TAILIEUCHUNG - Lecture Advanced management accounting - Chapter 24

After completing this chapter, you should be able to: Define managerial accounting and describe its role in the management process; explain four fundamental management processes that help organizations attain their goals; list and describe five objectives of managerial accounting activity;. | Lecture 24: Cost-Based Decision making (Pricing) In this lecture we will study the following: Time-and-material pricing is an approach to cost-plus pricing in which the company uses two pricing rates: One for labor used on a job - includes direct labor time and other employee costs. One for material - includes cost of direct parts and materials and a material loading charge for related overhead. Widely used in service industries, especially professional firms such as public accounting, law, and engineering. Pricing Services 3 Illustration: Assume the following data for Lake Holiday Marina, a boat and motor repair shop. Pricing Services 4 Using time-and-material pricing involves three steps: calculate the per hour labor charge, calculate the charge for obtaining and holding materials, and calculate the charges for a particular job. Pricing Services 5 Step 1: Calculate the labor charge. Express as a rate per hour of labor. Rate includes: Direct labor cost (includes fringe benefits). Selling, administrative, and similar overhead costs. Allowance for desired profit (ROI) per hour. Labor rate for Lake Holiday Marina for 2011 based on: 5,000 hours of repair time. Desired profit margin of $8 per hour. Pricing Services 6 Multiply the rate of $ by the number of labor hours used on any particular job to determine the labor charges for the job. Step 1: Calculate the labor charge. Pricing Services 7 Step 2: Calculate the material loading charge. Material loading charge added to invoice price of materials. Covers the costs of purchasing, receiving, handling, storing + desired profit margin on materials. Expressed as a percentage of estimated costs of parts and materials for the year: Estimated purchasing, receiving, handling, storing costs Estimated costs of parts and materials Desired profit margin on materials + Pricing Services 8 The marina estimates that the total invoice cost of parts and materials used in 2011 will be $120,000. The marina desires a 20% profit margin

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