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MASTER OF SCIENCE IN BUSINESS ADMINISTRATION

WORKING PAPERS

Management Control Systems 2012

Paulo Modesto Pardal 1

MASTER OF SCIENCE IN BUSINESS ADMINISTRATION

Cost Accounting : a managerial emphasis Horngren et all (14th ed.), Chapter 5 Management Control Systems 2012 Paulo Modesto Pardal 2

METHODS FOR DETERMINING VALUE

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Size/Complexity Pressure for data processing


Allocation Basis Cost centres

Paradox: The More... The Less...

ABC
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Product Cost-Cross Subsidization CASE

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Central Bakery

Bread
Flour Direct Labour (5h/100 Kg)

Birthday Cake
DIRECT COST
Flour Eggs Milk Sugar Direct Labour (0,5h/100 Kg) Chocolate Crumbled almonds Cream Dry fruits Water Energy Depreciation
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Salt Ferment Water Energy Depreciation

INDIRECT COSTS

Management Control Systems 2012

Product Cost-Cross Subsidization CASE

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Data:

CENTRAL BAKERY
Direct Costs of Bread: 4/100 Kg Direct Costs of Birthday Cake: 7/100 Kg Indirect Costs: 200.000/month (A) Indirect Costs Allocation Basis: Direct Labour hours Direct Labour hours/month: 200.000h (B) Allocation Rate: 1/h [(A) : (B)]

Bread
Direct Costs: Indirect Costs: Total: Price: Margin: 4 5 9 10 1

Birthday Cake
Direct Costs: Indirect Costs: Total: Price: Margin: 7 0,5 7,5 20 12,5

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A-B C / A-B M [ Activity-Based Costing / Activity-Based Management]


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Definition
Alternative methodology to allocate indirect costs to product/services regarding their more accurate evaluation

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THE LIES ABOUT A-B C

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1.

That is the costing system to services

2. That is the process to calculate exact costs


3. That is the magic potion to solve all the problems of management control

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A-B C [Activity-Based Costing]

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ACTIVITIES CONSUME RESOURCES; PRODUCTS CONSUME ACTIVITIES

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A-B C [Activity-Based Costing]

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CONCEPTUAL REFORMULATION
Activity Cost-Driver

APPLICATION REVOLUTION
Unit Cost of the activity/activities Fixed Costs viewed from a resource standpoint vs. Variable Costs viewed

from an activity standpoint

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A-B C [Activity-Based Costing]

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sam San SPk


Legend:

SPi SPj

SPi Painting
SPj Hot House SPk Polishing sam Warehouse sau - Cleaning & Maintenance X - Overheads
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Activity Treatment of Surfaces


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A-B C [Activity-Based Costing]

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Operational Advantages
Unnecessary to divide indirect costs among the 5 sections Unnecessary to transfer accumulated costs into 2 auxiliary sections Potential availability of information to calculate the unit cost of the activity Treatment of Surfaces

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A-B C / A-B M [Activity-Based Costing / Activity-Based Management]


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Demonstration Case
Part A Present Situation 1. Direct Costs
Lamps Candelabrums Quantity 60.000 15.000

ILUMINEX, S.A. Lamps & Candelabrums


Direct Materials 1.125.000 675.000 Direct Labour 600.000 (30.000h) 195.000 (9.750h)

2. Indirect Costs
Total Indirect Costs ......................... 2.385.000 Allocation Basis ............................... Direct Labour hours Total Direct Labour hours ................. 39.750h

Allocation Rate ................................ 60/h

3. Prices
Lamps ............................................ 63/unit Candelabrums ................................ 137/unit Management Control Systems 2012 Paulo Modesto Pardal 12

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Calculations
Lamps Candelabrums

ITEM
Total Value Direct Materials Direct Labour Total Direct Costs Allocated Indirect Costs Total Costs Sales Operational Profit 1.125.000 600.000 1.725.000 1.800.000 3.525.000 3.780.000 255.000 Unit Value 18,75 10,00 28,75 30,00 58,75 63,00 4,25 Total Value 675.000 195.000 870.000 585.000 1.455.000 2.055.000 600.000 Unit Value 45,00 13,00 58,00 39,00 97,00 137,00 40,00

TOTAL

1.800.000 795.000 2.595.000 2.385.000 4.980.000 5.835.000 855.000

6,75%
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29,20%
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14,65

13

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Part B Implementing A-B C

1. Cost Objectives (L)amps; (C)andelabrums

2. Direct Costs
Costs with Cleaning & Maintenance 270.000 - can be up-graded to Direct Costs because of their close relation with the number of batches produced (Lamps = 240; Candelabrums = 300)

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Lamps ITEM Total Value Direct Materials Direct Labour Cleaning & Maintenance Total Direct Costs 1.125.000 600.000 120.000 1.845.000 Unit Value 18,75 10,00 2,00 30,75

Candelabrums TOTAL Total Value 675.000 195.000 150.000 1.020.000 Unit Value 45,00 13,00 10,00 68,00 1.800.000 795.000 270.000 2.865.000

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MASTER OF SCIENCE IN BUSINESS ADMINISTRATION

3./4./5. Cost-Pools and Cost-Drivers

Activity

Basis

Total Costs

Level

Cost-Driver

Design
Setup Operations Delivery Distribution Supervision

m2
Setup hours Machine hours Nr. Loadings m3 Direct Labour hours

450.000
300.000 637.500 81.000 391.500 255.000

100 m2
2.000 hours 12.750 hours 200 loadings 67.500 m3 39.750 hours

4.500/m2
150/Setup hour 50/Machine hour 405/Loading 5,80/m3 6,4151/Direct Labour hour

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MASTER OF SCIENCE IN BUSINESS ADMINISTRATION 6./7. Costs and Margins


ITEM TOTAL DIRECT COSTS (A) INDIRECT COSTS
DESIGN Lamps 30 m2*4.500/m2 Candelabrums 70 m2*4.500/m2 SETUP Lamps 500h*150/h Candelabrums 1.500h*150h OPERATIONS Lamps 9.000 m h*50/m h Candelabrums 3.750 m h*50/m h DESPATCH Lamps 100 load.*405/load. Candelabrums 100 load.*405/load. DISTRIBUTION Lamps 45.000 m3*5,80/m3 Candelabrums 22.500 m3*5,80/m3 SUPERVISION Lamps 30.000 men-hours*6,4151/h Candelabrums 9.750 men-hours*6,4151/h 135.000 2,25

Lamps Total Value 1.845.000 Unit Value 30,75

Candelabrums Total Value 1.020.000 Unit Value 68,00

TOTAL 28.650.000

315.000
75.000 1,25 225.000 450.000 7,50 187.500 40.500 0,67

21,00

450.000

15,00

300.000

12,5

637.500

40.500
261.000 4,35 130.500 192.453 1.153.953 3,21 62.547 19,23 961.047

2,70

81.000

8,70

391.500

4,17 64,07

255.000 2.115.000

TOTAL INDIRECT COSTS (B)

TOTAL [(A)+(B)]
SALES OPERATIONAL PROFIT

2.998.953
3.780.000 781.047 20,67%

49,98
63,00 13,02

1.981.047
2.055.000 73.953 3,60%

132,07
137,00 4,93

4.980.000
5.835.000 855.000 14,65%

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A-B C / A-B M [Activity-Based Costing / Activity-Based Management]


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Comparative Analysis
High-powered information Traditional Costing Methods Cost =

(Dir. Mat.; Dir. Lab.; Overheads) where, usually,

Overheads =

(Direct Costs)

Activity-based Costing Cost =

(Dir. Mat.; Dir. Lab.; Overheads) with

Overheads =

(Activ. 1; Activ. 2; ...; Activ. N)

A new cost objective: the Activity As a consequence, increased information: the cost-drivers as unit costs of the Activities Planning & Controlling the cost-drivers: A-B B (Activity-Based Budgeting) and A-B M (Activity-Based Management)
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