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Optimal alternative selected to achieve objective - CVP - Limiting factors Decision (LFD) - Mutually Exclisive Decision (MED) - Pricing Decision (PD)

Q. 7 (a) Target costing process - Target cost= Competitive market price - Profit margin - Determining a product specification using analysis of what customers want => product features - Set selling price - desired profit margin => target cost. If the cost is higer => cost gap = costs - target. Try to close the gap. (b) Benefits of adopting target costing - External focus: look at what competitors are offering at earlier stage - Customer focus: Only features that are value to customers will be included in the product design - Cost control: emphasised at the design stage. Changes must happen before production stage - Faster time to market: "get things right first time" and avoids go back to the drawing board - Enhances profitability: Costs per unit are often lower under a target costing environment. (c) Steps to reduce a cost gap - Review features - Team approach: bring together members, brainstorming to allow discussion of methods to reduce costs - Review the whole supplier chain: Each step in the supply chain should be reviewed - Components: look at the significant costs involved in components - Assembly workers: Productivity gains by changing working practices or by de-skilling the process. Automation - Overheads: Productivity increases help by spreading FOH over a greater number of units - Consider ABC approach to its OH allocation => reveal more favourable cost allocations or ideas for reducing costs

Cumulative profit

30 25 20 15 10 5 0 -100 -5 -10 -15 -8 -10 Cumulative profit 0 100 200 300 21.68 19.68

1000

8.28

300

400

500

Cumulative profit

No. 11 28 1

Chapter U1: MA Intro U1: MA Intro U3: CAS U3: CAS U3: CAS U3: CAS U3: CAS U3: CAS U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U4: DMT U5: Budgeting U5: Budgeting U5: Budgeting U5: Budgeting U5: Budgeting U5: Budgeting U5: Budgeting U5: Budgeting U6: SC & VA U6: SC & VA U6: SC & VA U6: SC & VA U6: SC & VA U6: SC & VA U6: SC & VA

NPO CP(Single period) Costing principle CP(Multiperiod) CP(Single period) Costing principle Costing principle C5: Pricing decisions C3: CPV C7: Risk & Uncertainty C5: Pricing decisions C7: Risk & Uncertainty C6: ST decision C5: Pricing decisions C4: LF analysis C6: ST decision C7: Risk & Uncertainty C6: ST decision C5: Pricing decisions C6: ST decision C6: ST decision C7: Risk & Uncertainty C7: Risk & Uncertainty C7: Risk & Uncertainty C6: ST decision

2 Activity based costing 21 24 46 47 7 8 9 10 12 17 19 22 23 25 30 32 33 35 36 40 41 43 5 6 15 16 20 34 Life-cycle costing Marginal costing Target costing Throughput accounting Cost function Cost volume profit (CVP) analysis Decision rules Demand Expected values Further processing decision Incremental costs and revenues Linear programming Make-or-buy decisions Market research Outsourcing Pricing decisions Process costing Relevant costs Research techniques Risk and uncertainty in decision making Sensitivity analysis Shutdown decisions Budgetary systems and types Budgeting objectives Flexible budgets Forecasting Learning curve Quantitative analysis in budgeting

Question numbers Note 12, 22 66, 67, 68, 69, Mock 3 Q5 1, 2, 3, 4, 5, 10, Mock 2 Q1, Mock 3 Q4 2, 3, 4, 5, 6, 10, 36, 68, Mock 1 Q1, Mock 2 Q2,Mock 3 Q4 7, 9, 10, 38 1, 11, 48, 50 7, 8, 10 10, 11, 12, 13 20, 32 14, 15 30, 31, 32, 33 20, 32 30, 31, 32, 39 24, 29 29 16, 17, 18, 19, Mock 3 Q3 26 7, 20, 32 26, 27, 28 3, 4, 5, 20, 21, 22, 23, 25, 28, 29, 43, Mock 2 Q2 24 24, 25 31, 33 30, 31, 32, 33, Mock 2 Q5 30, 32 28 35, 36, 38, 45, 69, Mock 3 Q5 34, 72 45, 51 8, 37, 73 40, 41, 42, 43, 68, Mock 1 Q5 37, 39, 40, 41, 42, 44, 45, Mock 1 Q2 54 37 48, 49, 51, 52, 68 49, 68 49, 52, 53, 55 46, 48, 67, Mock 2 Q3 52, 54 48, 49, 52, Mock 1 Q3 45, 46, 47, 48, 49, 50, 51, 52, 53, 55, 56, 57,Mock 1 Q3, Mock 2 Q3, Mock 3 Q1 60, 61, 64, 65 59, Mock 2 Q4 58, 59, 60, 61, 62, 66, 70, 71, 73, 74, 75, 76,Mock 1 Q4, Mock 3 Q2 60, 75 58, 59, 63, 68, 71, 74, 75, 76, Mock 3 Q2 60, 61, 62, Mock 2 Q4 59, 60, 62, 74, Mock 2 Q4 58, 73

Quantitative analysis

39 Revised budgets 44 Spreadsheets 4 Behavioural aspects of standard costing 18 26 29 31 45 49 Idle time variances Material mix and yield variances Operating statements Planning and operating variances Standard costs Variance analysis

Quantitative analysis

14 Fitzgerald & Moon Building Block model U8: PM 27 Non-financial performance indicators 37 Residual income 38 Return on investment 42 Short-termism U8: PM U8: PM U8: PM U8: PM

Bulding Block Model N-FPI Divisional performance measures Divisional performance measures Short-termism and manipulation

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

x State the constraints Silk powder Silk amino acids Skilled labour C = 9x + 8y y1 y2 2,500.00 3,200.00 1,600.00 100.00 1,400.00 400.00 400.00 828.57 1,257.14 1,542.86 333.33 2,000.00 2,533.33 1,066.67 900.00 1,066.67 600.00 1,600.00 2,000.00 (100.00) 2,650.00 3,400.00 C = 9x + 8y State the constraints Silk powder 3x + 2y 5,000 Silk amino acids 1x + 05y 1,600 Skilled labour 4x + 5y 9,600 x y3 1,920.00 640.00 y4 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 Cont. 900.00 (900.00) (675.00) (32.14) 525.00 (300.00) 225.00 1,012.50 3x 1x 4x 0x 9x y 2y 0.5 y 5y 1y = 8y

4,000

Axis Title

800.00

1,257.14 1,653.33 1,066.67 1,440.00 2,000.00

3,500

3,000

y = -2x + 3200

2,000 y = -0.8x + 1920 1,500 c, 0, 1257.14 c, 828.57, 1257.14

1,000

500

500

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

500 1,000 Axis Title

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

(a) Optimum production plan Define the variables Let x = no. of jars of face cream to be produced Let y = no. of bottles of body lotion to be produced Let C = contribution State the objective function The objective is to maximise contribution, C C = 9x + 8y State the constraints Silk powder 3x + 2y 5,000 Silk amino acids 1x + 05y 1,600 Skilled labour 4x + 5y 9,600 Non-negativity constraints: x, y 0 Sales constraint: y 2,000

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

Draw the graph Silk powder 3x + 2y = 5,000 If x = 0, then 2y = 5,000, therefore y = 2,500 If y = 0, then 3x = 5,000, therefore x = 1,6667 Silk amino acids 1x +05y = 1,600 If x = 0, then 05y = 1,600, therefore y = 3,200 If y = 0, then x = 1,600 Skilled labour 4x + 5y = 9,600 If x = 0, then 5y = 9,600, therefore y = 1,920 If y = 0, then 4x = 9,600, therefore x = 2,400

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

A y1 y2 y3 y4 Cont. 2,500 3,200 1,920 2,000 900 B -1.5 x -2 x -0.8 x 0x -1.125 x y 2,500 3,200 1,920 2,000 900 x 1,666.67 1,600.00 2,400.00 #DIV/0! 800.00 y 0 y1 0 y2 0 y1 0 y3 0 y1 y4 y2 y3 y2 y4 y3 y4 x 1 2 3 4 5 6 1,400.00 828.57 333.33 1,066.67 600.00 (100.00) A

A-1

x

3.0 1.0 3.0 4.0 3.0 0.0 1.0 4.0 1.0 0.0 4.0 0.0

y

2.0 0.5 2.0 5.0 2.0 1.0 0.5 5.0 0.5 1.0 5.0 1.0 y 400.00 1,257.14 2,000.00 1,066.67 2,000.00 2,000.00 5,000 1,600 5,000 9,600 5,000 2,000 1,600 9,600 1,600 2,000 9,600 2,000 -1 2 1 -1 0 0 2 -1 1 0 0 0

c, 828.57, 1257.14

2,000

10

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008 1,500 2,000

Axis Title

y2 y3 y4

S COS GP

10 7.105 2.895

11

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

12

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

13

Chng trnh Giang day Kinh te Fulbright Nam hoc 2007 - 2008

4 x1= -6 y1= 0 x2= 0 y2= -1 1 0 0 -1 1 -1 1 x3= y3= x4= y4= x5= y5= x6= y6=

1,400.0 400.0 828.6 1,257.1 333.3 2,000.0 1,066.7 1,066.7 600.0 2,000.0 -100.0 2,000.0

14

Planning Variance: or revision variance - campares an original standard with a revised standard that would have been used if the planner had known what was going to happen

Operational Variance: or Operating variance - compares an actual results with revised standard

Example 6.2: At the beginning of 20x0, WB set a standard marginal cost for its major product of $25 per unit. The standard cost is recalculated once a year. Actual production cost during August 20x0 were 304000, and actual units 8,000 produced With the benefit of hindsight, the management of WB realized that realistic standard cost for current conditions would be $40 per unit. The planned Standard cost of $25 is unrealistically low. Required: Calculate the total planning and operational variance

Planning Variance:

Standard Cost Revised Standard (8,000 x $ 25) (8,000 x $ 40) 200,000 320,000

Revised Standard Actual Cost (8,000 x $ 40) 320,000 304,000

120,000

UF

Standard Cost Actual Cost (8,000 x $ 25) 200,000 304,000

16,000 104,000

Fav UF

104,000

UF

I.

1 Direct material cost variances 1 Direct material purchased price variances Actual qty should cost x Actual qty did cost x 2 Direct material usage variances

2,300 kg should cost ( 2300 kg x $4) But did cost Direct material price variance 4850 units should use But did used at Standard cost per unit ( 4850 units x 0.5kg)

$ 9,200 9,800 -600 (A) 2,425 2,300 125 (F) $4.00 $500 (F)

II.

price variances 8500 hours should cost But did cost ( 8500 hours x $2)

17,000 16,800 200 (F) 9,700 8,000 1,700 (F) $2.0 3,400 (F) 8,500 8,000 -500 (A) $2.0 -1,000 (A)

4 Direct labour

Efficiency variances 4850 units should take But did take at Std cost ( 4850 units x 2 hrs)

5 Direct labour

III. Variable production overhead variances (POH) 6 Variable P. O. H. expenditure variance 8000 hours incurring overhead(should cost x $0.3) 8000 hours But dis cost 7 Variable P. O. H. Efficiency variance 4850 units should take But dis take at Std cost IV. Fixed production overheads variances 8 Fixed POH expenditure variances Budgeted F.O.H Actual Fixed overhead Fixed POH 9 10 V. Sales variances 11 Sales 12 Sales volume variances eficiency variance capacity variances ( 5100 units x 0.6) ( 4850 units x 2 hrs)

2,400 2,600 -200 (A) 9,700 8,000 1,700 (F) $0.30 510 (F)

Relevant cost is any type of cost that is subject to change, depending on what kind of decision is made. Considered a key function within management accounting, the idea behind this type of cost definition is to determine how the budget will be impacted if a particular course of action is pursued.

In order to properly evaluate the situation, it is necessary to look at all current costs, and determine which ones would change as a result of the decision, and which ones would remain constant . Those that will change are said to be relevant to the consideration of that course of action. Assessing the relevant cost is not a particularly difficult process. All that is required is to project the chain of events that will take place should a particular action be taken. For example, a restaurant that wishes to attract more customers for lunchtime may consider implementing a lunchtime special that is only available for a few hours each day. Before actually implementing this new offering, the owner will look closely at what type of impact the project will have on labor, supplies, and utilities. If it is determined that the number of servers on duty is sufficient to handle the larger lunch crowd, that cost factor is not relevant, as it changes nothing from what already takes place. Should it be determined that an additional laborer in the kitchen is needed to prepare food during the lunchtime period, this does constitute a change in labor costs and would be considered a relevant cost. Since more food would likely be required to manage the additional lunchtime customers, that cost would also be relevant. The same general principal can be applied to just about any decision. Investors may look at what choosing a given investment scheme would mean in terms of additional expense or demand of their time, and determine if the effort is worth the expected outcome. Shopkeepers can decide if adding a specific product to the items they carry is likely to result in an increase of sales volume that will offset the cost of ordering that additional product. Understanding what the decision will change as far as the normal state of operations always makes it easier to determine if the decision is ultimately beneficial, or likely to have a negative impact. Understanding the type and nature of a relevant cost can make it much easier to use the accounting process to effectively manage expense, thus increasing the opportunity for earning a profit. Should the amount of relevant cost be so great that the potential for earning profit is greatly diminished, it may be determined that the course of action under consideration is not viable, and is abandoned. From this perspective, identified a relevant cost or costs in any given situation not only enhances the potential for increasing profits, but also prevents the deterioration of the current level of profit.

Microsoft Excel 14.0 Answer Report Worksheet: [F5_ Variance.xlsx]PTb1 Report Created: 26/03/2012 1:38:23 PM Result: Solver found a solution. All Constraints and optimality conditions are satisfied. Solver Engine Engine: GRG Nonlinear Solution Time: 0 Seconds. Iterations: 0 Subproblems: 0 Solver Options Max Time Unlimited, Iterations Unlimited, Precision 0.000001 Convergence 0.0001, Population Size 100, Random Seed 0, Derivatives Central Max Subproblems Unlimited, Max Integer Sols Unlimited, Integer Tolerance 1% Objective Cell (Max) Cell Name Original Value $V$14 y3 VT 9,600

Constraints Cell Name $V$10 y2 VT $V$11 y3 VT $V$12 y2 VT $V$13 y4 VT $V$14 y3 VT $V$15 y4 VT $V$4 y1 VT $V$5 y2 VT $V$6 y1 VT $V$7 y3 VT $V$8 y1 VT $V$9 y4 VT

Cell Value 1,600 9,600 1,600 2,000 9,600 2,000 5,000 1,600 5,000 9,600 5,000 2,000

Formula $V$10=$W$10 $V$11=$W$11 $V$12=$W$12 $V$13=$W$13 $V$14=$W$14 $V$15=$W$15 $V$4=$W$4 $V$5=$W$5 $V$6=$W$6 $V$7=$W$7 $V$8=$W$8 $V$9=$W$9

Status Binding Binding Binding Binding Binding Binding Binding Binding Binding Binding Binding Binding

Slack 0 0 0 0 0 0 0 0 0 0 0 0

ax 1 2 1

by 2 1 4

cz 3 1 2

Bien 5 -3 9

Ve trai 26 16 11

Ve phai 25 14 10

A*X=B 2 1 4 3 1 2

==>

x=A *B X x y z

-1

B 25 14 10

B2: Tm ma trn nghch o ca h A -0.15385 0.615385 -0.07692 -0.23077 -0.07692 0.384615 0.538462 -0.15385 -0.23077

x= y= z=

4 -3 9

Calculating basic variances Material Variance xxx - Price variance Actual qty should cost x Actual qty did cost x Variance x xxx - Usage variance Actual product should use x Actual production did use x x @ std rate x Variance x Labour variance xxx - Rate variance Actual hrs should have cost x Actual hrs did cost x Variance x xxx - Efficiency Actual production should take x Actual production did take x x @ std rate x Variance x Variable overhead variance xxx - Expenditure Actual hrs should have cost x Actual hrs did cost x Variance x xxx - Efficiency Actual production should take x Actual production did take x x @ std rate x Variance x Fixed overhead variance xxx - Expenditure Budgeted O/Hs x Actual O/Hs x Variance x Page 25 of 296 xxx - Volume Budgeted units x Actual units x x @ absorption rate x Variance x o Capacity

Budgeted hours x Actual hrs worked x X @ absorption rate x Variance x o Efficiency Actual production should take x Actual production did take x x @ absorption rate x Variance x xxx - Sales variance o Price Actual qty should sell for x Did sell for x Variance x o Volume Budgeted units x Actual units x x @ std profit x Variance x

Quantity variance = (AQ - SQ) * SP Total variance = Price variance + Quantity variance

Robert A. McLean, 2004

variance

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