BACOSTMX Module 1-Cost Accounting Fundamentals.pdf

COST ACCOUNTING FUNDAMENTALS, COST TERMS, CONCEPTS & CLASSIFICATIONS Cost Accounting and Control Module 1 BACOSTMX AJA AY2021-2022 1  2 Topic Learning Outcomes The students should be able t...

COST ACCOUNTING FUNDAMENTALS, COST TERMS, CONCEPTS & CLASSIFICATIONS Cost Accounting and Control Module 1 BACOSTMX AJA AY2021-2022 1  2 Topic Learning Outcomes The students should be able to: 1. Describe Cost Accounting and explain how it differs with Financial and Management Accounting 2. Identify the Current factors affecting cost accounting 3. Describe how management accountants’ function within an organization 4. Discuss the importance of ethical behavior of management accountants 5. Describe Cost Management System 6. Enumerate and discuss the different classification of costs 7. Discuss the Product Cost Flow 8. Prepare the Statement of Cost of Goods Manufactured, Statement of Cost of Goods Sold and Income Statement with application Integrity in reporting. Pre-Test General Instruction. Write your answer on the space provided in each items. It is not recorded. Part I. Matching a. Product cost h. Total manufacturing costs b. Cost to manufacture i. Conversion cost c. Raw materials inventory j. Selling and administrative costs d. Work in process inventory k. Direct labor e. Finished goods inventory l. Direct materials f. Cost of sales m. Manufacturing overhead g. Cost of goods manufactured n. Prime costs product____ cost 1. A cost which ―attaches‖ to the product as it moves through the operating cycle. cost to ____ 2. manufacture The total costs of all resources put into production during the period, whether completed or not. total manufacturing cost ____ 3. Direct materials plus direct labor plus factory overhead. WIP inventory ____ 4. The amount shown on the statement of financial position which represents the cost incurred to produce goods which are not yet completed. direct labor ____ 5. The cost of services of employees who work directly on the product. FG inventory ____ 6. The cost of goods already completed and held for sale. cost of goods ____ 7. manufactured The amount which represents the cost of goods made available for sale in the current period. RM inventory ____ 8. Cost of used raw materials conversion cost 9. ____ Direct labor plus manufacturing overhead. prime____ cost 10. Direct labor plus direct materials. cost of sales ____ 11. Cost of goods sold to the customers S&A costs ____ 12. Non-manufacturing costs incurred by a manufacturing firm in its operations. RM inventory ____ 13. Goods acquired for production but not yet requisitioned to be put into process. BACOSTMX Module 1  3 manufacturing OH ____ 14. Alternatively called factory overhead or simply overhead. cost of goods ____ 15. manufactured It represents the total cost of the finished goods transferred to the finished goods storeroom during the period. Lesson LO1 Describe Cost Accounting and explain how it differs with Financial and Management Accounting Accounting is the language of business. Types of Accountants  Financial accountants provide information to external parties like Investors, Creditors, Regulators  Managerial accountants provide information to internal users like Managers  Cost accountants provide information to both internal and external users (Product cost information) Accounting Information System Accounting Information System consists of interrelated manual and computer parts and it uses processes such as collecting, recording, summarizing, analyzing, and managing data to transform inputs into information provided to users Accounting Information System has two major systems with the targeted user being the major difference. It includes the Financial accounting information system and Cost management accounting information system. Financial Accounting Information System It produces outputs for external users and uses well-specified economic events as inputs It also follows rules and conventions set by the Securities and Exchange Commission (SEC) and the International Financial Reporting Standards Board (IFRSB) and provides outputs such as financial statements. It is used for investment decisions, stewardship evaluation, activity monitoring, and regulatory measures. Cost Management Information System It produces outputs for internal users. It has three broad objectives that provide information for Costing out services, products, and other objects of interest to management, Planning and control , and Decision making. Cost management is concerned with factors that drive costs. e.g. Cycle time Quality, Process productivity BACOSTMX Module 1 4 Cost Accounting Information System It assigns costs to individual products and services and other objects as specified by management and assists external financial reporting by assigning costs to products in order to value inventories and determine cost of sales. It also conforms to the rules and conventions set by the SEC and the IASB. Financial versus Managerial Accounting Relationship of Financial, Management, and Cost Accounting Cost Accounting provides product cost information that is used for inventory costing purposes in the financial statements and for special reports to management for decision-making purposes. Uses of Product Cost Information: External parties—stockholders, creditors, and regulators  For investment and credit decisions  Complies with GAAP (e.g. based on accounting standard, Product cost is the sum of the costs incurred within the factory to make one unit of product) BACOSTMX Module 1 5 Internal parties  Planning, controlling, decision making and evaluating performance (e.g. determining the selling price of a product, meeting competition, bidding on contracts, analyzing profitability, preparing budgets)  Includes upstream (research, development, and product design) and downstream costs (marketing, distribution, and customer service)  Disaggregated (separate) Two Basic Product Costing Systems Process Costing Characteristics:  Homogeneous units pass through a series of similar processes.  Costs are accumulated by processing department  Units costs are computed by dividing the individual departments costs by equivalent production.  the costs of production report provides the detail for the Work in Process account for each department.  Manufacturing costs are grouped by department or work center, with little concern for specific job orders.  It emphasizes a weekly or monthly time period rather than the time taken to complete a specific order.  It uses several Works in Process Inventory accounts – one for each department or work center in the manufacturing process. Job Order Costing Characteristics:  Unique jobs are worked on during a time period  Costs are accumulated by individual job  Unit costs are determined by dividing the total costs on the job cost sheet by the number of units on the job  The job cost sheet provides the detail for the work in process account.  It collects all manufacturing costs and assigns them to specific job or batches of product.  It measures costs for each completed job, rather than for set time periods.  It uses just one Work in Process Inventory Control account in the general ledger. This account is supported by a subsidiary ledger of job order cost cards or sheets for each job in process at any point of time. LO2 Identify the Current factors affecting cost accounting Factors affecting Cost Management  Global competition - Increased the demand for more accurate cost information  Growth of the service industry BACOSTMX Module 1 6  Deregulation has increased competition which led to the need to have accurate cost information for planning, controlling, continuous improvement, and decision making Advances in Information Technology  Use of computers to monitor and control operations results in the integration of manufacturing data with marketing and accounting data  Enterprise resource planning (ERP) software: Provides an integrated system capability  Use of tools such as personal computers (PCs), online analytic programs (OLAP), and decision-support systems (DSS)  Development of business analytics  Emergence of electronic commerce (e-commerce) e.g. Internet trading, Electronic data interchange, Bar coding Advances in Technology  Electronic data interchange (EDI): Exchange of documents between computers using telephone lines  Supply chain management: Management of products and services from the acquisition of raw materials through manufacturing, warehousing, distribution, wholesaling, and retailing Advances in Manufacturing Environment  Theory of constraints: Method used to continuously improve manufacturing and nonmanufacturing activities.  Just-in-time manufacturing: Produces a product only when it is needed and only in the quantities demanded. It focuses on continual improvement by reducing inventory costs and dealing with other economic problems. Lean manufacturing and computer-integrated manufacturing  Lean manufacturing: Persistent pursuit and elimination of waste that simultaneously embodies respect for people  Computer-integrated manufacturing Automation of the manufacturing environment allows firms to Reduce inventory, Increase productive capacity, Improve quality and service, Decrease processing time and Increase output LO3 Describe how management accountants’ function within an organization Line and Staff Relationships An organization chart also shows line and staff positions in an organization. Line positions: Positions that have direct responsibility for the basic objectives of an organization A person in a line position is directly involved in achieving the basic objectives of the organization. Staff positions: Positions that are supportive in nature and have only indirect responsibility for an organization’s basic objectives. A person in a staff position is indirectly involved in achieving those basic objectives. Staff positions support line positions, but they do not have direct authority over line positions. BACOSTMX Module 1 7 Chief Financial Officer (CFO) He is a member of the top management team responsible for providing timely and relevant data to support planning and control activities and preparing financial statements for external users. Controller / Comptroller He is a manager that often runs the accounting department and reports directly to the CFO. He supervises all accounting departments, participates in planning, controlling, and decision-making activities and responsible for both internal and external accounting requirements Treasurer He is responsible for the finance function, raises capital and manages cash, investments, and investor relations and in charge of credit and collections as well as insurance. LO4 Discuss the importance of ethical behavior of management accountants Accounting and ethical conduct Business ethics: Learning what is right or wrong in the work environment and choosing what is right. Ethical behavior creates customer and employee loyalty and can avoids litigation costs Standards of ethical conduct for management accountants Institute of Management Accountants (IMA) has established ethical standards for management accountants. Major divisions of the code  Competence  Confidentiality  Integrity  Credibility  Resolution of ethical conflict LO5 Describe Cost Management System Cost Management System is a set of formal methods developed for planning and controlling an organization’s cost generating activities relative to its strategy, goals and objectives. This system is designed to communicate all value chain functions about product costs, product profitability, cost and management, strategy implementation and management performance. Cost concepts and terms have been developed to facilitate this communication process. LO6 Enumerate and discuss the different classification of costs Cost refers to the monetary measure of resources given up to attain an objective (such as acquiring a good or delivering a service). BACOSTMX Module 1 8 Cost Categories Association with cost object Cost object is anything for which management wants to collect or accumulate costs (e.g. production operations and product lines) Direct—conveniently and economically traceable to a cost object (e.g. Cost Object: Tundra car product line – tires, fiberglass, leather, paint) Indirect—not conveniently or practically traceable to a cost object (e.g. Cost Object: Tundra car product line - cost of glue, property tax, janitorial maintenance, building depreciation costs)  Treated as overhead  Allocated Reaction to Changes in Activity Variable – a cost that varies in total in direct proportion to changes in activity (e.g. costs of materials, hourly wages, and sales commissions) Fixed – a costs that remains constant in total within the relevant range of activity (e.g. salaries, depreciation using straight-line method, insurance) Relevant Range—normal operating range Mixed – has both a variable and fixed component. On a per unit basis, it does not fluctuate in direct proportion to changes in activity, nor does it remain constant with changes in activity. (e.g. electric bill - $5,000/month plus $0.018 per kwh) Step – shifts upward or downward when activity changes by a certain interval or ―step‖. Step variable costs have small steps; Step fixed costs have large steps. BACOSTMX Module 1 9 Activity measures Common activity measures include production volume, service and sales volumes, hours of machine time used, pounds of material moved, and the number of purchase orders processed. Cost Reaction to Changes in Activity BACOSTMX Module 1 10 Total and Unit Cost Behavior Classification on the Financial Statements Costs can also be classified as product or period costs. Product Costs Product costs include all the costs that are involved in acquiring or making a product. More specifically, it includes direct materials, direct labor, and manufacturing overhead. Consistent with the matching principle, product costs are recognized as expenses when the products are sold. This can result in a delay of one or more periods between the time in which the cost is incurred and when it appears as an expense on the income statement. Product costs are also known as inventoriable costs. The discussion in the chapter follows the usual interpretation of GAAP in which all manufacturing costs are treated as product costs. It first appears on the balance sheet in inventory accounts and then are transferred to the income statement when product is sold. Product costs are unexpired before sale and are expired when sold It includes the following costs:  Direct material—Measurable part of a product; any material that can be easily and economically traced to a product  Direct labor—Labor used to manufacture a product or perform a service; time spent by individuals who work specifically on manufacturing a product or performing a service  Overhead—Indirect production cost Two more cost categories are often used in discussions of manufacturing costs—prime cost and conversion cost. Prime cost is the sum of direct materials cost and direct labor cost. Conversion cost is the sum of direct labor cost and manufacturing overhead cost. The term conversion cost is BACOSTMX Module 1 11 used to describe direct labor and manufacturing overhead because these costs are incurred to convert materials into the finished product. Period Costs Period costs include all selling costs and administrative costs. These costs are expensed on the income statement in the period incurred. All selling and administrative costs are typically considered to be period costs. The usual rules of accrual accounting apply to period costs. For example, administrative salary costs are ―incurred‖ when they are earned by the employees and not necessarily when they are paid to employees. Period costs appear on the income statement when incurred. The Conversion Process It refers to the change inputs into outputs. Degrees of Conversion Service Company BACOSTMX Module 1 12 Retail Company Manufacturer Cost Accumulation in a Manufacturing Company Cost Classification for Decision Making Differential costs or incremental costs are a difference in cost between any two alternatives. Differential costs can be either fixed or variable. A difference in revenue between two alternatives is called differential revenue. For example, assume you have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month. In this example, the differential revenue is $500 and the differential cost is $300. Opportunity cost is the potential benefit that is given up when one alternative is selected over another. These costs are not usually entered into the accounting records of an organization, but must be explicitly considered in all decisions. A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Since sunk costs cannot be changed and therefore cannot be differential costs, they should be ignored in decision making. While students usually accept the BACOSTMX Module 1 13 idea that sunk costs should be ignored on an abstract level, like most people, they often have difficulty putting this idea into practice. LO7 Discuss the Product Cost Flow Flow of Product Costs Journal Entries: BACOSTMX Module 1 14 LO8 Prepare the Statement of Cost of Goods Manufactured, Statement of Cost of Goods Sold and Income Statement with application Integrity in reporting. Statement of Cost of Goods Manufactured—Raw Materials Used Statement of Cost of Goods Manufactured BACOSTMX Module 1 15 Schedule of Cost of Goods Sold Income Statement References Raiborn and Kinney (2011) Cost Accounting: Foundations and Evolution 8th edition, Cengage Learning Hansen, Don R. and Mowen, Maryanne M. (2018) Cost Accounting and Control. Cengage Learning: Boston, USA. Garrison, Noreen, and Brewer (2010) Cost Accounting and Control 13th edition, McGraw-Hill Practice Quiz General Instruction: Write your answer on the space provided for each item. (It is not recorded) Part I. Identification of Variable, Fixed, and Semivariable Costs. Place a check mark in the appropriate column to indicate whether the following costs are variable, fixed, or mixed. Item Variable Fixed Semivariable 1. Small tools 2. Patent amortization 3. Health and accident insurance 4. Heat, light, and power 5. Straight line depreciation 6. Maintenance of buildings and grounds BACOSTMX Module 1 16 7. Royalties 8. Materials handling 9. Property and liability insurance 10. Maintenance of factory equipment Part II. Classification of Costs. Place a check mark in the appropriate column to indicate the proper classification of each of the following costs. Item Indirect Indirect Other Marketing Administrative Materials Labor Indirect Expenses Expenses Factory Costs 1. Factory heat, light, and power 2. Advertising 3. Wages of stockroom clerk 4. Freight out 5. Oil for machines 6. Salary of vice president of human relations 7. Legal expenses 8. Salary of the factory manager 9. Employer payroll taxes on controller's salary 10. Idle time due to assembly line breakdown Part III. Determination of per Unit Total Costs. The estimated unit costs for Hoteling Industries, when operating at a production and sales level of 10,000 units, are as follows: Cost Item Estimated Unit Cost Direct materials $15 Direct labor 10 Variable factory 8 overhead Fixed factory overhead 5 Variable marketing 4 Fixed marketing 3 Required: (1) Identify the estimated conversion cost per unit. (2) Identify the estimated prime cost per unit. (3) Determine the estimated total variable cost per unit. (4) Compute the total cost that would be incurred during a month with a production level of 10,000 units and a sales level of 12,000 units. BACOSTMX Module 1 17 Part IV. Salome Company had the following account balances as of August 1, 2020: Raw material (direct and indirect) inventory $20,300 Work in process inventory 7,000 Finished goods inventory 18,000 During August, the company incurred the following factory costs: 1. Purchased $164,000 of raw material on account. 2. Issued $180,000 of raw material, of which $134,000 was direct to the product. 3. Accrued factory payroll of $88,000; $62,000 was for direct labor and the rest was for supervisors’ salaries. 4. Accrued utility costs of $7,000; of these costs, $1,600 were fixed. 5. Accrued property taxes on the factory in the amount of $2,000. 6. Recorded $1,600 of prepaid insurance on factory equipment that expired in August. 7. Depreciated (straight-line) factory equipment, $40,000. 8. Applied actual overhead to Work in Process Inventory. 9. Transferred goods costing $320,000 to Finished Goods Inventory. 10. Recorded total sales of $700,000; of these, $550,000 were on account. 11. Recorded cost of goods sold of $330,000. 12. Recorded selling and administrative costs of $280,000 (credit “Various Expenses”) Required: a. Journalize the transactions for August. b. Post transactions to the general ledger accounts for Raw Material Inventory, Work in Process Inventory, Finished Goods Inventory and Cost of Goods Sold. c. Prepare a schedule of cost of goods manufactured for August using actual costing. d. Prepare an income statement, including a detailed schedule of cost of goods sold Answer Key to Pre-Test MATCHING 1. ANS: A 2. ANS: B 3. ANS: H 4. ANS: D 5. ANS: K 6. ANS: E 7. ANS: G 8. ANS: C 9. ANS: I 10. ANS: N 11. ANS: F 12. ANS: J 13. ANS: C 14. ANS: M 15. ANS: G BACOSTMX Module 1 18 Answer Key to Practice Quiz Part I Answer Key: 1. Variable 2. Fixed 3. Semivariable 4. Semivariable 5. Fixed 6. Fixed 7. Variable 8. Variable 9. Fixed 10. Semivariable Part II Answers 1. Other indirect factory costs 2. Marketing expenses 3. Indirect labor 4. Marketing expenses 5. Indirect materials 6. Administrative expenses 7. Administrative expenses 8. Indirect labor 9. Administrative expenses 10. Indirect labor Part III Answers: (1) $10 + $8 + $5 = $23 conversion cost per unit (2) $15 + $10 = $25 prime cost per unit (3) $15 + $10 + $8 + $4 = $37 variable cost per unit (4)[ ( $15 + $10 + $8 + $5 + $3 ) x 10,000 ] + ( $4 x 12,000 ) = $410,000 + $48,000 = $458,000 total cost 1st step: Compute the fixed costs: Fixed FOH = FFOH per unit x normal capacity of 10,000 units = 5 x 10,000 = 50,000 Fixed Mktg = Fixed Mktg cost per unit x normal capacity of 10,000 units = 3 x 10,000 = 30,000 2nd step: Compute the total production cost: Production cost for 10,000 units = [(DM + DL + VFOH) x 10,000 units produced] + FFOH Production cost = [(15 +10 + 8) x 10,000] + 50,000 = (33 x 10,000) + 50,000 = 330,000 + 50,000 = 380,000 3rd step: Compute the total mktg cost Mktg expense = (Variable mktg cost per unit x Units sold) + Fixed mktg cost = (4 x 12,000) + 30,000 = 48,000 + 30,000 = 78,000 4th step: Compute for the total cost Total cost = Production cost + Mktg expense = 380,000 + 78,000 = 458,000 BACOSTMX Module 1 19 Part IV Answers: a. a. 1 Raw material inventory 164,000 Accounts payable 164,000 To record material purchased on account 2 Work in process inventory 134,000 Variable overhead control 46,000 Raw Material inventory 180,000 To transfer direct and indirect materials to production 3 Work in process inventory 62,000 Fixed overhead control 26,000 Salaries and wages payable 88,000 To accrue factory wages payable 4 Variable overhead control 5,400 Fixed overhead control 1,600 Utilities payable 7,000 To accrue factory utilities 5 Fixed overhead control 2,000 Property taxes payable 2,000 To accrue property tax 6 Fixed overhead control 1,600 Prepaid insurance 1,600 To record expired insurance on factory equipment 7 Fixed overhead Control 40,000 Accumulated depreciation-factory equipment 40,000 To record depreciation on factory equipment 8 Work in process inventory 122,600 Variable overhead control 51,400 Fixed overhead control 71,200 To assign actual overhead to WIP inventory For journal entry no. 8, we can use the Variable overhead applied and the Fixed overhead applied. BACOSTMX Module 1 20 9 Finished goods inventory 320,000 Work in process inventory 320,000 To record cost of goods manufactured 10 Accounts receivable 550,000 Cash 150,000 Sales 700,000 To record sales on account and for cash 11 Cost of goods sold 330,000 Finished goods inventory 330,000 To record cost of goods sold for the period 12 Selling and Administrative Expenses 280,000 Various accounts 280,000 To record selling and adminstrative expenses At the end of the period we have to close the Variable overhead control and Fixed overhead control accounts to the Cost of Goods Sold account if still have balances. But in this example they have zero balances which means that they are already closed. It means that there is no overapplied or underapplied overhead. If after the closing entries the Overhead Control accounts have debit balances, it means that the overhead applied to the work in process account is under (underapplied). Underapplied overhead is an addition to cost of goods sold. If it has credit balances, it means that the overhead applied to WIP account is over (overapplied). Overapplied overhead is a reduction to cost of goods sold. b. Raw Material Inventory Beg. Bal. 20,300 (2) (180,000) (1) 164,000 End. Bal. 4,300 Work in Process Inventory Beg. Bal. 7,000 (9) 320,000 (2) 134,000 (3) 62,000 (8) 122,600 End. Bal. 5,600 Finished Goods Inventory Beg. Bal. 18,000 (11) 330,000 (9) 320,000 End. Bal. 8,000 Cost of Goods Sold (11) 330,000 BACOSTMX Module 1 21 330,000 c. Salome Company Schedule of Cost of Goods Manufactured For the month ended August 31, 2020 Balance of Work in Process Inventory, $ 7,000 8/1/2020 Manufacturing costs for the period Raw material Beginning balance $ 20,300 Purchases of material 164,000 Raw material available $ 184, 300 Less Indirect material used $ 46,000 Raw materials Ending balance 4,300 (50,300) Total direct material used $134,000 Direct labor 62,000 Variable overhead 51,400 Fixed overhead 71,200 Total current period manufacturing costs 318,600 Total cost to account for $ 325,600 Balance of Work-in Process inventory, (5,600) 8/31/2020 Cost of goods manufactured (normal) $ 320,000 d. Salome Company Income Statement For the month ended August 31, 2020 Sales $ 700,000 Cost of goods sold Finished goods, 8/1/2020 $ 18,000 Cost of goods manufactured 320,000 Cost of goods available for sale $338,000 Finished goods, 8/31/2020 (8,000) Cost of goods sold (330,000) Gross margin 370,000 Selling and administrative expenses (280,000) Income from operations/Earnings before $ 90,000 interest and tax Roma 8:28 At nalalaman natin na ang lahat ng mga bagay ay nagkakalakip na gumagawa sa ikabubuti ng mga nagsisiibig sa Dios, sa makatuwid baga’y niyaong mga tinawag alinsunod sa Kaniyang nasa. BACOSTMX Module 1 22 BACOSTMX Module 1