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15.963 Management Accounting and Control
Spring 2007

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Mozaffar Khan MIT Sloan School of Management .15.963 Managerial Accounting and Control Spring 2007 Prof.

Inc. large national chains. „ What is the external environment that Colorscope currently faces? „ „ „ Cheaper technology is lowering entry barriers. Intense competition from „ „ „ small stand-alones. and backward (vertical) integration by large printers. 15.963 [Spring 2007] Managerial Accounting & Control 2 .Colorscope. Better technology is eroding quality-based competitive advantage.

mistakes in advertised price can be expensive for content provider to honor. 15.Colorscope. and merchandisers take great pride in their catalogs. „ What has Colorscope’s competitive advantage been. and erosion of rents (high margins).963 [Spring 2007] Managerial Accounting & Control 3 . and why? „ Reputation for quality . „ Intense price pressures.poor quality is extremely costly because „ „ „ pre-press is the last stage at which an error can be detected. Inc.

e. how much to discount which items (i.Colorscope. Inc. then cost can only be determined then. „ Fast turnaround – this is very valuable to the content provider because it gives them more time to decide. for example.963 [Spring 2007] . „ Actual costing differs from normal costing in that overhead allocation rate = actual overhead / actual volume of base. it gives them more time to observe their competitors actions in a fluid environment). Managerial Accounting & Control 4 15. „ This is ex post allocation rate – if actual overhead will not be known till year-end..

output. „ „ How do we determine the amount of overhead in each overhead pool? In the California Bikes example. Inc. we were given the amount of overhead in each cost pool (machining and finishing).963 [Spring 2007] Managerial Accounting & Control 5 . and hours are not clocked in these departments in fixed proportions (Ex. and the only task was to assign the overhead from the cost pools to the jobs. scanning. as opposed to budgeted data.Colorscope. In this case.9). „ „ „ „ For Colorscope. How many overhead cost pools are appropriate for Colorscope? The five departments – prep. so this is an illustration of actual costing. assembly. These are the major stages in the production process. QC. and then allocate overhead from the pools to the jobs. „ „ 15. This is called a two-stage allocation system. we have to first allocate overhead to the cost pools (the five depts). we have actual.

963 [Spring 2007] Managerial Accounting & Control .Two Stage Cost Allocation System Cost of Resources Resources Drivers Cost Pools Cost Drivers Materials J 61001 J 61002 J 62001 6 Wages Depreciation Rent Others Job Preparation Scanning Assembly Output Quality Control Cost Objects 15.

11) „ Why is labor overhead here? „ „ Equipment depreciation is also tracked by dept.Colorscope. „ “other” overhead has to be allocated to the depts. „ 15. Wages are already tracked by dept (Ex.963 [Spring 2007] Managerial Accounting & Control 7 . „ Using floor space as the allocation base makes sense We could use labor hours as the allocation base. Inc. since this is available. „ „ Let us begin with the first stage allocation. Rent has to be allocated to the depts.

492 $92.000 $5.000 $13.999 $224.811 160 Idle Space Total $125.999 Overhead Rate per labor hour (1)/(2) Floor Space in square feet (from exhibit 11) $74 1000 $100 1000 $72 4000 $148 2000 $86 500 6500 15000 15.000 $25.000 $1.000 $1.000 $19.000 $8.811 160 Scanning $32.000 $2.First Stage Allocation Description Wages (from exhibit 11) Depreciation (from exhibit 11) a Rent (from exhibit 11) Others (from exhibit 11) (1) Total Overhead (2) Labor Hour (from exhibit 9) b Prep $8.000 $14.246 $64.311 $13.311 $11.963 [Spring 2007] Managerial Accounting & Control 8 .000 $10.000 $10.639 $29.000 $13.246 640 Assembly $64.000 $4.000 $50.000 $500 $2.000 $500 $1.000 $30.639 200 QC $11.000 $1.492 1280 Output $10.

„ „ „ Using labor hours seems reasonable.Second Stage Allocation „ In the second stage. Managerial Accounting & Control 9 15. Equipment depreciation is another possibility. „ We have to calculate allocation rates for each dept. we allocate from the overhead cost pools to each job. so labor hours will be a more important cost driver of overhead in this case. since it is similar to machine hours.963 [Spring 2007] . Which is a better choice? „ Cost of labor far exceeds depreciation.

total costs = revenues – direct costs – allocated overhead. What is the cost of rework? What should Colorscope do about the cost/quality tradeoff? „ „ Price customer initiated reworks. Restructure production sequence: prep -> scanning -> QC -> assembly -> output -> QC Managerial Accounting & Control 10 15.Colorscope „ Now we can calculate job profitability. „ This is just revenues . „ „ „ Examine job profitability whale curve.963 [Spring 2007] .