Samuel Curtis Johnson Graduate School of Management

LSM534: Measuring and Improving Margins

Cornell University

Measuring and Improving Margins

Course Project

Instructions:

As you progress through this course, you will periodically be directed to this document to answer questions relating concepts from the course to your organization (or to another organization that you know very well).

This project consists of four parts. Save this document to a convenient location on your computer so you can easily find it again when you are ready to complete subsequent parts of the project later in the course.

At the end of the course, you will submit this entire document to your instructor for review.

Part One of your course project begins on the next page.

Part One – What Are Your Costs?

Briefly describe a product or service provided by a part of the organization that you know well. The product or service might be provided to an external customer, or to another part of your organization.

Use the spaces below to identify the most significant costs required to create and deliver the product or service you described above. For this project, it is not important that you are able to quantify these costs. You need only to think about and describe the nature and relative importance of the most significant costs associated with your product or service. Don’t restrict yourself to costs that are recorded by your accountants—many important costs are not captured by reporting systems.

For each cost, identify what type it is by the resources given up (out-of-pocket, capacity, opportunity costs, etc.), by the purpose of that cost (product or period cost) and whether the resources associated with that cost are shared with other cost objects (whether it is a direct or indirect cost).

Cost #1 (Give this cost a name)

What type of cost is this, based on the resources given up (out-of-pocket, prime, capacity, opportunity, proprietary, or depreciation)?
Keep in mind that a cost might fit more than one category, because more than one resource is given up. For example, you might spend cash to add labor to inventory, creating a cost that is both out-of-pocket (because you spent cash) and prime (because you used labor to make inventory). In the same way, using a truck to ship goods to one customer instead of another might be both a capacity cost and an opportunity cost (because you give up the ability to ship to another customer).

What is the purpose of the cost (product or period cost)?

Are the resources associated with that cost shared with other cost objects? In other words, is it a direct or indirect (overhead) cost?

Cost #2 (Give this cost a name)

What type of cost is this, based on the resources given up (out-of-pocket, prime, capacity, opportunity, proprietary, or depreciation)?

What is the purpose of the cost (product or period cost)?

Are the resources associated with that cost shared with other cost objects? In other words, is it a direct or indirect (overhead) cost?

Cost #3 (Give this cost a name)

What type of cost is this, based on the resources given up (out-of-pocket, prime, capacity, opportunity, proprietary, or depreciation)?

What is the purpose of the cost (product or period cost)?

Are the resources associated with that cost shared with other cost objects? In other words, is it a direct or indirect (overhead) cost?

Cost #4 (Give this cost a name)

What type of cost is this, based on the resources given up (out-of-pocket, prime, capacity, opportunity, proprietary, or depreciation)?

What is the purpose of the cost (product or period cost)?

Are the resources associated with that cost shared with other cost objects? In other words, is it a direct or indirect (overhead) cost?

Cost #5 (Give this cost a name)

What type of cost is this, based on the resources given up (out-of-pocket, prime, capacity, opportunity, proprietary, or depreciation)?

What is the purpose of the cost (product or period cost)?

Are the resources associated with that cost shared with other cost objects? In other words, is it a direct or indirect (overhead) cost?

Cost #6 (Give this cost a name)

What type of cost is this, based on the resources given up (out-of-pocket, prime, capacity, opportunity, proprietary, or depreciation)?

What is the purpose of the cost (product or period cost)?

Are the resources associated with that cost shared with other cost objects? In other words, is it a direct or indirect (overhead) cost?

This is the end of Part One of your course project. Save this document to a location that you will be able to locate easily. Later in the course, you will return to this document to complete Part Two, which begins on the next page.

Part Two – Revisit Your Costs

Revisit Part One of this project and review the list of costs you created there.

1. Which of the costs that you identified will not be recorded by your cost accounting system (perhaps because they are opportunity costs or proprietary costs)?

2. Which costs will be recorded by your cost accounting system?

3. Applying what you now know about period and product costs, reflect on your answers from Part One about which costs are likely to be recorded by your cost accounting system as product and period costs. Would you change any of your answers? List your product and period costs here.

Product Costs:

Period Costs:

4. Applying what you now know about direct and indirect costs, reflect on your answers from Part One about which costs are likely to be recorded as direct or indirect costs. Would you change any of your answers? List your direct and indirect costs here:

Direct Costs:

Indirect Costs:

5. Explain why your indirect costs are treated as overhead, and whether it would be possible to treat them as direct costs.

This is the end of Part Two of your course project. You will return to this document to complete Part Three later in the course.

Part Three – Hidden Drivers and Differences in Your Organization

Revisit the indirect costs you identified in Part Two of this project.

1. What overhead drivers does your organization use to allocate those costs to the product or service?

2. Are there different or additional drivers that should be used? In particular, what can you measure that is currently not being used to allocate overhead that could be revealed as a hidden driver in a two-stage costing system?

3. For drivers that are currently being used, or that you propose using, what are the most important differences you would want to reveal by creating separate pools to calculate different overhead rates for that driver in different situations?

This is the end of Part Three of your course project. You will return to this document to complete the final section at the end of the course.

Part Four – Who Would Gain and Who Would Lose in Your Organization?

Revisit the indirect costs and driver(s) you identified in Part Three of this project.

1. What types of products or services are currently being over- or under-costed?

2. Using more accurate costing means that some products or services will report lower costs and higher margins than under the current system, while others will report higher costs and lower margins than under the current system. Who would benefit and who would lose from the changes you propose?

3. What are the most important decisions that would be made more effectively given the improvements you propose?

When you have finished your work and saved this course project document, return to the course assignment page, “Course Project, Part Four” and follow the instructions for submitting this document to your instructor for review and grading.