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IMA Hands-on: Simpler than ABC 1 SIMPLER THAN ABC New Ideas for Using Microsoft Excel for Allocating...
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Transcript of IMA Hands-on: Simpler than ABC 1 SIMPLER THAN ABC New Ideas for Using Microsoft Excel for Allocating...
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 11
SIMPLERSIMPLER THAN ABCTHAN ABC
New Ideas for Using Microsoft New Ideas for Using Microsoft Excel for Allocating CostsExcel for Allocating Costs
Reciprocal CostingReciprocal Costing
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 22
OUTLINEOUTLINE
The purpose of the presentation is to The purpose of the presentation is to introduce a new method of solving an old introduce a new method of solving an old problemproblem
The old problem is service cost allocation The old problem is service cost allocation using reciprocal costing.using reciprocal costing.
The new method uses Excel to determine The new method uses Excel to determine the reciprocal allocations using matrix the reciprocal allocations using matrix algebra and a mathematics technique algebra and a mathematics technique known as Cramer’s Rule.known as Cramer’s Rule.
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 33
BenefitsBenefits
By understanding this technique Decision By understanding this technique Decision Support Specialists can have at their Support Specialists can have at their fingertips what is considered the most fingertips what is considered the most accurate method of cost allocation accurate method of cost allocation between service departments while between service departments while overcoming some of the problems which overcoming some of the problems which have kept reciprocal costing from being have kept reciprocal costing from being more widely used in practice.more widely used in practice.
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 44
BenefitsBenefits
Traceability of costsTraceability of costs Doesn’t require specialized software Doesn’t require specialized software Doesn’t require extensive mathematical Doesn’t require extensive mathematical
training to solve systems of equations.training to solve systems of equations. More accurate than earlier methods of More accurate than earlier methods of
reciprocal costingreciprocal costing
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 55
ExampleExample
Service DepartmentsService Departments
MaintenanceMaintenance
PersonnelPersonnel
Production DepartmentsProduction Departments
Product AProduct A
Product BProduct B
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 66
Budgeted Costs & AllocationBudgeted Costs & Allocation
MaintenanceMaintenance
$1,000,000$1,000,000
Allocation BasisAllocation Basis
Value of AssetsValue of Assets
PersonnelPersonnel
$1.800,000$1.800,000
Allocation BasisAllocation Basis
Number of WorkersNumber of Workers
IMA Hands-on: Simpler than ABC 7
Table 1: Allocation AmountsAssets Employees Costs
Maintenance (M) 2,000,000$ 8 1,000,000$ Personnel (P) 1,000,000$ 2 1,800,000$
A 8,000,000$ 20B 24,000,000$ 15
Total 35,000,000$ 45
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 88
Solution MethodsSolution Methods
Direct allocationDirect allocation
Sequential AllocationSequential Allocation
Reciprocal AllocationReciprocal Allocation
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 99
DIRECT ALLOCATIONDIRECT ALLOCATION
B
A
B
A
P
P
M
M
3515000,800,1$
3520000,800,1$
3224000,000,1$
328000,000,1$
Microsoft Equation 3.0
A
$250,000
$750,000
B
Products
$1,028,571
$771,429
$1,278.571 $1,521,429
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 1010
Sequential MethodSequential MethodMaintenance FirstMaintenance First
PP AA BB
30,30330,303
242,424242,424
727,273727,273
B
A
P
P
3515303,830,1
3520303,830,1
B
A
P
M
M
M
3324000,000,1
338000,000,1
331000,000,1
1,045,8871,045,887
784,416784,416
$1,288,311$1,288,311 $1,511,689$1,511,689
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 1111
Sequential MethodSequential MethodPersonnel FirstPersonnel First
MM AA BB
334,884334,884
837.209837.209
627,907627,907B
A
M
P
P
P
4315000,800,1
4320000,800,1
438000,800,1
B
A
M
M
3224884,334,1
328884,334,1 333,721333,721
1,001,1631,001,163
1,170,9301,170,930 1,629,0701,629,070
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 1212
Direct & Sequential MethodsDirect & Sequential Methods
Direct method is simple but less accurateDirect method is simple but less accurate
Traceability of costs are easy with Traceability of costs are easy with sequential method butsequential method but
Results are dependent on the order of Results are dependent on the order of allocation so sequencing needs to be allocation so sequencing needs to be justified.justified.
A BMaintenance first 1,288,311 1,511,689
Personnel first 1,170,930 1,629,070
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 1313
Reciprocal AllocationReciprocal AllocationTextbook Algebraic MethodTextbook Algebraic Method
MP
PM
33
1000,800,1
43
8000,000,1
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 1414
Reciprocal AllocationReciprocal AllocationTextbook Algebraic Method(2)Textbook Algebraic Method(2)
452,342,1
884,334,114191411
1419
8884,334,1
33
1000,800,1
43
8000,000,1
M
M
MM
MM
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 1515
Reciprocal AllocationReciprocal AllocationAlgebraic Method(3)Algebraic Method(3)
000,800,2
132,183,3
680,840,1
452,342,133
1000,800,1
PBudgetedM
PM
P
P
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 1616
Reciprocal MethodReciprocal MethodFinal Allocations to A & BFinal Allocations to A & B
AA BB
1,342,4521,342,452 xx 8/338/33 325,443325,443
1,342,4521,342,452 xx 24/3324/33 976,329976,329
1,840,6801,840,680 xx 20/4320/43 856,130856,130
1,840,6801,840,680 xx 15/4315/43 642,098642,098
1,181,5731,181,573 1,618,4271,618,427
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 1717
Problems with Textbook Reciprocal Problems with Textbook Reciprocal Allocation MethodAllocation Method
In the preceding method the sums In the preceding method the sums attributed to each service department attributed to each service department include added amounts which defy easy include added amounts which defy easy explanation and leave the reciprocal costs explanation and leave the reciprocal costs useful only for allocation to final product.useful only for allocation to final product.
These reciprocal costs include only inward These reciprocal costs include only inward flows of resources so cannot be used to flows of resources so cannot be used to provide useful information to service provide useful information to service department managers.department managers.
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 1818
Problems with Textbook Reciprocal Problems with Textbook Reciprocal Allocation MethodAllocation Method
Traceability of cost flows between service Traceability of cost flows between service departments is limited.departments is limited.
Solution of problems becomes Solution of problems becomes cumbersome when service departments cumbersome when service departments become numerous.become numerous.
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 1919
Alternative Solution: The MathAlternative Solution: The Math
Rewriting the equations for each service Rewriting the equations for each service department to include both outflows and department to include both outflows and inflows allows the full specification of a inflows allows the full specification of a matrix that can be used with a common matrix that can be used with a common Excel function to provide reciprocal costs Excel function to provide reciprocal costs that do not include double counted that do not include double counted amounts and provide for traceability of amounts and provide for traceability of cost flows between service departmentscost flows between service departments..
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 2020
Same example: new methodSame example: new method..
PMP
MPM
45
8
35
1000,800,1
35
1
45
8000,000,1
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 2121
Reciprocal Cost New Method (2)Reciprocal Cost New Method (2)
000,800,145
81
35
1
000,000,145
8
35
11
PM
PM
IMA Hands-on: Simpler than ABCIMA Hands-on: Simpler than ABC 2222
Constructing the MatrixConstructing the Matrix