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Spring 2007

15.963 Management Accounting and Control

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963 Managerial Accounting and Control . Mozaffar Khan Spring 2007 15.MIT Sloan School of Management Prof.

Better technology is eroding quality-based competitive advantage. large national chains. and backward (vertical) integration by large printers. Inc. 2 . Intense competition from What is the external environment that Colorscope currently faces? Colorscope.963 [Spring 2007] Managerial Accounting & Control small stand-alones. Cheaper technology is lowering entry barriers.15.

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

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

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

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

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

246 $32.492 $10.000 $1.999 $30.311 $1.311 $11.000 $8.000 Idle Space First Stage Allocation 8 15000 $224.000 Assembly 2000 $148 200 $29.000 $64.000 $50.000 $13.000 Wages (from exhibit 11) Scanning Prep Description 500 $86 160 $13.000 $125.639 $4.000 $2.000 Total .000 $500 $11.000 $10.492 $8.639 $1.999 $19.$2.000 QC 6500 $13.000 $10.811 $1.000 $500 Depreciation (from exhibit 11) a Rent (from exhibit 11) 4000 $72 1280 $92.963 [Spring 2007] Floor Space in square feet 1000 $74 Overhead Rate per labor hour (1)/(2) 160 (2) Labor Hour (from exhibit 9) b $25.811 Others (from exhibit 11) (1) Total Overhead (from exhibit 11) 15.246 $5.000 Output Managerial Accounting & Control 1000 $100 640 $64.000 $14.

we allocate from the overhead cost pools to each job. Using labor hours seems reasonable. so labor hours will be a more important cost driver of overhead in this case. Cost of labor far exceeds depreciation. Second Stage Allocation .15.963 [Spring 2007] Managerial Accounting & Control 9 We have to calculate allocation rates for each dept. Which is a better choice? In the second stage. Equipment depreciation is another possibility. since it is similar to machine hours.

Colorscope . Restructure production sequence: prep -> scanning -> QC -> assembly -> output -> QC Examine job profitability whale curve.15.963 [Spring 2007] Managerial Accounting & Control Price customer initiated reworks. Now we can calculate job profitability.total costs = revenues – direct costs – allocated overhead. What is the cost of rework? What should Colorscope do about the cost/quality tradeoff? 10 This is just revenues .