managerial accounting applications

Managerial Accounting:Applications

Khalid Aziz-0322-3385752

OutlineSegmented Reporting and Responsibility A

ccounting SystemCost-Volume-Profit AnalysisBudgeting and Budgetary Control Standard Costs and Variance AnalysisManagerial Decision Making


IntroductionLet’s look at the XYZ Company example.

A manager at XYZ Company wants to replace an old machine with a new, more efficient machine.

New machine: List price 900000 Annual variable expenses 800000 Expected life in years 5Old machine: Original cost 720000 Remaining book value 600000 Disposal value now 150000 Annual variable expenses 1000000 Remaining life in years 5


IntroductionXYZ’s sales are Rs2000000 per year.Fixed expenses, other than amortization, are

Rs700000 per year.Should the manager purchase the new machine?


IntroductionThe manager recommends that the

company not purchase the new machine since disposal of the old machine would result in a loss:

Remaining book value 600000Disposal value -150000Loss from disposal 450000


IntroductionIs it correct?What’s your comment to the

manager’s decision? After learning this chapter,

you will know how to employ the tools of managerial accounting and make decisions correctly.


Segmented ReportingOrganizations may break down their

operations into various segments divisions, stores, services, or departments.

Management needs reports on each segment for cost management performance evaluation


Segmented ReportingSegments may be evaluated as

a cost centre a profit centre→Profit centre reports include information on a

segment’s revenues and costs. an investment centre.

Some costs are direct and some are indirect. Indirect costs may be allocated to various

departments.


Service Department Common Allocation BasesGeneral Office Number of employeesPersonnel Number of employeesPayroll Number of employeesAdvertising SalesPurchasing Number of Purchase OrdersCleaning Floor space occupiedMaintenance Floor space occupied

Segmented ReportingService department costs are shared indirect Service department costs are shared indirect

expenses of operation departments.expenses of operation departments.They may be allocated using a variety of bases.They may be allocated using a variety of bases.


Responsibility Accounting SystemResponsibility Accounting System

Responsibility Accounting System Responsibility Accounting System An accounting system An accounting system assigns managers the responsibility for assigns managers the responsibility for

costs and expenses under their control.costs and expenses under their control.


Responsibility Accounting System

Responsibility accounting budgets Responsibility accounting budgets are prepared prior to each accounting periodare prepared prior to each accounting period

Responsibility accounting performance Responsibility accounting performance reports reports compare actual costs and expenses to budgeted compare actual costs and expenses to budgeted

amountsamounts


Cost-Volume-Profit Analysis (CVP)

CVP analysis is used to answer: How much must I sell to earn my desired

income? How will income be affected if I reduce selling

prices to increase sales volume? How will income be affected if I change the

sales mix of my products? ……?


Assumptions of CVP Analysis

CVP analysis assumes relations can be CVP analysis assumes relations can be expressed as straight lines within the expressed as straight lines within the relevant range. relevant range.

Unit selling price remains constant.Unit selling price remains constant. Unit variable costs remain constant.Unit variable costs remain constant. Total fixed cost remain constant.Total fixed cost remain constant.

If the expected cost and revenue behaviour is If the expected cost and revenue behaviour is different from the assumptions, then the results of different from the assumptions, then the results of CVP analysis are of limited use.CVP analysis are of limited use.


Scatter Diagram

Vertical Vertical distance distance

is the is the change in change in

cost.cost.Horizontal distance is the change in activity.

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Activity, 1,000’s of Units ProducedActivity, 1,000’s of Units Produced

Unit Variable Cost = Slope = Change in costChange in units


High-Low Method

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Activity, 1,000’s of Units SoldActivity, 1,000’s of Units Sold

30 Vertical Vertical distance distance

is the is the change change in cost. in cost. (30 - 20)(30 - 20)

Horizontal distance is the change in activity.

(5 - 1)

Unit Variable Cost =Unit Variable Cost = 30 - 2030 - 20 5 - 1 5 - 1 = =

Rs2.50/unitRs2.50/unit


Least-Squares RegressionLeast-squares regression

is usually covered in advanced cost accounting courses.

is commonly used with computer software because of the large number of calculations required.

The objective of the cost analysis remains the same: determination of total fixed cost and the variable unit cost.


Break-Even AnalysisThe break-even point

is the unique sales level at which a company neither earns a profit nor incurs a loss.

SalesSales

Total costsTotal costs

Volume in UnitsVolume in Units

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ts a

nd R

even

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enue

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Break-Even AnalysisThe break-even point may be expressed in

units or in dollars of sales.

Break-even point in units = Contribution margin per unit

Unit sales price less unit variable costUnit sales price less unit variable cost

Fixed Costs


Break-Even AnalysisThe break-even formula may also be

expressed in sales dollars.

Unit sales price Unit sales price Unit variable costUnit variable cost

Break-even point in dollars = Break-even point in dollars = Contribution margin ratioContribution margin ratioFixed CostsFixed Costs


Computing Income from Expected Sales

What is the income given a predicted level of sales?

Pre-taxPre-taxIncomeIncome = Sales – [Fixed costs + Variable costs]= Sales – [Fixed costs + Variable costs]

Pre-taxPre-taxIncomeIncome = Sales –Fixed costs - Variable costs= Sales –Fixed costs - Variable costs

oror


Contribution margin ratio

Contribution margin per unitUnit sales = Fixed costs + Target incomeTarget income

Dollar sales = Fixed costs + Target incomeTarget income

Sales Volume Needed toEarn a Target Income

Break-even formulas can be adjusted to show the sales volume needed to earn any amount of income.


Margin of SafetyMargin of safety

How much sales can decrease before the company incurs a loss?

Expected salesExpected sales

Margin of Margin of safety, safety, percentpercent

Expected sales - Break-even salesExpected sales - Break-even sales==


New contribution margin ratio

New break-even point in dollars

New fixed costs

Sensitivity AnalysisThe effects of changes in variables such as

sales price, variable costs, and fixed costs.CVP analysis can be used to show the

effects of such changes.

=


BudgetsBudgetsBudgetsBudgets

formal statements of a company’s plans formal statements of a company’s plans expressed in monetary termsexpressed in monetary terms

attempt to capture the future activities of an attempt to capture the future activities of an organizationorganization

are used by businesses, not-for-profit, are used by businesses, not-for-profit, government, educational, and other types of government, educational, and other types of organizations.organizations.


Advantages

Communicates plansCommunicates plansand instructionsand instructions

Promotes analysis andPromotes analysis anda focus on the futurea focus on the future

Motivates employeesMotivates employees

Provides a basis forProvides a basis forevaluating performanceevaluating performance

CoordinatesCoordinatesbusiness activitiesbusiness activities

Defines goalsDefines goalsand objectivesand objectives

Importance of Budgeting


Budget CommitteeBudget Committee

Consists of managers from all departmentsof the organization

Provides central guidance→to insure that individual budgets submitted from all

departments are realistic and coordinated.


Flow of budget data isFlow of budget data is a a bottom-upbottom-up process. process.

S u p erviso r S u p erviso r

M id d leM an ag em en t

S u p ervis o r S u p ervis or

M id d leM an ag em en t

Top M an ag em en t

Budget Committee


2005 2006 2007 2008

Operating Budget

The annual operating budget may be divided into quarterly

or monthly budgets.

Budget CycleBudget horizons are usually for one year

but may extend for several years.


Continuous or Rolling Budget

The budget may be a twelve-month The budget may be a twelve-month budget that rolls forward one month budget that rolls forward one month as the current month is completed.as the current month is completed.

2005 2006 2007 2008

Rolling Budgets


Master BudgetMaster BudgetMaster Budget

A formal, comprehensive planA formal, comprehensive plan→for the future of a companyfor the future of a company

consists of several budgets linked togetherconsists of several budgets linked together→to form a coordinated plan for the organizationto form a coordinated plan for the organization


Preparesales

budget

Developproduction

budget

Prepare financial budgets: cash income balance sheet

Preparecapital

expenditurebudget

Prepareselling and

generaladministrative

budgets

Prepare manufacturing budgets: material labour overhead

Master Budget


Sales Budget

Sales budgetSales budget the starting point in the budgeting process.the starting point in the budgeting process. Most of the other budgets are linked to the sales Most of the other budgets are linked to the sales

budget. budget. Sales personnel are often involved in developing Sales personnel are often involved in developing

the sales budgets.the sales budgets.


Sales Budget

Sales BudgetSales Budget

Estimated Unit SalesEstimated Unit SalesEstimated Unit PriceEstimated Unit Price

Analysis of economic and market conditionsAnalysis of economic and market conditions++

Forecasts of customer needs from marketing personnelForecasts of customer needs from marketing personnel


Merchandise Purchases Budget

Merchandise Purchases Budget Provides detailed information about the

purchases necessary to fulfill the sales budget and provide

adequate inventories.

Merchandise Merchandise inventory to inventory to

be purchasedbe purchased

Budgeted Budgeted ending ending

inventoryinventory

Budgeted Budgeted sales for the sales for the

periodperiod

Budgeted Budgeted beginning beginning inventoryinventory= + _


Merchandise Purchases Budget

The quantity purchased is affected by:The quantity purchased is affected by: Just-in-time inventory systemsJust-in-time inventory systems→enable purchases of smaller, frequently delivered enable purchases of smaller, frequently delivered

quantities. quantities. Safety stock inventory systemsSafety stock inventory systems→provide protection against lost sales caused by provide protection against lost sales caused by

delays in supplier shipments.delays in supplier shipments.


Selling Expense BudgetSelling Expense Budget

lists the types and amounts of selling expenses Predictions of expenses are based on the sales

budget and past experience.


General and Administrative Expense Budget

General and Administrative Expense Budget lists the predicted operating expenses not listed

in the sales budget Includes both cash and non-cash expenses Often prepared by the office

manager or person responsiblefor general administration


Capital Expenditures BudgetCapital Expenditures BudgetCapital Expenditures Budget

lists the cash inflows or outflows lists the cash inflows or outflows pertaining to the disposal or acquisition pertaining to the disposal or acquisition of capital equipment.of capital equipment.

is usually affected by the organization’s is usually affected by the organization’s long-term plans.long-term plans.


Cash BudgetCash Budget Cash Budget

lists the expected cash inflows andlists the expected cash inflows andoutflows for the periodoutflows for the period

a tool used by management toa tool used by management toavoid excess cash balances oravoid excess cash balances orcash shortagescash shortages

Information from other budgets is used in its Information from other budgets is used in its preparationpreparation

Information from the cash budget is used to Information from the cash budget is used to prepare the budgeted income statement and prepare the budgeted income statement and balance sheetbalance sheet


Manufacturing companies need to prepare Manufacturing companies need to prepare additional budgets that include:additional budgets that include: Production budgetsProduction budgets Direct materials purchase budgetsDirect materials purchase budgets Direct labour budgetsDirect labour budgets Manufacturing overhead budgetsManufacturing overhead budgets

Production and Manufacturing BudgetsProduction and Manufacturing Budgets


Production and Manufacturing Budgets

Production and Manufacturing Budgets Provides detailed information about the

production necessary to fulfill the sales budget and provide adequate inventories.

Number of Number of units to be units to be producedproduced


inventoryinventory

Budgeted Budgeted sales for sales for

the periodthe period

Budgeted Budgeted beginning beginning inventoryinventory

== ++ __



Direct Materials Budget Provides detailed information about the purchases of

raw materials necessary to fulfill the production budget and provide adequate inventories.

Units of raw Units of raw materials to materials to

be purchased be purchased

Materials Materials needed for needed for productionproduction


inventoryinventory

Budgeted Budgeted beginning beginning inventoryinventory

== ++ __

Cost of raw Cost of raw materials to materials to

be purchased be purchased

Units of raw Units of raw materials to materials to

be purchasedbe purchased

Material price Material price per unit of per unit of

raw materialraw material== ××



Direct Labour and Manufacturing Overhead Direct Labour and Manufacturing Overhead BudgetsBudgets Provides information about the labour and Provides information about the labour and

manufacturing overhead costs given the level of manufacturing overhead costs given the level of production for the period.production for the period.


CashCashBudgetBudget

ExpectedExpectedReceiptsReceipts

andandDisbursementsDisbursements

BudgetedBudgetedIncomeIncome

StatementStatement

BudgetedBudgetedBalanceBalance

SheetSheet

Preparing Financial Budgets


Take corrective andTake corrective andstrategic actions.strategic actions.

This is an ongoingThis is an ongoing process.process.

Develop the budgetDevelop the budgetfrom planned objectives.from planned objectives.

CompareCompareactual withactual with budget and budget andanalyze anyanalyze anydifferences.differences.

ReviseReviseobjectivesobjectives

and prepareand preparea newa new

budget.budget.

Budgetary Control


Capital BudgetingCapital BudgetingCapital Budgeting

Analyzing alternative long-term investments Analyzing alternative long-term investments and deciding which assets to acquire or sell.and deciding which assets to acquire or sell.

These decisions require careful analysis since:These decisions require careful analysis since:→ The outcome is uncertain.The outcome is uncertain.→ Large amounts of money are usually Large amounts of money are usually

involved.involved.→ Investment involves a long-term Investment involves a long-term

commitment.commitment.→ Any decision may be difficult or Any decision may be difficult or

impossible to reverse.impossible to reverse.


Zero-based BudgetingZero-based Budgeting Zero-based Budgeting

are prepared assuming no previousare prepared assuming no previousactivities for the activities beingactivities for the activities beingplannedplanned

Managers must justify the amounts budgeted Managers must justify the amounts budgeted for each activityfor each activity

is popular among government and non-profit is popular among government and non-profit organizations.organizations.


Fixed BudgetFixed budgetsFixed budgets

are prepared for a single, predicted level of are prepared for a single, predicted level of activityactivity

Performance evaluation is difficult when actual Performance evaluation is difficult when actual activity differs from the predicted level of activity differs from the predicted level of activity.activity.→Example: How much of the unfavourable costExample: How much of the unfavourable cost

variance is due to higher activity, and how much is variance is due to higher activity, and how much is due to poor cost control?due to poor cost control?

→To answer these questions, we must flex the budget To answer these questions, we must flex the budget to the actual level of activity.to the actual level of activity.


Flexible (Variable) Budgets

Flexible budgetsFlexible budgets are prepared after a period’s activities are are prepared after a period’s activities are

complete. complete. Show revenues and expenses that should have Show revenues and expenses that should have

occurred at the actual level of activity. occurred at the actual level of activity. Reveal cost variances due to good cost control or Reveal cost variances due to good cost control or

lack of cost control. lack of cost control. Improve performance evaluation.Improve performance evaluation.


Flexible budgets To prepare a budget for different activity levels

→we must know how costs behave with changes in activity levels Total variable costs change in

direct proportion tochanges in activity.

Total fixed costs remainunchanged within therelevant range. FixedFixed

VariableVariable

Flexible (Variable) Budgets


Standard Costs Standard Costs Standard Costs Standard Costs

are preset costs for delivering a are preset costs for delivering a product or service under normal product or service under normal conditions.conditions.

are established through personnel, are established through personnel, engineering, and accounting studies engineering, and accounting studies using past experience.using past experience.

are benchmarks used in evaluating are benchmarks used in evaluating performance.performance.

are often used in setting budgets.are often used in setting budgets.


Example: A standard cost cardExample: A standard cost card

Standard StandardQuantity Price Standard

Cost factor or Hours or Rate Cost

Direct materials 1 kg 25$ per kg 25.00$ Direct labour 2 hours 20$ per hour 40.00 Variable mfg. overhead 2 hours 10$ per hour 20.00 Total standard unit cost 85.00$

Standard Costs


Variance Analysis

Take actionTake action

Prepare standard Prepare standard cost performance cost performance

reportsreports

Analyze Analyze variancesvariances

Investigate Investigate causescauses


Variance AnalysisManagement By ExceptionManagement By Exception

Standard cost accounting provides management Standard cost accounting provides management with information about costs that differ from with information about costs that differ from budgeted amounts (variances). budgeted amounts (variances).

Management may choose to focus only on Management may choose to focus only on variances that are significant. variances that are significant.

This approach is referred to asThis approach is referred to asManagement by Exception.Management by Exception.


AActual ctual QQuantity uantity AActual ctual QQuantityuantity SStandardtandard QQuantityuantity × × × × × × AActualctual PPrice rice SStandardtandard PPrice rice SStandardtandard PPricerice

Price VariancePrice Variance Quantity VarianceQuantity Variance AQAQ((APAP - - SPSP) ) SPSP((AQAQ - - SQSQ))

AQAQ = Actual Quantity = Actual Quantity SPSP = Standard Price = Standard Price APAP = Actual Price = Actual Price SQSQ = Standard Quantity = Standard Quantity

Variance AnalysisMaterial VariancesMaterial Variances


Actual Hours Actual HoursActual Hours Actual Hours Standard Hours Standard Hours × × × × × × Actual Rate Standard Rate Standard Rate Actual Rate Standard Rate Standard Rate

Rate VarianceRate Variance Efficiency VarianceEfficiency Variance

AH(AR - SR) SR(AH - SH)AH(AR - SR) SR(AH - SH)

AH = Actual HoursAH = Actual Hours SR = Standard Rate SR = Standard Rate AR = Actual RateAR = Actual Rate SH = Standard Hours SH = Standard Hours

Variance AnalysisLabour VariancesLabour Variances


Spending Spending VarianceVariance

EfficiencyEfficiencyVarianceVariance

AH × SVR AH × SVR

AH × AVRAH × AVR

AHAH = Actual Hours of Activity = Actual Hours of Activity AVR AVR = Actual Variable Overhead Rate = Actual Variable Overhead Rate SVR SVR = Standard Variable Overhead Rate = Standard Variable Overhead Rate SH SH = Standard Hours Allowed = Standard Hours Allowed

SH × SVR SH × SVR

Actual Flexible Budget AppliedActual Flexible Budget Applied Variable for Variable Variable for Variable Variable Variable Overhead Overhead at Overhead at Overhead Overhead at Overhead at Incurred Actual Hours Standard Incurred Actual Hours Standard Hours Hours

Variance AnalysisVariable Overhead VariancesVariable Overhead Variances


Spending Spending VarianceVariance

VolumeVolumeVarianceVariance

SFRSFR = Standard Fixed Overhead Rate= Standard Fixed Overhead Rate SH SH = Standard Hours Allowed= Standard Hours Allowed

SH × SFR SH × SFR

Actual Fixed Fixed FixedActual Fixed Fixed Fixed Overhead Overhead Overhead Overhead Overhead Overhead Incurred Budget Applied Incurred Budget Applied

Variance AnalysisFixed Overhead VariancesFixed Overhead Variances


Standard CostsStandard Costs Standard cost accounting systemsStandard cost accounting systems

record variances in the accountsrecord variances in the accounts simplify recordkeeping and help in the simplify recordkeeping and help in the

preparation of reportspreparation of reports


ABC Company has the following direct material standard to manufacture one unit product:

3.0 kilograms per unit at Rs8.00 per kilogram

Last week 6600 kilograms of material were purchased and used to make 2000 units. The material cost a total of Rs53000.

Discussions


Discussions

What is the actual price per kilogramWhat is the actual price per kilogrampaid for the material? paid for the material? a.a. Rs7.26 per kilogram.Rs7.26 per kilogram.b.b. Rs8.13 per kilogram.Rs8.13 per kilogram.c.c. Rs8.03 per kilogram.Rs8.03 per kilogram.d.d. Rs8.00 per kilogram.Rs8.00 per kilogram.


What is the actual price per kilogramWhat is the actual price per kilogrampaid for the material? paid for the material? a.a. Rs7.26 per kilogram.Rs7.26 per kilogram.b.b. Rs8.13 per kilogram.Rs8.13 per kilogram.c.c. Rs8.03 per kilogram.Rs8.03 per kilogram.d.d. Rs8.00 per kilogram.Rs8.00 per kilogram.

Discussions

AP = Rs53000 ÷ 6600 kgAP = Rs53000 ÷ 6600 kgAP = Rs8.03 per kg AP = Rs8.03 per kg


ABC’s material price variance (MPV)ABC’s material price variance (MPV)for the week was:for the week was:a.a. Rs198 favourable.Rs198 favourable.b.b. Rs198 unfavourable.Rs198 unfavourable.c.c. Rs189 favourable.Rs189 favourable.d.d. Rs189 unfavourable.Rs189 unfavourable.

Discussions


ABC’s material price variance (MPV)for the week was:a. Rs198 favourable.b. Rs198 unfavourable.c. Rs189 favourable.d. Rs189 unfavourable.

MPV = AQ(AP - SP)MPV = AQ(AP - SP) MPV =6600 kg × (Rs8.03 - 8.00) MPV =6600 kg × (Rs8.03 - 8.00) MPV = Rs198 Rs MPV = Rs198 Rs

Discussions


The standard quantity of material thatThe standard quantity of material thatshould have been used to produceshould have been used to produce2000 units is:2000 units is:a.a. 6500 kilograms.6500 kilograms.b.b. 6000 kilograms.6000 kilograms.c.c. 7000 kilograms.7000 kilograms.d.d. 5000 kilograms.5000 kilograms.

Discussions


The standard quantity of material thatshould have been used to produce2000 units is:a. 6500 kilograms.b. 6000 kilograms.c. 7000 kilograms.d. 5000 kilograms.

SQ = 2000 units × 3 kg per unitSQ = 2000 units × 3 kg per unit SQ = 6000 kg SQ = 6000 kg

Discussions


ABC’s material quantity variance (MQV)ABC’s material quantity variance (MQV)for the week was:for the week was:a.a. Rs4300 unfavourable.Rs4300 unfavourable.b.b. Rs4300 favourable.Rs4300 favourable.c.c. Rs4800 unfavourable.Rs4800 unfavourable.d.d. Rs4800 favourable.Rs4800 favourable.

Discussions


ABC’s material quantity variance (MQV)ABC’s material quantity variance (MQV)for the week was:for the week was:a.a. Rs4300 unfavourable.Rs4300 unfavourable.b.b. Rs4300 favourable.Rs4300 favourable.c.c. Rs4800 unfavourable.Rs4800 unfavourable.d.d. Rs4800 favourable.Rs4800 favourable.

MQV = SP(AQ - SQ)MQV = SP(AQ - SQ) MQV = Rs8.00(6600 kg - 6000 kg) MQV = Rs8.00(6600 kg - 6000 kg) MQV = Rs4800 unfavourable MQV = Rs4800 unfavourable

Discussions


Managerial Decision Making

Managerial Decision Making Cost accounting information is often used by

management for short-term decisions. Decision making involves five steps:

→ Define the problem.→ Identify alternatives.→ Collect relevant information on alternatives.→ Select the preferred alternative.→ Analyze decisions made.


Managerial Decision MakingAccepting additional business Accepting additional business

should be based on should be based on incremental costsincremental costs and and incremental revenuesincremental revenues

Incremental amountsIncremental amounts are those that occur if the are those that occur if the company decides to accept the new businesscompany decides to accept the new business


Managerial Decision MakingMake or Buy DecisionsMake or Buy Decisions

IncrementalIncremental costs also are important in the costs also are important in the decision to make a product or purchase it from decision to make a product or purchase it from a suppliera supplier→The cost to produce an item mustThe cost to produce an item must

includeincludedirect materialsdirect materialsdirect labourdirect labour incremental overheadincremental overhead

→We should We should notnot use the predetermined overhead rate use the predetermined overhead rate to determine product costto determine product cost


Managerial Decision MakingScrap or Rework DefectsScrap or Rework Defects

Costs incurred in manufacturing units of Costs incurred in manufacturing units of product that do not meet quality standards are product that do not meet quality standards are sunk costs and cannot be recovered.sunk costs and cannot be recovered.

As long as rework costs are recovered through As long as rework costs are recovered through sale of the product and rework does not sale of the product and rework does not interfere with normal production, we should interfere with normal production, we should rework rather than scrap. rework rather than scrap.


Managerial Decision MakingSell or Process Further Sell or Process Further

sell partially completed products vs. process sell partially completed products vs. process them to completionthem to completion

As a general rule, process further only if As a general rule, process further only if incremental revenues exceed incremental costsincremental revenues exceed incremental costs


Managerial Decision MakingSelecting Sales Mix Selecting Sales Mix

When a company sells a variety of products,When a company sells a variety of products,some are likely to be more profitable thansome are likely to be more profitable thanothers. To make an informed decision others. To make an informed decision regarding sales mix, management must consider regarding sales mix, management must consider . . .. . .→The The contribution margincontribution margin of each product, of each product,→TheThe facilitiesfacilities required to produce each required to produce each

product and any constraints on the facilities, andproduct and any constraints on the facilities, and→The The demanddemand for each product. for each product.


Managerial Decision MakingEliminating a SegmentEliminating a Segment

A segment is a candidate for A segment is a candidate for elimination if its elimination if its

revenues are less than itsrevenues are less than its avoidableavoidable expensesexpenses


Managerial Decision MakingQualitative factors in decisions

Qualitative factors are involved in most all managerial decisions→Quality→Delivery schedule→Supplier reputation→Employee morale→Customer opinions→……


Summary Segments may be evaluated as a cost centre, a profit centre,Segments may be evaluated as a cost centre, a profit centre,

and an investment centre. and an investment centre. CVP Analysis: CVP Analysis: break-even analysis, computing income frobreak-even analysis, computing income fro

m expected sales, sales volume needed to earn a target incom expected sales, sales volume needed to earn a target income, margin of safety, and sensitivity analysis.me, margin of safety, and sensitivity analysis.

Importance of budgeting, master budget, and Importance of budgeting, master budget, and budgetary budgetary control control

Standard costs, variance analysis and standard cost accounStandard costs, variance analysis and standard cost accounting systemsting systems

Managerial decision making: accepting additional business,Managerial decision making: accepting additional business, make or buy decisions, scrap or rework defects, sell or pro make or buy decisions, scrap or rework defects, sell or process further, selecting sales mix, eliminating a segment cess further, selecting sales mix, eliminating a segment


DiscussionsConsider the beginning XYZ case


DiscussionsRelevant Cost Analysis

Savings in variable expenses provided by the new machine ($200000 × 5 yrs.) 1000000

Net effect

Rs1000000 - Rs800000 = Rs200000 variable cost savingsRs1000000 - Rs800000 = Rs200000 variable cost savings


Discussions

Relevant Cost AnalysisSavings in variable expenses provided by the new machine ($200000 × 5 yrs.) 1000000Cost of the new machine (900000)Disposal value of old machine 150000Net effect 250000

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