Managerial Accounting
1. Basic Concepts
Product cost = Direct Labor (DL) + Direct Materials (DM) + Manufacturing Overhead (MOH)
Financial accounting Managerial Accounting
+ Sales + Sales
- COGS - Variable Costs
= Gross Profit = Contribution Margin
- SG&A - Fixed Costs
= Net Profit = Net Profit
COGS (Cost of Goods Sold) is an “inventoriable cost” ( recorded in the Balance Sheet as inventory and expensed (Income Statement) when goods are sold
SG&A (Selling, General & Administrative) are periodical costs ( expensed as incurred directly in the Income Statement
Economic Value: ROCE – WACC (ROCE = Return on Capital Employed)
2. Seligram Case and Anagene Case - Effective cost systems
Classical cost systems: Overhead allocated based on DL$
Products that absorb many machine-hours are undercosted; vice-versa for labor-intensive products
If the total overhead is allocated to products, we enter the DEATH-SPIRAL: the more we eliminate unprofitable products, the less profitable become the remaining products (because they absorb the cost of excess capacity)
Possible paradox: very expensive machines are bought to automate production of one single product ( direct labor required for the product is reduced thanks to automation ( the driver for overhead allocation (which is DL$) decreases ( overhead cost for the product decreases! (rationally, it should increase of the cost of the machine)
Effective cost systems: allocation of overhead based on drivers
Steps to perform:
1) Quantify the total amount of resources
2) Identify the cost pools and quantify their costs
3) Identify suited drivers for each cost pool
4) For each driver, calculate the burden rate (beware of excess capacity!)
5) Allocate the cost pools to the cost objects (products) using the drivers
Benefits:
- Accuracy of managerial decision (pricing)
- Better allocation of resources
Costs:
- Complexity
- Tracking / metering costs
- Expensive to be implemented
When
Product cost = Direct Labor (DL) + Direct Materials (DM) + Manufacturing Overhead (MOH)
Financial accounting Managerial Accounting
+ Sales + Sales
- COGS - Variable Costs
= Gross Profit = Contribution Margin
- SG&A - Fixed Costs
= Net Profit = Net Profit
COGS (Cost of Goods Sold) is an “inventoriable cost” ( recorded in the Balance Sheet as inventory and expensed (Income Statement) when goods are sold
SG&A (Selling, General & Administrative) are periodical costs ( expensed as incurred directly in the Income Statement
Economic Value: ROCE – WACC (ROCE = Return on Capital Employed)
2. Seligram Case and Anagene Case - Effective cost systems
Classical cost systems: Overhead allocated based on DL$
Products that absorb many machine-hours are undercosted; vice-versa for labor-intensive products
If the total overhead is allocated to products, we enter the DEATH-SPIRAL: the more we eliminate unprofitable products, the less profitable become the remaining products (because they absorb the cost of excess capacity)
Possible paradox: very expensive machines are bought to automate production of one single product ( direct labor required for the product is reduced thanks to automation ( the driver for overhead allocation (which is DL$) decreases ( overhead cost for the product decreases! (rationally, it should increase of the cost of the machine)
Effective cost systems: allocation of overhead based on drivers
Steps to perform:
1) Quantify the total amount of resources
2) Identify the cost pools and quantify their costs
3) Identify suited drivers for each cost pool
4) For each driver, calculate the burden rate (beware of excess capacity!)
5) Allocate the cost pools to the cost objects (products) using the drivers
Benefits:
- Accuracy of managerial decision (pricing)
- Better allocation of resources
Costs:
- Complexity
- Tracking / metering costs
- Expensive to be implemented
When