Appropriately tracing costs is extremely important when creating segmented income statements. Traceable costs are those costs that are directly incurred by and traceable to a specific segment of an organization (Brewer, 2015). This figure is then used when computing the segment margin, which indicates the long-run profitability of that business segment (Brewer, 2015). If costs are traced inaccurately, the profitability of a business segment may be over or under valued which may lead managers to make potentially unfortunate business decisions regarding that segment. For example, if the fixed costs of segment A are inaccurately traced to segment B, segment B may look as though it requires more money to break-even. Based on this inaccurate information,
I know that providing information of financial reports is the primary objective for useful and productive decision making. This is absolutely critical for a manager in a business. For this ability I will depend on the financial reports to give me an idea of where the profits and losses were for a specific period of time, and it gives me a business look at the past, present and future in regards to expenses of operation. Within these expenses is an array of costs that include; lease or payments of buildings, salaries, utilities, profit margins, product cost, employee expenses, company benefits, comp insurance, supplies, equipment, and any other outgoing expense for the business including accounting and attorney fees.
Topics 1. 2. 3. 4. 5. 6. Conceptual framework– general. Objectives of financial reporting. Qualitative characteristics of accounting. Elements of financial statements. Basic assumptions. Basic principles: a. Measurement. b. Revenue recognition. c. Expense recognition. d. Full disclosure. Accounting principles– comprehensive. Constraints. Assumptions, principles, and constraints. 28, 29, 30 10 11 Questions 1, 7 2 3, 4, 5, 6, 8 9, 10, 11 12, 13, 14 15, 16, 17, 18 19, 20, 21, 22, 23 24 25, 26, 27 1, 2, 3, 4 6, 11, 13 5, 7 8, 9, 12 8 8, 12, 8, 12 1, 2 2, 3, 4 5 6, 7 6, 7 7 6, 7 6, 7, 8 9, 10 3, 6, 7 6, 7 12 5, 6 5, 6 5, 6, 7, 8, 9, 11 11 Brief
This memo highlights segmented reporting and the variable approach to preparing income statements. Segmental reporting is necessary since there is a need to understand the cost data for each section. Proper cost allocation is critical to preparing the income statements, while it is also easier to identify the costs that are common and not attributable to any specific segment. Typically, the management analyzes the cost behavior by making the assumption that the total costs change occur because of change in level of a single activity (Slideshare, n.d.). The variable costing
although implicit costs do not show up in accounting profits, they nevertheless affect managerial decisions
This ratio plays an imperative role in representing the portion of the firm’s sales revenue that is not consumed or utilized by the variable costs hence contributes to the coverage of the firms fixed costs. Nonetheless, understanding the break-even point analysis is very important for the organizational managers (Gapenski, 2012). First, the point occurs as an indicator that the firm can effectively meet its expenses as the expenses equals the firms sales revenue realized in total. This assertion leads to a fundamental interplay between the fixed costs as well as the variable
In the business world there are employers and employees that have to report to management on their costs and profits made: for the day, month, and year, this then allows the management to figure the flow of profits and losses, also by relating flows to their sources, a manager can determine
Bhimani, A., Horngren, C., Datar, S., Rajan, M. et al. (2012) Management and Cost Accounting. 5th ed. Edinburgh: Prentice Hall, p.369 - 378.
This cost system treated most, sales, marketing, and administrative costs as fixed costs or as a percentage of sales revenue. This simplistic approach was used to allocate overhead costs. Indirect costs were manufacturing costs that were allocated to products based on direct labor, or they were selling & administrative costs that were treated as period expenses and were unanalyzed. In this system if a customer sales price exceeded the full manufacturing cost plus the allocation of SM&A (sales, marketing, and administrative costs) then the customer appeared to be profitable when in fact the customer wasn’t profitable at all.
With this system each customer’s order cost the same amount to complete causing orders with high profit limits to subsidized orders with low profit limits making it difficult for Super Bakery to know the true cost for an order. The company changed to the activity-based costing (ABC) system allowing the managers the ability to recognize the cost and profit margins for each sale. The ABC system associates the costs with the activities allowing managers the opportunity to access a system that allocates overhead costs that uses multiple bases. Costs can be traced back to each individual’s account regardless of the product provider letting managers know which products are profitable and which ones are not. The traditional costing system allocates cost to departments or jobs instead of overhead cost pools. The traditional costing system makes it difficult to know which activity or product is making a profit.
business is making a profit or loss. They also look at the costs of the
The first error relates to the reporting receipts from customers in the 2012 financial year until 31 December 2013 (ASX Company announcements for SLATER & GORDON LIMITED 2015). According to AASB 107 Cash flow statements Para 22, cash flows arising from cash receipts and payments on behalf of customers where the cash flows reflect customers’ activities should be reported on a net basis instead of gross amount (AASB107 2010). In this case, net amount should be based on the consideration of subtracting customer disbursement and related Value Added Tax (VAT) from gross amount. However, the method adopted in their report is on a gross basis, which means it does not comply with the accounting standard. Apparently, the correct treatment would be deducting these payments in related activities from both receipts from customers and payments to suppliers and employees.
Blocher et al (2013), says that the ABC system is relatively new to cost accounting; however, some industries within the government and non-profit agencies use the system for improving cost determination. Additionally, the ABC system is utilized to maximum profitability, while ensuring adequate resources is available to meet demand (Kirche et al, 2005). However, in order for firms to adopt a costing system, managers must understand how beneficial the system can effectively improve the firm’s profits. An ABC system identifies gaps in the old-style accounting systems and recognize the relationship between products and customer. Furthermore, the system identifies high impact areas for process improvements (Kirche et al, 2005). At the same
In order to efficiently calculate cost or expenses, Mal Ltd should adopt a cost classification approach. Cost classification is the separation of costs or expenses into different categories. The main categories that is largely used in cost classification are direct and indirect costs which can be broken down into many different costs that are expensed in the business. Cost classification can improve a business in many ways. One of the main benefits is through cost classification, profits can be increased. This is done by having an effective cost control and cost reduction (Kaplan & Cooper, 1998. By breaking down costs into fixed and variable costs, it will be easier to control and reduce costs. Cost classification can also help in the fixation of selling price. As the cost of a product can be broken down into more specific costs, it enables the management of Mal Ltd to adopt the most suitable selling price. Classifying costs can help Mal Ltd disclose which activities are profitable and non-profitable. This enables management to decide whether they want to continue carrying out and expanding profitable activities or eliminating unprofitable activities. It also allows management to improve budgeting (Kaplan & Cooper, 1998). With cost classification, management of Mal Ltd can ascertain which costs belong to which department and this allows them to efficiently set budgets for different departments in accordance with the level of activity within the department.
Both absorption and variable costing have a place in decision making. Accountants and decision makers need to understand the applications and limitations of the two techniques within the context of past, present, and future cost information needs. No matter which type of costing a firm uses, the firm’s total revenue must cover all costs – both
INTRODUCTION Target costing originated in Japan in the 1960s, though it remained a secret for years. Since the 1980s, however, when target costing was widely recognized as a major factor for the superior competitive position of Japanese companies, extensive efforts have been made to convey target costing to Western companies. Many large companies in North America and Europe have tried to adopt target costing to enhance their cost management and, thus, increase their competitiveness. Consequently, many variations of target costing have been developed and are being used in different countries. Since target costing, like many other management