Author:CollinsQianReviewer:BobArmacostbcCostAccountingMarch1998Copyright©1998Bain&Company,Inc.2CostAccountingbcBOSCopyright©1998Bain&Company,Inc.CostAccounting•Importanceofcostallocation•Clientexample•Definitions–directvs.indirect,fixedvs.variable–breakevenvolume•Exercises–costallocation–breakevenvolume•KeytakeawaysAgenda3CostAccountingbcBOSCopyright©1998Bain&Company,Inc.CostAccounting•Importanceofcostallocation•Clientexample•Definitions–directvs.indirect,fixedvs.variable–breakevenvolume•Exercises–costallocation–breakevenvolume•KeytakeawaysAgenda4CostAccountingbcBOSCopyright©1998Bain&Company,Inc.CostAccounting•Whichproductsareprofitable?•Whatisthebreakevenvolumebyproduct?•Whichproductsrequirecostreductionefforts?•Howshouldwepriceourproducts?•Whichcustomersegmentsaremostprofitable?Itiscriticaltohaveaccurateandcompletecostdatatomakesoundstrategicandtacticalmanagementdecisions.WhyAllocateCosts?5CostAccountingbcBOSCopyright©1998Bain&Company,Inc.CostAccounting•Historically,only20%ofmanufacturingcostswere“shared”acrossproductlines.Today,typically50%ofcostsare“shared”acrossproducts.Sharedcostsmightincluderent,freight,andadministrativecosts.•Forsimplicity,accountingtrackscostsbyfunction(e.g.,materials,salaries,benefits)ratherthanbytheactivitydevotedtoproductlines(e.g.,maintenanceofproductA,freightforproductB)•Forcoststhatarenoteasilyassignedtoindividualproductlines,companiesnormallyselectthemostconvenientwaytoassignthem,notnecessarilythebestway–forexample,companiestendtoallocaterentcostsbasedonsomethingthatiseasytomeasure,suchasdirectlabordollarsforeachproductline.Abetterallocationmethod,however,mightbetheactualspaceresourcedemandsofeachproductlineMostcompanieslackaccuratecostdatabyproduct.WhyCostsAreOftenNotAllocatedCorrectly6CostAccountingbcBOSCopyright©1998Bain&Company,Inc.CostAccounting•Importanceofcostallocation•Clientexample•Definitions–directvs.indirect,fixedvs.variable–breakevenvolume•Exercises–costallocation–breakevenvolume•KeytakeawaysAgenda7CostAccountingbcBOSCopyright©1998Bain&Company,Inc.CostAccountingRidingmowersBicyclesWalkingmowers$25.0MM$2.4MM$1.2MM$0$5$10$15$20$25$30PretaxOperatingProfit(MillionsofDollars)MiddleAmericaManufacturing,aBainclient,believedthatallthreeofitsproductlineswereprofitable.Returnonsales:10.0%2.4%1.6%Sales:$250MM$100MM$75MMMiddleAmericaManufacturing-EstimatedProfitability8CostAccountingbcBOSCopyright©1998Bain&Company,Inc.CostAccountingWalkingmowersBicyclesRidingmowersWalkingmowersBicyclesRidingmowersOriginalallocationRevisedallocation$8.0MM$8.0MM$0$2$4$6$8$10Cost(MillionsofDollars)Afterathoroughevaluation,theBainteamfoundthat$8.0MMincostshadbeenallocatedincorrectlyamongthethreeproducts.MiddleAmericaManufacturing-CostAllocation9CostAccountingbcBOSCopyright©1998Bain&Company,Inc.CostAccountingGeneraladministativeexpensesSystemscostsInventorycarryingcostsWalkingmowersBicyclesRidingmowersAdditionalunallocatedcostsAdditionalcostsreallocated$18.8MM$18.8MM$0$5$10$15$20Cost(MillionsofDollars)TheBainteamalsodeterminedthatanadditional$18.8MMincostsshouldbeallocatedtothethreeproducts.MiddleAmericaManufacturing-AdditionalCosts10CostAccountingbcBOSCopyright©1998Bain&Company,Inc.CostAccountingRidingmowersBicyclesWalkingmowers$18.0MM($3.0MM)($5.2MM)($10)($5)$0$5$10$15$20ProductLineProfitability(MillionsofD...
