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Lesson 14 Managerial Accounting Applications

Lesson 14 Managerial Accounting Applications

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Published by: MUNAWAR ALI on Jan 26, 2009
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05/16/2013

 
Task Team of FUNDAMENTAL ACCOUNTINGSchool of Business, Sun Yat-sen University
Lesson NotesLesson 14 Managerial Accounting: ApplicationsLearning objectives
1.
 
Describe segmented reporting and responsibility accounting system2.
 
Explain the main aspects of Cost-volume-profit analysis3.
 
Analyze budgeting and budgetary control4.
 
Describe standard costs and variance analysis5.
 
Explain the use of managerial accounting in decision making
Teaching hours
Students major in accounting 0 hoursOther students 6 hours
Teaching contentsIntroduction
Let’s look at the XYZ Company exa
mple.
 
A manager at XYZ Company wants to replace anold machine with a new, more efficient machine. New machine:List price 900000Annual variable expenses 800000Expected life in years 5Old machine:Original cost 720000Remaining book value 600000Disposal value now 150000Annual variable expenses 1000000Remaining life in years 5
XYZ’s sales are $2000000 per year.
Fixed expenses, other than amortization, are $700000 per year. Should the manager purchase the new machine? The manager recommends that thecompany not purchase the new machine since disposal of the old machine would result in a loss:Remaining book value 600000Disposal value -150000Lossfrom disposal 450000 1Is it correct?2
What’s your comment to the manager’s decision?
After learning this chapter, you will know how to employ the tools of managerial accountingand make decisions correctly.
Segmented Reporting and Responsibility Accounting Systems
 Segmented Reporting 
 
Organizations may break down their operations into various segments,such as divisions, stores, services, or departments. Thus, management needs reports on each
 
Task Team of FUNDAMENTAL ACCOUNTINGSchool of Business, Sun Yat-sen University
segment for cost management and performance evaluation.
 
Segments may be evaluated as a cost centre, a profit centre, where profit centre reports
include information on a segment’s revenues and costs, and an investment centre.
 Some costs are direct and some are indirect, and indirect costs may be allocated to variousdepartments. Service department costs are shared indirect expenses of operation departments.They may be allocated using a variety of bases. Please refer to the following table:
Service Department Common Allocation BasesGeneral Office Number of employeesPersonnel Number of employeesPayroll Number of employeesAdvertising SalesPurchasingNumber of PurchaseOrdersCleaning Floor space occupiedMaintenance Floor space occupied
 Responsibility Accounting System
Responsibility accounting system is an accounting systemwhich assigns managers the responsibility for costs and expenses under their control.
 
Responsibility accounting budgets are prepared prior to each accounting period.Responsibility accounting performance reports compare actual costs and expenses to budgetedamounts
Cost-volume-profit Analysis
CVP analysis is used to answer the questions such as (1) How much must I sell to earn mydesired income? (2) How will income be affected if I reduce selling prices to increase salesvolume? (3) How will income be affected if I change the sales mix of my products?....
 
The basic assumptions of CVP analysis is that CVP analysis assumes relations can beexpressed as straight lines within the relevant range, which means that unit selling price remainsconstant, unit variable costs remain constant, and total fixed cost remain constant. If the expectedcost and revenue behaviour is different from the assumptions, then the results of CVP analysis areof limited use.The objective of the cost analysis is determination of total fixed cost and the variable unitcost. The basic methods to estimate the total costs equation include: (1) scatter diagram; (2)high-low method; and (3) least-squares regression. Here least-squares regression is usuallycovered in advanced cost accounting courses. It is commonly used with computer software because of the large number of calculations required.
 Break-even Analysis
The break-even point is the unique sales level at which a companyneither earns a profit nor incurs a loss. The break-even point may be expressed in units or indollars of sales.
 
Break-even point in units =Contribution margin per unit
Fixed Costs
 
Task Team of FUNDAMENTAL ACCOUNTINGSchool of Business, Sun Yat-sen University
Computing Income from Expected Sales
The income given a predicted level of sales can becomputed as follows:
 Sales Volume Needed to Earn a Target Income
 
Break-even formulas can be adjusted toshow the sales volume needed to earn any amount of income.
Break-even point in dollars =Contribution margin ratioFixed Costs
= Sales
 –
[Fixed costs + Variable costs]
Pre-taxIncome
= Sales
 –
Fixed costs - Variable costs
or
Pre-taxIncomeContribution margin ratioContribution margin per unitUnit sales = Fixed costs +Target incomeDollar sales =Fixed costs +Target income

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