ACC 5301 IV A

ACC 5301, Management Applications of Accounting 1

Course Learning Outcomes for Unit IV Upon completion of this unit, students should be able to:

1. Compare and contrast U.S. and international accounting standards. 1.1 Identify key U.S. and international accounting standards. 1.2 Explain how key international factors affect business reporting.

5. Discuss compliance requirements of accounting information.

5.1 Identify key compliance and regulatory requirements.

Required Unit Resources Chapter 6: Cost Allocation and Activity-Based Costing, pp. 6-1 – 6-25 In order to access the following resources, click the links below. International Financial Reporting Standards. (n.d.). IFRS: Financial reporting for the world economy [Video].

https://www.ifrs.org/about-us/ Transcript for IFRS: Financial Reporting for the World Economy Video Note: You must scroll through the available videos on the Financial Accounting Standards Board Video & Podcasts page to access the following video: Financial Accounting Foundation (Producer). (n.d.). The importance of GAAP [Video].

https://www.youtube.com/watch?v=bjwi4Zp2IiE Transcript for The Importance of GAAP Video

Unit Lesson

Introduction Welcome to Unit IV. We will be discussing two very different topics in this unit. We will start by discussing the process of cost allocation. The main advantages of allocating these overhead costs is to more accurately calculate the total cost of an organization's product and/or service. The second topic will introduce you to international accounting standards and how these standards compare to U.S. accounting standards. Included in this topic will be some key compliance and regulatory requirements needed for financial reporting.

Cost Allocation We are going to start off with the basic concept of how costs are allocated, then we will go into a more specific process of cost allocation known as activity-based-costing.

UNIT IV STUDY GUIDE

Cost Allocation and International Accounting

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Basic Cost Allocation The first two items we will discuss are cost objectives and cost pools. Cost objectives are used to determine how products or services costs are allocated within the company. Going back to our previous example of a computer manufacturing company, the cost objectives would be the types of computers the company produces. For this example, we will say the company makes desktop and laptop computers. Cost pools are the overhead costs to be allocated. For example, at our computer manufacturing company, some of the cost pools would include the cost of depreciation for the factory equipment and factory building, management's salaries, and the cost of factory utilities. The relationship between cost objectives and cost pools can be shown in the diagram here: Now, we will move to defining an allocation base. Allocation base defines how the costs will be allocated between the products and/or services produced. In our example we will allocate these overhead costs (cost pools) based on the number of products (cost objectives) produced. So, if we make 100 computers per day in total and 60 of those computers are desktops and 40 of those computers are laptops, we would allocate the total overhead costs on a 60/40 split based on the number of each type of computer manufactured.

Activity-Based-Costing (ABC) In ABC costing, we are still allocating the costs, but we will be allocating costs on a more specific basis. For instance, using our computer manufacturing example again, instead of allocating all of the overhead costs in the cost pools simply 60/40 based on the number of computers produced, we are going to break down these overhead costs using cost drivers to more accurately allocate costs. Cost drivers are used to identify the usage of each overhead item for each product. For example, instead of just grouping the cost of depreciation for the equipment and factory into one large category, we are going to break down this amount by specific usage for each machine and the factory separately. Therefore, we list the cost of depreciation for Equipment A, cost of depreciation for Equipment B, and the cost of depreciation for the factory separately. We are still

ACC 5301, Management Applications of Accounting 3

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going to base our allocation or driver on number of machine hours used by each type of product. The reason here is that different products may use the different types of equipment a different number of hours.

Now let's see how all of this compares as we talk about the actual cost to make a desktop or laptop computer. In our example, we will assume the cost of depreciation for the equipment and factory is $10,000 in total. Using traditional costing, we split that $10,000 60/40 so desktop computers would be allocated $6,000 of these costs and laptop computers $4,000 of these costs.

Just based on these numbers (of course there are additional costs), we could say, as managers, if we sell the desktop computers for more than $6,000 and the laptop computers for more than $4,000, we would make a profit. We then go ahead and set the selling price for desktops at $6,500 and the laptops at $4,500 each to make a profit. Now, let's look at using activity-based-costing for this same company. The total cost of depreciation for equipment and the factory are the same at $10,000. The difference is in how we split up that total cost by activity usage by product rather than just the number of units produced. In this example, the desktops and laptops are produced using a different number of machine hours on different equipment; therefore, we are allocating costs based on a more accurate cost driver, such as machine usage. As you can see, the total cost of deprecation is exactly the same, but the cost allocated to each type of product is different. Therefore, in our prior example, if we now sold the laptops for $4,500, we would be losing money on each sale because it costs us $4,775. In addition, if we are pricing our desktops at $6,500, then this number may be too high for the market since the cost is actually lower. If the price is too high for the market, the computers may not sell at all. By more accurately determining the cost for the products and/or services of a company, the more accurate selling price can be calculated.

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As we have just seen in this example, it is important to allocate costs properly to each product and/or service within an organization. The next section will look more closely at how these cost drivers are determined for various levels of activities within an organization. There are four levels of activity we will be discussing: unit, batch, product, and facility levels. Unit Level Unit level activities directly relate to the product or unit that that is being produced. An example of this for our computer manufacturing company, would be the costs of the workers who distribute the raw materials (plastic, wires, etc.) needed to make laptop computers to the factory floor so factory workers can assemble the laptop computers. Batch Level Batch level activities would relate to the factory as a whole and not be specific to a particular product, as in our unit level example—which only applied to laptop computers. An example of a batch level activity would be the cost of labor for the factory worker that sets up Equipment A and B within the factory. In other words, these two machines are used to make both laptop and desktop computers. The worker sets up the machines that are used for both products. Product Level Product level relates to costs that benefit the company as a whole—not just one particular product, as with the case of unit level. These costs would not include direct labor, as with the case of batch level. An example of product level costs would be the salary of the engineer that designs the computers. Facility Level Facility level relates to the overall operation of the facility as a whole, not a particular product. An example of this would be the cost of the salaries for the facility managers. Below is a chart that summarizes the different level of activities, the associated costs, and the driver that may be used for each level (Jiambalvo, 2020).

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In addition to obtaining more accurate cost data by applying activities levels and detailed cost drivers, we can also assign responsibility more fairly for the costs that we incur making the products and/or providing the services of the organization. For example, the laptop division supervisor in the warehouse would have the responsibility for unit costs associated with just the laptops, such as the cost of moving the raw materials for laptops to the factory floor. Whereas, this same supervisor would not have control over product costs such as the hiring of engineers to design new products. That responsibility would fall to the product development manager. Let's take a look at how the management levels within an organization relate to the activities levels for product costing. As you can see, the higher the level of management, the more responsibility they have for costs within the organization as a whole.

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Benefits and Challenges of ABC The main benefit of ABC is that it provides more accurate cost allocation data and reporting. The more accurate the costs of a product and/or service, the more accurately management can set the selling price. On the other side, ABC does have a few challenges. As with any system that contains a lot of detailed reporting, there is a cost associated with gathering and processing this data. This process may be time consuming and take away from business activities. For example, when looking at tracking setup time per product, it would involve that employee logging in the exact time he/she spent on the set up for Equipment A versus the time spent on Equipment B. Then this information would have to be logged into the tracking system so that reports could be run to add those costs to the proper equipment.

International Accounting Our other topic in this unit looks at some of the rules of accounting. We are going to look at the U.S. rules of accounting, the generally accepted accounting principles (GAAP), and the international accounting rules, International Financial Reporting Standards (IFRS). There is not just one set of required accounting rules all over the world. Each country can select the accounting rules for their country, and this was fine when most countries were independent. However, as countries traded and invested with one another, it became more difficult to have so many separate accounting rules. IFRS was formed to unify accounting standards world-wide. Countries can elect to participate in IFRS, and there are currently over 100 countries participating. The United States is not one of the countries that has adopted IFRS as its accounting standards but has been working with IFRS to merge some of the accounting rules. The United States follows GAAP, which is established by the Financial Accounting Standards Board (FASB). As noted above, some of the rules are similar between GAAP and IFRS; others are not. Keep in mind, establishing one set of accounting standards for all countries is a significant task because there are many things to consider. For example, accounting rules are based on a country’s legal, economic, and political climates. In countries with very high inflation, the accounting system needs to take into account the current value of assets as their worth is constantly changing, and, therefore, these countries need to revalue assets (estimate the asset's worth). Yet, here in the United States, we base our asset value on historical costs (the value on the bill showing what we paid for an item). Another example of a differing reason for accounting standards is any country with an unstable political climate. That climate may lead to fluctuations in the economy such as drastically devaluing currency or claiming assets. These are just a few examples of how difficult it is to try and adopt one set of accounting standards world-wide and why the United States has been slow to adopt international standards. Remember, these accounting rules primarily relate to the preparation of financial statements for external users. However, this same data is used by managers to make decisions and to prepare the various costing reports we have seen so far in this course.

Conclusion In this unit, we have looked in detail at preparing costing reports. These reports break down costs so that they can more accurately be allocated to the products and/or services the organization produces. By allocating these costs in more detail, we, as managers, can more accurately make business decisions such as setting the selling price for products. Also, in this unit we discussed both international and U.S. accounting standards. While there are some similarities between the two systems, there are also a number of differences.

Reference Jiambalvo, J. (2020). Managerial accounting (7th ed.). Wiley.

https://bookshelf.vitalsource.com/#/books/9781119577706

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Suggested Unit Resources In order to access the following resources, click the links below. Review the International Financial Reporting Standards (IFRS) website to learn more about international accounting standards. International Financial Reporting Standards Foundation. (n.d.). IFRS home page. Retrieved from

https://www.ifrs.org/ Review the Financial Accounting Standards Board (FASB) website to learn more about FASB, the organization that sets U.S. accounting standards. Financial Accounting Standards Board. (n.d.). FASB home page. https://www.fasb.org/home View the following video by accessing the Unit IV Additional Unit Resources folder in the unit. The video Precor: Activity-Based Costing will demonstrate how activity-based costing techniques were used at Precor. You can access a transcript for this video by hovering over the PDF button at the bottom of the video and then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video to turn on closed captions.

Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. After watching the video Precor: Activity-Based Costing in the Suggested Unit Resources, you may want to answer the four Unit IV Questions. Note that the "View the Video" link referenced in each question is the same Precor: Activity-Based Costing video linked above.

ACC 5301, Management Applications of Accounting 1

Course Learning Outcomes for Unit IV Upon completion of this unit, students should be able to:

1. Compare and contrast U.S. and international accounting standards. 1.1 Identify key U.S. and international accounting standards. 1.2 Explain how key international factors affect business reporting.

5. Discuss compliance requirements of accounting information.

5.1 Identify key compliance and regulatory requirements.

Required Unit Resources Chapter 6: Cost Allocation and Activity-Based Costing, pp. 6-1 – 6-25 In order to access the following resources, click the links below. International Financial Reporting Standards. (n.d.). IFRS: Financial reporting for the world economy [Video].

https://www.ifrs.org/about-us/ Transcript for IFRS: Financial Reporting for the World Economy Video Note: You must scroll through the available videos on the Financial Accounting Standards Board Video & Podcasts page to access the following video: Financial Accounting Foundation (Producer). (n.d.). The importance of GAAP [Video].

https://www.youtube.com/watch?v=bjwi4Zp2IiE Transcript for The Importance of GAAP Video

Unit Lesson

Introduction Welcome to Unit IV. We will be discussing two very different topics in this unit. We will start by discussing the process of cost allocation. The main advantages of allocating these overhead costs is to more accurately calculate the total cost of an organization's product and/or service. The second topic will introduce you to international accounting standards and how these standards compare to U.S. accounting standards. Included in this topic will be some key compliance and regulatory requirements needed for financial reporting.

Cost Allocation We are going to start off with the basic concept of how costs are allocated, then we will go into a more specific process of cost allocation known as activity-based-costing.

UNIT IV STUDY GUIDE

Cost Allocation and International Accounting

ACC 5301, Management Applications of Accounting 2

UNIT x STUDY GUIDE

Title

Basic Cost Allocation The first two items we will discuss are cost objectives and cost pools. Cost objectives are used to determine how products or services costs are allocated within the company. Going back to our previous example of a computer manufacturing company, the cost objectives would be the types of computers the company produces. For this example, we will say the company makes desktop and laptop computers. Cost pools are the overhead costs to be allocated. For example, at our computer manufacturing company, some of the cost pools would include the cost of depreciation for the factory equipment and factory building, management's salaries, and the cost of factory utilities. The relationship between cost objectives and cost pools can be shown in the diagram here: Now, we will move to defining an allocation base. Allocation base defines how the costs will be allocated between the products and/or services produced. In our example we will allocate these overhead costs (cost pools) based on the number of products (cost objectives) produced. So, if we make 100 computers per day in total and 60 of those computers are desktops and 40 of those computers are laptops, we would allocate the total overhead costs on a 60/40 split based on the number of each type of computer manufactured.

Activity-Based-Costing (ABC) In ABC costing, we are still allocating the costs, but we will be allocating costs on a more specific basis. For instance, using our computer manufacturing example again, instead of allocating all of the overhead costs in the cost pools simply 60/40 based on the number of computers produced, we are going to break down these overhead costs using cost drivers to more accurately allocate costs. Cost drivers are used to identify the usage of each overhead item for each product. For example, instead of just grouping the cost of depreciation for the equipment and factory into one large category, we are going to break down this amount by specific usage for each machine and the factory separately. Therefore, we list the cost of depreciation for Equipment A, cost of depreciation for Equipment B, and the cost of depreciation for the factory separately. We are still

ACC 5301, Management Applications of Accounting 3

UNIT x STUDY GUIDE

Title

going to base our allocation or driver on number of machine hours used by each type of product. The reason here is that different products may use the different types of equipment a different number of hours.

Now let's see how all of this compares as we talk about the actual cost to make a desktop or laptop computer. In our example, we will assume the cost of depreciation for the equipment and factory is $10,000 in total. Using traditional costing, we split that $10,000 60/40 so desktop computers would be allocated $6,000 of these costs and laptop computers $4,000 of these costs.

Just based on these numbers (of course there are additional costs), we could say, as managers, if we sell the desktop computers for more than $6,000 and the laptop computers for more than $4,000, we would make a profit. We then go ahead and set the selling price for desktops at $6,500 and the laptops at $4,500 each to make a profit. Now, let's look at using activity-based-costing for this same company. The total cost of depreciation for equipment and the factory are the same at $10,000. The difference is in how we split up that total cost by activity usage by product rather than just the number of units produced. In this example, the desktops and laptops are produced using a different number of machine hours on different equipment; therefore, we are allocating costs based on a more accurate cost driver, such as machine usage. As you can see, the total cost of deprecation is exactly the same, but the cost allocated to each type of product is different. Therefore, in our prior example, if we now sold the laptops for $4,500, we would be losing money on each sale because it costs us $4,775. In addition, if we are pricing our desktops at $6,500, then this number may be too high for the market since the cost is actually lower. If the price is too high for the market, the computers may not sell at all. By more accurately determining the cost for the products and/or services of a company, the more accurate selling price can be calculated.

ACC 5301, Management Applications of Accounting 4

UNIT x STUDY GUIDE

Title

As we have just seen in this example, it is important to allocate costs properly to each product and/or service within an organization. The next section will look more closely at how these cost drivers are determined for various levels of activities within an organization. There are four levels of activity we will be discussing: unit, batch, product, and facility levels. Unit Level Unit level activities directly relate to the product or unit that that is being produced. An example of this for our computer manufacturing company, would be the costs of the workers who distribute the raw materials (plastic, wires, etc.) needed to make laptop computers to the factory floor so factory workers can assemble the laptop computers. Batch Level Batch level activities would relate to the factory as a whole and not be specific to a particular product, as in our unit level example—which only applied to laptop computers. An example of a batch level activity would be the cost of labor for the factory worker that sets up Equipment A and B within the factory. In other words, these two machines are used to make both laptop and desktop computers. The worker sets up the machines that are used for both products. Product Level Product level relates to costs that benefit the company as a whole—not just one particular product, as with the case of unit level. These costs would not include direct labor, as with the case of batch level. An example of product level costs would be the salary of the engineer that designs the computers. Facility Level Facility level relates to the overall operation of the facility as a whole, not a particular product. An example of this would be the cost of the salaries for the facility managers. Below is a chart that summarizes the different level of activities, the associated costs, and the driver that may be used for each level (Jiambalvo, 2020).

ACC 5301, Management Applications of Accounting 5

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In addition to obtaining more accurate cost data by applying activities levels and detailed cost drivers, we can also assign responsibility more fairly for the costs that we incur making the products and/or providing the services of the organization. For example, the laptop division supervisor in the warehouse would have the responsibility for unit costs associated with just the laptops, such as the cost of moving the raw materials for laptops to the factory floor. Whereas, this same supervisor would not have control over product costs such as the hiring of engineers to design new products. That responsibility would fall to the product development manager. Let's take a look at how the management levels within an organization relate to the activities levels for product costing. As you can see, the higher the level of management, the more responsibility they have for costs within the organization as a whole.

ACC 5301, Management Applications of Accounting 6

UNIT x STUDY GUIDE

Title

Benefits and Challenges of ABC The main benefit of ABC is that it provides more accurate cost allocation data and reporting. The more accurate the costs of a product and/or service, the more accurately management can set the selling price. On the other side, ABC does have a few challenges. As with any system that contains a lot of detailed reporting, there is a cost associated with gathering and processing this data. This process may be time consuming and take away from business activities. For example, when looking at tracking setup time per product, it would involve that employee logging in the exact time he/she spent on the set up for Equipment A versus the time spent on Equipment B. Then this information would have to be logged into the tracking system so that reports could be run to add those costs to the proper equipment.

International Accounting Our other topic in this unit looks at some of the rules of accounting. We are going to look at the U.S. rules of accounting, the generally accepted accounting principles (GAAP), and the international accounting rules, International Financial Reporting Standards (IFRS). There is not just one set of required accounting rules all over the world. Each country can select the accounting rules for their country, and this was fine when most countries were independent. However, as countries traded and invested with one another, it became more difficult to have so many separate accounting rules. IFRS was formed to unify accounting standards world-wide. Countries can elect to participate in IFRS, and there are currently over 100 countries participating. The United States is not one of the countries that has adopted IFRS as its accounting standards but has been working with IFRS to merge some of the accounting rules. The United States follows GAAP, which is established by the Financial Accounting Standards Board (FASB). As noted above, some of the rules are similar between GAAP and IFRS; others are not. Keep in mind, establishing one set of accounting standards for all countries is a significant task because there are many things to consider. For example, accounting rules are based on a country’s legal, economic, and political climates. In countries with very high inflation, the accounting system needs to take into account the current value of assets as their worth is constantly changing, and, therefore, these countries need to revalue assets (estimate the asset's worth). Yet, here in the United States, we base our asset value on historical costs (the value on the bill showing what we paid for an item). Another example of a differing reason for accounting standards is any country with an unstable political climate. That climate may lead to fluctuations in the economy such as drastically devaluing currency or claiming assets. These are just a few examples of how difficult it is to try and adopt one set of accounting standards world-wide and why the United States has been slow to adopt international standards. Remember, these accounting rules primarily relate to the preparation of financial statements for external users. However, this same data is used by managers to make decisions and to prepare the various costing reports we have seen so far in this course.

Conclusion In this unit, we have looked in detail at preparing costing reports. These reports break down costs so that they can more accurately be allocated to the products and/or services the organization produces. By allocating these costs in more detail, we, as managers, can more accurately make business decisions such as setting the selling price for products. Also, in this unit we discussed both international and U.S. accounting standards. While there are some similarities between the two systems, there are also a number of differences.

Reference Jiambalvo, J. (2020). Managerial accounting (7th ed.). Wiley.

https://bookshelf.vitalsource.com/#/books/9781119577706

ACC 5301, Management Applications of Accounting 7

UNIT x STUDY GUIDE

Title

Suggested Unit Resources In order to access the following resources, click the links below. Review the International Financial Reporting Standards (IFRS) website to learn more about international accounting standards. International Financial Reporting Standards Foundation. (n.d.). IFRS home page. Retrieved from

https://www.ifrs.org/ Review the Financial Accounting Standards Board (FASB) website to learn more about FASB, the organization that sets U.S. accounting standards. Financial Accounting Standards Board. (n.d.). FASB home page. https://www.fasb.org/home View the following video by accessing the Unit IV Additional Unit Resources folder in the unit. The video Precor: Activity-Based Costing will demonstrate how activity-based costing techniques were used at Precor. You can access a transcript for this video by hovering over the PDF button at the bottom of the video and then clicking on the word “Transcript.” Alternatively, you can click on the “cc” button at the bottom of the video to turn on closed captions.

Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. After watching the video Precor: Activity-Based Costing in the Suggested Unit Resources, you may want to answer the four Unit IV Questions. Note that the "View the Video" link referenced in each question is the same Precor: Activity-Based Costing video linked above.