4
Planning Deals with the estimation of
product costs, setting up of costing system to record cost data, preparation of cost standards and budgets, planning of materials and manpower resources, analysing cost behavior with changes in levels of activity
5
Control Deals with the maintenance of
product costing record, comparison of actual performance with standards or budgets, anlaysis of variances, recommendation of corrective actions, controlling cost to ensure operational efficiency and effectiveness
6
Decision-making Deals with whether it is more
profitable to make or buy a component, determine the economic order quantity and production batch size, replace fixed asset, add or drop products, decide pricing
7
Application Cost accounting has extended
from manufacturing operations to a variety of service industries such as hotels, bands, airline, etc
Cost accounting system should be flexible and adaptable to meet the new business environment and the changing nature of the company
9
Financial Accounting
Financial accounting measures and records business transactions and provides financial statements that are based on Generally Accepted Accounting Principles (GAAP)
Managers are responsible for the financial statements issued to investors, government regulators, and other parties outside the organization
Financial accounting focuses on external parties
Financial accounting reports on what happened in the past
10
Financial accounting Provides information to users who
are external to the business It reports on past transactions to
draw up financial statements The format are governed by law
and accounting standards established by the professional accounting policies
11
Cost Accounting
Cost accounting measures and reports information relating to the cost of acquiring and utilizing resources
Cost accounting provides information for management and financial accounting
Cost management describes the approaches and activities of managers in short-run and long-run planning and control decisions
These decisions increase value of customers and lower costs of products and services
Cost management is an integral part of a company’s strategy
12
Cost accounting Is concerned with internal users of
accounting information, such as operation managers
The generated reports are specific to the requirement of the management
The reporting can be in any format which suits the user
13
Cost Accounting
It provides information for both management accounting and financial accounting.
It measures and reports from financial and non financial data.
14
Management accounting Comprises all cost accounting
functions The accounting for product and
service costs, management accounting extends to use various internal accounting reports for planning, control and decision making
15
Cost and management accounting Provides management with costs
for products, inventories, operations or functions and compares actual to predetermined data
It also provides a variety of data for many day-to-day decision as well as essential information for long-range decisions
16
Functions of managerial accounting Determining the cost Providing relevant information for
better decision-making Providing information for planning,
control, decision-making and application
18
Management (cost)accounting
Financial accounting
Nature Records material, labour and overhead costs in product or jobReports produced are for internal management and contol
Records company transaction eventsExternal financial statements are produced
Accounting system
Not based on the double entry system
Follows the double entry system
19
Management (cost)accounting
Financial accounting
Accounting principles
No need to use accounting principlesAdopt any accounting techniques that generates useful accounting information
Use Generally Accepted Accounting Principles for recording transactions
Users of information
Used by different levels of management or departments responsible for respective activities
Used by external parties: shareholders, creditors, government, etc
20
Management (cost)accounting
Financial accounting
Operation guidelines or standards
Based on management instructions and requirements
Conforms to company Ordinances, stock exchange rules, HKSSAPs
Time span
Reports are prepared whenever neededThey may be prepared on a weekly or daily basis
Reports are prepared for a definite period, usually yearly and half yearly
21
Management (cost)accounting
Financial accounting
Time focus
Future orientation: forecasts, estimates and historic data for management actions
Past orientation: use of historic data for reporting and evaluation
Perspective
Detailed analysis of parts of the entity, products, regions, etc
Financial summary of the whole orgainisation
23
Management accounting
Cost accounting
Objective To provide information for planning and decision making by the management
To ascertain and control cost
Basic of recording
Concerned with transactions related to the future
Based on both present and future transactions for cost ascertainment
24
Management accounting
Cost accounting
Coverage Covers a wider area: financial accounts, cost accounts, taxation, etc.
Covers matters relating to ascertainment and control of cost of product or service
Utility Only the needs of internal management
The needs of both internal and external interested groups
25
Management accounting
Cost accounting
Types of transactions
Deals with both monetary any non-monetary transactions, covering both quantitative and qualitative aspects
Deals only with monetary transactions, covering only quantitative aspect
Chapter 2Basic Cost Terminology
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Cost—sacrificed resource to achieve a specific objective
Actual cost—a cost that has occurredBudgeted cost—a predicted costCost object—anything of interest for which
a cost isdesired
Cost Object Examples at BMW
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Cost Object IllustrationProduct BMW X 5 sports activity vehicleService Dealer-support telephone hotlineProject R&D project on DVD system
enhancementCustomer Herb Chambers Motors, a dealer that
purchases a broad range of BMW vehicles
Activity Setting up production machinesDepartment Environmental, Health and Safety
Basic Cost Terminology
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Cost accumulation—a collection of cost data in an organized manner
Cost assignment—a general term that includes gathering accumulated costs to a cost object. This includes:Tracing accumulated costs with a direct
relationship to the cost object andAllocating accumulated costs with an indirect
relationship to a cost object
Direct and Indirect Costs
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Direct costs can be conveniently and economically traced (tracked) to a cost object.
Indirect costs cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner.
Cost Examples
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Direct CostsPartsAssembly line
wagesIndirect Costs
ElectricityRentProperty taxes
Factors Affecting Direct/Indirect Cost Classification
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Cost materialityAvailability of information-gathering
technologyOperational design
Cost Behavior
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Variable costs—changes in total in proportion to changes in the related level of activity or volume.
Fixed costs—remain unchanged in total regardless of changes in the related level of activity or volume.
Costs are fixed or variable only with respect to a specific activity or a given time period.
Cost Behavior
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Variable costs are constant on a per-unit basis. If a product takes 5 pounds of materials each, it stays the same per unit regardless if one, ten, or a thousand units are produced.
Fixed costs change inversely with the level of production. As more units are produced, the same fixed cost is spread over more and more units, reducing the cost per unit.
Other Cost Concepts
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Cost driver—a variable that causally affects costs over a given time span
Relevant range—the band of normal activity level (or volume) in which there is a specific relationship between the level of activity (or volume) and a given costFor example, fixed costs are considered fixed
only within the relevant range.
Multiple Classification of Costs
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Costs may be classified as:Direct/Indirect, andVariable/Fixed
These multiple classifications give rise to important
cost combinations:Direct and variableDirect and fixedIndirect and variableIndirect and fixed
Total Costs and Unit Costs
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Unit costs should be used cautiously. Because unit costs change with a different level of output or volume, it may be more prudent to base decisions on a total dollar basis.Unit costs that include fixed costs should
alwaysreference a given level of output or activity.
Unit costs are also called average costs.Managers should think in terms of total costs
ratherthan unit costs.
Different Types of Firms
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Manufacturing-sector companies purchase materials and components and convert them into finished products.
Merchandising-sector companies purchase and then sell tangible products without changing their basic form.
Service-sector companies provide services (intangible products).
Types of Manufacturing Inventories
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Direct materials—resources in-stock and available for use
Work-in-process (or progress)—products started but not yet completed, often abbreviated as WIP
Finished goods—products completed and ready for
sale
Types of Product Costs
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Also known as inventoriable costsDirect materials—acquisition costs of all
materials that will become part of the cost object.
Direct labor—compensation of all manufacturing labor
that can be traced to the cost object.Indirect manufacturing—factory costs that are
not traceable to the product in an economically feasible way. Examples include lubricants, indirect manufacturing labor, utilities, and supplies.
Accounting Distinction Between Costs
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Inventoriable costs—product manufacturing costs.
These costs are capitalized as assets (inventory) until they are sold and transferred to Cost of Goods Sold.
Period costs—have no future value and are expensed in the period incurred.
Cost of Goods Manufactured
STEP 1
STEP 3
STEP 2
PANEL B: COST OF GOODS MANUFACTUREDCellular Products
Schedule of Cost of Goods Manufactured*For the Year Ended December 31, 2011 (in Thousands)
Direct materials:Beginning inventory, January 1, 2011 $11,000Purchases of direct materials $73,000Cost of direct materials available for use $84,000Ending inventory, December 31, 2011 $8,000
Direct materials used $76,000Direct manufacturing labor $9,000Manufacturing overhead costs:
Indirect manufacturing labor $7,000Supplies $2,000Heat, light, and power $5,000Depreciation-plant building $2,000Depreciation-plant equipment $3,000Miscellaneous $1,000
Total manufacturing overhead costs $20,000Manufacturing cost incurr3ed during 2011 $105,000Beginning work-in-progress inventory, January 1, 2011 $6,000Total manufacturing costs to account for $111,000Ending work-in-progress inventory, December 31, 2011 $7,000Cost of goods manufactured (to income Statement) $104,000* Note that this schedule can beco me a Schedule of Cost of Goo ds M anufactured and So ld simply by including the beginning and ending finished go o ds invento ry figures in the suppo rting schedule rather than in the bo dy of the inco me statement.
Multiple-Step Income Statement
STEP 4
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PANEL A: INCOME STATEMENTCellular ProductsIncome Statement
For the Year Ended December 31, 2011 (in thousands)Revenues $210,000Costs of goods sold:
Beginning finished goods inventory, January 1, 2011 $22,000Costs of goods manufactured (see Panel B) $104,000Costs of goods available for sale $126,000
Ending finished goods inventory, December 31, 2011 $18,000Cost of goods sold $108,000
Gross margin (or gross profit) $102,000Operating costs
R&D, design, mktg., dist., & cust.-service cost $70,000Total operating costs $70,000
Operating income $32,000
Other Cost Considerations
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Prime cost is a term referring to all direct manufacturing costs (materials and labor).
Conversion cost is a term referring to direct labor and indirect manufacturing costs.
Overtime labor costs are considered part of indirect
overhead costs.
Different Definitions of Costs for Different Applications
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Pricing and product-mix decisions—decisions about pricing and maximizing profits
Contracting with government agencies—very specific definitions of allowable costs for “cost plus profit” contracts
Preparing external-use financial statements—GAAP- driven product costs only
Different Definitions of Costs for Different Applications
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A Five-Step Decision-Making Process inPlanning and Control Revisited
1. Identify the problem and uncertainties2. Obtain information3. Make predictions about the future4. Make decisions by choosing between
alternatives, using cost-volume-profit (CVP) analysis
5. Implement the decision, evaluate performance, and
learn
Foundational Assumptions in CVP
Changes in production/sales volume are the sole cause for cost and revenue changes.
Total costs consist of fixed costs and variable costs.
Revenue and costs behave and can be graphed as a
linear function (a straight line).Selling price, variable cost per unit, and fixed
costs are all known and constant.In many cases only a single product will be
analyzed. If multiple products are studied, their relative sales proportions are known and constant.
The time value of money (interest) is ignored.
CVP: Contribution Margin
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Manipulation of the basic equations yields an extremely important and powerful tool extensively used in cost accounting: contribution margin (CM).
Contribution margin equals revenue less variable
costs.Contribution margin per unit equals unit
selling price less unit variable costs.
Contribution Margin
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Contribution margin also equals contribution margin per unit multiplied by the number of units sold.
Contribution margin percentage is the contribution margin per unit divided by unit selling price.
Cost–Volume–Profit Equation
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Revenue – Variable Costs – Fixed Costs = Operating Income
Selling
Sales
Price
Quantity
*( ) (
)*Unit-
Varia
bleCosts
SalesQuantit
y
- Fixed Costs
= Operating Income
Breakeven PointAt the breakeven point, a firm has no profit or loss at the given sales level.
Sales – Variable Costs – Fixed Costs = 0Calculation of breakeven number of units
Breakeven Units = Fixed Costs__
Contribution Margin per Unit
Calculation of breakeven revenuesBreakeven Revenue = Fixed Costs_
_Contribution Margin Percentage
Costing ApproachesActual costing—allocates:
Indirect costs based on the actual indirect-cost rates times the actual activity consumption.
Normal Costing—allocates:Indirect costs based on the budgeted indirect-cost
rates times the actual activity consumption.Both methods allocate direct costs to a cost
object the same way: by using actual direct-cost rates times actual consumption.
…logically extendedCost pool—any logical grouping of related
cost objectsCost-allocation base—a cost driver is
used as a basis upon which to build a systematic method of distributing indirect costs.For example, let’s say that direct labor hours cause
indirect costs to change. Accordingly, direct labor hours will be used to distribute or allocate costs among objects based on their usage of that cost driver.
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