CIMA P2 Advanced Management Accounting

CIMA P2 Advanced Management Accounting
First Intro slide – change details to your own 熊家财

Chapter 1 Analysing and managing costs
Activity based costing (ABC) Activity based management (ABM) Customer profitability analysis (CPA) Activity based profitability analysis TQM Other important techniques First Intro slide – change details to your own

Section 1 The nature of cost
迎评工作一 Section 1 The nature of cost

Traditional Costing Systems
Product Costs Direct labor Direct materials Factory Overhead Period Costs Administrative expense Sales expense Appear on the income statement when goods are sold, prior to that time they are stored on the balance sheet as inventory. Appear on the income statement in the period incurred.

Product Costs Direct labor Direct materials Factory Overhead Period Costs Administrative expense Sales expense Direct labor and direct materials are easy to trace to products. The problem comes with factory overhead.

Typically used one rate to allocate overhead to products. This rate was often based on direct labor dollars or direct labor hours. This made sense, as direct labor was a major cost driver in early manufacturing plants.

Problems with Traditional Costing Systems
Manufacturing processes and the products they produce are now more complex. This results in over-costing or under-costing. Complex products are not allocated an adequate amount of overhead costs. Simple products get too much.

Today’s Manufacturing Plants
Are often automated - AMT: Advanced manufacturing technology - CAD: Computer-aided design - CAM: Computer-aided manufacturing - Robotics - FMS: Flexible manufacturing systems - EDI: Electronic data interchange - Overheads become a greater proportion of total production costs

FMS: Flexible manufacturing systems
顾客的需求显示出量少、质高、多样化和快速多变的特点，从而使企业的产品趋于多样化、特殊化。企业以及时满足顾客日新月异的需求为宗旨，开始小批量生产，甚至接受个别的特殊订货。在这种情况下，以经济批量概念为基础的传统标准成本制度，无法计算与产品无关的成本，从而失去了它存在的基础，导致产品成本的失真。

Today’s Manufacturing Plants
Most costs are fixed in the short term rather than variable - wage - 机器调整准备费用 Marginal costing isn’t appropriate Use proportionately smaller amount of direct labor making direct labor a poor allocation base for factory overhead.

Cost analysis in the modern business environment
Short-term variable costs that vary with production volume - material cost Long-term variable costs that vary according to the range and complexity of production - support activities - set-ups, handling of inventory, expediting, scheduling

Volume versus variety

Volume versus variety The problem of producing a small number of products in volume, compared with producing a large variety of products in small runs The modern philosophy of manufacturing in variety leads to an increase in the costs of support services Cost control requires that costs of support activities are related to products via their casual factors The ABC approach is to relate the cost of support activities to cost drivers

Cost analysis in the modern business environment
Cost drivers Any factor which causes a change in the cost of an activity Short-term variable costs Cost driver = volume of activity (e.g. labour hrs) Long-term variable costs These are related to the transactions/activities in support departments where the costs are incurred. ∴Cost driver = transaction/activity in support department

When the manufacturing process is more complex:
Then multiple allocation bases should be used to allocate overhead expense. In such situations, managers need to consider using activity based costing (ABC).

Section 2 Activity based costing
迎评工作一 Section 2 Activity based costing

ABC Definitions ACTIVITY BASED COSTING(ABC) is an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.

ABC Definitions 以作业消耗资源和产品消耗作业为前提，以作为核算对象，依据资源动因将资源成本分配到作业中心，在将作业中心的成本以作业动因为基础追溯到产品成本，从而计算出各种产品总成本和单位成本。

Activities An activity is an event that incurs costs.
- 作业是企业组织为了特定目的而消耗资源的活动或事项，它代表了企业组织实施的工作，是连接资源与成本对象的桥梁。

Activities 作业是一系列相关任务（Task）的总称 “发出订货单”作业 - 订货部门收到购买需求 - 索取供应商报告并评估价格
- 订货部门收到购买需求 - 索取供应商报告并评估价格 - 编制比较分析表 - 认定或选择供应商 - 编制并发出订单

“作业”是最基本的概念，是进行作业成本计算的核心和基础。
Activity “作业”是最基本的概念，是进行作业成本计算的核心和基础。通俗的讲，作业是基于一定目的、以人为主体、消耗一定资源的特定范围内的工作。 Unit level （单位产品受益的作业，与产品产量成比例） Batch level （一批产品受益的作业，与产品批数成比例） Product level （某产品每单位受益的作业，与产品项目成比例）（某机构或部门产品受益的作业） Facility sustaining level

基本思想——作业消耗资源，产品消耗作业。
ABC key concept 基本思想——作业消耗资源，产品消耗作业。

Cost Driver 资源动因作业动因成本动因——成本驱动因素，决定成本发生的活动或事项。
BACK 成本动因——成本驱动因素，决定成本发生的活动或事项。成本动因可以是一个事件、一项活动或作业，它支配成本行为，决定成本的发生。资源被各种作业消耗的方式和原因，反映作业对资源的消耗，资源成本分配到作业中心的标准。资源动因成本动因在资源流动中所处的位置资源作业产品各项作业被最终产品或劳务消耗的方式和原因，反映产品消耗作业情况，是作业中心成本分配到产品中的标准。作业动因

Cost Driver

Resource cost driver 典型的资源动因：公用事业 ---- 仪表数薪酬作业 ---- 雇员人数
公用事业仪表数薪酬作业雇员人数调整作业调整次数材料整理作业材料移动次数机器运行作业机器小时门卫、清洁作业空间大小

Activity cost driver 典型的作业动因：采购订单份数验收单份数检验报告数或时数零部件储存数支付次数直接人工小时
机器小时

Design Steps for an ABC System
OBJECTIVE Activity-Based Costing System Design Steps for an ABC System Identify, define, and classify activities and key attributes. A simple list of activities identified is called an activity inventory. Activity attributes are nonfinancial and financial information items that describe individual activities. An activity dictionary lists the activities in an organization along with desired attributes. A primary activity is one that is consumed by the final cost object.

OBJECTIVE Activity-Based Costing System Design Steps for an ABC System Identify the factors that determine the size of the costs of an activity/cause the costs of an activity. —cost drivers

OBJECTIVE Activity-Based Costing System Design Steps for an ABC System Assign costs consumed by more than one activity in proportion to their usage of the activity as measured by the activity driver. Transaction drivers measure the number of times an activity is performed. Duration drivers measure the demands in terms of the amount of time it takes to perform an activity. Intensity drivers measure the charge each time an activity is performed.

OBJECTIVE Activity-Based Costing System Design Steps for an ABC System Collect the costs associated with each cost driver into what are known as cost pools. Cost pool is grouping of costs relating to a particular activity in an activity-based costing system. Charge the costs of each cost pool to products on the basis of their usage of the activity using a cost driver rate.

第一阶段：按资源动因将制造费用分配到各成本库。第二阶段：按成本动因将各成本库的成本分配给各产品线。
直接材料直接人工甲乙丙产产产品品品作业中心Ａ制造费用作业中心B 作业中心C 作业中心资源动因作业动因

Steps for an ABC

Activity based costing (ABC) 7
The ABC process

Let’s work an example . . . Assume that a company makes widgets
Management decides to install an ABC system

Example: ABC Suppose that Cooplan manufactures four products, W, X, Y, and Z. The direct labor cost per hour is $5. Other output and cost data for the period just ended are as follows. Output unit No of production runs Material cost per unit Labor cost hours per unit Machine hours per unit W 10 2 20 1 X 80 3 Y 100 5 Z 14

Example: ABC (continued)
Overhead cost Short-run variable costs Set-up cost Expediting and Scheduling costs Materials handling costs Prepare unit cost for each product using traditional costing and ABC.

Absorption costing W X Y Z Total Direct material 200 800 2000 8000
Direct labor 50 150 500 1500 Overheads 700 2100 7000 21000 950 3050 9500 30500 44000 Units produced 10 100 Cost per unit 95 305

ABC W X Y Z Direct material 200 800 2000 8000 Direct labor 50 150 500
1500 Short-run variable overheard 70 210 700 2100 Set-up costs 1560 3900 Expediting and Scheduling costs 1300 3250 Materials handling costs 1100 2750 4280 5120 13100 21500 44000 Units produced 10 100 Cost per unit 95 305

Summary Product traditional ABC Diff per unit Diff in total 95 428
W 95 428 +333 +3330 X 305 512 +207 +2070 Y 131 +36 +3600 Z 215 -90 -9000

Activity based costing (ABC)
Absorption costing allocates too great a proportion of overheads to high-volume products These products tend to cause relatively little diversity Also allocates too small a proportion to low-volume products These products cause greater diversity and use more support services, whereas ABC traces a more appropriate amount This has implications for pricing

Wider uses of ABC Planning Control ABC and decision-making
Many supporters of ABC claim it can assist with strategic decisions such as: Pricing strategy Make or buy decisions Promoting or discontinuing products or parts of the business Developing and designing products

Merit and Criticisms of ABC
Merits of ABC ABC rocognises the increased complexity of modern business with its multiple cost drivers Concerned with all overhead costs Gives a meaningful analysis of costs for pricing, product and design Help with cost reduction Ideally suited to CPA and can be used in service organisations

Merit and Criticisms of ABC
More complex than absorption costing so should only be introduced if it will provide additional management information Tends to burden low-volume (new) products with a punitive level of overhead and so could threaten innovation Can one cost driver explain the behaviour of all the items in a cost pool? Some measure of arbitrary cost apportionment needed for costs such as rent and rates Do decisions or the passage of time cause costs rather than activities? Or is there no clear cause of cost?

Section 3 Activity based Management
迎评工作一 Section 3 Activity based Management

Activity based management (ABM)
Background: - 富裕社会成型，人们收入增加 - 顾客行为更具选择性：突出个性、标新立异 - 企业按顾客特定需要“量体裁衣” - 企业产品品种多样化、产品生命周期大大缩短 - 传统以“产品”为中心的管理思维难以为继 - 形成新的企业组织观和管理思想

Background: 新思想 - “现代企业组织是一个为最终满足顾客需要而设计的一系列作业的集合体”。 - Activity Chain (作业链) - Value Chain (价值链) -企业必须优化作业链—价值链，提高作业产出、减少作业耗费——价值链分析

Activity-Based Management (ABM)
a systemwide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the profit achieved by providing this value 作业成本管理的核心：尽可能消除“不增值作业”，改进“增值作业”，优化“作业链”和“价值链”，最终增加“顾客价值”和“企业价值”。

Operational ABM Strategic ABM Activity analysis Product design Cost driver analysis Just in time (JIT) Performance evaluation Total quality management (TQM)

Activity analysis - Value-added and non-value-added Assessment Criteria Would customer encourage organization to do more of the activity? Would organization be more likely to achieve its goal by performing the activity?

Activity analysis Production or performance time Inspection time: performing quality control Transfer time: moving products from one place to another Idle time: storage time and time spent waiting at the production Question 1.10 in page 78

Cost driver analysis Question 1.3 in page 45

Cost reduction Activity elimination 1 Activity selection 2 Activity reduction 3 Activity sharing 4

Performance evaluation （1）Activity volume （2）Time （3）Quality （4）Cost

Design decisions: providing cost driver information to ensure production of low cost products meeting customers’ requirements - use fewer components - use standard components

Section 4 Direct product profitability (DPP)
迎评工作一 Section 4 Direct product profitability (DPP)

Direct product profitability (DPP)
Definition Used primarily by within retail sector Attribution of both purchase price and other indirect costs (distribution, warehousing, retailing) to each product line A net profit, as opposed to a gross profit, can be identified for each product The cost attribution process utilizes a variety of measures (eg. warehouse space, transport time) to reflect the resource consumption of individual products

Calculation of DPP General cost? $ Sales price X Less: purchase cost (X) Gross margin Less: direct product costs warehouse direct costs transport direct costs store direct costs Direct product profit

Direct product costs Direct product costs Example Warehouse direct costs Offloading, unpacking, picking and sorting, space costs, inventory financing costs Transport direct costs Fuel, depreciation of vehicle, driver’s salary, vehicle serving Store direct costs Receiving and inspecting, moving, shelf filling, space cost, inventory financing costs

Benefits of using DPP Detail information on the performance of individual product Product can be ranked according to product profitability Diagnostic capabilities Profitable product line can be give more prominent shelf space Lead to a mutual understanding of product and supply chain costs, and improve supplier/retail relationships Better pricing decision Improved management of store and warehouse space

Section 5 Customer profitability analysis (CPA)
迎评工作一 Section 5 Customer profitability analysis (CPA)

Customer profitability analysis (CPA)
Definition The analysis of the revenue streams and service costs associated with specific customers or customer groups. The relative profitability of specific customers/customer groups can be assessed Strategies can then be aimed at attracting and retaining the most profitable customers

Customers can be categorised using the following grid: The aim is to attract as many accepting customers as possible. Many large retail organisations fall into the demanding category

CPA and ABC The necessary analysis of costs can be successfully carried out using ABC cost drivers Examples Activity Cost driver Order taking No of orders taken Sales visits No of sales visit Emergency orders No of rushed order Delivery Miles travelled

Customer profitability analysis (CPA) 4
Unprofitable customers identified by CPA should be persuaded to alter their buying behaviour For example, discouraged from placing lots of small orders The ABC approach also highlights where cost reduction efforts should be focused (e.g. reduce ordering cost) Customer life cycles Customers can be costed over their life cycle and expected future cash flows discounted

Customer profitability analysis (CPA) 5
Customer profitability statement Question 1.5?

Question 1.5 Kipling Narayan Revenue at list price 50 * 100 *5 =25 000 50 * 420= Less: Discount given 2 500 3 150 Net Revenue 22 500 17 850 Less: Cost of good sold 12 500 10 500 Less: Customer costs Administration cost 250 500 Distribution costs 5 000 Net margin 4 750 6 850 No of pair shoe sold 420 Net gain per pair &9.5 $16.31 Net gain per $1 of sale revenue &0.19 $0.33

迎评工作一 Section 6 Activity based profitability analysis

Activity based profitability analysis 1
Applying the concept of the manufacturing cost hierarchy: The costs of products, customers and distribution channels can be compared with their revenues Then a tier of contribution levels established

Costs should be assigned to the appropriate level in the hierarchy This depends on whether they are incurred in relation to an activity that supports a product, product line, customer or distribution channel Costs should then be aggregated down the hierarchy to determine contribution margins by product/product line/customer/distribution channel

Section 7 Pareto analysis
迎评工作一 Section Pareto analysis

Pareto Analysis Pareto analysis is the 80/20 rule:
- In inventory control: 20% of inventory items might represent 80% of the value - In product analysis, 80% of the company profit is earned by 20% of the product - In CPA, 20% of the company customers generate approximately 80% of the company’s total margin

Pareto Analysis

Other important techniques 7
Traditional responses to the problems of improving manufacturing capacity and reducing unit costs of production include: Longer production runs Economic batch quantities Fewer products in the product range More overtime Reduced time on preventative maintenance, to keep production flowing

Section 8 Just in time (JIT)
迎评工作一 Section Just in time (JIT)

Just-in-time (JIT) — Background - Global environment - Flexibility - Employee empowerment It is of greatest importance to take an order form placement to completion in the shortest time possible.

Just-in-time (JIT) Definition: JIT is a system whose objective is to produce or to procure products or components as they are required (by a customer or for use) rather than for inventory. It is a “pull” system, which is responds to demand, in contrast to “push system”, in which inventories act as buffers between the different elements of the system, such as purchasing, production, and sales. “Push” system Supplier production customers “Pull” system Supplier production customers

Just-in-time (JIT) Definition: - JIT production: a production system that is driven by demand for finished products whereby each component on a production line is produced only when needed for next stage. - JIT purchasing: a purchasing system in which material purchases are contracted so that the receipt and usage of material, to the max extent possible, coincide.

Just-in-time (JIT) Operational requirement: - High quality: - Speed: - Reliability: supplier - Flexible: - Lower cost:

Just-in-time (JIT) Although often described as a technique, JIT is more of a philosophy It encompasses a commitment to continuous improvement Also a search for excellence in the design and operation of the production management system Philosophy: - To do things well, and gradually do them better (continuous improvement) - To squeeze waste out of the system

Just-in-time (JIT) — Three key elements of JIT philosophy:
- Elimination of waste - waiting time - transport time - inventory - inspection time - Involvement of all staff - Continuous improvement Question 1.10 in page 78

Just-in-time (JIT) JIT techniques and methodologies 1 - Work standards
- Flexibility in responsibilities - Equality of all staff - Autonomy - Development of personnel - Quality of working life - Creativity

Just-in-time (JIT) Other JIT techniques and methodologies 2
- Design for manufacture - Use several, small, simple machines - Work floor layout and work flow - Total productive maintenance - Set-up reductions - Total people involvement - Visibility - JIT purchasing

Just-in-time (JIT) A kanban control system

Just-in-time (JIT) Problems with JIT - May be difficult to predict patterns of demand - Makes the organisation vulnerable to disruptions in the supply chain - Wide geographical spread makes its operation difficult JIT in service operation

Manufacturing cycle efficiency: MCE=

Section9 Total quality management
迎评工作一 Section9 Total quality management (TQM)

Total Quality Management (TQM) 1
Manufacturing organisations Pre 1970s, there was little overseas competition Costs were passed on to customers Minimal efforts were made to maximise efficiency/reduce costs/improve management practices Now Massive overseas competition Global networks for acquiring raw materials and distributing high quality, low-priced goods

Service organisations Pre 1980s many were government-owned monopolies or protected by highly regulated, non-competitive environments Cost increases were covered by increasing prices Cost systems were not deemed necessary Now Privatisation and deregulation has resulted in intense competition Also an increasing product range and a need for sophisticated costing systems

Product life cycles In the past organisations could rely on years of high demand for products Now Competitive environment Technological innovation and discriminating and sophisticated customers demand/require continual product redesign and quick time to market

Changing customer requirements Successful organisations make customer satisfaction their priority Key success factors Cost efficiency Quality Time Innovation

New management approaches Continuous improvement Employee empowerment Total value chain analysis

Changing manufacturing systems Traditional manufacturing systems Jobbing industries Batch processing Mass/flow production

Recent developments Group technology/repetitive manufacturing Dedicated cell layout Manufacturing processes must be sufficiently flexible to accommodate new product design and To satisfy the demand for greater product diversity

To compete organisations need to: Be innovative and flexible Be able to deal with short product life cycles Be able to offer product variety whilst maintaining or reducing costs Reduce set-up times and inventories Have the greatest possible manufacturing flexibility

AMT helps them to do this Computer-aided design (CAD) Computer-aided manufacturing (CAM) Flexible manufacturing systems (FMS) Electronic data interchange (EDI)

Production management strategies Traditional approach to determining materials requirements is to monitor the level of inventories constantly, so that once they fall to a preset level they can be reordered This ignores relationships between different inventory lines Demand for a particular item is dependent on demand for assemblies/subassemblies of which it forms a part Modern computer techniques integrate such relationships into the inventory ordering process

The process of focusing on quality in the management of all resources and relationships within the organisation Two basic principles of TQM Getting things right first time On the basis that the cost of correcting mistakes is greater than the cost of preventing them Continuous improvement The belief that it is always possible to improve, no matter how high quality may be already

Measuring and controlling quality Quality assurance (supplier guarantees quality) Inspection of output (at various key stages) Monitoring customer reaction Employees and quality Workers are empowered and encouraged to become multiskilled Workers are encouraged to take responsibility for their work

Internal customers and suppliers To satisfy external customers’ expectations, the expectations of internal customers must be satisfied Internal customers are therefore linked in quality chains Cost of quality The difference between the actual cost of producing, selling and supporting products/services and The equivalent cost if there were no failures during production/usage

Cost of prevention Costs incurred prior to or during production in order to prevent substandard or defective products/services being produced Example Training in quality control Cost of appraisal Costs incurred in order to ensure that outputs produced meet required quality standards Inspection of goods inwards

Cost of internal failure Costs arising from inadequate quality which are identified before the transfer of ownership from supplier to purchaser Example Losses due to lower selling prices for sub-quality goods Cost of external failure Costs arising from inadequate quality discovered after the transfer of ownership from supplier to purchaser Cost of customer service section

Focuses on obtaining small incremental cost reductions during the production stage of the product life cycle Using various tools such as value analysis and functional analysis

Continuous improvement (CI) The use of an organisation’s human resources to produce a constant stream of improvements in all aspects of customer value This includes quality, functional design and timely delivery, while lowering cost at the same time

Basic concepts of CI Quality - defined by the needs of both internal and external customers Process improvements - through technology and innovative ideas Team work - in the form of quality circles and group problem–solving activities

CI and Kaizen costing 4 Essential factors for CI
Commitment from senior management Opportunity for all employees to contribute Information about the organisation’s environment Employees’ awareness of their role Management of the performance and contribution of employees Good communications Recognised quality management systems and standards Measurement and evaluation of progress against key performance indicators and benchmarks

Kaizen costing process

Standard costing v Kaizen costing

Theory of constraints (TOC) An approach to production management Aims to maximise sales revenue less material and variable overhead costs Focuses on the factors which act as constraints to this maximisation Binding constraint A process that acts as a bottleneck (or limiting factor) and constrains throughput

Principles Inventory costs money in terms of storage space and interest and so is undesirable The only inventory that should be held is a buffer inventory immediately prior to the bottleneck This means that output through it is never held up Operations prior to the binding constraint should operate at the same speed as the binding constraint otherwise WIP will build up

Aim Maximise throughput contribution (sales revenue less material cost) At the same time keeping conversion cost (all operating costs except material cost) and Investment cost (inventory, equipment, building costs etc.) to a minimum TOC is not an accounting system It is a production system

Throughput accounting (TA) Assumes management have a given set of resources available (existing buildings, capital equipment, labour force) Using these resources, purchased materials and parts must be processed to generate sales revenue The most appropriate financial objective to set is therefore maximisation of throughput This is sales revenue less direct material cost

Why is TA different? TA differs from other accounting systems because of what it emphasises Throughput Stock minimisation Cost control

Examples Throughput accounting can be used successfully in service and retail industries If there is a delay in processing a potential customer's application, business can be lost A bottleneck might form if work that could be done by nurses has to be carried out by doctors

Three concepts upon which TA is based All factory costs except materials costs are fixed The ideal inventory level is zero (apart from a buffer stock prior to the bottleneck) and so unavoidable idle capacity is inevitable No value is added and no profit is made until a sale takes place

Factors that limit throughput Bottleneck resources Lack of product quality/reliability Unreliable material supplies Customers with particular demands Throughput measures Return per time period - Throughput contribution ÷ time period Return per time period on bottleneck resource - Throughput contribution ÷ minutes (say) on bottleneck resource

TA ratio- Throughput contribution per time period ÷ conversion cost (i.e. labour + o/head) per time period Current effectiveness ratio- Standard minutes of throughput achieved ÷ minutes available All based on throughput contribution or return or value added = sales − material costs

Advantages of TA The principal advantage of TA is that it directs attention to critical factors, such as: Bottlenecks Key elements in making profit Inventory reduction Reducing response time to customer demand Even production flow Overall effectiveness and efficiency

Criticisms of TA It is seen by some as too short term, as all costs other than direct material cost are regarded as fixed It concentrates on direct material cost and does not control other costs By attempting to maximise throughput an organisation could be producing in excess of profit-maximising output

The fundamental rethinking and radical redesign of business processes to achieve dramatic improvements These improvements are seen in critical contemporary measures of performance such as cost, quality, service and speed A process is a collection of activities that takes one or more kinds of input and creates an output

Principles of BPR which influence systems development Processes should achieve a desired outcome (not focus on existing tasks) Personnel who use output from a process should perform the process There is no differentiation between information gathering and information processing

Principles of BPR which influence systems development continued Geographically-dispersed resources should be treated as if they were centralised Parallel activities should be linked, not integrated There is no distinction between workers and managers Information should be captured once, at source

CIMA P2 Advanced Management Accounting

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