Cost accounting systems
provide information to help managers make better decisions.
a sacrifice of resources. The price of each item measures the sacrifice we must make to acquire it.
a cost charged against revenue in an accounting period.
The focus on cost accounting is on
costs, not expenses.
Two Major categories of costs
outlay costs and opportunity costs
a past, present, or future cash flow.
forgone benefit that could have been realized from the best forgone alternative use of a resource.
excess of operating revenues over the operating costs necessary to generate those revenues.
Three types of income statements where the organization sell (what we focus on)
Service, Product that it acquires from anther organization (retailer), A product that it builds using materials from other organization (manufacturer)
provides customers an intangible product. While retail and wholesale companies sell but do not make intangible products, also they have additional information which is cost of goods sold.
Cost of goods sold
expense assigned to products sold during a period.
costs assigned to the manufacture of products and recognized for financial reporting when sold.
costs recognized for financial reporting when incurred.
Two types of product costs
direct manufacturing costs and indirect manufacturing costs
Direct manufacturing costs
product costs that can be feasibly identified with units of production.
Indirect manufacturing costs
all product costs except direct costs.
Direct costs are classified further into
direct materials cost and direct labor costs:
materials that can be identified directly with the product at reasonable cost
labor that can be identified directly with the product at reasonable cost
all production costs except those for direct labor and direct materials. Such as indirect labor, indirect materials and other manufacturing costs
Two categories of cost in manufacturing
prime and conversion costs
sum of direct materials and direct labor
sum of direct labor and manufacturing overhead
Two elements of nonmanufacturing costs
marketing costs and administrative costs
costs required to obtain customer orders and provide customers with finished products, including advertising, sales commissions, and shipping costs
costs required to manage the organization and provide staff support, including executive salaries, costs of data processing and legal costs
Nonmanufacturing costs are expensed
process of assigning indirect costs to products, services, people, business units, etc
any end to which a cost is assigned
collection of costs to be assigned in the cost objects
Cost allocation rule
method used to assign costs in the cost pool to the cost objects
Cost flow diagram
diagram or flowchart illustrating the cost allocation process.
any cost that can be directly (unambiguously) related to a cost object at reasonable cost.
any cost that cannot be directly related to a cost object.
Work in process
product in the production process but not yet complete
product fully completed but not yet sold.
costs added to inventory accounts.
costs that are unchanged as volume changes within the relevant range of activity
costs that change in direct proportion with a change in volume within the relevant range of activity
activity levels within which a given total fixed cost or unit variable cost will be unchanged
Semi variable cost
cost that has both fixed and variable components; also called mixed costs.
cost that increases with volume in steps; also called semi fixed costs
sum of all costs of manufacturing and selling a unit of product (includes both fixed and variable costs)
Full absorption cost
all variable and fixed manufacturing costs; used to compute a product's inventory value under GAAP
revenue minus cost of goods sold on income statements. Per unit, the gross margin equals sales price minus full absorption cost per unit.
sales price minus variable costs per unit
How to make cost information more useful for managers
full absorption costing, variable costing, and managerial costing
Full absorption costing
all fixed and variable costs are product costs, all others are period costs
only variable manufacturing costs are product costs, others are period costs
assumes that management determines which costs are associated with the product and should be considered product costs
Cost management system
system to provide information about the costs of process, products, and services used and produced by an organization.
The following three points relate to designing a new cost system for managerial purposes
Cost systems should have a decision focus, Different cost information is used for different purposes and Cost information for managerial purposes must meet the cost benefit test
Basic Cost Flow Model (basic inventory equation)
Beginning Balance + Transfers In - Transfers Out = Ending Balance
Predetermined Overhead Rate
cost per unit of the allocation base used to charge overhead to products.
Predetermined Overhead Rate
equals Estimated Overhead / Estimated Allocation Base
Two Stage Cost Allocation
process of first allocating costs to intermediate cost pools and then to the individual cost objects using different allocation bases
unit of a product that is easily distinguishable from another units
accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods.
accounting system used when identical units are produced through a series of uniform production steps
Continuous flow processing
system that mass produces a single, homogeneous output in a continuing process
hybrid costing system often used in manufacturing goods that have some common characteristics plus some individual characteristics
standardized method or technique that is repetitively performed
unit of a product that is easily distinguishable from other units
firm that produces jobs
Job cost sheet
record of the cost of the job kept in the accounting system
Subsidiary ledger account
account that records financial transactions for a specific customer, vendor or job
account in the general ledger that summarizes a set of subsidiary ledger accounts
excess of actual overhead costs incurred over applied overhead costs
excess of applied overhead costs incurred over actual overhead during a period.
cost of job determined by actual direct material and labor cost plus overhead applied using a predetermined rate and an actual allocation base
cost of job determined by actual direct material and labor cost plus overhead applied using an actual overhead rate and an actual allocation base
cost of job determined by standard (budgeted) direct material and labor cost plus overhead applied using a predetermined overhead rate and a standard (budgeted) allocation base.
complex job that often takes months or years to complete and requires the work of many different departments, divisions or subcontractors
number of complete physical units to which units in inventories are equal in terms of work done to date. A number of physical units multiplied by the estimated percentage that an "average" unit in inventory is "complete" with respect to the individual resource.
Five Steps to determining equivalent units
1) measure the physical flow of resources, 2) compute the equivalent unit of production, 3) identify the product costs for which to account, 4) compute the costs per equivalent unit: weighted average, 5) assign product cost to batches of work (Weighted Average Process Costing
Beginning WIP inventory + Units Started = Units Transferred Out + Ending WIP
weighted-average process costing
inventory method that for product costing purposes combines costs and equivalent units of a period with the costs and the equivalent units in the beginning inventory.
first in, first out (FIFO) process costing
inventory method whereby the first goods received are the first one charged out when sold or transferred. keeps the costs and the work separate and, in effect, computes separate unit costs for the two periods
production cost report
report that summarizes production and cost results for a period; generally used by managers to monitor production and cost flows.
Assigning Costs Using First-in, First-Out (FIFO) Process Costing
A disadvantage of weighted average costing is that it mixes current period costs with the costs of product in beginning inventory, making it impossible for managers to know how much it cost to make a product THIS PERIOD.
purpose of presenting the T-accounts is to give you an overview of the cost flows associated with the process costing computations.
Determining Which is Better: FIFO or Weighted Average
Either methods are acceptable for assigning costs to inventories and cost of goods sold. Weighted average has been criticized for masking current period costs. If computational and record keeping costs are about the same under both FIFO and weighted average, FIFO costing generally offers greater decision making benefits
Prior Department costs
manufacturing costs incurred in one department and transferred to a subsequent department in the manufacturing process
costs are collected for each unit produced. Process costing accumulates costs in a department for an accounting period and then spreads them evenly, or on an average basis, over all units produced that period. process costing assumes that each unit produced is relatively uniform.
has less detailed recordkeeping, so it is cheaper than job costing. But still does not provide as much information as job costing does. Job costing records the cost of each unit produced. the choice of process versus job costing system involves a comparison of the costs and benefits of each system as well as the production process being utilized.
hybrid costing system used in manufacturing goods that have some common characteristics and some individual characteristics
standardized method of making a product that is repeatedly performed.
operation costing is used in
manufacturing goods that have some common characteristics plus some individual characteristics.
The key difference between operation costing and the two methods
is that for each work order or batch passing through a particular operation, direct materials are different but conversion costs (direct labor and manufacturing overhead) are the same.
Operation costing system assigns
materials cost to the specific products for which the underlying materials are used.
process that begins by attempting to increase price to meet reported product costs, losing demand, reporting still higher costs, and so on until the firm is out of business. Can begin in many ways, but easy to avoid.
Two-Stage Cost Allocation
the basic approach in product costing is to allocate costs in the cost pool to the individual cost objects, which are the products or services of interest. we assign, or allocate, these costs to the individual cost objects by using appropriate cost allocation bases or cost drivers.
plantwide allocation method
allocation method that uses one cost pool for the entire plant by using one overhead allocation rate, or one set of rates, for all of a plant's departments
Department Allocation Method
allocation method that has a separate cost pool for each department, which has its own overhead allocation rate or set of rates
A Cost-Benefit Decision
the choice of whether to use a plantwide rate or departmental rates depends on the products and the production process. If the company manufactures products that are quite similar and that use the same set of resources, the plantwide rate is probably sufficient. if multiple products use the manufacturing facilities in many different ways, departmental rates provide a better picture of the use of manufacturing resources by the different products.
Activity based costing (ABC)
costing method that first assigns costs to activities and then assigns them to products based on the products' consumption of activities.
factor that causes, or "drives" an activity's costs
Activity based costing involves the following four steps
1)identify the activities 2)identify the cost drivers associated with each activity 3)compute a cost rate per driver unit or transaction 4)assign costs to products by multiplying the cost driver rate by the volume of cost driver units consumed by the product.
classification of cost drivers into general levels of activity, such as volume, batch, or product
is the first step in the budgetary planning and control cycle. The budgeting process provides a means to coordinate activities among units of the organization, to communicate the organization's goals to individual units, and to ensure that adequate resources are available to carry out the planned activities.
Master budget is typically set up before
the beginning of the accounting period, common to be revised during.
budgeted income statement, production budget, budgeted cost of goods sold, and supporting budgets.
budgets of financial resources, such as the cash budget and the budgeted balance sheet.
Two parts of master budget are
operating and financial budgets
difference between planned result and actual outcome. Uses this difference to evaluate the performance of individuals and business units and identify possible sources of deviations between budgeted and actual performance.
variance that, taken alone, results in an addition to operating profit
variance that, taken alone, reduces the operating profit.
budget for a single activity level; usually the master budget
budget that indicates revenues, costs, and profits for different levels of activity, including the ex post actual activity level
flexible budget line
expected monthly costs at different output levels.
sales activity variance
difference between operating profit in the master budget and operating profit in the flexible budget that arises because the actual number of units sold is different from the budgeted number; also known as sales volume variance
Profit Variance Analysis as a Key Tool For
profit variance analysis
analysis of the causes of differences between budgeted profits and the actual profits earned.
sales price variance
difference between the actual revenue and actual units sold multiplied by budgeted selling price.
Fixed costs are treated as
period costs, should not be affected by activity levels within a relevant range. That is why fixed costs is always the same in the master and flexible budgets
Marketing and Administrative costs are treated like
production costs. Variable costs are expected to change as activity changes.
standard cost sheet
form providing standard quantities of inputs used to produce a unit of output and the standard prices for the inputs.
cost variance analysis
comparison of actual input amounts and prices with standard input amounts and prices
difference between actual costs and budgeted costs arising from changes in the cost of inputs to a production process or other activity
difference between budgeted and actual results arising from differences between the inputs that were budgeted per unit of output and the inputs actually used.
total cost variance
difference between budgeted and actual results (equal to the sum of the price and efficiency variances)
flexible production budget
standard input price times standard quantity of input allowed for actual good output
The direct labor price variance is caused by
the difference between actual and standard labor costs per hour.
LABOR EFFICIENCY VARIANCE is a measure of
labor productivity. it is one of the closely watched variances because production managers usually can control it.
spending (budget) variance
price variance for fixed overhead
production volume variance
variance that arises because the volume used to apply fixed overhead differs from the estimated volume used to estimate fixed costs per unit. also called "capacity variance", "idle capacity" or a "denominator variance"
an accounting method that assigns costs to cost objects at predetermined amounts
Cost volume profit (CVP) analysis
study of the relations among revenue, cost, and volume and their effect on profit.
operating profit equals total revenue less total costs
Unit contribution margin
difference between revenues per unit (price) and variable cost per unit
Total contribution margin
difference between revenues and total variable costs
volume level at which profits equal zero
Contribution margin ratio
contribution margin as a percentage of sales revenue
Profit volume analysis
version of CVP analysis using a single profit line
proportion of an organization's fixed and variable costs to its total costs
extent to which an organization's cost structure is made of fixed costs
Margin of safety
the excess of projected or actual sales over the break even volume
Margin of safety percentage
the excess of projected or actual sales over the break even volume expressed as a percentage of actual sales volume
process of estimating revenues and costs of alternative actions available to decision makers and of comparing these estimates to the status quo
period of time over which capacity will be unchanged, usually one year
with two or more alternatives, costs that differ among or between alternatives
costs incurred in the past that cannot be changed by present or future decisions
sum of all fixed and variable costs of manufacturing and selling an unit
order that will not affect other sales and is usually a short run occurrences
Product life cycle
time from initial research and development to the time that support to the customer ends
price based on customers' perceived value for the product and the price that competitors charge
equals the target price minus the desired profit margin
practice of setting price below cost with the intent to drive competitors out of business
exporting a product to another country at a price below domestic cost
practice of selling identical goods to different customers at different prices
Peak load pricing
practice of setting prices highest when the quantity demanded for the product approaches capacity
agreement among business competitors to set prices at a particular level
Make or buy decisions
decision concerning whether to make needed goods internally or purchase them from outside sources
activity, resource, or policy that limits or bounds the attainment of an objective
Contribution margin per unit of scarce resource
contribution margin per unit of a particular input with limited availability
Theory of constraints (TOC)
focuses on revenue and cost management when faced with bottlenecks
operation where the work required limits production
sales dollars minus direct materials costs and variables such as energy and piecework labor
cost estimate based on measurement and pricing of the work involved in a task
cost estimation method that calls for a review of each account making up the total cost being analyzed
limits within which a cost estimate may be valid
graph that plots costs against activity levels
High low cost estimation
method to estimate costs based on two cost observations, usually at the highest and lowest activity levels
statistical procedure to determine the relation between variables
x term, or predictor, on the right hand side of a regression equation
y term, or the left handed side of a regression equation
measure of the linear relation between two or more variables, such as cost and some measure of activity
Coefficient of determination
square of the correlation coefficient, interpreted as the proportion of the variation in the dependent variable explained by the independent variables
t is the value of the estimated coefficient, b, divided by its standard error
Adjusted R squared
correlation coefficient squared and adjusted for the number of independent variables used to make the estimate
the systematic relationship between the amount of experience in performing a task and the time required to perform it