Cost Accounting

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Terms in this set (52)

Information Purpose Management: Helps managers make informed

decisions to fulfill an organisation's goals

Financial: to communicate an organisation's position

to outside parties (banks, Investors, creditors, and
regulators)

Primary Users of financial and Management: Managers of the organisation

management accounting
Financial: Outside interested parties (external users)
banks, investors, regulators.

Focus and emphasis of financial management: future orientated (budget for the year
and management accounting ahead)

Financial: Past orientated (looks at past performance

of the organisation)

Rules of measurement and management: based on cost-benefit analysis but do

reporting for financial and not have to follow GAAP. used by managers for
management accounting internal measures and reports.

Financial: Must be reported in accordance to GAAP

 and must be certified and audited by an external
party.

Time span and type of reports in Management: can vary from hourly information to 10-
financial and management 20 years, these can be financial and non financial
accounting reports on products, territories, land, holdings.

Financial: Annual and quartly reporting primarily on

the company as a whole.

Behavioural implications of Management: designed to influence the behaviours of

financial and management management and employees
accounting
Financial: primarily reports economic events but can
also influence managers behaviour as compensation
and bonuses are often tied to the reported financial
results

Strategy Definition Process What is our customers willingness to pay? (who are
our customers)

How much does it cost to produce the goods or

services? (what is the production service)

How sustainable are our profits?

(competition likely reaction)

Strategy monitoring process it is a control system that allows the company to

understand whether the firm is correctly progressing
with the strategy originally implemented.

identify the relevant dimensions of performance

design metrics that capture performance

predict levels that indicate implementation success

measure actual performance and compare against

budgeted.

What is hedging? eliminate or reduce the risk of changes in price of a

good

example. fuel, buy fuel for next year today in the

assumption that the price will increase later. therefore
save money in the long run.
imperfect and perfect hedge perfect: Buy all future need in future market

imperfect: buy a percentage of future needs in future

markets.

Cost object Anything for which a measurement of cost is desired,

e.g. product or service

Budgeted vs. Actual Budgeted: is a predict of how much cost will be

accumulated (forecasted, planned)

Actual: incurred cost

Direct costs Costs related to the cost object and can be traced to
it in a cost-effective way

indirect cost/ overhead Costs related to the cost object but cannot be traced
to it in a cost effective way

Variable Costs Costs that change in total in proportion to production

volume

Fixed Costs Costs that remain unchanged in a given time period

despited a wide range of production volume

Expense Costs related directly to goods or services

recognised as revenue

Costs incurred in a period whose benefits expire in a

period

resources expended now or in the past that are not

likely to create future benefit for the company.

Requirements of being an asset 1. Acquired at a measurable cost

2. obtained or controlled by the entity
3. expected to create future economic benefits
4. arises from a past transaction or event

Inventoriable cost All the costs (fixed or variable, direct or indirect)

incurred to a product that will eventually be sold as
part of the normal business of the firm

Period Costs All costs that are not cost of goods sold

Impacts of costing inventory impacts profits, assets and equity

 impacts managers and employee compensation

Cost function A mathmatical equation of how costs behave

cost driver independent variables that affect cost

functional form how changes in drivers translate into the cost of the
object

elements of a cost function Cost object

cost driver
functional form

cost function validity conditions relevant range

time horizon

Industrial engineering cost historical origin of cost analysis

estimation method

conference method used by cross functional task forces in a redesign

method

Cost analysis method costs are classified according to their expected

relationships identified by managers and engineers

quantitive analysis method fit the observed data into formal mathematical
relationships

How to judge a model Use managerial common sense aka is it plausible

look at data e.g. is there a linearity

use econometrics e.g. T-stat

Target operating income (Fixed costs+target operating income)/ unit

(quantity of units to be sold) Contribution margin

Unit break even point fixed costs/unit contribution margin

Sensitivity analysis technique that managers use to examine the effect of

a change in variables that will affect the outcome of a
decision
Margin of safety the measure of how much sales can decline and the
company remain profitable

operating leverage the level of accelerating of profits that occurs after

fixed costs are paid for

what determines operating industry in which the firm operates (engine

leverage manufacturing and luxury goods usually have high
operating leverage)

the strategy a firm adopt may increase or decrease

operating leverage typical to the level in the industry

Groos margin Sales revenue-cost of goods sold

is a measure of competitiveness based upon a
constant sales mix percentage

Contribution Margin Sales revenue-all variable costs

indicates how much of a companies revenue is
available to cover fixed costs

Job costing in this system the cost object is a unit or multiple units
of a good or service with high customisation and
value

Process Costing in this system the cost object is a large amount of

similar or identical units of goods or services

Components of allocation of the variable used to distribute overhead among

overhead different cost objects (also called cost driver)

Allocation rate the amount assigned per unit of the

allocation basis

equation for allocated overhead allocation rate * allocation basis

job costing for: Normal= actual rate * actual basis

Actual = actual rate * Budgeted Basis
Normal Standard= Budgeted rate * Budgeted Basis
Actual
Standard

what do to if normal or standard write off over or under allocation to cost of goods
methods of allocation vary from sold
actual
OR
 Proration spread between ending WIP Finished
Goods and COGS in relation to total manufacturing
overhead allocated to each account
and the ending balances of these accounts

Variable costing all variable manufacturing costs are included as

inventorial costs

absorption costing all variable manufacturing costs and all fixed

manufacturing costs are considered inventioriable

throughput costing only direct material costs are included as inventorial

costs

theoretical capacity capacity is based on producing at full efficiency all

the time

pratical capacity theoretical capacity adjusted for unavoidable

disturbances in production (e.g. scheduled
maintenance)

Normal (average) capacity the level of capacity that satisfies average consumer
demand over a period of two to three years

Master budget capacity the level of capacity utilisation that managers expect
for the next budgeted period (one year)

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