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REMEMEBER

MY TEXT BOOK IS:

Horngren,

C. T., Datar, S. M., &Rajan, M. V. (2015). Cost accounting: A managerial

emphasis (15th ed.). Boston: Pearson

1). Using this week’s lecture, discuss

the concept of equivalent units and how that concept relates to management

decision making. Be sure to include information in your discussion about the

weighted-average method in comparison to the FIFO method of accounting for work

residing in work-in-process units.

WEEK

LECTURE:

Process

costing deals with batches of like products.

For example, paint is produced in large quantities and you can’t tell

one gallon of white paint from another gallon of white paint. A barrel of oil would be another

example. The essence of this costing

method is that costs are accumulated by process rather than by job. Accounting is very definitive, so process costing

becomes a little out of the comfort zone for many accountants because we don’t

have anything that is exact. At month

end under job costing, we know how much in materials have been charged to a

specific job. However, under process

costing we only know that a certain quantity of materials has been entered into

the process. As a result, we have to estimate how far along we are in the

process for direct materials and direct labor.

To do this we introduce the concept of equivalent units. Equivalent units is just fancy terminology

for how far along we are in the process. Since accountants like to think of

completed units for costing purposes, we estimate, based on where we are in the

process, how many equivalent units of completed materials we would have if we

combined all the partially completed units into a smaller number of completed

units. For example, we might estimate

that 200 units ½ complete would be equivalent to 100 fully completed

units. See, that wasn’t so bad.

Here

is a short video on the basics: Process Costing Part 1 – Managerial Accounting

Journal

entries under process costing are also a little different than under job order

costing. Materials are issued to a

process, rather than a job, so materials requisitioned would be debited to WIP

(some department) and credited to Materials Inventory. There are a series of five steps we use for

this type of costing:

- Measure the

physical flow of resources - Compute the

equivalent units of production - Identify

the product costs to be accounted for - Compute the

cost per equivalent unit: weighted average - Assign

product cost to batches of wor

Here’s

a problem that will demonstrate this process:

Process Costing Part 2 – Managerial Accounting

One

other concept that bears some additional discussion is called an Economic Order

Quantity (EOQ). The idea behind the EOQ

is that there is some specific quantity of materials that should be orderedeach

time an order is placed in order to minimize inventory holding costs and

inventory ordering costs. This concept dovetails nicely with our ABC discussion

in an earlier week actually.

The

formula for the EOQ is:

EOQ

= the square root of (2DS/H) where D=annual quantity demanded, S=flat fixed

cost per order and H is the annual holding cost.

There

are several assumptions that underlie this formula. First, the order cost is constant per

order. Next, demand is known and is

evenly distributed throughout the period.

Third, the lead time for the order is fixed, and, fi

2). Using this week’s lecture, answer

the following:

- What

is an (EOQ)? - How

is EQQ calculated and what are the underlying assumptions associated with

the use of this tool? - From

a management perspective, why might the EOQ conflict with a manager’s

performance evaluation goals?

3). Capital budgeting is an integral

part of the strategic planning and budgeting process of most firms. Explain and provide a numerical example of

the use of the internal rate-of-return method and the Net Present Value (NPV)

method of analyzing capital budget projects.

Which one is a better indicator for management decision-making related

to capital acquisition decisions? Why?

4). Using this week’s lecture, explain

what a transfer price is, what the criteria should be for evaluating potential

transfer price, and provide an example of transfer pricing in action assuming:

a) excess capacity and b) no excess capacity. Review the Forbes article:

Transfer Pricing as Tax Avoidance and explain how transfer pricing might be

used for tax avoidance.

WEEKS

LECTURE:

Coming

down the home stretch this week we take a look at combining all these

activities and concepts into a management tool we call a budget, or plan. It has been said that if we don’t know where

we are going, then it doesn’t really matter how we get there. A budget not only tells us where we are

heading (in financial terms) but also gives us measures of performance along

the way to help managers stay on track.

Think about this in terms of your own personal situation. If you did not know how much money you were

going to make this month, how would you know what to buy and what not to buy,

right? So this budget becomes a tool to

manage performance.

Since

a budget causes us to think about our operations in broad terms, we can call

this strategic management. In the

perfect world a company establishes its long-term strategic objectives in terms

of financial profitability and then budgets are prepared that indicate how each

manager/department will perform in order to help the company reach those

goals. So, we need a process that will

lead us to our end result, which is a master budget. To get to this, we start with a sales

forecast of units expected to be sold.

Once we have this figured out, then we can figure out the revenue those

sales will generate. To meet that sales

demand, we figure out how much needs to be produced, then we break this down

into the main components, direct materials, direct labor and manufacturing

overhead. Once we have these figures, then we can put dollar values to them and

create a budget for each. A budget must

also be prepared for administrative overhead and for capital spending

(machinery and so on), and from this, we create a cash flow budget (inflows and

outflows). The end result of this activity will be a budgeted (forecasted)

income statement, balance sheet, and statement of cash flows.

This

short video will summarize this process:

Responsibility Accounting: Master Budget – Managerial Accounting Video

Our

final topic is transfer pricing. Let’s

suppose we have a sister plant that makes a part for a widget that we need to

produce our widgets. Presently we are purchasing that part from an outside

supplier. If we were to switch and buy

that part internally from our sister plant, what price should be charged to us

that would make us willing to purchase the part internally and would also make

our sister plant happy to do business with us?

That price is the subject of much debate among plant managers, but the

“fair” price is actually dependent on the level of capacity the producing plant

has available. Ingeneral terms, the transfer price

should be the sum of the outlay costs (usually variable costs to produce) plus

the opportunity cost of the resource at the transfer point.

Take a look

at a quick example: Pricing – 6: Transfer Pricing