Summary of topic 1-4 for the midterm of Intermediate management accounting. Includes the slides, questions and answers to the quizzes and questions and answers to the cases.
Introduction
* all of the cases can be found in the case book recommended by the teacher
Role of managers
Planning
o Setting goals and objectives and
determining how to achieve them
Directing and motivating
o Overseeing day-to-day operations and keeping
the organization functioning smoothly
Controlling
o Evaluating the performance against the plan,
and making adjustments to keep the
organization pressing toward its goal
Problems could arise...
- What if the CEO of Frito-Lay did not have the cost information? (Lack of information)
- What if the CEO of Frito-Lay did not know how to manage costs? (Adverse selection)
- What if the CEO of Frito-Lay did not care the company’s long-term interests but only want to pursue high salary
before retirement? (Moral Hazard)
- What if the middle- and lower-employees did not cooperate with the new strategy? (Moral Hazard)
The principal-agent relationship
Agents are hired to act on the principal’s behalf
Control problems
Any problems, issues, weaknesses, or vulnerabilities
that are likely to cause negative organization
outcomes and hinder an organization from achieving
its goal.
Managers fail to make the best decisions
Employees fail to exhibit the most
desirable behaviours
Management control systems (MCSs)
A management Control System (MCS) is an integrated use
of different mechanisms to gather and use the information about the organizational performance
Collect and analyse MA information
Provide feedback to employees and managers facilitate learning, better practices, and more informed
decisions
Motivate higher effort and performance
Identify problems and possible solutions
Integrated use of MCSs can turn into corporate culture that attract the right employees
As a manager:
How do you set prices for your products? How do you know which products are more profitable? How to manage
the costs and increase profitability?
A costing system could help
How to develop goals and plans for the next period? How to assess the current performance? How to analyze the
difference between actual and planned performance?
A planning and budgeting system could help
How to reward and motivate your employees? How to evaluate their performance? How to prevent them from
committing misconduct? How to attract and recruit the right people?
A performance measurement and rewards system could help
, Lecture 1: Volume based costing
Example: costs incurred for producing chairs
Manufacturing/product costs Non-manufacturing costs
Materials Marketing
(e.g., wood, plastic, nails, screws)
Labour Costs of storage and delivery
Utilities used for production Depreciation of delivery equipment
(e.g., water and electricity)
Depreciation of the equipment used for production Salary paid to managers and administrative staff
Rent paid for the factory site Rent paid for the office site
Utilities used in the office
Depreciation of equipment used in the office
Direct Overhead
Materials, labour, Product cost that cannot
depreciation and utilities be directly traced to a
that can be traced directly cost object
to a cost object
How to allocate overhead to each chair? What if we only have one product line?
Only have one type of products = allocate overhead equally to each product
overhead
Allocation rate (or burden rate) =
number of products
Cost allocation in Regionfly:
Indirect cost pool All overhead costs: $2.179.686 (in 2014)
Cost-allocation base Variable direct costs: $722.206 (in 2014)
Cost object (each route) Allocated overhead costs + direct costs
Direct costs Variable direct costs
Resources spending and resources consuming
Resources spending ≠ resources consuming
Resources spending may be independent from volumes produced
o For example, a firm needs to pay for the rent of its warehouse/factory/office regardless of the
volume it sells
o In RegionFly, a lot of overheads are still incurred after the volume declined;
Resources consuming is usually directly related to production;
o For example, the direct and/or indirect labour and materials used to produce the products
Avoidable and unavoidable costs
Which costs are avoidable and which are unavoidable?
Fixed and variable costs as approximation of what costs are unavoidable or avoidable
o Variable costs change proportionally with volume
o Fixed costs remain fixed throughout
This may not always be the case. If a firm increases/decreases its capacity, its fixed costs
will change
o Using allocated costs to analyse the current situation of RegionFly may not be appropriate, as it
ignores that even a drop a route, the fixed costs will not decrease
Costs: fixed or variable? Indirect or direct?
Wood and plastic used to manufacture chairs? – variable, direct
Wages paid to administration staff? – fixed, indirect
Wages paid to manufacturing workers? – depends: do we pay them fixed wages or by hours or by
products?, direct
Rent? – fixed, indirect
Utilities? – semi-fixed (or semi-variable), partially direct and partially indirect
Depreciation of product equipment? – most time variable, but may not be straight-line, direct/indirect
depends on how the equipment is used and the cost object
, Death spiral
Consider which cots are avoidable and unavoidable at all costs in the product drop decision
Otherwise be aware of DEATH SPIRAL:
o Drop products. Production volume decreases
o Allocation rate increases
Allocation base decreases proportionally to volume
O/H costs does not decrease that much
Allocation base decreases more than the overhead
o Reported costs of remaining routes increase
o More routes are dropped
o Cycle where eventually no routes are flown!
o Death of the firm
What should the company do?
Besides making decisions about dropping or keeping route 7, what do you think the managers in Region
Fly should do?
o Cut fixed costs?
o Increase the volume of the current routes?
o Change strategy and expand?
To sum up
Overhead allocation rate = (overhead costs) / (allocation base)
Spending on resources differs from resource consumption
Relevant costs for a service drop decision should be avoidable costs
o Fixed and variable cost distinction as starting point for identifying avoidable costs
Beware of death spiral: drop services volume decreases burden rate increases reported service
costs increases further services dropped
Applying fixed vs. variable distinction can be difficult in real life! A more “sophisticated” costing system is needed!
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