2nd Semester Notes PDF

- - - - - - Characteristics of management advisory services 1. 2. 3. 4. 5. 6. 7. 8. Managerial Accounting vs Financial Accounting +-----------------------+-----------------------+-----------------------+ | Bases of Comparison | Managerial...

- - - - - - Characteristics of management advisory services 1. 2. 3. 4. 5. 6. 7. 8. Managerial Accounting vs Financial Accounting +-----------------------+-----------------------+-----------------------+ | Bases of Comparison | Managerial | Financial | +=======================+=======================+=======================+ | a. | Internal (Owners) | External (BIR, SEC) | +-----------------------+-----------------------+-----------------------+ | b. | Special | General | +-----------------------+-----------------------+-----------------------+ | c. | Future | Historical | +-----------------------+-----------------------+-----------------------+ | d. | Flexible | GAAP | +-----------------------+-----------------------+-----------------------+ | e. | Subjective & | Objective | | | Objective | | +-----------------------+-----------------------+-----------------------+ Work of Management and the Planning and Control Cycle 1. 2. 3. 4. Need for Information Information Data ------------------------------ --------------------------------------------------------------------------- Relevant for Decision-Making Group of records. Once the data is process, it will be now an information Characteristics of managerial accounting report 1. 2. 3. 4. 5. Areas of MAS 1. 2. 3. 4. 5. Organizational Structure - - - - - The Chief Financial Officer - Treasurership vs Controllership functions +-----------------------------------+-----------------------------------+ | Treasurership | Controllership Functions | +===================================+===================================+ | 1. | 1. | +-----------------------------------+-----------------------------------+ | 2. | 2\. Reporting and interpreting | +-----------------------------------+-----------------------------------+ | 3. | 3\. Evaluating and consulting | +-----------------------------------+-----------------------------------+ | 4. | 4\. Tax administration | +-----------------------------------+-----------------------------------+ | 5. | 5\. Government reporting | +-----------------------------------+-----------------------------------+ | 6. | 6\. Protection of assets | +-----------------------------------+-----------------------------------+ | 7. | 7\. Economic appraisal | +-----------------------------------+-----------------------------------+ Cost Accounting **Cost** -- Anything that is sacrificed to obtain a benefit. It could be monetary or non monetary. In cost accounting, we only focus on monetary cost. Though some non monetary cost may be relevant in decision making, we can only account for monetary cost because of its measurability. **Cost accounting** is a branch in accounting focused on the identification, measurement, analysis, accumulation,preparation, interpretation, and communication of costs resulting from operation. Its main objective is to provide consistent cost information for financial reporting and decision making According to the Chartered Institute of Management Accountants, London, cost accounting is the process of accounting for costs from the point at which its expenditure is incurred or committed to the establishment of the ultimate relationship with cost units. In its widest sense, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of the activities carried out or planned. **Classifications of Cost** Things to remember: -Costs can be classified in a number of ways \--depending on the purpose of the classification.( external Vs internal) \--classifications of costs are not mutually exclusive. **GAAP Costs** are costs [used for financial reporting], they are normally [recorded in the books and are found in our financial statements]. These are your [manufacturing and non manufacturing costs] (functional costs such as rent, salaries,operating expenses, etc). **GAAP COSTS** 1. a. - - - - - b. - - c. - - - - d. - - 2. - - **As to Accounting Periods** 1. 2. 3. 4. **Non GAAP Cost** - Any cost classification that cannot be classified as GAAP Costs are Non GAAP cost ( Variable cost, opportunity cost, etc) NON-GAAP COSTS **As to behavior** 1. 2. 3. 4. 5. As to activity 1. 2. 3. 4. **As to Managerial Influence** 1. 2. **Cost Classification according to a time frame perspective** 1. 2. **Cost for Planning and Control** 1. 2. 3. **Cost for Analytical Process** 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. **QUALITY COSTS** - These are costs incurred to maintain the quality of the company\'s outputs. there are four categories: **Prevention Costs** - These are incurred to prevent possible events or factors in affective the quality of the product. **Appraisal Costs** - Incurred to check and maintain the quality during the process **Internal Failure Costs** - result of producing a defective product and the product is not yet delivered **External Failure Costs** - incurred when defective products were already delivered **Methods of Costing** These are the different ways on how you can accumulate and present costs 1. 2. 3. 4. 5. Introduction to Cost flow Systems (The Non-Cost System) Non-Cost System - - - Before we begin, you should know the following: 1. 2. 3. 4. 5. 6. 7. IT STARTS IN THE STORE ROOM OF RAW MATERIALS Normally, our operations would start from the purchase of raw materials which will go to our store room. The value of such will be increased by the amount of freight incurred and will be reduced by our purchase returns, allowances, and discounts. The net purchase will be computed as follows: Purchases P xxx Add: Freight-in [Xxx] Gross Purchase P xxx Less: Purchase returns P xxx Purchase allowances Xxx Purchase discounts [Xxx] [Xxx] Net Purchases [P xxx] The net purchase is the net increase in our inventory for the period. Under the periodic inventory system, you can get the value of the beginning raw materials inventory in the ledger (or last year's trial balance/Balance sheet) and the ending raw materials inventory during our inventory count. Now you can compute your direct materials (Raw Materials Used) as follows: Net Purchases ( from above) P xxx Add: Beginning Raw Materials Inventory [Xxx] Total Materials available for use P xxx Less: Ending Raw Materials Inventory [xxx] Direct materials (Raw materials used) [P xxx] The Direct Material is the value of materials used in production. This amount represents how much materials were transferred from the storeroom going to our factory or production facility. (Others would prefer to use Direct Materials Used, but that would be redundant,would be redundant and redundant. FROM STOREROOM TO FACTORY To be transformed to its saleable state, the direct materials should be converted in the factory. In the process, we will be incurring Conversion cost (Direct labor and Factory Overhead). These costs when incurred and put together will give us the total manufacturing cost for the current period. Direct Materials P xxx Direct Labor Xxx Factory Overhead [Xxx] Total Manufacturing cost [P xxx] Now add this to your work in process beginning inventory ( that's the amount of inventories you did not finish last period) and you will get the Total Cost Placed In Process. This is how much you can finish for the current period. From that amount, if you deduct your work in process ending inventory (from your inventory count though most of the time it\'s just estimated, we\'ll get back on that soon), you will arrive at the Cost of Goods Manufactured. This is the value of your completed goods for the current period, and now ready for sale. Total Manufacturing cost P xxx Add: Beginning WIP Inventory [Xxx] Total cost placed in process P Xxx Less: Ending WIP Inventory [Xxx] Cost of Goods Manufactured [P xxx] FROM FACTORY TO SALES ROOM Once these goods are completed, they are now transferred to the saleroom or to another room where finished goods are stored. In the same manner, they have to be reclassified from work in process to finished goods inventory. These inventories will be expensed at the time they are sold accounted under the Cost of Goods Sold, computed as follows: Cost of Goods Manufactured P xxx Add: Beginning FG Inventory [Xxx] Total Goods Available for Sale P Xxx Less: Ending FG Inventory [Xxx] Cost of Goods Sold [P xxx] Tadaaa! Congratulations! You've just finished the basic cost flow of manufacturing cost... But wait, there's more! If that's too long for you, I will provide below not 1, not 2...but 3 T-accounts which may serve as your cheat sheet...  The Costing Systems **Cost Accounting** is an area in accounting concerned in cost determination, analysis, and control for the purpose of financial reporting and decision making. This area of accounting supplements financial accounting by providing details of cost figures found in generic financial statements (statements that are prepared by using general standards, i.e. GAAP). It also enables management accounting is processing (cost) data which will be used in analysis and decision making. In short, we need cost accounting for financial reporting and decision making. **Cost system** - also known as the perpetual approach, accounts for the flow of costs in detail with the intention of providing unit costs and inventory cost for periodic reporting. Costs are accumulated by products and batches, or by processes and departments. *(Review periodic vs perpetual)* Know the following: (these are easy checklists of topics for you to read. It would improve your understanding in the succeeding topics if you have an idea beforehand. I would create a different entry for these but in the meantime, please read them on your own. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Job Order Costing and Process Costing Cost accumulation and reporting may be done by products or batches ( using the job order costing), or by departments (using the process costing system). Let's have a quick comparison of these two costing system. +-----------------------+-----------------------+-----------------------+ | | Job Order costing | Process costing | +=======================+=======================+=======================+ | As to the nature of | Products or batches | Products or batches | | products | can be easily | are not | | | identified and | distinguishable from | | | differentiated from | each other. | | | each other | (homogeneous) | | | (heterogeneous). | | | | | Products go through | | | Each product has its | the same continuous | | | own unique features | process resulting to | | | due to different | similar | | | processes involved. | characteristics. | +-----------------------+-----------------------+-----------------------+ | Examples: | Customized shoes, | Beverages, cosmetic | | | made to order boats, | products, canned | | | houses, fabricated | goods, refined | | | factory machines, | sweeteners. | +-----------------------+-----------------------+-----------------------+ | Cost accumulation and | By Job orders | By departments or | | reporting | | processes | +-----------------------+-----------------------+-----------------------+ | When is unit cost | Upon completion | At the end of the | | computed | | accounting/cost | | | | period (usually at | | | | the end of the month) | +-----------------------+-----------------------+-----------------------+ | Computation of unit | [Production cost per | [Departmental | | cost | job] | cost] | | | | | | | Number of units | Equivalent units of | | | | production | +-----------------------+-----------------------+-----------------------+ | Subsidiary record for | Job order cost sheet | Cost of production | | work in process | | report | +-----------------------+-----------------------+-----------------------+ | PRIMARY OBJECTIVE? | Compute the cost per | Compute the costs | | | job | charged to each | | | | production process | +-----------------------+-----------------------+-----------------------+ Below is a summary of the Job order cost flow, please take note of the key entries. Understanding the cost flows together with these primary entries would facilitate future discussion. Study them, memorize them, visualize them, put them in your index cards, have them tattooed at the back of your hands, put them at the cover of your economics and psychology notebooks... I know you get the point.  And below is the Process costing cost flow In addition, below is an example of a job order cost sheet... this will be used in job order costing.  And below is just a sample portion of Cost of Production Report, feel free to google a better example and insert it here... coz right now I am fighting the urge to insert a picture of my cat playing with my kids toys... (I will update this post as soon as I can) Job Order Costing Accurate costing is critical to a company's success. For example, in order to set a selling price for a new job and to know whether it profited from past jobs, the company needs a good costing system. This article will discuss how (manufacturing) costs are assigned to specific jobs. BUT FIRST, Let\'s have a quick review of the following concepts: 1. 2. 3. There are two major steps in the flow of costs: 1. 2. **Accumulating Manufacturing Costs** To illustrate a job order cost system, we will use the January transactions of KAIA-MOTO Manufacturing Company, which makes gardening tools. RAW MATERIALS COSTS When KAIA-MOTO receives the raw materials it has purchased, it debits the costs of the materials to Raw Materials Inventory. The company would debit this account for the invoice cost of the raw materials and freight costs chargeable to the purchaser. It would credit the account for purchase discounts taken and purchase returns and allowances. KAIA-MOTO makes no effort at this point to associate the cost of materials with specific jobs or orders. For example, assume that KAIA-MOTO Manufacturing purchases on account 2,000 handles (Stock No.RM0011) at Php5 per unit (Php10,000) and 800 modules (Stock No.RM0012) at Php40 per unit (Php32,000) for a total cost of Php42,000 (Php10,000 plus Php32,000). The entry to record this purchase on January 4 is: 1/4 Raw Materials Inventory 42,000 ----- ------------------------- -------- -------- Accounts Payable 42,000 Later in this article, the company will then assign raw materials inventory to work in process and manufacturing overhead. FACTORY LABOR COSTS Basically ,the cost of factory labor consists of three costs: 1. 2. 3. Companies debit labor costs to Factory Labor as they incur those costs. Assuming that KAIA-MOTO Manufacturing incurs Php32,000 of factory labor costs. Of that amount, Php27,000 relates to wages payable and Php5,000 relates to payroll taxes payable in January. The entry to record factory labor cost for the month is: +-----------------+-----------------+-----------------+-----------------+ | 1/31 | Factory Labor | 32,000 | | +=================+=================+=================+=================+ | | Factory Wages | | 27,000 | | | Payable | | | +-----------------+-----------------+-----------------+-----------------+ | | Employer | | 5,000 | | | Payroll | | | | | | | | | | Taxes Payable | | | +-----------------+-----------------+-----------------+-----------------+ The company would subsequently assign factory labor to work in process and manufacturing overhead. MANUFACTURING OVERHEAD COSTS There are many types of overhead costs. An entity may recognize these costs daily, as in the case of factory equipment repairs and the use of factory supplies and indirect labor. Or, it may record overhead costs periodically through adjusting entries (as in the case of property taxes, depreciation, and insurance) This is done using a summary entry, which summarizes the totals from multiple transactions. An example for this would be the following entry (using assumed amounts): +-----------------+-----------------+-----------------+-----------------+ | 1/31 | Manufacturing | 13,800 | | | | Overhead | | | +=================+=================+=================+=================+ | | Utilities | | 4,800 | | | Payable | | | +-----------------+-----------------+-----------------+-----------------+ | | Prepaid | | 2,000 | | | Insurance | | | +-----------------+-----------------+-----------------+-----------------+ | | Accounts | | 2,600 | | | Payable | | | +-----------------+-----------------+-----------------+-----------------+ | | Accumulated | | 3,000 | | | | | | | | Depreciation | | | +-----------------+-----------------+-----------------+-----------------+ | | Property Taxes | | 1,400 | | | | | | | | Payable | | | +-----------------+-----------------+-----------------+-----------------+ The company would then assign manufacturing overhead to work in process. **Assigning Manufacturing Costs to Work in Process** Assigning manufacturing costs to work in process results in the following entries: (Refer to previous cheat sheet) 1. 2. An essential accounting record in assigning costs to jobs is a job cost sheet, A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. Companies keep a separate job cost sheet for each job. The job cost sheets constitute the subsidiary ledger for the Work in Process Inventory account. A subsidiary ledger consists of individual records for each individual item---in this case, each job. The Work in Process account is referred to as a control account because it summarizes the detailed data regarding specific jobs contained in the job cost sheets. Each entry to Work in Process Inventory must be accompanied by a corresponding posting to one or more job cost sheets.  RAW MATERIALS COSTS Companies assign raw materials costs when their materials storeroom issues the materials. Requests for issuing raw materials are made on a prenumbered materials requisition slip. The materials issued may be used directly on a job, or they may be considered indirect materials. The requisition should indicate the quantity and type of materials withdrawn and the account to be charged. The company will charge direct materials to Work in Process Inventory ,and indirect materials to Manufacturing Overhead. The company may use any of the inventory costing methods (FIFO, LIFO,or average-cost) in costing the requisitions to the individual job cost sheets. Periodically, the company journalizes the requisitions. For example, if KAIA-MOTO Manufacturing uses Php24,000 of direct materials and Php6,000 of indirect materials in January,the entry is: +-----------------+-----------------+-----------------+-----------------+ | 1/31 | Work in Process | 24,000 | | | | Inventory | | | +=================+=================+=================+=================+ | | Manufacturing | 6,000 | | | | Overhead | | | +-----------------+-----------------+-----------------+-----------------+ | | Raw Materials | | 30,000 | | | | | | | | Inventory | | | +-----------------+-----------------+-----------------+-----------------+ The requisition slips show total direct materials costs of Php12,000 for Job No. 101, Php7,000 for Job No.102,and Php5,000 for Job No.103.The posting of requisition slip R247 and other assumed postings to the job cost sheets for materials are shown below. After the company has completed all postings,the sum of the direct materials columns of the job cost sheets (the subsidiary accounts) should equal the direct materials debited to Work in Process Inventory (the control account).  (Companies post to control accounts monthly and post to job cost sheets daily.) FACTORY LABOR COSTS Companies assign factory labor costs to jobs on the basis of time tickets prepared when the work is performed. The time ticket indicates the employee, the hours worked, the account and job to be charged, and the total labor cost. Many companies accumulate these data through the use of bar coding and scanning devices. When they start and end work, employees scan bar codes on their identification badges and bar codes associated with each job they work on. When direct labor is involved, the time ticket must indicate the job number, as shown in Illustration 20-8. The employee's supervisor should approve all time tickets. The time tickets are later sent to the payroll department,which applies the employee's hourly wage rate and computes the total labor cost. Finally, the company journalizes the time tickets.It debits the account Work in Process Inventory for direct labor, and debits Manufacturing Overhead for indirect labor. For example, if the Php32,000 total factory labor cost consists of Php28,000 of direct labor and Php4,000 of indirect labor,the entry is: 1/31 Work in Process Inventory 28,000 ------ --------------------------- -------- -------- Manufacturing Overhead 4,000 Factory Labor 32,000 As a result of this entry, Factory Labor has a zero balance, and gross earnings are assigned to the appropriate manufacturing accounts. Let's assume that the labor costs chargeable to KAIA-MOTO's three jobs are Php15,000, Php9,000, and Php4,000. The illustration below shows the Work in Process Inventory and job cost sheets after posting. As in the case of direct materials, the postings to the direct labor columns of the job cost sheets should equal the posting of direct labor to Work in Process Inventory.  MANUFACTURING OVERHEAD COSTS Companies charge the actual costs of direct materials and direct labor to specific jobs. In contrast, manufacturing overhead relates to production operations as a whole. As a result, overhead costs cannot be assigned to specific jobs on the basis of actual costs incurred. Instead, companies assign manufacturing overhead to work in process and to specific jobs on an estimated basis through the use of a predetermined overhead rate. The predetermined overhead rate is based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base. The company may state the activity in terms of direct labor costs,direct labor hours,machine hours,or any other measure that will provide an equitable basis for applying overhead costs to jobs. Companies establish the predetermined overhead rate at the beginning of the year. Small companies often use a single, company-wide predetermined overhead rate. Large companies often use rates that vary from department to department. The formula for a predetermined overhead rate is as follows. Overhead relates to production operations as a whole. To know what "the whole" is, the logical thing is to wait until the end of the year's operations.At that time the company knows all of its costs for the period. As a practical matter, though, managers cannot wait until the end of the year. To price products accurately,they need information about product costs of specific jobs completed during the year.Using a predetermined overhead rate enables a cost to be determined for the job immediately.  KAIA-MOTO Manufacturing uses direct labor cost as the activity base. Assuming that the company expects annual overhead costs to be Php280,000 and direct labor costs for the year to be Php350,000,the overhead rate is 80%,computed as follows: Php280,000 / Php350,000= 80% This means that for every peso of direct labor,KAIA-MOTO will assign 80 cents of manufacturing overhead to a job.The use of a predetermined overhead rate enables the company to determine the approximate total cost of each job when it completes the job. Historically, companies used direct labor costs or direct labor hours as the activity base.The reason was the relatively high correlation between direct labor and manufacturing overhead. Today more companies are using machine hours as the activity base,due to increased reliance on automation in manufacturing operations. Many companies now use activity-based costing in an attempt to more accurately allocate overhead costs based on the activities that give rise to the costs. A company may use more than one activity base. For example,if a job is manufactured in more than one factory department, each department may have its own overhead rate. For KAIA-MOTO Manufacturing, overhead applied for January is Php22,400 (direct labor cost of Php28,000 80%). The following entry records this application. 1/31 Work in Process Inventory 22,400 ------ --------------------------- -------- -------- Manufacturing Overhead 22,400 The overhead that KAIA-MOTO applies to each job will be 80% of the direct labor cost of the job for the month. And to summarize the WIP