Strategic Cost Accounting

MBA- First Year

Strategic Cost Accounting

Dr. Zakia Abdelmoneim

BSc, MSc, PhD; Cairo University
PGC in HE; Greenwich university, London
FEA; Fellow of the Higher Education Academy (HEA)
Lecturer Of Accounting
Postdoctoral Researcher
Lecturer In BIS; Helwan University; & MSA University
 Course

Outline
Job costing
 Process Costing
 ABC: Activity based Costing
 ABM: Activity Based Management
Cost  ABB: Activity Based Budgeting

Management  TQM: Total Quality Management

 TC: Target Costing
Terminologies
 TOC: theory of constraint
And Concepts  LCC: Life cycle costing
 Value chain analysis and supply chain analysis
 Benchmark
 Re-Engineering
 BSC: Balanced Scorecard
  Prepare a project for 20-30 pages max. about one of the
following topics:
 1. How to link between different strategic cost tools
 2. Applying one of the strategic cost tools in an Egyptian industry

Required The project should be within 25% turn it in percentage

Project Project includes:
1. Cover page and table of content
2. Abstract, Introduction, Body
3. Method, Results, and conclusion
4. List of References (APA style)
  Traditional accounting has a historical background. However,
remarkable changes have taken place in the industry between
the time the system was developed and the 1990s (Atrill &
McLaney 1997).
 Despite the fact that it is over 75 years old, most companies
Traditional still use standard cost systems both to value inventory for
accounting financial statement purposes and for many other management
purposes as well. While it has some advantages for financial
statement purposes (simplicity, consistency, well understood by
auditors)
COSTING SYSTEMS

• JOB-COSTING—SYSTEM ACCOUNTING FOR DISTINCT COST OBJECTS CALLED JOBS. EACH JOB MAY BE
DIFFERENT FROM THE NEXT, AND CONSUMES DIFFERENT RESOURCES.
• WEDDING ANNOUNCEMENTS, AIRCRAFT, ADVERTISING
• PROCESS-COSTING—SYSTEM ACCOUNTING FOR MASS PRODUCTION OF IDENTICAL OR SIMILAR
PRODUCTS.
• OIL REFINING, ORANGE JUICE, SODA POP
COSTING SYSTEMS ILLUSTRATED
a. Job costing l. Job costing
b. Process costing m. Process
costing
c. Job costing n. Job costing
d. Process costing o. Job costing
e. Job costing p. Job costing
f. Process costing q. Job costing
g. Job costing r. Process costing
h. Job costing (but some process costing) s. Job costing
i. Process costing t. Process costing
j. Process costing u. Job costing
k. Job costing
COSTING APPROACHES

• ACTUAL COSTING—ALLOCATES:
• INDIRECT COSTS BASED ON THE ACTUAL INDIRECT-COST RATES TIMES THE ACTUAL ACTIVITY CONSUMPTION.
• NORMAL COSTING—ALLOCATES:
• INDIRECT COSTS BASED ON THE BUDGETED INDIRECT-COST RATES TIMES THE ACTUAL ACTIVITY
CONSUMPTION.
• BOTH METHODS ALLOCATE DIRECT COSTS TO A COST OBJECT THE SAME WAY: BY USING ACTUAL DIRECT-
COST RATES TIMES ACTUAL CONSUMPTION.
COSTING APPROACHES SUMMARIZED
SEVEN-STEP JOB COSTING

1. IDENTIFY THE JOB THAT IS THE CHOSEN COST OBJECT.

2. IDENTIFY THE DIRECT COSTS OF THE JOB.
3. SELECT THE COST-ALLOCATION BASE(S) TO USE FOR ALLOCATING INDIRECT COSTS TO THE JOB.
4. MATCH INDIRECT COSTS TO THEIR RESPECTIVE COST-ALLOCATION BASE(S).
SEVEN-STEP JOB COSTING
5. CALCULATE AN OVERHEAD ALLOCATION RATE:
Budgeted Manufacturing Budgeted Manufacturing Overhead Costs
Overhead Rate = Budgeted Total Quantity of Cost-Allocation Base

6. ALLOCATE OVERHEAD COSTS TO THE JOB:

BUDGETED ALLOCATION RATE X ACTUAL BASE ACTIVITY FOR THE JOB

7. COMPUTE TOTAL JOB COSTS BY ADDING ALL DIRECT AND INDIRECT COSTS TOGETHER.
JOB COSTING
OVERVIEW
Pumpkin Plastic Products Company manufactures pipes and applies manufacturing costs to production
at a budgeted indirect-cost rate of $9 per direct labor-hour. The following data are obtained from the
accounting records for June 2010:

Direct materials $300,000

Direct labor (16,000 hours @ $11/hour) $ 44,000
Indirect labor $ 20,000
Plant facility rent $ 100,000
Depreciation on plant machinery and equipment $ 40,000
Sales commissions $ 30,000
Administrative expenses $ 40,000

Required:
a. What actual amount of manufacturing overhead costs was incurred during June 2010?
b. What amount of manufacturing overhead was allocated to all jobs during June 2010?
c. For June 2010, was manufacturing overhead underallocated or overallocated? Explain.

Answer:
a. $20,000 + $100,000 + $40,000 = $160,000
b. 16,000 × $9 per dlh = $144,000
c. Underallocated by $16,000: Only allocated $144,000 of the $160,000 of actual overhead
Isabelle, Inc., uses a budgeted factory overhead rate to apply overhead to production. The following data
are available for the year ended December 31, 20X5.

Budgeted Actual
Factory overhead $675,000 $716,000
Direct labor costs $450,000 $432,000
Direct labor-hours 12,500 dlh 13,325 dlh

Required:
a. Determine the budgeted factory overhead rate based on direct labor-hours.
b. What is the applied overhead based on direct labor-hours?
c. Is overhead overapplied or underapplied? Explain.

Answer:
a. $675,000/12,500 hrs. = $54.00 per hour
b. $54.00 × 13,325 hrs. = $719,550
c. $716,000 - $719,550 = $3,550 overapplied
 The following information was gathered for Jasmine Company for the year ended December 31, 2010

Budgeted Actual
Direct labor-hours 75,000 dlh 80,000 dlh
Factory overhead $600,000 $625,000

Assume that direct labor-hours are the cost-allocation base.

Required:
a. Compute the budgeted factory overhead rate.
b. Compute the factory overhead applied.
c. Compute the amount of over/underapplied overhead.

Answer:
a. $600,000/75,000 hrs. = $8.00 per hour
b. $8.00 × 80,000 hrs. = $640,000
c. $640,000 - $625,000 = $15,000 overapplied
 Budgeted manufactur ing
Budgeted manufactur ing overhead costs
= = 2700,000/1500,000= 1.8 or 80%
overhead rate Budgeted direct manufactur ing
labor costs

Actual manufactur ing

Actual manufactur ing overhead costs
= = 2755,000/1450,000=1.9 or 190%
overhead rate Actual direct manufactur ing
labor costs
 2. Costs of Job 626 under actual and normal costing follow:

Actual Normal
Costing Costing
Direct materials $ 40,000 $ 40,000
Direct manufacturing labor costs 30,000 30,000
Manufacturing overhead costs
$30,000  1.90; $30,000  1.8 57,000 54,000
Total manufacturing costs of Job 626 $127,000 $124,000

3. Total manufacturing overhead = Actual manufacturing  Budgeted

allocated under normal costing labor costs overhead rate

= $1450,000  1.8

= $2610,000

Underallocated manufacturing = Actual manufacturing – Manufacturing

overhead overhead costs overhead allocated

= $2755,000 $2610,000 = $147,000

There is no under- or overallocated overhead under actual costing because overhead is

allocated under actual costing by multiplying actual manufacturing labor costs and the actual
manufacturing overhead rate. This, of course equals the actual manufacturing overhead costs. All
actual overhead costs are allocated to products. Hence, there is no under- or overallocatead
overhead.
2. Costs of Job 626 under actual and normal costing follow:

Actual Normal
Costing Costing
Direct materials $ 40,000 $ 40,000
Direct manufacturing labor costs 30,000 30,000
Manufacturing overhead costs
$30,000  1.90; $30,000  1.75 57,000 52,500
Total manufacturing costs of Job 626 $127,000 $122,500
3. Total manufacturing overhead = Actual manufacturing  Budgeted
allocated under normal costing labor costs overhead rate

= $980,000  1.75

= $1,715,000

Underallocated manufacturing = Actual manufacturing – Manufacturing

overhead overhead costs overhead allocated

= $1,862,000  $1,715,000 = $147,000

1. An overview of the product costing system is

INDIRECT
COST
POOL
 Machining Department
Manufacturing Overhead
Assembly Department
Manufacturing Overhead

COST
ALLOCATION
BASE
 Machine-Hours Direct Manuf.
Labor Cost


COST OBJECT:
PRODUCT
Indirect Costs
Direct Costs

DIRECT
COST Direct
Materials
Direct
Manufacturing
Labor
Budgeted manufacturing overhead divided by allocation base:

$1,800,000
Machining overhead = $36 per machine-hour
50,000
$3,600,000
Assembly overhead: = 180% of direct manuf. labor costs
$2,000,000
2. Machining department, 2,000 hours  $36 $72,000
Assembly department, 180%  $15,000 27,000
Total manufacturing overhead allocated to Job 494 $99,000

3. Machining Assembly
Actual manufacturing overhead $2,100,000 $ 3,700,000
Manufacturing overhead allocated,
55,000  $36 1,980,000 —
180%  $2,200,000 — 3,960,000
Underallocated (Overallocated) $ 120,000 $ (260,000)
  It is used to improve the
effectiveness, efficiency, and accuracy
of the allocations of the indirect costs,
The Activity – and the cost analysis by focusing on
Based Costing: assigning the costs to the firm's
ABC: activities not to the products "as
traditional approach" ,and then these
activities are associated with different
products or services.
  Traditional costing is a misleading tool to
assist in making effective management
decisions.
 From direct labor-intensive and direct labor-
paced to capital-intensive and machine-paced
The reasons behind the production,
development of ABC as  From a low level of overheads to a high level
overheads relative to direct costs, and
a new accounting
allocating costs method:  From a relatively uncompetitive to a highly
competitive international market.
• Mertens Company provides the following ABC costing information:

• Activities Total Costs Activity-cost drivers

• Account inquiry hours $200,000 10,000 hours
• Account billing lines $140,000 4,000,000 lines
• Account verification accounts $75,000 40,000 accounts
• Correspondence letters $ 25,000 4,000 letters
• Total costs $440,000
• The above activities are used by Departments A and B as follows:
• Department A Department B
• Account inquiry hours 2,000 hours 4,000 hours
• Account billing lines 400,000 lines 200,000 lines
• Account verification accounts 10,000 accounts 8,000 accounts
• Correspondence letters 1,000 letters 1,600 letters
•  
•How much of the account inquiry cost will be assigned to
Department A?
•A) $40,000
•B) $200,000
•C) $80,000
•D) None of these answers are correct.
•Answer: A
•Explanation: A) ($200,000 / 10,000) × 2,000 = $40,000
•How much of the account billing cost will be assigned to
Department B?
•A) $14,000
•B) $140,000
•C) $7,000
•D) None of these answers are correct.
•Answer: C
•Explanation: C) ($140,000 / 4,000,000) × 200,000 = $7,000
•How much of account verification costs will be assigned to
Department A?
•A) $15,000
•B) $18,750
•C) $75,000
•D) $5,000
•Answer: B
•Explanation: B) ($75,000 / 40,000) × 10,000 = $18,750
• How much of correspondence costs will be assigned to Department
B?
• A) $800
• B) $6,250
• C) $25,000
• D) $10,000
• Answer: D
• Explanation: D) ($25,000 / 4,000) × 1,600 = $10,000
• How much of the total costs will be assigned to Department A?
• A) $79,000
• B) $40,000
• C) $112,000
• D) $440,000
• Answer: A
• Explanation:
• A) ($200,000 / 10,000) x 2,000 = $40,000
• ($140,000 / 4,000,000) x 400,000 = $14,000
• ($75,000 / 40,000) x 10,000 = $18,750
• ($25,000 / 4,000) x 1,000 = $6,250
• $79,000
• How much of the total costs will be assigned to Department B?
• A) $79,000
• B) $40,000
• C) $112,000
• D) $440,000
• Answer: C
• Explanation:
• C) ($200,000 / 10,000) x 4,000 = $ 80,000
• ($140,000 / 4,000,000) x 200,000 = $ 7,000
• ($75,000 / 40,000) x 8,000 = $ 15,000
• ($25,000 / 4,000) x 1,600 = $ 10,000
• $112,000
•Happy Valley Land and Snow Company provides the
following ABC costing information:
• 

•Activities Total Costs Activity-cost drivers

•Labor hours $320,000 8,000 hours
•Gas $36,000 6,000 gallons
•Invoices $40,000 2,500 invoices
• Total costs $396,000
• 
•The above activities used by their three departments are:
• 
• Lawn Department Bush Department Plowing Department
•Labor hours 2,500 hours 1,200 hours 4,300 hours
•Gas 1,500 gallons 800 gallons 3,700 gallons
•Invoices 1,600 invoices 400invoices 500 invoices
•How much of the labor cost will be assigned to the
Lawn Department?
•A) $100,000
•B) $25,600
•C) $40,000
•D) None of these answers are correct.
•Answer: A
• How much of the gas cost will be assigned to the Plowing
Department?
• A) $50,000
• B) $22,200
• C) $30,000
• D) None of these answers are correct.
• Answer: B
• Explanation: B) ($36,000 / 6,000) × 3,700 = $22,200
• How much of invoice cost will be assigned to the Bush
Department?
• A) $6,400
• B) $8,000
• C) $25,600
• D) $40,000
• Answer: A
• Explanation: A) ($40,000/ 2,500) × 400 = $6,400
• ) How much of the gas cost will be assigned to the Lawn
Department?
• A) $4,800
• B) $20,000
• C) $9,000
• D) $22,200
• Answer: C
• Explanation: C) ($36,000/ 6,000) × 1,500 = $9,000
• How much of the total cost will be assigned to the Plowing Department?
• A) $396,000
• B) $202.200
• C) $134,600
• D) $172,000
• Answer: B
• Explanation:
• B) ($320,000 / 8,000) x 4,300 = $172,000
• ($36,000 / 6,000) x 3,700 = $22,200
• ($40,000 / 2,500) x 500 = $8,000
• $202,200
•How much of the total costs will be assigned to the Lawn
Department?
•A) $100,000
•B) $49,200
•C) $200,000
•D) $134,600
•Answer: D
•Explanation:
•D) ($320,000 / 8,000) x 2,500 = $100,000
•($36,000 / 6,000) x 1,500 = $9,000
• ($20,000 / 2,500)x 1,600 = $25,600
• $134,600
• Gregory Enterprises has identified three cost pools to allocate overhead
costs. The following estimates are provided for the coming year:
• 

• Cost Pool Overhead Costs Cost driver Activity level

• Supervision of direct labor $320,000 Direct labor-hours 800,000
• Machine maintenance $120,000 Machine-hours 960,000
• Facility rent $200,000 Square feet of area 100,000
• Total overhead costs $640,000
•  
• The accounting records show the Mossman Job consumed the following resources:
•  
• Cost driver Actual level
• Direct labor-hours 200
• Machine-hours 1,600
• Square feet of area 50
•) If direct labor-hours are considered the only overhead
cost driver, what is the single cost driver rate for Gregory
Enterprises?
•A) $0.50 per direct labor-hour
•B) $0.80 per direct labor-hour
•C) $0.40 per direct labor-hour
•D) $1.20 per direct labor-hour
•Answer: B
•Explanation: B) $640,000 / 800,000 = $0.80 per dlh
•Using direct labor-hours as the only overhead cost driver, what is
the amount of overhead costs allocated to the Mossman Job?
•A) $160
•B) $120
•C) $240
•D) $125
•Answer: A
•Explanation: A) 200 dlh × (640,000 / 800,000) = $160
•) The Guy Fawkes Company is noted for an exceptionally impressive line of Mardi Gras masks. Guy Fawkes
has established the following selling and distribution support activity-cost pools and their corresponding
activity drivers for the year 2010:
• 
• Activity Cost Cost driver
• Marketing $60,000 $500,000 of sales
• Customer service 20,000 5,000 customer
• Order execution 10,000 100 orders
• Warehousing 10,000 50 product lines
• 
•Required:
•a. Determine the activity-cost-driver rate for each of the four selling and distribution activities.
•b. Under what circumstances is it appropriate to use each of the activity-cost drivers?
•c. Describe at least one possible negative behavioral consequence for each of the four activity-cost drivers.
•Answer:
•a. Activity-cost driver rate for Marketing = 12% of sales = $60,000/$500,000.
• Activity-cost driver rate for Customer Service = $4 per customer = $20,000/5,000.
• Activity-cost driver rate for Order Execution = $100 per order = $10,000/100.
• Activity-cost driver rate for Warehousing = $200 per order = $10,000/50.
• 
•b. For marketing, using 12% of stipulated sales is appropriate when management wants to limit marketing costs to a
budgeted proportion to sales. Using the number of customers for customer service is appropriate when the customer service
costs are similar enough to use the average for all customers. Using the number of orders for order execution is appropriate
when all orders are sufficiently alike in terms of resources used that they can be averaged. Using the number of product lines
for warehousing is appropriate when each product line requires similar proportions of the warehousing efforts.
• 
•c. For marketing, using 12% of sales limits the marketing activities to an arbitrary amount without consideration for potential
opportunities. Using the number of customers for customer service can lead to customer service initiatives to limit the amount
of time servicing each customer to cause the number of customers serviced to increase. Using the number of orders for order
execution can result in purchasers splitting orders to increase the numbers of orders executed. Using the number of product
lines for warehousing can lead warehouse personnel to designate more product line differences in the warehouse.
• Cocoa Pet Corporation manufactures two models of grooming stations, a standard and a deluxe
model. The following activity and cost information has been compiled:

• Number of Number of Number of

• Product Setups Components Direct Labor Hours
• Standard 3 30 650
• Deluxe 7 50 150
• Overhead costs $20,000 $60,000
• Assume a traditional costing system applies the $80,000 of overhead costs based on direct labor
hours.
• a. What is the total amount of overhead costs assigned to the standard model?
• b. What is the total amount of overhead costs assigned to the deluxe model?
• Assume an activity-based costing system is used and that the number of setups and the number
of components are identified as the activity-cost drivers for overhead.
• c. What is the total amount of overhead costs assigned to the standard model?
• d. What is the total amount of overhead costs assigned to the deluxe model?
• e. Explain the difference between the costs obtained from the traditional costing system and
the ABC system. Which system provides a better estimate of costs? Why?
Answer:
a. [$80,000 / (650 + 150)] x 650 = $65,000

b. [$80,000 / (650 + 150)] x 150 = $15,000

c. Setups: $20,000 / (3 + 7) = $2,000

Components: $60,000 / (30 + 50) = $750
($2,000 x 3) + ($750 x 30) = $28,500

d. ($2,000 x 7) + ($750 x 50) = $51,500

e. Because the products do not all require the same proportionate shares of the
overhead resources of setup hours and components, the ABC system provides
different results than the traditional system which allocates overhead costs on
the basis of direct labor hours. The ABC system considers some important
differences in overhead resource requirements and thus provides a better
picture of the costs from each grooming table style, provided that the activity
measures are fairly estimated.
  It uses activity analysis to improve
operational control and
Activity- based management control. It is adopted
management: by the firm after implementing
ABM: ABC, it is mainly used to increase
the value to customers and profit
for the firm.
  Activity-based Budgeting (ABB) means presenting a budget in
terms of the cost of an organization's products and services, rather
than the traditional budget that describes cost factors (expense

Activity-based codes) such as compensation, travel, and training.

It's wise to do ABB before ABC accountin
budgeting :
g

ABB: In addition to producing a budget, ABB is

used to calculate a cost-based set of rates
(prices) for all the organization's products and
services.
 It determines the cost reduction in
Target costing:TC:
relation to the market price determined by
 

customers and the desired profit

determined by the firm as a profit
Target cost TC: percentage or ratio multiplied by the
target or desired sales volume.
 Target cost = market price- the desired/
target profit
 The total target cost = target cost per
unit x Expected value.
 It is a managerial tool used to calculate the costs of a
product or service throughout its life cycle, including not
just manufacturing costs but also the upstream and down
stream.
Life Cycle It includes all steps of product/service development, the
Costing: LLC: steps includes : the research & development , the product
design, manufacturing, marketing & promotion and the
sales & after sales services. In some classifications it
includes the customer maintenance costs and other services
the customers bear.
  Strategic pricing depends on the position of the position of the product
or service in the sales life cycle. as the sales life cycle becomes shorter
(only months in some industries such as consumer electronics), the
analysis of the sales life cycle becomes increasingly important. In
contrast to the cost life cycle just described, the sales life cycle refers
Strategic pricing to the phase of the product's or service's sales in the market.

for phases of the

sales life cycle: 2 3

 1= introduction. 1
 2= Growth. 4
 3= maturity.
Time
 4= Decline.
  It is a process by which a firm identifies its critical
success factors, studies the best practices of other firms
(or other within a firm) for achieving these critical
success factors, and then implements improvements in
the firm's processes to match or beat the performance of
Benchmarking those competitors.

:  It is considered as a related technique for the ABC,

which in this case is defined as the continuous process of
comparing products, services, and activities against the
best industry standards.
  It is a technique by which management develops policies and
Total quality practices to ensure that the firm's products and services exceed
management: customer's expectations.

TQM:
 Strategic information using critical success factors
provides a road map for the firm to use to chart its
competitive course and serves as a benchmark for
competitive success.
Financial measures such as profitability reflect only a
partial, and frequently only a short-term, measure of the

The Balanced firm's progress. Without a strategic information, the firm is

likely to stray from competitive course and to make
scorecards strategically wrong product decision.
To emphasize the importance of using strategic
information, both financial and non-financial accounting
reports of a firm's performance are now often based on
critical success factors in four different dimensions.
  It is a strategic technique to help firms effectively improve a
The theory of very important critical success factor cycle time, the rate at
constraints: which raw materials are converted to finished products.

TOC:
  It is a process for creating competitive advantage in which a
firm reorganizes its operating and management functions, often
with the result that jobs are modified, combined, or eliminated.

Reengineering It has been defined as the "fundamental rethinking" and radical

redesign of business process to achieve dramatic improvements
: in critical, contemporary measures of performance, such as
cost, quality, service, and speed.
 Continuous  The Japanese word is kaizen, it is a managerial technique by
Improvements which managers and workers commit to a program of
continuous improvement in quality and other critical success
: "cost factor

kaizen":
 • The relationship between EVA and Market Value Added is more
complicated than the one between EVA and Firm Value.

Economic •The market value of a firm reflects not only the Expected EVA of
Assets in Place but also the Expected EVA from Future Projects
Value Added •To the extent that the actual economic value added is smaller

(EVA) than the expected EVA the market value can decrease even though
the EVA is higher.
Just in time
(JIT)