traditional cost management traditional cost management c h a p t e r 6
TRANSCRIPT
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Traditional Cost ManagementTraditional Cost Management
C H A P T E R 6
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Learning Objective 1
Outline the different cost flow patterns in manufacturing, merchandising, and service organizations and understand how these costs are reflected in the income statement and balance sheet.
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What are Cost Flow Patterns of Manufacturing, Merchandising, and Service Organizations?
Direct MaterialsDirect LaborManufacturing Overhead
SuppliesWages & Salaries Overhead
Manufacturing
Merchandising
Inventory Purchase CostInventory Shipping Cost
Service
Work-in-ProcessInventory
Cost of Goods Sold
FinishedGoodsInventory
Cost of Goods Sold
Merchandise InventoryMerchandise Inventory
Work-in-Process Services
Cost of Services Sold
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Learning Objective 2
Interpret a cost of goods manufactured schedule and analyze the levels of raw materials, work-in- process, and finished goods inventories in a manufacturing organization.
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Cost of Goods Manufactured Schedule
Shows specific costs incurred to manufacture goods.
Provides calculations that support flow of costs.
Total costs of goods manufactured should include only those costs that have gone through work-in-process during the period.
Underapplied MOH is subtracted from actual MOH costs. Overapplied MOH is added to actual MOH costs.
Cost of goods available for sale = beginning finished goods inventory (adjusted for over- or underapplied MOH) + total cost of goods manufactured.
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Analyzing COGS
COGS is not useful for internal decision making. Management wants to determine cost of goods
manufactured on a product-by-product basis; on a department-by-department basis; on a period-by-period basis.
Other criteria examined besides cost: product quality. speed of production.
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Learning Objective 3
Understand how merchants manage cost information in their organization.
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Inventory Management IssuesCarrying Too Much Inventory
Increased overhead costs Increased financial holding
costs Increased risk of loss of
market value Decreased inventory
flexibility Increased inventory
shrinkage
Carrying Too Little Inventory Increased risk of lost
sales Increased ordering costs Increased risk of supplier
price increases Increased exposure to
nondelivery Decreased bulk order
discounts
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Return on Investment It is just as important to manage the money outflow for
asset investment as it is to manage the money inflow from profits.
Good management accounting can provide real value in the management effort to improve a merchandising operation.
Profit margin X Asset turnoverROI =
Profit
RevenueProfit margin =
Revenue
Total assetsAsset turnover =
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Define Net Operating Profit
The difference between normal business sales and normal business expenses.
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Learning Objective 4
Measure profitability and personnel utilization in a service organization.
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Describe the Characteristics of Service Organizations
Professional Services
Service Shops
Mass Services
People Equipment
Process Product
High Customization
Low Customization
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What Two Concepts Are Used to Develop Cost Management Evaluation
Tools for Service Organizations?
1) Profitability
2) Efficiency
- While management of materials inventories, equipment, and building space are important in a service organization, where must the emphasis be placed?
- Management of the people and their related cost to obtain the most efficient use of this critical resource.
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What is the Formula for Profit Percentage from Professionals (PPP)?
What is a Personnel Utilization Report (PUR)?
PUR =Actual billable hours
Budgeted billable hours
PPP =Revenue – Professional compensation cost
Revenue
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Learning Objective 5
Calculate and interpret holding costs in merchandising and service businesses.
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Match These Terms with Their Correct Formula or Definition
Economic Profit
Cost of Capital
Financial Holding Cost
The Cost of Using Money
Average Investment x Annual Rate x Number of Periods
Net Operating Profit – Holding Cost of Inventory and Other Asset Investments
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Match These Terms with Their Correct Formula or Definition
Economic Profit
Cost of Capital
Financial Holding Cost
The Cost of Using Money
Average Investment x Annual Rate x Number of Periods
Net Operating Profit – Holding Cost of Inventory and Other Asset Investments
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Define Segment and Economic Value Added
_____________________ is a commercialized performance measurement system emphasizing incremental profits above the profit necessary to meet cost of capital requirements.
__________ is a part of a business that requires separate reports by management for evaluation purposes.
Segment
Economic Value Added
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Expanded MaterialLearning Objective 6
Use classic quantitative tools in inventory management (economic order quantity, reorder point, and safety stock).
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Economic Order Quantity
What must firms balance?
costsof carrying too much inventory
costs of carrying too
little inventory
EOQ attempts to balance these costs:overhead costs, holding costs,risk of lost market values, shrinkage, etc.
EOQ attempts to answer what questions?How much inventory should we order?When do we place the inventory order?
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Calculating EOQ
EOQC
QP2
Q = The market demand in units for the period
P = The overhead cost of placing one order
C = The total carrying cost for one unit for the period
Q = The market demand in units for the period
P = The overhead cost of placing one order
C = The total carrying cost for one unit for the period
How much inventory should we order?What is the formula for EOQ?
What do the terms mean?
How much inventory should we order?What is the formula for EOQ?
What do the terms mean?
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Reorder Point
When do we place the inventory order? What is the formula?
Reorder point = Average lead time in days
x Average daily sales
Define Lead Time:
time lag between initiating a purchase order and when inventory is delivered and ready for sale.
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Safety Stock
Because a surge in customer demand or problems in order processing or shipping may cause fulfillment problems, a manager may see the need for a little cushion in reorder point.
Safety stock — calculation has two parts:
1. To handle possible problems in the reorder process.
2. To handle an unexpected spike in sales demand.
Why does a business want to hold safety stock?
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Define Safety StockThe minimal level of inventory required to ensure against the organization running out of inventory in the case of unforeseen problems in receiving its next purchase order.
Reorder point = (Average lead time in days x Average daily sales) + Safety stock
Combining the two calculations is acceptable, assuming management is not interested in knowing the specific level for safety stock. However, management usually wants to know when sales are eating into the safety stock.
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EOQ, Reorder Points, and Safety Stock Inventory Levels
EOQReorder
Point
Safety Stock
Inventory (Units)
0 units
3 days
6 days
9 days
12 days
Average Lead Time (3 days)
Reorder Point with Safety Stock