CPAR (PA REW SCHOOL OFTHE PAILPINES Menlle MAS 8601 [MANAGEMENT ADVISORY SERVICES MANAGEMENT ADVISORY SERVICES - refers to that area of accounting work concerned with Drowding advice anc technical assistance to help clents improve the use of their resouras ‘achieve thelr goals. MANAGEMENT CONSULTANT ~ 2 person who is qualifed by education, experience, technical ‘ably, and temperament to advise or assst businessmen on 2 professional basis in 'entifying, defining, and solving specific management problems involving the organization, Panning, drecton, contrel, and operation ofthe frm. CHARACTERISTICS OF MAS 1. Services are rendered for the management rather than for third partis. 2. Invokes problem solving, Relates tothe future, Broad in scope, Involves varied assignments Engagements are usually non-recurring. Engagements require ight qualified staf, ‘Human relations playa val role in each engagement eNowee COSTS AND COST CONCEPTS (Cost ~ a measurement, in monetary terms, of the amount of resources used for some purpose. When notified by a term that defines the purpose, enst becomes operational, e.g, seling ost, acquisition cost, variable cost, et. (Cost Pool ~ an account in which a variety of similar costs are aocumulated prior to alocation to cost objects, Tris a group of costs associated with an activity. Example: overhead aocount. (Cost object - the ntermeciate and fra dsposton of cost poo. ‘Example: product, ob, process (Cost driver — a factor that causes a change inthe cost pool fora particular activity. Tis used as @ bss for cost allocation; any factor or activity that has a direct cause-effect relationship ‘Activity ~ any event, action, transaction, or work sequence that incurs costs when producing @ ‘roduc or proving a service, COST BEHAVIOR (COST BEHAVIOR ~ describes how a cost behaves or changes as the amount of cost driver changes {TYPES OF COSTS AS TO BEMAVIOR: 1. AED COST Int costar win he eat ge a acy oun charges prin hinges ey ol changes 2. VARIABLE COST ~ In total: varies in direct proportion to changes in activty output; per unit: remains constant T 3. MIXED COST has both ied and arabe components. | | | |MAS 9601 ‘COST CONCEPTS AND ANALYSIS panel (8. s7 BENAVIOR ASSUMPTIONS: ‘Relevant Range Assumption Relevant range refers to the band of actvty within which the Kentifed cst benaver Bates ae va ‘Ary level of activity outside ths range may have 2 diferent avr pattern. 2. Time Period Assumption "Me cost behawor pattems identifed are tue only over 8 speed period of time Beyond tis, the cost may show a diferent behavior. ‘SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS: 1. High-Low Points Method ~ the fixed and varlable lerents of the mixed costs are ‘computed from two data points (periods}—the high and fow periods as to ‘actinty level or cost driver. 2. ‘Statistical Scattergraph Method - various casts (the dependent variable) are pote cna vertical fre (y-axis) and measurement figures (cost drivers or activity levels) are plotted on 2 horizontal ine (x ans). A straight ine is drawn ‘through the points and, using this ne, the rate of varabilty andthe fixed costae computed. 3. Method of Least Squares (Regression Analysis) mathematical determines a ine ‘of best ft or 2 linear regression line through a set of plotted points so that the sum of the squared deviations of each actual plotted point from the point directly above or below it on the regression fine fs a minimum, “Ths method uses the folowing equations In computing forthe values of unit variable cost and fixed cost! Equation 2: EY = na + bE Equation 2: ey = abe + Ee (COST FORMULA: y = a+ bx Winere: *Y" denotes total cost It is called the dependent variable because it s dependent on ‘the valve of another variabe, the activity level x. vats an estimate ofthe feed cost “b's an estimate ofthe variable cost per unt of athty. VALUE CHAIN Research gy, Design and OF Products — gy Production mp Marketing Mp Distribution 9 Customer Development and Processes > serica Exercises: 4, Burger Queen, 2 hamburger fastfood restaurant, Incurs the folowing casts: 2. Gost of ol for the deep fryer 'b, Wages of the counter help who give customers the food they order Cost ofthe costume forthe King onthe Burger King television commercials 4. Cost of chidren’s toys aiven aay free wth Kids’ meals {Cost ofthe posters incicating the special two cheeseburgers for P2.50" i f. Gost of frozen onion rings nd French fries {Salaries ofthe foad specialists who create new sandwiches forthe restaurant chain 1. ost of ogo” bas requested by customers who cou not Mish the measMAS 3601 COST CONCEPTS AND ANALYSIS Page 3088 PB se: ‘Classify each ofthe cost items (a-h) as ane ofthe business functions of the vale chain 2. Direct, Indirect, fixed, and variable costs. ‘Best Breads manufactures two types of bread, which are soK as wholesale products to various specialty retail bakeries, Each loaf of bread requires a three-step process. The first step iS ‘mixing. The mixing department combines all of the necessary ingredients to create the dough ‘and processes it through high speed mbxers. The dough ts then left to rise before baking. The ‘second step Is baking, which Is an entirly automated process. The baking department molds the dough into its final shape and bakes each loaf of bread in a high temperature oven. The final step is finishing, which is an entirely manual process. The finishing department coats each loaf of bread with a special glaze, allows the bread to cool, and then carefully packages each loaf in 2 specialty carton for sale in retal bakeries, 1L. Costs involved in the process are listed below. For each cot, indicate whether itis a direct variable, drect fixed, increct variable, or indvect fed cost, assuming “unis of production ‘of each kind of bread” is the cnst objet. Yeast Mising department menager Four Materials handlers in each department Packaging materia ‘Custodian in factory Depreciation on ovens {Night ard in factory Deprecation on moang machines Rent on factory buiing Machine maintenance personnel n each department Fre insurance on fectry balding Maintenance supple fr factory Factory tities ‘Gearing supplies for factory Finishing department hourly laborers © 6. t o if 4 ca t m B 2 Ifthe cost object were the "mixing department” rather than units of production of each kind of bread, which preceding cots would now be direct instead of indirect costs? levels of production: ‘Sesion ‘2g00umts ——S.000uns Materals 16,000 4,000 8 sv Rent 20,000 20,000 F ‘Assembly line workers’ wages 10,000 m0 0s sy Factory supplies 8,000 1500 04 3M Factory supervisors’ salaries 40,000 40,000 F Depreciation 7,000 7,000 F Maintenance 6,000 4750 325M Insurance 12,000 12,000 f Electricity 14,000 325007 6s M '3. A Company, doing business inthe cy of Zamboanga, reperts the folowing total costs at two ‘Requinen: Classify each cost as variable, fied, or mixed. i “4, Jim Beaumont, the owner of Lube ‘n’ Go, Is interested in determining the fixed and varidble ‘costs of performing a standard ol change. Since the oll changes are fairy standard, each ‘aking about the same amount of time and using about the same amount of grease, ‘tives, etc, Jim thinks the number of el changes would be @ good independent variable. ‘al monthly cost includes the salaries ofthe two service persons, depreciation on the facity‘MAS 8601 ‘COST CONCEPTS AND ANALYSIS: Page 4 of 8 ‘and equipment, utes, and supplies such as grease and wipes. (The cast of oll is not SESSUS sat le ae es eter ‘quarts actually used.) Data forthe past eight months are as tw ‘Month Number of Ol Changes Total Cost May 1,400 7,350 dune 1400 7,950 hwy 4380 8,350 ‘August 3250 7.825 September ‘880 5,730 October 900 5,730 November 850 5,450 December 700 5,150 1 Compute the cost formula for ol changing series using te hihlow method. Calaate the precited cos for January fo 1,000 ol charges using te hahow formula 2. Compute the cost formula for ol change serves using the methad of least squares, Using the regresion cast forma what's the priced cost for January for 1,000 ai changes? What does the coefient of determination tell you about the cost formula computed by regression? ‘3. Which eas rmula=the one computed using the high-ow method or the one using the least-squares coeficents—co you thinks better? Exlain. ‘5. Krystel Mining has complied the flloning date to analyze utility costs Month Machine Hours Utility Cost January 200 300 February 325 440 March 400 480 Apel 410 490 May 525 620 dune 680 790 uly 820 840 ‘August 900 900 Requireo: '._ Use the least squares method to develop a formula for budgeting utity cost.(Round (off value of "b" to three (3) decimal places and the value of “ato two (2) decimal places.) b= ass a= 14529 b. Prepare 2 flexible budget with separate variable and fied categories for utity costs ‘at 350, 500, and 600 machine hours. 260 500 00 Varad cost paoreo PAD Peano Prodcot 7452914528829 Toua\cot = Peaacs = Baan 6. The method of least squares was uséd to develop a cost equation to predict the cast of ‘maintenance. Monthly data forthe past fobr years were used for the regression. “The following computer output was received: Intercept 8,000 Slope 6 Coefficient of correlation 0.80MAS 8601 COST CONCEPTS AND ANALYSIS. Page 50f6 “The driver used was "number of maintenance hours.” REQUIRED: 1. What isthe cost formula? 2 Using the cost formula, predict the cast of maintenance if 650 maintenance hows 2re to be worked next month 13, What percentage of the varlablity In maintenance cost is explalned by number * maintenance hours? Do you think the equation wil predict well? Why oF why 10X7 4. Using the resus from the regression equation, predict the cost of maintenance for rrext year 7,500 maintenance hours are predicted. 77. Nayvicky Compary is making plans forthe Introduction of a new product, which hes a target seling price of F? per unit. The folowing estimates of manufacturing costs have Deen ‘erved for 6 milion units, to be produced during the frst year: Direct material: P6,000,000 Direc labor: P2,100,000 (at P14 per hour) Overhead costs have not yet been estimated, but monthiy data on total production and ‘Overhead for the past 12 months have been analyzed by using least-squares regression. The major overhead cost drivers direct labor hours, with the folwang results: Computed values: Fixed overbead cost: P3,200,000 Coefficient of independent variable: 2.25 Requen: a. Prepare the company’s regression equation (Y = a + bx) to estimate overhead. . Calculate the predicted overhead cost at an activity level of 6,300,000 unis. ‘c. What is Nayvicky's dependent variable in this case? 4. How can the company evaluate the “quality” of is regression equation? '8. Charger Corporation has three cust: Ay whichis variable; B, whichis fined; and C, which is ‘semvariable. The company uses the high-low method and extracted the folowing data from its accounting records: * At 180,000 hours of activity, Cost totaled P2,610,000. {At 140,000 hours, the low point during the period, Cost C totaled P1,498,000; at 200,000 hours, the high point, Cost C's fixed portion amounted to 1.75 per hour. At 160,000 hours of activity, the sum of Costs A, B, and C amounted to P8,162,000. equine: ‘2. Compute the variable portion (total) of Cost C at 149,000 hours of activity. . Compute Cost C (tata) at 160,000 hours of activity. & —_Compute Cost 8 (total) at 160,000 hours of activity. 19. Cleo Company wants to determine the factors that are associated with overhead. The Controller for Cleo constructed 2 muitple regression equation using the following independent variables: direct labor hours, number of setups, and number of purchase orders. The analysis was run using the past 50 months of data. From the printout, the following data were obtained: Parameter Estihate Intercept 10,000 Rates of variably: Direct labor hours (H) Ps Number of setups (S) 200 Number of purchase orders (P) 4 Number of observations (n) 50‘MAS 8601 COST CONCEPTS AND ANALYSIS Pages ot6 P= 0.96 RequneD: 1. Wile out the cost formula for monthly overhead for Cleo Company. 2, If Geo budgets the folowing for next month, what is the budgeted overhead cost? ‘© Direct labor hours. 200 Number of setups 30 ‘+ Number of purchase orders 150 3. ‘Suppose that Cleo's engineers expect the number of setups to increase by 20 Percent. How much additional overhead cost would be Incurred for the following month? 110. The chief statistician of Legaspl Company has developed the following cost fermul ‘Y= P100,000+ SL. + 10M Where: Y= total monthly manufacturing overhead cost bor hours ‘machine hours ‘The measure of goodness of fit Is good and no evidence of multicoinearty exists. The ‘company will use 10,000 labor hours and 6,000 machine hours next month. REQUIRED: 1. Determine the total manufacturing overhead costs that Legaspi Company should incur next month. 2. Legaspi makes a product that has P20.00 In materia casts. It requires two hours ‘of labor time and 45 minutes of machine time. Laborers ear P20 per hour. What isthe product’ per unit variable manufacturing cost? 3. Suppose that Legaspi Company could reduce the labor time for the product escrbed In requirement 2 by 30 minutes, to 1.50 hours. Machine time wil remain the same. By how much would the er uni variable manufacturing cost fl? 1250