Transcript TM 661 Engineering Economics for Managers

IENG 216
Cost Accounting
Flexible Budgeting
 Geared towards a range of activities
 Dynamic rather than static
Flexible Budgeting
 Geared towards a range of activities
 Dynamic rather than static
Need to understand rudiments of cost
accounting
 Job order costing
 Process costing
 Activity based costing
Job Order Costing
 K-Corp collects its cost data by the job order
cost system. For each job, they know the
amount and material costs. Direct labor costs
are $9.50 per hour. Factory overhead rate is
computed at $4.50 per hour.
J o b O rd e r C o s t in g
D ire c t M a t e ria ls
H rs
Rate
Co s t
7/ 14 Is s u e d
$1,200
7/ 20 Is s u e d
800
7/ 25 Is s u e d
500
T o tal
$2,500
D ire c t La b o r
W e e k 7/ 20
180
$9.50 / h r
$1,710
W e e k 7/ 26
160
$9.50 / h r
1,520
T o t a l La b o r
$3,230
C o s t S u m a m ry
D ire c t M a t e ria l
$2,500
D ire c t La b o r
F a c t o ry O v e rh e a d
3,230
340
$4.50 / h r
T o tal Co s t
1,530
$7,260
S e ll P ric e
J o b P ric e
C o s t + 40%
$10,164
Process Costing
 A Company produces and sells a chemical
product. During a given month the company
purchases 15,000 gallons of chemicals at a
cost of $30,000. 10,000 gallons are
completed and transferred to the next
department. 5,000 gallons are 20% complete
as to conversion. Factory overhead for the
month is $20,000.
Process Order Costing
Items
Chemicals
Conversion Costs
Chemicals Transferred
Work in Process
(20% of 5,000)
Total Conversion
Total Costs
Units
15,000
Cost
Cost/Unit
$30,000
$2.00
$20,000
$50,000
$1.82
$3.82
Ending Work in Process
Materials
Conversion Cost
Total Work in Process
Completed & Transferred
Total Costs Accounted
Units
Cost/Unit
5,000
$2.00
1,000
$1.82
Cost
$10,000
1,818
$11,818
38,182
$50,000
10,000
1,000
11,000
10,000
$3.82
Activity Based Costing
 Historically
direct labor & material constitute significant
elements of cost of goods sold
 Current
overhead costs dominate the cost of production
 Activity-based costing
is designed to meet the challenge of a changing
cost mix by associating manufacturing costs with
activities which drive them
ABC Two-Step Process
 Define Cost Pools
(usually support functions)
 Identify Cost Drivers
(trace costs to the cost pools)
ABC Example
 A multinational firm uses traditional
accounting to allocate manufacturing and
management support costs. However, travel
is typically allocated on the basis of
employees at plants in France, Germany,
Italy, and Greece. Consequently, some
plants are likely generating much more
management travel than others. The ABC
system is chosen to more precisely allocate
travel costs to major product lines.
ABC Example
Total Travel
Total Employment
Total Vouchers
Travel Rate
$500,000
29,100
500
$17.18
Traditional Costing
Plant
France
Italy
Germany
Greece
Travel
Employees Allocation
12,500
$214,777
8,600
147,766
4,200
72,165
3,800
65,292
travel
budgetbudget
travel
Indirect
cos
t
rate
=
Indirect cost ratetotal
= workforce
total workforce
$500,000
=
=000
$17.18
$500,
29
,
100
=
= $17
29,100
ABC Example
1. Determine Cost Pool
ABC Cost Pool
Plant
France
Italy
Germany
Greece
Plant
Employees
Budget % to Travel
12,500
$2,000,000
5.0%
8,600
500,000
15.0%
4,200
1,000,000
17.5%
3,800
500,000
30.0%
Total
Travel
$100,000
75,000
175,000
150,000
$500,000
ABC Example
2. Determine Cost Driver
travel travel cos t pool
ABC rate =
total vouchers
$500,000
=
= $1,000
500
ABC Example
Driver Distribution
Travel Vouchers
Plant
France
Italy
Germany
Greece
Total Vouchers
1
50
80
100
230
2
25
Product Line
3
4
30
25
50
5
30
20
30
20
140
170
Total
75
140
145
140
500
ABC Example
Allocation of Costs
Travel Vouchers
Plant
France
Italy
Germany
Greece
Total Vouchers
1
50,000
80,000
100,000
$230,000
2
25,000
Product Line
3
4
30,000
25,000
$50,000
5
30,000
20,000
$30,000
$20,000
140,000
$170,000
Total
$75,000
140,000
145,000
140,000
$500,000
Value Added
 Examines the difference between the net
operating profit (after tax) and the cost of
capital
 Four ways to create value for shareholder
 increase
profit margins without increasing capital
 invest in projects that earn more than cost of
capital
 free-up capital than earns less than cost of capital
 use debt to reduce the cost of capital
Value Added
 Which is the better firm from a shareholder’s
point of view?
A
Assets (millions)
Owner Equity
Net Income
ROA
ROE
B
$100
100
24
24%
24%
$200
200
42
21%
21%
Value Added
 Firm B has largest Economic Value Added
(EVA)
A
B
Assets (millions)
Owner Equity
Net Income
ROA
ROE
Cost of Capital (12%)
EVA ( NI - CoC )
$100
100
24
24%
24%
$200
200
42
21%
21%
12
$12
24
$18
Value Added
 Firm B has largest Economic Value Added
(EVA)
A
B
Assets (millions)
Owner Equity
Net Income
ROA
ROE
Cost of Capital (12%)
EVA ( NI - CoC )
$100
100
24
24%
24%
$200
200
42
21%
21%
12
$12
24
$18
Maximizing ROI is not the right objective!