Week 3 Acct2522

ACCT2522 Management Accounting 1 Session 1, 2013 Tutorial Week 3 – Cost basics Overall Theme We will explore fundamental assumptions of cost functions and discuss the relationships between cost behaviour, cost estimation and cost prediction. The concept of cost driver analysis and its application to cost estimation and cost management will also be discussed. We will also describe how to estimate cost behaviour using managerial judgment, engineering methods and other quantitative techniques. Desired Learning Outcomes and Essential Reading Langfield-Smith, K. , H. Thorne, and R. W. Hilton (2012).

Management Accounting 6e: Information for Managing and Creating Value, 6th ed, McGraw-Hill Australia Pty Ltd. (Hereafter referred to as LS) • Chapter 2 • Chapter 3 (include Appendix 3 portion on “Evaluating the regression equation” p. 108109) TOPIC 3 COST BASICS After completing this topic, you should be able to: 1. 2. 3. 4. 5. 6. 7. 8. Why are costs important? What does ‘different costs for different purposes’ mean? Understand and apply various classifications of costs. Understand cost drivers and the role of cost driver analysis. Describe and apply the activity hierarchy of costs and cost drivers.

Explain the relationships between cost estimation, cost behaviour and cost prediction. Understand and apply various methods for cost estimation. Understand some practical issues faced in estimating cost functions. 1 Tutorial Questions (must be prepared prior to the tutorial) Question 1: Langfield-Smith, Chapter 3, Case 3. 41 Parts Q3-8 only Please note that all numbers in the cost functions should be rounded off to 2 dec places. Excel regression outputs are as follows: Part 1: If only patient load is considered as a determinant of administration costs, a simple regression can be used, utilising Excel.

The output is reproduced below. Regression Statistics Multiple R 0. 927088078 R Square 0. 859492304 Adjusted R Square 0. 824365379 Standard Error 401. 9749382 Observations 6 ANOVA df Regression Residual Total 1 4 5 Coefficients Intercept Patients 6 181. 36646 3. 838509317 SS 3 953 664. 596 646 335. 4037 4 600 000 Standard error 730. 0175478 0. 775999898 MS 395 3665 161583. 9 F 24. 468191 Significance F 0. 00778042 t Stat 8. 467422 4. 946533 P-value 0. 0010661 0. 0077804 Lower 95% 4 154. 51281 1. 6839882 Upper 95% 8 208. 220107 5. 993030436

Part 2: When both patient load and the number of emergency procedures are considered as determinants of administrative cost, a multiple regression must be used. Utilising Excel, the regression statistics are reproduced below. Regression Statistics Multiple R 0. 92919029 R Square 0. 86339459 Adjusted R Square 0. 77232432 Standard Error 457. 669779 Observations 6 ANOVA Regression Residual Total df 2 3 5 SS 3 971 615. 12 628 384. 8797 4 600 000 MS 1 985 808 209 461. 6 F 9. 480532 Significance F 0. 05048959 Standard Lower Coefficients Error t Stat P-value 95% Intercept 5943. 98625 1161. 190869 5. 18871 0. 01443 2 248. 558665 Emergency 24. 9140893 85. 10570782 0. 292743 0. 788799 -245. 930256 Patients 3. 80756014 0. 889819838 4. 279024 0. 023443 0. 975756281 Upper Lower Upper 95% 95. 0% 95. 0% 9 639. 414 2 248. 5599 639. 414 295. 7584 -245. 932 95. 7584 6. 639364 0. 975756 6. 639364 2 Question 2: Refer to Beth and Jessie’s ice cream factory from the tutorial last week. Please assume that in addition to chocolate chip ice-cream, Beth and Jessie have expanded their operations to produce Extra Chewy Cookie Dough ice-cream and Super Creamy Strawberry Cheesecake ice-cream. They hired semi-retired chef on a project-by-project basis to help develop these two flavours; and he is currently experimenting with another new flavour - Very Juicy Mango Delight. We further assume that the processes are exactly the same to manufacture all three types of ice-creams, except that different flavours and different “extra ingredients” are added. A. Please give examples of the following: Cost object = A box of ice-cream. 1. A unit level cost 2. A batch level cost 3. A product level cost 4. A facility level cost B. For each of the your examples, 1. Suggest a potential cost driver 2.

Classify the cost as manufacturing or non-manufacturing 3 Self Study Questions and Solutions (complete in your own time) 1. 2. 3. 4. LS, Chapter 2, Self-Study problem 1. LS, Chapter 2, Review Question 2. 7 LS, Chapter 3, Question 3. 34. Mowen, Chapter 3, Question 3. 10. (Note: You are not required to run a regression, the output table is provided below. 4 Self Study Questions and Solutions (complete in your own time) 1. LS, Chapter 2, Self-Study problem 1. Solution is on p. 61-62 with the following amendments: 4) Answer should a, and h. (Sales and marketing are often used interchangeably. 7) Answer should be a, and NOT b. (The word-processing equipment is used for administration purposes and should not be inventorised. ) 9) Answer should be a, and either g or h. (If the new product packaging is designed to attract customers’ attention and increase sales, the cost of material can also be considered a marketing cost. ) 2. LS, Chapter 2, Review Question 2. 7 When analysing cost behaviour the ‘level of activity’ refers to the level of work performed in the organisation. The activity generally causes the cost and, for this reason, the level of activity is often referred to as the level of cost driver.

Activity can be expressed in many different ways, including units produced, number of machine hours, number of direct labour hours, number of transactions, kilometres driven, kilowatts used, pages printed, number of set-ups, number of engineering hours and so on. 3. LS, Chapter 3, Question 3. 34. Answers to this question will vary. Rather than looking for a right answer, students should seek an understanding of the concepts. 1. Given that a full-time technician is hired, this component of the cost is a fixed cost.

The additional cost of repairs by the local dealer may be related to the number of instruments used in the school, or number of hours of instruction. A semi-variable cost. 2. The number of audit hours is a cost driver, which, in turn may be related to the number of students (influencing the number of transactions. ) A variable cost. 3. No cost driver - a fixed cost; step-fixed cost if the number of students grew beyond the ability of existing admin staff to cope and another new staff has to be hired. 4. Number of students enrolled, or number of hours of instruction. Variable cost. . No cost driver i. e. a fixed cost (if annual fixed salary paid) or, (if paid on an hourly basis) the number of hours employed or the number of hours of instruction (i. e. , a variable cost). 6. Number of students enrolled. A variable cost. 7. A fixed cost; no driver. (However, in the long term, the cost of new instruments purchased will drive the depreciation charge. ) 8. Probably fixed; no cost driver. 9. Number of hours the school is open. A semi-variable cost. 5 4. Mowen, Chapter 3, Question 3. 10 Note: You may have a slightly different figure due to rounding (e. g. , ±1). 6