Cost Accounting PDF

Chapter 1 1. Management accounting- measures, analyses and reports financial and nonfinancial information Internal target audience (managers) Help managers in planning, decision-making, and risk-management Focused on the future (budgets, forecasts) Not limited to...

Chapter 1 1. Management accounting- measures, analyses and reports financial and nonfinancial information Internal target audience (managers) Help managers in planning, decision-making, and risk-management Focused on the future (budgets, forecasts) Not limited to financial information (e.g. explanations to support the data) Not GAAP compliant 2. Cost accounting – measures, analyses and reports costs of acquiring or using resources Part of the information collected by management accountants to make management decisions Strategic cost management – cost management that focuses on strategic issues 3. Value chain R&D -> Design -> Production -> Marketing -> Distribution -> Customer service Production and distribution make up the supply chain 4. Decision-making process 1) Identify the problem  2) Obtain information 3) Predictions about the future 4) Decision by choosing alternatives 5) Implement 5. Planning The most important planning tool when implementing a strategy is a budget 1) Selecting goals and strategies 2) Predicting results under various alternatives 3) Deciding how to attain the desired goals 4) Communicating the goals and how to achieve them 6. Control 1) Taking actions on planning decisions 2) Evaluating results 3) Providing feedback  7. Management accounting guidelines – 3 guidelines provide the most value to the decision-making Cost-Benefit approach – compares the benefits of the actions to their costs Behavioral and technical considerations recognize that management is a human activity that should focus on encouraging individuals to do their job better Alternative ways to compare costs in different decision-making situations 8. Institute of Management Accountants (IMA) has advanced 4 standards of ethical conduct Competence Confidentiality Integrity Credibility Chapter 2 1. Principles of costs Cost – a sacrifices or forgone resource to achieve a specific objective Actual cost – a cost that has occurred\ Budget cost – predicted cost Cost object – anything for which a cost measurement is desired (e.g. product, project, or department) Cost accumulation – helps in identifying the total cost of producing a product or providing a service. Cost assignment – gathering of accumulated costs to a cost object in 2 ways - Tracing costs with direct relationship to the cost object - Allocating costs with an indirect relationship to a cost object - e.g. the furniture manufacturer assigns the accumulated costs to different types of furniture (chairs, tables, cabinets). Direct costs like wood and wages are directly assigned, while indirect costs like rent and utilities are allocated based on the production volume or machine hours used. Cost drivers - factors or activities that cause costs to be incurred (activity, volume, etc.) 2. Types of costs Direct costs – can be conveniently and economically traced to a cost object - Material - Labor  - Freight-in (shipping) Indirect costs – Indirect costs are expenses that cannot be directly traced to a single cost object. Instead, they benefit multiple cost objects and are often shared across various departments or projects. - Electricity - Rent - Property taxes - Plant administration expenses Fixed costs – remain unchanged for a given time period despite the activity changes in the organization Variable costs – change depending on the production Relevant range - The relevant range is the span of activity levels or volume in which the assumptions about cost behavior hold true. Within this range, costs are assumed to behave in a predictable manner—typically, fixed costs remain constant, and variable costs change in direct proportion to activity levels. 3. Sectors Manufacturing Merchandise Services 4. Inventory Direct materials – resources in stock and available for use Work-in-progress – goods partially worked on Finished goods Prime costs – all direct costs (labor and materials) Conversion costs - the expenses incurred to convert raw materials into finished goods. These costs include both direct labor and manufacturing overhead. Essentially, they are the costs associated with transforming materials into a final product. Overtime Premium - labor costs as part of indirect overhead costs. Idle Time - wages paid for unproductive time caused by lack of orders, machine or computer breakdown, work delays, poor scheduling, and the like  Inventoriable/Product costs – all the costs needed to produce inventory (expensed as CGS). All costs of a product that are considered assets in a company’s balance sheet - Direct materials - Direct labor (AI believes that these are associated with workers who directly contribute to the production process. Instead of being immediately expensed, they are capitalized as part of the product's cost.) - Conversion cost = Manufacturing overhead + Direct Labor - Indirect manufacturing - all manufacturing costs that are related to the cost object but cannot be traced to that cost object in a feasible way Cost of goods manufactured - represents the total cost incurred to produce goods during a specific period (Beginning direct materials + Product/Inventoriable costs – COGS Period costs – not related to the product (pre-paid rent), operating costs - Step-by-Step Explanation: Direct Material Inventory: o Beginning Inventory: The starting amount of raw materials available. In this case, it's $11,000.  o Direct Material Purchases: The cost of raw materials purchased during the period. Here, it's $73,000. o Ending Inventory: The remaining raw materials at the end of the period. For this example, it's $8,000. o Direct Material Used: Calculate this by adding the Beginning Inventory and Direct Material Purchases, then subtracting the Ending Inventory: $11,000+$73,000−$8,000=$76,000 Work-in-Process Inventory: o Beginning Inventory: The starting amount of partially completed goods. Here, it's $6,000. o Direct Manufacturing Labor: Wages paid to workers involved in the production process, which is $9,000. o Manufacturing Overhead Costs: Indirect costs like utilities and depreciation, totaling $20,000. o Total Manufacturing Costs Incurred: Sum of Direct Material Used, Direct Manufacturing Labor, and Manufacturing Overhead Costs: $76,000+$9,000+$20,000=$105,000 Ending Inventory: The remaining work-in-process inventory at the end of the period, which is $7,000. Cost of Goods Manufactured: Calculate this by adding the Beginning Inventory and Total Manufacturing Costs Incurred, then subtracting the Ending Inventory: $6,000+$105,000−$7,000=$104,000 Finished Goods Inventory: o Beginning Inventory: The starting amount of completed goods ready for sale. Here, it's $22,000. o Ending Inventory: The remaining finished goods at the end of the period. For this example, it's $18,000. o Cost of Goods Sold: Calculate this by adding the Beginning Inventory and Cost of Goods Manufactured, then subtracting the Ending Inventory: $22,000+$104,000−$18,000=$108,000 Unit costs - Unit cost is a total expenditure incurred by a company to produce, store, and sell one unit of a particular product or service 5. Framework for cost accounting and cost management  Calculate costs Obtain information for planning, control, and performance evaluation Analyse information Chapter 3: Cost-Volume-Profit (CVP) Analysis Summary: What if... (What if I sell x amount? When do I break even?) Contribution margin per unit = Selling price – Variable costs per unit Break even = FC/CM (how many units I need to sell to break even) (FC + Target Net Income)/ SP – VC Target = (P-VC)Q-FC 1. Essentials Know how profits will change as the units sold of a product change Use “what if” analysis to examine the possible outcomes of different situations Relationship between selling price, variable costs, fixed costs Selling price, variable and fixed costs are known as constants Typically, only a single product case is studied Operating income = Contribution margin per unit*Q – FC Contribution margin ratio = Contribution margin/Revenue Break-even point – the quantity at which you equal your fixed costs Operating income = Net income/(1-tax rate) 30000=x*(1-0.35) 30000=x*0.65 x=46153 Operating income = Contribution margin – Fixed costs 2. Operating risk Strategic decisions such as lowering SP entails risk Use CVP to evaluate how the operating income will change - Cannot be certain of the truthfulness of the estimates 3. Margin of safety Distance between budgeted sales and breakeven - MOS = Budgeted sales – BE sales  MOS ratio removes the effect of the company size in the output - MOS ratio = MOS / Budgeted sales Margin of safety calculation answers: - How far revenues can fall before the breakeven point - How far can revenues fall before the company starts losing money 4. Operating leverage Effects of fixed costs Operating leverage = contribution margin / Operating income Increases with higher proportion of fixed costs than variable costs Use to estimate changes to OI from changes in sales - Change in OI (%) = Operating leverage * Change in sales (%) 5. Contribution margin vs Gross margin Rev – VC = CM CM – All fixed costs = OI Rev – CGS = Gross margin Gross margin – Non manuf. FC (SGNA) = Operating income Chapter 9: Costing Methods and Capacity Levels 1. Methods of costing inventory in manufacturing companies – variable costing, absorption costing, throughput costing Variable costing – all variable manufacturing costs (direct and indirect) are inventoriable costs - Not fixed manufacturing costs - There is no production-volume variance (don't think of the production- volume capacity) - Revenue - (VC/Production volume) * Sales = Contribution margin - Contribution margin – TFC = OI Absorption costing – all variable costs and fixed manufacturing costs are inventoriable costs - Inventory absorbs all manufacturing costs - There is production-volume variance - Think of the capacity level, fixed costs are spread per unit - Revenue - (VC + TFMC/Production volume) * sales = Gross margin - Gross margin – Other FC = OI Throughout costing – only direct materials costs are inventoriable costs - All other costs are expensed Managers reduce the undesirable effects of absorption costing: - Focus on careful budgeting and inventory planning - Change in the period (i.e. timing) used to evaluate performance - Include nonfinancial as well as financial variable to evaluate performance - In financial accounting you use absorption costing to account that you have paid for something that you will receive in the future and don't account it initially as a cost 2. Denominator-level capacity – account for firms spending fixed manufacturing costs for... Theoretical capacity – based on producing at full efficiency all the time Practical capacity – reduced theoretical capacity by considering: - Unavoidable operating interruptions and scheduled maintenance time - Shutdown for holydays Normal capacity – utilization that satisfies customer demand over a period - Seasonal, cyclical, and trend factors - Based on customer demand  Master-budget capacity (future) – utilization that managers expect for the current budget period Mistakes 1) 2) (Requirement 6)