question is above: RISK MANAGEMENT QUESTION, SHOW STEPS AND…

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Question Answered step-by-step question is above: RISK MANAGEMENT QUESTION, SHOW STEPS AND… Image transcription textA trader hays stocks of a company on margin as per the table below. How [and 11012]? does the trader have toprovide initially? For what share price is there a margin call? ther of shares bang” on margin 200 Stock price {in$5} 215.00 Initial Margin {in 5’51} ’65 00 Maintenance Margin {in 5’3] 32.50 … Show more question is above:   RISK MANAGEMENT QUESTION, SHOW STEPS AND EXPLAIN. ANSWER DIGITALLY INTO THE ANSWER BOX, AND EXPLAIN THE RISK MANAGEMENT CONCEPTS IF OR WHERE USED.  Business Finance FIN 820 Share QuestionEmailCopy link Comments (0)

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Description Q 1 Provide numerical example of assigning support department cost and discuss the purpose of assigning support department costs (Chapter 8, Measuring and Assigning Support Department Costs). (attached) Q 2 LMN Compagny produces three products K, L and M. During the year, the joint costs of processing the three products were $480,000. Production and sales value information were as follows: Sales ValueProduct Units at Split-Off Separable Costs Selling PriceK 500,000 $13 per unit $6.00 per unit $40 per unitL 300,000 $12 per unit $4.00 per unit $37 per unitM 200,000 $8 per unit $3.00 per unit $28 per unitAllocate the joint costs using the physical output method.(Chapter 9, Joint product and by – Product costing) (attached) (1.5 marks)Q 3 Provide numerical examples of static and flexible budget and discuss how these budgets could be used to evaluate the performance of the managers (Week 12: Static and flexible budgets) (attached) 4 attachmentsSlide 1 of 4attachment_1attachment_1attachment_2attachment_2attachment_3attachment_3attachment_4attachment_4.slider-slide > img { width: 100%; display: block; } .slider-slide > img:focus { margin: auto; } Unformatted Attachment Preview College of Administrative and Financial Sciences Assignment 3 Deadline: 21/11/2020 @ 23:59 Course Name: Cost accounting Student’s Name: Course Code: ACCT 301 Student’s ID Number: Semester: 1 CRN: Academic Year: 1441/1442 H For Instructor’s Use only Instructor’s Name: Students’ Grade: Marks Obtained/Out of Level of Marks: High/Middle/Low Instructions • The Assignment must be submitted on Blackboard (WORD format only) via allocated folder. • Assignments submitted through email will not be accepted. • Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page. • Students must mention question number clearly in their answer. • Late submission will NOT be accepted. • Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions. • All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism). • Submissions without this cover page will NOT be accepted. Page 1 of 2 Q 1 Provide numerical example of assigning support department cost and discuss the purpose of assigning support department costs (Week 10: Chapter 8, Measuring and Assigning Support Department Costs). (2 marks) Q 2 LMN Compagny produces three products K, L and M. During the year, the joint costs of processing the three products were $480,000. Production and sales value information were as follows: Sales Value Product Units at Split-Off Separable Costs Selling Price K 500,000 $13 per unit $6.00 per unit $40 per unit L 300,000 $12 per unit $4.00 per unit $37 per unit M 200,000 $8 per unit $3.00 per unit $28 per unit Allocate the joint costs using the physical output method. (Week 11: Chapter 9, Joint product and by – Product costing) (1.5 marks) Q 3 Provide numerical examples of static and flexible budget and discuss how these budgets could be used to evaluate the performance of the managers (Week 12: Static and flexible budgets). (1.5 marks) . Page 2 of 2 Cost Management Measuring, Monitoring, and Motivating Performance Chapter 10 Static and Flexible Budgets © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 1 Chapter 10: Static and Flexible Budgets Learning objectives • Q1: How do budgets contribute to the strategic management process? • Q2: What is a master budget and how is it prepared? • Q3: What are flexible budgets and how can they be used for sensitivity analysis? • Q4: How are budget variances calculated and used as performance measures? • Q5: How do behavioral tensions influence the budgeting process? • Q6: What approaches exist for addressing the problems of traditional budgeting? © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 2 Q1: Budgets & Strategic Management Process • A budget is • • • • A formalized financial plan. A translation of an organization’s strategies. A method of communicating. A way to define areas of responsibility and decision rights. • The budget cycle is the series of sequential steps followed to create and use budgets. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 3 Q1: Budgets & Strategic Management Process • Budgeting process begins with the organizational vision, core competencies, and risk appetite • Organizational strategies designed to achieve the vision will drive the capital expenditures and long term financing plans • Operating plans are then created in line with the organizational strategies • Actual results must be monitored, measured, and analyzed compared to budgeted plans © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 4 Q1: Budgets & Levers of Control Belief Systems • Communicates organizational strategies and goals • Motivates managers to plan in advance and coordinate activities © John Wiley & Sons, 2011 Boundary Systems • Authorizes employees to engage in planned activities and spend within budget limits • Ensures sufficient cash flow for financial viability Interactive Control Systems Diagnostic Control Systems • Utilize variances to identify opportunities and threats to the business • Revaluate strategies and operating plans as conditions changes • Assign responsibility and reward employees for achieving budget targets • Motivate managers to provide good estimates and use resources appropriately Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 5 Q2: Master Budgets • A master budget is • A comprehensive plan for the upcoming accounting period. • Usually prepared for a one-year period. • Is based on a series of budget assumptions. • The master budget consists of several subsidiary budgets, in two categories: • Operating budgets. • Financial budgets. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 6 Q2: Operating Budgets © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 7 Q2: Operating Budgets The operating budget is created by preparing the following individual budgets, in this order: • • • • • • • • Revenue budget Production budget Direct materials budget Direct labor budget Manufacturing overhead budget Inventory and cost of goods sold budget Support department budgets Budgeted income statement © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 8 Q2: Financial Budgets The financial budget is created by preparing the following individual budgets, in this order: • • • • • Capital budget Long-term financing budget Cash budget Budgeted balance sheet Budgeted statement of cash flows © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 9 Q2: Operating Budget Example Stanley J, Inc., makes a tool used by auto mechanics that sells for $68/unit. It expects to sell 6,000 units in April and 7,000 units in May. Stanley J prefers to end each period with a finished goods inventory equal to 10% of the next period’s sales in units and a direct materials inventory equal to 20% of the direct materials required for the next period’s production. The company never has any beginning or ending work-in-process inventories. There were 400 units in finished goods inventory on April 1. Prepare the revenue and production budgets for April. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 10 Q2: Operating Budget Example Stanley J’s product uses 0.3 pounds of direct material per unit, at a cost of $4/lb. There were 220 lbs. of direct material on hand on April 1. Assume that budgeted production for May is 6,500 units. Prepare the direct materials purchases and usage budget for April. Usage Budget = 1,890 pounds * $4 per pound = $7,560 © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 11 Q2: Operating Budget Example Stanley J’s product uses 0.2 hours of direct labor at a cost of $12/hr. Prepare the direct labor budget for April. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 12 Q2: Operating Budget Example Stanley J’s budgeted fixed manufacturing overhead for April is $167,000, and variable manufacturing overhead is budgeted at $6 per direct labor hour. Prepare the manufacturing overhead budget for April. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 13 Q2: Operating Budget Example Assume that Stanley J’s April 1 direct materials inventory had a cost of $1,560. Prepare the April ending inventories budget for direct materials. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 14 Q2: Operating Budget Example Prepare the April ending inventories budget for finished goods. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 15 Q2: Operating Budget Example Assume that Stanley J’s April 1 finished goods inventory had a cost of $12,146. Prepare the cost of goods sold budget for April. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 16 Q2: Operating Budget Example Stanley J’s budget for April includes $22,000 for administrative costs, $34,000 for fixed distribution costs, $18,000 for research and development, and $13,000 for fixed marketing costs. Additionally, the budgeted variable costs for distribution are $0.75/unit sold and the budgeted variable costs for marketing are 4% of sales revenue. Prepare the support department budget for April. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 17 Q2: Operating Budget Example Suppose that Stanley J’s income tax rate is 28%. Prepare the budgeted income statement for April. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 18 Q4: Budget Variances • Managers compare actual results to budgeted results in order to • Monitor operations, and • Motivate appropriate performance. • Differences between budgeted and actual results are called budget variances. • Variances are stated in absolute value terms, and labeled as Favorable or Unfavorable. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 19 Q4: Budget Variances • Reasons for budget variances are investigated. • The investigation may find: • Inefficiencies in actual operations that can be corrected. • Efficiencies in actual operations that can be replicated in other areas of the organization. • Uncontrollable outside factors that require changes to the budgeting process. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 20 Q3: Static Budgets • A budget prepared for a single level of sales volume is called a static budget. • Static budgets are prepared at the beginning of the year. • Differences between actual results and the static budget are called static budget variances. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 21 Q3: Flexible Budgets • A budget prepared for a multiple levels of sales volume is called a flexible budget. • Flexible budgets are prepared at the beginning of the year for planning purposes and at the end of the year for performance evaluation. • Flexible budgets are also used for sensitivity analysis and to manage risk due to uncertainty. • Differences between actual results and the flexible budget are called flexible budget variances. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 22 Q3, Q4: Flexible Budget Example Tina’s Trinkets is preparing a budget for 2006. The budgeted selling price per unit is $10, and total fixed costs for 2006 are estimated to be $5,000. Variable costs are budgeted at $3/unit. Prepare a flexible budget for the volume levels 1,000, 1,100, and 1,200 units. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 23 Q3, Q4: Static Budget Variances Example Suppose that Tina’s 2006 static budget was for 1,100 units of sales. The actual results are given below. Compute the static budget variances for each row and discuss. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 24 Q3, Q4: Flexible Budget Variances Example Compute the flexible budget variances for Tina and discuss the results. Compare the flexible budget variances to the static budget variances on the prior page. © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 25 Q3, Q4: Performance Evaluation • A static budget variance includes effects from output volume. • A flexible budget variance removes these output volume effects. • Other adjustments to the year-end flexible budget may be made for a fair performance evaluation, such as • Input price changes outside the control of the manager under evaluation • Fixed cost increases outside the control of the manager under evaluation © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 26 Q5: Behavior Tensions in Budgeting • Budgets used to evaluate performance and compensation can create behavioral tension • Participative budgeting – when managers who are responsible for the budgets prepare the budget forecasts – Can result in budgetary slack – when managers set targets so low that goals can be met easily (and bonuses achieved) • Budget ratcheting – when top managers set targets – If targets unachievable, this can result in employees having little motivation to meet targets • Organizations must watch for budget manipulation © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 27 Q6: Other Budgeting Approaches • Zero based budgets are prepared without using past information as justification. • Rolling budgets are prepared frequently for overlapping time periods and actual results may be used to update the budget for the next period. • Kaizen budgets plan cost reductions over time. • Activity based budgets use more cost pools and cost drivers. • GPK and RCA budgets identify fixed and variable cost functions at the resource center level. • Beyond budgeting uses external benchmarks to evaluate managers’ performance © John Wiley & Sons, 2011 Chapter 10: Static and Flexible Budgets Eldenburg & Wolcott’s Cost Management, 2e Slide # 28 Cost Management Measuring, Monitoring, and Motivating Performance Chapter 9 JOINT PRODUCT AND BY-PRODUCT COSTING © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 1 Chapter 9: Joint Product and By-Product Costing Learning objectives • Q1: What is a joint process, and what is the difference between a by-product and a main product? • Q2: How are joint costs allocated? • Q3: What factors are considered in choosing a joint cost allocation method? • Q4: What information is relevant for deciding whether to process a joint product beyond the split-off point? • Q5: What methods are used to account for the sale of byproducts? • Q6: How does a sales mix affect joint cost allocation? • Q7: How do joint cost allocations affect decisions and managerial incentives? © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 2 Q1: Joint Processes and Costs • A process that yields one or more products is called a joint process. • The products are called joint products. • The costs of the process are called joint costs. • The split-off point is the stage in the joint process where the separate products become identifiable. • Joints costs are incurred prior to the split-off point. • Costs incurred past split-off are separable costs. • Joint products that have minimal sales value compared to the main product are called byproducts. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 3 Q1: Joint Processes and Costs Sawdust Bark Joint costs include DM, DL & Overhead. © John Wiley & Sons, 2011 Planks If sawdust sells for a relatively minimal amount, it is a byproduct. The costs of processing planks further are separable costs. Wall paneling Joint products Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 4 Q2: Methods of Allocating Joint Costs • Physical output methods • Can be used only when joint products are measured the same way (e.g. pounds or feet). • Market-based methods • Sales value at split-off method • Often used when all products sold at split-off. • Net realizable value (NRV) method • NRV = Final selling price – Separable costs. • Constant gross margin (GM) NRV method • The two NRV methods can be used when some products are processed past split-off. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 5 Q2: Physical Volume Method Example Pleasing Peaches grows peaches and processes three different peach products that are sold to a canning company. The pounds produced for each product, and the selling price per pound, is given below. The joint costs of processing the 280,000 pounds of products were $70,000. Allocate the joint costs to each product using the physical volume method. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 6 Q2: Sales Value at Split-Off Method Example Allocate the joint costs of $70,000 to each of Pleasing Peaches products using the sales value at split-off method. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 7 Q2, 6: Compare the Physical Volume and Sales Value at Split-Off Methods Compute the gross margin for each product for each of the two allocation methods. Discuss the differences between the two methods. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 8 Q2, 6: Compare the Physical Volume and Sales Value at Split-Off Methods Compute the gross margin ratio (GM/Sales) for each product under both of the methods and discuss. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 9 Q2: Net Realizable Value (NRV) Method Example Pleasing Peaches could process each of its three products beyond split off. It could can the peach halves itself, make the peach slices into frozen peach pie, and make juice out of the peach purée. The retail value of the new products and the separable costs for the additional processing are given below. Compute the joint costs allocated to each of the products using the NRV method. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 10 Q2: Constant GM NRV Method • Under the constant GM NRV method, all products are allocated joint costs to achieve the same gross margin ratio (GM%). • First compute overall gross margin and GM%: GM = Revenue – Joint costs – Separable costs GM% = GM/Sales • Then compute the GM for each product: GM = Final sales value x GM% • All products end up with the same gross margin ratio; for each product solve for allocated joint costs: Final sales value – joint costs – separable costs = GM © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 11 Q2: Constant GM NRV Method Example Compute the joint costs that Pleasing Peaches would allocate to each of the products using the constant GM NRV method. First compute the overall GM and GM ratio: GM = $350,000 - $163,000 - $70,000 = $117,000 GM% = $117,000/$350,000 = 33.43% Values are rounded as appropriate. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 12 Q2, 6: Compare the NRV and Constant GM NRV Methods Compute the gross margin (GM) and the gross margin ratio (GM%) for each product under NRV method. Compare this to the results of the constant GM NRV method and discuss. Values are rounded as appropriate. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 13 Q3: Choosing a Joint Cost Allocation Method • Allocated joint costs should not be used in decision making. • Still, avoid a method that shows one product to be unprofitable. • Under the physical volume method, the product with the greatest relative physical volume is allocated the most joint costs, regardless of product’s sales value. • Both of the NRV methods allocate joint costs based on the products’ “ability to bear the cost”. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 14 Q4: Sell or Process Further Decisions • Companies often can choose to sell a product at the split-off point or to process it further. • Compare the incremental revenue of processing further to the product’s separable costs. • Incremental revenue of processing further = Final sales value – Sales value at split-off • Process further only when the incremental revenue exceeds the separable costs. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 15 Q4: Sell or Process Further Example Peg’s Plastic Products makes the molded plastic parts for three model car kits, A, B & C from a joint production process. The joint costs of this process are $150,000. In each case, Peg could decide to make the entire kit rather than just the plastic parts. Information about the sales values and separable costs for each kit is given below. Determine which kits Peg should sell at the split-off point and which she should process further. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 16 Q5: Accounting for By-Products • When by-products have no sales value, there is no reason to account for them. • Otherwise, there are two accounting methods available: • Recognize by-product value at time of production • Recognize by-product value at time of by-product sale © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 17 Q5: Recognize By-Product Value at Time of Production • This method is also known as the offset approach or the NRV approach. • Joint cost of the main products is reduced by the NRV of the by-products, even if by-products are not yet sold. • NRV of the by-products is kept in ending inventory until sold. • At sale of by-product, ending inventory is reduced; there is no gain/loss on sale. • This method allows managers to control by-products. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 18 Q5: By-Product Value Recognized at Time of Production Example SJ Enterprises produces a main product and one by-product in a joint process. The joint costs totaled $480,000. The main product sells for $10/unit and the by-product sells for $1/unit. Information about the production and sales of the 2 products is given below. Use the NRV method to compute the production cost per unit for the main product. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 19 Q5: By-Product Value Recognized at Time of Production Example Prepare an income statement for SJ Enterprises and compute the costs attached to ending inventory using the NRV method, assuming that nonmanufacturing costs totaled $250,000. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 20 Q5: Recognize By-Product Value at Time of Sale • This method is also known as the Realized Value Approach or the RV Approach. • Joint cost of the main products is not reduced by the NRV of the by-products, regardless if byproducts are sold. • NRV of the by-products is not kept in ending inventory. • At sale of by-product, either Other Income is recorded or Cost of Goods Sold is reduced. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 21 Q5: By-Product Value Recognized at Time of Sale Example SJ Enterprises produces a main product and one by-product in a joint process. The joint costs totaled $480,000. The main product sells for $10/unit and the by-product sells for $1/unit. Information about the production and sales of the 2 products is given below. Use the RV method to compute the production cost per unit for the main product. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 22 Q5: By-Product Value Recognized at Time of Sale Example Prepare an income statement for SJ Enterprises and compute the costs attached to ending inventory using the RV method, assuming that nonmanufacturing costs totaled $250,000. By-product sales is recorded as other income. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 23 Q7: Decision Making & Joint Cost • Joint cost information is required for financial statement & tax return preparation when production does not equal sales (inventory and cost of goods sold). • Allocated joint costs are irrelevant for most decisions, especially regarding individual products • Joint cost information should not be used to make product mix decisions. © John Wiley & Sons, 2011 Chapter 9: Joint Product and By-Product Costing Eldenburg & Wolcott’s Cost Management, 2e Slide # 24 Cost Management Measuring, Monitoring, and Motivating Performance Chapter 8 Measuring and Assigning Support Department Costs © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 1 Chapter 8: Measuring and Assigning Support Department Costs Learning objectives • • • • • • • Q1: What are support departments, and why are their costs allocated to other departments? Q2: What process is used to allocate support department costs? Q3: How is the direct method used to allocate support costs to operating departments? Q4: How is the step-down method used to allocate support costs to operating departments? Q5: How is the reciprocal method used to allocate support costs to operating departments? Q6: What is the difference between single- and dual-rate allocations? Q7: How do support cost allocations affect decisions and managerial incentives? © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 2 Q1: Support versus Operating Departments • The operating departments of an organization produce products or services that generate revenue. • The support departments of an organization produce products or provide services to the operating and other support departments. • The support department costs are common costs that are shared between two or more other departments. © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 3 Q1: Reasons for Allocating Support Department Costs • External reporting • Motivation • appropriate consumption of support department resources • efficiency of support department • monitor consumption of support department services • Decision making • product pricing • make or buy decisions © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 4 Q1: Support Department Allocation Process © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 5 Q2: Process for Allocating Support Department Costs 1. Clarify allocation purpose 2. Identify cost pools 3. Assign costs to cost pools 4. Choose allocation bases for each cost pool 5. Choose allocation method; allocate support department costs 6. Allocate updated operating department costs to units of goods or services, if relevant © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 6 Q2: Process for Allocating Support Department Costs 1. Clarify allocation purpose • if the purpose is to motivate the use of the services of a newly formed department, perhaps no costs should be allocated • if the purpose is to discourage operating department managers from over-use of the services of support departments, then a rate per unit of service might be large and not based on actual costs • if the purpose is to determine the full cost of products or services for long-term pricing decisions, then all support costs should be allocated © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 7 Q2: Process for Allocating Support Department Costs 2. Identify cost pools • the purpose will determine whether both fixed and variable support department costs should be allocated • the purpose will determine which costs should be allocated © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 8 Q2: Process for Allocating Support Department Costs 3. Assign costs to cost pools • some costs will be direct to the cost pool (e.g. toner cartridge costs would be direct to the “variable copying costs” cost pool) • some costs will be indirect to the cost pool (e. g. rent costs for an entire facility would be indirect to the “information technology costs” cost pool) © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 9 Q2: Process for Allocating Support Department Costs 4. Choose allocation bases for each cost pool • an allocation base with a good cause-andeffect relationship with the cost pool provides a reasonable allocation rate • users of support department services will carefully monitor their consumption of the allocation base © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 10 Q2: Process for Allocating Support Department Costs 5. Choose allocation method and allocate support department costs • in this chapter we cover three allocation methods • each of these three methods could be implemented using • a single- or dual-rate approach (covered later) • actual or budgeted costs and allocation bases (covered later) © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 11 Q2: Process for Allocating Support Department Costs 6. Allocate updated operating department costs to units of goods or services, if relevant • for some decisions, this may not be relevant • for long-term pricing decisions, this is likely to be relevant © John Wiley & Sons, 2011 Chapter 8: Measuring and Assigning Support Department Costs Eldenburg & Wolcott’s Cost Management, 2e Slide # 12 Q3: The Direct Method of Allocating Support Department Costs • The direct method ignores the fact that support departments use each others’ services. • Each support department’s costs are allocated only to operating departments. • This method is the easiest computationall
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