PRODUCED”: -“– is the time it takes to produce one product ,used as a common denominator to divide up costs into different products.

“STANDARD PROFIT STATEMENT”: This is an income statement , using pre-determined standard cost rates , showing what profit we can expect from a given sales volume.The volume is usually estimated from known sales and production capacity, but could also just mean the volume for the flexed budget, when using standard costing.

STATIC BUDGET The plain original realistic budget for the year drawn up at beginning of year.

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FLEXED BUDGET Standard Budget : The budget the is drawn up using the ACTUAL sales VOLUME, but with the original costs from the Original Budget, not the Actual Costs. This can then be compared to the actual Income statement to see what the difference in each cost was once converted to the actual sales level.

BILL OF MATERIALS A list of all the actual materials needed to manufacture a specific product. Does not include labour/overheads etc. like the ‘Standard Cost Card.’

STANDARD COST CARD Card with the costs of all the Inputs used to make 1 output product.(That should (actual) be used to produce a product.)1 card is kept for each different product made. (-historical cost -not a goal type cost).Nowdays on computer.

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3-OWN NOTES RECONCILLIATIONS : ANY AND ALL TYPES POSSIBLE. 1. Pages with recons: a. Bottom pg 46 viggio b. 2. Remember you one can be a few rands out with a Recon. Of Explanation of Over/Under Recovered overhead due to different(wrong) (amount/hours=rate ) for one or other cost driver in BUDGET as opposed to ACTUAL.One calls it "Rounding Off"- just write in the list of the calculation in order to balance the reconcilliation properly – at approximate place where it is relevant : Rounding Off -R20 on page 55 in viggio 3. RECON OF OVERHEADS: you start at allocated (namely Actual Amount. ), not budget ,so if you sold more you start there Pg 54 bottom viggio. 4. EXAMPLE OF A RECON: ??? yet to be classified ….

5.

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1-CHAPTER 1 :INTRODUCTION(drury ch1) The Correct Method To Adopt When Looking At Product Decision-Making Is As Follows: 1.6. Identify the main or flag-ship product that the company manufactures. 1.7. Maximise the profit on the main product by maximising production ,sales and contribution. 1.8. Sell other products manufactured by the company only if there is spare capacity. 1.9. Sell other products at a price higher than variable cost.

DEFINITION OF ACCOUNTING ( USA ACC. ASSOCIATION) a) Process of identifying ,measuring and communicating economic info to permit informed judgements + decisions by users of b) Objective of Fin Acc :generate info ext. users use to make decisions about investment in company + analyse how company is performing.

USERS OF ACC INFO: Fin Acc :External reporting /Ext users Mngmt Acc: Internal reporting /Int Users USERS:= MNGMT , SHAREHOLDERS , EMPLOYEES , CREDITORS + LOAN PROVIDERS , INVESTORS ALSO: Private Individuals ,Non-profits eg church , Companies

DIFFERENCE BETWEEN MNGMT AND FIN ACC.: a) Legal Requirements : Fin Acc ( ie:fin stats) are legally required ; : Mngmt Acc IS NOT legally req. b) Focus on Individual Parts :Fin Acc : reports generated on WHOLE ; : Mngmt acc : reports generated on SEGMENTS c) GAAP :Fin Acc: Uniformity must according IFRS/usa-fasb/uk asb ; :Mngmt acc NOT REQUIRED d) Time Dimension :Fin Acc: PAST ONLY :Mngmt Acc: FUTURE & PAST e) Report Frequency :Fin: Annual & less detail Semi-annual :Mngmt: Daily/Weekly/mnthly etc f) Users :Fin: Ext (+ int you say) :Mngmt: Int.

THE DECISION MAKING PROCESS: 1) Identify Objectives : i) Maximise Pres.Value. of future net cash flows. ii) Social Goals iii) Security. 2) Search for Alternative Courses of action i) SWOT /opportunities+threats eg:new products to a New Market or products to an Old market 3) Gather Data about Alternatives i) States Of nature for each eg boom or recession /inflation ii) Used for (1) Short term Decision ::Price / Media to use in advert etc. (2) Long term decision : Product to sell /machinery to use 4) Select Appropriate Course of action i) Eg: based on difference in cash flows ( profitability) 5) Implement Decisions i) In the form of a budget mostly 6) Compare actual and planned outcomes ( Master budget) i) Performance reports /from feedback

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 24 ii) To facilitate management by exeption.

INFLUENCE OF CHANGING COMPETITIVE ENVIRONMENT ON MNGMNT ACC. PRACTICE 1) Pre- 80's No Incentive for Efficiency/costs/ Mngmt practice 2) Post 80's Globalisation competition caused

a) Innovative products b) Changing Product Life Cycles – (needs flexibility) i) From initial expense on research /develop to time customer support is withdrawn ii) Increasing: sophistication+discriminating customer demands ;tech innovation ;global compete iii) Many costs are locked in by decisions at design stage –THUS mngmt Acc is used to cost optimise at the design stage

iv) Reduce time to market of new + modified products,adapt to changing customer requirements

c) High Quality d) At low Cost e) First Class Customer Servicec i) How a value chain works to explain below diagram

(1)Research and development -2 Design-3- Production 4- marketing 5Distribution 6- Customer Service ii)

KEY SUCCESS FACTORS: KEY SUCCESS FACTORS: 1-Cost Efficiency:Costing accurate ,no under or over costing loose customers+profits, 1-Cost Efficiency:Costing accurate ,no under or over costing loose customers+profits, 2-Quality:eg:tQM=customer orientate process-continuous improve,stats+all processes 2-Quality:eg:tQM=customer orientate process-continuous improve,stats+all processes 3- Time:Cust. Demand speed - Mngmnt Acc do time based measures eg cycle time= time from 3- Time:Cust. Demand speed - Mngmnt Acc do time based measures eg cycle time= time from start to finish of product= process time +move time+wait time+inspect time –where eg:non-value start to finish of product= process time +move time+wait time+inspect time –where eg:non-value add activities be eiminated to decrease .(all exept process time) add activities be eiminated to decrease .(all exept process time) 4-Innovation:ability to adapt to changing customer requirements –flexibility 4-Innovation:ability to adapt to changing customer requirements –flexibility

5-Reliability 5-Reliability

CONTINUOUS CONTINUOUS IMPROVEMENT: IMPROVEMENT: 1-Mngmt acc supports this 1-Mngmt acc supports this by identify ways to by identify ways to improve and then report improve and then report on progress on progress

CUSTOMER CUSTOMER SATISFACTION SATISFACTION as asTOP TOP PRIORITY PRIORITY

EMPLOYEE EMPLOYEE EMPOWERMENT EMPOWERMENT 1-Empowering is giving 1-Empowering is giving employees closest to the employees closest to the action /customer authority action /customer authority to improve processes/ to improve processes/ approaches. approaches.

TOTAL VALUE-CHAIN ANALYSIS TOTAL VALUE-CHAIN ANALYSIS 1-Co-ordinating all parts of chain to work as a team to improve cost 1-Co-ordinating all parts of chain to work as a team to improve cost efficiency , reliability and delivery efficiency , reliability and delivery

iii) Social Responsibility and Corporate ethics also form part of customer satisfaction

f) Greater Product variety New replaced old BY:

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 25 a) Just in Time Production Systems b) AMT : Advanced Manufacturing Systems

3) Service Industries :( esp large eg financial or airlines) a) Pre-80's : Monopolies with barriers /or Govt. b) Post 80's : Deregulation + Privatisation caused : i) Before NOT costing of individual services , now COSTING PRESSURE causes costing of individ. Services TO REDUCE COSTS (before easy to pass on cost , now not)

IMPACT OF I.T./COMPUTERS MNGMT ACC. 1) E-business ,e-commerce, internet commerce 2) Derive cost savings from eg; paperless airline tickets,internet banking 3) ERPS: Enterprise resource planning System : eg SAP/Baan/Oracle/J.D.Edwards.= all business function streamlined in one info system – real time info manager/ one database / single data entry(no duplication) 4) For Mngmt Acc it means no reason to ask mngmnt acc for reports,just push button instead ,but limits ability to produce locally relevant info.Now to avoid redundancy accoubtants must concentrate more on provide a supportive/ interpretative/advisers/internal consultants. –THEY SPEND MORE TIME ANALYSING DATA NOW -

INTERNATIONAL CONVERGANCE OF MNGMNT ACC. 1) Generally Mngmnt Acc is standardised throughout industrialised countries-esp. on macro level (overall sys)

FUNCTIONS OF MANAGEMENT ACCOUNTING: 1) A Management and Cost accounting System should generate info. to meet the following requirements: a) Allocate costs between GOODS SOLD and INVENTORIES for INTERNAL and EXT. PROFIT REPORTING i) Match costs to revenues per year/mnth etc. /Get inventory value / costs b) Provide RELEVANT INFO. to HELP MANAGERS mage better decisions. i) A-routine reports all for Resouce allocation+product mix/discontinuation decision etc. ii) B-non-routine – strategic decision eg: new machinery investment / negotiate long-term contracts etc c) Provide info. on PLANNING ,CONTROL ,PERFORMANCE MEASUREMENT ,and CONTINUOUS IMPROVEMENT. i) In form of BUDGETS. 2) COST ACCOUNTING : definition: concerned with cost accumulation for inventory valuation to meet requirements of ext. reporting & int. profit measurement. a) OBJECTIVE OF COST ACC.:cost acc gathers + analyses costs for purpose of : i) Product costing ii) Stock valuation /costing iii) Job costing 3) MANAGEMENT ACCOUNTING : definition: provision of appropriate info. for DECISION MAKING , PLANNING ,CONTROL and EVALUATION. / provision of info. to internal users to help them to make better decisions and improve the efficiency and effectiveness of operations. 4) NOTE : in many organisations database is originally designed for fin acc, not mngmnt acc, and still in use.!

HISTORY OF MANAGEMENT ACCOUNTING. 1) Most of practices used today from before 1925 -industrial revolution. 2) In 1980s- crisis due mngmnt acc not developed enough to be useful to then.Since 1980 major development to now.Now it is seen as useful enough.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 26

CH6-CHAPTER : COST CLASSIFICATION AND ESTIMATION :ch6 viggario book REM/ NOTE FOR EXAMS : COST CLASSIFICATION CHAPTER 2) Exams ask: I) (1)SEE PAGE 244 in Viggario book for Quest. + Answers. II) (3)REM: if they ask :the company gets an order for an extra 100 units, what will a profitable price be for this –it means ONLY FOR THE LAST 100 – not all units,ie the differential/ price. III) If asked to get the profit for extra hundred(not just 'last' –but 'extra') DONT FORGET TO LEAVE OUT FIXED COSTS PER UNIT in your calculations!!!!! It is supposedly already paid by the first few –see pg 244 viggio. IE:IN MANAGEMENT ACC. IF FIXED COSTS ARE GIVEN IN A BUDGET AS A PER UNIT WORKED OUT COST – IT MEANS THAT THE TOTAL FIXED COSTS HAS ALREADY BEEN DIVIDED UP BETWEEN THE NUMBER OF UNITS IN THAT BUDGET- ANY EXTRA UNITS WOULD NOT SIMPLY INCUR THESE COSTS WITHOUT IT BEING STATED HOW-IE: IF PRODUCTION WOULD THEN AN EXTRA MONTHS RENT UP ETC.SO YOU IGNORE THESE FIXED COSTS FOR ANY EXTRA UNITS PRODUCED.unless told otherwise. 4) REM: NOTE: if you have to find out the fixed costs for a very large units- ONLY first convert variable costs to single/per unit(because lecturer/book/everyone does this) ,but do not first convert total costs and fixed costs to :per unit- use straight from large amounts because otherwise any- 0.33333 so R0.33 -recurRing fractions will give you wrong ANSWERS.(becuase you cannot get all the recurring parts in)

1) COST CLASSIFICATION I)

Costs are classified as

(1)

FUNCTIONAL COSTS: OR

Used mainly for EXTERNAL REPORTING , costs classified as per function , into eg: departments etc. ,like ‘manufacturing’ or ‘administration’.

(2)

BEHAVIOURAL COSTS:

Used for INTERNAl REPORTING/ DECISION MAKING like to evaluate a product division.Behavioural costs refers to the way costs change in relation to changes in the volume of activity. : Eg fixed or variable costs. So if mngmnt want to close a division, they will want to know which detailed costs will be eliminated, and which partially eliminated etc.

FIXED AND VARIABLE PRODUCTION OVERHEADS : AND COST BEHAVIOUR OF i) Measurements of volume needed to :patients seen-one more patient/day?=costs/revenue/(or units sold ?reduce price to sell more?,or units produced ,guests booked etc)

VARIABLE COSTS : Vary directly or very nearly directly proportionaly to incr./decr. in activity/VOLUME(EG:OF PRODUCTION).See chart below : total variable costs are linear/direct and Unit var. cost is constant.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 27 Variable Costs:(b)Per Unit (cost =R10 per unit)

5000 4000 3000 2000 1000 0

1000

0 0

100

2000

200

3000

300

UNIT Variable Cost

TOTAL Variable Cost

VARIABLECOSTS: (a)TOTAL 5000 4000

400

500

40 30 20 10 0

10 0

ActivityLevel

10 100

10 200

10 300

10 400

10 500

ActivityLevel (unitsofoutput)

FIXED PRODUCTION COSTS :( OR ‘LONG TERM VARIABLE COSTS’) Basicly stay constant regardless of VOLUME OF PRODUCTION –OVER a specific period of time- (before inflation pushes up input prices etc),therefore also called ‘long term variable costs’ because over the long term ALL costs are seen a variable-due to inflation etc. eg:rent, municipal rates REM: watch for over how many units your fixed costs are written off- to be sure any units after that are costed excluding fixed costs – for quotations etc .Also watch when they are re-activated eg new periods rent etc. for further costing. FIXED COSTS:(b) unit (supposed hyperbolic!) Unit Fixed Cost

Total Fixed Costs

FIXEDCOSTS:(a) Total 50

0 0

100

200

300

400

1000 500 0 0

500

2

4

6

Activity Level : Output -no of units produced

ActivityLevel (no.ofunits)

SEMI-FIXED (OR STEP-FIXED COSTS) : They are costs that are fixed in (Relevant Ranges )at specific activity levels :eg at 100 – 5000 products ,-within a specific time period (same as fixed –to exclude inflation etc)- but if production goes above that they change to the next level etc.– usually in steps-

Total Fixed Costs

STEP FIXEDCOSTS 300 250 200 150 100 50 0 0

100

200

300

400

500

ActivityLevel

MIXED COSTS (OFTED REFERRED TO AS SEMI-VARIABLE COSTS ,BUT WE CALL IT MIXED) These include both a FIXED and a VARIABLE component eg: maintenance = fixed cost for permanent labour? + a variable cost according to amount of activity(spares used) ; or sales rep. costs =salary + commission per amount of sales. Eg rent= rent +10%gross revenue MOST INDIRECT COSTS (incl labour costs) exhibit mixed costs characteristics.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 28 600 500 400

+ VAR IAB LE

300

FIXED

200 100 0 0

200

400

600

SEMI-VARIABLE COSTS (NOT ALLWAYS SAME AS MIXED COSTS,BUT VISA VERSA TRUE) COSTS that increase with production,BUT NOT ON A PROPORTIONATE BASIS. Classified into: (a) costs that increase at an INCREASING RATE (b) costs that increase at a DECREASING RATE. (often called LEARNING CURVE COSTS) Costs that increase at a DECREASING RATE (also sometimes just called 'LEARNING CURVE COSTS')

Coststhat increase at an INCREASINGRATE

Variable Costs

600 500

400

400 VARIABLE COSTS

300 200

VARIABLE COSTS

200 0

100 0 0

200

400

Activity Level.

600

0

200 400 600 ActivityLevel.

HOW TO SEPARATE THE FIXED AND VARIABLE PART OF MIXED COSTS : NORMAL METHOD. 1) . WARNING !: You ONLY EVER calculate the TOTAL FIXED COSTS spent per period , NEVER the per unit fixed cost for any calculations with this method- OR you will definitely get wrong answers!!!! 2) METHOD: You just work out the increase between any 2 levels of production (in a single RELEVANT RANGE) of by how much the costs increased for each /per single unit per any number of production units increase.This is the VARIABLE COST COMPONENT – because the fixed costs component does not change at all, so only the var. costs will have changed for any increase in units produced etc(marginal increase).-! REM: specify 'only per relevant range' in your answer. a) After you have the variable component you can now find the fixed component.REMEMBER; fixed costs can NEVER BE COMPARED ON A PER UNIT BASIS. WARNING !: You ONLY EVER calculate the TOTAL FIXED COSTS spent per period , NEVER the per unit fixed cost for any calculations with the high low methodOR you will definitely get wrong answers!!!! b) Then, to get the fixed costs after this , the fixed cost component is calculated by taking any 1 single level of production eg : at 60000 units in below example, and subtracting the (no. units X variable cost) from the total cost for the period for that item eg for direct materials.so you end up subtracting the total variable cost from the total total cost and get the total fixed cost! 3) Allways do the breakdown of costs to calc. variable costs in the standard format as shown in first table below. REM: NOTE: if you have to find out the fixed costs for a very large units- ONLY first convert variable costs to single/per unit(because lecturer/book/everyone does this) ,but do not first convert total costs and fixed costs to :per unit- use straight from large amounts because otherwise any- 0.33333 so R0.33 -recurRing fractions will give you wrong ANSWERS.(because you cannot get all the recurring parts in) 4) Note: below ,remember that the fixed costs REMAIN THE SAME, so they are all there anyway in the figures below.Only the variable costs can change AT ALL EVER, the fixed costs just stay, no matter what the units produced is.So any marginal can only be ‘variable costs’.That is the logic. 5) Example: You are given following cost budget at 2 levels of activity:Required: determine fixed & variable levels of activity. COST BUDGET MARGINAL VARIABLE Per Unit Costs (Differential Units =A-minus-B) (Tot. Price/Tot.Units=

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 29 change per unit) UNITS produced:

60000

R

R

80000 80000-60000= 20000 R

.

R

Direct Materials

600000 800000 =(800000-600000)=200000

Labour

400000 500000 =500000-400000=100000

R 200000/20000=R10 per unit 100000/20000=R5 per unit

Production Overheads 380000 440000 =440000-380000=60000

60000/20000= R3 per unit

Rent

120000 120000 0

0/0=0 per unit

Power

200000 260000 =60000

60000/ 20000=R3 per unit

ANSWER Cont. TO SHOW THE FIXED COSTS AS WELL you basicly now do a Full analysis of costs worksheet for CVP

Units Variable Cost(from above)

Direct Materials

R10

Labour

R5

Unit Total Cost LESS Per Unit Fixed Costs variable costs at that level(use any level-say 60000) Remember: FIXED costs cannot be worked out for a PER UNIT basis–only as a “total value” per relevant range 600000 –(60000*10)=

0 100000

Production Overheads R3

400000 –(60000 * 5) 380000 –(60000 * 3)

200000

Rent

R0

120000-(60000 *0)

60000

Power

R3

200000-(60000 *3)

20000

HIGH-LOW ANALYSIS -METHOD :IDENTIFICATION OF FIXED & VARIABLE COMPONENTS. 1) 2) 3)

4) 5) 6)

7)

WARNING !: You ONLY EVER calculate the TOTAL FIXED COSTS spent per period , NEVER the per unit fixed cost for any calculations with the high low method- OR you will definitely get wrong answers!!!! This is a very simple method, and not very accurate because only 2 values are used, not all the values like some other mathematical methods.Very commonly well known method.Managers sometimes use very simple methods to estimate cost functionsThe high / low method is used where MULTIPLE cost differences are given for MULTIPLE LEVELS OF PRODUCTION eg: values at 100,300,500,700 etc etc -not where just 2 levels are given eg:at 30 units and 100 units, as in previous Standard Method & example. – METHOD: Simply Take the HIGHEST and LOWEST values of the COST DRIVER (some books use costs instead)(eg:a cost driver is = total.units -NOT total.cost- ) and use these as the 2 different values , then carry on as in Normal Standard method above.–ie subtract low from high and carry on as in Normal Standard method above. Note ‘units produced’ or any other cost driver could also be used as the COST DRIVER in a high-low method , to calculate any similar type of exercise , it does not have to be ‘units produced’. Cost function is y=a+bX ,so differential costs/(diff.cost driver ???? whats this)= slope=b.,any of high or low can be used to compute constant from here ('because both equations are linear with 2 unknowns-slope+constant-as per book' !). So fixed is =a ,and X = cost driver eg machine hours or units produced. PROBLEMS WITH HIGH/LOW METHOD.: a) Highest & Lowest values may not be representative of entire population. b) The 2 values may be outliers(extremes – not part of average). c) Ignores all other values (not like regression analysis,which dos'nt) Only works in relevant range(eg: minimum wage for performance based pay for production causes a 'range')

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 30 THIS method only works in IN RELEVANT RANGE – not out of rel. range .eg:idle plant. One CANNOT use a value that came from an idle plant where it is exceptionally low , because this will not be an accurate value to base a calculation on-_ie there was no real production taking place.So it would be wise in real life to also check the line on the graph of the plotted values of all values given to choose from, and look for outliers or stepped fixed costs or relevant ranges before using high-low method NOTE: sometimes another 2 values are chosen which are more representative if managment suspects outliers/non-representative BUT for exam , unless specifically mentioned, just use the highest and lowest values.

THE LEARNING CURVE: 1) This is a method to calc. how much faster it gets to produce units as workers get more experienced.It is only quoted as a percentage % -all else works from or around this %.Time decreases exponentially and learning continues at same rate till conditions change or a steady state is reached.

1-CUMULATIVE AVERAGE TIME-LEARNING MODEL. 1) The whole formula works in a funny way- the % quoted as the learning curve ONLY applies to the time it takes to DOUBLE the production from one level to another.(stats type maths funny thing).IF you multiply this % by a time taken for the first unit ever made – it gives you :NOTE FUNNY THING: the average of 1st unit +2nd +3rd +4th / 4 =average time per unit.(and that includes the extra in 1st + little less extra in 2nd ...to end.SO IT DOES NOT GIVE YOU THE EXACT TIME TO PRODUCE THE VERY LAST UNIT – YOU MUST MULTIPLY THIS ANSWER BY THE nth value of unit-eg: No.16th unit so multiply answer from (% X learning curve) by 16 and then if you could do the same for unit no 15,which is difficult because it only works in “doubles”, then If you could subtract final figure for 15th from 16th- you now get the exact time how long unit 16 actually took(true MARGINAL time).The first figure from the learning curve % is thus just an average of TOTAL TIME TO NOW / final unit you land on eg :16th etc. ALSO :To get in-between % of say 3 units- between 2 & 4 –you must??? (1) Make a Graph –read off. (2) try use algebra mathematical model instead 2) BATCHES: because factory production is mostly in batches,if you get ANY QUESTIONS QUOTED IN BATCHES of eg:100 units –DO NOT CONVERT TO SINGLE UNITS – all answers get done per batches(as if each batch is a single product) and learn.curve %'s only apply to each full batch.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 31

Example : using 80% learning curve : 40hrs to make first unit

Units Learning Produce Curve % d

Productio Cumulativ Average n :for last e Time (per half of Production unit) total units . made

1 2

100% 80%

1 1

1 2

40 40 80%*40=32 32 (Or 40*80%) X2=64(note)

3 4

64%(80*80) 2

4

32*80=25.6 25.6*4=102.4 (Or 40*64%)

102.464=38.4

19.2

38.4/2=19.2

5 6 7 8

51.2%(64*8 4

8

163.8415.4 102.4=61.4 4

61.44/4=15. 4

16

40.96%

16

25.6*80%=20. 20.48*8=163. 48 84 (Or 40*51.2%) 20.48*80%= 262.14 16.384 (Or40*40.96 %) Previous AverageTime Average X .X multiply 80% Cumulative (Or new Production learning curve * hours for 1st one ever made)

98.3

98.3/8=12.3

0)

8

(51.2*80 %)

Total Time (all units)

½ way MARGINAL times Total Average Note : this Time (last Unit marginal is ½ of total Time(pe cockeyed – it units r each is only for made) of last the last ½ of half of units made , total an average units for them made) only 40 40 64-40=24 24

12.3

Current Total Time –minus Previous KNOWN Total Time

Previous column divided by Number of units in this last half of TOTAL units made. 3) MATHEMATICAL ALGEBRA FORMULA FOR LEARNING CURVE:(use esp.to work out between doubles ie: 3,5,6 etc.) b

I) y=ax II) y= cumulative average time /unit when x units are produced (ie: it gives you avg. time per unit as an answer,same as the answer you get when you multiply {learning curve % by hours taken sort of thing}) III) a=time to produce first unit IV) x= cumulative number of units produced (eg:d if you want to know avg. time ea. For for 15 units, then x=15) V) measure or learning (where b = log % / log 2 )rem: on calculator 80% =0.8 NOTE ) a) VI) NOTE: to get b – you do it on calculator : b= log (learning%as decimal) / div by / log (2) VII) Use this formula esp. to work out between doubles ie: for number 3,5,6 etc.) VIII) You can use it to make a % TABLE for units 1-200 etc where each no.of units has a simple % next to it to use.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 32

B-INCREMENTAL UNIT-TIME LEARNING MODEL: 1) THIS method works exactly the same as the other model, incl. the formula exactly ,exept that the final figure one gets for the answer eg: 30,5 hours for 4 units , IS NOT THE AVERAGE TIME per unit , but the marginal time for only the last one .If you want to calc. the average time from this, to compare to other method – you must add all the cumulative values to here- from unit 1 upwardsthen divide by the no. of units of course. 2) TO CHOOSE BETWEEN 2 MODELS : Each industry different – so best to study workflow and make graphs – then compare answers between 2 models to find the one that fits best to that industry.This model will only differ in some weird exponential / type way from first.

C-USE OF MODELS. These models can can also be used to measure quality betterment instead of production increment.Other factors , other than time that the workers have been learning the job , also contribute to quality eg:job rotation & divide workers into teams.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 33

4 CHAPTER :COST –VOLUME PROFIT ANALYSIS ch. 7 in vigario book 1.ECONOMIST VS ACCOUNTANTS VIEW 1) The economists view is different from the accountants view for following reasons: a) Economists view whole range of activity 0- end Accountants view only relevant range where costs behave in a linear relationship. b) Economists assume info.on price, cost, volume is available all levels activity , Accountants assume limited availability of this info , and linearity over relevant range. c) Economists view is EXPOSITIONAL , Accountants view is PRACTICAL.

ECONOMISTS VS ACCOUNTANTS COST-VOLUME-PROFIT GRAPH. : ECONOMISTS GRAPH:

a) TOTAL REVENUE LINE IS CURVILINEAR : Firm cannot increase sales by holding selling price constant- thus total revenue will be max where slope is zero(starts to fall as sales volume increase) or marginal revenue from n'th sale = zero. b) INCREASING AND DECREASING RETURNS TO SCALE :Costs at start (A-B) increase direct linear (normal increase) then (B-C) as bulk buy discounts & division of labour kicks in , costs level out (decrease ) then (Cend) costs increase sharply again due to bottlenecks & production beyond normal capacity. c) Note : there are 2 break –even points for econ. View. ,profit max where distance between cost/revenue lines is greatest.

ACCOUNTANTS GRAPH.

i)

CONSTANT FIXED COST LINE :Assumption that costs are constant in relevant range only

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 34 ii) CONSTANT VARIABLE COST & SELLING PRICE /UNIT: these 2 are also constant in relevant range – because range is small.(sales increase from promotion etc)\ iii) This is representative of a VARIABLE COSTING SYSTEM method.

C.V.P. ANALYSIS. (COST-VOLUME-PROFIT.) ASSUMPTIONS OF CVP ANALYSIS: i) All other variables remain constant (when you calc. change from another variable) ii) Profits calc. on the variable/direct costing basis. iii) Assumes a short term (normally 1 year) planning period – ie inflation/ market changes are not worked in. iv) A single product or constant sales mix exists.

BREAK-EVEN ANALYSIS: The number of units that must be sold to break even = Fixed Costs / Contribution.

TARGET PROFIT: If a company requires a certain profit during a period- we must determine whether it is fixed or varies with each unit sold.If profit required is fixed we treat it in same way as fixed cost – if variable we treat it in same way as a variable cost.

CONTRIBUTION : CONTRIBUTION is the SELLING PRICE of a product LESS all VARIABLE COSTS.The term used by Management accountants to describe the incremental profit that a company will make as the company sells one more unit of production.(DOES NOT include FIXED COSTS, ONLY PRICE – VARIABLE COSTS = contribution, then after that ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Mngmn acc only concerned with contribution,not profit since incr. sales = incr.contribution where fixed costs stay constant. Means ' Profit contributed toward total profit of firm before fixed costs' so.This happens because fixed costs do not change , but production volume does, so once all fixed costs have been paid by current production volume, any increase in production volume above this results in a higher profit than before the fixed costs were paid for.Thus before fixed profit is paid for , PART OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for, ALL OF THE CONTRIBUTION goes toward profit.

Divided by =

Change in Variable Costs Change in SALES VOLUME CONTRIBUTION per unit

OR less = -

Total Sales revenue Variable Costs CONTRIBUTION Fixed Costs

=

PROFIT

MARGIN OF SAFETY: a) Difference between : Budgeted Sales Volume MINUS Break-Even Sales Volume. b) Sometimes Expressed as % of Budgeteted Volume or Budgeted Revenue.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 35

KEY RATIOS FOR CVP (PV RATIO) PROFIT VOLUME RATIO: ( OR ALSO CALLED ‘CONTRIBUTION MARGIN %’ ) %

= Contribution / Sales. =0.abxy or ( * 100/1= ab.xy %) TO 4 decimal places OR to 2 decimal places for

PROFIT RATIO =Profit / Sales =0.abcd or ( * 100/1= ab.cd %) TO 4 decimal places OR to 2 decimal places for %

(B/E SALES) BREAK-EVEN SALES REVENUE:( NOT A RATIO) =Fixed Expenses / PV Ratio = Rands ,2 decimal cents. REM: FIXED expenses is NEVER just the totals that do not change –you must FIRST CHECK EVERY TOTAL eg: labour-MATERIALS-OVERHEADS ETC FOR THE FIXED PART AND VAR. PART BEFORE you calc. the total fixed costs.

BREAK-EVEN SALES VOLUME:( NOT A RATIO) =Fixed Expenses / Contribution per unit. = units (round- off unwards only –ie: per unit)

MARGIN OF SAFETY RATIO Sales - (B\E Sales revenue) / Sales = =0.abcd or ( * 100/1= ab.cd %) TO 4 decimal places OR to 2 decimal places for % {sales means budget sales revenue. –but could also be actual... depends on needs)

OTHER TYPES: 1.1. contribution ratio = marginal contribution/marginal sales 1.2. variable cost ratio = marginal variable costs / marginal sales

ABBREVIATIONS FOR RATIO’S ETC: (1) (2) (3) (4) (5) (6) (7)

FC -fixed costs VC -variable costs SP -selling price OP - operating profit???? UCM -unit contribution margin IE: contribution per unit UVC -unit variable costs :the variable costs per unit. USP -unit selling price : the selling price per unit

ANALYSIS OF COST STRUCTURE USING CVP PRINCIPLES : (OF A COMPANY) 2. If sales ‘NUMBER OF UNITS’ not given –do the same ‘analysis spreadsheet’ but calculate ratios TO FIND ANSWERS instead of using the per unit cost to calculate them: 2.1. ie: contribution ratio = marginal contribution/marginal sales 2.2. variable cost ratio = marginal variable costs / marginal sales 2.3. Use the var cost ratio to find fixed & var. costs from sales – then you can firn break-even sales volume etc etc from here. 2.4. Use the contribution & var. cost ratios to also find increase in sales effect on contribution etc etc. IF NO UNITS OF PRODUCTION ARE GIVEN ii) REM: if selling price goes up by 10% -you cannot just * profit by 10% to get new answer- because fixed cost : var. cost ratio will stuff it up.You must first * ‘contribution’ by 10% then subtrACT fixed costs to get new profit.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 36

METHOD: FORMAT OF SPREADSHEET FOR:

FULL YEAR FINAL ANALYSIS

VIGGARIO PAGE 247

i. Simply divide costs up into a spreadsheet of 4 columns with totals at bottom(see where to write names): a. Names/itemised b. all Variable costs PER UNIT/ea – Not Totals c. All Fixed costs PER TOTALS – Not per Unit/ea. d. Total column Per Item (multiply Variable cost column * Number sold Then add Fixed Costs) Name

Variable per Unit

Variable Cost Totals

Fixed

Units (Put R here to split lines)

Sales

Note format!!! Format!R R 58(see 5800000 calc.below)

R

Total (R)

(TO ILLUSTRATE Initial figures from ONLY) budget.

100000 units

(TO ILLUSTRATE ONLY ILLUSTRATE Note FORMAT:(TO ONLY

R

2000000

ILLUSTRATE ONLY ILLUSTRATE (to illustrate) (TO ONLY Only var 2000000

200000 300000

1000000 500000

1000000 500000

80% variable

400000 200000 180000 500000 80000

400000 200000 300000 500000 100000

400000 200000 300000 500000 100000

fixed

5800000

Mnftr Costs: Direct materials Labour Costs Overhead Costs Non-Mnft Costs Rent Accounting Marketing Salaries Other Costs

(20)

2000000

(8) (2)

800000 200000

120000

(1.2) (0.2)

CONTRIBUTIO 26.6(=sales-all costs) N FIXED COSTS NOTE ABOVE

20000

(to illustrate) (TO

40% variable

Fixed 40% var Fixed 40% prod.units.

var.with

(to illustrate) (to illustrate) (TO

2660000 1860000

PROFIT

800000

ILLUSTRATE ONLY ILLUSTRATE (to illustrate) (TO ONLY ILLUSTRATE (to illustrate) (TO ONLY

II )METHOD: fORMAT OF SPREADSHEET FOR: Pre-Calculations of Variable & Fixed Costs from multiple years figures. Name

Variable per Unit

Variable Cost Fixed Totals

Units

Sales

Note format!!! Format!R R 58(see 5800000 calc.below)

R

Total (R)

(TO ILLUSTRATE Initial figures from ONLY) budget.

100000 units

(TO ILLUSTRATE ONLY ILLUSTRATE Note FORMAT:(TO ONLY

R 5800000

Mnftr Costs: Direct materials

(20)

2000000

2000000

(to illustrate) (TO

ILLUSTRATE ONLY ILLUSTRATE (to illustrate) (TO ONLY Only var 2000000

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 37 Labour Costs Overhead Costs Non-Mnft Costs Rent Accounting Marketing Salaries Other Costs

(8) (2)

(1.2) (0.2)

CONTRIBUTI 26.6(=sales-all costs) ON FIXED COSTS NOTE ABOVE

800000 200000

200000 300000

1000000 500000

1000000 500000

80% variable

400000 200000 300000 500000 100000

400000 200000 300000 500000 100000

fixed

120000

400000 200000 180000 500000 80000

20000

40% variable

Fixed 40% var Fixed 40% prod.units.

var.with

(to illustrate) (to illustrate) (TO

2660000 1860000

PROFIT

800000

ILLUSTRATE ONLY ILLUSTRATE (to illustrate) (TO ONLY ILLUSTRATE (to illustrate) (TO ONLY

INCOME STATEMENT (OR BUDGET) SHOWING CONTRIBUTION SEPARATELY. INCOME STATEMENT OF XYZ FOR PERIOD 123 Sales(Revenue)

R 5800000 0

Variable Costs:

Total Var.

Direct materials Labour costs Overhead costs Marketing –variable costs Other –variable costs Contribution: costs) Fixed Costs:

Xxx Xxx Xxx Xxx Xxx 266000 0

= (sales – variable

Total Fixed

Marketing- non-variable costs Other costs – non-variable costs Rent Accounting Etc Profit/Loss costs)

=(contribution – fixed

xxx xxx xxx xxx xxx 800000

COST –VOLUME –PROFIT CHART/DIAGRAM. 1) Simply draw a diagram as shown below detailing all totals shown with arrows/labels /units /zero/x&y axis etc all marked.The prices/units are a bit difficult to get precise on graph-think carefully.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 38

Rands

Cost-Volume Profit diagram

Sales Revenue

4055

Profit/Contribution (Fixed +Variable) Costs Fixed Costs

0 0

69925 Units

|____________| Margin Of Safety.

LABELS: i) "Margin of safety" (break-even point to selling price- write below the x-axis) ii) "Variable costs" : arrow from fixed costs line up to var.costs line –labeled. iii) "Fixed costs" : arrow from fixed costs line down to x –axis-labelled. iv) "Revenue/sales" v) "Total costs( fixed + variable costs)" vi) "Break-even point" vii) "Increase in profit /contribution"-arrow showing along Profit&Contribution Line +++ from break-even point. viii) "DECREASE in profit /contribution"-arrow showing back Profit&Contribution Line ---- from breakeven point.

INCOME STATEMENT SHOWING MANUFACTURING COSTS SEPARATELY (OR ALSO CALLED INCOME &EXPENDITURE STATEMENT SHOWING...) 1.1.1. Normal inc.Stat just you can show "Manufacturing Costs" under "Cost of sales" breakdown as a heading and Manufacturing Profit as Gross profit instead.The rest can go under NON-Manufacturing costs and Profit/Loss at the bottom. INCOME STATEMENT OF XYZ FOR R PERIOD 123 Sales(Revenue) 5800000 0 Cost of Sales Xxx Manufacturing Costs Blank Labour costs Xxx Overhead costs Xxx Direct Material Xxx Other –costs Xxx Less : Closing Inventory Xxx Manufacturing profit Xxx Non-Manufacturing Costs blank Marketingxxx Other costs xxx Rent xxx Profit/Loss 800000

(3)

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1+2 CHAPTER :ABSORBTION COSTING :

SYSTEMS FOR RECORDING AND CONTROLLING COSTS

:vigario ch-1+2 TO REMEMBER FOR EXAM/ TRICKY STUFF (1) For overhead recovery, remember for apportioning from service depts. to production depts., if you leave out the service % for some calc. , then it is production / all production%`s, NOT 100%, but like eg: 90% or 95%.EXEPT FOR reciprocal method, where you don’t do this , after the algebra equation you use 40/100 or 30 / 100 to apportion to production depts.,do no use product./all product. Depts. eg 30/90 here- because somehow the other service % has already been used etc.!

FROM CH1 VIGARIO:THE MEANING OF MANAGEMENT ACCOUNTING. FINANCIAL ACCOUNTING. OBJECTIVE OF FINANCIAL ACCOUNTING: THE OBJECTIVE OF FINANCIAL ACCOUNTING is to provide information that external users can use to make decisions about their investment and analyse how company is performing. Financial accountants produce Financial statements useful to Fin Analysts.These are produced in accordance with a system known as absorbtion costing , which means all production costs incl. value of work in progress,finished goods,and product and period costs(eg rent) are incorporatred in closing stock valuation. It is important to note that Absorbtion Costing exists for the sole benefit of the Financial accountant, Management does NOT concern itself with absorbtion costing. Using a pre-determined overhead recovery rate will result in either an under-recovery or over-recovery of overheads. FINANCIAL ACCOUNTING SYSTEM

ABSORBTION COSTING

PRODUCT COSTING 1-ALLOCATE COSTS TO PRODUCTION AND SERVICE DEPARTMENTS PRODUCT COSTING DUCTION AND SERVICE DEPTS.

3-SELECT AN ACTIVITY BASE

2-ALLOCATE COSTS FROM SERVICE TO PRODUCTION DEPARTMENTS

4-CALCULATE AN OVERHEAD RECOVERY RATE

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MANAGEMENT ACCOUNTING Management Accountants require Info. that will assist them in decision making and performance evaluation activities.The shift in emphasis from cost accumulation for financial accounting needs to 'relevant information" for better profitability reasons has led to emergance of mngmnt acc. as adiscipline.Cost acc.refers to ext.fin acc. purposes , while mngmnt acc. refers to internal decision making purposes. MANAGEMENT Acc. measures profits in terms of Contributions, sets budgets, and analyses performance of a company by comparing the budgeted to the actual results. Managerial accounting is a very simple discipline used by companies to maximise profit. It requires the analysis of costs into two simple categories, namely variable and fixed. The managerial accountant is predominantly involved with setting budgets and evaluating the company or product performance once the actual results are available.The performance analysis requires a reconcilliation of budget profit to actual profit ,using the variable costing system. MMANAGEMENT ACCOUNTING SYSTEM

VARIABLE COSTING

PERFORMANCE ANALYSIS

1-RELEVANT COSTING

2-CONTRIBUTION

3-CVP COST VOLUME PROFIT

A-LIMITING FACTORS

B-PROBABILITY ESTIMATES

MANAGEMENT ACCOUNTING IS:

RELEVANT COSTING

STANDARD VARIABLE COSTING

Contribution Budgets Performance

VARIABLE COSTING

COST VOLUME PROFIT

C-COST ESTIMATES

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VARIABLE COSTING (OR MARGINAL OR DIRECT COSTING) IN EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED USING ABSORBTION COSTING, ONE MUST QUICKLY CACULATE THE SAME FIGURES USING VARIABLE COSTING – OR YOU WILL NOT BE ABLE TO DO PROPER COMPARISONS AND WORK THINGS OUT! Due to fixed costs being in there- always take them out and convert to CONTRIBUTION .. The method used to VALUE CLOSING STOCK using variable manufacturing costs only- fixed costs are written off as period costs.(as per book- fixed mnfrtring costs are charged to the Income statement as an expense for the period.So closing stock is valued on manufacturing variable costs only. Ie: the valuation excludes all mnfring fixed costs.The System is representative of managerial accounting for decision making. Variable costing enables mngmnt to make decisions based on congruent with company objectives of "profit maximisation". Variable costing is consistent with CVP analysis,ie fixed costs are treated as period costs.(per book exactly) FOR VARIABLE COSTING ,THERE ARE 2 WAYS OF VALUING STOCK – 1-BUDGET OR 2-ACTUAL.

1. FROM CH 2 VIG. SYSTEMS FOR RECORDING AND CONTROLLING PRODUCT COSTS. : • Basic difference between short term & long term decision making. • The 2 components of the over/under recovery rate. • Pre-determined overhead rates NOTE: Absorbtion costing is sometimes called traditional or standard costing.

REM: USE 4 DECIMAL PLACES FOR HOURLY LABOUR/MACHINE RATES FOR PRODUCTS. DEFINITION: ABSORBTION COSTING : IN EXAM, OR REAL LIFE, AS SOON AS ONE GETS AN INCOME STATEMENT OR FIGURES PREPARED USING ABSORBTION COSTING, ONE MUST QUICKLY CALCULATE THE SAME FIGURES USING VARIABLE COSTING – OR YOU WILL NOT BE ABLE TO DO PROPER COMPARISONS AND WORK THINGS OUT! Due to fixed costs being in there- always take them out and convert to CONTRIBUTION .. Method used to VALUE CLOSING STOCK that includes ALL MANUFACTURING COSTS-VARIABLE AND FIXED-NOT any NON-MNFTRING COSTS AT ALL!!!!!! ((WHICH DOES/can INCL. RENT AND MAINTENANCE per book)– The fixed cost element can be determined by budget or by actual,and is added to all variable mnftring costs(eg direct material) to get the total per unit product cost for inventory valuation per the IAS definition ( which says ALL MNFTRING COSTS must be included in Inventory Valuation incl. fixed mnftring costs eg: Maintenance etc.) .ONLY Financial Accounting uses it. NOTE: every time production volume changes ,the cost per unit will change because fixed costs get divided by a larger /or smaller number now.So it is an inconvenient method requiring constant raising of under/over recovery charges to balance the figures.The 2 reasons for this is: 1-Actual volume is different to budget volume. 2-Actual manufacturing overhead being different to budget overhead. That is why Management Accounting uses a different method –: called "Variable Costing". FOR ABSORBTION COSTING THERE ARE 2 WAYS OF VALUING STOCK:1-BUDGET AND 2ACTUALVARIABLE PLUS FIXED COST OF PRODUCTION. But for variable costing there is also budget & actual , exept there it is only VARIABLE COSTS OF PRODUCTION, not fixed in the stock valuation(per book vigario pg14-concl.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 43 ALSO, FOR ABSORBTION COSTING THERE ARE 3 POSSIBLE WAYS OF PRESENTING THE INFORMATION IN THE FINANCIAL STATEMENTS. 1-FULLY INTEGRATED ABSORBTION COSTING (BUDGET COST) 23-ACTUAL COST ABSORBTION COSTING. (all exactly per vig. Pg 14 book!) IS ABSORBTION COSTING ACCEPTABLE:? NO, because it will distort true company profits due to showing fixed costs as closing inventory costs –you cannot compare 2 periods properly,or budget properly if you use include rent at a pre-determined rate eg R300 per product it will not be accurate if production rises or falls.- it will eg show excessive profits when stock holding is rising ? per book vig pg14. HOW DO YOU MAKE IT ACCEPTABLE: You explain on any budget that the Per Unit cost can vary by the TOTAL FIXED COSTS AMOUNT included in the costing eg R500 –at any level above or below the no. of units that the budget was calculated at. However ,for calculating costs of products in a Job Costing environment, where the costs are used to quote on future jobs eg: Printers , when using absorbtion costing, one must remember that one company allocates fixed costs differently to another one,and there is no right or wrong method to allocate fixed costs really, ie some allocate all overheads, some only admin + management , some only maintenance and depreciation etc.

DEFINITION :COST ABSORBTION RATE : the cost rate at which a group of costs or fixed costs or overheads are charged to a specific product eg: machine hours divided between no. of products.(it is used by fin . accountants to calculate absorbtion costing system.

DEFINITION :FULLY INTEGRATED ABSORBTION COSTING SYSTEM If the fixed element is pre-determined .So when fixed elements eg: rent+maintenance ,are pre-calculated in the previous years as a per unit cost, from per average normal production levels,so eg R1000 rent / 500products made per mnth= R2 rent per product ;and these amounts are added to normal vriable costseg direct material, to get a (estimated/ avg)total cost per product unit . (NOTE: not all fixed costs need to be allocated as such ONLY mnftring costs MUST BE(WHICH DOES INCL. RENT AND MAINTENANCE per book), other fixed costs eg admin and computer,marketing costs(more 'sales costs' types get left out)can be left out and the system would still be called Fully Integrated absorbtion Costing) ONLY where the fixed cost element is predetermined though and not based on actual fixed costs ,which is another type of absorbtion costing.The actual amount will differ from the allocated amount though and OVER or UNDER recovery of fixed overhead will occour, which must be balanced by a BALANCING AMOUNT known as the over/under –recovered fixed overhead.This amount is included by 'raising a charge' (possibly it's very own ledger account-CRJ/CPjournal) and including it in the Cost of sales breakdown in Income statement for Gross Profit calc. Do NOT ASSUME every company uses fully integrated abs.cost. to allocate costs in order to arrive at the cost of a product.Only companies that have a JOB COSTING environment , require a pre-determined FIXED COST to allocate to FUTURE production.Very few companies will allocate costs to production and service depts. , followed by re-allocation from service depts. to production depts. However , when using absorbtion costing, one must remember that one comapny allocates fixed costs differently to another one,and there is no right or wrong method to allocate fixed costs really, ie some allocate all overheads, some only admin + management , some only maintenance and depreciation etc.

IAS 2 ON INVENTORIES STATES THE FOLLOWING.: IAS 2 : INTERNATIONAL STATEMENT ON INVENTORIES states that :Firstly, closing stock – work completed but unsold- (??? What About inventories & work in progress???) must be valued at the lower of cost and net realisable value. AND : Inventories are valued at : all costs incurred in bringing to current state – ONLY manufacturing direct and indirect costs-The Costs of conversion of inventories include costs directly related to the units of production,such as direct labour.They also include a systematic allocation of fixed & variable overheads that are incurred in converting material into finished goods.Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation ,maintenance of factory buildings and equipment,and the cost of factory management and administration. However FIXED OVERHEADS are only allocated at the normal production capacity(over anumber of seasons or periods under normal circumstances,taking into account the loss of activity relating to planned maintenance) .If idle plant /low production inventory costs are ONLY allocated at normal prod. Capacity Levels.BUT in periods of abnormally high production, the amount of fixed averheads allocated to each product unit is decreased so inventories are not valued at below cost.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 44 Variable Production overheads are those indirect costs of production that vary directly,or nearly directly,with the volume of production,such as indirect materials and indirect labour. As a result of this accounting definition ,the valuation of stock is carried out on a FIFO or weighted average basis.LIFO is strictly prohibited. Cost accounting grew out of the need that financial accountants have for financial information ,and gathers and analyses costs for the purposes of :product costing,job costing,stock valuation.

METHOD TO DO ABSORBTION COSTING. INTRO : ALLOCATING SERVICE COSTS TO PRODUCTION DEPTS: 1.1. Called the TRADITIONAL or STANDARD METHOD OF absorbtion costing. 1.2. Remember full integrated absorbtion costing is mostly used in Job costing environment, not every company will want to estimate the FIXED COSTS to apportion to each product. 1.3. NOTE :(copied vertabim from book)The allocation of mnftring overheads to products in order to determine a full product cost for decision making purposes will allways give incorrect product costs , as the overheads are usually allocated on a labour or machine hour basis.It has been argued that the activity based costing system (ABC) -which identifies more than one activity base- is amore accurate cost allocation method.ABC tends to allocate a more proportionate value of overheads to products that are manufatured in short runs and use up a higher proportion of overhead costs than it allocates to long production run products. 1.4. Method , for fully integrated absorbtion, to allocate service costs to production depts is to use a basis that most closely reflects the usage of the service cost by the specific production dept. The most common activity in the production dept. is used, depending on if it is MORE MACHINE or LABOUR intensive. TYPES of Basis to allocate by: 1.4.1. Labour hours 1.4.2. Machine hours 1.4.3. Any Other

COST ALLOCATION PROCEDURE Note clever analysis by Viggio author : there is no such thing as cost per unit or profit per unit for a product.Both cost and profit change every time production quantities change. To answer question – is it important for a company o determine cost for each product produced- ONE MUST FIRST ASK QUESTION: for what purpose do you need to know the cost : if answer is to value closing stock – then answer to question is yes , and we must use absorbtion costing (fin acc.) If answer is to determine selling price , then answer to quest. Is NO, not important, because selling price is determined by demand. If answer is to determine PROFITABILITY of product – Note- then answer is yes but we must use variable costing to determine Contribution etc. STEP 1: Allocate relevant production overheads to the Production AND Service departments. Identify all OVERHEADS of company and allocate them to these depts on an appropriate basis as follows: 1.4.4. 1.4.5. 1.4.6. 1.4.7. 1.4.8. 1.4.9.

DEPRECIATION : Asset Values in each Department. INSURANCE : Asset Values in each Department. RENT : Area occupied. WATER & ELECTRICITY : Area occupied. SALARIES : Staff in each Dept. EMPLOYEE COSTS :Number of Employees.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 45 STEP 2: Reallocate Service Depts. costs to the Production depts. Service depts. such as maintenance ,exist to support the manufacturing departments , therefore we need to find an appropriate BASIS to allocate the costs according to % of usage by the production departments, Some appropriate methods are: 1-DIRECT COST ALLOCATION METHOD. Service dept costs are allocated directly to producing depts. No service dept costs are allocated to other service depts, even though they may perform work for the other service depts.

2-STEP COST ALLOCATION METHOD This tequnique does account for inter-service dept. cost allocation. The method used here is to allocate the cost for the service dept. which services the greatest no. of other service depts. first. Or if you get a situation where some service depts. service each other,as in example here, then first to be allocated is the one with highest cost.REMENMBER : each time you apportion a dept out, you leave out it’s % in the next apportion calc.So after serice dept 1 – it is xx/95 after service dept 2 it is xx/ 80 after service dept 3 it is xx / 75 etc etc, always leave out last ones % in the denominator of next one!7

3-RECIPROCAL COST ALLOCATION METHOD.(linear algebra) WE MUST ONLY USE THIS METHOD. This method takes into account inter-service dept. work.It works by apportioning the costs backwards and forwards between depts. until all costs have been allocated. THIS IS THE METHOD LECTURER SAYS WE ARE SUPPOSED TO USE – NOT THE OTHERS. Remember : for this method, FOR reciprocal method , after the algebra equation/ apportioning you use 40/100 or 30 / 100 to apportion to production depts.,do no use [product % / all product. Depts . %] eg 30/90 here , like for a direct method or step allocation method last step.The reason why we do this is because somehow the other service % has already been used in the algebra type thing (maths reason).!

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STEP 3: ALLOCATE COSTS TO EACH OF THE VARIOUS PRODUCTS ,using one of the rates types given below, from the production depts. to the products themselves. Identify the activity most common to a specific production dept. and use that activity to determine the cost recovery rate. Ie : based on the pre-dominant activity of the production depts. , allocate costs to EACH OF THE VARIOUS PRODUCTS. The 4 common bases for allocating the overhead production are: (it is mostly time related in practice) 1.4.10. Direct labour hours 1.4.11. Machine hours 1.4.12. Direct labour cost 1.4.13. Material cost.

OVERHEAD AND MANUFACTURING ACCOUNTS IN LEDGER: i) SEE PAGE 44 VIGGIO ii) Overheads acc. uses dr actual and cr budget overheads iii) Mnftring acc uses (dr budget overheads contra overheads acc.) see pg 44 vig

OVERHEAD RECOVERY RATES: PURPOSES OF ALLOCATING MNFTRING OVERHEAD TO A PRODUCT. i)

To arrive at the value of closing stock, when an absorbtion costing system is used.

PRE-DETERMINED OVERHEAD RATES. 1) Remember when you calculate the 'budget costs' and 'actual costs ' for the income statement, to calc. budget costs you use the budget rates X actual hours worked (not budget hours worked) to get budget cost.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 47 2) Also rem : if they give you budget and actual :overheads and hours , for some period, then USE THE BUDGETED FIGURES TO GET RATES, AND THEN MULTIPLY THESE RATES BY THE ACTUAL HOURS WORKED TO GET THE PRE-DETERMINED OVERHEAD COSTS. Do not mix these two up in wrong manner! 3) To get a pre-determined recovery rate to do Quotes.- Esp. in Job Costing Systems eg Printing/Building etc. to apportion Fixed costs : eg machine repairs, machine time,rental,machine depreciation,electricity etc. 4) Method : a) Either we use the Overhead Recovery Rates we calculated in the previous Fin. Years and apply them to Future Quotes. b) Normaly do a BUDGET / Estimate of the Next Years overheads and Next years Labour hours/Machine hours.Then calc. our Pre-determined recovery rate from that.

c) Or mix of the 2 methods. 5) Two reasons we will be WRONG in ESTIMATE: a) The overhead charged will not equal charged overhead. b) Machine/Labour hours will be different. 6) METHOD OF DOING OVERHEAD ACCOUNT AND OVER/UNDER RECOVERY INCOME STATEMENT. a) Overhead account CONTRA WIP account. : All estimated/charged overheads to CR , Actual overheads to DR , Balancing amount as Over/Under recovery to Income Statement. i) REM: ???????just remember the over/under recover amount that goes to income statement or comes from this account , WILL NOT INCLUDE ANY OVER/UNDER RECOVERY FOR CLOSING STOCK????????? ii) NOTE : The total of all entries : NOT including/ BEFORE any balancing "c/d" figure on the CR – estimated/charged : side is the figure that goes the income statement as part of Cost of Sales - then after this the over/under recovery ( balancing or "c/d" amount from Overhead Account) is added or subtracted from Gross Profit in the INCOME STATEMENT to get the "Actual Gross Profit" in the Inc. Stat OR alternatively –one can add/ subtract the over/under recovery just below the "Estimated Fixed Cost from Overhead account " –Before the Gross Profit is calculated- in the Income statement iii) The OVER/UNDER RECOVERED amount is written off to the Income & Expenditure Account from the Overhead account. b) WIP (work in progress) account CONTRA Overhead acc.: All Estimated/charged is DR debited to WIP account and CR credited to Overhead account. c) Where thes 2 accounts come from or go to I do not know. d) WHEN WE CHARGE the variable costs amount at the time of production we know what the actual costs were, so there is never a under/over recovery for variable costs,only for fixed costs.So we do not send the quoted/estimated/ charged amount for a particular jobs variable costs to the accounts, we send the actual material etc. used.That is how the system works.So only the Estimated/Charged/Quoted Fixed costs are sent to the accounts because we do not know what the actual yearly production or yearly fixed overhead is going to be yet, and for Variable costs, we send the actual costs. WHY? Do not know yet. e) ALSO SEE EXAMPLE UNDER JOB COSTING FURTHER A FEW PAGES AHEAD in these very notes.

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TO INCOME STATEMENT: 7) CLOSING STOCK VALUATION WHEN USING THE OVER/UNDER RECOVERY SYSTEM.: a) IAS 2 says that closing stock must be valued at the lower of COST and NET REALISABLE VALUE.One can still make income statements with a normal calculated amount from Budget or Actual values and it will comply with a "standard absorbtion costing system", but at the end of the year an adjustment would be made to reflect the IAS 2 requirement. b) The value of closing stock must be shown at actual cost for absorbtion costing and at budget cost for standard absorbtion costing for materials and labour etc. 8) INCOME STATEMENT : a) Remember when you calculate the 'budget costs' and 'actual costs ' for the income statement, to calc. budget costs you use the budget rates X actual hours worked (not budget hours worked) to get budget cost. b) There are 2 ways to include the over/under recovery and Estimated Fixed Costs in the Income Statement. FIRST : calculate the The total of all entries : NOT including/ BEFORE any balancing "c/d" figure on the CR – estimated/charged : side is the figure that goes to the Income Statement as part of Cost of Sales - then after this the over/under recovery ( balancing or "c/d" amount from Overhead Account) also goes to Income Statement. (1) The over/ under recovered amount is added or subtracted. from Gross Profit in next line AFTER you calculate gross profit in the normal way using ESTIMATED FIXED COSTS –This is NAMED : "Actual Gross Profit" in the Inc. Stat, then normal from there on(so 2 gross profits. (2) OR alternatively –one can add/ subtract the over/under recovery just below the "Estimated Fixed Cost from Overhead account " line. Before the Gross Profit is calculated- in the Income statement, and from there as normal. (so you only have 1 'gross profit '.) EXAMPLES : Example 1 on left is a Different exercise from Example 2 on right.

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8) RECONCILLIATION of BUDGET to ACTUAL PROFIT. a) When a STANDARD COSTING SYSTEM is used, the under/over recovery is shown as : i) Volume Variance (difference between budget –actual) ii) AND Expenditure Variance. (difference between budget –actual) EXAMPLE: Example 1 on left and 2 on right are completely different exercises, both are Reconcilliations.The one on the right seems the more correct one.-includes units- but not sure if both are equally correct- ASK.

9) To CALCULATE A MACHINE HOUR RATE FOR EG: a bandsaw a) Add YEARLY DEPRECIATION (remember to less scrap value etc) + RENT PER M2 + POWER USED + OTHER OVERHEADS (excl. rent previously calculated) -- all divided by total hours per year -- = machine hour rate. b) DON'T include "Direct Bandsaw Labour" in this calculation.

JOB COSTING ACCOUNTING TREATMENT. Job costing is essentially a bookkeeping exercise used by printers,panelbeaters ,furniture,auditing etc. AS PER THIS EXAMPLE ONLY:

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REM: NOTES TO REMEMBER 1)

Remember to check for CLOSING STOCK if Sales is less than Manufacturing'

COST CLASSIFICATION FOR SHORT TERM /LONG TERM DECISIONS. 1. Done in 'relevant costs' chapter.

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5 CHAPTER ABC (ACTIVITY BASED COSTING) VIG CH 5 SPECIAL NOTES TO WATCH OUT FOR: 1.

ACTIVITY BASED COSTING: GENERAL. 1. ABC is just a more sophisticated type of absorption costing first articles written 1988 by Cooper & Kaplan. 1. ABC is a system of allocating PRODUCTION OVERHEADS to PRODUCTS manufactured in more equitable manner than the TRADITIONAL METHOD of using a SINGLE ALLOCATION BASE such as labour hours.It is a more sophisticated tecnique . 2. How does ABC use cost data for decision making purposes: ANSWER : ABC analyses the overhead costs into cost pools and then allocates the costs to the products using cost drivers. 3. What if there is a production constraint? ANSWER: Because ABC Profit= selling price-variable costs-allocated 'cost driver' overheads. SO ABC would advocate maximisation of profit per limiting factor. 4. What is logical error of ABC :ANSWER ABC can and will give you the incorrect decision when the selling price is determined by supply and demand,and cannot be derived from cost alone.The only time that ABC may give you the correct answer for decision making is when a cost plus formula gives a selling price that is less than the market is prepared to pay for the product. 5. The Correct Method To Adopt When Looking At Product Decision-Making Is

As Follows:

1.1. Identify the main or flag-ship product that the company manufactures. 1.2. Maximise the profit on the main product by maximising production ,sales and contribution. 1.3. Sell other products manufactured by the company only if there is spare capacity. 1.4. Sell other products at a price higher than variable cost.

6. Reasons for current shift to ABC from TRADITIONAL

6.1. Abc recognise mnfrtring moved away from labour to capital intensive, thus shift from Direct Variable to Indirect Fixed Costs. 6.2. Shift from single product to Multi product mnftr.-thus low volume require more set up costs,inspection,packaging,ordering,selling etc. than high volume. 6.2.1. Cost –Plus basis = Traditional costing ,and here companies smooth over all overhead costs on an equal basis to all products manufactured ,result under costing low volume &over costing high volume products- THUS outpricing itself on high-volume & make a loss on low volume products. 7. There is a high similarity between conventional absorbtion costing and ABC, but ABC is superior to Trad.Absorp.Costing as the cost allocation to underlying products is more relevant. 8. Note :ABC costing suffers from exact same problem causing /per unit profit & costs & 'costing' to be incorrect when changing fixed costs or No. of units producted changes. 9. ABC takes the view that all costs are variable in the long term, and links the activity that causes the variability to the cost. ABC recognises that there are many activities or cost-drivers causing costs to be incurred.The system has a framework that is similar to that of a conventional absorption costing system. 10. ABC focuses attention on the underlying causes of costs, provides a method to manage/control overhead costs. 11. ABC treats volume related products in same way as Trad.Absorb.Costing but differs in treatment of nonvolume related overheads. 12. ABC is similar to zero-based budgeting.

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ABC: METHODOGY . 1. Note :ABC costing suffers from exact same problem causing /per unit profit & costs & 'costing' to be incorrect when changing fixed costs or No. of units producted changes. 2. ABC involves 2 stages : 2.1. Overhead costs are pooled according to the activities which cause the cost. 2.2. Each cost activity is then linked by a cost driver to the product output. 3. Overheads are allocated to products by dividing the activity cost by the period cost driver volume and then multiplying the determined rate by the units of activity used by the product.A typical ABC cost system will involve the following steps: 3.1. Determine the activities that relate to the overheads. 3.2. Quantify the activity cost. 3.3. Determine the cost driver associated with the enquiry. 3.4. Determine the cost driver rates by dividing the activity cost by the cost driver volume. 3.5. Apply the rates estimated in step 4 to a product.

ACTIVITIES – COST DRIVERS. : EXAMPLES OF. BASICLY: ABC does away with the production depts. and service depts. and allocating overhead to each dept in absorbtion costing and says rather where do the overheads come from originally –and turns these sources into the new DEPTS .Then the costs go directly from each dept to the product.(some overheads eg electricity are still divided into each dept., but this is seen as a separate step –not part of the sequence we say is the method! Purchase Requests Material Procurement Material Handling Set-Up Maintenance Machinery Fitting Quality Control Pricing Customer Vetting Expediting Delivery Administration.

No. of Requests. 1-No of Supplier Orders 2-No of Items. No of Movements No of Set-ups No. of Maintenance hours. No of Machine Hours No of Labour Hours No of Inspections 1-No of Orders 2-No of Customers 1-No of Customers 2-Size of Orders. No of Deliveries No of Staff.

4. NOTE ;If there are limiting factors of production, the ABC accountant will recomend that the company maximise the profit per limiting factor/s and may recomend that 1 of the products be discontinued or that none of the products be discontinued. ABC costing is only concerned with maximising profit per limiting factor.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 54 4.1. BUT- this logic is incorrect, because if there are limiting factors, using the profit per unit concept in making decisions will allways lead to incorrect conclusions, because overhead costs are not variable and do not move with the relevant activity.Consequently , the cost per unit will change as production levels change.if there are limiting factors of production , the production levels will change and so will the cost per unit.????????????????

VALUATION OF CLOSING STOCK: 4.2. For absorbtion costing - Closing stock can be valued at either budget or actual –we go for budget more?? But see page 46 viggio for full explanation. (budget is the normal correct way , I think at actual is a bit wrong. 4.3. Note – if budget cost is used to value closing stock , then it may not comply with IAS2 ,that cost must be at lower of cost and net realisable value.At year end an adjustment would simply have to be made to reflect the IAS2 requirement. 4.4. Variable costing and Absorbtion costing values closing stock differently because variable leaves out fixed costs in the calculation , but absorbtion includes fixed+variable+raw materials :see pg 56 viggio for a simple example-(question is bottom pg 55)

ABRIDGED(SHORTENED) INCOME STATEMENTS FOR ABC COSTING: Simple Examples for reference.

THE LOGICAL ERROR OF ABC COSTING 1. ABC is just a more sophisticated type of absorption costing . 2. ABC costing has been sold as a better way to make costings to companies, in same way as zero-based budgeting has been sold to them.The idea is to re-think the cost structure of a product so that a 'better cost' for the product is arrived at. 3. The greater the competition in a field , the more the selling price is a given , and costs are a by-product of sales, and we must just max. contribution and sales , without compromising the quality. 4. How does ABC use cost data for decision making purposes: ANSWER : ABC analyses the overhead costs into cost pools and then allocates the costs to the products using cost drivers. 5. What if there is a production constraint? ANSWER: Because ABC Profit= selling price-variable costs-allocated 'cost driver' overheads. SO ABC would advocate maximisation of profit per limiting factor. 6. What is logical error of ABC :ANSWER ABC can and will give you the incorrect decision when the selling price is determined by supply and demand,and cannot be derived from cost alone.The only time that ABC may give you the correct answer for decision making is when a cost plus formula gives a selling price that is less than the market is prepared to pay for the product. 7. The Correct Method To Adopt When Looking At Product Decision-Making Is

As Follows:

7.1. Identify the main or flag-ship product that the company manufactures. 7.2. Maximise the profit on the main product by maximising production ,sales and contribution. 7.3. Sell other products manufactured by the company only if there is spare capacity. 7.4. Sell other products at a price higher than variable cost. 7.5. One can only Max contribution using variable costing per limiting factor, not ABC or Absorption cost unless you work it out from the start for each price & production level.

HOW RELEVANT IS ABC COSTING? Much of the criticism of ABC can be summed up as follows: 1-ABC treats the cost allocation to an activity as absolute, certain and linear. 2-It uses a small sample of historical data and extrapolates the information for long-term costing and decision- . . . making requirements. 3-ABC is a sophisticated absorption costing system and suffers from the same limitations as the traditional method: a)Choice of absorption base. b)Changing volume of production. 4-ABC ignores opportunity costs and will therefore lead to invalid decisions where other contribution-maximising options exist. Contempory problems in accounting: Inability of accounting systems to control the activities of companies which operate in an advanced manufacturing environment. The main criticisms of accounting and management accounting 1-Conventional accounting systems do not address the modern competitive business environment.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 55 2-Absorption costing systems provide inaccurate information for decision-making. 3-Management accounting is simply accommodating and becoming the slave of financial accounting. Benefits of ABC: 1-When a high proportion of overhead costs are non-volume-related, and a company produces a variety of products, the resultant product cost is more accurate than that obtained using traditional methods. 2-The flexibility of ABC allows the extension of cost analysis to areas such as customer costing and internal management costs. 3-Product costs reflect the long-run variable(fixed) product cost, which is important for strategic decision- making. 4-ABC improves cost estimation, as cost behaviour understanding is improved. 5-ABC improves strategic decision-making in a)The pricing of products; b)Improving the product range by discontinuing old products and promoting new ones, and assists in the costing of . new products. Many of the above benefits are questionable in the light of changing production volumes, where the cost per activity will inevitably change as the overhead cost remains constant. It is future marginal or differential (variable costing) costs (not historical costs) that are relevant for short- and long-term decisions. ses. Limitations of ABC 1-There is no real evidence that ABC improves company profits. 2-ABC is based on absorption costing techniques, which are only valid at a single historical level of production. 3-ABC is historic and lacks relevance for future strategic decisions. 4-The selection of cost drivers is difficult and in some instances has little relevance to activity. 5-Costs such as rent, rates, depreciation, power, insurance still have to be apportioned 6-ABC assumes that a single cost driver within a cost pool fully explains the cost behaviour of the pool. It is doubtful . that detailed segregation of costs achieves perfect cost homogeneity within a cost pool. 7- ABC requires an activity whose cost is measurable and can be related to a product. Some costs such as general . . . advertising, audit fees, finance costs, and goodwill have no meaningful cost driver and cannot be linked to a . .. .. specific product. Operational benefits of ABC The most favourable benefits of ABC have been in the areas of improvement in the management of business operations, and the motivation to improve business methods. By breaking down the production operation into many activities that cause costs to be incurred, ABC forces management to look at the products being manufactured in the light of the overheads being incurred. It also makes management look at better methods for improving the manufacturing process and business efficiency. In addition, it improves cost awareness and in many instances results in cost reduction and improved methods of buying, setting-up, manufacturing and selling. The technological advances made in the 1980s have dramatically changed production processes in many companies. Modern product manufacturing requires the production of innovative products of high quality at a low cost, coupled with strong customer service. These changes have called for the modernising of the ‘traditional absorption costing’ system, and a mini-revolution in management accounting. Modern automated manufacturing techniques require greater emphasis to be placed on quality control, production flow and improvement of set-up times. The western style of management in the mass-production era has long been one of rigid, hierarchical organisational structures with the line of responsibility well defined. The adoption of automated manufacturing technologies requires a change in this style, and a move away from highly-structured management. The distinction between planning and execution must be eliminated, so that management can respond to changes in product specifications and customer demand. Western management styles have traditionally concentrated on the costs of individual responsibility centres, rather than on the costs of the company’s strategic activities, which requires the co-ordination of the activities of many departments. These requirements are seldom found in the traditional accounting set-up, which does not focus on determining the costs of providing product characteristics and, in the end, value to the customer.ABC is one system that can help focus on prominent issues and developed in this time for this reason. Strategic decisions and ABC 1-good for Job Costing 2-good to be used for management to concentrate on various cost pools and cost drivers to increase efficiency and lower costs. 3-Good to give value to customers by proper costing of products and focus attention on improving each cost pool. Eastern + Western Business strategy: Product Strategies :Japanese Businessmen start a costing strategy exercise by determining the selling price that the market accepts : to ensure a desired size of market share , taking into consideration the changing marketing environment for that product , according to demand and supply, first.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 56 Future market share is planned for and strong customer service is established. From the selling price they work backwards , to determine max allowed costs that will determine ...according to a calculus determined primarily by the potential customers utility for the product, the desired marketing positioning, and internal resource inputs to manufacture product. Co-ordinated efforts of accountants , designers,and engineers to achieve the desired cost. Companies establish a strong cost reduction policy that ensures long term survival. They then go to their books and determine the costs from that starting point – on the basis of cost reduction. Any decision made on a cost plus basis will invariably give a wrong signal – ie not to actively keep costs in the right category but to charge the customer for your first choice in production setup.

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CH 4 VIG VARIABLE AND ABSORBTION COSTING. SPECIAL NOTES TO WATCH OUT FOR: a) Note:Rem :For fully integrated absorbtion costing, If the question says the company is unable to distinguish between variable & fixed overheads but they only give you % of each to divide up the actual overheads,eg : say 40 % variable and 60% fixed, YOU CANNOT use that same % on the budget overhead to divide that up- it might have a different % completely so unless they give you a specific % for the budget overheads ,DO NOT separate the two at all.Just do the whole calculation as if there was no dividng up and call it “Overheads” ,not fixed overheads, in income statement.Then the over/under recovery will only be due to fixed overheads,but they might as well have not mentioned the % ‘s because everything is done as if it were not there.(viggio pg 131 middle) b) Number Sold X Price Difference : Note not price difference X No.Sold Difference,No Sold Difference is only used in Volume Variances! i) Expenditure Variance: then 2nd do expenditure variance below (1) Overhead Volume & Expenditure :)(Fixed Mnftring Overheads in cost of sales must be taken out,in 2 special steps) (a) 1 funny part: Overhead Volume : must be accounted for: the fixed mnftring costs locked in the cost of sales part, are taken out of the budget profit by subtracting the {Volume change X Recovery Rate used to calc budget profit}”Volume change” is how many more/less sales you had than in budget.The “recovery rate” is the one that was used originally to get the Fixed costs in the BUDGET, NOT in the ACTUAL cost of sales.This step is only done because the absorbtion costing system results in fixed costs being treated as variable (b) Overhead Expenditure: c)

ARGUMENTS FOR VARIABLE VS ABSORBTION COSTING ARGUMENTS IN FAVOUR OF VARIABLE COSTING: (1) It is consistent in reporting profits if sales/production changes, absorbtion is inconsistent in this. (2) Does not incl. fixed costs, which do NOT change with volume, thus more useful to Mngmnt Decision Making , escp. Decisions made where volume is changing. (3) Fixed costs should ,as is done in variable costing, be charged to period costs because Related to Ability to produce for a period of time ,not to Production of Specific Units.If zero is produced –fixed costs will still be incurred.

ARGUMENTS IN FAVOUR OF ABSORBTION COSTING: i) Fixed Costs are Product Costs :Fixed costs are a neccessary cost in producing a product and as such should be charged to production /the product cost.

ii) Required by GAAP and Commissioner of Inland Revenue : Absorbtion costing is iii) Variable Underestimates True Value :Variable costing underestimates the true value of stock( see 1 above),absorbtion reflects it more accurate

iv) Consistency :internal &externalAlso some say : 1-inter- company comparison easier 2- assurance that all fin stats prepared in accordance GAAP 3- external reporting must be consistent ,if company changes its reporting method each year then consistency lost. v) Matching Concept Argument: some say absorbtion because it matches fixed costs to revenue received. (1) NOTE: some advocate Adsorption costing because it allows inter-company comparisons,this is controversial because of: (a) One may be labour intensive while the other may be capital intensive. (b) Rent vs lease assets (c) Asset age different(depreciation) (d) Cost structures different from company location.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 58 (e) Have different trading markets. (f) Capital structure differences (g) Management is different.

VIEWPOINT: ANY SYSTEM WHICH REPORTS INCONSISTENT PROFITS IF SALES REMAIN SAME SHOULD BE DISCARDED. i)

Absorbtion costing is inconsistent if production volume changes,but not sales: fixed costs cause imbalance. ii) Matching concept argument: some say absorbtion because it matches fixed costs to revenue received.

ACCOUNTING STATEMENT ON INVENTORIES:-IAS 2 i)

A Primary issue in inventories is amount of cost to be recognised as asset and carried forward until related revenues are recognised. ii) Per IAS2 The cost of inventories should comprise all costs of purchase,costs of conversion,and other costs incurred in bringing inventories to their present location and condition. iii) Includes systematic allocation of fixed and variable production(not sales/distribution) overheads incurred in converting materials into finished goods.- costs of conversion includes direct labour. iv) The process of recognising as an expense the carrying amount of inventories once Sold results in the Matching of costs and revenues.

EFFECT ON PROFIT (INCOME) OF VARIABLE .VS. ABSORBTION COSTING. 1) NOTE: rem: the difference between both will ALLWAYS ONLY be the increase or decrease in closing stock multiplied by the fixed manufacturing cost per unit.(per textbook vertabim) 2) There are 3 Different Possible Situations ,each gives a different result. a) If Production > Sales : then Absorbtion Profit > Variable Profit : see Year 1 Below.(fixed costs locked in inventory)

b) If Production < Sales : then Absorbtion profit < Variable Profit : see Year 2 Below.(fixed costs from last year added)

c) If Production = Sales : then Absorbtion profit = Variable Profit : see Year 3 Below. EXCEPT if company is holding stock of finished goods at a cost different to the current periods cost per unit.(like stock carried over from year 1 below ) QUESTION for EXAMPLE:

ABSORBTION COSTING Solution.

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VARIABLE COSTING Solution.

EXACT ONLY DIFFERENCE BETWEEN 2 TYPES OF VARIABLE COSTING AND 3 TYPES OF ABSORBTION COSTING.

METHOD 1.CLOSING STOCK CALCULATION VARIABLE COSTING Standard Variable Costing VARIABLE COSTING Normal Variable Costing ABSORBTION COSTING Fully-integrated

ABSORBTION COSTING Standard Absorbtion

2.Fixed Variable Mnftring Mnftring OVERHEA OVERHEADS DS

Budget Variable Cost =Budget Fixed Overheads(Costs) NOT INCLUDED

ACTUAL

ACTUAL

Actual Variable Costs =Actual Fixed Overheads(Costs) NOT INCLUDED

ACTUAL

ACTUAL

ACTUALVARIABLE COSTS = Actual

FIXED MNFTRING OVERHEADS = BUDGET FIXED MNFTRING OVERHEADS = BUDGET Rate X Actual Budget Rate X Actual Hours Hours Must do a Over/under (some place in book says can use actual fixed, recovery . but don’t understand yet-I think misunderstood) Include Raw materials+ WIP +Finished goods:ALL STOCK BUDGET VARIABLE COSTS: Use the figures FIXED MNFTRING given for the Budget or Standard cost, not the OVERHEADS = actual cost.If plain figures are not given,and ACTUAL final cost, you must work out ,use Budget Rates X Actual so NO Under/Over hours. recovery done BUDGET FIXED MNFTRING OVERHEADS :

ACTUAL

ACTUAL

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 60 Budget Rates X Actual hours or units etc

ABSORBTION COSTING Actual closing stock

Include Raw materials+ WIP +Finished goods at standard/budget costs.ALL STOCK) ACTUAL VARIABLE COSTS :Actual amounts,if FIXED MNFTRING given. OVERHEAD = ACTUAL final cost FIXED OVERHEADS : Use Actual Rate X so NO Under/Over Actual hours (Note: not budget rate X actual recovery done hours like the other 2 types) (not done because actual cost is used ,not Include Raw materials+ WIP +Finished budget rates.) goods:ALL STOCK

ACTUAL

EXCELLENT EXAMPLE of the difference between Variable and Absorbtion costing where the profit is different in 2 years with same costs&price.:

WHAT IS VARIABLE COSTING.(OR MARGINAL OR DIRECT COSTING) 1) Variable costing is ONLY –it recognises fixed costs (ie : mnftring overheads) as a period cost and values stock at the variable cost of production.:NOTE: NOT variable marketing costs or variable selling /delivery costs. 2) The only difference between Variable costing and Absorbtion Costing is the Treatment of the Closing Stock. 3) Fixed Manufacturing Overheads are included as part of ‘Cost of Sales’ calculation, BEFORE Gross Profit , and NOT just written off as a period cost after gross profit, ie NOT included with marketing fixed costs ,selling fixed costs and distribution fixed costs etc.Variable costing is NOT the same as ”Contribution”calculation exept for closing stock on a very basic level. 4) Variable Costing ONLY EXCLUDES FIXED manufacturing costs when valuing closing stock.There are 2 methods a) Closing stock valued at ACTUAL VARIABLE COSTS incurred in current year. b) Closing stock valued at BUDGET VARIABLE COSTS (also referred to as a type of ‘STANDARD COSTING’) 5) Variable costing is the ONLY system that accurately reflects the profits of a company as fixed mnftring costs are written off in year incurred, not carried forward to the balance sheet (vertabim as per book viggio pg136 ). Meaning presumably the ‘cost of sales’ in ‘income statement’ is where the fixed mnftring overheads are disappeared/written off as a period cost, and not carried over to next year,by left over inventory in the balance sheet.It is regrettable that fin acc is obsessed with capitalizing fixed costs as per IAS standards by including the in closing stock calculations. 6) NOTE: NOT TO BE INCLUDED : variable marketing costs or variable selling /delivery costs. 7) Contribution is NOT to be confused with Variable Costing –it has nothing to do with it.You do not apply ‘contribution’ calculation here except vaguely in Closing Stock calc. where Selling price never comes into it anyway!(variable costing is a fallacy actually) 8) CONTRIBUTION: CONTRIBUTION is the SELLING PRICE of a product LESS all VARIABLE COSTS.The term used by Management accountants to describe the incremental profit that a company will make as the company sells one more unit of

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 61 production.(DOES NOT include FIXED COSTS, ONLY PRICE – VARIABLE COSTS = contribution, then after that ,CONTRIBUTION-FIXED COSTS=NET LOSS/PROFIT.) Mngmn acc only concerned with contribution,not profit since incr. sales = incr.contribution where fixed costs stay constant. Means ' Profit contributed toward total profit of firm before fixed costs' so.This happens because fixed costs do not change , but production volume does, so once all fixed costs have been paid by current production volume, any increase in production volume above this results in a higher profit than before the fixed costs were paid for.Thus before fixed profit is paid for , PART OF THE CONTRIBUTION goes to fixed costs, but after the fixed cost is paid for, ALL OF THE CONTRIBUTION goes toward profit.

-

SALES Variable Costs CONTRIBUTIO N Fixed Costs

=

PROFIT

=

METHOD : VARIABLE COSTING (CALCULATING VARIABLE PROFIT ) 1) Variable Costing ONLY EXCLUDES FIXED manufacturing costs when valuing closing stock ,other wise it works exactly the same as NORMAL ABSORBTION COSTING.(see absorbtion costing) 2) In all Variable Costing methods ,Fixed non-mnftring costs are left out of Gross Profit calculation and are treated as Period Costs only.FIXED manufacturing costs are INCLUDED in GROSS PROFIT calculation –in COST OF SALES ,but LEFT OUT of CLOSING STOCK calculation.But ONLY VARIABLE MANUFACTURING COSTS are included when valuing CLOSING STOCK, fixed are left out, so as not to carry them to next year/capitalize them/send them to balance sheet. 3) The 2 methods of doing variable costing are: i) Method 1: Closing stock valued at Actual Variable Costs: (1) Use : Actual Rate X Actual Hours etc. ,or plain quoted Actual amount,whichever is given. (2) Include Raw materials+ WIP +Finished goods; ie: ALL STOCK) ii) Method 2 : Closing stock is valued at budget variable cost –Standard costing. (1) Use : Budget Rate X Actual Hours etc. (a) Use the Budget Rate or Budget Total Amount if given,and remember to also Include any Raw materials+ WIP +Finished goods; merchandise for sale all at standard / budget cost.. ie :ALL STOCK. (b) The reason why they use the Budget Total Given Amount (eg for materials or variable labour)in standard costing is that they want the cost carried over to the following Fin Year to be an average cost, as set by their standard costing rates.This is so small fluctuations in yearly prices or other factors do not upset the costing on a long term scale- so we know last years stock is valued at +/- what this years stock will be valued at, so we are not too far out.: ie “Standardized Costing”.

Examples of both methods for same exercise below.:

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WHAT IS ABSORBTION COSTING: b) Absorbtion costing is a financial accounting system that incorporates both variable &fixed costs in arriving at BOTH its Gross Profit and Closing Stock valuation.The system matches the costs to revenue received ,so fixed costs are carried over to following year in any closing stock left over. c) Note:Rem : If company unable to distinguish between variable & fixed overheads – usually they give you a ratio to divide it up in, and one MAY ONLY USE FIXED for over/under recovery, not variable for this at all. d) Note: for all 3 types of absorbtion costing, the closing stock must include all unused raw materials +all WIP(work in progress) + All Unsold Finished goods +All Merchandise purchased for resale(incl.costs to bring to that point eg freight) :ie ALL STOCK.

CALCULATING ABSORBTION PROFIT : 3 METHODS i) THERE are 3 Different Methods to Do Absorbtion Costing. ii) The ONLY difference between the 3 types is : (1) Fixed Mnftring Overheads AND (2) Closing Stock Calculation.

(1)

FULLY INTEGRATED ABSORPTION COSTING. (a) A fully integrated absorbtion costing system is mainly used where a company runs a job costing accounting system and it wishes to determine the full cost of a particular job once it has been completed.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 63 (b) A Fully Integrated absorption costing system is very similar to the others 2 types.There are 2 differences : (i) FIXED OVERHEAD :the Budget Rate X Actual Hours or units, is charged to income statement. 1. Under/Over recovery :must be done because budget rates are used in cost of sales,so any difference must be balanced out.(see absorbtion costing chapter before for details) (ii) CLOSING STOCK :Actual costs ONLY for Variable costs and Budget Rates X Actual Hours/Units/Parts for Fixed overheads (c) Full Job Cost will equal: (i) Direct Materials Actual Cost (ii) Direct Labour Actual Cost (iii) Other Variable Costs Actual Cost (iv) Overhead Costs Allocated = Budget Rate X Actual Hours etc. (d) Closing Stock is valued in exactly the same way as “Cost of Sales” above, no difference. (e) Closing stock Includes Raw materials+ WIP +Finished goods;ALL STOCK (f) BUDGET Rate : is also called the “PRE-DETERMINED RECOVERY RATE”.It is usually calculated by preparing a budget at beginning of year, using previous years costs,new price levels,etc. (g) Under/Over Recovery :With this one , one uses an over/under recovery – so you first use budget rate X actual hours to calc. fixed overheads, then show any difference to actual as over/under recovery at the end of the income statement.Standard Absorbtion does not put an over/under recovery in, there you only use the actual costs for 'cost of sales', no budget rates used at all,(but budget variable +budget fixed costs for closing stock). (h) Note rem:Over/Under recovery is only applied to sales,not closing stock, but at the full total for closing stock +sales , so there is a mistake where sales takes over/under recovery away from closing stock and visa versa, and Opening stock dilutes it all a bit too, wrongly.(say sales was only 1, then apply this to any example to see how it makes a mistake) (i) Income Statement : you can deduct Over/Under Recovery in the Cost of Sales(just before closing stock) or just before Net Profit at end- it will make no difference –both are correct.But closing stock is calculated separately, without applying any over/under recovery to it separately,and deducted in cost of sales breakdown. Rem :Cost of sales = TOTAL (incl. closing stock)labour,materials,overheads –minus- SEPARATE closing stock . (j) Note:Rem :For fully integrated absorbtion costing, If the question says the company is unable to distinguish between variable & fixed ACTUAL overheads but they only give you % of each to divide up the actual overheads,eg : say 40 % variable and 60% fixed, YOU CANNOT use that same % on the budget overhead to divide that up- it might have a different % completely so unless they give you a specific % for the budget overheads ,DO NOT separate the two at all.Just do the whole calculation as if there was no dividng up and call it “Overheads” ,not fixed overheads, in income statement.Then the over/under recovery will only be due to fixed overheads, not the variable overheads – it just moves through the whole thing as normal because it should not appear in your calculation because it was not different! So but they might as well have not mentioned the % ‘s because everything is done as if it were not there.(viggio pg 131 middle)????????????not sure of this statement – re-check this! EXAMPLE OF FULLY INTEGRATED METHOD

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(2)

STANDARD ABSORPTION COSTING.(CLOSING STOCK IS VALUED AT BUDGET

ABSORPTION COST)

(a) The standard absorption costing system is very similar to the fully-integrated absorption costing system.There are 2 differences : (i) FIXED OVERHEAD :the ACTUAL final cost ,NOT the budget rate X actual hours like in Fully integrated , is charged to the income statement.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 65 1. NO Under/Over recovery :not done because actual cost is used ,not budget rates. (ii) CLOSING STOCK :Budget cost structure for both Variable costs and Fixed overheads, not just for fixed. 1. Budget Variable Costs: Use the figures given for the Budget or Standard cost, not the actual cost.If plain figures are not given,and you must work out ,use Budget Rates X Actual hours. 2. Budget Fixed Overheads :Use Budget Rates X Actual hours or units etc (b) Closing stock Includes Raw materials+ WIP +Finished goods;ALL STOCK 1. (c) EXAMPLE: STANDARD COSTING SYSTEM.

(3)

ABSORBTION COSTING (NORMAL)

CLOSING STOCK IS VALUED AT ACTUAL

ABSORPTION COST.

(a) Normal absorbtion costing is basicly the same as the other 2 types, exept that Budget costs are never used anywhere at all, only Actual costs are used. (b) It would only differ from the other 2 for the following 2 items: (i) FIXED OVERHEAD :the ACTUAL final cost ,NOT the budget rate X actual hours like in Fully integrated , is charged to the income statement. 1. NO Under/Over recovery :not done because actual cost is used ,not budget rates. (ii) CLOSING STOCK :Only Actual Costs are used.For all Variable Costs :the plain full actual amounts,if given.For Fixed overheads , which must be apportioned, between goods sold and closing stock –which is what absorption costing is originally all about- Fixed Overheads =Actual Rate X Actual hours.(Note: not budget rate X actual hours like the other 2 types) (c) Incomplete jobs are valued in exactly the same way as finished products –up to stage where they are completed now.They are not valued at ZERO! (d) Closing stock Includes Raw materials+ WIP +Finished goods;ALL STOCK

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 66 EXAMPLE: CLOSING STOCK VALUED AT ACTUAL ABSORPTION COST.

RECONCILLIATION : STANDARD ABSORBTION COSTING : BUDGET PROFIT TO ACTUAL. 1. Note : This is a Reconcillation of difference between budget rates X units budgeted and actual ratesXunits sold, not between budget cost and actual cost. 2. This example is for standard costing, so no Over/Under recovery takes place in the Income statement, but there will still be an over/under recovery between budget profit and fixed profit.This is because FIXED PROFIT IS LOCKED INTO THE BUDGET CALC. AND MUST BE TAKEN OUT SEPARATELY ALLWAYS:,because it does not change with volume change: needs special treatment,in same context as for fully Integrated system basicly.It is shown below as an “Overhead Volume& Overhead Expenditure Difference.”,but all in the Expenditure section of recon.Note!see method+example. 3. DO NOT go from budget sales to standard sales.It is more meaningful and easier if you allways recon budget profit to standard profit and then to actual profit.If you want you can first go from budget sales to budget profit , but from there carry on as above. B-Sales to S-Sales to S-Profit recon is however possible, but not wanted, rather B-Sales to B-profit to S-profit OR just B-Profit to S-Profit. 4.

METHOD:

(we always first do a volume variance, then an expenditure variance,never anything else)

NOTE rem: For Income ALLWAYS SUBTRACT THE top RECONCILLIATION FIGURE FROM THE bottom ONE BUT for Costs ALLWAYS SUBTRACT THE bottom RECONCILLIATION FIGURE FROM THE top ONE in any recon.: so if BudgetProfit is at top its always BudgetProfit – ActualProfit in ALL the calculations , or visa versa.THERE is only 1 exception to this rule so far: for “fixed mnftring overhead volume variance” Note: rem: CLOSING STOCK/OPENING STOCK COST: (A)- if there is opening stock on your actual income statement , or in your budget income statement : you just add it to your production as if it was produced in current period, also uniyts is now also more ,you add it to your budget units produced. (i)VARIABLE COSTS: you must take out the individual material,labour etc OUT of the OPENING STOCK and add it to all the Cost of Sales : Input material and labour and fixed costs etc. used as the recon. costs for any calculations for the recon.IT IS PART OF THE actual and budget raw materials etc,in this way, when doing ANY calculations.If the Cost Prices in the Opening stock are any different to the Cost Prices in the Budget/Actual – then it will just average out to a new value. (Tip –Do Not IGNORE it in budget ,because if it is the same as the current budget costs , it can mostly be ignored –it cancels out with any calc.s one does for [standard costs X actual volume stuff] for the recon-you`ll get the same answer both ways from budget figures- you`ll see.BUT if they are different

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 67 to budget costs ( ie:from year before)-eg: in a trick question-then it cannot be ignored, it will change all the Rates and calculations.) (ii)FIXED COSTS:Any opening stock in budget : you must take out any mnftr-fixed costs and add it to budget fixed costs to get a total to use in all calcs.So if budget fixed-mnftr costs=100 000 and in opening stock you have 18 000 , then you ONLY work with 118 000 .Remember your total number of units for these cost calculations in the budget will be : [The No. Produced + Number In Opening Stock].:DON’T FORGET! USE BOTH! So number of units will be more than stated!!! by the number in opening stock.!!! (P.S: if there is opening stock for actual there must also be for budget ) (B)-Closing stock on Actual : forget it, the calculations and formulas will work around it by themselves. (C)-Closing stock on Budget: ??dont know?? Maybe only :(not sure)subtract from contribution, before subtracting fixedmnft costs,then divide by units no. for recon step (1) thing?? 1. First: do the ACTUAL income statement so you have all the figures , then calculate the BUDGET profit only , you just need this figure to start off with.- all the budget per unit rates etc are also needed but you do not have to first do a budget income statement , only an actual one,just use all the given figures for the budget. a. VOLUME VARIANCE : 1st do volume variance at top b. Balance no.1 :then show new balance no.1 for volume difference, c. EXPENDITURE VARIANCE : then 2nd do expenditure variance below d. Balance no.2 :then show balance no.2 for expenditure + volume difference. i. VOLUME VARIANCE : 1st do volume variance at top 1. For Standard Absorption Costing: a. = {( Budget Manufacturing Profit – Variable Non-Mnftr Costs only )} / budget no. units X [+/-Difference in Sales Volume] (less= -,more =+) to give a Neg or Pos answer eventually. b. Note : This would be = {( Budget Total Contribution less closing stock – Fixed Mnftr Costs) / Budget Units} X [+or -Difference in Sales Volume ] (less= -,more =+) c. Note :=this would also be =( “Gross Profit Less Variable NonMnftring cost(leave fixed mnft costs)) / divided by budget units” X Difference in Sales Volume +/-.” 2. For a Variable Standard Costing recon.: a. Contribution per unit X [+or -Difference in Sales Volume] (less= -,more =+) b. You will also not subtract (fixed)mnftring costs here, nor subtract closing stock from contribution , it just comes out below in one shot, because you don’t do a special “Overheads Volume –variance subtraction” in the expenditure section below, because you don’t have any fixed costs in the closing stock to wheedle out (if the numbers are right it could cause a error, If You don’t do all this I think) ,(ask : 1-but what do you do with closing stock – or 2- opening stock with different fixed cost to this year?) 3. Note:rem: Why , for absorbtion type costing ,they leave out non-mnfr fixed costs is ANSWER:because fixed costs do not change if sales volume changes,only variables costs will make a difference,remember you are working with profit, not revenue – so you basicly use the “Contribution” to do your calculations ,exept for ‘absorbtion’ you also subtract the fixed mnfrt costs from contribution, because Note: the fixed mnftring costs locked in the cost of sales part, are balanced out by an Overhead Volume+Expenditure variance calculation in the Expenditure Variance part below.This is the only “volume variance” that takes place in the “expenditure section of the reconciliation” –to get rid of the fixed costs locked in the costing - it is an extra volume variance section forced into the expenditure variance section. This 1 special step: is only done because the absorbtion costing system results in fixed costs being treated as variable costs-(last sentence per viggio book vertabim) Ie :24000-8000=16000/1000= R16/unit

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 68 4. This Step just brings the budget volume down to actual volume using the contribution ,BUT still at budget prices, on its way to showing how the actual profit came out of the budget profit. ii. Balance no.1 :then show new balance no.1 for volume difference, also incl. a Units Sold column on left, To show new no. of units .Note the ‘description’/name used in example. iii. EXPENDITURE VARIANCE: then 2nd do expenditure variance below 1. Overhead Volume & Expenditure :)(Fixed Mnftring Overheads in cost of sales must be taken out,in 2 special steps)

a. Mnfctring Fixed Cost Overhead Volume :funny part i. For Standard Absorbtion Costing : 1. {(+/-) Production Volume changeX Fixed Costs Recovery Rate used to calc budget profit}” if production went up(+) add , if down(-) subtract.2. Note: the subtract top from bottom and visa versa rule thing does not work here – this is a special case. 3. Note :You add if production went up(+) or subtract, if down(-) because you have more profit if there`s more in stock, or less profit if there`s less in stock at end of day, from manuftr. more. 4. -Note: USE Production Volume , DO NOT USE Sales Volume, ie: not like in the Volume Variance in step 1. It is just a mathematical formula/method to balance out fixed mnftr.costs stuck in production volume/budget closing&opening stock/sales volume/ actual closing&opening stock etc. 5. (ii)FIXED COSTS: Any OPENING STOCK IN BUDGET : you must take out any mnftr-fixed costs and add it to budget fixed costs to get a total to use in all calcs.So if budget fixed-mnftr costs=100 000 and in opening stock you have 18 000 , then you ONLY work with 118 000 .Remember your total number of units for these cost calculations in the budget will be : [The No. Produced + Number In Opening Stock].:DON’T FORGET! USE BOTH! (P.S: if there is opening stock for actual there must also be for budget ) 6. 7. -Note: The “recovery rate” is the one that was used originally to get the Fixed costs in the BUDGET, NOT in the ACTUAL cost of sales. Volume change” is how many more/less production,NOT sales , you had than in budget -Note: The reason for this step is that the fixed mnftring costs locked in the Opening/CLOSING STOCK of cost of sales part, are dealt with by a 2 part process to recon budget to actual profit. 1st in Sales Volume Variance the fixed-mnft costs and closing stock are subtracted from contribution , where they would normally stay, then in this step we basicly restore the balance lost in step 1. The balance we “lost” is if you multiply a fraction of the budget sales by the “contribution less fixed-mnftr costs less closing stock” you are treating fixed costs as a variable cost .This step just restores the balance – mathematicly.(must work it out yourself one day!no time) 8. - This one step is only included if some fixed costs are in your opening/closing stock, to make sure they are treated correctly.If no fixed costs are in closing stock it could theoreticly be left out and only 1- “overhead expenditure” below and 2-exclusion of mnftring fixed costs as well as non-mnftr fixed costs for “sales volume variance”(step 1) be done instead.(you must click the idea behind or difficult)

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 69 ii. For Standard Variable Costing The difference between variable&absorbtion recon. lies only in sales volume variance and the fixed mnftr cost(done below) variance.This step is left out because there are no fixed costs to wheedle out of Opening/Closing stock, like in absorbtion costing. b. Mnfctring Fixed Cost Overhead Expenditure: =Budget Mnftring Overhead – Actual Mnftring Overhead(even if result=negative)

(ii)FIXED COSTS:Any OPENING STOCK IN BUDGET : you must take out any mnftr-fixed costs and add it to budget fixed costs to get a total to use in all calcs.So if budget fixed-mnftr costs=100 000 and in opening stock you have 18 000 , then you ONLY work with 118 000 .Remember your total number of units for these cost calculations in the budget will be : [The No. Produced + Number In Opening Stock].:DON’T FORGET! USE BOTH! (P.S: if there is opening stock for actual there must also be for budget ) 2. Sales Price : Number Actually SOLD X Price Difference : Note not price difference X No.Sold Difference, Number Sold Difference is only used in Volume Variances! :Note: for the rule of always minus bottom from top or visas versa – a sale is trated as an income so it is the subtract top from bottom one to apply here –so “actual – budget=answer” .If price increased it must be positive(you add), but if decreased , it must be negative(less).So here you minus visa versa : ie: top from bottom : this answer is then added to the recon if positive, or minus’ed if negative. 3. Variable Selling Costs :{ Number Actually SOLD X Budget Per/unit cost}Actual Total Cost funny part 3 of 3: Note: We already did any Volume calculations in step 1, so First we bring the Budget selling costs up/down to the amount sold volume ,to avoid doing it twice, Then only can we subtract Actual Selling costs from Budget selling costs. Note: selling costs come from amount sold, not the amount produced. 4. Variable Manufacturing Costs: :{ Number Actually PRODUCED X Budget Per/unit cost}-Actual Total Cost These costs include MATERIAL,VARIABLE LABOUR etc. Note: First we bring the Budget PRODUCED costs up/down to the amount PRODUCED volume , Then only can we subtract Actual PRODUCTION costs from Budget PRODUCTION costs.Because closing stock is already subtracted from from actual profit /and/or / budget profit shown on recon. , we don’t touch it.All we are doing is adding/subtracting a bit to the figure in cost of sales before closing stock was subtracted. Note:manufacturing costs = for amount actually produced , not just amount sold. Note: rem: Closing stock/Opening Cost: if there is opening stock on your actual income statement , or in your budget income statement , you must take out the individual material,labour etc OUT of the OPENING STOCK and add it to all the Cost of Sales : Input material and labour and fixed costs etc. used as the recon. costs for any calculations for the recon.IT IS PART OF THE actual and budget raw materials etc,in this way, when doing ANY calculations.If the Cost Prices in the Opening stock are any different to the Cost Prices in the Budget/Actual – then it will just average out to a new value. (Tip –Do Not IGNORE it in budget ,because if it is the same as the current budget costs , it can mostly be ignored –it cancels out with any calc.s one does for [standard costs X actual volume stuff] for the recon-you`ll get the same answer both ways from budget figures- you`ll see.BUT if they are different to budget costs ( ie:from year before)-eg: in a trick question-then it cannot be ignored, it will change all the Rates and calculations.) 5. Fixed Selling/Admin etc. Costs : total Budget – total Actual –finish and klaar (even if ANSWER is negative, then put it as negative)

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 70 These costs would also be for distribution or marketing costs- ie: any FIXED costs that are NON-MANUFACTURING costs, so not part of cost of sales, get treated like this.The variable non-manufacturing are shown in no. 4 above. iv. Balance no.2 :then show balance no.2 for expenditure + volume difference, and include units on far left.

Example from last example in section above. (viggio pg136)

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RECONCILLIATION OF ABSORBTION PROFIT TO VARIABLE PROFIT(PG 141 VIGGIO)

1) The Only difference between the absorption and variable profit is ALWAYS the increase or decrease in closing stock multiplied by the fixed manufacturing cost per unit.- so either can be higher or lower depending on circumstancesa) 2) There are 3 possible methods to do this recon: a) WHERE OPENING AND CLOSING STOCK HAVE THE SAME FIXED COSTS involved.(cost structures) (Ignore variable cost changes) i) You just do 1 item line : [closing stock–opening stock increase/decrease] X [Per Unit fixed cost incr.or decr] ii) See which is higher/lower to decide when to minus/add. b) WHERE OPENING AND CLOSING STOCK HAVE DIFFERENT FIXED COSTS involved.(cost structures) (Ignore variable cost changes) i) You do 2 item lines :completely different from the type done above ii) ADD :Fixed stock in opening stock: Opening stock units X Per Unit fixed costs in opening stock. iii) MINUS :Fixed stock in closing stock: Closing stock units X Per Unit fixed costs in closing stock.(if closing drops then try adding, or a complete visa- versa not sure) c) IF NO METHODS WANT TO WORK –remember they are all based on the main method below ,then try that one:

3) General Method: a) Find Closing stock per unit costs first(rem :leave out fixed costs in the variable but include in absorb.),but for standard absorbtion it will be at budget costs, so you cannot do this. b) Use this to find how many units in each closing stock :(they will be the same). but for standard absorbtion it will be at budget costs, so you cannot do this c) Find in absorbtion costing, fixed mnfr costs / total production –to get fixed costs per unit.(remember in standard absorbtion – all done at budget costs, but in other absorbtion all done at Actual costs) d) Use all the above in the formulas. 4) Allways use ACTUAL opening /closing cost for your calculations, not budget. 5) Allways start at absorbtion and end at variable.Check to see if adding/ or subtracting will cause the recon to work.I am not sure which way is minus / or which is add? Remember the theorem though: a) If production higher than sales, absorb. > Var. ,visa versa, and if = then absorb=var.

RECONCILLIATION OF ABSORBTION PROFIT TO ABSORBTION PROFIT(PG 142 VIGGIO)

2) METHOD :Whether it is a year to year or month to month recon . for the 1 company or whatever : a) No units on left needed. b) Start with 1st profit AFTER over/under adjustment, end with last profit after over/under adjustment. c) Add any Variable Non-mnftr costs (eg:selling costs) subtracted before for net profit. d) Any non-mnftr fixed costs : Add them back in.{or maybe ; not sure but do other one rather- it seems you want to see the gross profit somewhere)) if different you must do a separate item line to recon it : just subtract one from the other then put difference in recon ( highly unlikely to happen anyway!)

e) 1st :Do opposite to over/under to bring to first period gross profit( if added in income stat, -then subtract it and visa-versa) f) Now you have next periods Gross Profit. g) Now add/minus previous months over/under- same as you would in income stat,(not add if subtracted etc but add again – you are going toward getting NEXT PERIODS NET PROFIT now as if it is a normal income stat.) h) Now add next periods Variable and Fixed non-mnftr overheads in.

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Finished –now you

i)

have next periods net profit. Recon done!

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INCOME STATEMENTS FORMATS: a) 2 COLUMN FORMAT INCOME STATEMENT

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b) 3 COLUMN FORMAT INCOME STATEMENT /PROFIT STATEMENT.

c) 3 X 1COLUMN FORMAT ,3 YEARS All ON 1 PAGE FOR COMPARISON.

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RECONCILLIATIONS: Check page 150 viggio bottom for a new type.-scan in – not yet scanned in or done yet Make sure you got recon of absorbtion to absorbtion

FOR OVER/UNDER RECOVERY IN FULLY INTEGRATED ABSORBTION COSTING( JUST COPIED , MUST STILL SORT IT ALL OUT)

(4) THIS IS BOTH FROM FULLY INTEGRATED , ESP. MEANT FOR THE OVER/UNDER RECOVERY RECON. iii) ume Variance (difference between budget –actual) iv) AND Expenditure Variance. (difference between budget –actual) EXAMPLE: Example 1 on left and 2 on right are completely different exercises, both are Reconcilliations.The one on the right seems the more correct one.-includes units- but not sure if both are equally correct- ASK.

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CH 9 STANDARD COSTING (PG 325 VIG) PURPOSE OF STANDARD COSTING: a) Standard costs are pre-determined target costs that should be incurred under efficient operating conditions.They are not the same as budget costs.Budgets are on a entire activity basis, standard costs are on a per unit basis.But they are similar to a budget and could even be referred to as a budget at times eg:in exams)The Budget Cost developed is used to calculate the Standard Unit Costs. b) Standard costing is a performance system that analyses performance in detail.The purpose is to look at each category of variance and do an in-depth analysis of what went wrong or right,and establish how,given this information, we can do better in the next accounting period. c) Standard costing stands for “standard” : ie: it sets a standard. d) 3 types of Standard costs can be used: i) BASIC COST STANDARDS: Not used much : A value which does not change over long periods of time.-Developed from years of experience. Used more as a basis to develop current standards from and to compare actual results with.But not used much for standard costing, as they are too easy to attain, not a very high goal to set, most efficient way is not necessarily found/studied. ii) CURRENT ATTAINABLE / STANDARDS: Most frequently used : based on current operating conditions,they make a study to take account of machine breakdowns, substitute materials, etc.= a fair base from which to evaluate employee performance.In the short term. Basicly- higher than basic but still attainable. iii) IDEAL STANDARDS: Seldom used: Reflect the minimum operating costs under ideal conditions.Seldom used as they are usually seen by workers as being impossible. c) Methods of Setting the Standards: i) HISTORICAL: from historical cost – but does not set a very high goal or find most efficient way of production. ii) ENGINEERING STUDIES: do studies to find most efficient way of production ,yet still attainable: 1Materials: purchasing dept makes a study ;2-Labour :time &motion study incl.machine breakdowns etc 3-Overhead –any method 4-“Standard Hours Produced” – is the time it takes to produce one product ,used as a common denominator to divide up costs into different products. d) STANDARD PROFIT STATEMENT: This is like an income statement but sometimes for just a single product, using pre-determined standard cost rates , showing what profit we can expect from a given sales volume.The volume is estimated from known sales and production capacity.Could also mean the flexed budget when using standard costing. e) STATIC BUDGET:The plain original realistic budget for the year drawn up at beginning of year. f) FLEXED BUDGET:/Standard Budget : The budget the is drawn up using the ACTUAL sales VOLUME, but with the original costs from the Original Budget, not the Actual Costs. This can then be compared to the actual Income statement to see what the difference in each cost was once converted to the actual sales level. g) STANDARD PROFIT: same as a flexed budget basicly , it is like an income statement using standard costs at actual sales level, not budget sales level.It does not need to be for the whole company, it could also be for just 1 product .Formula = [actual units sold X standard sales price] – [actual units sold X standard costs]. h) BILL OF MATERIALS: A list of all the actual materials needed to manufacture a specific product.Does not include labour/overheads etc. like the ‘standard cost card.’ e) STANDARD COST CARD: card with the costs of all the Inputs used to make 1 output product.(That should (actual) be used to produce a product.)1 card is kept for each different product made. (-historical cost -not a goal type cost). f) STOCK ACCOUNTS: raw materials, work in progress, finished goods and the like. g) A “RUN DOWN OF STOCK” : is the transfer of raw materials from inventory to WIP.

METHOD OF STANDARD COSTING: i)

If a company uses standard costing, then all stock accounts must be at a standard value all the time.Stock accounts include the following:

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 77 (1) NOT Raw Materials purchased : this is Dr entered at actual price in books. (2) BUT ALL “Raw Material” Transferred to “Work in Progress”: at Standard Cost.ther (3) BUT ALL “Work in Progress” Transferred to “Finished Goods” : at Standard Cost. ii) A “RUN DOWN OF STOCK” : is the transfer of raw materials from inventory to WIP. iii) CHANGING /RE-ESTIMATING STANDARD COSTS: As per textbook, from a managerial accounting perspective it is best to re-estimate/change standard costs at the start of Year. But it is common practice and accepted accounting&auditing practice to change at End of year, incl. re-valuing all stock accounts eg WIP, finished goods etc and also all variance accounts by Dr or Cr them with the incr/decr in stock values. iv) Rem: when you transfer to WIP and then to FINISHED GOODS and then COST OF SALES you also ONLY send [Variable costs] for Variable Costing and [Fixed- Mnftr + Variable Costs] for Absorbtion costing,same as for closing stock.(it seems when it hits the income statement with fixed- mnftr in the cost of sales, it is only for inventory or tax valuation purposes? Unknown- must check)

RAW MATERIAL VARIANCE. (1)

THE STANDARDS: 1. 2. 3. 4.

The Price -Material cost per unit input The Usage -Required per unit of output Finished Product Cost Price(eg:2kg X R10/kg=R20) - Cost per Unit of Output The Mix (eg :2kg sand + 3 kg cement) - Amount of each Type Material required per Unit output 5. The Yield (eg:5kg = 1 unit) - Amount of finished product you get from 1 Mix

(2)

THE VARIANCES: 1. 2. 3. 4.

(3)

Price Variance: Actual No. used X Budget/Standard Cost Usage Variance: Budget required per unit output Vs Actual usage . Mix Variance: Financial effect of changing budget mix to a new mix. Yield Variance: Budget Vs. Actual total output from materials used.

METHOD: 1. You can only calc. a materials variance price that is based on actual purchases 2. The usage variance is always at standard cost value. 3.

RECONCILLIATION BUDGET PROFIT TO ACTUAL PROFIT. 5. DO NOT go from budget sales to standard sales.It is more meaningful and easier if you allways recon budget profit to standard profit and then to actual profit.If you want you can first go from budget sales to budget profit , but from there carry on as above. B-Sales to S-Sales to S-Profit recon is however possible, but not wanted, rather B-Sales to B-profit to S-profit OR just B-Profit to S-Profit. 6. Note : This is a Reconcillation of difference between budget ratesXunits budgeted and actual ratesXunits sold, not between budget cost and actual cost. 7. This example is for standard costing, so no Over/Under recovery takes place in the Income statement, but there will still be an over/under recovery between budget profit and fixed profit.This is because FIXED PROFIT IS LOCKED INTO THE BUDGET CALC. AND MUST BE TAKEN OUT SEPARATELY ALLWAYS:,because it does not change with volume change: needs special treatment,in same context as for fully Integrated system basicly.It is shown below as an “Overhead Volume& Overhead Expenditure Difference.”,but all in the Expenditure section of recon.Note!see method+example. 8.

METHOD:

(we always first do a volume variance, then an expenditure variance,never anything else)

NOTE rem: For Income ALLWAYS SUBTRACT THE top RECONCILLIATION FIGURE FROM THE bottom ONE BUT for Costs ALLWAYS SUBTRACT THE bottom RECONCILLIATION FIGURE FROM THE top ONE in any recon.: so if BudgetProfit is at top its always BudgetProfit – ActualProfit in ALL the calculations , or visa versa. Note: rem: CLOSING STOCK/OPENING STOCK COST:

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 78 (A)- if there is opening stock on your actual income statement , or in your budget income statement : (i)VARIABLE COSTS: you must take out the individual material,labour etc OUT of the OPENING STOCK and add it to all the Cost of Sales : Input material and labour and fixed costs etc. used as the recon. costs for any calculations for the recon.IT IS PART OF THE actual and budget raw materials etc,in this way, when doing ANY calculations.If the Cost Prices in the Opening stock are any different to the Cost Prices in the Budget/Actual – then it will just average out to a new value. (Tip –Do Not IGNORE it in budget ,because if it is the same as the current budget costs , it can mostly be ignored –it cancels out with any calc.s one does for [standard costs X actual volume stuff] for the recon-you`ll get the same answer both ways from budget figures- you`ll see.BUT if they are different to budget costs ( ie:from year before)-eg: in a trick question-then it cannot be ignored, it will change all the Rates and calculations.) (ii)FIXED COSTS:Any opening stock in budget : you must take out any mnftr-fixed costs and add it to budget fixed costs to get a total to use in all calcs.So if budget fixed-mnftr costs=100 000 and in opening stock you have 18 000 , then you ONLY work with 118 000 .Remember your total number of units for these cost calculations in the budget will be : [The No. Produced + Number In Opening Stock].:DON’T FORGET! USE BOTH! So number of units will be more than stated!!! by the number in opening stock.!!! (P.S: if there is opening stock for actual there must also be for budget ) (B)-Closing stock on Actual : forget it, the calculations and formulas will work around it by themselves. (C)-Closing stock on Budget: ??dont know?? Maybe only :(not sure)subtract from contribution, before subtracting fixedmnft costs,then divide by units no. for recon step (1) thing?? e. f. g. h.

VOLUME VARIANCE : 1st do volume variance at top Balance no.1 :then show new balance no.1 for volume difference, EXPENDITURE VARIANCE : then 2nd do expenditure variance below Balance no.2 :then show balance no.2 for expenditure + volume difference. i. VOLUME VARIANCE : 1st do volume variance at top 1. For Standard Absorption Costing: a. = {( Budget Manufacturing Profit – Variable Non-Mnftr Costs only )} / budget no. units X [+/-Difference in Sales Volume] (less= -,more =+) to give a Neg or Pos answer eventually. b. Note : This would be = {( Budget Total Contribution less closing stock – Fixed Mnftr Costs) / Budget Units} X [+or -Difference in Sales Volume ] (less= -,more =+) c. Note :=this would also be =( “Gross Profit Less Variable NonMnftring cost(leave fixed mnft costs)) / divided by budget units” X Difference in Sales Volume +/-.” 2. For a Variable Standard Costing recon.: a. Contribution per unit X [+or -Difference in Sales Volume] (less= -,more =+) b. You will also not subtract mnftring costs here, nor subtract closing stock from contribution , it just comes out below in one shot, because you don’t do a special “Overheads Volume –variance subtraction” in the expenditure section below, because you don’t have any fixed costs in the closing stock to wheedle out (if the numbers are right it could cause a error, If You don’t do all this I think) ,(ask : 1-but what do you do with closing stock – or 2- opening stock with different fixed cost to this year?) 3. Note:rem: Why they leave out non-mnfr fixed costs is ANSWER:because fixed costs do not change if sales volume changes,only variables costs will make a difference,remember you are working with profit, not revenue – so you basicly use the “Contribution” to do your calculations ,exept for ‘absorbtion’ you also subtract the fixed mnfrt costs from contribution, because Note: the fixed mnftring costs locked in the cost of sales part, are balanced out by an Overhead Volume+Expenditure variance calculation in the Expenditure

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 79 Variance part below.This is the only “volume variance” that takes place in the “expenditure section of the reconciliation” –to get rid of the fixed costs locked in the costing - it is an extra volume variance section forced into the expenditure variance section. This 1 special step: is only done because the absorbtion costing system results in fixed costs being treated as variable costs(last sentence per viggio book vertabim) Ie :24000-8000=16000/1000= R16/unit 4. This just brings the budget volume down to actual volume, BUT still at budget prices, on its way to showing how the actual profit came out of the budget profit. ii. Balance no.1 :then show new balance no.1 for volume difference, also incl. a Units Sold column on left, To show new no. of units . iii. EXPENDITURE VARIANCE: then 2nd do expenditure variance below 1. Overhead Volume & Expenditure :)(Fixed Mnftring Overheads in cost of sales must be taken out,in 2 special steps)

a. Overhead Volume :funny part i. For Standard Absorbtion Costing : 1. {(+/-) Production Volume changeX Fixed Costs Recovery Rate used to calc budget profit}” if production went up(+) add , if down(-) subtract.2. Note :You add if production went up(+) or subtract, if down(-) because you have more profit if there`s more in stock, or less profit if there`s less in stock at end of day, from manuftr. more. 3. -Note: USE Production Volume , DO NOT USE Sales Volume, ie: not like in the Volume Variance in step 1. It is just a mathematical formula/method to balance out fixed mnftr.costs stuck in production volume/budget closing&opening stock/sales volume/ actual closing&opening stock etc. 4. (ii)FIXED COSTS: Any OPENING STOCK IN BUDGET : you must take out any mnftr-fixed costs and add it to budget fixed costs to get a total to use in all calcs.So if budget fixed-mnftr costs=100 000 and in opening stock you have 18 000 , then you ONLY work with 118 000 .Remember your total number of units for these cost calculations in the budget will be : [The No. Produced + Number In Opening Stock].:DON’T FORGET! USE BOTH! (P.S: if there is opening stock for actual there must also be for budget ) 5. 6. -Note: The “recovery rate” is the one that was used originally to get the Fixed costs in the BUDGET, NOT in the ACTUAL cost of sales. Volume change” is how many more/less production,NOT sales , you had than in budget -Note: The reason for this step is that the fixed mnftring costs locked in the Opening/CLOSING STOCK of cost of sales part, are dealt with by a 2 part process to recon budget to actual profit. 1st in Sales Volume Variance the fixed-mnft costs and closing stock are subtracted from contribution , where they would normally stay, then in this step we basicly restore the balance lost in step 1. The balance we “lost” is if you multiply a fraction of the budget sales by the “contribution less fixed-mnftr costs less closing stock” you are treating fixed costs as a variable cost .This step just restores the balance – mathematicly.(must work it out yourself one day!no time) 7. - This one step is only included if some fixed costs are in your opening/closing stock, to make sure they are treated correctly.If no fixed costs are in closing stock it could theoreticly be left out and only 1- “overhead

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 80 expenditure” below and 2-exclusion of mnftring fixed costs as well as non-mnftr fixed costs for “sales volume variance”(step 1) be done instead.(you must click the idea behind or difficult) ii. For Standard Variable Costing The difference between variable&absorbtion recon. lies only in sales volume variance and the fixed mnftr cost(done below) variance.This step is left out because there are no fixed costs to wheedle out of Opening/Closing stock, like in absorbtion costing. b. Overhead Expenditure: =Budget Mnftring Overhead – Actual Mnftring Overhead(even if result=negative)

(ii)FIXED COSTS:Any OPENING STOCK IN BUDGET : you must take out any mnftr-fixed costs and add it to budget fixed costs to get a total to use in all calcs.So if budget fixed-mnftr costs=100 000 and in opening stock you have 18 000 , then you ONLY work with 118 000 .Remember your total number of units for these cost calculations in the budget will be : [The No. Produced + Number In Opening Stock].:DON’T FORGET! USE BOTH! (P.S: if there is opening stock for actual there must also be for budget ) 2. Sales Price : Number Actually Sold X Price Difference : Note not price difference X No.Sold Difference, Number Sold Difference is only used in Volume Variances! :Note: here you must break the rule of always minus bottom from top – here if price increased it must be positive(you add), but if decreased , it must be negative(less).So here you minus visa versa : ie: top from botton : ie minus budget from actual =this answer is then added to the recon if positive, or minus’ed if negative. 3. Variable Selling Costs :{ Number Actually Sold X Budget Per/unit cost}Actual Total Cost funny part 3 of 3: Note: We already did any Volume calculations in step 1, so First we bring the Budget selling costs up/down to the amount sold volume ,to avoid doing it twice, Then only can we subtract Actual Selling costs from Budget selling costs. Note: selling costs come from amount sold, not the amount produced. 4. Variable Manufacturing Costs: :{ Number Actually PRODUCED X Budget Per/unit cost}-Actual Total Cost These costs include MATERIAL,VARIABLE LABOUR etc. Note: First we bring the Budget PRODUCED costs up/down to the amount PRODUCED volume , Then only can we subtract Actual PRODUCTION costs from Budget PRODUCTION costs.Because closing stock is already subtracted from from actual profit /and/or / budget profit shown on recon. , we don’t touch it.All we are doing is adding/subtracting a bit to the figure in cost of sales before closing stock was subtracted. Note:manufacturing costs = for amount actually produced , not just amount sold. Note: rem: Closing stock/Opening Cost: if there is opening stock on your actual income statement , or in your budget income statement , you must take out the individual material,labour etc OUT of the OPENING STOCK and add it to all the Cost of Sales : Input material and labour and fixed costs etc. used as the recon. costs for any calculations for the recon.IT IS PART OF THE actual and budget raw materials etc,in this way, when doing ANY calculations.If the Cost Prices in the Opening stock are any different to the Cost Prices in the Budget/Actual – then it will just average out to a new value. (Tip –Do Not IGNORE it in budget ,because if it is the same as the current budget costs , it can mostly be ignored –it cancels out with any calc.s one does for [standard costs X actual volume stuff] for the recon-you`ll get the same answer both ways from budget figures- you`ll see.BUT if they are different to budget costs ( ie:from year before)-eg: in a trick question-then it cannot be ignored, it will change all the Rates and calculations.)

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 81 5. Fixed Selling/Admin etc. Costs : total Budget – total Actual –finish and klaar (even if ANSWER is negative, then put it as negative) These costs would also be for distribution or marketing costs- ie: any FIXED costs that are NON-MANUFACTURING costs, so not part of cost of sales, get treated like this.The variable non-manufacturing are shown in no. 4 above. iv. Balance no.2 :then show balance no.2 for expenditure + volume difference, and include units on far left.

Example from last example in section above. (viggio pg136)

9.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 82

1-CHAPTER 8 :BUDGETS(ch8Viggio book) Still add a raw materials needed per product budget- check all last years budgets for an example of this-magato-

PRINCIPLES OF BUDGETING: DEFINE BUDGETING: 1) Definition: Budgeting :are accounting plans that normally serve the purpose of quantifying the objectives of the firm and provide a basis for control and performance evaluation. It is long & short term goals that are quantified Financially OR Physically. Important is Comparison between goals & results.

3 CATEGORIES OF BUDGETS: Operating Plans: a) Operating plans are directed at the Production and Investment objectives of the firm. 2) Administrative Plans a) These form the objectives of the development and maintenance of the Companies structure. 3) Strategic Plans a) Long term company objectives in relation to Competitors , Company growth, and Philosophy. 1)

REASONS FOR BUDGETING: 1)

Periodic Planning : budgeting process’ creates a formal planning framework that provides specific deadlines for each phase of the planning process:

2)

Co-ordination of company activities and quantification of objectives. : exchange

ideas between various company segments +quantify costs of available alternatives + compare cost/revenue of each product&dept. 3) Performance evaluation : compare actual to original or flexed budget. 4) Cost Awareness : promote cost awareness in managers who are normally concerned with other things eg production or marketing strategy. 5) Goal Orientation. : makes depts. achieve com0pany goals, not their own goal. Often highlighted in the the transfer and use of products intercompany- looks like nothing but it could be too much.

FINANCIAL & MANAGEMENT BUDGETING: 1) Define the objectives of the budgeting system to prevent: a battle of wills to by dept managers to get the Max. expenditure and the Min. results.(to just keep fin. Managers happy) 2) Companies must realize there are 2 separate budgetry functions in the corporate objectives a) Financial control: ie the Master Budget incorporating all the financial budgets. b) Management Control : Line & production managers : system should allow greater freedom of action by line managers varying from specific details to more general target specifications thereby improving attitude of workers etc.

LONG TERM PLANNING: 1) Concerned with defining company objectives eg: a) Profit maximization b) Or Increase market share c) Or Improve company image d) Or Increase shareholder wealth e) Or non-financial issues i) Eg :environmental issues / ii) Employee job satisfaction iii) Improve company image ( where do we want to be in 10 years) iv) Environmental issues. v) Staff training 2) 5-10 years management to look at where it wants to be : as per asset base + labour force + market share. + non-financial issue (as mentioned above)

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 83 3) Strategic Planning Requires :(it is a whole process to be read up about) a) SWOT ananlysis : Strengths & Weaknesses + Opportunities & Threats evaluation. b) Establish Data Banks to provide past & current information for planning. c) Establish Preliminary Long Term Forecasts. d) Review Expectations of internal + external company participants. 4) 5) See where resources are to be directed. 6) Most common Problems with Strategic Planning: i) To make managers do Long term goals because they are vague and do not allways cause short term profit (no-bonuses) etc. ii) The assumption that historical data can be extrapolated to the future because unknown economic & political changes make future strategies void within a short time.

POSITIVE FACTORS OF BUDGETING BUDGETING & THE HUMAN FACTOR 1) 2) 3) 4) 5) 6) 7) 8) 9)

Meeting goals means employees must 1- understand them and 2-act in certain manner to meet them Coersion is often used eg : bonus or take action if budgets not met. Lack of consultation as to employees reaction can lead to industrial disputes. Dangers of Strict Performance Evaluation :Line managers could make sure budget is not bettered as future budgets will be even more stringent.- ie deviousness. Also manipulate data and dysfunctional behavior to get around tight budgets. Defined, quantitative targets are more likely to motivate management to perform well, even if they are difficult, as long as they are accepted by management. Budgets will motivate workers if they represent a set of definite, quantitative goals, together with regular feedback on the attainment of the standards. It is therefore essential that management is involved in setting standards and budgets. Companies should strive for a budgetary system that will achieve complete goal-congruence between the workers and the company. Positive aspects of budgeting If the budgeting system creates a negative reaction in workers, who may see the system as unfair and inequitable, you will create a subversive spirit leading to dysfunctional behaviour in conflict with corporate goals.

The budgeting process should, where possible, be structured in such a • El sets appropriate standards of performance: • El defines good performance and provides a means of measuring such pertormance, anc • U stipulates how rewards are to be linked to results. • El Communication of corporate objectives and budgetary guidelines to all people responsible for budget preparation. • El Determination of the success factors of the company. • El Full participation by all line management, with a commitment to meet corporate goals. • II Preparation of the sales budget. • El Preparation of budgets for all major operating activities. • U Negotiation of budgets and standards. • Co-ordination and review of budgets. • El Acceptance and communication of all budgets by managers who will bear responsibility. • El Frequent feedback of actual performance against budget targets. • El Flexible budgeting capabilities. • El Monetary and non-monetary incentives.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 84

METHOD FOR BUDGETS: MASTER BUDGET: 1) The master budget is the total budget package for a company; It is the end product of the budget preparation process. The master budget consists of all the individual budgets for each part of the company aggregated into one overall budget for the entire company. The development of the master budget is a sequential process, in which information from one budget is carried forward to another budget. Some elements, such as the capital expenditure budget, are independent. 2) Components of the master budget • Operating budget • Sales budget • Budget of ending inventories • Production budget: — Materials budget — Direct labour budget — Manufacturing overhead budget. • Budgeted cost of goods sold • Administrative expense budget • Marketing expense budget • Budgeted net income from operations • Budgeted non-operating items • Budgeted net income

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 85

FINANCIAL BUDGET Consists of the following parts: • Capital expenditure budget • Budgeted statement of financial position (balance sheet) • Budgeted statement of changes in financial position

OPERATING BUDGET •

The operating budget is composed of the income statement elements. A manufacturing business budgets for both manufacturing and non-manufacturing activities. We will discuss the various elements of the operating budget of a manufacturing firm shortly.

CASH BUDGET: (OR CASH FLOW STATEMENT) • •

Cash Budget is one of the most important budgets because it shows how liquid a company is. Normally prepared Weekly or Monthly as they are required for management (liquidity) information.

(4)

KEY PREPARATION OF CASH BUDGET STEPS

1) First you prepare the Debtors Collection Schedule, then the Creditors Payment Schedule, and then you can go and prepare the final Cash Budget (or also called the Cash Flow ). Also , it is one of the last budgets one prepares, because you must do all the sales,production, purchases etc budgets first to get all the figures you need. 2) The cash budget is one of the most important budgets as it shows how liquid the company is at any point in time. Cash budgets are normally prepared weekly or monthly, as they are required for management information. 3) Key factors in preparing a cash budget are i) Establish opening cash balance ii) Estimate cash from operations, ie net income after adjusting for non-cash items such as depreciation iii) Estimate timing of debtor cash receipts taking into account customer payment behaviour iv) Include all non-operating cash items such as capital purchases, repayment or advances on loans, etc v) Estimate the amount and timing of credit payments, salaries and wages 4) The difference between the net income figure and net cash flow is explained to a large extent by the changes in working capital. Note: The cash budget is normally the more complex budget to complete, because non-cash items appearing in different budgets must be adjusted for (removed). Receipts &payments also usually lag behind periods incurred in Note: Esp. in exam, it is recommended to first draw up a diagram to determine where cash flows take place.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 86

STEP 1 DEBTORS COLLECTION SCHEDULE: MONTH December credit(cash in from

TOTAL

previous credit sales)

JAN FEB 10000 (if 8000 it is calculabl e) 20000 16000 40000 24000 19200

January-Cash January-Credit Feb-Cash Feb-Credit Mar-Cash Mar-Credit Capital expenditure Loan repayments Etc. TOTALS

20000 80000 24000 96000 32000 128000 1000 5000 10000

500 1000 5000 This total will 52500

500 2000 5000 98250

January-Cash

100% AS PER exercise 20% 50%

25%

January-Credit(cash in from previous credit sales) Feb-Cash Feb-Credit Mar-Cash Mar-Credit

include april,may,etc ,so leave out.

100% 20

MAR

20000 48000 32000 25500 2000 0 127500

50% 100% 20%

Workings for Debtors Schedule: (rather write jan/feb with/ instead of %) : see all the calculations on the left of this debtors schedule for how to do the calculations.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 87

STEP 2: CREDITORS PAYMENTS SCHEDULE • You can do MONTH January-Cash January-Credit(cash

the same type of creditors payment schedule as above or. TOTAL 20000 80000

JAN 20000 16000

FEB

MAR

40000

in from previous credit sales)

Feb-Cash Feb-Credit iTOTALS •

24000 96000 xxxx

24000 19200 xxxx

xxxx

xxxxxx xxxxx

Another type of payments/purchases budget.

Creditors’ payments schedule/Purchases Sales Cost of sales Opening Stock Closing Stock (90 000 x Increase Stock Purchases Discount @ 4%

100

March 100 000 66 667* (15 625)* 60 000* 44 375*

/150)

April 105 000 70 000* (60 000) 60 000* _ 111 042 (2 800)* 67 200

(4 442)* 106 600

May 117 000 78 000* (60 000) 60 000* - _ 70 000 (3 120)* 74 880

78 000

Solution: CASH BUDGET or CASH FLOW STATEMENT Open Bank Balance Sales Total Less:materials Less:labour Less:other Less:etc Closing Bank Balance

Jan (10000)(eg: from material being paid 1 Qtr in advance)

Feb (142000) (from below left)

0(there were sales

60000(cash

but no receipts of cash yet)

received for previous sales etc.)

(10000) (80000) (10000) (20000) (22000) (142000)

Etc Etc Etc Etc Etc Etc

Mar

Apr

Total

Etc Etc etc Etc Etc Etc

Etc Etc Etc Etc etc etc

Etc Etc Etc Etc Etc Etc

SALES BUDGET: 1) The sales budget is the first budget to be prepared, and it is usually considered the most important budget because so many other budgets are directly related to sales and are therefore largely derived from the sales budget.

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 88 2) Factors that are taken into account include (a) Decisions taken by competitors What the competitors are doing is important, as we need to consider whether we are likely to gain or lose market share. Perhaps we should even consider diversifying. (b) State of local and world economy We need to consider our current markets as well as the potential for export. Local and world trends are important, especially as the two begin to merge as lechnological advances improve. We need to consider inflation rates, exchange rates and cost of debt. (c) International markets These must be considered from both the exporting side and the effect that imported goods will have on our projected sales. (d) Effectiveness of advertising and promotion policies The effect that advertising will have on our product needs to be considered. Where necessary, surveys should be carried out to ascertain consumer tastes. Demand elasticity should also be ascertained in setting a pricing strategy. (e) Effects of seasonal fluctuations We need to ascertain if there are any seasonal or cyclical trends that should be considered in creating our objective or subjective forecasts. (I) Stability of supplies Consideration of supply lines is important, as disruption will cause production bottlenecks that will affect sales. (g) Historical data In preparing forecasts, it is always important to analyse historical data to ascertain trends and determine whether future expectations are likely to mirror historical trends. 3) Key General Budgeting Factors 1) The key to budgeting lies in the recognition of the sales market as well as the production limitations.: These are: a) Expected Sales levels of products b) Production capacity dictated by space, machine output, availability of labour and material. c) Financial Resources, both short and long term Sales Budget (EXAMPLE per viggio)

Products

Price

June Mondi

120

Hilton

150

JUNE Total Value Unit Total s Value

JUL Total Value Units Tota l Valu e

AUG Total Value Units Total Value

100 0 200 0

Etc

etc

etc

Etc

Etc

etc

etc

Etc

Etc

etc

etc

Etc

120,00 0 300,00 0 420,00 0

OR ALTERNATIVELY YOU CAN USE THIS LAYOUT, IF THERE are workings to be shown in the columns, and not enough space etc. Products

Price

Unit s

Total Value

June Mondi

120

120,000

Hilton

150

100 0 200 0

300,000 420,000

July

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 89 Mondi Hilton

Etc

etc etc etc

July Mondi Hilton

…total …total

total Etc total

…total …total etc

Another Example Of Sales Budget “Workings”(vigio) May June Sales –Units 800 1000 Sales –Value 96000 120000

July 1000 120000

Aug 1200 144000

More “Sales” workings: (Vig) (for getting the % in weird questions with multiple % discounts etc to work out first, before you do the answer) May 45% 30% 15% Jun 45% 30% 15% Jul ` 45% 30% Aug 45%

PURCHASES BUDGET : FOR RAW MATERIALS / OR RETAIL STOCK /OR ANY 1) One can do a purchases budget for Raw materials or Stock for a retail shop or anything else. One can do a separate purchases budget for each of these things , then combine them in a master purchases budget, or just add the figures from each to get the total purchases for the Budget Income Statement (SCI) or Cash Budget(cash flow budget) 2) Before you do the purchases budget you must do the Sales Budget then the Production Budget then the Raw Materials Opening Stock Budget etc. to get all the figures needed to do this budget. So it is one of the last budgets you do. PURCHASES BUDGET for: Raw Materials (MANUFACTURING) (EXAMPLE per viggio) 1st half 2nd half Total Material A Required closing 13500kg Etc Etc Stock LESS:Opening 12500kg Etc Etc stock 1000kg Etc Etc ADD: materials 1250x20 Etc Etc needed for ea=25000kg current production Budget 26000 Etc Etc Purchases Material B. Etc Etc Etc Etc Etc Etc Etc Etc Etc Etc Etc Etc Etc Etc Etc

Another type of payments/purchases budget:

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 90

PURCHASES BUDGET for RETAIL SHOP STOCK. Sales ( cosmetic ie: X 70% = cost) Cost of sales

March 100 000

April 105 000

70 000 * (60 000 ) 60 000 * _

78 000 * (60 000 ) 60 000 * - _

May 117 000

66 667 * Opening Stock (15 625 )* Closing Stock (90 000 60 000 x 100/150) * Increase Stock 44 375 OPENING STOCK (finished * goods OR raw materials ETC) Purchases 111 042 70 000 78 000 BUDGET: Discount @ 4% (2 800 (3 120 (4 442 )* )* )* 1) This is a very specialized budget , actually 106 600 67 200 74 880 just a calculation to work out the opening stock. The budget of this type which would be more of a ‘budget’ is a ‘Stock’ or “stock-holding” budget –There can be many different “stock ‘ budgets, eg 1-raw materials 2-finished goods etc. 2) A Raw Materials budget can be done in EXACTLY the same format and way- just different names&numbers. 3) This budget could be prepared in a format where the periods are in columns and materials on the left if it is more convenient. Ie column 1=Material 2-Cost each 3- July: no.Units & Total Cost 4-Aug no.Units&Total Cost 5-Sept. No.Units & Total Cost etc. etc. etc. Given a policy to keep sufficient stock on hand to meet 50% of sales in following year: 1-First work out the cost of each finished goods. Finished Goods Budget (EXAMPLE per viggio) Products Units Cost Total Value Opening stock Begin Year Mondi 50%x1000=50 80 40,000 0 Hilton 50%x2000=10 100 100,000 00 140,000 Stock Begin Second Half Mondi Etc Etc Hilton Etc Year End Stock Mondi Hilton

Etc total Etc total

…total …total

…total …total

PRODUCTION BUDGET: • •

•

The production budget is dependent on the expected sales, together with required inventory levels of finished goods. The production plan must take the opening stock levels into account, and specify the timing of production. Remember: if the question says the policy of company is to keep 50% of the ‘estimated’ sales of finished goods in stock then even if they DID NOT SAY there is any opening stock in the first year, THERE PROBABLY IS so you must work it out as the OPENING STOCK for the first year of production ( this is a hidden figure- not given or logical & plain) Production budget works on Units, not normally on Rands Value.

Given a policy to keep sufficient stock on hand to meet 50% of sales in following year: 1-First work out the cost of each finished goods. Production Budget (EXAMPLE per viggio) 1st half 2nd half Total

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 91 Mondi Required closing Stock LESS:Opening stock ADD: Sales Budget Production: Hilton Etc Etc Etc Etc

750

600

600

500

750

500

250 1000 1250

(150) 1500 1350

100 2500 2600

Etc Etc Etc

Etc Etc Etc Etc

Etc Etc Etc Etc

OPENING STOCK -RAW / DIRECT MATERIALS- BUDGET: Direct materials budget •

• •

Purchases will be determined by opening stock levels, desired closing stock levels, and production requirements. We need to consider: o Quantity discounts o Storage capacity o Stock and re-order levels o Delivery times from suppliers o Liquidity constraints So you first have to do the production budget in order to get the figures to be able to do this raw materials budget next. This budget could be prepared in a format where the periods are in columns and materials on the left if it is more convenient. Ie column 1=Material 2-Cost each 3- July: no.Units & Total Cost 4-Aug no.Units&Total Cost 5-Sept. No.Units & Total Cost etc. etc. etc.

Given a policy to keep sufficient stock on hand to meet 50% of PRODUCTION(not sales) in next 6mnth period: For unit calculation is was here: 50% x 1250(from previous budget) x20kg per unit= total material A needed Raw Materials Stock Budget (EXAMPLE per viggio) Materials Units Cost Total Value Opening stock Begin Year Material A 50%x1250x20=1 2 25000 2500 Material B 50%x1600x10=8 5 40000 000 65000 Stock Begin Second Half Material A 50%x1350x20=1 Etc 3500 Material B Etc Year End Stock Material A Material B

Etc total Etc total

…total …total

…total …total

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 92

LABOUR BUDGET: 1) The direct labour budget is useful for production planning as well as for personnel management. Consideration must be given to any changes in the type of labour talent needed as a result of changes in the mix of products manufactured and sold. Significant swings in production during the year cause much greater problems in planning for labour than for materials and manufacturing overheads. 2) Factors requiring consideration (a) Establish general requirements for skilled and unskilled labour (b) Training needs (c) Staff turnover (d) Wage negotiating policies. 3) It is Taken from other budgets prepared for eg :Production Budget etc. above then carried on from there, so: LABOUR Budget (EXAMPLE per viggio) 1st half 2nd half

Total

Mondi type product. Budget Production Direct Labour Hour Total hours Hourly rate Direct Labour Cost

1250

Etc

Etc

x4

Etc

Etc

=5000 hrs x10 =R50000

Etc Etc Etc

Etc Etc Etc

Hilton type product. Budget Production Direct Labour Hour Total hours Hourly rate Direct Labour Cost

Etc

Etc

Etc

Etc

Etc

Etc

Etc Etc Etc

Etc Etc Etc

Etc Etc Etc

Total hours

=5000 hrs

Etc

Etc

Hourly rate

x10

Etc

Etc

Direct Labour Cost

=R50000

Etc

Etc

BUDGET INCOME STATEMENT/ STATEMENT OF INC&EXPENDITURE: Taken from budgets above then carried on from there, so: Sales Opening Stock: Finished product Opening stock: Materials Purchases: Materials LESS :Labour costs: LESS Closing stock: Finished product LESS Closing stock: Materials COST of SALES: Profit for the Year/half year/etc.

140000 65000 138250 130000 (130 000) 473250 (120000) (73000) 280000

(280000) 140000

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 93

Sales

Q1 (15000)(eg: even if

Q2 (142000)

Q3

Q4

Total

Etc Etc Etc Etc Etc Etc

Etc Etc Etc Etc Etc Etc

etc etc etc etc etc etc

etc etc etc etc etc etc

not paid for yet)

Costs Less:materials Less:labour Less:other Less:etc Planning etc Total costs Profit/loss

(10000) (80000) (10000) (20000) (22000) ******** (51)

NOT FINISHED YET : STILL TO DO: no time

The following set of scans is what you could not finish due to no time: still to study very well.as budgets are very common & important.

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CHAPTER 11 RELEVANT COSTS (VIG CH11) CONTEXT OF RELEVANT COSTS: 1) This chapter explains the “relevant costing decision model” which one must use to make new product/drop product/special orders/2 alternative decisions/limiting factors etc. type of decisions. 2) Management accounting is primarily concerned with producing budgets, setting performance standards, and evaluating performance. 3) Relevant costs Requires an understanding of: 1) Special Orders: A special order is one that will not affect a companies current sales to its regular customers (often as an export). It is usually sold at below full cost – by using contribution to work out an extra low price, because overheads are covered by sales to normal customers. { {Note : Be careful : even doing this for export can cause your own goods to re-appear on the local market at lower price than you usually even sell at by a re-import.} a) 2 Alternative Decisions: is about comparing a capital–intensive business to a labour intensive-business usually. b) Limiting Factors: always look out for when assessing any exam question: eg: production bottlenecks/raw material supply problems ie:quotas. TERMS: DEFINITIONS 1) Relevant Cost: i) Those Future costs and Revenues that will be changed by any specific decision relating to production volume or selling volume.eg: material costs change if choose to produce more a future cash flow arising as a direct consequence of the decision under review.-ONLY RELEVANT COSTS should be considered in decision making , because it is assumed that in the long run future profits would be maximized if the ‘cash profits’ of the company, ie: the cash earned from sales minus the cash expenditures incurred to sell the goods, are also maximized. ii) COSTS WHICH ARE NOT RELEVANT INCLUDE: (1) Past sunk costs, or money already spent. (2) Future spending already committed by separate decisions. (3) Costs which are not of a cash nature eg: depreciation (4) Absorbed overheads eg rent (so only cash overheads NEWLY by the decision incurred are relevant to a decision) iii) The relevant cost of a unit of production is usually the variable cost of that unit plus (or minus) any change in the total expenditure of fixed costs. 2) Differential cost a) A differential cost is the difference in cost of alternative choices. If Option A costs an extra R300 Option B costs an extra R360, the cost differential is R60, with Option B being more expensive. A differential cost is the difference between the relevant costs of each option. 3) Incremental cost(marginal) a) The differential cost of an extra unit of production is the extra cost required to make that unit, ie it is the difference in cost between making the unit and not making it. This type of cost is also called incremental cost. Incremental costs are relevant costs. 4) Opportunity cost a) An opportunity cost is the benefit foregone by selecting one alternative in preference to the most profitable alternative. If, for example, a company is currently making a cash-flow of R100 000 from the use of a machine and it now has an opportunity of investing in a new machine, the choices are: i) Continue with the existing machine ii) Replace with the new machine iii) Opportunity cost could be the difference in new machine (buying)– old machine (selling) cost 5) Sunk costs a) A sunk cost in decision-making terms is a past expenditure incurred as a result of past decisions,which: i) Has been charged as a cost of sale in a previous accounting period OR ii) Will be charged in a future accounting period, although the expenditure has already been incurred (or the expenditure decision irrevocably taken). An example of this type of cost is depreciation. if the fixed asset has been purchased, depreciation may be charged for several years but the cost is a sunk cost about which nothing can now be done.

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ADDING A NEW PRODUCT Following factors are to be considered: 1- working capital :cash to be invested in stock and debtors , as well as 2incremental admin.costs, 3-advertising, 4-incremental marketing costs, etc.

DROPPING A PRODUCT OR DIVISION 1) Following factors are to be considered: i) Production capacity taken up by product : (1) Under-utilisation condition of capacity : if it at least contributes to fixed costs it should not be dropped. (2) Operating At Full Capacity: strong consideration should be given to an alternative product if it has a higher ‘Contribution’ . ii) Long term prospects for recovery of demand iii) Market competition iv) The cash break-even point /CHART (1) The cash break-even point is only a short term solution where the long term prospects for recovery are good. (2) Where the CVP chart shows the profit break even point below which a company is said to be making a loss, (3) the CASH BREAK-EVEN CHART is an analysis based on the receivable cash from sales minus the outflow of all cash payable.It ignores all NON-CASH OUTLAYS and takes account of time lags in accounts receivable and payable. Eg depreciation could make a difference between the 2 chart types. So if cash outflows are low the company could SAFELY continue to operate at a financial actual loss without big risk of INSOLVENCY.

MAKE OR BUY DECISION 1) Includes outsourcing a service (eg: IT Dept functions. ) 2) Qualitative as well as Quantitative aspects must be considered: a) QUALITATIVE ASPECTS: i) Consideration of competitiors economies of scale. ii) Consideration of inhibited future expansion due to the tying up of available capacity. iii) Reduction in dependence on outside supplier. iv) Internal quality control, rather than relying on outside companies quality control dept. v) Risk of destroying long term relationships with suppliers which may prove to be harmful and disruptive. vi) Technology change often makes internal production more costly than purchasing from outside. b) QUANTITATIVE ASPECTS : i) This means the Actual numbers involved : see example below. 3) METHOD: a) You only use Variable costs to go and calculate the Differential cost between making or buying the product. So only relevant costs are considered, not sunk costs like overheads eg rent + depreciation.

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SPECIAL ORDERS 1) To work this out , do an “incremental analysis” ( income statement – all costs&profit added up one by one sort of)of new order then minus any loss of sales from production capacity (less commission etc.) to get the final answer. 2) A special order is one that will not affect a companies current sales to its regular customers (often as an export). It is usually sold at below full cost – by using contribution to work out an extra low price, because overheads are covered by sales to normal customers. { {Note : Be careful : even doing this for export can cause the goods to re-appear on the local market at lower price than you usually even sell at.} 3) The following qualitative aspects must be considered for special orders: a) The effect of selling at lower prices to use excess capacity: the buyer might undersell you to your normal customers. b) One might have to use normal customers capacity to fulfill a large order and loose normal sales. c) The special order may be packaged in a different brand so as not to compete with the normal sales, or sold on a foreign market. d) Price must cover variable costs, special shipping& production costs and then still have some contribution(profit) left to make it viable e) Opportunity cost of tying up the plant must be considered. f) Effect on commissions paid to company staff. g) Accommodation of sales to existing customers h) Future long term contracts from company requesting a special order price.( now they always want the low price, not just once,- your normal customers will want it too if they ever find out!) i) Market factors: how will the special order affect our competitiors attitude to pricing. 4) Example:

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IMPORTANT : USE THE RELEVANT COSTING DECISION MODEL AS AN AID IN CHOOSING AMONG COMPETING ALTERNATIVES. 1) LABOUR VS CAPITAL INTENSIVE EVALUATION: To Evaluate by Normal Method: a) first calc. the fixed costs, then evaluate how long it will take to break even. b) Next calc. indifference point: fixed+variable x X = fixed + variable x X. (???when on a time-volume line both are equal- or what???) c) Draw a graph to see which is more profitable ABOVE the indifference point. d) To evaluate a decision with limiting factors, choose the one which maximizes profit on the basis of contribution per limiting factor. 2) LIMITING FACTORS EVALUATION: How To Evaluate Management Accounting Information For All Questions And In Particular Where There Is A Limiting Factor a) Step1-5 Simplified: 1-sort variable/fixed costs+ work out totals.2-do contribution VS limiting factors(bottlenecks). Step 1 Sort out the information given by evaluating fixed costs and variable costs, both budget and actual. Virtually all questions require an analysis of the cost structure. Have headings, eg fixed costs, variable costs, high / low, absorption costing, variable costing. You will invariably be given information on a variable costing or absorption costing basis that requires you to sift through the information and show the costs as variable costs or fixed costs. Step 2 Identify maximum production capacity for machinery or labour and show whether there is a limiting factor. Headings should read “Potential limiting factor — machine hours”, (or labour hours or material, etc). You must also conclude whether there is a limiting factor for each cost analysed. Step 3 When there is a limiting factor, you must determine the contribution per unit, followed by the cost per limiting factor. Step 4 Do the budget. Step 5 Evaluate possible alternative information that may change the contribution per unit determined in Step 3 above.

NOTE :EXAMPLE OF CONTRIBUTION PER LIMITING FACTOR WHERE BUYING IN IS A PROBLEM.

This is often a problem for students . Where there is an option to buy in , the correct method is to calc. the contribution per limiting factor.Method is shown here:

M A C N 1 0 1 M a n a g e m e n t A c c o u n t i n g N o t e s P a g e | 100 3) 2 Alternative Decisions: is about comparing a capital–intensive business to a labour intensive-business. 4) When evaluating a business decision or when answering an examination question that requires an opinion on how a business should be structured you should consider the following: a) BUSINESS COST STRUCTURE Business is about maximising contribution and minimising ‘overheads’.The goal should be lower fixed costs to be able to generate a positive contribution or profit faster.When starting a company it is therefore better to start small and not ‘too flashy’ in order to minimise the fixed costs. If the business does not work, your losses will be restricted to the fixed costs. Low fixed costs, however, tend to go hand in hand with high variable costs. The contribution per unit for new companies will normally tend to be relatively low. b) FIRST MILESTONE The first objective of a business should be to break even. If a company cannot break even in the short to medium-term, it is probably a bad investment. You should therefore always determine the 1-break even point and the 2-margin of safety. Companies with a low fixed cost structure or low overheads will be less risky than companies with high fixed costs. In an examination question asking for advice how a company is performing, focus your answer on an analysis of the companies cost structure, ie its fixed costs and contribution per unit. c) MEDIUM /LONG TERM OBJECTIVE: Once a company has established itself and has passed the break-even point, the company will look to changing its cost structure so that the contribution per unit increases. Invariably, this means moving from a ‘low fixed cost, high variable cost’ cost structure to a ‘high fixed cost, low variable cost’ cost structure. It therefore becomes important at this point to determine the Production Point Of Indifference, ie where the total cost of a capital-intensive company = the total cost of a labour-intensive company d) LONG-TERM OBJECTIVE The long-term objective should be to maximise return on investment. Companies should therefore aim at increasing sales and reducing variable costs. In the long-term, a company will aim at minimising the variable costs of production, and therefore maximise contribution. Targeting fixed costs is counter-productive. Fixed costs are the engine-room of the company and represent the manufacturing assets that generate sales profit. If the overheads are too high, it is because the sales are too low. Target sales, and the costs will look after themselves. Most companies, when faced with difficult times, tend to target fixed costs such as salaries and the infrastructure of the company, which often leads to a slow death. It is better to target variable costs which will increase contribution and sales rather than a cost reduction. Always focus on sales. d) EXAMPLE: The example below evaluates two production options, high fixed costs, low variable costs vs. the option of low fixed costs and high variable costs. In examinations, you must focus on the overall discussion. 1- Effects of different cost structure (VARIABLE – FIXED –CONTRIBUTION) 2 -Break-even point 3 -Point of indifference ; indifference point 4 -Long-term cost structure

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Still to do: 1- METHOD EXACTLY OF HOW TO DO THE INDEIFFERECE POINT 2-ALL THE RATIOS TO USE AND WORK OUT IN THE EVALUATION PROCESS 3-EXAMPLES OF LIMITING FACTORS & METHOD IN OWN WORDS. See all following scans for ‘still to do’ +/-

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