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COST MANAGEMENT SYSTEMS ACCT 2013 STUDY GUIDE Study Period 5, 2006 1 © Universi

COST MANAGEMENT SYSTEMS ACCT 2013 STUDY GUIDE Study Period 5, 2006 1 © University of South Australia 2006 2 CONTENTS Page WELCOME 5 HOW TO USE THIS STUDY GUIDE 7 TOPIC 1 PROCESS COSTING 9 TOPIC 2 JOINT COSTING 25 TOPIC 3 PRICING & PRODUCT MIX DECISIONS 35 TOPIC 4 ACTIVITY BASED MANAGEMENT& MANAGING CUSTOMERS 39 TOPIC 5 MANAGING SUPPLIERS, INVENTORY & QUALITY 47 TOPIC 6 RESPONSIBILITY ACCOUNTING, DECENTRALIZATION & TRANSFER PRICING 57 TOPIC 7 FINANCIAL PERFORMANCE MEASURES & REWARD SYSTEMS 54 TOPIC 8 CONTEMPORARY APPROACHES TO MEASURING PERFORMANCE 71 TOPIC 9 CAPITAL BUDGETING 77 TOPIC 10 CAPITAL BUDGETING: SOME ADDITIONAL ISSUES 85 TOPIC 11 SOCIAL AND ENVIRONMENTAL ACCOUNTING 93 COURSE OVERVIEW 97 3 ACCT 2013 Cost Management Systems Introduction WELCOME Welcome to Cost Management Systems, ACCT2013, a course that includes a mix of traditional and contemporary management accounting topics. This course expands and extends upon ACCT2006, Management Accounting. We hope you find your studies interesting, enjoyable and useful. The aim of this course is to expand your knowledge of management accounting and its application in both the private and public sectors. After increasing your knowledge of costing systems, we focus even more so on the management of costs rather than on the costing of products. In addition to teaching you about some new management accounting topics, we also revise and revisit from a new perspective, the flow of costs and costing of manufacturing overhead as taught in Management Accounting. Therefore, it is desirable that you are confident of your knowledge in these topics, that is, the contents from your textbook of chapters 1 to 7. Understanding rather than memorising is an essential part of this course, as is being flexible in applying your knowledge. You will need to be able to adapt to varying circumstances and learn that there may be a range of alternative answers to any given situation. This Study Guide is comprised of a series of eleven topic summaries, which are the cornerstone and hub of the learning for this course. Topic summaries are very important because they provide you with an overview of what you need to learn and supplement references in your textbook. They also list the tutorial questions for each topic, and your learning should be organized around these topic summaries. Basil Tucker 4 ACCT 2013 Cost Management Systems Introduction This course has five sections: 1. Costing Systems: Topics 1 and 2. In Management Accounting, namely chapter 4 of the textbook, you studied costing systems such as Job Costing; this course revisits the flow of costs and moreover it will teach you about some new costing techniques. 2. Cost Management Systems (CMS) and Strategy: Topics 3 – 5. The term Cost Management Systems only emerged approximately 15 years ago and it encompasses techniques on how to better manage costs compared to the traditional cost control methods and techniques such as standard costing, budgeting, responsibility accounting… This course will cover some CMS and Strategic Management Accounting techniques. 3. Control and Performance Evaluation: Topics 6 – 8. You would have already studied budgeting and standard costing, which are two traditional control and performance evaluation topics. In this course, we will look at two additional traditional topics, namely, Responsibility Accounting and Financial Performance Measures. Finally, we will introduce you to two contemporary performance evaluation techniques, that is, the Balanced Scorecard and Benchmarking. 4. Capital Budgeting: Topics 9 and 10. In this topic, we study medium and long term decision-making. This topic will contrast and complement your previous studies in short term or tactical decision-making from Management Accounting. 5. Social and Environmental Accounting: Topic 11. Finally, to conclude this course, we consider the role management accounting can play in the determination of the social and environmental impacts of corporate policies and practices. 5 ACCT 2013 Cost Management Systems Introduction HOW TO USE THIS STUDY GUIDE You should:  Study the topics, in the sequence, as outlined on page 4, of this Study Guide.  Organise your learning around the individual topic summaries in this Study Guide. Specifically, for each topic, you should:  Note the Objectives for the topic.  Then read the topic summary.  Next and most importantly read your textbook and any articles mentioned in the topic summary.  If you are having difficulty, then, refer to “Other Text Reading”.  As they arise in the topic summary, attempt all of the tutorial questions for the topic. This course applies concepts and theories to  practical situations and it is essential, to be successful, that you do all  of the tutorial questions.  Finally, refer again to the topic objectives and check that you have mastered each objective for the topic. 6 ACCT 2013 Cost Management Systems Topic 1 TOPIC 1 COSTING SYSTEMS: PROCESS COSTING OBJECTIVES By the end of this topic you should be able to:  Understand the concept of process costing.  Explain when to use a process costing system.  Define the term equivalent units.  Calculate equivalent units for both FIFO and Weighted Average.  Using equivalent units, calculate the appropriate unit costs and total costs in order to determine process transfer costs and closing balances.  Enter cost flows into appropriate accounts, including transfer costs, opening and closing WIP inventories.  Understand how to account for and record normal losses.  Account for and record abnormal losses using weighted average.  Explicate the concept of operations costing.  Describe when to use an operations costing system.  Calculate the cost per unit and total cost for each batch (product).  Record the cost flows for an operations costing system. Resource: Text Reading Langfield-Smith, K; Thorne, H and Hilton, R (2006), Management Accounting: Information for managing and creating value. 4th edition. Sydney: McGraw Hill, Chapter 4 & Chapter 5. Resource: Other Text Reading Hansen & Mowen (2003), Management Accounting, 6th Edition, South-Western. Chapter 6 pages 198-210 & 215-219. Morse, Davis & Hartgraves (2003), Management Accounting: A Strategic Approach, 3rd 7 Edition, South-Western., Chapter 6 pages 249-257. ACCT 2013 Cost Management Systems Topic 1 1. PROCESS COSTING: AN INTRODUCTION In your previous studies, you would have learned about job costing and how to record job costing, cost flows into ledger accounts. Ultimately, the key to a job (project) costing system is to understand the role of the underlying subsidiary ledger or job cards (sheets) as it is from here that we track the costs for each order, client or customer. Contrasted with job costing is process costing and organisations involved in process costing demonstrate the following characteristics:  They make their products in batches.  They only produce one product or a small range of almost identical products.  Their manufacturing generally involves a number of processes and therefore a WIP account for each process.  They are involved in some of the mass production industries. Interestingly, the textbook refers to a number of industries as examples of the application of process costing systems. Later, in this topic, once you have studied operations costing, it may be appropriate to then reflect again on the survey figures. More specifically, the accounting for process costing systems involves:  Products with the same or very similar material, labour and manufacturing overhead costs.  More than one WIP account.  In general, less “paperwork”, because accumulating batch costs is less onerous than collecting job costs.  Accumulating the cost of each process, and then averaging these costs across all units produced in order to get the cost of one unit. We will now, in the following sections, look at some example of process costing. 8 ACCT 2013 Cost Management Systems Topic 1 2. THE FLOW OF COSTS: A BASIC EXAMPLE Similarly to job costing, the flow of costs in process costing consists of direct material, direct labour and manufacturing overhead being transferred to a WIP account or accounts then to Finished Goods and COGS. Using the data provided in the text, for Spritz Soft Drinks, we will now look at the recording of cost flows in a basic example of process costing. This example is described as basic because there is no opening or closing inventory in either of the two Work in Process accounts, namely, the Mixing Dept. and the Finishing Dept. You should now analyse the recording of double entry into Spritz’s cost flow accounts as demonstrated below. Also, to complete the cost flows, let us assume that 98% of finished drink production is sold. Material and Supplies Mixing Mixing 505,400 Mat’ls & Supplies 505,400 Finishing 275,124 Wages Payable 30,880 Finishing 646,880 MOH Applied 110,600 646,880 646,880 Finishing Mixing 646,880 Mat’ls & Supplies 275,124 Finished Goods 1,045,204 Wages Payable 24,400 MOH Applied 98,800 1,045,204 1,045,204 Finished Goods Cost of Sales 1,024,300 Finishing 1,045,204 Closing Balance 20,904 1,045,204 1,045,204 Cost of Goods Sold Finished Goods 1,024,300 9 ACCT 2013 Cost Management Systems Topic 1 3.0 PROCESS COSTING WITH CLOSING INVENTORIES In a job cost system, to value our closing inventory for Work in Progress, we simply add up the total of our uploads/Management/ study-guide 62 .pdf