Replys
Replys to Discussions ppt attached. 250 Words each
Relevant Cost and Decentralization
Advantages of decentralization
There are many advantages of having a decentralized system like lower-level management becomes more responsible and gains expertise by solving day to day problems.
The higher-level management can focus on strategic plans and more important factors.
The operating environment gains much efficiency as the decision making table gets divided to further levels.
The response time in any case significantly gets reduced too.
Disadvantages of decentralization
The quality of lower level management decisions can hurt the organization overall at times
This situation occurs if the entire picture is not understood (Mbate, 2017).
The objectives of the management levels experience clashes in alignment from time to time.
This is impacting the overall operations of the organization.
Responsibility accounting centers
There are cost centers in which the managers work to bring the cost to the organization down.
This provides the best services to the customers.
The profit center management has full control over the cost and the returning revenues on the offerings.
The third is the investment center whose managers have all the control over cost, investment, and profit.
Operating assets
In the operating assets, all the cash allocated, tools, machineries, and equipment
Net value is used to calculate the operating costs averages.
It has certain limitations of depreciation costs always increasing and net book value decreasing.
Thus, always loss is shown by default.
Numeric example
Suppose if a company has two department manufacturing and selling department. During the year, the company has a stock of 1000 goods costing $ 100 each.
If a company gets an order for 2000 goods, then to fulfill such target the company needs to purchase and manufacture more 1000 units.
Thus in case of decentralization the sale manger will transfer such information to the manufacturing department.
Accordingly, the manufacturing department will direct the purchasing department about the materials needed to manufacture 1000 goods.
This distribution of job among the different department helps the organization to fulfill their target more effectively. In addition, it also helps the organization in performance evaluation of all individual departments.
Different costs and their benefit
There are many types of costs like avoidable costs
The alternatives can be weighed in to eliminate them.
These costs are relevant costs while those which are unavoidable
No alternative can fill in the gap are unavoidable ones and no decision can be further changed for them.
Isolating relevant costs
There is a need to isolate all the relevant costs
Firstly there is very little possibility that the information base is available for full income statement preparation in the organization for every identified alternative.
It is important to have relevant costs identified.
Secondly, the mixing of irrelevant costs and relevant costs is confusing and can cause errors and duplicates in the statement.
Cost analysis
There are many ways to do a cost analysis for the organization
Some of the standard headings are sales and fixed expenses that make up the majority of the statement (Chen & Koebel, 2017).
The fixed costs have many profiles like the salaries of the workforce, consumables, utilities, bills and insurances.
The result of this entire add up gives the net operating income for the company.
Make or buy decision
There are many aspects that revolve around a firm’s decision to either manufacture a product or component in-house or buy it from other established vendors (Meng, Yao, Nie, & Zhao, 2018).
Future aspects, cost to cost analysis, expertise, and time frame to complete in-house manufacturing, development of the facility, and quality of the finished product comprises the main factors in the priority list.
Numeric example
A cycle manufacture company incurs a total cost of $420000 for Producing 10000 shifters.
Instead of manufacturing, if the company purchased the shifters from outside at a cost of $ 25 per shifter.
Then the total cost for company would be $ 250000. Hence comparing its cost required for manufacturing the shifter and the purchase price of the shifter for decision making as shown in the table
It is seen that instead of making, buying the shifter from the market would save $ 170000 cost of the company.
Output (units) 10000
Particulars MAKE BUY
Purchase Price 25
Material Cost 150000
Labor Cost 90000
Variable Indirect Expenses 80000
Relevant Fixed Overhead 100000
Total Relevant Cost 420000 250000
Difference in Favor of Buying 170000
References
Chen, X., & Koebel, B. M. (2017). Fixed cost, variable cost, markups and returns to scale. Annals of Economics and Statistics/Annales d’conomie et de Statistique, (127), 61-94.
Mbate, M. (2017). Decentralisation, Governance and Accountability: Theory and Evidence. Journal of African Democracy and Development, 1(2), 1-16.
Meng, X., Yao, Z., Nie, J., & Zhao, Y. (2018). Make or buy? It is the question: A study in the presence of carbon tax. International Journal of Production Economics, 195, 328-337. Chapter 10- Cost Variance Analysis
Cost Variance Analysis is an accounting control system used to identify, track and control variance in budgets from established levels.
Most budgets do not go as planned- they need periodical supervision and analysis to identify and minimize costs and maximize profits.
Usually performed by financial analysts or managers of the concerned business unit, cost center or task force
It is a useful tool which enables modifications to an otherwise rigid system.
Types of Variance analysis
Price variance- the difference between the actual price of purchase of materials vs the standard price of materials
Quantity variance- the difference between actual quantity of raw materials at standard price vs. the standard quantity of materials at standard price
Labor variance- the difference between actual cost incurred on labor vs the standard cost budgeted for labor
Labor rate variance- the difference between the actual hours worked at the actual rate and the standard hours worked at the standard rate
Labor efficiency variance- the difference between the actual hours worked at the standard rate vs the standard hours worked at the standard rate.
Steps to perform variance analysis to achieve better results
Tabulate the actual costs incurred vs the standard costs based on the type of variance
Identify differences and calculate the total variance
Analyze the results and conduct interviews if needed to identify root cause of variance
Report findings to executives for review and adopt in future budgeting
Numerical example
Consider a shoe manufacturer which sells safety shoes. The following are the sales metrics for the FY 2019:
There is a difference if 10,000 pounds of raw materials for the production of 100,000 pairs of shoes.
Direct materials variance analysis yields a $100,000 favorable result for the organization
Sales Volume = 100,000 pairs
Standard price of raw materials = $10 per pair
Quantity of raw materials purchased = 100000 pounds
Actual quantity of materials used in production = 90000 pounds
Quantity variance = (90000 x $10) – (100000 x $10)
= ($100,000) favorable
Chapter 11- Decentralized Organizations
A type of organizational structure where decision-making and authority is delegated to a large number of managers.
It is common in almost all industries and companies after it reached a particular size.
Decentralized Organization Structure
Centralized Structure- Each manager has authority over a wide range of employees
Decentralized Structure- each manager has authority over a smaller number of employees. Managers share similar responsibilities and report in to higher management.
Advantages of decentralization
Greater autonomy for managers and employees- helps build a sense of responsibility and empowers the team
Relieves some duties from upper management- directors and executives can focus on strategy and vision.
Flexibility- decentralization offers the ability to deal with events and emergencies
Ease of expansion- newly built business units and sites can operate independently
Disadvantages of decentralization
Possibility of conflicts- in an effort to out-perform other units, animosity and rivalry may arise between managers
Cost and redundancy- decentralization leads to duplication of efforts- each business unit will have access to common departments which leads to repetition of tasks
Requires trained and capable managers- Decentralization needs managers to perform as independent business owners, with a combination of technical and managerial skills- a combination which is hard to find.
Loss of control- The upper management may lose control over smaller groups and decentralization may lead to creation of silos.
Methods to retain control in a decentralized organization
The fundamental driver to any business is the creation of profits.
Have each business unit/ location report to the same executive who controls investments into each the overall business- This can be the CFO or VP of Finance
Establish cost centers and profit centers which provide executives visibility of each business unit so that they can make executive decisions without formally exercising control over the individual contributors.
References
Managerial Accounting (2012) Saylor Academy. Retrieved from: https://saylordotorg.github.io/text_managerial-accounting/s00- license.html
Managerial Accounting (2012) Saylor Academy. Retrieved from:
https://saylordotorg.github.io/text_managerial-accounting/s15-how-do- managers-evaluate-perfo.html
Production Volume Variance (2019). Retrieved July 2020, from https://www.investopedia.com/terms/p/production-volume-variance.asp
