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    Cost Accounting

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    sskumar82
    This document provides an overview of cost accounting, including its uses, types of businesses that use it, and key concepts. It describes cost accounting's relationship to financial and managerial accounting and identifies the three basic elements of manufacturing costs. It also distinguishes between job order and process cost accounting systems, and provides examples of how costs flow through a manufacturing process.

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    Cost Accounting

    Uploaded by

    sskumar82
    141 views29 pages
    This document provides an overview of cost accounting, including its uses, types of businesses that use it, and key concepts. It describes cost accounting's relationship to financial and managerial accounting and identifies the three basic elements of manufacturing costs. It also distinguishes between job order and process cost accounting systems, and provides examples of how costs flow through a manufacturing process.

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    A short intro to cost accounting principles.

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    This document provides an overview of cost accounting, including its uses, types of businesses that use it, and key concepts. It describes cost accounting's relationship to financial and managerial accounting and identifies the three basic elements of manufacturing costs. It also distinguishes between job order and process cost accounting systems, and provides examples of how costs flow through a manufacturing process.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    141 views29 pages

    Cost Accounting

    Uploaded by

    sskumar82
    This document provides an overview of cost accounting, including its uses, types of businesses that use it, and key concepts. It describes cost accounting's relationship to financial and managerial accounting and identifies the three basic elements of manufacturing costs. It also distinguishes between job order and process cost accounting systems, and provides examples of how costs flow through a manufacturing process.

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    Chapter 1

    Introduction to Cost Accounting

    Learning Objectives
    LO1 Explain the uses of cost accounting data. LO2 Describe the ethical responsibilities and certification requirements for management accountants. LO3 Describe the relationship of cost accounting to financial and managerial accounting.

    Learning Objectives
    LO4 Identify the three basic elements of manufacturing costs. LO5 Illustrate basic cost accounting procedures. LO6 Distinguish between the two basic types of cost accounting systems. LO7 Illustrate a job order cost system.

    The Need for Cost Accounting


    Cost accounting provides the detailed cost data that management needs to control current operations and plan for the future. Companies must control costs in order to keep prices competitive. In todays global environment, cost information is more crucial than ever in remaining competitive.

    Types of Businesses That Use Cost Accounting


    Manufacturers (Ford, General Motors) Merchandisers (WalMart, Kmart) Wholesalers (Beverage Distributors) For-profit Service Businesses (CPAs, Attorneys) Not-for-profit Service Agencies (United Way, Red Cross)

    The Manufacturing Process


    This process involves the conversion of direct (raw) materials, direct labor, and factory overhead into finished goods. Product quality is an important competitive weapon in manufacturing. Many companies require their suppliers to be ISO 9000 certified.

    ISO 9000 Certification


    The International Organization for Standardization created a set of five international standards for quality management, ISO 9000-9004. These standards require that manufacturers have a well-defined quality control system and they consistently maintain a high level of quality.

    Determining Product Costs and Pricing


    Cost accounting is used to determine products costs and help with marketing decisions.
    1. Determining the selling price of a product. 2. Meeting competition. 3. Bidding on contracts. 4. Analyzing profitability.

    Planning and Control


    Planning is the process of establishing objectives or goals for the firm and determining the means by which the firm will attain them. Effective planning is facilitated by the following:
    1. Clearly defined objectives of the manufacturing operation. 2. A production plan that will assist and guide the company in reaching its objectives.

    Planning and Control (cont.)


    Control is the process of monitoring the companys operations and determining whether the objectives identified in the planning process are being accomplished. Effective control is achieved through the following:
    1. Assigning responsibility. 2. Periodically measuring and comparing results. 3. Taking necessary corrective action.

    Responsibility Accounting
    Responsibility accounting is the assignment of accountability for costs or production results to those individuals who have the most authority to influence them. A cost center is a unit of activity within the factory to which costs may be practically and equitably assigned. The manager of a cost center is responsible for those costs that the manager controls.

    Reporting
    Cost and production reports for a cost center reflect all cost and production data identified with that center. The performance report will include only those costs and production data that the centers manager can control. A variance is the favorable or unfavorable difference between actual costs and budgeted costs.

    Performance Report Example


    Renaldis Restaurant Performance Report September 30, 2006 Budgeted Actual
    Expense September Year-to-Date September Year-to-Date

    Variance
    September Year-to-Date

    Kitchen Wages Food Supplies Utilities Total

    $5,500 17,700 3,300 1,850 $28,350

    $47,000 155,300 27,900 15,350 $245,550

    $5,200 18,300 3,700 1,730 $28,930

    $46,100 157,600 29,100 16,200 $249,000

    $300 F 600 U 400 U 120 F $580 U

    $900 F 2,300 U 1,200 U 850 U $3,450 U

    F = Favorable U = Unfavorable

    Management Accounting
    The Institute of Management Accountants (IMA) is the largest organization of accountants in industry. The Certified Management Accountant (CMA) is comparable to the Certified Public Accountant (CPA) for public accountants. For more information, please visit the IMAs website at www.imanet.org

    Cost Accounting vs. Financial and Managerial Accounting


    Cost Accounting System
    Characteristics Financial Accounting Managerial Accounting

    Users:
    Focus: Uses of Cost Information:

    External Parties Managers


    Entire business Product costs for calculating cost of goods sold and finished goods, work in process, and raw materials inventory using historical costs and GAAP.

    Managers Segments of the business Budgeting Special decisions such as make or buy a component, keep or replace a facility, and sell a product at a special price. Nonfinancial information such as defect rates, % of returned products, and ontime deliveries

    Cost Accounting vs. Financial and Managerial Accounting (cont.)


    Cost accounting includes those parts of both financial and management accounting that collect and analyze cost information.

    Cost of Goods Sold


    Merchandiser
    Beginning merchandise inventory Plus purchases Merchandise available for sale Less ending merchandise inventory Cost of good sold

    Manufacturer
    Beginning finished goods inventory Plus cost of goods manufactured Finished goods available for sale Less ending finished goods inventory Cost of good sold

    Inventories
    Most manufacturers maintain a perpetual inventory system that uses FIFO, LIFO, or moving average methods of costing. An inventory ledger is maintained to provide support for the control accounts. Some manufacturers may use a factory ledger, which contain all of the accounts relating to manufacturing.

    Inventories
    Merchandiser Current assets: Cash Accounts receivable Merchandise inventory Manufacturer Current assets: Cash Accounts receivable Inventories: Finished goods Work in process Materials

    Elements of Manufacturing Costs


    Direct materials
    Materials that become part of the finished good and can be readily identified.

    Direct labor
    Labor of employees who work directly on the product manufactured.

    Factory overhead
    Includes all costs related to production other than direct materials and direct labor.

    Prime Cost and Conversion Cost


    Direct Materials
    Elements of Cost

    Direct Labor
    Factory Overhead

    Prime Cost Conversion Cost

    Flow of Manufacturing Costs


    Direct Materials Direct Labor Factory Overhead Work in Process (Assets) Finished Goods (Assets) Cost of Goods Sold (Expenses)

    Illustration of Accounting for Manufacturing Costs


    Materials Accounts Payable Work in Process (Direct Materials) Factory Overhead (Indirect Materials) Materials Payroll Wages Payable Wages Payable Cash Work in Process (Direct Labor) Factory Overhead (Indirect Labor) Selling & Admin Exp (Salaries) Payroll Factory Overhead (Depr. Bldg) Selling & Admin Exp (Depr. Bldg) Accum. Depr. Bldg Factory Overhead (Depr. Mach & Eq) Accum. Depr. Mach & Eq xx xx xx xx xx xx Factory Overhead (Utilities) Selling & Admin Exp (Utilities) Accounts Payable Selling & Admin Exp Accounts Payable Work in Process Factory Overhead xx Finished Goods Work in Process Accounts Payable Cash Accounts Receivable Sales Cost of Goods Sold Finished Goods Cash Accounts Receivable xx xx xx xx xx xx

    xx
    xx xx xx xx xx xx xx xx xx xx xx

    xx xx xx xx xx

    xx
    xx xx xx xx

    Cost Accounting Systems


    Job Order Cost System
    Output consists of special or custommade products. Provides a separate record for the cost of each quantity of these special or custom-made products.

    Process Cost System


    Accumulates costs for each department or process in the factory.

    Job Order Cost System

    Direct Materials Direct Labor Factory Overhead

    Work in Process Account

    Finished Goods Account

    Job Cost Sheets

    Process Cost System


    Work in Process Dept. 2

    Work in Process Dept. 1

    Finished Goods

    Direct Materials

    Direct Labor

    Direct Materials

    Direct Labor

    Factory Overhead

    Factory Overhead

    Standard Cost System


    May be used with either a job order or a process cost system. Uses predetermined standard costs to furnish a measurement that helps management make decisions regarding the efficiency of operation. Standard costs are costs that would be incurred under efficient operating conditions and are forecast before the manufacturing process begins.

    Appendix

    Standards of Ethical Conduct for Management Accountants Members of the IMA have an obligation to the public, their profession, the organizations they serve, and themselves to maintain the highest standards of ethical conduct.
    1. 2. 3. 4. Competence Confidentiality Integrity Credibility

    Appendix (cont.)

    Resolution of Ethical Conflict


    When applying the standards of ethical conduct, IMA members may encounter problems in identifying unethical behavior or in resolving an ethical conflict.
    1. Discuss problems with the immediate superior except when it appear that the superior is involved. 2. Clarify relevant ethical issues by confidential discussion with an objective advisor. 3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

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