Week 1

COSTS
 Cost pools: costs are assigned into meaningful groups called cost pools
 Cost drivers: the direct cause of a business expense
o Ex: the distance to deliver a package is a cost driver for the total cost of gas
 Cost objects: the things we want to know the cost of
 Cost assignment: the process of assigning resource costs to cost pools and then from cost
pools to cost objects

A cost can either be direct or indirect and fixed or variable

 Direct costs can be traced directly to a cost pool or a cost object
o The wood needed to build a table, WAGES of workers (wage = per hour)
 Cost tracing = the assignment of direct costs to the cost object
 Indirect/overhead costs are not traceable to a specific cost pool or cost object
o Cost of a manager, rent, depreciation
 Cost allocation = the assignment of indirect costs to the cost object
 Variable costs change in response to changes in the number of cost drivers
 Fixed costs don't change with the volume of cost drivers

Additional costs
 Prime costs = direct materials + direct labour
 Conversion costs = direct labour + overhead

 Product costs = the costs necessary to complete the product at the manufacturing step
o direct labour + direct materials + overhead
 Period costs = all other costs incurred by the firm in managing or selling the product
o Selling costs, administrative costs…

 Factory overhead = necessary to manufacture, but not DM or DL

Inventory
NOTES:
 management accounting is about the company as a whole
 Total quality management is a method with which managers develop business practices and
measures to be sure that the products and services of the company surpass customer
expectations
 Management accounting does not follow any rule or regulation
Week 2
Regression analysis

Learning curve analysis

Week 3

Cost volume profit analysis

=> Used if you want to determine how many units to sell in order to break even or in order to
achieve a certain desired profit.
If break even is reduced,
 It is positive cause it means that we need to produce less in order to break even
 It can be negative cause it means that either the reduction in the break even point could be
because the fixed cost or variable cost got lower or prices per unit got higher
o If reduction in fixed cost comes from a reduction of costs in R&D it's negative cause
it compromises future possibilities to be modern

To effectively use the CVP model, three additional concepts are necessary:
1. The contribution margin per unit: P-VC
o It measures the increase in operating profit for each unit increase in sales
2. The total contribution margin: (P-VC) * Q (number of units sold)
3. The contribution margin ratio: (P-VC)/P
o It is the contribution margin per euro of revenue
o It helps determine the projected increase (or decrease) in profit caused by an
increase (or a decrease) in the sales euros

CVP for activity based costing (ABC)

Margin of Safety, degree of operating leverage and CVP analysis for sales mix
Margin of safety (MOS) is the amount of sales above the breakeven point. It indicates the amount
by which sales could fall before losses are incurred.

Margin of safety ratio is the measure for comparing the risk of two or more alternative products.
The lowest option is the one with the most risk.
Degree of operating leverage (DOL) is a measure of sensitivity of operating income to changes in
sales volume. => The higher the Dol, the more sensitive are the profits to changes in sales volume.
 High DOL = high FC
 Low DOL = low FC

CVP analysis for sales mix

Week 4

Cost allocation
Why should we develop a costing system?

Also important because cost allocation is used internally to make decisions about product
portfolios

 If you want to reduce the costs, you need to understand where they are from, which is why
identifying them is important

Job costing can use different cost measurement systems to measure costs:
 Actual costing only uses actual costs incurred over a period
 Standard costing only uses predetermined standard costs
 Normal costing is like actual costing, but uses a predetermined overhead rate
Differences between the three:

Applying overhead:

Which overhead rate to use for companies?

 Plantwide overhead rate: when the production departments of a company are very similar
 Departmental overhead rate: when there are significant differences between departments
Sometimes, when you use a predetermined overhead rate, you can overapply or underapply:
 Overapplied overhead: the amount of factory overhead applied that exceeds the actual
factory overhead cost incurred
 Underapplied overhead: the amount by which actual factory overhead exceeds factory
overhead applied.

Activity based costing

Idle capacity is the differences between the capacity available and the planned level of capacity
utilisation.
 Idle/unused capacity cost = the cost which remain unabsorbed due to under-utilization of
capacity

 Practical capacity = the highest realistic amount of output that a factory can maintain over
the long term
Customer profitability analysis
Companies tend to get rid of unprofitable customers
Week 5
Relevant and irrelevant costs:
 Relevant costs differ between alternative courses of action and affect future results
o Ex: Opportunity costs = the loss of other alternatives when one alternative is chosen
 Irrelevant costs are costs that are already incurred and that don't affect future results
o Ex: sunk costs

There are four applications in a business context that deal with these concepts:

One time only special order decisions:

Make or buy decisions:

Keep or drop product line decisions:

Short term product mix decisions:

Capacity constraints
 1. Identify the constraining resource that is a constraint

 Less than 560 hours available, meaning that there is not capacity constraints when it comes
to labor hours

 However, there is constraint with machine hours

1. Maximize the contribution margin (CM) per unit of the constraint resource

= the contribution margin per unit / time required per unit for the machine
(15/2 and 12/1)

 The touring is more profitable than mountain (12>7.5) thus, we prioritize it

1. We now produce as many units as possible of the touring bike and if there are hours left,
we produce mountain bikes

 Because we have 220 hours, we take the remaining time and we can produce mountain
bike with it
The steps for implementing target costing are:
1. Determine price based on market
2. Determine margin
3. Determine target cost
4. Adapt design and production

Pricing decisions
SHORT RUN

LONG RUN

The cost life cycle

Week 6
Budgeting and variance analysis

BUDGETING
Definitions about financial planning and budgeting
 Operating budgets: plans for all phases of operations, including production, purchasing,
personnel and marketing budgets
 Financial budgets: identify sources and uses of funds for budgeted operations and capital
expenditures

 Master budget: a static budget calculated with standard/budgeted prices and

standard/budgeted quantities
 Flexible budget: BUDGETED prices and costs at the ACTUAL volume
o A firm prepares a flexible budget at the end of a period when the total work done
(the actual output level) for the period is known.
o Useful for assessing short term financial performance

NOTE: Standard cost = budgeted cost on a per unit level

 Usually based on predetermined amounts
 Used for planning labour and material requirements as expected levels of performance
 Serve as benchmarks for measuring performance

Types of variance:
Master budget / operating income variance = the difference between
the actual operating income and the master budget operating income.

The sales volume variance = the impact on operating profit of selling a

different volume of sales compared to the budgeted volume reflected in
the master budget.
- differences are due to differences in sales volume

The flexible-budget variance = the effect on operating income of

changes in three factors: selling price per unit, variable cost per unit, and
total fixed costs.
- differences are due to differences in prices and costs

Flexible-budget and sales volume variance enables us to split the

difference between actual and budgeted in two components:
 Difference in sales volume
 Difference in price and costs
=> This way, we know what happened and who is responsible
FORMULAS TO CALCULATE THE VARIANCE

Sales volume variance, sales quantity variance and sales mix variance
 Sales quantity variance: it shows the deviations between the number of units sold and the
number of units budgeted to be sold, and measures the effect of these deviations on
contribution and income.
It is the product of three elements:
  Sales mix variance: it refers to the effect that a change in the relative proportion of the
product from the budgeted proportion has on the total contribution margin of the period.
It is the product of three components:

Sales volume variance = sales mix variance + sales quantity

variance

Market share variance and market size variance

 Market size variance = the effect of changes in market size on a firm's total contribution
margin

NOTE:

 Market share variance compares a firm's actual market share to its budgeted market share
and measures the effect of the difference in market share on the firm's total contribution
margin and operating income
Week 7

Responsibility Accounting

Organizational design involves:

1. Allocation of decision rights: who is allowed to decide what
 Centralized: managers cannot take a lot of decisions
 Decentralized: managers can take a lot of decisions

2. Organizational structure: how do we put our different employees into different business
units
3. Accountability for decisions made: who do you hold responsible and how do you hold them
responsible
  Investment center (IC) = it has control over everythig and operates independently (if not
CEO)
 Revenu center = only responsible for selling the product (marketing & sales)
 Cost center = responsible for product support and maintenance (procurement &
manufacturing
 Profit Center = The profit center manager’s goal is to earn profits.

Problem when trying to maximize the contribution margin: managers may be tempted to substitute
the variable expenses by fixed expenses (ex: replace manual labour (V) by machines (F)). But this
might not always be a good thing.
Thus, controllable profit might be a good alternative
> You can improve your ROI by either increasing your profit over sales (=getting out more profit
out of each dollar that you sell).
OR
By increasing your sales over investment (=for every dollar of investment you make, you should
try to increase the sales that you get out of it)
The manager would over invest since it's good for him as 8% is higher than current 5% ROI,
however, 8% is still lower than the 10% cost of capital, so investing would not be a good thing for
the firm.

Under investment because manager would not invest as he does not want his ROI to decrease,
however, the firm would want to invest as 15% is higher then its 10% cost of capital

 We can conclude that RI measure can help to avoid dysfunctional behaviour between
managers and firms
 Because RI is an absolute measure so business units that are larger come up with higher
measures as well and so cannot really be compared

The Balanced Scorecard

The 4 perspectives of the Classic balanced scorecard

Sustainability Balance scorecard
- organizations realize that sustainability issues such as climate change, resource constraints or
population growth affect their business
- sustainability performance measurement is becoming more important for internal decision making
and external reporting
How would sustainability fit in the balanced scorecard ?
FULL VS VARIABLE COSTING:

Variable costing refers to the use of contribution income statements as it separates VC and FC.
 Only VC are included in determining the cost of sales and the CM.
 All FC are treated as period costs and are subtracted after calculating the CM

Full costing is a cost system that includes FC in production cost and cost of sales before calculating
the gross CM.
 It is required by financial reporting systems

The difference between Full and Variable costing is that in Full costing, product cost take into
account DM, DL, Variable manufacturing overhead but also fixed manufacturing overhead.
Whereas for variable costing, only DM, DL and Variable manufacturing overhead are product costs;
the rest are period costs.

NOTES:
 Net income determined with full costing is affected by changes in inventory levels whereas
when using variable costing, NI is not affected by inventory levels.

 Variable costing is a more useful measure for evaluating performance as it eliminates the
incentive to overproduce

Other things being equal, income computed by the variable costing

method will exceed that computed by the full costing method if
 Units sold exceed units produced.
FULL COSTING APPROACH
VARIABLE COSTING APPROACH
Between the two methods, there is a difference in the income:
 When inventory increases, full costing will lead to a higher operating income
 When inventory decreases, variable costing will lead to a higher operating income