cost terms & purposes
DESCRIPTION
Management Accounting -TRANSCRIPT
Management Accounting:Introduction
• Cost Flows• Cost terms & purposes
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Cost:Definition
• Monetary measure of resources given up to attain an objective (such as acquiring a good or service) – Barfield, Raiborn, Kinney
• At the time of acquisition, the cost incurred is for present or future benefits. When these benefits are utilized, the costs become expenses. An expense is defined as a cost that has given a benefit and is now expired. Unexpired costs that give future benefits are classified as assets. – Polimeni, Fabozzi, Adelberg
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Cost Categories
Relevant, differential, sunk, opportunity
Direct, indirect
Controllable, noncontrollable
Impact on decision making
Unexpired, expired
Product, period
Prime, Conversion
Classification on the F/S
Variable, fixed,
Mixed, step
Reaction to changes in activity
Historical, replacement, budgetedTime of incidence
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Basic Cost Terms:Cost Objects and Drivers
Cost• A sacrifice of resources. Distinguish from
“expense”.Cost Object• Any activity or item for which a separate
measurement of costs is desired.Cost Driver• Any factor whose change “causes” a change
in the total cost of a related cost object. (Note: Cost drivers can be factors other than volume.)
From: ocw.mit.edu
Direct and Indirect CostsDirect Costs• Costs that can be traced to a given cost
object (product, department, etc.) in an economically feasible way.
Indirect Costs• Costs that cannot be traced to a given cost
object in an economically feasible way. These costs are also known as “overhead”.
Cost Assignment• Direct costs are traced to a cost object.• Indirect costs are allocated or assigned to
a cost object.
DirectCost A
DirectCost B
IndirectCost C
ObjectX
ObjectY
From: ocw.mit.edu
Product and Period CostsProduct Costs• Costs that “attach” to the units that
are produced (i.e., manufacturing costs) and are not reported as expenses until the goods are sold.
Period Costs• Costs that must be charged against
income in the period incurred and cannot be inventoried (e.g., selling and administrative expenses.)
Unit Costs• Total cost of units divided by units
produced.
Product Costs PeriodCost
DirectCost
IndirectCost
Product X
Inventory
IncomeStatement
From: ocw.mit.edu
Cost BehaviorVariable Costs• Costs that change directly in proportion to changes in the
related cost driver.Fixed Costs• Costs that remain unchanged for a given time period
regardless of change in the related cost driver.Other common functions for Cost Behavior• Semi-variable costs (part variable and part fixed).• Step costs (give examples)Main Assumptions needed to define fixed/variable:• Cost object, Time span, Linear functional form.• Relevant range = the band of cost driver activity in which a
specific relationship between a cost and a driver holds.
From: ocw.mit.edu
Basic Cost Terms• Product costs can be Direct or Indirect
(Overhead)• Not all Direct costs are variable
– The depreciation of a special piece of equipment bought to manufacture a single product line.
• Not all Overheads are fixed– Processing of raw material purchase orders– Electricity used in operating production
equipment.
From: ocw.mit.edu
Answer the following:Kym Manufacturing provided the following
information for last month:Sales $12,000Variable costs 4,000Fixed costs 1,000Operating income $7,000
If sales double next month, what is the projected operating income?a. $14,000b. $15,000c. $18,000d. $19,000
Prime Costs and Conversion Costs
Prime Costs• all direct manufacturing costs. (would comprise
direct material costs and direct manufacturing labor costs) As information-gathering technology improves, companies may add additional direct-cost categories.
Conversion Costs• all manufacturing costs other than direct
materials costs. These costs are for transforming direct materials into finished goods. (would comprise direct manufacturing labor costs and indirect manufacturing costs)
Traditional Costing System
Product
Costs
Direct CostsDirect labor
Direct materials
Overhead CostsIndirect labor
Indirect materialsDepreciation
Traceddirectly
Traced using allocation base,e.g. direct labor hrs, machine hrs
From: ocw.mit.edu
Activity-Based Costing (ABC) System
Product
Costs
Direct CostsDirect labor
Direct materials
Overhead CostsIndirect labor
Indirect materialsDepreciation
Activities thatdrive
overhead
From: ocw.mit.edu
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Movement of Expenditures into F/S
ExpenditureExpenditure
CostCost
DeferredDeferred
Balance SheetBalance Sheet
ExpiredExpired
Income StatementIncome Statement
ExpenseExpense LossLoss
• or unexpired• future use• capital expenditure
or inventoriable
costs
• no future use• incl. period costs
• no benefit
was derived
Service Company
Purchasesupplies
Purchasesupplies
Use supplies,labor, overhead
to provide service
Use supplies,labor, overhead
to provide service
Input Output
Sell to customer
Sell to customer
Purchaseproductsfor resale
Purchaseproductsfor resale Sell to
customer
Sell to customer
Warehouseand/or display
Warehouseand/or display
Retail Company
Purchaseraw materials and supplies
Purchaseraw materials and supplies
Production Center
add labor and overhead
Manufacturer
Sell to customer
Sell to customer
Finished Product
Finished Product
Cost Accumulation in aManufacturing Company
MaterialsInventory
MaterialsInventory
Work in ProcessInventory
Work in ProcessInventory
FinishedGoods
Inventory
FinishedGoods
Inventory
Cost of GoodsSold
Balance SheetIncome
Statement
Accumulation Procedures
DM DL FOHDM DL FOH
WIPJob #1
WIPJob #1
WIPJob #2
WIPJob #2
WIPJob #3
WIPJob #3
FGJob #1
FGJob #1
FGJob #2
FGJob #2
FGJob #3
FGJob #3
WIPDept 1
WIPDept 1
WIPDept 2
WIPDept 2
WIPDept 3
WIPDept 3
FGInv.
FGInv.
DM DL FOHDM DL FOH
Job Order Costing Process Costing
Flow of Product Costs (entries)
Raw Materials InventoryAccounts Payable
Work in Process InventoryRaw Materials Inventory
Work in Process Inventory Salaries/Wages Payable
Fixed OH Control (actual)Salaries/Wages Payable
Variable OH Control (actual)Utilities Payable
Work in Process InventoryVariable OH Control (applied)Fixed OH Control (applied)
Finished Goods InventoryWork in Process Inventory
Accounts ReceivableSales
Cost of Goods SoldFinished Goods Inventory
Statement of Cost of Goods Manufactured
Raw Materials Used
Beginning raw materials xxx
Purchases of raw materials xxx
Raw materials available xxx
Ending raw materials <xxx>
Total raw materials used xxx
To Statement of Cost of Goods Manufactured
Statement of Cost of Goods Manufactured
• Beginning work in process xxxx– Raw materials used xxx– Direct labor xxx– Variable overhead xxx– Fixed overhead xxxx
• Current period manufacturing costs xxxx• Total costs to account for xxxx• Ending work in process <xxxx>• Cost of goods manufactured xxxx
Schedule of Cost of Goods Sold
Beginning Finished Good xxxx
Cost of Goods Manufactured xxxx
Cost of Goods Available for Sale xxxx
Ending Finished Goods <xxxx>
Cost of Goods Sold xxxx
From Schedule of Cost of Goods Manufactured
Costing Approaches• Actual Costing – allocates:
Indirect costs based on the actual indirect-cost rates times the actual activity consumption
•Normal Costing – allocates:Indirect costs based on the budgeted indirect-
cost rates times the actual activity consumption•Both methods allocate Direct costs to a cost object the same way: by using actual direct-cost rates times actual consumption.
Cost System and Cost Accumulation ProcedureA
CT
UA
LN
OR
MA
LS
TA
ND
AR
D
JOB ORDER PROCESS
Actual direct materialsActual direct laborActual OH assigned to jobs after end of period
Actual direct materialsActual direct laborActual overhead costs assigned to process at end of period using FIFO or wtd. ave. cost flow
Actual direct materialsActual direct laborOH applied at completion of job or end of period (predetermined rate x actual input)
Actual direct materialsActual direct laborPredetermined OH applied at the end of the process using FIFO or wtd ave. cost flow
Standard direct materialsStandard direct laborOH applied at completion of job or end of period (predetermined rate x standard input)
Standard direct materialsStandard direct laborStandard overhead applied using FIFO cost flow
Other Cost Terms:• Several key points:
Cost Objects – including responsibility centers, departments, customers, products, etc.
Direct costs and Tracing – materials and labor Indirect Costs and Allocation – overhead
•Cost Pool – any logical grouping of related cost objects•Cost-allocation Base – a cost driver is used as a basis upon which to build a systematic method of distributing indirect costs
For example, let’s say that direct labor hours cause indirect costs to change. Accordingly, direct labor hours will be used to distribute or allocate costs among objects based on their usage of that cost driver