The measuring The recording, and The reporting of product costs Consists of the various manufacturing costs that are fully integrated into the general ledger system.
An important charcteristic is the use of a perpetual
inventory system (ERP) to provide immediate, up-to- date information on the cost of a product. Job-Order Cost Flows The cost accounting systems report the costs of the physical flow of the materials as they are converted into finished goods. Manufacturing costs are assigned to Work in Process Cost of completed jobs is transferred to Finished Goods Inventory When units are sold, the cost is transferred to Cost of Goods Sold. Job-Order Cost Flows Chapter 4
Process Cost Accounting Systems Job-Order & Process Cost flows
Job-Order Cost Flow
Work in Process Direct Materials Inventory Finished Goods Cost of Goods Direct Labour Job No. 101 Inventory Sold Manufacturing Job No. 102 Overhead Job No. 103
Process Cost Flow
Direct Materials Work in Work in Finished Cost of Direct Labour Process— Process— Goods Goods Manufacturing Department A Department B Inventory Sold Overhead Production Cost Report • Key report used to provide data on activities and to evaluate performance • Four steps 1. Calculate physical unit flow 2. Calculate equivalent (completed) units of production 3. Calculate unit production costs 4. Prepare a cost reconciliation schedule Process Cost Accounting Systems Equivalent units – Weighted average method Chapter 5
Activity Based Costing -
ABC Hierarchy of Activity Levels Four Levels Types of Activities Cost Drivers
Direct cost Direct materials Direct materials Direct labour
Direct labour Chapter 7
Incremental Analysis Incremental Analysis Concept Definition Incremental Analysis: Process to identify/compare/evaluate financial data whose result/outcome changes under different scenarios Incremental Analysis Business Scenarios
Accept an order at a special price
Make or buy component parts or finished products Sell products or process further Retain or replace equipment Eliminate an unprofitable business segment Allocate limited resources Incremental Analysis Key Concepts In incremental analysis scenarios; the relevant revenues and costs to be considered are: •Those costs and revenues that are different for each scenario •Those costs and revenues that will occur in the future. Incremental Analysis Key Concepts
Opportunity cost: • Using a resource in a particular way results in giving up the opportunity to use the resource in alternative ways •This lost opportunity is an (opportunity) cost that must be taken into account when making a decision
Sunk cost: Costs that have already been incurred
and will not be changed or avoided by any future decision are called sunk costs. Sunk costs are not relevant costs. Incremental Analysis Make or Buy – Example (Continued) ABC Company Make Buy Net Income Increase/ Decrease Direct materials $50,000 $0 $50,000 Direct labour 75,000 $0 75,000 Variable manufacturing costs 40,000 $0 40,000 Fixed manufacturing costs 60,000 50,000 10,000 Purchase price (25,000 x $8) 0 200,000 (200,000) Total Annual Cost $225,000 $250,000 ($25,000)
Based on the costs analysis of the both alternatives:
Purchasing from an outside supplier would add $25,000 to the cost of the switches
Decision: Continue to make switches internally.
Chapter 9
Pricing External sales Target Costing - Concept In a highly competitive market, price is largely determined by supply and demand Target cost – cost that provides the desired profit on a product when the seller does not have control over the product’s price Must control costs to earn a profit Requires effective project management Internal Sales Negotiated Transfer Price - Example Sole Division has excess capacity Can produce 80,000 soles, but can sell only 70,000 Available capacity of 10,000 soles Contribution margin is not lost The minimum transfer price acceptable to Sole:
Negotiate a transfer price between $11 (minimum
acceptable to Sole) and $17 (maximum acceptable to Boot) Internal Sales Negotiated Transfer Price - Example Sole Division has no excess capacity If Sole sells to Boot, payment must at least cover variable cost per unit plus its lost contribution margin per sole (opportunity cost) The minimum transfer price acceptable to Sole:
Maximum Boot Division will pay
what the sole would cost from an outside buyer Chapter 10
Budgetary Planning Budgeting Basics: The Master Budget - Framework Operating Budgets: Budgeted Income Statement Hayes Company 2017 Budgeted Income Statement Sales 900 000 $ Cost of goods sold 660 000 Gross profit 240 000 Selling and administration expenses 160 000 Operating income 80 000 Interest expense 5 000 Income before income taxes 75 000 Income taxes (20% of income before tax) 15 000 Net Income 60 000 $ Financial Budgets Budgeted Balance Sheet Hayes Company 2017 Budgeted Balance Sheet 1/1/2017 Data 12/31/2017 Assets Cash 40 000 Source: cash budget 50 000 Acccounts receivable 70 000 Source: collection schedule ($270 000 - $172 000) 108 000 Finished goods (600 at $44) 26 400 Source: production schedule (1000 at $44) 44 000 Buildings and equipement 182 000 Source: capital expenditure schedule ($10 000) 192 000 Less: Accumulated depreciation -29 000 Source: Mfg overhead schedule ($28 000) -57 000 Total Assets 289 400 337 000 Liabilities and Sharehoders' Equity Loan payable 100 000 Source: cash budget - repayment: $12 400 87 600 Common shares 125 000 125 000 Retained earnings 64 400 Source: budgeted Income Statement: $60 000 124 400 Total liabilities and equity 287 000 337 000 Chapter 11
Budgetary Control &
Responsibility Accounting Flexible Budgets Concept Projects budget data for various levels of activity A series of static budgets at different activity levels Budgetary process more effective if it is adapted to changes in operating conditions Flexible Budget Example
29 Copyright John Wiley
Responsibility Centers Categories Cost centers (Responsible for : Expenses) • Example: Production centre or service department • Profit centers (Responsible for: Revenue and Expenses) • Example: Individual retail store, bank branch • Investment centers (Responsible for Revenue, Expenses and Return on Investment) • Example: Subsidiary company Chapter 11
Standard Costs &
Variance analysis Comparing Standards Costs and Budgets
• A standard cost is a unit amount
Standard costs may be incorporated into a cost accounting system
• A budget is for the total operations
• Both budgets and standard costs are
management planning and control tools Standards Costs - Variances Illustration Total Variance
Total Total Total
Material Labour Overhead Variance Variance Variance
