principles of cost accounting 13e edward j. vanderbeck
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Principles of Cost Principles of Cost Accounting 13EAccounting 13EEdward J. VanDerbeckEdward J. VanDerbeck
Chapter 1Chapter 1
Introduction to Cost AccountingIntroduction to Cost Accounting
Learning ObjectivesLearning Objectives
Explain the uses of cost accounting data.Explain the uses of cost accounting data. Describe the ethical responsibilities and Describe the ethical responsibilities and
certification requirements for certification requirements for management accountants.management accountants.
Describe the relationship of cost Describe the relationship of cost accounting to financial and managerial accounting to financial and managerial accounting.accounting.
Learning ObjectivesLearning Objectives
Identify the three basic elements of Identify the three basic elements of manufacturing costs.manufacturing costs.
Illustrate basic cost accounting Illustrate basic cost accounting procedures.procedures.
Distinguish between the two basic types Distinguish between the two basic types of cost accounting systems.of cost accounting systems.
Illustrate a job order cost system.Illustrate a job order cost system.
The Need for Cost The Need for Cost AccountingAccounting
Cost accounting provides the detailed cost Cost accounting provides the detailed cost data that management needs to control current data that management needs to control current operations and plan for the future.operations and plan for the future.
Companies must control costs in order to keep Companies must control costs in order to keep prices competitive.prices competitive.
In today’s global environment, cost information In today’s global environment, cost information is more crucial than ever in remaining is more crucial than ever in remaining competitive.competitive.
Types of Businesses That Types of Businesses That Use Cost AccountingUse Cost Accounting
Manufacturers (Ford, General Motors)Manufacturers (Ford, General Motors) Merchandisers (WalMart, Kmart)Merchandisers (WalMart, Kmart) Wholesalers (Beverage Distributors)Wholesalers (Beverage Distributors) For-profit Service Businesses (CPAs, For-profit Service Businesses (CPAs,
Attorneys)Attorneys) Not-for-profit Service Agencies (United Not-for-profit Service Agencies (United
Way, Red Cross)Way, Red Cross)
The Manufacturing The Manufacturing ProcessProcess
This process involves the conversion of This process involves the conversion of raw materials, direct labor, and factory raw materials, direct labor, and factory overhead into finished goods.overhead into finished goods.
Product quality is an important competitive Product quality is an important competitive weapon in manufacturing.weapon in manufacturing.
Many companies require their suppliers to Many companies require their suppliers to be ISO 9000 certified.be ISO 9000 certified.
ISO 9000 CertificationISO 9000 Certification
The International Organization for The International Organization for Standardization created a set of five Standardization created a set of five international standards for quality international standards for quality management, ISO 9000-9004.management, ISO 9000-9004.
These standards require that These standards require that manufacturers have a well-defined quality manufacturers have a well-defined quality control system and they consistently control system and they consistently maintain a high level of quality.maintain a high level of quality.
Determining Product Determining Product Costs and PricingCosts and Pricing
Cost accounting is used to determine Cost accounting is used to determine product costs and help with marketing product costs and help with marketing decisions.decisions. Determining the selling price of a product.Determining the selling price of a product. Meeting competition.Meeting competition. Bidding on contracts.Bidding on contracts. Analyzing profitability.Analyzing profitability.
Planning and ControlPlanning and Control
Planning is the process of establishing Planning is the process of establishing objectives or goals for the firm and objectives or goals for the firm and determining the means by which the firm determining the means by which the firm will attain them. Effective if facilitated by will attain them. Effective if facilitated by the following:the following: Clearly defined objectives of the Clearly defined objectives of the
manufacturing operation.manufacturing operation. A production plan that will assist and guide A production plan that will assist and guide
the company in reaching its objectives.the company in reaching its objectives.
Planning and Control Planning and Control (Cont.)(Cont.)
Control is the process of monitoring the Control is the process of monitoring the company’s operations and determining whether company’s operations and determining whether the objectives identified in the planning process the objectives identified in the planning process are being accomplished. Effective control is are being accomplished. Effective control is achieved through the following:achieved through the following: Assigning responsibility.Assigning responsibility. Periodically measuring and comparing results.Periodically measuring and comparing results. Taking necessary corrective action.Taking necessary corrective action.
Responsibility AccountingResponsibility Accounting
Responsibility accounting is the assignment of Responsibility accounting is the assignment of accountability for costs or production results to accountability for costs or production results to those individuals who have the most authority those individuals who have the most authority to influence them.to influence them.
A cost center is a unit of activity within the A cost center is a unit of activity within the factory to which costs may be practically and factory to which costs may be practically and equitably assigned. The manager of a cost equitably assigned. The manager of a cost center is responsible for those costs that the center is responsible for those costs that the manager controls.manager controls.
ReportingReporting
Cost and production reports for a cost Cost and production reports for a cost center reflect all cost and production data center reflect all cost and production data identified with that center.identified with that center.
The performance report will include only The performance report will include only those costs and production data that the those costs and production data that the center’s manager can control.center’s manager can control.
A variance is the difference between actual A variance is the difference between actual costs and budgeted costs.costs and budgeted costs.
Performance Report Performance Report ExampleExample
Renaldi’s RestaurantRenaldi’s Restaurant
Performance ReportPerformance Report
September 30, 2005September 30, 2005
BudgetedBudgeted ActualActual VarianceVariance
ExpenseExpense SeptemberSeptember Year-to-DateYear-to-Date SeptemberSeptember Year-to-DateYear-to-Date SeptemberSeptember Year-to-DateYear-to-Date
Kitchen Kitchen WagesWages
$5,500$5,500 $47,000$47,000 $5,200$5,200 $46,100$46,100 $300 F$300 F $900 F$900 F
FoodFood 17,70017,700 155,300155,300 18,30018,300 157,600157,600 600 U600 U 2,300 U2,300 U
SuppliesSupplies 3,3003,300 27,90027,900 3,7003,700 29,10029,100 400 U400 U 1,200 U1,200 U
UtilitiesUtilities 1,8501,850 15,35015,350 1,7301,730 16,20016,200 120 F120 F 850 U850 U
TotalTotal $28,350$28,350 $245,550$245,550 $28,930$28,930 $249,000$249,000 $580 U$580 U $3,450$3,450
F = FavorableF = Favorable U = UnfavorableU = Unfavorable
Management AccountingManagement Accounting
The Institute of Management Accountants The Institute of Management Accountants (IMA) is the largest organization of (IMA) is the largest organization of accountants in the industry. The Certified accountants in the industry. The Certified Management Accountant (CMA) is Management Accountant (CMA) is comparable to the Certified Public comparable to the Certified Public Accountant (CPA) for public accountants.Accountant (CPA) for public accountants.
For more information, please visit the For more information, please visit the IMA’s website at IMA’s website at www.imanet.orgwww.imanet.org
Cost Accounting vs. Cost Accounting vs. Financial and Managerial Financial and Managerial AccountingAccounting
CharacteristicsCharacteristics Financial AccountingFinancial Accounting Managerial AccountingManagerial Accounting
Users:Users: •External PartiesExternal Parties•ManagersManagers
ManagersManagers
Focus:Focus: Entire businessEntire business Segments of the businessSegments of the business
Uses of Cost Information:Uses of Cost Information: Product costs for Product costs for calculating cost of goods calculating cost of goods sold and finished goods, sold and finished goods, work in process, and raw work in process, and raw materials inventory using materials inventory using historical costs and GAAP.historical costs and GAAP.
•BudgetingBudgeting•Special decisions such as Special decisions such as make or buy a component, make or buy a component, keep or replace a facility, keep or replace a facility, and sell a product at a and sell a product at a special price.special price.•Nonfinancial information Nonfinancial information such as defect rates, % of such as defect rates, % of return products, and on-return products, and on-time deliveriestime deliveries
Cost Accounting System
Cost Accounting vs. Cost Accounting vs. Financial and Managerial Financial and Managerial Accounting (cont.)Accounting (cont.)
Cost accounting Cost accounting includes those parts includes those parts of both financial and of both financial and management management accounting that accounting that collect and analyze collect and analyze cost information.cost information.
Cost of Goods SoldCost of Goods Sold
MerchandiserMerchandiser ManufacturerManufacturer
Beginning merchandise Beginning merchandise inventoryinventory
Plus purchasesPlus purchases
Merchandise available for saleMerchandise available for sale
Less ending merchandise Less ending merchandise inventoryinventory
Cost of good soldCost of good sold
Beginning finished goods Beginning finished goods inventoryinventory
Plus cost of goods Plus cost of goods manufacturedmanufactured
Finished goods available for Finished goods available for salesale
Less ending finished goods Less ending finished goods inventoryinventory
Cost of good soldCost of good sold
InventoriesInventories
Most manufacturers maintain a perpetual Most manufacturers maintain a perpetual inventory system that uses FIFO, LIFO, or inventory system that uses FIFO, LIFO, or moving average methods of costing.moving average methods of costing.
An inventory ledger is maintained to provide An inventory ledger is maintained to provide support for the control accounts.support for the control accounts.
Some manufacturers may use a Some manufacturers may use a factory factory ledger,ledger, which contains all of the accounts which contains all of the accounts relating to manufacturing.relating to manufacturing.
InventoriesInventories
MerchandiserMerchandiser
Current assets:Current assets:
CashCash
Accounts receivableAccounts receivable
Mdse. inventoryMdse. inventory
ManufacturerManufacturer
Current assets:Current assets:
CashCash
Accounts receivableAccounts receivable
Inventories:Inventories:
Finished goodsFinished goods
Work in processWork in process
MaterialsMaterials
Elements of Elements of Manufacturing CostsManufacturing Costs
Direct materialsDirect materials Materials that become part of and can be Materials that become part of and can be
readily identified.readily identified. Direct laborDirect labor
Labor of employees who work directly on the Labor of employees who work directly on the product manufactured.product manufactured.
Factory overheadFactory overhead Includes all costs related to production other Includes all costs related to production other
than direct materials and direct labor.than direct materials and direct labor.
Prime Cost and Prime Cost and Conversion CostConversion Cost
Direct MaterialsDirect Materials
Direct LaborDirect Labor
Factory OverheadFactory Overhead
Prime Cost
Conversion Cost
Elements of Cost
Flow of Manufacturing Flow of Manufacturing CostsCosts
Direct MaterialsDirect LaborFactory Overhead
Work in Process(Assets)
Finished Goods(Assets)
Cost of Goods Sold (Expenses)
Cost Accounting SystemsCost Accounting Systems
Job Order Cost SystemJob Order Cost System Output consists of special or custom-made Output consists of special or custom-made
products.products. Provides a separate record for the cost of Provides a separate record for the cost of
each quantity of these special or custom-each quantity of these special or custom-made products.made products.
Process Cost SystemProcess Cost System Accumulates costs for each department or Accumulates costs for each department or
process in the factory.process in the factory.
Job Order Cost SystemJob Order Cost System
Direct MaterialsDirect LaborFactory Overhead
Job Cost Sheets Finished Goods
Work in Process Account
Process Cost SystemProcess Cost System
Work in ProcessDept. 1
Work in ProcessDept. 2 Finished Goods
FactoryOverhead
DirectLabor
Direct Materials
Direct Materials
DirectLabor
FactoryOverhead
Standard Cost SystemStandard Cost System
May be used with either a job order or a May be used with either a job order or a process cost system.process cost system.
Uses predetermined standard costs to furnish Uses predetermined standard costs to furnish a measurement that helps management make a measurement that helps management make decisions regarding the efficiency of operation.decisions regarding the efficiency of operation.
Standard costsStandard costs are costs that would be are costs that would be incurred under efficient operating conditions incurred under efficient operating conditions and are forecast before the manufacturing and are forecast before the manufacturing process begins.process begins.
AppendixAppendixStandards of Ethical Conduct for Standards of Ethical Conduct for Management AccountantsManagement Accountants
Members of the IMA have an obligation to Members of the IMA have an obligation to the public, their profession, the the public, their profession, the organizations they serve, and themselves to organizations they serve, and themselves to maintain the highest standards of ethical maintain the highest standards of ethical conduct.conduct. CompetenceCompetence ConfidentialityConfidentiality IntegrityIntegrity ObjectivityObjectivity
Appendix (cont.)Appendix (cont.)
Resolution of Ethical ConflictResolution of Ethical Conflict When applying the standards of ethical conduct, IMA members When applying the standards of ethical conduct, IMA members
may encounter problems in identifying unethical behavior or in may encounter problems in identifying unethical behavior or in resolving an ethical conflict.resolving an ethical conflict. Discuss problems with the immediate superior except when it Discuss problems with the immediate superior except when it
appears that the superior is involved.appears that the superior is involved. Clarify relevant ethical issues by confidential discussion with an Clarify relevant ethical issues by confidential discussion with an
objective advisor.objective advisor. Consult your own attorney as to legal obligations and rights Consult your own attorney as to legal obligations and rights
concerning the ethical conflict.concerning the ethical conflict. If the conflict remains after exhausting the preceding actions, If the conflict remains after exhausting the preceding actions,
resign from the organization and submit an informative resign from the organization and submit an informative memorandum to an appropriate member of the organization.memorandum to an appropriate member of the organization.