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Summary Management Accounting EUR Business Administration Year 2

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Comprehensive lecture summary of the course Management Accounting at Erasmus University year 2 study Business Administration. Mostly in English.

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  • June 1, 2022
  • 85
  • 2021/2022
  • Summary

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By: boydvermeulen • 2 year ago

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The course Management Accounting

Gedurende het vak zullen de volgende 3 elementen worden behandeld:
Costing for planning and Operational and strategic decision Strategy implementation
operational control making

- Cost behavior and cost assignment - Production choice and production mix - Performance measurement
- Budgeting - Manufacturing methods and outsourcing - KPI characteristics and design
- Variance analysis - Pricing - Performance reporting
- Customer profitability


Strategy
Strategy (firm) → plan that outlines the company's purpose and long-term planning.
Firms arrive (by choice or market forces) at one of two strategies that provide a competitive
advantage in the market (Michael Porter):
● Product differentiation → firm offers a superior/unique product or service relative to
the products or services of its competitors. This leads to brand loyalty and the
willingness of customers to pay high prices.
● Cost leadership → firm outperforms competitors in producing products or services
at the lowest costs. Focus on productivity and efficiency improvements, elimination of
waste, and tight cost control. This leads to lower selling prices and more demand.

Strategy and management accounting “Strategy without measurement is meaningless”
It’s important to start with a strategy that makes the size and purpose of the company clear.
But on the other hand, having a strategy without being able to measure its outcomes won't
get you any further either.
→ Management Accounting forms the basis for viewing the results of the strategy.

Management accounting becomes increasingly more strategic
Progressive skills, strategic analysis and strategic skills are becoming increasingly important
for auditors and management accountants.



Lecture 1 → read chapter 3 → make exercises 3-27, 29, 30, 35, 37, 40, 41, 48 & 3-54
Lecture 2 → read chapter 8 → make exercises 8-16, 24, 26, 29, 30, 32, 39, 40 & 8-42
Lecture 3 → read chapter 9 → make exercises 8-12, 14, 15, 18, 21, 29, 30, 35 & 9-37
Lecture 4 → read chapter 4 → make exercises 4-18, 19, 22, 26, 32, 34, 35, 36 & 4-44
Also → read chapter 5 → make exercises 5-17, 19, 21, 22, 25, 27, 28, 29 & 5-42
Lecture 5 → read chapter 11 → make exercises 11-11, 12, 15, 19, 23, 27, 30 & 11-36, 11-41
Also → read chapter 13 → make exercises 13-20, 21, 22, 23, 28, 30, 31, 41 & 13-35
Lecture 6 → read chapter 10 → make exercises 10-14, 16, 17, 18, 22, 25, 36 & 10-50
Also → read chapter 14 → make exercises 14-13, 14, 21, 22, 23, 24, 26 & 14-49
Also → read chapter 16 → make exercises 16-22, 23, 24, 25, 32, 33, 39, 40 & 16-52
Lecture 7 → read chapter 18 → make exercises 18-17, 18, 19, 22, 25, 43 & 18-46
Also → read chapter 19 → make exercises 19-11, 12, 13, 18, 20, 26 & 19-42
Also → read chapter 2 → make exercises 2-33, 37 & 2-56

,Lecture 1 - Introduction to key concepts & cost terminology (Book chapters 1 and 3)
- Cost allocation Direct cost vs. Indirect cost
- Cost behavior Fixed cost vs. Variable cost
- Cost relevance Relevant cost vs. Irrelevant cost
- Cost recording Product cost vs. Period cost
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(1) Cost allocation Direct cost vs. Indirect cost

Cost allocation → the process of assigning costs to particular products and services.
- Cost object → the things we want to know the cost of.
- Direct cost → can be easily traced to cost objects.
- Indirect costs (Overheadcosts) → can’t be traced, instead they must be allocated
to cost objects using a cost driver.
- Cost driver (cost allocation base) → factor that causes a change in cost (e.g.
production volume or number of sales).




Cost assignment example
A bicycle factory produces three different types of e-bikes (Touring, Racing and Urban).
There is a certain amount of profit associated with the sale of the e-bikes.
And there are various costs:
- Item costs → like direct materials (e.g. the costs for frame wheels).
- Direct labor costs → like costs during the assembly process (e.g. the person who
attaches the wheels to the frame).
- Labor costs → like production costs.

Now let's say we have an overhead cost of 15,000 euros (e.g. machine maintenance). How
can we allocate this 15,000 euros to the different E-bikes to ensure that we have included all
direct costs and indirect costs of the production process?

We could use the direct labor cost of the production process as a cost driver. With the cost
driver, we can calculate a certain overhead rate. We use this rate to allocate the overhead
costs to the individual products.
- Overhead rate = OH (Overhead) / DL (direct labor cost) = = 0.74.
So for every dollar of direct labor costs used in the production process, there is € 0.74 in
additional costs. We use this rate to allocate the overhead costs to the individual products.

, Given Calculated

Type Revenue Direct Material Direct Labor (euro) Overhead Profit

Touring € 65200 € 19820 € 6500 → 0.74*6500 = € 4827 € 34053

Racing € 74800 € 25630 € 8300 → 0.74*8300 = € 6163 € 34707

Urban € 55600 € 17800 € 5400 → 0.74*5400 = € 4010 € 28390

Total € 195600 € 63250 € 20200 € 15000 € 97150


The direct costs are known (direct materials and direct labor costs) and the overhead costs
are allocated, which allows us to make a profit calculation for each model of bicycle.
- Profit = Revenue - Direct Material - Direct Labor - Overhead




Now let's assume we've also included the direct labor costs in hours (instead of euros) used
in the process. So that's 520 for Touring, 664 for Racing and 432 for Urban. Let us further
assume that each labor hour is € 12.50, then you can make a similar calculation.
- Overhead rate = OH (Overhead) / DL (direct labor hour) = = 9.28.
So for every hour of direct labor used in the production process, there is € 9.28 in additional
costs. We use this rate to allocate the overhead costs to the individual products.


Given Calculated

Type Revenue Direct Material Direct Labor (hour) Overhead Profit

Touring € 65200 € 19820 520 → 9.28*520 = € 4827 € 34053

Racing € 74800 € 25630 664 → 9.28*664 = € 6163 € 34707

Urban € 55600 € 17800 432 → 9.28*432 = € 4010 € 28390

Total € 195600 € 63250 1616 € 15000 € 97150

, In reality the problem is not that simple.
To visualize this, we look at the Daimler-Benz organizational chart. And let's assume we are
interested in allocating direct and indirect costs of the production of Daimler's E-class.




Now, what we see in the organizational chart is that there are many different corporate-level
support functions and different production lines. If we look at the car department, we again
see many support functions. Within the production department there are also several
factories that produce different types of cars. (e.g. E-class cars that are produced in
Sindelfingen). From looking at the organizational chart, we can conclude the following:
● Allocating direct costs is quite simple, while allocating indirect costs is quite complex
and sometimes even quite arbitrary (random).
- Because if we look at the costs of the E-class, we really need a way how we
can allocate all indirect functions, which entail certain costs, to the E-class.
This can be quite complicated and often involves certain assumptions.

Direct and indirect costs: assignment of costs to cost objects
● Costs can be direct costs for one cost object, but indirect costs for another.
- Vb. The cost object individual car versus the cost object production plant. The cost of
the manager overseeing the factory is indirect to the individual car (because there is
no simple way to allocate these manager costs to an individual car), but they can be
direct for the production factory (because there is a 1-to-1 relationship between the
factory and the manager, you can't run the factory without a manager overseeing).

● Costs are not only classified whether they are direct or indirect, but also whether they
are fixed or variable. This brings us to Cost Behavior.

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