cost accounting (ch. 1-5 table of contents)

7/29/2019 Cost Accounting (ch. 1-5 table of contents)

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Brian Moats


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TableofContents

CHAPTER1:THEACCOUNTANT'SROLEINTHEORGANIZATION 3

COSTACCOUNTING 3CHAPTER2:ANINTRODUCTIONTOCOSTTERMSANDPURPOSES 4COSTCLASSIFICATIONS 4OTHERTERMS 4EXERCISE17 4CHAPTER3:COSTVOLUMEPRODUCTANALYSIS 7NETINCOME--COMEDUCTANALYSIS/(1-T) 7SAMPLE 8CHAPTER4: 9EXAMPLES 9CHAPTER5:ACTIVITYBASEDCOSTINGANDACTIVITYBASEDMANAGEMENT 11ACTIVITYBASEDCOSTING 11#16ON164ABC 11ACTIVITYBASEDMANAGEMENT 12


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Chapter1:TheAccountant'sRoleintheOrganization

CostAccounting

Financial Accounting

o Purpose: For external users to make decisions.o Focus: Pasto Rules: GAAP (generally accepted accounting principles) (alternatives:

cost/benefit and materiality [big enough to make a difference])o Influence: Stockholders, creditors

Management Accountingo Purpose: For internal users to make decisions.o Focus: Futureo Rules: GAAP compliant (alternatives CPA audited and usually non-

GAAP)o Influence: Employees

Cost Accounting- provide information to both the groups above. They analyzedata, measure, and report it. It is used in strategy, planning, value chain, etc.

Success Factors:o Cost and Efficiency-o Quality-o Time-o Innovation-

5 Step Decision Making Process

o Identify the Problem and Uncertaintieso Obtain Informationo Make Predictionso Make Decisionso Implement the Decision, Evaluate Performance


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Chapter2:AnIntroductiontoCostTermsandPurposes Cost- is usually measured as the monetary amount that must be paid to acquire

goods or services. Actual Cost- is the cost incurred (a past cost) Budgeted Cost- is a predicted or forecast cost (a future cost) Cost Object- anything for which a measurement of costs is desired. Cost Accumulation- is a collection of cost data in some organized way by means

of an accounting system.

CostClassifications

Set 1

Direct Cost (traceable)- cost that can be tracked to a cost object. There is arelationship between it and the cost object. Like materials and labor for making aproduct.

oFor a chair, metal, plastics, and the labor to put them together. Screws andother cheap minor things arent included are included in this.

o Direct Materials- Metal, Plastic, etc.o Direct Labor- Assembly line technician.

Indirect Cost (allocated/applied)-o Indirect Materials- things like screws and small rubber pieces.o Indirect Labor- Plant manager, etc.

Set 2

Fixed Cost- Do not change with activity level.o The slope of this would be 0 (horizontal) on the graph.o Stay about the same unless looking at the value per unit. Basically rent is

10,000. If you look at this per unit, for 10 units, your rent per unit is 1,000.o This values only changes when you go beyond your relevant range (will

explain later). Variable Cost- costs that in total, change with change in activity. Stay same per

unit.o Cost to make an object is $10. To make one of that, it is $10. To make 10

of those, it is $100.o The slope of this would be a slanted line with either a positive or negative

slope on the graph.The two sets can be combined. Direct Fixed Cost, Direct Variable Cost, Indirect FixedCost, and Indirect Variable Cost.

OtherTerms Relevant Range- Cost Drivers-

Exercise171)Clay- Direct VariablePaint- Direct Variable


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Packaging Material- Direct VariableDepreciation on Machinery and Molds- Indirect FixedRent on Factory- Indirect FixedInsurance on Factory- Indirect FixedFactory Utilities- Indirect Variable

Painters- Direct VariablePainting Department Manager- Indirect FixedBaking Department Manager- Indirect FixedMaterials Handlers- Indirect Variable (fixed if on a salary)Custodian in Factory- Indirect FixedNight Guard in Factory- Indirect FixedMachinist- Indirect VariableMachine Maintenance personnel- Indirect FixedMaintenance supplies for factory- Indirect VariableCleaning Supplies for Factory- Indirect Variable (or direct depending)

2)Clay- Direct VariablePaint- Direct VariablePackaging Material- Direct VariableDepreciation on Machinery and Molds- Direct FixedRent on Factory- Indirect FixedInsurance on Factory- Indirect FixedFactory Utilities- Indirect VariablePainters- Direct VariablePainting Department Manager- Indirect FixedBaking Department Manager- Direct FixedMaterials Handlers- Indirect Variable (fixed if on a salary)Custodian in Factory- Indirect FixedNight Guard in Factory- Indirect FixedMachinist- Direct VariableMachine Maintenance personnel- Indirect FixedMaintenance supplies for Factory- Indirect VariableCleaning Supplies for Factory- Indirect Variable (or direct depending)

Manufacturing- Makes productso Their types of inventoryo Raw Materialso

W-I-P (work in progress)- products that are still in process and notcounted.o Finished goods inventory- things that are done and not sold.

Merchandising- Buys products to re-sale.o Merchandise Inventory- the stuff it sells.

Service- Sells Service.o

How do you manufacture create products (The process)?


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o Raw Materials (direct materials)- parts/pieces used that can beeconomically traced back to the product.

o Direct Labor- work being done directly to the producto Manufacturing Overhead (indirect labor/indirect

materials/utilities/insurance)- the cost that is important, but directly tied to

the product. Cleaning crew, electricity, plant manager, etc.

All cost in a factory is a Product Cost (inventory cost)o Inventory is an asset (given future benefit)o COGS are an expense.

Administration and Marketing are Period Expenses (no future benefit or value)->Expensed


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Chapter3:CostVolumeProductAnalysis The only things that will change CVP is the cost and something TC (total cost)= VC (variable cost) + FC (fixed cost) The relationship between revenues and units is linear. Assumption is that we are staying in our relevant range. If you sell different products, the marketing mix will stay the same. When Total Cost and Total Revenue lines cross, that point is the break even point.

o Above that point and in between those lines is the profit area.NetIncome(SPVC)QFC=TI/(1T)

Revenue Expenses = Net Incomeo Revenue = Selling Price (SP) x Quantity (Q)o Expense = FC + (VC x Q)o (SP x Q) (VC x Q) FC = NIo

Q(SP VC) FC = Income (SP-VC) is Contribution Margin per unit

o Q = (FC + I)/(SP-VC) Ex. SP = 10, VC = 5, FC= 100,000, find Q at break even point.

o (10-5)Q-100,000 = 0 (NI is 0 at break even point)o 5Q=100,000o Q=20,000 Unitso Q x SP = Qpriceo 20,000 x 10 = 200,000o Checkingo

Revenues Total VC = CM FC = Incomeo 200,000 5(20,000)= 100,000 100,000 = 0 (0 is break even value)

Ex. SP = 10, VC = 5, FC= 100,000, find Q at 100,000 target income.o (10-5)Q-100,000=100,000o 5Q=200,000o Q = 40,000 units

To figure out how to implement this formula with tax consideration, just changeNI to

o TI / (1-T) TI= Target income and T is Tax rate.o Example: TI = 100,000 and T = .5o Then TI/ (1-T) = 100,000/.5=200,000o Soo 5Q=200,000+100,000o Q=60,000 units


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SAMPLE#22 homework(8-3.2)Q 450,000 = 105,000 / (1-.3)Q = 125,000To check

Contribution Marginal Income StatementRevenue Total VC = CM FC = TI Taxes = NI1,000,000 400,000 = 600,000 450,000 = 150,000 (150,000 x .3) = 105,000

When asked forNet Income, you include the tax part.When asked about Target Income, you dont include the tax part.

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Revenue 1,500,000Total VC 900,000CM 600,000FC 600,000Income -0-

Given $15 VC per unitVC x Q = TVC900,000/ 15 = 60,000 units

1,500,000 / 600,000 = $25 per unit for Sales Price

Suppose 80,000 are sold. Compute the margin of safety (basically beyond breakeven)(80,000 60,000) x 25 = 500,000

^Breakeven

Extra Things on Test

DM Direct MaterialDL Direct LaborPrime Cost = DM + DLOvHd Overhead

Conversion Cost = DL + OvHd


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Chapter4:Insert 2/6/09 notes.

Job Order Costing- special orders.

Process Costing- large orders of the same product.

Tracing costs to a producto DM and DL can be traced per unit.o Overhead is allocated (it is applied).

Cost Pool- take cost objects and put them together. Gas, electric, water, etc. pooled together to be utilities.

Cost Allocationo Take overhead and allocate to what we are put cost on. (budgeted)Estimated Overhead / Budgeted Cost Driver

Cost Driver- whatever makes the cost happen. When dealing with manufacturing a product, you use 1 of 2

things as a cost driver.o Direct Labor (if you have a lot of hands on labor)

By the Hours. Cost paid to people.

o Machine Hours (if you have more machines doingthe work.

Cost of machines

Overhead costs vary in time frames a lot so you dont know theexact number until the end of the year.

o Actual DM, Actual DL, and Actual Overhead become Actual Costingwhen put together.

o Actual DM, Actual DL, and Allocated Overhead becomes Normal Costwhen put together.

Examples#16a) Job Costingb) Processc) Job Costingd) Processe) Jobf) Processg) Job

h) Usually Process withexception.

i) Processj) Processk) Jobl) Jobm)Processn) Job

o) Jobp) Jobq) Jobr) Processs) Jobt) Processu) Job


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#17a) Actual Manufacturing Overhead = Actual Ovhd/Actual Labor =

2,755,000/1,450,000a. 1.9 = 190%

b) Budgeted Manufacturing Overhead = Budgeted Ovhd/budget labor =2,700,000/1,500,000a. 1.8 = 180%

c) Finish Part 2 for Homework. Do the actual and normal.a. Given: Actual Normalb. DM 40,000 40,000c. DL 30,000 30,000d. Ovhd=laborx1.9 57,000 54,000 = laborx1.8e. Total Cost 127,000 124,000

d) Compute over and under cost.a. Compare actual overhead to budgeted (allocated) overhead.b. Budgeted Labor was 1,450,000 x 1.8 = 2,610,000 (actual labor cost x budgeted %)c.

Budgeted Labor was = 2,755,000d. Difference - 145,000

e. Since the difference is -145,000 they under allocated their cost. Thismeans during the year they didnt allocate their cost enough to truly covertheir actual cost.

f. DM+DL+OH=Product Cost => Finished Goods Inv. => COGS (expense)g. Because of this, the under allocation means you need to increase COGS to

make up the difference.i. If it were over, you would decrease the COGS.

ii. If it was over by 10%, you would need to distribute it betweenWIP, FG inv, and COGS.


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Chapter5:ActivityBasedCostingandActivityBased

Management Over the last 20 years, technology changes (machines doing more work) and more

globalization has changed the way cost accounting is handled. In originally in cost accounting, you can either under or over estimate the cost of

making a product.o Under estimating means that you want to sell more of the product to make

up for the expected cost.o Over is the inverse.

We used to throw all the overhead into one pool, just overhead.ActivityBasedCosting

In Activity Based Costing, we break down the overhead and try to find what is thecost driver in those areas.

You still have 3 categories of cost (direct labor, direct material, and overhead), butoverhead may be in multiple categories.

o Overhead broken up into things like rent, electricity, and supervisor salary.o Cost driver for these are as such:

Electricity, something like machine hours since they use theelectricity.

Supervisor salary, something like open days and hours. Rent, months.

ABC is based on a hierarchy:o Unit Level (output level)

Lowest level. Based on how many units you make. Depreciation for machines isoften in this category.

o Batch Level Cost that come from a group of units and products. Cost of redoing

machines to handle different variety of products. Machine setups are in this category.

o Product-Sustaining Level Supports the product no matter how many you make. Designers and engineers are in this category since they are paid not

based on unit numbers.o Facility-sustaining Level

Cost that support organization as a whole. President, Marketing, Main Copier, etc. is in this area. Broadest level.

By using multiple cost pools and drivers, it should be betterbut it can be harderand isnt always perfect.

#16on164ABCa) Unit Level


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b) Batch Levelc) Batch Level Indirect materialsd) Batch Levele) Product-Sustaining Levelf) Unit Levelg)

Facility-Sustaining Level

ActivityBasedManagement Management uses ABC in decisions like pricing decisions, product mix decision

(how many of their different products do they make), reduce cost, and ways toimprove processes (improving quality).

ABC is also used for design decisions. Even though product designs can be great,it could also be too expensive.

Also used for product management activities. There are signals that tell a business that they need to implement ABC:

o They realize they have these big cost pools that are based on ____ costdrivers.

o When they are trying to allocate on unit level (which doesnt really work).o If you make products that consumer different levels of inputs (resources).o Management finds a product that they should be able to make large profit

from, they are ..o Find that the operation staff and accounting has conflicts on the costs of

manufacturing.

cost accounting (ch. 1-5 table of contents)

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