4Definition 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.
5Managerial Accounting as a Career Professional OrganizationsInstitute of Management Accountants (IMA)PublishesManagementAccountingand researchstudies.AdministersCertifiedManagementAccountantprogramDevelopsStandards ofEthicalConduct forManagementAccountants
6Professional EthicsEthical 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.
7Resolution of Ethical Conflict Professional EthicsCompetenceConfidentialityIntegrityObjectivityResolution of Ethical Conflict
8Professional Ethics Follow applicable laws, regulations and standards. Maintain professional competence.CompetencePrepare complete and clear reports after appropriate analysis.
9Professional EthicsDo not disclose confidential information unless legally obligated to do so.Do not use confidential information for personal advantage.ConfidentialityEnsure that subordinates do not disclose confidential information.
10Professional EthicsAvoid conflicts of interest and advise others of potential conflicts.Do not subvert organization’s legitimate objectives.IntegrityRecognize and communicate personal and professional limitations.
11Professional EthicsAvoid 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.IntegrityCommunicate unfavorable as well as favorable information.
12Professional Ethics Communicate information fairly and objectively. ObjectivityDisclose all information that might be useful to management.
13Resolution of Ethical Conflict Professional EthicsResolution of Ethical ConflictFollow 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.
14Resolution of Ethical Conflict Professional EthicsResolution of Ethical ConflictIf 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.
15Major Themes in Managerial Accounting BehavioralIssuesInformationand IncentivesCosts andBenefitsManagerialAccounting
16Evolution and Adaptation in Managerial Accounting Service Vs. ManufacturingFirmsComputer-IntegratedManufacturingInformation andCommunicationTechnologyEmergence of NewIndustriesChangeGlobal CompetitionProduct Life CyclesTotal QualityManagementFocus on the CustomerCross-Functional TeamsTime-Based CompetitionContinuous ImprovementJust-in-Time Inventory
17Managerial Accounting in Modern Production Environments Key developments that reshaped Managerial Accounting include:Integrated information systemsWeb hostingJust-in-time and lean productionTotal Quality ManagementTheory of constraintsBenchmarking and continuous improvement
18The 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.
19New Management Trends to Create Value Encourage Management Accounting Systems Redesign, for example.Customer focusQuality focusDelivery focusOutsourcing and the virtual companyCommunicationsShortening product life cyclesTeam developmentDeregulation in the service sector1. 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.
20Perubahan Lingkungan Bisnis Menentukan hal apa saja yang tidak perlu dilakukan,bagaimana perusahaan harus dikelola dan bagaimanapekerjaan dilakukanBeberapa praktek manajemen:JIT (Just In Time)Manajemen Mutu Total (TQM)Rekayasa UlangTeori Kendala (Theory of Constrain/TOC)
21JIT (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.
22TQM (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.
23Gambaran utama TQM adalah meningkatkan produktivitas Increased emphasis on product quality because goods are produced only as neededTotal Quality Management (TQM)- a philosophy of zero defects -Gambaran utama TQM adalah meningkatkan produktivitasdengan mendorong penggunaan pengetahuan dalammengambil keputusan dan menekan perilaku defensif yangtidak produktif.LO 8 Identify trends in management accounting.
24Rekayasa Ulang Proses (Process Reengineering-PR) Meliputi desain ulang secara menyeluruh proses bisnis dalam rangkamenghilangkan aktivitas yang tidak bernilai tambah dan mengurangikemungkinan terjadinya kesalahan. Rekayasa ulang mengandalkanpada 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.
25Teori Kendala (Theory of Contrains/ToC) Menekankan pada pentingnya mengelola kendala yangdihadapai oleh organisasi. Karena kendala adalah sesuatuyang menghalangi organisasi, proses perbaikan akan efektifkalau difokuskan pada kendala yang dihadapiTeori kendala didasarkan pada pandangan bahwa manajemen kendala secara efektif merupakan kunci keberhasilan
26Activity-Based-Costing (ABC) Allocates overhead based on use of activitiesResults in more accurate product costing and scrutiny of all activities in the value chainBalanced ScorecardEvaluates operations in an integrated fashionUses both financial and non-financial measuresLinks performance measures to overall company objectivesLO 8 Identify trends in management accounting.
27Review QuestionWhich 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.
28The Strategic Approach to Teaching Management Accounting Topics —An Introduction
29Strategic 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 survivalThe 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.
31Competitive 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.
32Michael Porter: Strategic Positioning Cost Leadership—outperform competitors by producing at the lowest cost, consistent with quality demanded by the consumerDifferentiation—creating value for the customer through product innovation, product features, customer service, etc. that the customer is willing to pay for
34Strategic Positioning There are three general strategies that have been identified:cost leadershipproduct differentiationfocusing
35Strategic 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.
36Strategic 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.
37Strategic 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.
38Consequences of Lack of Strategic Cost-Management Information Decision-making based on guess and intuitionLack of clarity about direction and goalsOver time, lack of a clear and favorable perception of the firm by customers and suppliersIncorrect decisions: choosing products, markets, or manufacturing processes that are inconsistent with the organization’s strategyFor control purposes, cannot link performance effectively to strategic goals…
39Tools for Integrating Strategy into Management Accounting -- The Value Chain-- Strategy Maps & the Balanced Scorecard (BSC)
41For a manufacturing firm these include the following: Value ChainRefers to all activities associated with providing a product or serviceFor a manufacturing firm these include the following:LO 8 Identify trends in management accounting.
42Industrial 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.
43Value 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” ActivitiesManufacturing/Operations“Downstream” Activities
44Value-Chain Analysis Develop competitive advantage by: Identify value-chain activitiesDevelop competitive advantage by:Identifying opportunities for adding value for the customerIdentifying opportunities for eliminating non- value added activities and reducing costUnderstand linkages among suppliers, the entity, and customers
45Internal 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.
46Strategy 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:FinancialCustomerInternal ProcessesLearning and Growth
50Evolution of Cost Accounting Systems ABC(simple &minimal)ABC(multidimensional)TraditionalCostingResourcesResourcesResourcesConsumedbyConsumedbyAllocatedtoActivitiesActivitiesConsumedbyConsumedbyCost ObjectsCost ObjectsoutputschannelsCostObjectsUsers
51ABC/M Framework What Things Cost Resource Drivers Resource Costs RootCauses of CostsWork ActivitiesPerformanceMeasuresCost ReductionProcess reengineeringCost of qualityContinuous improvementWaste eliminationBenchmarkingActivity CostAssignmentActivityDriversCost ObjectsDesign for manufacturingMake versus BuyWhy ThingsCostBetter DecisionMaking
52Organizational 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.
53Organizational Activities and Drivers Structural Activities Structural Cost DriversBuilding plants Number of plants, scale, degree of centralizationManagement structuring Management style and philosophyGrouping employees Number and type of work unitsComplexity Number of product lines, number of unique processes, number of unique partsVertically integrating Scope, buying power, selling powerSelecting and using process Types of process technologies, technologies experience
54Organizational Activities and Drivers Executional Activities Executional Cost DriversUsing employees Degree of involvementProviding quality Quality management approachProviding plant layout Plant layout efficiencyDesigning and producing products Product configurationProviding capacity Capacity utilization
55Operational 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.
56Organizational and Operational Activity Relationships Organizational Activity(Selecting and using process technologies)Structural Cost Driver(JIT: Type of process technologyOperational Driver(Number of moves)Operational Activity(Moving material)
57Internal Value ChainDesignServiceDevelopDistributeProduceMarket
58Exploiting 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 ExpectedActivity Cost Driver Capacity Demand DemandMaterial usage # of parts 200, ,000 80,000Labor usage Labor hours 10,000 10,000 5,000Purchasing # of orders 15,000 12,500 6,500Warranty repair # of defects 1,
60Activity-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:
61Exploiting External Linkages (continued) Large Ten Smaller Customer CustomersUnits purchased 500, ,000Orders placedManufacturing cost $3,000,000 $3,000,000*Order-filling cost allocated 303, ,000Order 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)]
62Exploiting External Linkage (continued) Assume that ordering costs are allocated using a new driver:Large Customer Ten Smaller CustomersUnits purchased 500, ,000Orders placedManufacturing costs $3,000,000 $3,000,000*Orders-filling costs 6, ,000Order cost per unit $.012 $1.20*Order-filling capacity is allocated using number of orders. The allocationrate 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.
63Product Life Cycle Viewpoints There are three basic views of the product life cycle:Marketing viewpointProduction viewpointConsumable life viewpoint
64Marketing Viewpoint Units of sales Introduction Growth Maturity Decline
65Life Cycle Cost Management Cost Commitment CurveLife CycleCost %10090752590 percent of life-cyclecosts are committed at thispointResearch Planning Design Testing Production Logistics
66A 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 BehaviorFunctional-based system:Variable conversion activity rate: $40 per direct labor hourMaterial usage rate: $8 per partABC system:Labor usage $10 per direct labor hourMaterial usage: $8 per partMachining: $28 per machine hourPurchasing activity: $60 per purchase orderSetup activity: $1,00 per setup hourWarranty activity: $200 per returned unitCustomer repair cost: $10 per hour
67Life Cycle Costing (continued) Traditional Costing (Overhead allocated by direct labor hours)Design A Design BDirect materials $ 800,000 $ ,000Conversion costb 2,000, ,200,000Total manufacturing cost $2,800,000 $ 3,680,000Units produced 10, 10,000Unit cost $ $ ======== ========a$8 x 100,000 parts; $8 x 60,000 partsb$40 x 50,000 direct labor hours; $40 x 80,000 direct labor hours
68Life Cycle Costing (continued) ABC Costing (Overhead allocated by direct labor hours)Design A Design B ClassificationDirect materials $ 800,000 $ 480,000 ManufacturingDirect labora 500, ,000 ManufacturingMachiningb 700, ,000 ManufacturingPurchasingc 18,000 12,000 UpstreamSetupsd 200, ,000 ManufacturingWarrantye , ,000 DownstreamTotal product costs $2,298,000 $1,967,000Units productd 10, 10,000Unit 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 setupsb$10 x 25,000 parts; $10 x 20,000 parts e$200 x 400 defects; $200x 1,000 defectsc$60 x 300 design hours; $60 x 2000 design hours
69Target 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
70Target-Costing Model PRODUCT FUNCTIONALITY MARKET SHARE OBJECTIVE TARGET PRICETARGET PROFITTARGET COSTPRODUCT AND PROCESS DESIGNNoTARGET COST MET?YesPRODUCE PRODUCT
71Resource 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.
72Time-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.
73TDABC ExampleTDABC 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.
76Customer Profitability Analysis: The Whale Curve
77What Makes for a Profitable Customer? Profitable and unprofitable customers are distinguishedby the demands they place on the organizationLess profitable customersSmall order quantitiesSpecial products orderedHeavy discountingUnpredictable demandsDelivery times changeHigh technical supportSlow payment (imputedinterest)More profitable customersLarge order sizesStandard products orderedLittle discountingPredictable demandsDelivery times standardLow technical supportOn-time payment (imputed interest)These demands can be estimatedby activity costs and activity cost drivers52
78Migrating Customers to Higher Profitability – A Strategic Analysis VeryProfitableTypes of CustomersHigh(Creamy)ProfitableProduct MixMarginUnprofitableLow(Low Fat)VeryunprofitableLowHighCost-to-Serve78
79Customer 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 mostvaluable customers?What is the difference?The “customer lifetime value” (CLV) measure is intended to answer this question.
80You are a pharmaceutical supplier: which customer is more important? Dentist ASales = $750,000profits = $100,000Age 61Dentist BSales = $375,000profits = $40,000Age 25Which is more profitable?Which is more valuable?
81Customer 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 MeasureThe 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.
82Customer Equity What is it? The economic value of ALL customer relationships.The MeasureThe sum of the CLVs for all customers.How UsedProvides a measure of the value of the company from the perspective of customer profitability.
83The Management & Control of Quality (including Six-Sigma and Lean)
84Relationship between TQM & Financial Performance
86Lean ManufacturingAt 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 ; andflexible manufacturing systems in which different vehicles are produced on the same assembly line and employees are trained for a variety of tasks
87Accounting for LeanThere 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.
88Accounting for LeanLean 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.
90Operational and Management-level Performance Measurement
91Performance Measurement Motivation and EvaluationIncentives: right decisionsAlign performance measurement with strategyIncentives: working hardCompensation and bonus plansEquity/fairnessControllabilityCost allocationsOperational-level and Management-level
92Operational Performance Measurement with a Flexible Budget 20102010
94Management Performance Measurement Profit Centers:Variable costing income statementsIssue of transfer pricingRole and importance of nonfinancial performance indicatorsInvestment Centers:ROI vs. RI vs. EVA®Measurement issuesRole and importance of non-financial performance indicators
95Customer Plant Warehouse Management –Level Performance Measurement: When to Use Profit or Cost CenterCustomerPlantWarehouse
104Learning ObjectivesDefine responsibility accounting and describe the four types of responsibility centers
105Responsibility 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 centerRevenue centerProfit centerInvestment center
106Responsibility Accounting 10-10610-106Responsibility AccountingCostCenterProfitCenterInvestmentCenterCost, profit,and investmentcenters are allknown asresponsibilitycenters.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.ResponsibilityCenter
10710-10710-107Cost CenterA 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.
10810-108Profit Center10-108RevenuesSalesInterestOtherCostsMfg. costsCommissionsSalariesA 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.
10910-109Investment Center10-109Corporate HeadquartersA 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.
110Responsibility Centers 10-110Responsibility Centers10-110Investment CentersCost CentersPart ISuperior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization.Part IIThe President and CEO, as well as the Vice President of Operations, manage investment centers.Part IIIThe 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.
111Responsibility Centers 10-11110-111Responsibility CentersProfit CentersEach 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.
112Responsibility Centers 10-11210-112Responsibility CentersCost CentersThe 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.
113Management 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.
114Profit CenterOrganize business into subunits, profit center & cost centers.Track variable costs to profit centers.Control escalatorsAllocate asset use to subunits.Evaluate on contribution margin and amount of capital invested.Summarize using points from slide.
115Word 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--
116Terms to Recognize Cost volume profit analysis Profit = Sales (S) – Variable Costs (VC) – Fixed Costs (FC)Contribution MarginSales -- Variable CostsContribution Margin Ratio(Sales – Variable Costs)÷ SalesDefine 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.
118Breakevent PointSales (in dollars) = Fixed Costs / Contribution margin ratioSales (units) = Fixed Costs / Contribution margin per unitI 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? $4,000? What additional information do we need to know? Assume 25% contribution margin ratio.Farm Example: Family member returns to farm adding additional fixed costs of ?Another example using a manufacture. Concrete company. I noticed a truck that had been wrecked. The owner she was very upset and I assumed it was because of the truck. In talking with her she said, “Look at these clamps in the garbage.” “I have 7 employees and they will each throw 7 per day away, forever. These are the costs I have a hard time controlling, the truck it is insured”. Watch the variable costs and watch the “escalators” costs that will continue to rise carrying cost higher and reducing the contribution margin. Now we will look at a break-even graph.
119Break-Even Diagram Cost or Revenue ($) 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 ProducedBreak-Even Diagram
120Break-Even Diagram Total Revenue Cost or Revenue Total Cost ($) Break Even QuantityProfit / LossCorridorBreak Even QuantityTotal RevenueVariableCostsCost or Revenue($)Total CostA 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 CostFixed CostQuantity ProducedBreak-Even Diagram
121Break-Even Diagram Increased Fixed Costs Break Even QuantityBreak Even QuantityProfit / LossCorridorTotal RevenueVariableCostsTotal CostCost or Revenue($)Total CostFixed Cost1st (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 efficiencyQuantity Produced
122Vocabulary 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.
123Responsibility Accounting Model The responsibility accounting model is defined by four essential elements:assigning responsibilityestablishing performance measures or benchmarksevaluating performanceassigning rewards
124Types of Responsibility Accounting Management accounting offers the following three types of responsibility accounting systems.Functional-basedActivity-basedStrategic-based
125Functional-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.
126Elements of a Functional-Based Responsibility Accounting System Individualin ChargeOrganizationalUnitResponsibilityis DefinedOperatingEfficiencyFinancialOutcomesUnitBudgetsStandardCostingPerformance Measuresare EstablishedCurrentlyAttainableStandardsStaticStandards
127Elements of a Functional-Based Responsibility Accounting System FinancialEfficiencyControllableCostsPerformanceis MeasuredActual versusStandardFinancialMeasuresPromotionsBonusesIndividuals are RewardedBased onFinancial PerformanceSalaryIncreasesProfitSharing
128Activity-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.
129Elements of an Activity-Based Responsibility Accounting System TeamProcessResponsibilityis DefinedValueChainFinancialOptimalDynamicPerformance Measuresare EstablishedValue-AddedProcess-Oriented
130Elements of an Activity-Based Responsibility Accounting System TimeReductionsQualityImprovementPerformanceis MeasuredCostReductionsTrendMeasuresPromotionsBonusesIndividuals are RewardedBased on MultidimensionalPerformanceSalaryIncreasesGain-sharing
131Strategic-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 perspectiveThe customer perspectiveThe process perspectiveThe infrastructure (learning and growth) perspective
132StrategyStrategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectivesA thorough understanding of the industry is critical to implementing a successful strategy
133Elements of a Strategic-Based Responsibility Accounting System FinancialCustomerResponsibilityis DefinedProcessInfrastructureCommunicateStrategyBalancedMeasuresPerformance Measuresare EstablishedLink toStrategyAlignment ofObjectives
134Elements of a Strategic-Based Responsibility Accounting System FinancialMeasuresCustomerMeasuresPerformanceis MeasuredProcessMeasuresInfrastructureMeasuresPromotionsBonusesIndividuals are RewardedBased on MultidimensionalPerformanceSalaryIncreasesGain-sharing
136Learning Objectives Explain why firms choose to decentralize Explain the role of transfer pricing in a decentralized firm.Discuss the methods of setting transfer prices.
137Decentralization: The Major Issues The degree of decentralizationPerformance measurementManagement compensationThe setting of transfer prices
138Reasons for Decentralization There are many reasons to explain why firms decide to decentralize, including:1. better access to local information2. cognitive limitations3. more timely response4. focusing of central management5. training and evaluation6. motivation7. enhanced competition
139Decentralization in Organizations 10-139Decentralization in Organizations10-139Advantages ofDecentralizationTop managementfreed to concentrateon strategy.Lower-level managersgain experience indecision-making.Decision-makingauthority leads tojob 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 decisionsoften based onbetter information.Lower level managers can respond quickly to customers.
140Decentralization in Organizations 10-140Decentralization in Organizations10-140May be a lack ofcoordination amongautonomousmanagers.Lower-level managersmay make decisionswithout seeing the“big picture.”Disadvantages ofDecentralizationThe 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’sobjectives may notbe those of theorganization.May be difficult tospread innovative ideasin the organization.
141Decentralization and Segment Reporting 10-14110-141Decentralization and Segment ReportingQuick MartAn Individual StoreA segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.A Sales TerritoryA 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
142Superior Foods: Segmented by Geographic Regions 10-14210-142Superior Foods: Segmented by Geographic RegionsAs this slide illustrates, Superior Foods could segment its business by geographic region.Superior Foods Corporation could segment its business by geographic region.
143Superior Foods: Segmented by Customer Channel 10-14310-143Superior Foods: Segmented by Customer ChannelOr, Superior Foods could segment its business by customer channel.Superior Foods Corporation could segment its business by customer channel.
144Keys to Segmented Income Statements 10-14410-144Keys to Segmented Income StatementsThere 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.
145Identifying Traceable Fixed Costs 10-14510-145Identifying Traceable Fixed CostsTraceable costs arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared.No computerdivision means . . .No computerdivision 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.
146Identifying Common Fixed Costs 10-14610-146Identifying Common Fixed CostsCommon costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminated.No computerdivision but . . .We still have aCEO.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.
147Traceable Costs Can Become Common Costs 10-14710-147Traceable Costs Can Become Common CostsIt 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.
14810-148Segment Margin10-148The 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 MarginTime
149Traceable and Common Costs 10-14910-149Traceable and Common CostsFixedCostsDon’t allocatecommon costs to segments.TraceableCommonPart IAllocating common costs to segments reduces the value of the segment margin as a guide to long-run segment profitability.Part IIAs a result, common costs should not be allocated to segments.
150Activity-Based Costing 10-150Activity-Based Costing10-150Activity-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.
151Levels of Segmented Statements 10-15110-151Levels of Segmented StatementsWebber, Inc. has two divisions.Webber, Inc.Computer DivisionTelevision DivisionAssume 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.
152Levels of Segmented Statements 10-152Levels of Segmented Statements10-152Our approach to segment reporting uses the contribution format.Cost of goodssold consists ofvariable manufacturingcosts.The contribution format income statement for the Television Division is as shown. Notice that:Cost of goods sold consists of variable manufacturing costs; andFixed and variable costs are listed in separate sections.Fixed andvariable costsare listed inseparatesections.
153Levels of Segmented Statements 10-153Levels of Segmented Statements10-153Our approach to segment reporting uses the contribution format.Contribution marginis computed by taking sales minus variable costs.Also notice that:Contribution margin is computed by subtracting variable costs from sales; andThe divisional segment margin represents the Television Division’s contribution to overall company profits.Segment marginis Television’scontributionto profits.
154Levels of Segmented Statements 10-154Levels of Segmented Statements10-154The 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.
155Levels of Segmented Statements 10-155Levels of Segmented Statements10-155The 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.
156Traceable Costs Can Become Common Costs 10-15610-156Traceable Costs Can Become Common CostsAs 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!
157Traceable Costs Can Become Common Costs 10-157Traceable Costs Can Become Common Costs10-157Webber’s Television DivisionLCDPlasmaTelevisionDivisionAssume that the Television Division can be broken down into two major product lines – LCD and Plasma television sets.ProductLines
158Traceable Costs Can Become Common Costs 10-158Traceable Costs Can Become Common Costs10-158Assume that the segment margins for these two product lines are as shown.We obtained the following information fromthe LCD and Plasma segments.
159Traceable Costs Can Become Common Costs 10-159Traceable Costs Can Become Common Costs10-159Of 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 tracedto the Television Division$80,000 + $10,000 = $90,000
16010-160External Reports10-160The 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.
16110-161Omission of Costs10-161Costs assigned to a segment should include all costs attributable to that segment from the company’s entire value chain.Business FunctionsMaking Up TheValue ChainThe 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 CustomerR&D Design Manufacturing Marketing Distribution Service
162Inappropriate Methods of Allocating Costs Among Segments 10-16210-162Inappropriate Methods of Allocating Costs Among SegmentsFailure to tracecosts directlyInappropriateallocation baseCosts 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.Segment1Segment2Segment3Segment4
163Common Costs and Segments 10-163Common Costs and Segments10-163Common 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.Segment1Segment2Segment3Segment4
16410-164Quick Check 10-164Assume that Hoagland's Lakeshore prepared the segmented income statement as shown.Assume that Hoagland's Lakeshore prepared its segmented income statement as shown.
16510-16510-165Quick 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?
16610-16610-166Quick 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.
16710-167Quick Check 10-167Suppose 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. $20,000b. $30,000c. $40,000d. $50,000Suppose 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?
168The bar would be allocated 1/10 of the cost or $20,000. 10-168Quick Check 10-168Suppose 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. $20,000b. $30,000c. $40,000d. $50,000The 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.
16910-16910-169Quick 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?
170Allocations of Common Costs 10-17010-170Allocations of Common CostsTake 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!!!
171Quick Check Should the bar be eliminated? a. Yes b. No 10-171 10-171
172Quick Check Should the bar be eliminated? a. Yes b. No 10-172Quick Check 10-172Should the bar be eliminated?a. Yesb. NoThe 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!
173Transfer PricingThe transferred good is revenue to the selling division and cost to the buying division. This value is called transfer pricing.
174Transfer Pricing: General Concerns Some Major IssuesImpact on divisional performance measuresImpact on firm wide profitsImpact on divisional autonomy
175Transfer Pricing Approaches Market priceNegotiated transfer pricesCost-based transfer pricesFull costFull cost plus markupVariable cost plus fixed fee
176A Transfer Pricing Problem Assume the following data for Division A:Capacity in units ,000Selling price to outside $15Variable cost per unitFixed costs per unit (based on capacity) 5Division 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.
177A 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= $82. 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)