March 24, 2016, Prof. Jacob Cohen came to Fudan University School of Management again and gave a MIT Lecture about managerial accounting-cost allocation system.
Prof. Jacob Cohen is a Senior Lecturer in Accounting and Law and Associate Dean for Undergraduate and Master’s Programs at the MIT Sloan School of Management. He is also an old friend of FDSM. What he taught last year about accounting still remained in students’ memory and they were excited about having the chance to attend his lecture again.
He began by introducing the definition of managerial accounting, which is also called cost accounting. “The COGS mainly includes three items: direct material, direct labor and manufacturing overhead. We will focus on manufacturing overhead this time” he said. He introduced the so called “Death Spiral” condition with a simple case named “Youngstown Products”. In this case, Company Youngstown produces four products A, B, C and D. According to the calculation, product A was losing money while other three were making money. “If you are a manager of this company, it seems reasonable to cut product A lose.” Professor said. But after removing product A and recalculated the profit margin, students found that product B turned to lose money right now while others’ profit margin dropped dramatically. Then if they keep cutting unprofitable product, at the end, there would be no profitable product at all! Prof. Jacob explained “This condition, the death spiral, came out when the burden rate kept going up which caused by the decrease of cost driver, which is DLH in this case. In order to avoid death spiral, managers need to use practical capacity versus actual capacity.”
“How to use practical capacity in real case? Using Activity Based Costing!” Prof. Jacob introduced this concept by telling a story of his teacher who created this concept. “The amazing thing is that as an accounting professor, actually he did not learn accounting in university. He kept asking himself about actual content of cost instead of simply accept it.” The Activity Based Costing consists of 6 steps, including identification of material activities in the organization, identification of the total amount spent on these activities, identification of activity drivers, identification of the amount associated with the activity driver, calculation of activity burden rate, and finally allocation.
Prof. Jacob provided a case for the students in the classroom to practice the theory of Activity Based Costing and explain the application scenario and limitation of this theory.
“His lecture is always so fascinating because he explained profound theories in simple language and bring dozens of insight to us”, one of the student said after his lecture. ” It’s our pleasure to attend his lecture!”
Written by 2015 IMBA WANG Huixiong
March 31th, 2016
