Cost and Cost Object PDF

# COST AND COST OBJECT ## I. Main Concept - Management accounting & financial accounting - Accounting? = information system - Do? - recording - estimating - organizing - summarizing - What data? - Financial & operational - Types: - Financial...

# COST AND COST OBJECT ## I. Main Concept - Management accounting & financial accounting - Accounting? = information system - Do? - recording - estimating - organizing - summarizing - What data? - Financial & operational - Types: - Financial - Management ## II. Financial - Mandatory - Standard: ✓ - External (ex: tax purpose) - Report: company wide - Info: financial; past - Expense: sorted by nature - Frequency: yearly/quarterly ## III. Management - Optional - Standard: X - Internal (decision-making pp.) - Report: segments (divisions, products, activities,...) - Info: financial & non-financial; past & future - Expense: by destination - Frequency: when needed ## IV. Organization - As blackbox: - Resources - Materials - Labor - Machines - etc. - Through financial accounting "lenses": focus on resources, transformation cost, revenue. - Diagram - Resource - Cost - Transformation process (blank) - Income - Product/services - Revenue ## V. Through Cost Accounting "lense": Track cost by stage - Diagram - Resources - Material - Labor - Machines, etc. - Purchase - Production - Sales - Income - Transformation process (no more black box) ## VI. From cost to expenses - Supply stage: - Cost: raw material $ - Appeared: purchase cost (transporting,...) - Recorded as: inventory of raw material (ex: 1000 paper) - Production stage: - Cost: - raw material used(ex: used 900 / 1000 paper) - direct labor - Appeared: Production cost - Recorded as: cost of goods manufactured / inventory of finished goods (ex: 300 finished) - Sale stage: - Cost: finish goods sold - Appeared: - selling & other expenses (ex: sold 200 / 300 goods) - (ad, commissions,...) - Recorded as: cost of goods sold (COGS) - operating expenses - selling, general, and administrative cost (SG&A) or non-manufacturing cost. ## VII. Cost & Cost Object - Cost: $ measure of resources consumed to do sth. - Sum of expenses to achieve sth. - Cost object: anything you want to calculate the cost separately. - Ex: want to make a product - product = cost object - Cost timing - Actual cost: record after incurred - Standard cost: estimated cost ## VIII. Cost & Cost Management Systems (CMS) - Purpose of CMS: - Collect, accumulate and classify cost to categories. - Assign cost to the cost object. - Help decision-makers (managers). - Cost assembling - Different managerial decisions - Depend: managerial decisions - Costing = choosing (best way) to calculate cost based on the decision you are trying to make. - Ex: need to set price -> know what to make or buy - Ex: need to buy sth -> choose to make or buy (choose the cheaper) - Cost object - Direct - variable: ex: raw material, ... - fixed: ex: design, marketing,... - Indirect - variable: ex: transportation,... - fixed: ex: sponsoring,... ## IX. Costs behavior - Variable cost: change with activity of volume - Ex: Flour to make a pancake (more cake = more flour = more $) - Unit variable cost (VCu) = constant - Variable cost = 1w. production - Fixed cost: same with quantity/ production - Change by steps. - Ex: Rent (change with 1 activity) - Total fixed cost = constant - Unit fixed cost = 1w. production ## X. Cost assignment - Cost calculation - Direct - Materials - Direct labor - Sales commissions - Depreciation of a single-product machine - Depreciation of a multi-product machine - Fixed - Electricity - Supervision - Rent - Indirect: resource consume by several objects - Ex: a glue used by many PP. - Direct: traceable to a single cost object - Ex: cost of material for 1 shoe ## XI. Costing method - Full (absorption) costing system: include all costs (fixed/variable; direct/ indirect) - Partial costing system: include only some selected costs ## XII. Income & margin - What? Main economic performance indicators - Margin: for partial costing - Income: for full costing ## LESSON 2: VARIABLE COSTING METHOD - What cost was counted ? — VARIABLE - Direct, variable (depends on volume) - Indirect, variable (of several cost object) ## I. Calculation - Revenue: Σ of selling price (price x Q/volume) - Variable cost: Σ of all variable cost (VCu x Q) - Contribution margin: Revenue - VC (selling price) - Income (Profit) = CM - Fixed cost ## II. Cost-volume-profit (CVP) analysis - What? - Systematic method - Do what? - Examining relationship / changes in activity level / changes in revenue / cost / profit - VCu & FC (total) = independent of volume ## III. The breakeven point - What? - The minimum quantity needed to sell to make profit. - Achieve how: Analytical income = 0 - In equation: Income = 0 -> (Qx CMu) - Fc = 0 - BEP by Q: BEP = FC/CMu = Q - BEP in sales revenue = FC/CM ratio = Sales/unit x Q - What does it help? - Analyze impact of change - Margin of safety = sales - BEP - (how much sales can drop before reaches BEP (> BEP = no profit)) ## IV. Indifference threshold - Purpose: - Compare 2 cost structure - To? Decide which is better. - Formula: - Analytical income with cost structure 1 = Analytical income with cost structure 2 - (Q. x VCu 1 ) + Fc 1 = (Q x VCu 2) + Fc - How to choose: - < IT -> Choose one with the lowest FC - > IT -> Choose one with lowest Veu ## V. Product mix when capacity constraints exist (limit resource) - Goal? Make most $ by choosing the right product combination - How? Use the limited resource for profiting product. - Steps: - Find limiting resource (identify what's lacking) - Calculate profit/unit - Allocate resources (focus on most profiting/unit product) ## VI. Short-term pricing - What? Pricing based on immediate circumstances - Fixed Cost is excluded - Limitation - Contribution margin (R - Vc) always > 0 - FC & VC: must not impacted - ≠ apply to all products the same time - Consider: impact on customers / competitions ## VII. Uses of CVP - For manager/entrepreneur - Determine BEP (to see if the business is profitable) - Assess risk (potential risks & unexpected change) - Short-term pricing (ensure price cover all VC & FC) - Decide to outsource: to minimize cost, to maximize profit - Long-term decision and plan. ## SESSION 3: ADVANCED CONTRIBUTION MARGIN METHODS - Principle of advanced contribution margin method - Work with? - Direct cost (variable + fixed) - Calculation - Sales revenue: Sum of all sales (Q x selling price) - Direct cost (variable & fixed): sum all direct cost. - CM after DC: - - Analytical income: - total indirect cost -Principles - All variable & direct cost are included in the calculation of cost object's cost. - Sales revenue: cover <direct fixed cost> to yield (+) advanced CM - Overview diagram - Sales - Cost - VC - FC - Direct - Indirect - Advanced contribution margin of "cost object" - Analytical income ## II. Complete calculation - Sales - Variable costs (direct and indirect) - Contribution margin - Direct fixed costs - Advanced contribution margin - Indirect fixed costs - Analytical income ## III. Specific BEP - What? The volume for which VC & direct FC are covered. - Achieve when? Advanced CM (ACM) = 0 - Calculation - ACM= Sales - VC - DFC - = [ Q (SPu - VCu) ] - FC - SBEP - ACM= 0 -> Q x CMu - DFC = 0 - SBEP in quantity: DFC/CMu ## IV. Profitability analysis diagram - IF: Analytical income 70 - Yes - Continue product - No - Review allocation methods - Yes - 1 Global output/ 1 IFC - 1 output - No - 1 DFC & VC - Yes - Simple CM - No - Drop the product - 1 output (other product) ## V. Use of ACM method - Determine BEP by product/activity (SBEP) - Help decide whether to continue or drop sth (products, activities, clients, stores, workshops, departments).