Cost & Management Accounting Techniques Must for Effective Decision Making BY: A AMIR INSTITUTE OF COST & MANAGEMENT ACCOUNTANTS OF PAKISTAN

CONTENTS Cost & Management Accounting Cost & Management Accounting Techniques Conclusion

Cost & Management Accounting

Cost & Management Accounting Techniques

Conclusion

Cost & Management Accounting The Process of Identifying Measuring Analyzing Interpreting Communicating Information

The Process of

Identifying

Measuring

Analyzing

Interpreting

Communicating Information

Techniques The Make or Buy Decision Just-In-Time Inventory Management Budgeting Variance Analysis Const-Volume-Profit Analysis Activity Based Costing Linear Programming Enterprise Cost Management

The Make or Buy Decision

Just-In-Time

Inventory Management

Budgeting

Variance Analysis

Const-Volume-Profit Analysis

Activity Based Costing

Linear Programming

Enterprise Cost Management

The Make or Buy Decision A decision concerning whether an item should be produced internally or purchased from an outside supplier is called a “Make or Buy” decision. Let’s look at the Astech Company example.

A decision concerning whether an item should be produced internally or purchased from an outside supplier is called a “Make or Buy” decision.

Let’s look at the Astech Company example.

The Make or Buy Decision Astech manufactures part 4A that is used in one of its products. The unit product cost of this part is:

Astech manufactures part 4A that is used in one of its products.

The unit product cost of this part is:

The Make or Buy Decision Equipment used to manufacture part 4A has no resale value. Total general factory overhead, which is allocated on the basis of direct labor hours, would be unaffected by this decision. The $30 unit product cost is based on 20,000 parts produced each year. An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part. Should we accept the supplier’s offer?

Equipment used to manufacture part 4A has no resale value.

Total general factory overhead, which is allocated on the basis of direct labor hours, would be unaffected by this decision.

The $30 unit product cost is based on 20,000 parts produced each year.

An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part.

Should we accept the supplier’s offer?

The Make or Buy Decision 20,000 × $9 per unit = $180,000

The Make or Buy Decision The special equipment has no resale value and is a sunk cost.

The Make or Buy Decision Not avoidable; irrelevant. If the product is dropped, it will be reallocated to other products.

The Make or Buy Decision Should we make or buy part 4A?

The Make or Buy Decision DECISION RULE In deciding whether to accept the outside supplier’s offer, Astech isolated the relevant costs of making the part by eliminating : The sunk costs. The future costs that will not differ between making or buying the parts.

DECISION RULE

In deciding whether to accept the outside supplier’s offer, Astech isolated the relevant costs of making the part by eliminating :

The sunk costs.

The future costs that will not differ between making or buying the parts.

Techniques The Make or Buy Decision Just-In-Time Inventory Management Budgeting Variance Analysis Const-Volume-Profit Analysis Activity Based Costing Linear Programming Enterprise Cost Management

The Make or Buy Decision

Just-In-Time

Inventory Management

Budgeting

Variance Analysis

Const-Volume-Profit Analysis

Activity Based Costing

Linear Programming

Enterprise Cost Management

Impact of JIT Inventory Methods In a JIT inventory system . . . Production tends to equal sales . . . So, the difference between variable and absorption income tends to disappear.

Techniques The Make or Buy Decision Just-In-Time Inventory Management Budgeting Variance Analysis Const-Volume-Profit Analysis Activity Based Costing Linear Programming Enterprise Cost Management

The Make or Buy Decision

Just-In-Time

Inventory Management

Budgeting

Variance Analysis

Const-Volume-Profit Analysis

Activity Based Costing

Linear Programming

Enterprise Cost Management

Inventory Management

Qunatity Discounts Avoid Disturbance Reduce number of ordering / setup Hedge against inflation Meet Unexpected Demands Quantity Discounts When to order How much to order Buffer Stock Maximum Inventory How often to review stock E O Q R O P

Techniques The Make or Buy Decision Just-In-Time Inventory Management Budgeting Variance Analysis Const-Volume-Profit Analysis Activity Based Costing Linear Programming Enterprise Cost Management

The Make or Buy Decision

Just-In-Time

Inventory Management

Budgeting

Variance Analysis

Const-Volume-Profit Analysis

Activity Based Costing

Linear Programming

Enterprise Cost Management

Budgeting Define goal and objectives Uncover potential bottlenecks Coordinate activities Communicating plans Think about and plan for the future Means of allocating resources

Techniques The Make or Buy Decision Just-In-Time Inventory Management Budgeting Variance Analysis Const-Volume-Profit Analysis Activity Based Costing Linear Programming Investment Decision Robust Decision Enterprise Cost Management

The Make or Buy Decision

Just-In-Time

Inventory Management

Budgeting

Variance Analysis

Const-Volume-Profit Analysis

Activity Based Costing

Linear Programming

Investment Decision

Robust Decision

Enterprise Cost Management

Variance Analysis Material Variances Labor Variances Factory Overhead Variances

Material Variances

Labor Variances

Factory Overhead Variances

Techniques The Make or Buy Decision Just-In-Time Inventory Management Budgeting Variance Analysis Const-Volume-Profit Analysis Activity Based Costing Linear Programming Investment Decision Robust Decision Enterprise Cost Management

The Make or Buy Decision

Just-In-Time

Inventory Management

Budgeting

Variance Analysis

Const-Volume-Profit Analysis

Activity Based Costing

Linear Programming

Investment Decision

Robust Decision

Enterprise Cost Management

CVP Graph Units Dollars Fixed expenses Total Expenses Total Sales

CVP Graph Units Dollars Profit Area Loss Area Break-even point

Equation Method Profits = Sales – (Variable expenses + Fixed expenses) Sales = Variable expenses + Fixed expenses + Profits OR At the break-even point profits equal zero.

Techniques The Make or Buy Decision Just-In-Time Inventory Management Budgeting Variance Analysis Const-Volume-Profit Analysis Activity Based Costing Linear Programming Investment Decision Robust Decision Enterprise Cost Management

The Make or Buy Decision

Just-In-Time

Inventory Management

Budgeting

Variance Analysis

Const-Volume-Profit Analysis

Activity Based Costing

Linear Programming

Investment Decision

Robust Decision

Enterprise Cost Management

Activity Based Costing (ABC) ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” costs. I agree! ABC is a good supplement to our traditional cost system

ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” costs.

Techniques The Make or Buy Decision Just-In-Time Inventory Management Budgeting Variance Analysis Const-Volume-Profit Analysis Activity Based Costing Linear Programming Investment Decision Robust Decision Enterprise Cost Management

The Make or Buy Decision

Just-In-Time

Inventory Management

Budgeting

Variance Analysis

Const-Volume-Profit Analysis

Activity Based Costing

Linear Programming

Investment Decision

Robust Decision

Enterprise Cost Management

LP Applications Development of a production schedule that will satisfy future demands for a firm’s production while minimizing total production and inventory costs Selection of product mix in a factory to make best use of machine-hours and labor-hours available while maximizing the firm’s products

Development of a production schedule that will

satisfy future demands for a firm’s production

while minimizing total production and inventory costs

Selection of product mix in a factory to

make best use of machine-hours and labor-hours available

while maximizing the firm’s products

LP Applications Determination of grades of petroleum products to yield the maximum profit Selection of different blends of raw materials to feed mills to produce finished feed combinations at minimum cost Determination of a distribution system that will minimize total shipping cost from several warehouses to various market locations

Determination of grades of petroleum products to yield the maximum profit

Selection of different blends of raw materials to feed mills to produce finished feed combinations at minimum cost

Determination of a distribution system that will minimize total shipping cost from several warehouses to various market locations

Techniques The Make or Buy Decision Just-In-Time Inventory Management Budgeting Variance Analysis Const-Volume-Profit Analysis Activity Based Costing Linear Programming Enterprise Cost Management

The Make or Buy Decision

Just-In-Time

Inventory Management

Budgeting

Variance Analysis

Const-Volume-Profit Analysis

Activity Based Costing

Linear Programming

Enterprise Cost Management

ECM

CONCLUSION Corporate Decision-Makers Rely on Cost & Management Accountants Thank you.

Corporate Decision-Makers Rely on

Cost & Management Accountants