Strategic Cost Management
ACCT90009
Seminar 12
Review Lecture
1
Dr. Chung-Yu Hung
First…
In lecture 1, we set up the expectation of problem solving.
In lecture 2, we discuss the terminology of costs and cost behaviour, i.e.,
variable and fixed costs.
In lectures 3-5, we discuss how to calculate product costs and emphasize the
difference in assigning direct and indirect costs to product.
Manufacturing costs: Job costing/ Activity-based costing/ Process Costing
Non-Manufacturing costs: different allocation method/ ABC
For internal reporting purposes, cost allocation is not always necessary.
2
Direct Indirect
Variable DM+DL VOH
Fixed FOH
A map of costing system choices
Two major, independent choices:
1. How to determine product cost (for internal management purposes)
Variable manufacturing costs only (variable costing)
Variable and fixed manufacturing costs (absorption costing; typically using a single
cost driver for overheads)
All manufacturing (and possibly non-manufacturing costs) via homogenous cost
pools and multiple cost drivers (activity-based costing)
2. What costing system to use to accumulate product costs (largely depends
on the nature of the production process)
Job costing
Process costing
Hybrid costing
3
Production process
generates costs
Direct
materials
Direct
labour
Variable
overhead
Fixed
overhead
Non-
manufacturing
costs
What costs
to assign to
products,
and how to
assign
them
Variable costing*:
Direct costs + single variable o/h rate
(pre-determined or actual)
Absorption costing:
(Direct costs + all mfg o/hs; predetermined or
actual o/h rate; generally single allocation base)
Activity-based costing*:
Direct costs + all mfg o/hs + non-mfg costs; pre-determined rates
per cost driver for each activity pool
Systems for
gathering
product costs
Job
Process
Hybrid
Management
choice
Largely
prescribed by
production
process
4
*Note that VC, and including non-mfg costs in ABC are not generally permitted for external reporting
Next…
As of lecture 6, we discuss how to use cost information in various decisions.
In lectures 6-10, we emphasize the importance of keeping the distinction
between variable and fixed costs.
Understanding how managers’ actions affect costs is crucial
This requires the knowledge of how costs behave.
5
Summary of Lectures 6-10
6
Direct Indirect
Variable DM+DL VOH
Fixed FOH
Strategic production
decisions
Break-even-point
Business decisions
Pricing decisions
Control purposes
Summary of Lectures 6-10
7
Direct Indirect
Variable DM+DL VOH
Fixed FOH
Strategic production
decisions
Break-even-point
Business decisions
Pricing decisions
Control purposes
Absorption and variable costing
Profit differences between the two
methods overproduction incentives
Opportunity and sunk costs
Relevance of information
It varies across scenarios
A price range
Time horizon/ market structure matters
Different pricing approaches
The proportion of fixed cost
Estimate the financial impact
Operating leverage
The role of flexible budget
Variance analyses
Interpretation of different variances
Summary of Lectures 6-10
8
Direct Indirect
Variable DM+DL VOH
Fixed FOH
Strategic production
decisions
Break-even-point
Business decisions
Pricing decisions
Control purposes
Absorption and variable costing
Profit differences between the two
methods overproduction incentives
Opportunity and sunk costs
Relevance of information
It varies across scenarios
A price range
Time horizon/ market structure matters
Different pricing approaches
The proportion of fixed cost
Estimate the financial impact
Operating leverage
The role of flexible budget
Variance analyses
Interpretation of different variances
Summary of Lectures 6-10
9
Direct Indirect
Variable DM+DL VOH
Fixed FOH
Strategic production
decisions
Break-even-point
Business decisions
Pricing decisions
Control purposes
Absorption and variable costing
Profit differences between the two
methods overproduction incentives
Opportunity and sunk costs
Relevance of information
It varies across scenarios
A price range
Time horizon/ market structure matters
Different pricing approaches
The proportion of fixed cost
Estimate the financial impact
Operating leverage
The role of flexible budget
Variance analyses
Interpretation of different variances
Summary of Lectures 6-10
10
Direct Indirect
Variable DM+DL VOH
Fixed FOH
Strategic production
decisions
Break-even-point
Business decisions
Pricing decisions
Control purposes
Absorption and variable costing
Profit differences between the two
methods overproduction incentives
Opportunity and sunk costs
Relevance of information
It varies across scenarios
A price range
Time horizon/ market structure matters
Different pricing approaches
The proportion of fixed cost
Estimate the financial impact
Operating leverage
The role of flexible budget
Variance analyses
Interpretation of different variances
Summary of Lectures 6-10
11
Direct Indirect
Variable DM+DL VOH
Fixed FOH
Strategic production
decisions
Break-even-point
Business decisions
Pricing decisions
Control purposes
Absorption and variable costing
Profit differences between the two
methods overproduction incentives
Opportunity and sunk costs
Relevance of information
It varies across scenarios
A price range
Time horizon/ market structure matters
Different pricing approaches
The proportion of fixed cost
Estimate the financial impact
Operating leverage
The role of flexible budget
Variance analyses
Interpretation of different variances
Conclusion
How to collect information (Job/Process/Hybrid costing)
How to reorganize information (ABC)
How to use information for various purposes
Cost accounting information is useful in many conditions but how it is used
depending on the scenarios.
We use different cases to illustrate the importance of identifying the management
issue and accordingly decide on how to apply the appropriate knowledge to solve the
problem.
The effective way to review the materials
Grasp the key points of each lecture
Reflect on how the workshop question relates to the key points of each lecture
By doing so, you match what you learn with the real management issue
12
Good luck with the exam!
