AKUNTANSI MANAJEMEN LANJUTAN

AKUNTANSI MANAJEMEN LANJUTAN
DESENTRALISASI PENGENDALIAN OPERASIONAL om

PERTEMUAN I, 30 September 2013 REVIEW KONSEP AKUNTANSI MANAJEMEN
AKUNTANSI PERTANGGUNGJAWABAN DESENTRALISASI DAN HARGA TRANSFER

REVIEW KONSEP AKUNTANSI MANAJEMEN

Definition of Management Accounting: IMA
Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy.

Managerial Accounting as a Career
Professional Organizations Institute of Management Accountants (IMA) Publishes Management Accounting and research studies. Administers Certified Management Accountant program Develops Standards of Ethical Conduct for Management Accountants

Professional Ethics Ethical business practices build trust and promote loyal, productive relationships with customers, employees and suppliers. Many companies have written codes of ethics which serve as guides for employees to follow.

Resolution of Ethical Conflict
Professional Ethics Competence Confidentiality Integrity Objectivity Resolution of Ethical Conflict

Professional Ethics Follow applicable laws, regulations and standards.
Maintain professional competence. Competence Prepare complete and clear reports after appropriate analysis.

Professional Ethics Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage. Confidentiality Ensure that subordinates do not disclose confidential information.

Professional Ethics Avoid conflicts of interest and advise others of potential conflicts. Do not subvert organization’s legitimate objectives. Integrity Recognize and communicate personal and professional limitations.

Professional Ethics Avoid activities that could affect your ability to perform duties. Refrain from activities that could discredit the profession. Refuse gifts or favors that might influence behavior. Integrity Communicate unfavorable as well as favorable information.

Professional Ethics Communicate information fairly and objectively.
Objectivity Disclose all information that might be useful to management.

Professional Ethics Resolution of Ethical Conflict Follow established policies of your organization. If unresolved or if policy does not exist: Clarify relevant concepts in a confidential discussion with an objective advisor to explore possible courses of action. Discuss problem with immediate supervisor.

Professional Ethics Resolution of Ethical Conflict If immediate supervisor is involved in the unethical behavior, discuss at the next level. If problem is not resolved, the last resort is to resign. Generally, do not communicate ethical conflicts to outsiders.

Major Themes in Managerial Accounting
Behavioral Issues Information and Incentives Costs and Benefits Managerial Accounting

Evolution and Adaptation in Managerial Accounting
Service Vs. Manufacturing Firms Computer-Integrated Manufacturing Information and Communication Technology Emergence of New Industries Change Global Competition Product Life Cycles Total Quality Management Focus on the Customer Cross-Functional Teams Time-Based Competition Continuous Improvement Just-in-Time Inventory

Managerial Accounting in Modern Production Environments
Key developments that reshaped Managerial Accounting include: Integrated information systems Web hosting Just-in-time and lean production Total Quality Management Theory of constraints Benchmarking and continuous improvement

The Goal of Good Management is to Create Value
Cost Management is applying the value criteria to every decision we make, every activity we perform, and every process we complete. Modern accounting systems do not just evaluate good stewardship but must provide managers with the information managers need to improve value. Management accounting systems are used to enhance both decision making and management control. Management accounting systems do not need to be perfect, only ‘good enough’ to increase value. We think it is fair to explain our definition of value. We limit our definition of value to the creation of current and future cashflows. This ignores value to owner stakeholders that may not create cashflows. We expand this idea later in the text to discuss and define stakeholders as groups of individuals that can influence the value of an organization. This is an opportunity for the instructor to discuss the influence of personal value or preferences on the costs of operations. For example ‘If you like your job, you will work for less’. You may wish to use as a discussion question the following. What kinds of value to you think are important for managers to consider because they will influence future cashflows? Any of these activities will influence value (cashflows). Cashflows from customers. Cashflows paid for wages and materials. The image of the company will influence customer loyalty, thereby increasing or decreasing revenue. The training and working conditions of employees will influence the wages they demand, and their productivity levels.

New Management Trends to Create Value
Encourage Management Accounting Systems Redesign, for example. Customer focus Quality focus Delivery focus Outsourcing and the virtual company Communications Shortening product life cycles Team development Deregulation in the service sector 1. CUSTOMER FOCUS: Companies try to provide differentiated products that have unique value. Information on the cost and value of unique features are needed. 2. QUALITY FOCUS: Means companies provide goods and services as specified to both internal and external customers. This requires information on the costs of quality and progress towards total quality management. 3. DELIVERY FOCUS: Means delivering goods and services as promised. The performance and costs of this goal needs to be monitored. 4. OUTSOURCING AND THE VIRTUAL COMPANY: Companies need to identify their ‘core’ competencies and outsource things they do not do well to other companies. This requires activity based measurement systems based upon quality, delivery and value-chain costs. 5. COMMUNICATIONS: This refers to the dramatic improvement in communications technology. Information is much more timely and available. 6. SHORTENING PRODUCT LIFE CYCLES: Short product life cycles force companies to manage product lines from the initial design stage more often. This requires new accounting systems to provide the support for this activity. 7. TEAM DEVELOPMENT: Teams working across functional groups are needed to efficiently and effectively manage dynamic environments. Accounting information is needed to establish priorities and communicate among functional groups. 8. DEREGULATION IN THE SERVICE SECTOR: With deregulation service industries need to make cost effective decisions that reflect the value of services to customers.

Perubahan Lingkungan Bisnis
Menentukan hal apa saja yang tidak perlu dilakukan, bagaimana perusahaan harus dikelola dan bagaimana pekerjaan dilakukan Beberapa praktek manajemen: JIT (Just In Time) Manajemen Mutu Total (TQM) Rekayasa Ulang Teori Kendala (Theory of Constrain/TOC)

JIT (Just In Time) Sistem Pengendalian Persediaan dan Produksi JIT:
>> Membeli BB dan memproduksi unit output sesuai dengan permintaan aktual dari pelanggan >> Persediaan dikurangi sampai pada tingkat minimum (bahkan sampai titik nol) Dampak JIT (perush. Manufaktur): >> Efisiensi dan mengurangi biaya (penyimpanan dan pemesanan) serta meningkatkan efisiensi dan efektifitas operasi. Bahan bahan baku yang diterima segera masuk ke proses produksi, bahan produksi lainnya segera digabungkan dan dikerjakan, dan produk yang telah jadi segera dikirimkan kepada pelanggan.

TQM (Total Quality Management)
Perbaikan terus menerus yang memiliki karakteristik : >> Fokus pada pelayanan pelanggan >> Pemecahan masalah secara sistematis dengan menggunakan tim yang ada di garda depan yang dibekali dengan salah satu alat manajemen >> Penentuan tolok ukur (benchmarking) yang dilakukan dengan mempelajari organisasi terbaik yang ada untuk menjelaskan tugas tugas tertentu.

Gambaran utama TQM adalah meningkatkan produktivitas
Increased emphasis on product quality because goods are produced only as needed Total Quality Management (TQM) - a philosophy of zero defects - Gambaran utama TQM adalah meningkatkan produktivitas dengan mendorong penggunaan pengetahuan dalam mengambil keputusan dan menekan perilaku defensif yang tidak produktif. LO 8 Identify trends in management accounting.

Rekayasa Ulang Proses (Process Reengineering-PR)
Meliputi desain ulang secara menyeluruh proses bisnis dalam rangka menghilangkan aktivitas yang tidak bernilai tambah dan mengurangi kemungkinan terjadinya kesalahan. Rekayasa ulang mengandalkan pada spesialis dari luar perusahaan. >> Merupakan pendekatan yang lebih radikal dibandingkan TQM >> Sebagai ganti perbaikan sistem yang dirancang serial dan bertahap. >> Dalam PR suatu proses bisnis diplot dalam sebuah diagram secara detail, dikritik dan kemudian dirancang ulang untuk menghilangkan langkah-langkah yang tidak diperlukan, mengurangi kemungkinan terjadinya kesalahan dan mengurangi biaya. Proses bisnis adalah serangkaian tahapan yang harus dilakukan untuk menjalankan tugas-tugas dalam dalam suatu bisnis.

Teori Kendala (Theory of Contrains/ToC)
Menekankan pada pentingnya mengelola kendala yang dihadapai oleh organisasi. Karena kendala adalah sesuatu yang menghalangi organisasi, proses perbaikan akan efektif kalau difokuskan pada kendala yang dihadapi Teori kendala didasarkan pada pandangan bahwa manajemen kendala secara efektif merupakan kunci keberhasilan

Activity-Based-Costing (ABC)
Allocates overhead based on use of activities Results in more accurate product costing and scrutiny of all activities in the value chain Balanced Scorecard Evaluates operations in an integrated fashion Uses both financial and non-financial measures Links performance measures to overall company objectives LO 8 Identify trends in management accounting.

Review Question Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner? Just-in-time inventory. Total-quality management. Balanced scorecard. Activity-based costing. LO 8 Identify trends in management accounting.

The Strategic Approach to Teaching Management Accounting Topics —An Introduction

Strategic Cost Management: Basic Concepts
Strategic decision making is choosing among alternative strategies with the goal of selecting a strategy, or strategies, that provides a company with reasonable assurance of long-term growth and survival The key to achieving this goal is to gain a competitive advantage. Strategic cost management is the use of cost data to develop and identify superior strategies that will produce a sustainable competitive advantage.

A Model of the Decision-Making Process

Competitive Advantage
Competitive advantage is the process of creating better customer value for the same or lower cost than that of competitors or creating equivalent value for lower cost than that of competitors. Customer value is the difference between what a customer receives (customer realization) and what the customer gives up (customer sacrifice). The total product is the complete range of tangible and intangible benefits that a customer receives from a purchased product.

Michael Porter: Strategic Positioning
Cost Leadership—outperform competitors by producing at the lowest cost, consistent with quality demanded by the consumer Differentiation—creating value for the customer through product innovation, product features, customer service, etc. that the customer is willing to pay for

Aspects of the Two Competitive Strategies

Strategic Positioning
There are three general strategies that have been identified: cost leadership product differentiation focusing

Strategic Positioning
A cost leadership strategy happens when the same or better value is provided to customers at a lower cost than a company’s competitors. Example: A company might redesign a product so that fewer parts are needed, lowering production costs and the costs of maintaining the product after purchase.

Strategic Positioning (continued)
A product differentiation strategy strives to increase customer value by increasing what the customer receives (customer realization). Example: a retailer of computers might offer on-site repair service, a feature not offered by other rivals in the local market.

Strategic Positioning (continued)
A focusing strategy happens when a firm selects or emphasizes a market or customer segment in which to compete. Example: Paging Network, Inc., a paging services provider, has targeted particular kinds of customers and is in the process of weeding out the nontargeted customers.

Consequences of Lack of Strategic Cost-Management Information
Decision-making based on guess and intuition Lack of clarity about direction and goals Over time, lack of a clear and favorable perception of the firm by customers and suppliers Incorrect decisions: choosing products, markets, or manufacturing processes that are inconsistent with the organization’s strategy For control purposes, cannot link performance effectively to strategic goals …

Tools for Integrating Strategy into Management Accounting
-- The Value Chain -- Strategy Maps & the Balanced Scorecard (BSC)

Introducing Strategy Strengths OpportunitiesThreats Weaknesses
Map Balanced Scorecard (BSC)

For a manufacturing firm these include the following:
Value Chain Refers to all activities associated with providing a product or service For a manufacturing firm these include the following: LO 8 Identify trends in management accounting.

Industrial Value Chain
The industrial value chain is the linked set of value-creating activities from basic raw materials to the disposal of the finished product by end-use customers. Fundamental to a value-chain framework is the recognition that there exist complex linkages and interrelationships among activities both within and external to the firm.

Value Chain Analysis: A Detailed Look at Strategy…
The Value Chain is a linked set of value-adding activities used by an organization to deliver its value proposition to its customers. It consists of: “Upstream” Activities Manufacturing/Operations “Downstream” Activities

Value-Chain Analysis Develop competitive advantage by:
Identify value-chain activities Develop competitive advantage by: Identifying opportunities for adding value for the customer Identifying opportunities for eliminating non- value added activities and reducing cost Understand linkages among suppliers, the entity, and customers

Internal and External Linkages
There are two types of linkages that must be analyzed and understood: internal and external linkages. Internal linkages are relationships among activities that are performed within a firm’s portion of the value chain. External linkages describe the relationship of a firm’s value-chain activities that are performed with its suppliers and customers. There are two types: supplier linkages and customer linkages.

Strategy Maps & the Balanced Scorecard (BSC)
The BSC and Strategy Map are used to align the organization’s activities with achieving strategic goals, using the four perspectives: Financial Customer Internal Processes Learning and Growth

vision & mission Integrate systems Develop employee skills Internal
Exceed shareholder expectations Diversify income stream Increase sales volume Improve profit margins Financial Diversify customer base Increase sales to existing customers Customer Attract new customers Internal Process Target profitable market segments Optimize internal processes Develop new products Attract new customers Learning & Growth Develop employee skills Integrate systems

The Balanced Scorecard (BSC): Feedback to Strategy
Map Balanced Scorecard (BSC)

Activity-Based Costing (ABC), RCA, and TDABC

Evolution of Cost Accounting Systems
ABC (simple & minimal) ABC (multidimensional) Traditional Costing Resources Resources Resources Consumed by Consumed by Allocated to Activities Activities Consumed by Consumed by Cost Objects Cost Objects outputs channels Cost Objects Users

ABC/M Framework What Things Cost Resource Drivers Resource Costs
Root Causes of Costs Work Activities Performance Measures Cost Reduction Process reengineering Cost of quality Continuous improvement Waste elimination Benchmarking Activity Cost Assignment Activity Drivers Cost Objects Design for manufacturing Make versus Buy Why Things Cost Better Decision Making

Organizational Activities and Cost Drivers
Organizational activities are of two types: structural and executional. Structural activities are activities that determine the underlying economic structure of the organization. Executional activities are activities that define the processes and capabilities of an organization and thus are directly related to the ability of an organization to execute successfully.

Organizational Activities and Drivers
Structural Activities Structural Cost Drivers Building plants Number of plants, scale, degree of centralization Management structuring Management style and philosophy Grouping employees Number and type of work units Complexity Number of product lines, number of unique processes, number of unique parts Vertically integrating Scope, buying power, selling power Selecting and using process Types of process technologies, technologies experience

Organizational Activities and Drivers
Executional Activities Executional Cost Drivers Using employees Degree of involvement Providing quality Quality management approach Providing plant layout Plant layout efficiency Designing and producing products Product configuration Providing capacity Capacity utilization

Operational Activities
Operational activities are day-to-day activities performed as a result of the structure and processes selected by the organization. Examples:Receiving and inspecting incoming parts, moving materials, shipping products, testing new products, servicing products, and setting up equipment.

Organizational and Operational Activity Relationships
Organizational Activity (Selecting and using process technologies) Structural Cost Driver (JIT: Type of process technology Operational Driver (Number of moves) Operational Activity (Moving material)

Internal Value Chain Design Service Develop Distribute Produce Market

Exploiting Internal Linkages
An Example: Assume that design engineers have been told that the number of parts is a significant cost driver and that reducing the number of parts will reduce the demand for various activities downstream in the value chain. They plan to reduce the price by per-unit savings. Currently 10,000 units are produced. The data of the new design and its effects on demand are given below: Current Expected Activity Cost Driver Capacity Demand Demand Material usage # of parts 200, ,000 80,000 Labor usage Labor hours 10,000 10,000 5,000 Purchasing # of orders 15,000 12,500 6,500 Warranty repair # of defects 1,

Exploiting Internal Linkages (continued)
Potential Savings : Material usage (200, ,000)$3 $360,000 Labor usage (10, )$12 60,000 Purchasing [$30,000 + $.50(12, ,500)] 33,000 Warranty repair [($28,000 + $20( )] ,000 Total $487,000 ====== Units 10,000 Unit savings $48.70

Activity-Based Customer Costing
An Example: Suppose that the Thompson Company produces precision parts for 11 major buyers. An activity-based costing system is used to assign manufacturing costs to products. The company prices each customer's order by adding order-filling costs to manufacturing costs and then adding a 20% markup (to cover any administrative costs plus profits). Order-filling costs total $606,000 and are currently assigned in proportion to sales volume (measured by number of parts sold). Of the 11 customers, one accounts for 50% of sales, with the remaining ten accounting for the remainder of sales. Orders placed by the smaller companies are also about the same size. Data concerning Thompson’s customer activity are given on PPT 13-22:

Exploiting External Linkages (continued)
Large Ten Smaller Customer Customers Units purchased 500, ,000 Orders placed Manufacturing cost $3,000,000 $3,000,000 *Order-filling cost allocated 303, ,000 Order cost per unit $0.606 $0.606 *Order-filling capacity is purchased in blocks of 45 (225 capacity), each block costing $40,400; variable order-filling activity costs are $2,000 per order; thus, the cost is [(5 x $40,400) + ($2,000 x 202)]

Exploiting External Linkage (continued)
Assume that ordering costs are allocated using a new driver: Large Customer Ten Smaller Customers Units purchased 500, ,000 Orders placed Manufacturing costs $3,000,000 $3,000,000 *Orders-filling costs 6, ,000 Order cost per unit $.012 $1.20 *Order-filling capacity is allocated using number of orders. The allocation rate is $3,000 pre order ($606,000/202 orders). Implications: By using a new driver, we are drastically reducing the ordering-cost per unit of the high volume customer (50% of our business). This information could assist Thompson in establishing a new strategy for pricing.

Product Life Cycle Viewpoints
There are three basic views of the product life cycle: Marketing viewpoint Production viewpoint Consumable life viewpoint

Marketing Viewpoint Units of sales
Introduction Growth Maturity Decline

Life Cycle Cost Management
Cost Commitment Curve Life Cycle Cost % 100 90 75 25 90 percent of life-cycle costs are committed at this point Research Planning Design Testing Production Logistics

A Life Cycle Costing Example
Suppose that engineers are considering two new product designs for one of its power tools. Both designs reduce direct materials and direct labor content over the current model. The anticipated effects of the two designs on manufacturing, logistical, and postpurchase activities costs are listed below: Cost Behavior Functional-based system: Variable conversion activity rate: $40 per direct labor hour Material usage rate: $8 per part ABC system: Labor usage $10 per direct labor hour Material usage: $8 per part Machining: $28 per machine hour Purchasing activity: $60 per purchase order Setup activity: $1,00 per setup hour Warranty activity: $200 per returned unit Customer repair cost: $10 per hour

Life Cycle Costing (continued)
Traditional Costing (Overhead allocated by direct labor hours) Design A Design B Direct materials $ 800,000 $ ,000 Conversion costb 2,000, ,200,000 Total manufacturing cost $2,800,000 $ 3,680,000 Units produced  10,  10,000 Unit cost $ $ ======== ======== a$8 x 100,000 parts; $8 x 60,000 parts b$40 x 50,000 direct labor hours; $40 x 80,000 direct labor hours

Life Cycle Costing (continued)
ABC Costing (Overhead allocated by direct labor hours) Design A Design B Classification Direct materials $ 800,000 $ 480,000 Manufacturing Direct labora 500, ,000 Manufacturing Machiningb 700, ,000 Manufacturing Purchasingc 18,000 12,000 Upstream Setupsd 200, ,000 Manufacturing Warrantye , ,000 Downstream Total product costs $2,298,000 $1,967,000 Units productd  10,  10,000 Unit cost $ $ Postpurchase costs $ ,000 $ ,000 ======== ======== a$5 x 50 ,000 hours ; $5 x 40,000 hours d$1,000 x 200 setups; $1,000 x 100 setups b$10 x 25,000 parts; $10 x 20,000 parts e$200 x 400 defects; $200x 1,000 defects c$60 x 300 design hours; $60 x 2000 design hours

Target Costing - Example
Assume that a company is considering the production of a new trencher. Current product specifications and the targeted market share call for a sales price of $250,000. The required profit is $50,000 per unit. The target cost is computed as follows: Target cost = $250,000 - $50,000 = $200,000

Target-Costing Model PRODUCT FUNCTIONALITY MARKET SHARE OBJECTIVE
TARGET PRICE TARGET PROFIT TARGET COST PRODUCT AND PROCESS DESIGN No TARGET COST MET? Yes PRODUCE PRODUCT

Resource Consumption Accounting (RCA)
Resource consumption accounting (RCA) is an adaption of ABC that emphasizes resource consumption by greatly increasing the number of resource cost pools, which allows more direct tracing of resource costs to cost objects than an ABC system with fewer cost centers. RCA is particularly appropriate for large organizations with repetitive operations and high-level information systems such as those provided by SAP, Oracle, and SAS.

Time-Driven ABC (TDABC)
When a substantial amount of the cost of a company’s activities are in a highly repetitive process (much like in the RCA example above), the cost assignment can be based on the average time required for each activity. Time-Driven Activity-Based Costing assigns resource costs directly to cost objects using the cost per time unit of supplying the resource, rather than first assigning costs to activities and then from activities to cost objects.

TDABC Example TDABC computes the cost per minute of the resources performing the work activity. Assume 2 clerical workers paid $45,000 annually perform a certain activity that is expected to require 17 minutes. TDABC calculates the total cost as $45,000 x 2 = $90,000; TDABC then calculates the total time available for the activity as 180,000 minutes (assuming 30 hours per week with two weeks vacation: 2 workers x 50 weeks x 30 hours x 60 minutes per hour = 180,000 minutes per year). The TDAC rate for the activity is $0.50 per minute ($90,000 / 180,000).The cost of a unit of activity is $0.50 x 17 min = $8.50; if the activity required 20 min, then the allocation would be $.50 x 20 = $10.

Customer Profitability Analysis

Customer Profitability Analysis
Customer Relationship Management (CRM): Customer Lifetime Value (CLV) Customer Equity

Customer Profitability Analysis:
The Whale Curve

What Makes for a Profitable Customer?
Profitable and unprofitable customers are distinguished by the demands they place on the organization Less profitable customers Small order quantities Special products ordered Heavy discounting Unpredictable demands Delivery times change High technical support Slow payment (imputed interest) More profitable customers Large order sizes Standard products ordered Little discounting Predictable demands Delivery times standard Low technical support On-time payment (imputed interest) These demands can be estimated by activity costs and activity cost drivers 52

Migrating Customers to Higher Profitability – A Strategic Analysis
Very Profitable Types of Customers High (Creamy) Profitable Product Mix Margin Unprofitable Low (Low Fat) Very unprofitable Low High Cost-to-Serve 78

Customer Relationship Management (CRM) Requires Strategic Cost Management Data
Who is more important to pursue with the scarce resources of our marketing budget? Our most profitable customers? Our most valuable customers? What is the difference? The “customer lifetime value” (CLV) measure is intended to answer this question.

You are a pharmaceutical supplier: which customer is more important?
Dentist A Sales = $750,000 profits = $100,000 Age 61 Dentist B Sales = $375,000 profits = $40,000 Age 25 Which is more profitable? Which is more valuable?

Customer Lifetime Value (CLV)
What is it? The projected economic value of customer relationships during the whole period of the relationship between the customer and company. The Measure The net present value (NPV) of all future profits from that customer; it is a projection, from when the customer is acquired or from the current date.

Customer Equity What is it?
The economic value of ALL customer relationships. The Measure The sum of the CLVs for all customers. How Used Provides a measure of the value of the company from the perspective of customer profitability.

The Management & Control of Quality (including Six-Sigma and Lean)

Relationship between TQM & Financial Performance

A Strategic Model for Managing Quality

Lean Manufacturing At the heart of lean manufacturing is the Toyota Production System (TPS): a long-term focus on relationships with suppliers and coordination with these suppliers; an emphasis on balanced, continuous flow manufacturing with stable production levels; continuous improvement in product design and manufacturing processes with the objective of eliminating waste ; and flexible manufacturing systems in which different vehicles are produced on the same assembly line and employees are trained for a variety of tasks

Accounting for Lean There are three reasons why the improvements in financial results typically appear later than the operating improvements from implementing lean. Customers will benefit from the improved manufacturing flexibility by ordering in smaller, more diverse quantities. Improvements in productivity will create excess capacity; as equipment and facilities are used more efficiently, some will become idle. The decrease in inventory that results from lean means that, using full cost accounting, the fixed costs incurred in prior periods flow through the income statement when inventory is decreasing.

Accounting for Lean Lean accounting uses value streams to measure the financial benefits of a firm’s progress in implementing lean manufacturing. Each value stream is a group of related products or services. Accounting for value streams significantly reduces the need for cost allocations (since the products are aggregated into value streams) which can help the firm to better understand the profitability of its process improvements and product groups.

Lean Accounting – Value Streams

Operational and Management-level Performance Measurement

Performance Measurement
Motivation and Evaluation Incentives: right decisions Align performance measurement with strategy Incentives: working hard Compensation and bonus plans Equity/fairness Controllability Cost allocations Operational-level and Management-level

Operational Performance Measurement with a Flexible Budget
2010 2010

Management Performance Measurement
Cost Centers Engineered Cost (cost driver: volume based) Flexible Budget Discretionary Cost (cost driver?) Master Budget “Profit Center” – one step from outsourcing…

Management Performance Measurement
Profit Centers: Variable costing income statements Issue of transfer pricing Role and importance of nonfinancial performance indicators Investment Centers: ROI vs. RI vs. EVA® Measurement issues Role and importance of non-financial performance indicators

Customer Plant Warehouse Management –Level
Performance Measurement: When to Use Profit or Cost Center Customer Plant Warehouse

Using Software in the Strategic Cost Management

Using Software in the Strategic Cost Management
Excel: Goal Seek Solver ABC: OROS (SAS), SAP, … Excel Simulation: Crystal Excel(Formulas/Functions)

ABC Software: OROS Quick (from SAS)
Comprehensive: resources through objects Allow a couple of classes Short Tutorial, 13 pages, couple of hours Blue Ridge Manufacturing Case

Introduction to Management Accounting
Strategic Positioning Ethics Implementing Strategy Product Costing Cost Behavior (Planning and Operational Control) Product Life Cycle The Value Chain The Balanced Scorecard Volume Based (Job Costing) Activity - based Cost Estimation CVP Analysis Master Budget Decision Making Flexible Budget s Target Life Management Control

Cost Accounting Managing Constraints · Strategic Positioning Ethics
Implementing Strategy Product Costing Cost Behavior (Planning and Operational Control) Product Life Cycle The Value Chain The Balanced Scorecard Job Costing ABC Costing Process Cost Joint Costs Standard Cost Estimation CVP Analysis (ABC) Master Budget Decision Making (ABC) Target Life Cycle Managing Constraints

Advanced Management Accounting
Strategic Positioning Ethics Implementing Strategy Cost Behavior (ABC - based) Product Life Cycle The Value Chain The Balanced Scorecard (BSC) Cost Es timation (Regression) CVP Analysis Master Budget Decision Making (LP) Target Costing Life Management Control (TP) Executive Compensation Business Valuation

Comparison of JIT Approaches with Traditional Manufacturing and Purchasing
JIT Traditional 1. Pull-through system 1. Push-through system 2. Insignificant inventories 2. Significant inventories 3. Small supplier base 3. Large supplier base 4. Long-term supplier contracts 4. Short-term supplier contracts 5. Cellular structure 5. Departmental structure 6. Multiskilled labor 6. Specialized labor 7. Decentralized services 7. Centralized services 8. High employee involvement 8. Low employee involvement 9. Facilitating management style 9. Supervisory management style 10. Total quality control 10. Acceptable quality level 11. Buyers’ market 11. Sellers’ market 12. Value-chain focus 12. Value-added focus

AKUNTANSI PERTANGGUNGJAWABAN

Learning Objectives Define responsibility accounting and describe the four types of responsibility centers

Responsibility Accounting
Responsibility accounting is a system that measures the results of each responsibility center and compares those results with some measure of expected or budgeted outcome. There are four major types of responsibility centers: Cost center Revenue center Profit center Investment center

Responsibility Accounting
10-106 10-106 Responsibility Accounting Cost Center Profit Center Investment Center Cost, profit, and investment centers are all known as responsibility centers. Responsibility accounting systems link lower-level managers’ decision-making authority with accountability for the outcomes of those decisions. The term responsibility center is used for any part of an organization whose manager has control over, and is accountable for cost, profit, or investments. The three primary types of responsibility centers are cost centers, profit centers, and investment centers. Responsibility Center

10-107 10-107 Cost Center A segment whose manager has control over costs, but not over revenues or investment funds. The manager of a cost center has control over costs, but not over revenue or investment funds. Service departments such as accounting, general administration, legal, and personnel are usually classified as cost centers, as are manufacturing facilities. Standard cost variances and flexible budget variances are often used to evaluate cost center performance.

10-108 Profit Center 10-108 Revenues Sales Interest Other Costs Mfg. costs Commissions Salaries A segment whose manager has control over both costs and revenues, but no control over investment funds. The manager of a profit center has control over both costs and revenue. Profit center managers are often evaluated by comparing actual profit to targeted or budgeted profit. An example of a profit center is a company’s cafeteria.

10-109 Investment Center 10-109 Corporate Headquarters A segment whose manager has control over costs, revenues, and investments in operating assets. The manager of an investment center has control over cost, revenue, and investments in operating assets. Investment center managers are often evaluated using return on investment (ROI) or residual income (discussed later in this chapter). An example of an investment center would be the corporate headquarters.

Responsibility Centers
10-110 Responsibility Centers 10-110 Investment Centers Cost Centers Part I Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization. Part II The President and CEO, as well as the Vice President of Operations, manage investment centers. Part III The Chief Financial Officer, General Counsel, and Vice President of Personnel all manage cost centers. Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization.

10-111 10-111 Responsibility Centers Profit Centers Each of the three product managers that report to the Vice President of Operations (e.g., salty snacks, beverages, and confections) manages a profit center. Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization.

10-112 10-112 Responsibility Centers Cost Centers The bottling plant manager, warehouse manager, and distribution manager all manage cost centers that report to the Beverages product manager. Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization.

Management Hubs Profit Centers.
Subunit that has responsibility for generating revenue as well as for controlling costs. Cost Centers. Subunit that has responsibility for controlling costs but does not sell product. i.e. service departments. Cow calf vs. Back grounding. Feed yard and crops.

Profit Center Organize business into subunits, profit center & cost centers. Track variable costs to profit centers. Control escalators Allocate asset use to subunits. Evaluate on contribution margin and amount of capital invested. Summarize using points from slide.

Word List Cost Behavior Variable Costs.
Variable Costs per unit are constant. Fixed Costs. Fixed costs per unit vary with production level. Mixed Costs. Semi-variable costs change in total with changes in production level, but not proportionately. Go over terms. Give further definitions. Total Variable costs change with volume. Ask for examples? Total Fixed remain constant over the relevant range. Mixed Costs have characteristics of both. Examples. Land cost owned & rented. Labor--

Terms to Recognize Cost volume profit analysis
Profit = Sales (S) – Variable Costs (VC) – Fixed Costs (FC) Contribution Margin Sales -- Variable Costs Contribution Margin Ratio (Sales – Variable Costs)÷ Sales Define Profit. (SP * SQ) – (PVC * QVC) – FC. Contribution Margin important to know by enterprise. Contribution Margin Ratio used in determining $ volume of sales to break-even. Examples and switch to next slide.

Cost-Volume-Profit Diagnostics

Breakevent Point Sales (in dollars) = Fixed Costs / Contribution margin ratio Sales (units) = Fixed Costs / Contribution margin per unit I will use a manufacturing example. This particular manufacturer was going to add a vending service to provide breaks for employees. This added an annual cost of $1,000. How much do sales have to increase to cover this additional cost? $1,000? $4,000? What additional information do we need to know? Assume 25% contribution margin ratio. Farm Example: Family member returns to farm adding additional fixed costs of ? Another example using a manufacture. Concrete company. I noticed a truck that had been wrecked. The owner she was very upset and I assumed it was because of the truck. In talking with her she said, “Look at these clamps in the garbage.” “I have 7 employees and they will each throw 7 per day away, forever. These are the costs I have a hard time controlling, the truck it is insured”. Watch the variable costs and watch the “escalators” costs that will continue to rise carrying cost higher and reducing the contribution margin. Now we will look at a break-even graph.

Break-Even Diagram Cost or Revenue ($)
A break-even graph is helpful in evaluating long-term strategy. The horizontal axis represents the size of the business in terms of quantity or production or sales. The vertical axis is cost of production or sales revenue. (Click) Total Revenue increases as volume increases. (Click) Total Fixed costs remain constant. Fixed costs per unit declines as volume increases. (Click) Variable costs are added to fixed costs to arrive at total costs. (Click) The variable costs increase as production increases. The point where total costs and total revenue intersect is the break-even point. (Click) To the left of this point the ranch will lose money. (Click) The area between total costs and total revenue to the right of the break-even point is profit. What happens to the break-even point if variable costs are increased? (Click) i.e. drought. The total cost curve tilts upward and break-even point shifts to the right. Business that were just at break-even point before will have to adjust to remain viable. (Click) What are some alternatives to consider? Each business has to examine their own cost structure to determine the best alternatives. 1)Increase production. 2)Increased revenue. Adjustments to variable costs? Most efficient use of inputs. 3)Able to reduce fixed costs? Examine all assets and cull those that are non-productive. Quantity Produced Break-Even Diagram

Break-Even Diagram Total Revenue Cost or Revenue Total Cost ($)
Break Even Quantity Profit / Loss Corridor Break Even Quantity Total Revenue Variable Costs Cost or Revenue ($) Total Cost A break-even graph is helpful in evaluating long-term strategy. The horizontal axis represents the size of the business in terms of quantity or production or sales. The vertical axis is cost of production or sales revenue. (Click) Total Revenue increases as volume increases. (Click) Total Fixed costs remain constant. Fixed costs per unit declines as volume increases. (Click) Variable costs are added to fixed costs to arrive at total costs. (Click) The variable costs increase as production increases. The point where total costs and total revenue intersect is the break-even point. (Click) To the left of this point the ranch will lose money. (Click) The area between total costs and total revenue to the right of the break-even point is profit. What happens to the break-even point if variable costs are increased? (Click) i.e. drought. The total cost curve tilts upward and break-even point shifts to the right. Business that were just at break-even point before will have to adjust to remain viable. (Click) What are some alternatives to consider? Each business has to examine their own cost structure to determine the best alternatives. 1)Increase production. 2)Increased revenue. Adjustments to variable costs? Most efficient use of inputs. 3)Able to reduce fixed costs? Examine all assets and cull those that are non-productive. Fixed Cost Fixed Cost Quantity Produced Break-Even Diagram

Break-Even Diagram Increased Fixed Costs
Break Even Quantity Break Even Quantity Profit / Loss Corridor Total Revenue Variable Costs Total Cost Cost or Revenue ($) Total Cost Fixed Cost 1st (Work thru increase in fixed costs.) The closer the firm is to break-even reducing variable costs can have a strong impact on bottom line. The further to the left the business is the more aggressive it must be in making adjustments. Combination of strategies including: revenue enhancing, asset sales (fixed & inventory), reduced variable costs and increased efficiency Quantity Produced

Vocabulary Differential costs and revenue
The additional cost or revenue incurred when one alternative is chosen over another. Sunk cost. Costs that are already incurred & not reversible. Opportunity Costs. The benefit given up by selecting one alternative over another. i.e. Interest on stored grain. Incremental or Differential Analysis is the analysis of the incremental revenue and the incremental costs incurred when one alternative is chosen over another. Incremental revenue is the additional revenue received from one alternative over another. Incremental costs are the additional costs incurred as a result of selecting one alternative over the other. Incremental costs and revenues are also known as relevant costs or differential costs.

Responsibility Accounting Model
The responsibility accounting model is defined by four essential elements: assigning responsibility establishing performance measures or benchmarks evaluating performance assigning rewards

Types of Responsibility Accounting
Management accounting offers the following three types of responsibility accounting systems. Functional-based Activity-based Strategic-based

Functional-Based Responsibility Accounting System
A functional-based responsibility accounting system assigns responsibility to organizational units and expresses performance measures in financial terms. It is the responsibility accounting system that was developed when most firms were operating in relatively stable environments.

Elements of a Functional-Based Responsibility Accounting System
Individual in Charge Organizational Unit Responsibility is Defined Operating Efficiency Financial Outcomes Unit Budgets Standard Costing Performance Measures are Established Currently Attainable Standards Static Standards

Elements of a Functional-Based Responsibility Accounting System
Financial Efficiency Controllable Costs Performance is Measured Actual versus Standard Financial Measures Promotions Bonuses Individuals are Rewarded Based on Financial Performance Salary Increases Profit Sharing

Activity-Based Responsibility Accounting System
An activity-based responsibility accounting system assigns responsibility to processes and uses both financial and nonfinancial measures of performance. It is the responsibility accounting system developed for those firms operating in continuous improvement environments.

Elements of an Activity-Based Responsibility Accounting System
Team Process Responsibility is Defined Value Chain Financial Optimal Dynamic Performance Measures are Established Value- Added Process- Oriented

Elements of an Activity-Based Responsibility Accounting System
Time Reductions Quality Improvement Performance is Measured Cost Reductions Trend Measures Promotions Bonuses Individuals are Rewarded Based on Multidimensional Performance Salary Increases Gain- sharing

Strategic-Based Responsibility Accounting System
A strategic-based responsibility accounting system (Balanced Scorecard) translates the mission and strategy of an organization into operational objectives and measures for four different perspectives: The financial perspective The customer perspective The process perspective The infrastructure (learning and growth) perspective

Strategy Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives A thorough understanding of the industry is critical to implementing a successful strategy

Elements of a Strategic-Based Responsibility Accounting System
Financial Customer Responsibility is Defined Process Infrastructure Communicate Strategy Balanced Measures Performance Measures are Established Link to Strategy Alignment of Objectives

Elements of a Strategic-Based Responsibility Accounting System
Financial Measures Customer Measures Performance is Measured Process Measures Infrastructure Measures Promotions Bonuses Individuals are Rewarded Based on Multidimensional Performance Salary Increases Gain- sharing

DESENTRALISASI DAN HARGA TRANSFER

Learning Objectives Explain why firms choose to decentralize
Explain the role of transfer pricing in a decentralized firm. Discuss the methods of setting transfer prices.

Decentralization: The Major Issues
The degree of decentralization Performance measurement Management compensation The setting of transfer prices

Reasons for Decentralization
There are many reasons to explain why firms decide to decentralize, including: 1. better access to local information 2. cognitive limitations 3. more timely response 4. focusing of central management 5. training and evaluation 6. motivation 7. enhanced competition

Decentralization in Organizations
10-139 Decentralization in Organizations 10-139 Advantages of Decentralization Top management freed to concentrate on strategy. Lower-level managers gain experience in decision-making. Decision-making authority leads to job satisfaction. A decentralized organization does not confine decision-making authority to a few top executives; rather, decision-making authority is spread throughout the organization. The advantages of decentralization are as follows: It enables top management to concentrate on strategy, higher-level decision-making, and coordinating activities. It acknowledges that lower-level managers have more detailed information about local conditions that enable them to make better operational decisions. It enables lower-level managers to quickly respond to customers. It provides lower-level managers with the decision-making experience they will need when promoted to higher level positions. It often increases motivation, resulting in increased job satisfaction and retention, as well as improved performance. Lower-level decisions often based on better information. Lower level managers can respond quickly to customers.

Decentralization in Organizations
10-140 Decentralization in Organizations 10-140 May be a lack of coordination among autonomous managers. Lower-level managers may make decisions without seeing the “big picture.” Disadvantages of Decentralization The disadvantages of decentralization are as follows: Lower-level managers may make decisions without fully understanding the “big picture.” There may be a lack of coordination among autonomous managers. The balanced scorecard can help reduce this problem by communicating a company’s strategy throughout the organization. Lower-level managers may have objectives that differ from those of the entire organization. This problem can be reduced by designing performance evaluation systems that motivate managers to make decisions which are in the best interests of the company. It may difficult to effectively spread innovative ideas in a strongly decentralized organization. This problem can be reduced through the effective use of intranet systems, which enable globally dispersed employees to electronically share ideas. Lower-level manager’s objectives may not be those of the organization. May be difficult to spread innovative ideas in the organization.

Decentralization and Segment Reporting
10-141 10-141 Decentralization and Segment Reporting Quick Mart An Individual Store A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. A Sales Territory A segment is a part or activity of an organization about which managers would like cost, revenue, or profit data. Examples of segments include divisions of a company, sales territories, individual stores, service centers, manufacturing plants, marketing departments, individual customers, and product lines. A Service Center

Superior Foods: Segmented by Geographic Regions
10-142 10-142 Superior Foods: Segmented by Geographic Regions As this slide illustrates, Superior Foods could segment its business by geographic region. Superior Foods Corporation could segment its business by geographic region.

Superior Foods: Segmented by Customer Channel
10-143 10-143 Superior Foods: Segmented by Customer Channel Or, Superior Foods could segment its business by customer channel. Superior Foods Corporation could segment its business by customer channel.

Keys to Segmented Income Statements
10-144 10-144 Keys to Segmented Income Statements There are two keys to building segmented income statements: A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin. There are two keys to building segmented income statements. First, a contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin. The contribution margin is especially useful in decisions involving temporary uses of capacity, such as special orders. Second, traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin. Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.

Identifying Traceable Fixed Costs
10-145 10-145 Identifying Traceable Fixed Costs Traceable costs arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared. No computer division means . . . No computer division manager. A traceable fixed cost of a segment is a fixed cost that is incurred because of the existence of the segment. If the segment were eliminated, the fixed cost would disappear. Examples of traceable fixed costs include the following: The salary of the Fritos product manager at PepsiCo is a traceable fixed cost of the Fritos business segment of PepsiCo. The maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing.

Identifying Common Fixed Costs
10-146 10-146 Identifying Common Fixed Costs Common costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminated. No computer division but . . . We still have a CEO. A common fixed cost is a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment. Examples of common fixed costs include the following: The salary of the CEO of General Motors is a common fixed cost of the various divisions of General Motors. The cost of heating a Safeway or Kroger grocery store is a common fixed cost of the various departments – groceries, produce, and bakery.

Traceable Costs Can Become Common Costs
10-147 10-147 Traceable Costs Can Become Common Costs It is important to realize that the traceable fixed costs of one segment may be a common fixed cost of another segment. For example, the landing fee paid to land an airplane at an airport is traceable to the particular flight, but it is not traceable to first-class, business-class, and economy-class passengers. It is important to realize that the traceable fixed costs of one segment may be a common fixed cost of another segment. For example, the landing fee paid to land an airplane at an airport is traceable to a particular flight, but it is not traceable to first-class, business-class, and economy-class passengers.

10-148 Segment Margin 10-148 The segment margin, which is computed by subtracting the traceable fixed costs of a segment from its contribution margin, is the best gauge of the long-run profitability of a segment. A segment margin is computed by subtracting the traceable fixed costs of a segment from its contribution margin. The segment margin is a valuable tool for assessing the long-run profitability of a segment. Segment Margin Time

Traceable and Common Costs
10-149 10-149 Traceable and Common Costs Fixed Costs Don’t allocate common costs to segments. Traceable Common Part I Allocating common costs to segments reduces the value of the segment margin as a guide to long-run segment profitability. Part II As a result, common costs should not be allocated to segments.

Activity-Based Costing
10-150 Activity-Based Costing 10-150 Activity-based costing can help identify how costs shared by more than one segment are traceable to individual segments. Assume that three products, 9-inch, 12-inch, and 18-inch pipe, share 10,000 square feet of warehousing space, which is leased at a price of $4 per square foot. If the 9-inch, 12-inch, and 18-inch pipes occupy 1,000, 4,000, and 5,000 square feet, respectively, then ABC can be used to trace the warehousing costs to the three products as shown. Activity-based costing can help identify how costs shared by more than one segment are traceable to individual segments. For example, assume that three products, a 9-inch, a 12-inch, and an 18-inch pipe, share 10,000 square feet of warehousing space, which is leased at a price of $4 per square foot. If the 9-inch, 12-inch, and 18-inch pipes occupy 1,000, 4,000, and 5,000 square feet, respectively, then activity-based costing can be used to trace the warehousing costs to the three products as shown. When using activity-based costing to trace fixed costs to segments, managers must still ask themselves if the traceable costs that they have identified would disappear over time, if the segment disappeared. In this example, if the warehouse was owned rather than leased, perhaps the warehousing costs assigned to a given segment would not disappear if the segment was discontinued.

Levels of Segmented Statements
10-151 10-151 Levels of Segmented Statements Webber, Inc. has two divisions. Webber, Inc. Computer Division Television Division Assume that Webber, Inc. has two divisions – the Computer Division and the Television Division. Let’s look more closely at the Television Division’s income statement.

10-152 Levels of Segmented Statements 10-152 Our approach to segment reporting uses the contribution format. Cost of goods sold consists of variable manufacturing costs. The contribution format income statement for the Television Division is as shown. Notice that: Cost of goods sold consists of variable manufacturing costs; and Fixed and variable costs are listed in separate sections. Fixed and variable costs are listed in separate sections.

10-153 Levels of Segmented Statements 10-153 Our approach to segment reporting uses the contribution format. Contribution margin is computed by taking sales minus variable costs. Also notice that: Contribution margin is computed by subtracting variable costs from sales; and The divisional segment margin represents the Television Division’s contribution to overall company profits. Segment margin is Television’s contribution to profits.

10-154 Levels of Segmented Statements 10-154 The Television Division’s results can be rolled into Webber, Inc.’s overall results as shown. Notice that the results of the Television and Computer Divisions sum to the results shown for the whole company.

10-155 Levels of Segmented Statements 10-155 The common costs for the company as a whole ($25,000) are not allocated to the divisions. Common costs are not allocated to segments because these costs would remain even if one of the divisions were eliminated. Common costs should not be allocated to the divisions. These costs would remain even if one of the divisions were eliminated.

10-156 10-156 Traceable Costs Can Become Common Costs As previously mentioned, fixed costs that are traceable to one segment can become common if the company is divided into smaller segments. The Television Division’s results can also be broken down into smaller segments. This enables us to see how traceable fixed costs of the Television Division can become common costs of smaller segments. Let’s see how this works using the Webber, Inc. example!

10-157 Traceable Costs Can Become Common Costs 10-157 Webber’s Television Division LCD Plasma Television Division Assume that the Television Division can be broken down into two major product lines – LCD and Plasma television sets. Product Lines

10-158 Traceable Costs Can Become Common Costs 10-158 Assume that the segment margins for these two product lines are as shown. We obtained the following information from the LCD and Plasma segments.

10-159 Traceable Costs Can Become Common Costs 10-159 Of the $90,000 of fixed costs that were previously traceable to the Television Division, only $80,000 is traceable to the two product lines and $10,000 is a common cost. Fixed costs directly traced to the Television Division $80,000 + $10,000 = $90,000

10-160 External Reports 10-160 The Financial Accounting Standards Board now requires that companies in the United States include segmented financial data in their annual reports. Companies must report segmented results to shareholders using the same methods that are used for internal segmented reports. Since the contribution approach to segment reporting does not comply with GAAP, it is likely that some managers will choose to construct their segmented financial statements using the absorption approach to comply with GAAP. The Financial Accounting Standards Board now requires that companies in the United States include segmented financial data in their annual reports. This ruling has implications for internal segment reporting because: It mandates that companies report segmented results to shareholders using the same methods that are used for internal segmented reports. Since the contribution approach to segment reporting does not comply with GAAP, it is likely that some managers will choose to construct their segmented financial statements using the absorption approach to comply with GAAP. The absorption approach hinders internal decision making because it does not distinguish between fixed and variable costs or common and traceable costs.

10-161 Omission of Costs 10-161 Costs assigned to a segment should include all costs attributable to that segment from the company’s entire value chain. Business Functions Making Up The Value Chain The costs assigned to a segment should include all the costs attributable to that segment from the company’s entire value chain. The value chain consists of all major business functions that add value to a company’s products and services. Since only manufacturing costs are included in product costs under absorption costing, those companies that choose to use absorption costing for segment reporting purposes will omit from their profitability analysis all “upstream” and “downstream” costs. “Upstream” costs include research and development and product design costs. “Downstream” costs include marketing, distribution, and customer service costs. Although these “upstream” and “downstream” costs are not manufacturing costs, they are just as essential to determining product profitability as are manufacturing costs. Omitting them from profitability analysis will result in the undercosting of products. Product Customer R&D Design Manufacturing Marketing Distribution Service

Inappropriate Methods of Allocating Costs Among Segments
10-162 10-162 Inappropriate Methods of Allocating Costs Among Segments Failure to trace costs directly Inappropriate allocation base Costs that can be traced directly to specific segments of a company should not be allocated to other segments. Rather, such costs should be charged directly to the responsible segment. For example, the rent for a branch office of an insurance company should be charged directly against the branch office rather than included in a companywide overhead pool and then spread throughout the company. Some companies allocate costs to segments using arbitrary bases. Costs should be allocated to segments for internal decision making purposes only when the allocation base actually drives the cost being allocated. For example, sales is frequently used to allocate selling and administrative expenses to segments. This should only be done if sales drive these expenses. Segment 1 Segment 2 Segment 3 Segment 4

Common Costs and Segments
10-163 Common Costs and Segments 10-163 Common costs should not be arbitrarily allocated to segments based on the rationale that “someone has to cover the common costs” for two reasons: This practice may make a profitable business segment appear to be unprofitable. Allocating common fixed costs forces managers to be held accountable for costs they cannot control. Common costs should not be arbitrarily allocated to segments based on the rationale that “someone has to cover the common costs” for two reasons: First, this practice may make a profitable business segment appear to be unprofitable. If the segment is eliminated the revenue lost may exceed the traceable costs that are avoided. Second, allocating common fixed costs forces managers to be held accountable for costs that they cannot control. Segment 1 Segment 2 Segment 3 Segment 4

10-164 Quick Check  10-164 Assume that Hoagland's Lakeshore prepared the segmented income statement as shown. Assume that Hoagland's Lakeshore prepared its segmented income statement as shown.

10-165 10-165 Quick Check  How much of the common fixed cost of $200,000 can be avoided by eliminating the bar? a. None of it. b. Some of it. c. All of it. How much of the common fixed cost of $200,000 can be avoided by eliminating the bar?

10-166 10-166 Quick Check  How much of the common fixed cost of $200,000 can be avoided by eliminating the bar? a. None of it. b. Some of it. c. All of it. A common fixed cost cannot be eliminated by dropping one of the segments. None of it. A common fixed cost cannot be eliminated by dropping one of the segments.

10-167 Quick Check  10-167 Suppose square feet is used as the basis for allocating the common fixed cost of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet? a. $20,000 b. $30,000 c. $40,000 d. $50,000 Suppose square feet is used as the basis for allocating the common fixed cost of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet?

The bar would be allocated 1/10 of the cost or $20,000.
10-168 Quick Check  10-168 Suppose square feet is used as the basis for allocating the common fixed cost of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet? a. $20,000 b. $30,000 c. $40,000 d. $50,000 The bar would be allocated 1/10 of the cost or $20,000. The bar would be allocated one tenth of the cost or $20,000.

10-169 10-169 Quick Check  If Hoagland's allocates its common costs to the bar and the restaurant, what would be the reported profit of each segment? If Hoagland's allocates its common costs to the bar and the restaurant, what would be the reported profit of each segment?

Allocations of Common Costs
10-170 10-170 Allocations of Common Costs Take a minute and review this slide. Notice that the common costs of $200,000 are allocated to the bar and restaurant. Hurray, now everything adds up!!!

Quick Check  Should the bar be eliminated? a. Yes b. No 10-171 10-171

Quick Check  Should the bar be eliminated? a. Yes b. No
10-172 Quick Check  10-172 Should the bar be eliminated? a. Yes b. No The profit was $44,000 before eliminating the bar. If we eliminate the bar, profit drops to $30,000! No. The profit was $44,000 before eliminating the bar. If we eliminate the bar, profit drops to $30,000!

Transfer Pricing The transferred good is revenue to the selling division and cost to the buying division. This value is called transfer pricing.

Transfer Pricing: General Concerns
Some Major Issues Impact on divisional performance measures Impact on firm wide profits Impact on divisional autonomy

Transfer Pricing Approaches
Market price Negotiated transfer prices Cost-based transfer prices Full cost Full cost plus markup Variable cost plus fixed fee

A Transfer Pricing Problem
Assume the following data for Division A: Capacity in units ,000 Selling price to outside $15 Variable cost per unit Fixed costs per unit (based on capacity) 5 Division B would like to purchase units for Division A. Division B is currently purchasing 5,000 units per year from an outside source at a cost of $14.

A Transfer Problem Example (continued)
1. Assume division A has idle capacity in excess of 10,000 units: Minimum transfer price = Variable cost + Lost contribution margin = $8 + $0 = $8 2. Assume division A is working at capacity: Transfer Price = Variable cost + Lost contribution margin = $8 + $7 = $15 (market price) 3. Assume division A is working at capacity, but a negotiated $2 in variable costs can be avoided on intercompany sales. Transfer Price = Variable cost + Lost contribution margin = $6 + $7 = $13 (negotiated price)

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