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Cost & Management Accounting Techniques

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COST AND MANAGEMENT ACCOUNTING TECHNIQUES: MUST FOR EFFECTIVE DECISION MAKING

Published in: Economy & Finance, Technology

Cost & Management Accounting Techniques

  1. 1. Cost & Management Accounting Techniques Must for Effective Decision Making BY: A AMIR INSTITUTE OF COST & MANAGEMENT ACCOUNTANTS OF PAKISTAN
  2. 2. CONTENTS <ul><li>Cost & Management Accounting </li></ul><ul><li>Cost & Management Accounting Techniques </li></ul><ul><li>Conclusion </li></ul>
  3. 3. Cost & Management Accounting <ul><li>The Process of </li></ul><ul><ul><ul><li>Identifying </li></ul></ul></ul><ul><ul><ul><li>Measuring </li></ul></ul></ul><ul><ul><ul><li>Analyzing </li></ul></ul></ul><ul><ul><ul><li>Interpreting </li></ul></ul></ul><ul><ul><ul><li>Communicating Information </li></ul></ul></ul>
  4. 4. Techniques <ul><li>The Make or Buy Decision </li></ul><ul><li>Just-In-Time </li></ul><ul><li>Inventory Management </li></ul><ul><li>Budgeting </li></ul><ul><li>Variance Analysis </li></ul><ul><li>Const-Volume-Profit Analysis </li></ul><ul><li>Activity Based Costing </li></ul><ul><li>Linear Programming </li></ul><ul><li>Enterprise Cost Management </li></ul>
  5. 5. The Make or Buy Decision <ul><li>A decision concerning whether an item should be produced internally or purchased from an outside supplier is called a “Make or Buy” decision. </li></ul><ul><li>Let’s look at the Astech Company example. </li></ul>
  6. 6. The Make or Buy Decision <ul><li>Astech manufactures part 4A that is used in one of its products. </li></ul><ul><li>The unit product cost of this part is: </li></ul>
  7. 7. The Make or Buy Decision <ul><li>Equipment used to manufacture part 4A has no resale value. </li></ul><ul><li>Total general factory overhead, which is allocated on the basis of direct labor hours, would be unaffected by this decision. </li></ul><ul><li>The $30 unit product cost is based on 20,000 parts produced each year. </li></ul><ul><li>An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part. </li></ul><ul><li>Should we accept the supplier’s offer? </li></ul>
  8. 8. The Make or Buy Decision 20,000 × $9 per unit = $180,000
  9. 9. The Make or Buy Decision The special equipment has no resale value and is a sunk cost.
  10. 10. The Make or Buy Decision Not avoidable; irrelevant. If the product is dropped, it will be reallocated to other products.
  11. 11. The Make or Buy Decision Should we make or buy part 4A?
  12. 12. The Make or Buy Decision <ul><li>DECISION RULE </li></ul><ul><li>In deciding whether to accept the outside supplier’s offer, Astech isolated the relevant costs of making the part by eliminating : </li></ul><ul><ul><li>The sunk costs. </li></ul></ul><ul><ul><li>The future costs that will not differ between making or buying the parts. </li></ul></ul>
  13. 13. Techniques <ul><li>The Make or Buy Decision </li></ul><ul><li>Just-In-Time </li></ul><ul><li>Inventory Management </li></ul><ul><li>Budgeting </li></ul><ul><li>Variance Analysis </li></ul><ul><li>Const-Volume-Profit Analysis </li></ul><ul><li>Activity Based Costing </li></ul><ul><li>Linear Programming </li></ul><ul><li>Enterprise Cost Management </li></ul>
  14. 14. 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.
  15. 15. Techniques <ul><li>The Make or Buy Decision </li></ul><ul><li>Just-In-Time </li></ul><ul><li>Inventory Management </li></ul><ul><li>Budgeting </li></ul><ul><li>Variance Analysis </li></ul><ul><li>Const-Volume-Profit Analysis </li></ul><ul><li>Activity Based Costing </li></ul><ul><li>Linear Programming </li></ul><ul><li>Enterprise Cost Management </li></ul>
  16. 16. Inventory Management
  17. 17. 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
  18. 18. Techniques <ul><li>The Make or Buy Decision </li></ul><ul><li>Just-In-Time </li></ul><ul><li>Inventory Management </li></ul><ul><li>Budgeting </li></ul><ul><li>Variance Analysis </li></ul><ul><li>Const-Volume-Profit Analysis </li></ul><ul><li>Activity Based Costing </li></ul><ul><li>Linear Programming </li></ul><ul><li>Enterprise Cost Management </li></ul>
  19. 19. Budgeting Define goal and objectives Uncover potential bottlenecks Coordinate activities Communicating plans Think about and plan for the future Means of allocating resources
  20. 20. Techniques <ul><li>The Make or Buy Decision </li></ul><ul><li>Just-In-Time </li></ul><ul><li>Inventory Management </li></ul><ul><li>Budgeting </li></ul><ul><li>Variance Analysis </li></ul><ul><li>Const-Volume-Profit Analysis </li></ul><ul><li>Activity Based Costing </li></ul><ul><li>Linear Programming </li></ul><ul><li>Investment Decision </li></ul><ul><li>Robust Decision </li></ul><ul><li>Enterprise Cost Management </li></ul>
  21. 21. Variance Analysis <ul><li>Material Variances </li></ul><ul><li>Labor Variances </li></ul><ul><li>Factory Overhead Variances </li></ul>
  22. 22. Techniques <ul><li>The Make or Buy Decision </li></ul><ul><li>Just-In-Time </li></ul><ul><li>Inventory Management </li></ul><ul><li>Budgeting </li></ul><ul><li>Variance Analysis </li></ul><ul><li>Const-Volume-Profit Analysis </li></ul><ul><li>Activity Based Costing </li></ul><ul><li>Linear Programming </li></ul><ul><li>Investment Decision </li></ul><ul><li>Robust Decision </li></ul><ul><li>Enterprise Cost Management </li></ul>
  23. 23. CVP Graph Units Dollars Fixed expenses Total Expenses Total Sales
  24. 24. CVP Graph Units Dollars Profit Area Loss Area Break-even point
  25. 25. Equation Method Profits = Sales – (Variable expenses + Fixed expenses) Sales = Variable expenses + Fixed expenses + Profits OR At the break-even point profits equal zero.
  26. 26. Techniques <ul><li>The Make or Buy Decision </li></ul><ul><li>Just-In-Time </li></ul><ul><li>Inventory Management </li></ul><ul><li>Budgeting </li></ul><ul><li>Variance Analysis </li></ul><ul><li>Const-Volume-Profit Analysis </li></ul><ul><li>Activity Based Costing </li></ul><ul><li>Linear Programming </li></ul><ul><li>Investment Decision </li></ul><ul><li>Robust Decision </li></ul><ul><li>Enterprise Cost Management </li></ul>
  27. 27. Activity Based Costing (ABC) <ul><li>ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” costs. </li></ul>I agree! ABC is a good supplement to our traditional cost system
  28. 29. Techniques <ul><li>The Make or Buy Decision </li></ul><ul><li>Just-In-Time </li></ul><ul><li>Inventory Management </li></ul><ul><li>Budgeting </li></ul><ul><li>Variance Analysis </li></ul><ul><li>Const-Volume-Profit Analysis </li></ul><ul><li>Activity Based Costing </li></ul><ul><li>Linear Programming </li></ul><ul><li>Investment Decision </li></ul><ul><li>Robust Decision </li></ul><ul><li>Enterprise Cost Management </li></ul>
  29. 30. LP Applications <ul><li>Development of a production schedule that will </li></ul><ul><ul><li>satisfy future demands for a firm’s production </li></ul></ul><ul><ul><li>while minimizing total production and inventory costs </li></ul></ul><ul><li>Selection of product mix in a factory to </li></ul><ul><ul><li>make best use of machine-hours and labor-hours available </li></ul></ul><ul><ul><li>while maximizing the firm’s products </li></ul></ul>
  30. 31. LP Applications <ul><li>Determination of grades of petroleum products to yield the maximum profit </li></ul><ul><li>Selection of different blends of raw materials to feed mills to produce finished feed combinations at minimum cost </li></ul><ul><li>Determination of a distribution system that will minimize total shipping cost from several warehouses to various market locations </li></ul>
  31. 32. Techniques <ul><li>The Make or Buy Decision </li></ul><ul><li>Just-In-Time </li></ul><ul><li>Inventory Management </li></ul><ul><li>Budgeting </li></ul><ul><li>Variance Analysis </li></ul><ul><li>Const-Volume-Profit Analysis </li></ul><ul><li>Activity Based Costing </li></ul><ul><li>Linear Programming </li></ul><ul><li>Enterprise Cost Management </li></ul>
  32. 33. ECM
  33. 35. CONCLUSION <ul><li>Corporate Decision-Makers Rely on </li></ul><ul><li>Cost & Management Accountants </li></ul>Thank you.

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