Nội dung

6 1 Management Cost Accounting B reakeven and its related cost/volume/profit concepts apply to all profit-making activities. In this chapter we’ll discuss inventory and overhead, two important topics. Cost Behavior, Inventory, and Overhead Understanding inventory costing is another part of cost accounting that affects primarily business managers. Inventory in merchandising, where you buy a finished good to sell to customers, is more straightforward than inventory in manufacturing, where you have three levels of inventory to track, as we’ll discuss shortly. Managers at all levels of government, educational institutions, and nonprofit organizations join businesses in tackling the fundamental concept of overhead. In a standard accounting textbook, overhead is usually defined as the sum of all costs after direct materials and labor have been subtracted. But that’s just the tip of the iceberg. 102 Copyright 2003 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use. Management Cost Accounting 103 How inventory and Overhead The costs of overhead are tracked and doing business other than recorded has an impact on direct materials and direct both the income statement labor. Overhead includes rent, insurance, heat, light, supervision costs, and the balance sheet. facilities maintenance, and indirect When factors like net income or return on invest- materials and indirect labor. ment serve as compensation criteria, managers will strive to push those numbers into the bonus range. For example, many managers get performance bonuses if they meet certain net income targets. Since inventory is valued on the balance sheet as an asset and is not reported as an expense on the income statement until it is sold, keeping inventory at a high level can increase net income. Bonus time! Your cost accounting approach to inventory and overhead will vary depending on whether you make or provide a product or a service. Added considerations include the performance metrics standards managers must meet. Generally, multiple performance standards reflect performance better than a single Multiple Meanings Confuse “Burden” is the term sometimes used interchangeably with “overhead” and sometimes in place of it. More often, you will find it referring to a specific set of costs that may include both fixed and variable costs—“What is your labor burden, your inventory burden, etc.?” As with many accounting terms, these multiple meanings can cause confusion unless you pin down the references.The culture of one company may refer to the payroll burden as the total payroll cost, while another may mean only the direct manufacturing labor cost.Add to this confusion the effects of globalization. Increasingly, British or other national accounting terms pop up in reports and papers with no context, particularly in manufacturing companies with global operations. You cannot take for granted that everyone at the table sees the elephant in the same way. As a manager, one of your tasks is to bring clarity to communication. Having everyone understand the same meaning is a good start. 104 Accounting for Managers standard. In the end, cost accounting is just a way to gauge how well managers meet their goals. Liquid Lemons For an overall look at how a business accounts for costs, manufacturing, labor, inventory, and overhead, let’s call Dick and Jane back to their lemonade stand. Dick and Jane make and sell a product. They are combined manufacturers and direct sellers. They have a recipe for lemonade: 1 cup simple syrup (1 cup sugar dissolved in 1 cup water) juice of 6 lemons 4 cups cold water yield: five 8-ounce servings They must buy raw materials to make the lemonade: lemons are $.10 each and sugar is $.30 a pound. They know the bus stops on the corner every 15 minutes starting at 4 p.m., when they can open, until they have to close after the 6:15 p.m. bus to go home for supper. These hours will give them 10 selling opportunities. Five to 10 people get off each bus and start the hot walk home. They plan to sell two to five glasses of lemonade at $.50 per glass per bus. Oops, Molly and Tom want to get paid. They both want $1.00 per hour. Now, there is enough cost information to plan breakeven. Each time the bus stops, their direct costs are $1.25. For total direct cost, in direct materials (DM), they will need six lemons and a half pound of sugar plus $.50 in direct labor (DL) times the 10 bus stops. Direct materials 6 lemons x $.10 x 10 = $6.00 ½ pound sugar x $.15 x 10 = $1.50 Direct labor $.50 x 10 = $5.00 Total $12.50 They will have to sell how many glasses to break even? Management Cost Accounting 105 Without any overhead, they will have to sell 25 glasses at $.50 to break even. Do you remember James? He was going to buy the supplies and they’ll put him to work making the lemonade. Because he’s a year older than Molly, he wants $1.10 per hour. He’ll also work an extra hour getting the stuff from the store and setting up. So, that’s 3.5 hours at $1.10, for $3.85. We face a decision. How will we classify James’ costs? Part could go to direct labor for mixing the lemonade. Part could go to administrative overhead for buying the materials. Then, maybe we ought to reconsider Molly and Tom as administrative overhead selling costs. Notice, by the way, that James’ costs bring breakeven sales up to $16.35 ($12.50 + $3.85), more than halfway to the maximum sales predicted of $25.00 (5 glasses x 10 buses at $.50 per glass). Recall the discussion about leverage and fixed costs. If they don’t sell more than three glasses per bus, they’re in the red. Converting Molly and Tom to variable cost items under the selling overhead could make sense. One of them may have to go home if sales aren’t as brisk as planned. If you’re thinking ahead, you may have worked out that at maximum sales, Dick and Jane will gross just under $2.00 per hour. If they average only four glasses per bus, they’ll make about $.90 per hour, less than their employees. At three glasses, they’re in the red. This business looks like it will need some sort of capital infusion until it can establish a reliable customer base. Entrepreneurs can identify with this narrow ledge separating profit from loss. What do they do with any lemonade left over at the end of the day? How about cleanup costs? Will people get clean glasses or use paper cups? How about those costs? How about equipment? James will need a knife to slice the lemons and a juicer. Also, something to heat the water to make the syrup and a pan for the syrup. Yeah, pitchers for the lemonade. Need a sign. Be nice to have someone do a cute graphic to catch people’s attention. They can call their business “Liquid Lemons.” 106 Accounting for Managers Need an umbrella to shade Molly and Tom so they don’t get sunburned and have to file workers’ compensation. In the cycle of planning and decision-making, you can see that Dick and Jane are starting to put together elements for a master budget, a sales budget, a production budget, and an operating budget. For a more extensive look at budgeting, refer to Budgeting for Managers by Sid Kemp and Eric Dunbar (McGraw-Hill, 2003). I’ll only touch on some specialized aspects of budgeting when discussing variances under activitybased costing and the budget impact on profit planning. As a manager, your prime duties include asking questions about all the things that your entity needs to do the job and how much each costs. For a simple lemonade stand, Liquid Lemons shows the complications managers face when they have to consider and account for all the potential costs. Classifying Costs Useful cost data has several characteristics, regardless of the specific product or service involved. Costs may be classified by their nature, their relationship to production or administration unit activities, or their relationship to changes in production volume. The following box includes some basic cost categories. Avoidable costs Costs that can be saved by not taking a given alternative. Unavoidable costs Costs that cannot be saved. Committed costs Costs that cannot be cut, even if the organization halts operations for a short time.They result from an organization’s facility use, fixed contracts, or even its basic organization structure. Conversion cost All direct labor costs and overhead costs to convert materials into finished products. In some cost accounting systems, it can specifically mean the costs to upgrade a cost object in value or durability. Discretionary costs Costs that an organization chooses to incur, which management can quickly adjust up or, most often, down. Examples would be advertising and research, although the cost most often cut is training. Management Cost Accounting 107 Engineered costs Costs that have a definitive, physical relationship to a selected measure of activity. Financing cost Cost of interest paid on cash to support the organization. Period costs Costs that are not product costs. All selling and administrative costs are typically considered to be period costs. Period costs are expensed on the income statement in the time period in which they are incurred. Prime costs All direct materials and direct labor costs. Product costs Direct materials, direct labor, and manufacturing overhead.They appear as the cost of goods sold on the income statement. Relevant costs Costs that would no longer be incurred if a specific activity were to cease, costs that differ for alternatives being considered.They are also known as incremental or differential costs. Irrelevant costs Costs that would not be affected by a decision between or among alternatives that would change relevant costs. Sunk costs Costs that cannot be recovered because they occurred in the past and have no effect on decision making. There are many ways to categorize a cost. In basic production, when we look at a cost’s nature, we try to fit it in terms of the following: • materials—direct and indirect • labor—direct and indirect • overhead—all the costs other than direct materials and direct labor Trends in the manufacturing sector suggest that many costs once considered variable or overhead have become committed fixed or semivariable costs because of automation and labor union contract provisions. Service businesses also see this happening with salaries in particular. Overhead costs can be further broken down into factory overhead, manufacturing overhead, administrative overhead, selling overhead, etc. How managers classify and treat these 108 Accounting for Managers overhead costs can influence financial reporting. Net income is a major example we’ll look at a bit later. When costs are considered as part of the production process, we see that prime cost equals direct materials plus direct labor (PC = DM + DL). Product cost is direct (raw) material cost plus conversion cost. Recall that conversion cost is direct labor plus production overhead. Total cost is product cost plus all the administrative, selling, and distribution overhead involved plus any financing cost. Under a cost/profit center arrangement, managers categorize costs by administrative units. They can look at factory departments like production or production services departments. Administrative departments might break out into personnel, accounting, security, and so forth or be lumped together as administrative overhead. Some other common operational subdivisions, depending on the nature of the business, Cost Behavior Patterns Variable costs (VC) stay constant on a per-unit basis and change in direct proportion to activity levels. Make more and the VC total goes up. Step-variable costs are nearly variable, but go up in small steps rather than at a constant rate. Equipment maintenance is an example: as more machines work more hours, more maintenance work results. If the steps are small, you can treat the step-variable cost function as a variable cost. Fixed costs (FC) remain constant in total, but fluctuate per unit depending on activity levels. Make more and the FC per unit will decrease. Step-fixed costs behave as fixed costs within a wide relevant range, but change outside that range. Semivariable (or mixed) costs have both a variable and a fixed component.They increase or decrease with activity levels, but not in direct proportion. An example would be a salesperson on a fixed salary plus commission. Curvilinear costs cannot be represented with a straight line, but are represented with a curve showing either increasing or decreasing marginal costs.Working these out is why people take calculus. Management Cost Accounting 109 are marketing, selling, distribution, and transportation departments. All of these will have some overhead costs associated with them. Looking at cost behavior associated with volume, we find that product costs do not transfer from assets to expenses until the finished goods are sold. Once the goods are sold, their product costs become part of the expense item cost of goods sold (COGS). They are then matched with sales revenue and other operating overhead expenses to find operating income. Finished goods that are not sold by the end of a reporting period are treated as finished goods stock or inventory held for sale. Under the absorption cost accounting system (which I’ll explain shortly), overhead costs linked to these finished goods are also assigned to the goods and not reported as expenses. Remember this point: we’ll return to it later. To predict costs, managers must understand cost behavior patterns as they plan, control, and make decisions for their organization’s operation. Those costs need to be parsed out into the various cost categories for analysis. One common way to classify costs involves looking at the ledger account names and deciding whether each cost is fixed or variable or what. Rent? We pay it each month, so it must be fixed. Raw materials? The cost depends on how much we make, so it must be variable. Electricity? We have to pay something each month, but the bill depends on how much we run the machines, so it must be one of those semivariable costs. Each cost is classified as a variable, fixed, or semivariable cost to determine how the cost will behave in the future. This classification is then adjusted based on experience. Many small businesses go no further. The weakness of this approach is that it reports only what costs have been, not what they should be. Analyzing Cost Behavior Cost behavior can show multivalent charms. The relationship to activity can be linear, nonlinear (zigzag), or curvilinear. There are four main techniques for splitting semivariable costs into 110 Accounting for Managers component elements: • • • • high-low engineering scatter graph least squares regression analysis Because all of these methods depend, to some degree, on past data, if conditions change dramatically the results will be unreliable in predicting future cost. The high-low (two-point) method relies on the highest and lowest cost in a given period for prior activity levels. The variable cost part of the mixed cost is the change in cost divided by the change in activity: VC = ∆C / ∆A (In mathematical formulas, the Greek letter delta (∆) means change.) The fixed cost component is equal to the total cost at high volume less the high volume times the variable cost component: FC = TC – (HV x VC) In the engineering approach, engineers study a product’s direct material and labor requirements, add related direct overhead, and then make per-unit estimates of the costs that Variable and Fixed Costs Month Jan Feb Mar VC VC VC VC = = = = Electricity Costs $5,000 $2,500 $1,000 ∆C / ∆A ($5,000 – $1,000) / (1,600 – 1,200) $4,000 / 400 $10.00 per unit FC = $5,000 – (1,600 x 1.00) FC = $5,000 – 1,600 FC = $3,400 Units Produced 1,600 1,400 1,200 Management Cost Accounting 111 should vary with production. As a predictor, this approach shows what costs should be rather than what they were. The engineering approach is often used when making a decision on whether to start producing an item or to upgrade or otherwise alter an item. In the case of a new product, this estimate is then adjusted as operational data comes available. A useful feature that is sometimes combined with the engineering approach and sometimes stands alone is a simple interview. Asking workers directly involved in production helps identify cost drivers and find out what’s likely to happen, given specific action paths. Interviewing workers not only clarifies the engineering approach, but also has residual managerial benefits: it gives people who have firsthand experience input into the analysis. For the scatter graph method, you gather cost and volume data from prior periods and chart the data points on an X-Y grid. Then, you draw a straight line from the origin to the farthest data point. The placement and slope of the line are judgment calls: you eyeball the data and fit the line visually as close to the data points as possible. Then, for any cost/volume consideration, you start from the corresponding X-Y axis, go out to the line, and then go straight over to the other axis to find the result. The scatter approach works reasonably well if you have a large number of data points. Then, there’s regression analysis. This is a more rigorous, statistical way to tease out the fixed and variable parts of a mixed cost. Like other methods, regression uses cost and volume data from prior periods. Regression, in many respects, is the mathematical solution to the scatter graph’s guessed relationships. The equation takes the form Y = a + bX. For our immediate purposes, the observed dependent variable, Y, is the given semivariable cost, while a equals fixed costs, b equals variable costs, and X is the independent variable. There are two reasons for all the fuss to clarify exactly which costs are fixed and which costs are variable. The first reason is to be able to find breakeven and, from there, do further analysis on the cost/volume/profit relationships to guide our manage-