24.01.2021
Week 3: Activity Based Costing and Management and Process Costing
Description:
Learn costing and apply various methods depending upon the type of business and products.
Learning Goals:
· Explain why functional (or volume)-based costing approaches may produce distorted costs
· Explain how an activity-based costing system works for product costing
· Describe activity-based customer costing and activity-based supplier costing
· Explain how activity-based management can be used for cost reduction
· Describe the basic characteristics and cost flows associated with process manufacturing
Required Reading: Managerial Accounting: The Cornerstone of Business Decision-Making, 7th Edition ISBN-10: 1337115770 ISBN-13: 9781337115773
Lecture:
Chapter 5 – Activity-Based Costing and Management
Chapter 6 – Process Costing
Discussion Board Activity (Wednesday)
1. How does lean manufacturing differ from the conventional manufacturing process?
Assignment (Sunday)
Find an example of Activity Based Accounting and write a brief memo (no more than 2 pages) about the example. Use a memo template from Word to create your document. Include citations and references.
REGISTRO 03.02.2021
The breakeven point is an indicator of business security. It is who shows how much it is necessary to sell so that the revenues are equal to the costs. It is which indicates when, based on the entrepreneur's sales projections, the company will be matching its revenues and costs.
According with Mitchell on Investopedia site: "In accounting, the breakeven point formula is determined by dividing the total fixed costs associated with production by the revenue per individual unit minus the variable costs per unit. In this case, fixed costs refer to those which do not change depending upon the number of units sold. Put differently, the breakeven point is the production level at which total revenues for a product equal total expenses”.
To exemplify Deloitte shows the forum of the breakeven point in sales:
BE Sales ($) =
Fixed Costs
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(Contribution Margin % / Total Sales per unit)
As can be seen in the graph below, Deloitte uses the number of units that need to be sold for new or used vehicles, parts and accessory items, financial contracts or hourly units - in order to balance. The graph shows profits, variable and fixed cost too.
The sales mix can affect a company's breakeven point, however, it is possible to work with a mix of differentiated products / services, think about cutting some product line or encourage those that are more profitable and that contribute more to the breakeven point.
Regarding the second question, the degree of operational leverage has two purposes: to measure the distance the company is from the Breakeven Point and to measure the variation in profit due to a variation in sales. To calculate the Operational Leverage Degree, it is necessary for the company to pay attention to the financial and accounting information of the business, more precisely the Operating Profit and the Percentage Change in Sales.
According to CFI Education: “the degree of operational leverage can be calculated in several different ways. First, we can use the formula from the definition of the ratio:
Degree of Operating Leverage =
% Change in Operating Income
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% Chane in Sales
Since the operating leverage ratio is closely related to the company’s cost structure, we can calculate it using the company’s contribution margin. The contribution margin is the difference between total sales and total variable costs.
Degree of Operating Leverage =
Contribution Margin
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Operating Income
Finally, if there is available information about the cost structure of a company, we can use the following formula:
Degree of Operating Leverage =
Q ( P - V )
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Q ( P - V ) - F
Where:
⦁ Q – the number of units
⦁ P – the price per unit
⦁ V – the variable cost per unit
⦁ F – the fixed costs
Operational leverage is one of the types of leverage that can be realized in the financial market by a company. The purpose is to make production generate more profits.
REFERENCES
Corporate Finance Institute (2015 to 2021). Degree of Operating Leverage. Retrieved from: https://corporatefinanceinstitute.com/resources/knowledge/finance/degree-of-operating-leverage/
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Deloitte (2013). Breaking Even. Retrieved from: https://www.eprofitfocus.com/market-intelligence/motor-industry-update/breaking-even/
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Mitchell, Cory (2020). Breakeven Point (BEP). Retrieved from: https://www.investopedia.com/terms/b/breakevenpoint.asp
GLOSSARY
Upon - sobre ,em , em cima de , em direção , pela .
Approaches - introduzir , aproximar .
Distorted - distorcido , deformado , desfigurado .
Customer - cliente , freguês .
Supplier - fornecedor .
Manufacturing - produzir industrialmente , manufaturar .
Factory - fábrica .
Fabric - tecido .
Managerial - gerenciamento .
Cornerstone - pilar , sustentação .
Decision- making - tomada de decisão .
Lecture - palestra .
Board - borda , limite .
Lean manufacturing - produção enxuta , equilibrada .
Manufacturing process - processo de fabricação .
Assignment - tarefa , ação .
Brief - breve , curto , temporário .
Than - do que , de que .
Then - então , depois .
Include - incluir .
Pretend - fingir , fazer de conta .
Intend - pretender .
