1、2022年10月29日星期六某咨询财务分析某咨询财务分析costaccounting Importance of cost allocationClient exampleDefinitionsdirect vs.indirect,fixed vs.variablebreakeven volumeExercisescost allocationbreakeven volumeKey takeawaysAgendaCU7122397ECA Importance of cost allocationClient exampleDefinitionsdirect vs.indirect,fixed
2、vs.variablebreakeven volumeExercisescost allocationbreakeven volumeKey takeawaysAgendaCU7122397ECA Which products are profitable?What is the breakeven volume by product?Which products require cost reduction efforts?How should we price our products?Which customer segments are most profitable?It is cr
3、itical to have accurate and complete cost data to make sound strategic and tactical management decisions.Why Allocate Costs?CU7122397ECA Historically,only 20%of manufacturing costs were“shared”across product lines.Today,typically 50%of costs are“shared”across products.Shared costs might include rent
4、,freight,and administrative costs.For simplicity,accounting tracks costs by function(e.g.,materials,salaries,benefits)rather than by the activity devoted to product lines(e.g.,maintenance of product A,freight for product B)For costs that are not easily assigned to individual product lines,companies
5、normally select the most convenient way to assign them,not necessarily the best wayfor example,companies tend to allocate rent costs based on something that is easy to measure,such as direct labor dollars for each product line.A better allocation method,however,might be the actual space resource dem
6、ands of each product lineMost companies lack accurate cost data by product.Why Costs Are Often Not Allocated CorrectlyCU7122397ECA Importance of cost allocationClient exampleDefinitionsdirect vs.indirect,fixed vs.variablebreakeven volumeExercisescost allocationbreakeven volumeKey takeawaysAgendaCU71
7、22397ECA Riding mowersBicyclesWalking mowers$25.0MM$2.4MM$1.2MM$0$5$10$15$20$25$30Pretax Operating Profit(Millions of Dollars)Middle America Manufacturing,a Bain client,believed that all three of its product lines were profitable.Return on sales:10.0%2.4%1.6%Sales:$250MM$100MM$75MMMiddle America Man
8、ufacturing-Estimated ProfitabilityCU7122397ECA Walking mowersBicyclesRiding mowersWalking mowersBicyclesRiding mowersOriginal allocationRevised allocation$8.0MM$8.0MM$0$2$4$6$8$10Cost(Millions of Dollars)After a thorough evaluation,the Bain team found that$8.0MM in costs had been allocated incorrect
9、ly among the three products.Middle America Manufacturing-Cost AllocationCU7122397ECA Generaladministative expensesSystems costsInventory carrying costsWalking mowersBicyclesRiding mowersAdditional unallocated costsAdditional costs reallocated$18.8MM$18.8MM$0$5$10$15$20Cost(Millions of Dollars)The Ba
10、in team also determined that an additional$18.8MM in costs should be allocated to the three products.Middle America Manufacturing-Additional CostsCU7122397ECA Riding mowersBicyclesWalking mowers$18.0MM($3.0MM)($5.2MM)($10)($5)$0$5$10$15$20Product Line Profitability(Millions of Dollars)Bains analysis
11、 indicated that both bicycles and walking mowers were unprofitable.Middle America then began to investigate whether to exit or fix these two businesses.Return on sales:7.2%(3.0%)(6.9%)Sales:$250MM$100MM$75MMMiddle America Manufacturing-Actual ProfitabilityCU7122397ECA Importance of cost allocationCl
12、ient exampleDefinitionsdirect vs.indirect,fixed vs.variablebreakeven volumeExercisescost allocationbreakeven volumeKey takeawaysAgendaCU7122397ECA Definitions:Costs that do not vary directly with changes in outputCosts that vary directly with changes in outputCosts incurred directly in the productio
13、n or delivery of a firms product or service.These costs can easily be identified with,or assigned to,a particular productCosts generally incurred by the firm outside of the production process.These costs cannot easily be identified with,or assigned to,a particular productAll costs can be broken down
14、 along two dimensions.FixedVariableDirectIndirectvs.vs.Examples:Equipment depreciationRentAdvertisingRaw materialsProduction laborDelivery costsDirect laborDedicated equipmentRaw materialsSG&AOffice suppliesPlant managerRule of thumb:If a particular cost changes when production increases or decrease
15、s,the cost is variable.If a particular cost“goes away”when a product is dropped from the product line,the cost is direct.Types of CostsCU7122397ECA All costs are variable over a very long time horizon(i.e.,for very large increases in volume)Costs to run and maintain a computer system that tracks pro
16、duct orders are clearly fixed for a small change in volume,such as that associated with a slightly busy month.However,they are variable for a large change in volume,such as that associated with a new plant.Most costs are semi-variable(i.e.,they tend to be added in lumps as volume increases)Superviso
17、ry labor tends to be considered fixed because it is unlikely that additional supervisors would have to be added to handle a small increase,say 10%,in volume.But the workforce can only increase so much before an additional supervisor is needed.In theory,production labor is variable.However,in many cl
18、ient situations,restraints placed by unions and difficulty in hiring and firing people in response to short-term volume fluctuations make it,in practice,semi-variable.Defining the appropriate time horizon for the analysis is important.A meaningful analysis will isolate the fixed cost and variable co
19、mponents of a particular costFixed vs.VariableCU7122397ECA The following is an illustration of cost behavior for fixed,semi-variable,and variable costs:Cost(Dollars)Volume(Units)Variable costsSemi-variable costsFixed costsFixed vs.Variable-IllustrationCU7122397ECA It is useful to know the following
20、terms when doing cost analysis:Simplified income statement:-Variable Cost Gross Margin-Fixed Cost Operating MarginRevenue=Price per Unit x VolumeGross margin is also called“Gross Profit,”or“Contribution Margin”Operating Margin is also called“Operating Profit”RevenueIncome Statement TermsCU7122397ECA
21、 Breakeven volume is the volume at which the company covers its fixed costs.At breakeven volume,the operating profit is zero.VolumeContribution margin(i.e.,revenue less variable costs)Fixed costsBreakeven volume$Operating LossFixed costsUnit contributionPrice per unit-Variable cost per unitBreakeven
22、 volume=Fixed costs=Operating Profit Contribution MarginBreakeven VolumeCU7122397ECA Operating Profit =Revenue-Costs =Revenue-Variable Costs-Fixed costs =(Price per unit x Volume)-(Variable cost per unit x Volume)-Fixed costs =Volume x(Price per unit-Variable cost per unit)-Fixed costs =Volume x Uni
23、t contribution-Fixed costsThe breakeven volume is the volume for which operating profit=0 0 =Breakeven volume x Unit contribution-Fixed costsFixed costsUnit contributionPrice per unit-Variable cost per unitBreakeven volume =Fixed costs=Backup for Breakeven FormulaCU7122397ECA Importance of cost allo
24、cationClient exampleDefinitionsdirect vs.indirect,fixed vs.variablebreakeven volumeExercisescost allocationbreakeven volumeKey takeawaysAgendaCU7122397ECA All products are made using the same equipment and machineryPlant supervisors oversee production of all three productsEquipment capacity exists t
25、o increase production by 50%Sales people sell all three productsSales people are paid a base salary,plus a commission which is a percentage of the selling priceMost advertising is product specificThe company uses a trucking company to deliver products to customers(costs are based on the length of tr
26、ip and weight)Maple Leaf Company wants to allocate costs to the three products it makes and sells.Cost Allocation Exercise-BackgroundCU7122397ECA How would you characterize the following costs over a time horizon in which the company plans to increase sales volume by 10%?FixedVariableDirectIndirectC
27、EOs salaryRaw materialsSupervisory laborProduction floor laborRentEquipment depreciationOffice suppliesFreight to customerElectricity to run machinesInterest expense to finance inventoryAdvertisingGoodwill amortizationSales commissionsSales peoples salariesSales travel and expensesCosts:Cost Allocat
28、ion Exercise-QuestionCU7122397ECACost Allocation Exercise-Answer Most costs are fixed indirect or variable direct.FixedVariableDirectIndirectAdvertisingRaw materialsProduction floor laborFreight to customerInterest expense to finance inventorySales commissionsEquipment depreciationCEOs salarySupervi
29、sory laborRentOffice suppliesGoodwill amortizationSales peoples salariesSales travel and expensesElectricity to run machinesCU7122397ECA Cost ComponentsFixed vs.VariableDirect vs.IndirectAdvertisingFixed,because advertising is usually not tied directly to volumeDirect,because,in this case,most of it
30、 is product specificEquipment depreciationFixed,because excess capacity exists for a 10%increase in volumeIndirect,because all products are made on the same machinesCEOs salaryFixed,assuming his/her salary does not change with 10%sales increaseIndirect,because CEO oversees the whole companySuperviso
31、ry laborFixed,because it is unlikely that additional supervisors will be needed to handle a 10%increase in volumeIndirect,because supervisors oversee production of all three productsIndirect,because all three products are produced at the same siteRentFixed,assuming current facility has excess capaci
32、tyCost Allocation Exercise-Detailed Answer(1 of 3)CU7122397ECA Cost ComponentsFixed vs.VariableDirect vs.IndirectOffice suppliesFixed,because it is unlikely that additional office supplies will be needed to handle 10%increase in volumeIndirect,because the office supplies are used to support all thre
33、e productsGoodwill amortizationFixed,because goodwill is not directly related to volumeIndirect,assuming the goodwill is incurred to support the whole companySalespeoples salariesFixed,assuming that current sales force can handle 10%additional volumeIndirect,because each salesman sells all three pro
34、ductsSales travel and expensesFixed,assuming that 10%volume increase will not require significant increase in sales activitiesIndirect,because sales-force handles all three productsRaw materialVariable,because a 10%increase in volume would require 10%more raw materialsDirect,because raw materials ar
35、e directly traceable to individual productsCost Allocation Exercise-Detailed Answer(2 of 3)CU7122397ECA Cost ComponentsFixed vs.VariableDirect vs.IndirectDirect,because even though the products are made on the same machine,the hours spent working on each of the products are directly traceableProduct
36、ion floor laborVariable,because more production labor will be needed to handle the increase in volumeFreight to customersVariable,because the freight cost clearly increases with the volume increaseDirect,because weight and distance can be directly traced to individual productsInterest expense to fin
37、ance inventoryVariable,because more inventory means more inventory financing and hence more interest expenseDirect,because inventory is product specificSales commissionsVariable,because sales commissions are paid based on a percentage of salesDirect,because commissions are based on individual produc
38、t salesElectricity to run machinesVariable,because it clearly varies with volumeIndirect,because all products are made on the same machinesCost Allocation Exercise-Detailed Answer(3 of 3)CU7122397ECA LaborIn many client situations,restraints placed by unions and difficulty in hiring and firing peopl
39、e in response to short term volume fluctuations make a portion of labor costs behave as fixed costsElectricity to run machinesIn theory this is direct,but in practice it is considered indirect because it is difficult to trace electricity cost to productsAlso,the 80/20 rule applies here.Electricity i
40、s usually a small cost item,and,for simplicity,could be allocated using machine hours spent on productionAdvertisingUsually,advertising is not tied to volume.For example,advertising to support a corporate brand is not tied to the volume of the products under that brand.If advertising is not tied to
41、volume,it is fixed and indirect.There are few caveats:Cost Allocation Exercise-CaveatsCU7122397ECA A dean of a business school is considering starting an executive program.She estimates the revenues and costs as follows:Question:How many students does the program need to break even?Costs:Revenue:Adv
42、ertisingClassroom rental(Each classroom can accommodate 15 students)Program administrationProgram directors salaryFaculty salaries(The program will be staffed with 1 faculty member for every 5 students)Guest lecturerRoom and board per studentText and supplies per studentTuition per student$3,000$13,
43、500$500$30,000 per classroom$15,000$20,000$20,000 per faculty member$12,000$3,200Breakeven Exercise-BackgroundCU7122397ECA Step 1:Categorize costsAdvertisingClassroom rentalProgram administrationProgram directors salaryFaculty salariesGuest lecturesRoom and board per studentText and supplies per stu
44、dentFixedVariableStep 2:Calculate fixed costsFixed costs:$3,000Advertising$15,000Program administration$20,000Program directors salary$12,000Guest lectures$50,000Semi-VariableFirst,you must categorize costs and calculate fixed costs.Breakeven Exercise-Answer(1 of 3)CU7122397ECA Step 4:Calculate unit
45、 contributionUnit contribution=Price per unit-Variable cost per unit=$13,500tuition -3,200room and board-500text and supplies$9,800Step 3:Calculate semi-variable costsClassroomFaculty10 students$30,000$40,00015 students$30,000$60,00020 students$60,000$80,000Then you must calculate semi-variable cost
46、s and the unit contribution.Breakeven Exercise-Answer(2 of 3)CU7122397ECA*The most effective way to calculate the breakeven volume is to write a simple formula in ExcelStep 5:Calculate breakeven volumeBreakeven volume=For 10 students:=12.2 students with 10 students the program does not If you keep i
47、ncreasing the number of students by one and redoing the calculation*,you will find that the business school needs to have 15 students to break even on the executive programFixed costsUnit contribution$140,000$9,800Now you are ready calculate the breakeven volume.For 15 students:$120,000$9,800=14.3 s
48、tudentsbreak evenBreakeven Exercise-Answer(3 of 3)CU7122397ECA Importance of cost allocationClient exampleDefinitionsdirect vs.indirect,fixed vs.variablebreakeven volumeExercisescost allocationbreakeven volumeKey takeawaysAgendaCU7122397ECA A company must know the total cost associated with the prod
49、uction and delivery of its good and services in order to make the right strategic and tactical decisionsMost companies lack accurate cost data by productAll costs can be broken down along two dimensions:fixed versus variable and direct versus indirectDefining the appropriate time horizon for costs i
50、s important because fixed costs are“fixed”only for a certain time frameBreakeven volume is the minimum amount of product that a company must sell in order to cover its fixed costs.At breakeven volume,the companys operating profit is zeroBreakeven volume=Fixed costsUnit contribution=Fixed costsPrice
