Professional Documents
Culture Documents
Organizational Structure
Produce goods in
Decentralization Store inventory anticipation of
o Delegation of decision-making authority sales
throughout an organization Lean Production
Can be done by giving managers the o Lean thinking model
authority to make decisions relating to Five-step management approach
their area of responsibility 1. Identify value in
Corporate Organization Chart specific
products/services
o Shows how responsibility is divided (chain of
command) 5. Continuously 2. Identify business
pursue perfection process that delivers
Board of Directors in business process value
President
4. Create a pull 3. Organize
system work
Vice President Chief Financial arangements
Puchasing Personnel Operations Officer
Measuring
performance
Work In Process
(Job Cost Sheet)
DM
DL
Overhead
Applied
Mfg. Overhead
Actual Applied
IM OH
IL applied to
Others WIP
Finished Goods
COGM COGS
Step-variable cost
o Cost of a resource that is obtained in large
chunks and that increases or decreases only in
response to fairly wide changes in activity
Small changes in production are unlikely to
have any effect on the number of workers
employed
Only wide changes in activity
Cost level will cause a change in
the number of workers
employed
Activity Level
We assume a strictly
linear relationship
between cost and volume
Relevant Range
o Range of activity
within which the
assumptions are
reasonably valid
Fixed expense
Application
Application
Break-Even Analysis
Target Profit
V. COST-VOLUME-PROFIT RELATIONSHIPS
Margin of Safety
CVP Relationships in Equation Form The excess of budgeted (or actual) sales over the break-
Profit formula even volume of sales
Unit CM formula
Cost Structure and Profit Stability Setting Standard Costs
Cost structure refers to the relative proportion of fixed Accountants, engineers, purchasing agents, and
and variable costs in an organization. production managers combine efforts to set standards
High fixed cost (or low variable cost) structures that encourage efficient future operations
Advantage Disadvantage
> Income will be higher in > Income will be lower in bad Setting Direct Material Standards
good years compared to years compared to companies Price Standards: final, delivered cost of materials, net of
companies with lower with lower proportion of fixed discounts
proportion of fixed costs costs Quantity Standards: summarized in a Bill of Materials
Companies with low fixed cost structures enjoy greater Setting Direct Labor Standards
stability in income across good and bad years.
Rate Standards: often a single rate is used that reflects the
mix of wages earned
Operating Leverage
Time standards: use time and motion studies for each
Measure of how sensitive net operating income is to labor operation
percentage changes in sales
Setting Manufacturing Overhead Standards
Rate Standards: the rate is the variable portion of the
predetermined overhead rate
Concept of Sales Mix
Quantity Standards: the quantity is the activity in the
Sales mix the relative proportion in which a companys allocation base for predetermined overhead
products are sold
Different products = different selling prices, cost Standard Cost Card
structures and contribution margin
variable (constant per unit) and fixed (constant in total) Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00
Direct labor 2.5 hours 14.00 per hour 35.00
elements Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
In multiproduct companies, the sales mix is constant. Total standard unit cost $ 54.50
4. Receive
explanations
FORMULAS (Shortcut, as taught by Sir Drex ) Emphasis on negative may impact morale
Continuous improvement may be more important than
meeting standards
Examples
Standard example
Decentralization
Benefits
o Top management can concentrate on strategy
o Lower-level managers gain experience in
decision-making
o Decision-making authority leads to job
satisfaction
o Lower-level decisions often based on better
information
o Lower level managers can respond quickly to
customers
Disadvantages
o May be a lack of coordination among
autonomous managers
o Lower-level managers may make decisions
without seeing the big picture
o Lower-level managers objective may not be
those of the organization
o May be difficult to spread innovative ideas in the
organization
Responsibility Center
Cost Center
o Segment whose manager has control over costs,
Backtracking but not over revenues or investment funds
Profit center
o Segment whose manage has control over both
costs and revenues, but not investment funds
Investment center
o Segment whose manager has control over costs,
revenues, and investments in operating assets
Segment Margin
Computed by subtracting the traceable fixed costs from
its contribution margin
Best gauge of the long-run profitability of a segment
Return on Investment
Measures net operating income earned relative to the
investment in average operating assets
Formulas
Residual Income
Another measure of performance
Measures net operating income earned less the minimum
required return on average operating assets
Encourages managers to make profitable investments that
would be rejected by managers using ROI
Disadvantage: Cannot be used to compare the
performance of divisions of different sizes
Formula
With Analysis Evaluation
o If an intracompany would result in higher
profits, there is always a range of transfer prices
within which both the selling and buying
divisions would have higher profits should they
agree to the transfer
o If managers are pitted against each other rather
than against their past performances, a no
cooperative atmosphere is almost guaranteed
o Given disputes that accompany the negotiation
process, most rely on other means of setting
transfer prices.
Special Orders
Total Cost It is profitable to continue processing a joint product
after the split-off point so long as the incremental
Situation Differential
Current With New Costs and revenue from such processing exceeds the incremental
Situation Machine Benefits processing costs incurred after the split-off point
Sales (5,000 units @ $40 per unit) $ 200,000 $ 200,000 -
Less variable expenses: General formula
Direct materials (5,000 units @ $14 per unit) 70,000 70,000 -
Direct labor (5,000 units @ $8 and $5 per unit) 40,000 25,000 15,000
Variable overhead (5,000 units @ $2 per unit) 10,000 10,000 -
Total variable expenses 120,000 105,000 -
Contribution margin 80,000 95,000 15,000
Less fixed expense:
Other 62,000 62,000 -
Rent on new machine - 3,000 (3,000)
Total fixed expenses 62,000 65,000 (3,000)
Net operating income $ 18,000 $ 30,000 12,000
Differential Cost
If there is profit, process further. If loss, sell at split-off
Net Advantage to Renting the New Machine point.
Decrease in direct labor costs (5,000 units @ $3 per unit) $ 15,000
Increase in fixed rental expenses (3,000)
Net annual cost saving from renting the new machine $ 12,000 Examples
Managing Constraints
Constrained Resources
Constraint: limited resource of some type restricts a
companys ability to satisfy demand
Bottleneck: machine or process that limits overall output
Utilization
o Fixed costs are usually unaffected, so the
product mix that maximizes the companys total
contribution margin should be selected
o A company should not necessarily promote
those products with highest unit CM
o Total CM will be maximized by promoting
products or accepting orders that provide the
highest CM in relation to the constraint
General formula
Joint Costs
Two or more products produced from a common input
Traditionally allocated among different products at the
split-off point
o Split-off point: point in the manufacturing
process where each joint product can be
recognized as a separate product
o Typical approach: allocated joint costs according
to relative sales value of the end products
Can be dangerous for decision making
Per Log
Lumber Sawdust
Sales value at the split-off point $ 140 $ 40
REMINDERS:
Do not forget to bring the ff:
o CALCULATOR
o Ruler
o Assignment notebook
Please dont rely on this reviewer alone! This is just a
summarized version of the PPTs STUDY WELL! And
best of luck!