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Relevant Information For Decision Making Cost Allocation: Reciprocal Method

This document discusses several methods for cost allocation, performance measurement, budgeting, and capital budgeting. It outlines the reciprocal method for cost allocation between two cost objects. It describes responsibility accounting and how to prepare a segmented income statement. It also defines metrics like throughput, manufacturing cycle efficiency, and process productivity. The document provides details on preparing a master budget, including sales, production, purchases, labor, and overhead budgets. Finally, it reviews capital budgeting techniques like payback period, accounting rate of return, net present value, profitability index, internal rate of return, and how to account for depreciation and taxes in analyses.

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Kyla Dane P. Prado
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42 views

Relevant Information For Decision Making Cost Allocation: Reciprocal Method

This document discusses several methods for cost allocation, performance measurement, budgeting, and capital budgeting. It outlines the reciprocal method for cost allocation between two cost objects. It describes responsibility accounting and how to prepare a segmented income statement. It also defines metrics like throughput, manufacturing cycle efficiency, and process productivity. The document provides details on preparing a master budget, including sales, production, purchases, labor, and overhead budgets. Finally, it reviews capital budgeting techniques like payback period, accounting rate of return, net present value, profitability index, internal rate of return, and how to account for depreciation and taxes in analyses.

Uploaded by

Kyla Dane P. Prado
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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RELEVANT INFORMATION FOR DECISION MAKING

COST ALLOCATION

Reciprocal Method

S1 = S1 Budgeted OH Cost + %S2


S2 = S2 Budgeted OH Cost + %S1

S1 = S1 Budgeted OH Cost + %(S2 Budgeted OH Cost + %S1)

RESPONSIBILITY ACCOUNTING

Preparation of Segmented Income Statement

Service revenue xx
Variable cost (xx)
Segment Contribution Margin xx
Controllable fixed cost (by managers) (xx)
Controllable profit margin (by managers) xx
Non-controllable fixed costs (fixed cost controllable by others) –
fixed cost that is traceable but non-controllable (xx)
Segment Profit Margin xx
Less: Allocated Common expenses (traceable costs not
controllable by managers and others) (xx)
Income before taxes xx
Less Income Tax Expense (xx)
Net income xx

ROI = Net income


Average invested Capital

*Invested Capital = Asset - Liabilities


*If the given in the problem is only “invested capital”. It is assumed that it is already
average.

DuPont of ROI = Profit Margin x Asset Turnover

Residual Income = Capital Invested x (Target Return – Imputed interest rate)

or Net income - (Average Operating assets x ROI)

EVA = NOPAT - (Invested Capital x Cost of Capital or WACC)

PERFORMANCE MEASURE

Throughput per hour = Manufacturing Cycle Efficiency (MCE) x Process


Productivity x Quality Yield

*Throughput - the amount of units passing through a system or process


*The higher the throughput the better

MCE = Value-added processing time


Total Processing Time

Process Productivity = TOTAL units produced during the period


Value-added processing time

Process quality yield = Percentage of products that pass through the compliance
check

MASTER BUDGET

A. Operating Budget
1. Sales Budget:

Unit sales x Selling price per unit = Peso Sales

2. Production Budget:

Unit of sales + Units desired in EI – Units in BI = Units to be produced

3. Purchases Budget:

Units to be produced + Units desired in EI – Units in BI = Units to be purchased

4. Direct labor budget:

Units of production
x Standard time allowed per unit
Standard labor time allowed
x Per hour direct labor cost
Total direct labor cost

5. Overhead budget:

Predicted activity base


x Variable overhead rate per unit of activity
Total variable OH cost
+ Fixed OH cost
Total OH cost

6. Selling and administrative budget

Predicted sales pesos


x Variable S&A rate per pesos
Total variable S&A cost
+ Fixed S&A cost
Total S&A cost

B. Financial Budget

1. Cash Budget

Beginning cash balance


+ Cash receipts (collections)
Cash available for disbursements (excluding noncash expenses)
- Cash needed for disbursements
Cash excess or deficiency
- Minimum desired cash balance
Cash needed or available for investment or financing
+ or - various financing measures
Ending cash balance

2. Budgeted Financial Statements

CAPITAL BUDGETING

Payback period

a. Payback Period (recouping the investment)

= Investment
After-Tax Cash Flows

or Investment
Cash savings
(whichever is applicable)

i. Depreciation given along with Tax rates -> Consider the tax depreciation benefit

ii. Depreciation only the given -> Sunk cost

b. Payback bailout:
- Consider the salvage value (i.e., add the salvage value).

(a) (a + cprev) (f-e)

Annual Cash inflow Salvage Expected Cost of To be


cash inflow to date value cash investment recovered

(a) (c) (d) (e) (f)

1,000,000

300,000 300,000 200,000 500,000 1,000,000 -500,000 1

400,000 700,000 100,000 800,000 1,000,000 -200,000 1

200,000 900,000 50,000 950,000 1,000,000 -50,000 1

150,000 1,050,000 20,000 1,070,000 1,000,000 70,000 0.53

3.53

Unknown period
= Cost of the investment - Cash inflow prior year - Salvage value (current yr.)
Cash inflow (curent yr.)

c. Payback reciprocal = 1/Payback period


Accounting Rate of Return

Accounting rate of return = Estimated Accounting Profit


Average Investment including Residual Value if any

Net Present Value

Present value of cash inflow


= Cash inflow x PV of annuity @ discount rate or cost of capital

NPV = Cash Outflow minus the PV of Cash Inflow (Accept if: NPV is 0 or more)

Profitability Index

Profitability Index = Net Present value


Investment

Internal Rate of Return

0 = Cash outflow + Cash inflow x PV of annuity @IRR

IRR is missing:

*IRR is a discount rate that makes NPV equals to zero

R = IRR

0 = Cash outflow + Cash inflow


(1 + R)
If IRR > Cost of Capital, accept

Cash outflow = Cash inflow x PV @ IRR

Present value @Annuity = Cost of Investment


Annual savings (Then: IRR = Trial and Error)

Depreciation and Taxation Effects

After-tax cash flow = Proceeds + Tax Savings

Equivalent annuity cash flow

Equivalent annuity cash flow = (Interest rate x NPV)


[1 - (1 + r)n ]

References:

Bail-out payback and ARR:


https://www.youtube.com/watch?v=bFgAEQ4jOYU&t=5s

Payback period (Uneven) and Payback Reciprocal:


https://www.youtube.com/watch?v=yZG2ddMK2Ko

Equivalent Annual Annuity (EAA):


https://www.investopedia.com/terms/e/equivalent-annual-annuity-approach.asp

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