UNSW Business School

ACCT2522 Management Accounting for Decision Analysis

Topic 1: Understanding Processes

and Costing

Lecturer: Yee Shih Phua

Email: [email protected]
Zoom consult: Thurs 1.45 to 2.45pm (book on Moodle by Weds midnight)
Participate in lecture polls: join at slido.com #ACCT2522T32024
 What is management accounting?
• “The processes and techniques that focus on the effective and efficient use
of organisational resources, to support managers in their tasks of
enhancing both customer value and shareholder value.”

Langfield-Smith et al. (2022) p.6

2
 ACCT2522 Course Map
Introduced in COMM1180; advanced
understanding in ACCT3583

Value Creation
Managing Costs Customers: Products & Services Role of Management
2. Activity-based Costing
Strategy Implementation

Accounting (MA)
3. Standard Costs & Cost Quality Time
Variance Analysis
7. Responsibility
1. Understanding Accounting & Transfer
Managing Quality Processes Pricing
4. Costs & Quality
Planning 8. Management Control
& Performance
Activities Processes Evaluation
Managing Time 9. MA Information for
5. Theory of Constraints Decision-making
6. Project Management
Control

Organisational Resources

3
Introduced in COMM1170
Topic 1: Learning Objectives
1. Understand how management accounting differs from
financial accounting
2. Understand processes and demonstrate the ability to
conduct process analysis
3. Apply further techniques in overhead cost allocation:
a) Departmental approach: allocate support department costs to
production departments
b) Use cost estimation approaches to understand cost behaviour

4
Required Readings
• Moodle e-book on Topic 1 (hereafter “Moodle e-book”)

• Langfield-Smith et al. (2022) 9th ed (hereafter “LS” or

“Textbook”)
• Chapter 3 p. 71-73, 87-93 and Appendix Part 1 (excluding High-low
method)
• Chapter 7 p. 284-286 and 294-301 (excluding step-down method)

5
Topic 1: Learning Objectives
1. Understand how management accounting differs from
financial accounting
2. Understand processes and demonstrate the ability to
conduct process analysis
3. Apply further techniques in overhead cost allocation:
a) Departmental approach: allocate support department costs to
production departments
b) Use cost estimation approaches to understand cost behaviour

6
 LS Chapt 1
Management Accounting vs. Financial Accounting
• MA is… “the processes and techniques that focus on the effective and efficient
use of organisational resources, to support managers in their tasks of enhancing
both customer value and shareholder value.” Langfield-Smith et al. (2022) p.6

Management Accounting (MA) Financial Accounting

• Internal user focus (e.g., managers, • External user focus (e.g., investors,
employees) regulators)
• No external standards • Must follow external standards
• Financial and nonfinancial data from • Primarily financial data from core
many sources (internal and external) transaction-based accounting systems
• Past, current, and future-oriented; • Past-focus, aggregated, sometimes not
various levels of detail, often subjective very relevant and timely, but focus on
but always relevant and timely. reliability and verifiability

7
 Use of MA information
• Strategy formulation & implementation
• Planning & forecasting
• Control and performance evaluation Which product
• Facilitate decision making should we produce
Cost Quality Time more of?

How do we make our Do we outsource How do we improve

operations more some of our quality?
efficient? processes?
8
 Topic 1: Learning Objectives
1. Understand how management accounting differs from
financial accounting
2. Understand processes and demonstrate the ability to
conduct process analysis
3. Apply further techniques in overhead cost allocation:
a) Allocate support department costs to production departments
b) Use cost estimation approaches to understand cost behaviour

Reference: Moodle e-
book on Topic 1
9
What is a process?

Process
Group of interdependent activities which, when performed,
utilise the resources of a business to produce a definite
result

10
Conducting a Process Analysis 4 steps
1. Identify the process of interest Not our focus in this topic! Start/End
2. Chart the process
3. Evaluate the process
 Identify opportunities for cost reduction Flow
• Value analysis
• Assess efficiency and effectiveness
 Identify causes Activity
• Root cause analysis
• Fish bone diagram (Not our focus in this topic)
4. Implement process improvement Decision
• 4 approaches to reduce activity cost
• BPR vs CI
11
Example: Dry Cleaning Process
• Activities/decisions underlying the process:
A • Inspect for stains.
• Do they have stains?
D
• If yes, treat stains, and then sort clothes into 3 piles – dark, beige, A
and white
• If no, sort clothes into 3 piles – dark, beige, and white. A
A • Load directly into dry cleaning machines and start machines
A • Once dry cleaning is completed, unload
A • Press clothes
A • Pressed clothes are combined based on orders and wrapped in plastic
A • Checks at random to make sure all items in the order are present
D • Are clothes correctly packed?
12
A Simple Process Map for Dry Cleaning
Inspect for
Start
stains

No
Press Unload Load and start Sort
clothes machines machines clothes Stains?

Yes
Combine and Random
pack clothes Checks Treat stains

No Yes
To Are orders
End
continue correct?

13
 Processes can be analysed at different levels
of granularity…
Sort Treat stains
clothes

Apply stain
Inspect for
Rinse remover and
stains
stand

No Yes
Move to
sorting station Stains?

14
Conducting a Process Analysis 4 steps
1. Identify the process of interest Not our focus in this topic!
2. Chart the process
3. Evaluate the process
 Identify opportunities for cost reduction
• Value analysis
• Assess efficiency and effectiveness
 Identify causes
• Root cause analysis
• Fish bone diagram (Not our focus int this topic)
4. Implement process improvement
• 4 approaches to reduce activity cost
• BPR vs CI
15
 Evaluate a Process: Value Analysis Revision: COMM1180;
also Moodle e-book p. 7

• Value-added (VA) Activity

1. Provides essential value to customer
• Does the activity increase service potential? (Are customers willing to pay?)
• Does this activity bring the product one step closer to completion? (e.g., produces
a change in state?)
• Is the activity done right the first time? Re-doing a step due to error does not add
value! (Necessary but not sufficient)
OR 2. Essential to the functioning of the business (Usually administrative in nature)

• Non-value added (NVA) Activity

• Does not add value from (1) the customer AND (2) business perspective
• Potential grey areas – VA or NVA? 16
Evaluate a Process: Efficiency vs Effectiveness E2

• Efficiency: Resource usage Revision: COMM1180;

• Ability of activities to use the fewest possible resources also Wk 1 Tute
• Ratio of output to input

• Effectiveness: Goal attainment

• Ability of activities to meet customer needs

Example: Activity of sorting clothes

Efficiency Effectiveness (Your turn!)
Measure No. of pieces of clothes
sorted per hour (for the
month of April)
17
Conducting a Process Analysis 4 steps
1. Identify the process of interest Not our focus in this topic!
2. Chart the process
3. Evaluate the process
 Identify opportunities for cost reduction
• Value analysis
• Assess efficiency and effectiveness
 Identify causes
• Root cause analysis
• Fish bone diagram (Not our focus int this topic)
4. Implement process improvement
• 4 approaches to reduce activity cost
• BPR vs CI
18
 Identifying Causes: Root Cause Analysis
• Root Cause Analysis (aka Cost Driver Analysis)
• Method that identifies root cause or root cause cost drivers of activities
• Root cause cost driver
• “Underlying factors that cause activities to be performed and their costs to be
incurred” (LS p. 730)
• Why did something happen?
• The most fundamental reason.
The owner of the dry cleaning store noticed that some clothes were not pressed
properly and were still wrinkled when being packed. What is a possible root cause?
(a) An employee did (b) The pressed clothes (c) An inexperienced (d) Customers
not do a good job are not inspected by casual employee was complaining
when pressing supervisor after hired to press the about wrinkled
clothes. pressing. clothes this week. clothes.
19
Identifying Causes: Fishbone Diagram Not Required in
ACCT2522!

Machinery Method

fridge door not

Aging washing machines ribs Ineffective
contemination: procedures
Too little notice is
shut properly drinking mik straight
milk not put back for identifying stains
provided to restaurants
fridge outlet
not cold Too
Hiring many
protocol is not from carton
Clogged water tocompliant
the fridge after
with best
bones
enough itemspractices
per wash
use

X
Spine or Customers complain that there are still stains on
head Spoilt milk in the fridge
their cleaned clothes (Problem)

no one bothered
Low quality detergent
milk past expiry&
Poor quality Poor employee
Delivery
to replace
personnel
spoilt lack of training on
Delivery personnel
packaging
treatment date material are poorly qualified
skills
milk Inattentive
milk storage employees
&
are not motivated
personal hygiene

Material Labour

20
Conducting a Process Analysis 4 steps
1. Identify the process of interest Not our focus in this topic!
2. Chart the process
3. Evaluate the process
 Identify opportunities for cost reduction
• Value analysis
• Assess efficiency and effectiveness
 Identify causes
• Root cause analysis
• Fish bone diagram (Not our focus in this topic)
4. Implement process improvement
• 4 approaches to reduce activity cost
• BPR vs CI
21
 4A
Process Improvement: 4 Approaches to Reduce Activity Costs
• Activity elimination Case info: Wrinkled clothes identified during
packing must be pressed again. The owner
• Eliminating the activity wants to reduce these “rework costs”.
• Activity reduction Root cause: Overworked employees rushing
• Reducing resources consumed by the activity to finish pressing clothes on time.

• Activity selection
• Choosing an activity with the lowest cost that matches the strategy

• Activity sharing
• Choosing or designing an activity that allows sharing between different products
Recommendation 1

Hire more employees who are experienced to press clothes.

22
 4A
Process Improvement: 4 Approaches to Reduce Activity Costs
• Activity elimination Additional info: Assume that clothes are
• Eliminating the activity
separated into 2 categories: delicates vs.
regular, and the pressing activity is very
• Activity reduction different for each because a lot more
• Reducing resources consumed by the activity care and time is required for delicates.

• Activity selection Choose a pressing activity that is more efficient

• Choosing an activity with the lowest cost that matches the strategy

• Activity sharing
• Choosing or designing an activity that allows sharing between different products
Recommendation 2: Replace labour-intensive manual pressing with an automatic press-
machine that presses clothes more efficiently.
Recommendation 3: “Redesign” the pressing activity by upgrading some equipment used
in pressing such that the same pressing process can be used for both categories of clothes. 23
Types of Improvement: BPR vs CI
Business process re-engineering Continuous improvement
(BPR) (CI)
Definition from “…fundamental rethinking and “…small incremental changes to
Moodle e-book radical redesign of business achieve… (CI) of processes…”
processes…”
1. Scale of change Radical Small
2. Personnel Cross-functional teams All employees
Involvement
3. Timing One-off Ongoing

Purchase a new detergent brand that can remove stains without requiring any separate stain
treatment. This new detergent makes it more likely for stains to be removed in one wash.

Fully automate the process where clothes are automatically washed, pressed, inspected by
AI-enabled cameras, and packed. 24
 Topic 1: Learning Objectives
1. Understand how management accounting differs from
financial accounting
2. Understand processes and demonstrate the ability to
conduct process analysis
3. Apply further techniques in overhead cost allocation:
a) Departmental approach: allocate support department costs to
production departments
b) Use cost estimation approaches to understand cost behaviour

Chapter 7 p. 284-286, 294-301

(excluding step-down method) 25
“Traditional” or Volume-based Costing System: Two Approaches
to Manufacturing Overhead Cost Allocation Assumed
Plantwide knowledge in
approach COMM1170

Manufacturing Predetermined Total budgeted MOH costs

Overhead MOH rate (or cost =
allocation rate) Budgeted quantity of cost driver

One cost pool

Predetermined Quantity of cost

One cost allocation
Applied overhead = OH rate × driver consumed by
base/cost driver
the product

Cost object:
Product Total cost = fixed cost + variable cost

26
Two Approaches to Manufacturing Overhead Cost
Allocation
Plantwide Departmental
approach approach

Manufacturing Manufacturing
Overhead Overhead
Stage 1:
Our focus!
One cost pool Cost Pool 1 Cost Pool 2 Cost Pool 3
for MF Dept 1 for MF Dept 2 for MF Dept 3
One cost allocation Cost Driver 1 Cost Driver 2 Cost Driver 3
base/cost driver Stage 2:
Not our
focus
Cost object: Cost object:
Product Product

27
Two Approaches to Manufacturing Overhead Cost
Allocation
• Organisations make choices about how to group or ‘pool’ manufacturing
overhead for allocation purposes
• A. Plantwide approach
• All overhead put into one cost pool and one cost driver used  one allocation rate
used to apply to manufacturing overhead to products
• B. Departmental approach
• The causes of manufacturing overhead costs may vary between production
departments  each production department is treated as a cost pool
• Two stages:
• (1) Overhead costs are assigned to production departments
• (2) Each production department will have its own cost driver and its own rate to
apply its costs to products

28
Departmental Approach: Allocation of Support Department Costs

Maintenance Department

A support department
“does not work directly on
producing products but is
necessary for the
manufacturing process to
occur” LS p. 278
Moulding Assembly

Three Methods:
1. Direct
2. Step-down (excluded)
3. Reciprocal services
Lecture Example: Avocado Toys Limited
Avocado Toys Limited produces two types of toys: Darth Potatoes and Storm Trooper
Potatoes. The company has two production departments: Moulding and Assembly; and
two support departments: Maintenance and Quality Control (QC). The budgeted costs for
Maintenance department is $50K and for QC department is $35K.

Table: Use of Maintenance Department’s and QC Department’s services by various departments.

Supplied By
Maintenance Quality Control
Used By (% based on (% based of # employees)
maintenance hrs)
Moulding 55% 35%
Assembly 30% 45%
Maintenance - 20%
Quality control 15% -
30
Lecture Example: Avocado Toys Limited

Required:
Allocate cost of support departments to the production
departments using each of the three methods:
1. Direct method
2. Reciprocal services method

31
Lecture Example: Direct Method
• Support departments costs are allocated directly to the
production/service departments only

Support Quality
Maintenance
Departments Control

Manufacturing Moulding Assembly

Departments

32
Lecture Example: Direct Method
Support Quality
Maintenance 30%
Departments 85%
Control
55% 45%
85% 80%
35%
80%
Manufacturing Moulding Assembly
Departments
Table 3:
Supplied By
Maintenance Quality Control
Used By
(% of DLH) (% of DLH)
Moulding 55% 85% 35% 80%
Assembly 30% 45%
Maintenance - 20%
Quality control 15% -
Lecture Example: Direct Method
Maint. Quality Ctrl Moulding Assembly
Budgeted costs 50,000 35,000 180,000 Prop. 90,000 Prop.
Allocation of
Maintenance’s 55 30
(50,000) - 32,353 17,647
costs 85 85

Allocation of
Quality control’s 35 45
- (35,000) 15,313 19,688
costs 80 80

Total allocated
costs - - $47,666 $37,334
Total budgeted
MOH cost of $227,666 $127,334
prod. department
Lecture Example: Reciprocal Services Method
• Fully accounts for the provision of services between support
departments.

• Three steps:
• Step 1: specify a set of equations that express the relationship
between the departments

• Step 2: solve the simultaneous equation (assumed knowledge)

• Step 3: allocate the total cost of operating each support department

to various departments that use its services
35
Lecture Example: Reciprocal Services Method
Supplied By
Maintenance Quality Control
Used By (% based on (% based of # employees)
maintenance hrs)
Moulding 55% 35%
Assembly 30% 45%
Maintenance - 20%
Quality control 15% -
Budgeted costs for the two support departments:
Maintenance =$50,000; Quality control = $35,000
• Step 1: specify equation
(Total MOH Cost = Budgeted + allocated from Support)
– Let: M = Total cost of Maintenance Department; Q = Total cost of QC Department
– Equations: M = 50 000 + 0.20Q (1)
Q = 35 000 + 0.15M (2) 36
Lecture Example: Reciprocal Services Method
• Step 2: Solve the simultaneous equations

Substitute: equation (2) into equation (1). Assumed

Knowledge
M = 50,000 + 0.2(35,000 +0.15M)
0.97M = 57,000
M = 58,763 (Rounded)

QC = 35,000 + 0.15(M)
QC = 35,000 + 0.15(58,763)
QC = 43,814(Rounded)

37
Lecture Example: Reciprocal Services Method
Maint. Quality Ctrl Moulding Assembly
Budgeted costs 50,000 35,000 180,000 90,000
Allocation of
Maintenance’s (58,763 ) 8,814 15% 32,320 55% 17,629 30%
costs
Allocation of
Quality control’s 8,763 20% (43,814) 15,335 30% 19,716 45%
costs
Total allocated
- - 47,655 37,345
costs
Total budgeted
MOH cost of - - 227,655 127,345
prod. department
 Topic 1: Learning Objectives
1. Understand how management accounting differs from
financial accounting
2. Understand processes and demonstrate the ability to
conduct process analysis
3. Apply further techniques in overhead cost allocation:
a) Departmental approach: allocate support department costs to
production departments
b) Use cost estimation approaches to understand cost behaviour

Chapter 3 p. 71-73, 87-93 and Appendix

Part 1 (excluding High-low method) 39
 The process of The relationship Using knowledge about cost
determining cost between cost and behavior to forecast the level of
behavior. activity/cost driver. cost for a level of activity.

Cost Estimation Approaches

• Managerial judgment
• Using experience and judgement to classify costs
• Engineering method
• Study of processes that result in the incurrence of costs Not our focus in this topic!
• Quantitative analysis
• High–low method
• Regression analysis (Our focus!)
40
Regression Analysis
Simple Regression Multiple Regression
• A statistical technique used to estimate Similar to simple regression but hs more
the relation between a dependent than one independent variable (>1 cost
variable (Y) & an independent variable drivers)
(X)
Y = a + b1X1 + b2X2 +...
• Y = a + bX Where:
Where: Y is the cost; X1, X2 etc are the quantity of activity
X is the quantity of activity;
a is the FC (constant),
b is the VC per unit (coefficient).

41
 Lecture exercise, Tooth Fairy Lollipop Case
Regression Analysis requirement 4(a)(i)
Mixture Number Let’s use a multiple regression to develop a cost
weight of Mixing function based on mixture weight and number
Week (kg) batches cost of batches.
1 132 719 90,031
The dependent variable:
2 145 537 87,388
3 226 1,134 145,023 Y: Mixing cost
4 133 779 94,518 The independent variables:
5 100 581 73,684
X1 : Mixture weight (kg)
6 103 541 70,066
7 143 839 98,991 X2 : No. of batches
8 85 280 90,122 Note: data outside of relevant range (week 8 and
9 128 663 87,092 12 have been removed in the table on this slide)
10 149 846 104,202
11 157 732 107,117 You can do this using excel or some other statistical
12 260 1,650 153,221 program (see LS: appendix to Ch3)
13 112 525 77,182
14 166 896 111,054 42
 Regression Analysis Lecture exercise, requirement 4(a)(i)
Regression output of regression analysis using data within the relevant range:
SUMMARY OUTPUT
Fixed cost = $9322.97 Variable costs:
Regression Statistics $413.89 per kilo of mixture
Multiple R 0.99484935 $37.91 per batch
R Square 0.98972523
Adjusted R Square 0.98744194
Standard Error 2277.39895
Observations 12

ANOVA
df SS MS F Significance F
Regression 2 4496380642 2248190321 433.4658 1.12973E-09
Residual 9 46678913.6 5186545.96
Total 11 4543059556

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 9322.97077 3001.26611 3.10634593 0.012593 2533.635131 16112.31 2533.635131 16112.3064
Mixture weight (kg) 413.891913 42.2682362 9.79203182 4.26E-06 318.27452 509.5093 318.27452 509.5093064
Number of batches 37.9139502 7.8640958 4.82114551 0.000945 20.12412953 55.70377 20.12412953 55.7037708 43
Tooth Fairy 4(a)(i) – develop cost function

Fixed cost = $9322.97 Variable costs:

$413.89 per kilo of mixture
$37.91 per batch

Y = 9,322.97 + 413.89X1 + 37.91X2

where: Y= mixing cost; X1 =mixture weight; X2 =number of batches

Mixing cost = $9,322.97 + $413.89 per kg of mixture weight + $37.91 per batch

Tooth Fairy 4(a)(ii) – predict mix cost if 120kg and 500 batches using the
cost function

• Mixing cost = $9,322.97 + ($413.89 * ) + ($37.91 * ) = $77,944.77

44
Evaluate Regression Output and Cost Function
Lecture exercise, requirement 4(a)(iii)
SUMMARY OUTPUT

Regression Statistics
Based on the regression output, would you use this cost
Multiple R 0.99484935 function to predict mixing costs in Tooth Fairy’s
R Square 0.98972523 operations? Justify your answer.
Adjusted R Square 0.98744194
Standard Error 2277.39895
Observations 12

ANOVA
df SS MS F Significance F
Regression 2 4496380642 2248190321 433.4658 1.12973E-09
Residual 9 46678913.6 5186545.96
Total 11 4543059556

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 9322.97077 3001.26611 3.10634593 0.012593 2533.635131 16112.31 2533.635131 16112.3064
Mixture weight (kg) 413.891913 42.2682362 9.79203182 4.26E-06 318.27452 509.5093 318.27452 509.5093064
Number of batches 37.9139502 7.8640958 4.82114551 0.000945 20.12412953 55.70377 20.12412953 55.7037708
45
Evaluate Regression Output and Cost Function
Recall: cause & effect relationship b/w
1. Economic plausibility (non-statistical) cost driver and cost (COMM1170)

2. Goodness of fit (adjusted R2/R2)

• % variation in Y that is explained by the model
3. F – statistic (all independent variables)
• What is the likelihood that all relationships between the cost and cost drivers have
occurred by chance?
• Benchmark for determining significance: p-value < 0.05 (see heading “Significance F”
in table)
4. t- statistic (each independent variable)
• What is the likelihood that the relationship between the cost and each cost driver
has occurred by chance?
• Benchmark for determining significance: p-value < 0.05

46
Evaluate Regression Output and Cost Function

Adj R 2: goodness of fit • Economic plausibility

Explains 98.7% of variation
• Adjusted R2
Cost function significance • F statistic and p-value
significance F <0.05 • t-statistic and p-value

= 0.0000000011

Cost driver (t-stat)

significance p<0.05

47
Advantages and Disadvantages of Regression
Analysis
 Objective
 Accurate/complete
 Statistical evaluation
 > 1 cost driver
 May be costly

48
 What next?
• Prepare for and attend your week 1 tutorial this week (Look for Topic 0
Questions on Moodle)
• Prepare for your week 2 tutorials!
• From the lecture activity: Redo case requirements 4(a) at your own pace as
practice.
• Complete your post-lecture review questions on Moodle.
• Complete all other remaining Tooth Fairy Lollipop Case Requirements i.e., Part I
Questions 1, 2, 3, and 4 (b), and Part II.
• You will go through these in the tutorial

49
Topic 1: Learning Objectives
1. Understand how management accounting differs from
financial accounting
2. Understand processes and demonstrate the ability to
conduct process analysis E2 4A
VA/NVA Efficiency, 4 approaches BPR/CI
effectiveness Root cause

3. Apply further techniques in overhead cost allocation:

a) Departmental approach: allocate support department costs to
production departments
b) Use cost estimation approaches to understand cost behaviour
50