Management Accounting

Controller (Chief Accounting Officer)

- Supervises all accounting departments

- Participates in planning, controlling, and decision making activities

- Responsible for both internal and external accounting requirements

Treasurer

- Responsible for finance function

- Raises capital, manages cash, investment, and Investor Relations

- In charge of credit and collections as well as insurance

Planning

- detailed formulation of future actions to achieve a particular end

- requires setting objectives and identifying methods to achieve those objectives

Controlling

- a managerial activity of monitoring a plan’s implementation and taking corrective action

- achieved with the use of feedback

Continuous Improvement

- relentless pursuit of improvement in the delivery of value to customer

- required to remain competitive or to establish a competitive advantage

Decision Making

- process of choosing among competing alternatives

(An information system is designed to provide information to people in the company who
might need it)

Inputs:

FINACC: Well-specified economic events
CMGMT: Set by management

Processes:

FINACC: Rules and conventions established by the SEC, FASB, IASB...
CMGMT: Not bound by externally imposed criteria

Outputs:

FINACC: Financial statements for external users
CMGMT: Information for 3 broad objectives:

                1. Costing out services, products, and other objects of interest to management
                2. Planning and control
                3. Decision making

Value Chain

The set of activities required to design, develop, produce, market, deliver, and provide post-sales service for the products and services sold to customers

Cost

Cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future benefit (e.g. workers in the assembly line)

Expenses

Expired (used up) costs that are deducted from revenues to calculate income (e.g. salaries, they are gone after)

Loss

Cost that expires without producing any revenue benefits (e.g. cost of uninsured inventory destroyed by a flood)

Assets

Unexpired costs that appear on the balance sheet (e.g. machines)

-> The main difference between a cost being classified as an expense or as an asset is timing!!

Cost Objects

- Things for which costs are measured and assigned (here, acuraccy is crucial!)

- Includes products, customers, departments, projects, activities, etc.

Traceability

Ability to assign a cost directly to a cost object in an economically feasible way by means of a causal relationship

a) Direct Tracing

Process of identifying and assigning costs to a cost object that are specifically or physically associated with the cost object. Direct tracing is most often accomplished by physical observation.

b) Driver Tracing

Use of drivers to assign costs to cost objects (e.g. machine hours)
(Drivers are factors that cause changes in resource usage, activity usage, costs, and revenue. They can be observed and measure a cost object’s resource consumption)

- Indirect costs cannot be traced to cost objects

- Assignment of indirect costs (e.g. lighting of a plant) is called allocation 
(Since no causal relationship exists, allocating indirect costs is based on convenience or some assumed linkage... not very accurate but e.g. required for external reporting)

Tangible Products:

Goods produced by converting raw materials into finished products

Services:

Tasks or activities performed for a customer or activity performed by a customer using an organization's products or facilities

Dimensions that differ services from tangible products:

- Intangibility
- Perishability (Vergänglichkeit)
- Inseparability

Production (or product) costs

Costs associated with manufacturing goods or providing services

Nonproduction costs

Costs associated with the functions of selling and administration

Direct materials

Materials traceable to the goods or services being produced (e.g. cost of wood in furniture)

Direct labor

Labor traceable to the goods or services being produced (e.g. wage of assembly line workers / pilots...)

Overhead

Production costs OTHER than direct material and direct labor (e.g. plant depreciation, utilities, property taxes, indirect materials, indirect labor etc.)

Prime cost

Direct Materials cost + Direct Labor cost

Conversion cost

Direct Labor Cost + Overhead cost

(can be interpreted as the cost of converting raw materialsinto a final product)

-----> SEE CORNERSTONE 2.1

Marketing (selling) costs

Costs necessary to market and distribute a product or service (e.g. advertising, storage, freight-out)

Administrative costs

Costs that cannot be reasonably assigned to either marketing or production (e.g. salaries, legal fee, R&D)

-> Marketing and administrative costs are NOT inventoried and are called Period Costs. That means they are expensed in the period in which they are incurred.

Income Statement

- Follows the standard format (for external parties)
- Referred to as absorbtion-costing income or full-costing income cause all manufacturing costs are fully assigned to the product
- Expenses are separated according to function and then deducted from revenues to arrive at income
- Two major functional categories: Cost of goods sold and operating expenses

Cost of goods manufactured (needed to calculate CoGS)

- total manufacturing cost of goods completed during the current period (only of direct materials, direct
labor, and overhead)

Cost of goods sold

- manufacturing cost of the units that were sold during the period.

(It is important to remember that the cost of goods sold may or may not equal the cost of goods manufactured. In addition, we must remember that the cost of goods sold is an expense, and it belongs on the income statement)

------> SEE CORNERSTONE 2.2 AND 2.3

Traditional Cost Accounting

- Assumes that all cost can be classified as fixed or variable
- Uses only unit-based activity drivers to assign costs (e.g. direct labor hours or machine hours)

Traditional Cost Control

- Assigns costs to organizational units
- Holds organizational unit manager responsible for controlling the assigned costs (Performance is measured by comparing actual outcomes with standard or budgeted outcomes)
- Traces costs to individuals who are responsible for costs

Activity-Based Cost Accounting

- Emphasizes tracing over allocation
- Uses both unit- and non-unit-based activity drivers (e.g. "moving materials"...)

Activity-Based Cost Control

- Focuses on accountability for activities rather than for costs
- Activity-based management (ABM) focuses on improving customer value (and the profit the company as a whole (!) makes through this improvement)

.

Cost Behavior

- Term to describe whether a cost changes when the level of output changes
- Fixed: cost does not change
- Variable: cost does change

Cost Object

- Item for which managers want cost information
- Tangible products or services (depending on the firm)

Measures of Output

- Activity drivers explain changes in activity costs by measuring changes in activity output (usage)
- 2 Categories:
      a) Unit-level drivers (more costs per unit produced)
      b) Non-unit level drivers (e.g. inspection hours; not affected by no. of units produced)

Fixed Costs are costs that in total are constant within the relevant range as the level of activity drivers varies

(relevant range: e.g. once the volume of production increases to a specific level, a second supervisor might be needed)

- Variable costs are costs that in total vary in direct proportion to changes in an activity driver

- The total cost of direct materials for each level of production varies, but the unit cost stays the same

Mixed costs are costs that have both a fixed and a variable component

Total Cost = Fixed Cost + Total Variable Cost

(more units = lower costs because fixed costs are spread over more units)

Resources

- Economic elements that enable one to perform activities
- Resources needed to perform an activity: Activity capacity
- Practical capacity is activity level where activity is performed efficiently

a) Flexible Resources

- Supplied as needed and used
- Quantity supplied = quantity demanded
- No unused capacity (JIT)

e.g. using kilowatt-hours as the driver, as the demand for power increases, the cost of power increases.

b) Committed Resources

- Supplied in advance of usage
- A given quantity is obtained, whether or not that full amount is used
- Unused capacity is possible

e.g. employees

Step-Cost Behavior

A step cost function displays a constant level of cost for a range of output and then jumps to a higher level of cost at some point

a) Step-variable costs

- Follow a step-cost behavior with narrow steps (pretty much variable costs themselves...)

b) Step-fixed costs

- Follow a cost-step function
- Once a relevant range is exceeded, the costs increase "one step"

----> SEE CORNERSTONE 3.2

Mixed Cost Behavior

Many activities have characteristics of both flexible and committed resources

e.g. power department aquires long-term capacity by investing in a building and equipment but it also aquires fuel to produce power on an as-needed basis

Cost Separation

The Industrial Engineering Method

A forward‐looking method of determining, through physical observation and analysis, just what activities, in what amounts, are needed to complete a process (e.g. Zeit im Excel eintragen...)

The Account Analysis Method

Used to estimate costs by classifying accounts in the general ledger as fixed, variable, or mixed (by judgement and experience)

High-Low Method

Take two points (the high and the low by volume of activity) and determine the slope and intercept
• Slope is variable rate
• Intercept is fixed cost

Advantages

• objective
• simple to calculate

Disadvantages

• high and low points may be “outliers”
• Other pairs of points may clearly be more representative

---> SEE CORNERSTONE 3.4

Scatterplot Method

Uses a scattergraph to visually assess the relationship between cost and output
– Intercept is fixed cost
– Slope is variable rate

Advantages

• Allows for visual inspection of the data
• Identifies nonlinearity, outliers, and shifts in the cost relationship

Disadvantages

• subjective

Learning Curve

Shows how labor hours per unit decrease as units produced increase

Experience Curve

Relates cost to increased efficiency: the more you perform a task the lower the cost of doing it

Cumulative Average-Time Learning Curve (focus!)

States that the cumulative average time per unit decreases by a constant percentage
• The learning rate is expressed as a percent

-----> SEE CORNERSTONE 3.8

Incremental Unit-Time Learning Curve

The incremental unit‐time learning curve model decreases by a constant percentage each time the cumulative quantity of units produced doubles

 Managerial Judgement

The most widely used method in practice

• Managers may just use their experiences and observations to determine fixed and variable costs

• Managers may identify mixed costs and use experience to determine what part is fixed – thus denoting the rest as variable

• This is a simple method and can yield good results when the manager has a good understanding of the processes
– However poor judgment yields poor results

 Unit-based Costing

1. assign overhead costs to a functional unit, creating either plant or departmental cost pools

2. these pooled costs are assigned to products using predetermined overhead rates based on unit-level drivers

Predetermined Overhead Rate

Budgeted annual overhead
Budgedet annual driver level        (e.g. machine hours...)

Applied Overhead

Overhead rate x actual driver usage

First-stage cost assignment

Budgeted overhead costs are assigned to plantwide pool

Second-stage cost assignment

Overhead costs are assigned to products by multiplying the rate by the actual total direct labor hours used by each product

---> SEE CORNERSTONE 4.1