Ch1 - Introduction - find corresponding Y (total cost) at given X (cost driver/qty).

1.1 MA: A process that focuses on effective & efficient use of resources to support managers in Method 2 - High–low method | Taking 2 observations with highest & lowest level of activity [NOT
their task of enhancing both customer value and shareholder value. cost] to calculate the cost function using cost equation
Type of Strategies
- Operational Excellence Strategy ↔ deliver products & services faster, more conveniently, and at
lower prices. ~Cost Leadership Strategy: Economies of production; Superior Process Technologies;
Tight cost control Method 3 - Regression analysis | Uses a range of data points to estimate the r/s between cost
- Customer Intimacy Strategy↔understand & respond to individual customer needs (Y) and cost drivers (X) through best fit ⇒ more accurate than high-low (uses all data)
- Product/Price Leadership Strategy↔Higher quality / value for money i.e. Product differentiation: - Multiple regression | estimates linear r/s btw 1 dependent (Y) &
Superior quality; Customer service; Delivery performance; Product features {basically what is so 2 or more independent (X1, X2..) ⇒
good about your product/services that makes people want to buy} - regression line can be evaluated by: (i) How well the line fits the data points. (ii) Using excel
Stategic Planning - formulate strategies after ST & LT planning with MA Info (budget; costs) regression ⇒ R^2 > 0.8 is considered a good fit.
Implementing plans and strategies - new structures, systems, production processes, marketing - Least Squares regression method
approaches and HR management policies; performance measurement systems that compare
actual outcomes to budgets/targets. This is the responsibility of managers Cost formula can be used to predict cost at any activity level within the relevant range.
Controlling {execution} - putting mechanisms in place to ensure that operations proceed - The relevant range of activity should be specified for each method.
according to plan and that objectives are achieved; - taking corrective actions when actual Practical issues in cost estimation:
performance deviates from plans and rewarding employees when targets are met.; - MA - Collection of data may be problematic ‒ i.e. data quality issue; lack of manpower/supporting IT
information provides information for controls. i.e. the performance measurement and reporting system
system: compare actual performance against the budgets/targets/plans Sales Performance Ch2 – Cost Behavious, Cost Driver, Cost Estimations / DO - Learning curve effect may influence cost behaviour ‒ labour time/unit decrease as labour force
Report, Manufacturing Cost Variances Report and others. 2.1 Cost Drivers gain experience
Volume-based cost drivers | units produced; DLhours; DL cost; machine hours - Accuracy of cost estimations subjected to cost-benefit decisions when choosing estimation
1.2 Cost Classifications - Unit Level ‒ conventional production volume method
Product - go to BS | Period – go to exp immediately [salary as expensed off every mth] - Batch Level ‒ activities performed for a grp of product units (i.e. batch/delivery load; batch - All cost functions based on simplifying assumptions: cost behaviours depend on single/few types
Variable - change over level of activity [wages; DM]| Fixed - same no matter level of activity setup cost) of activity; cost behaviours are linear within relevant range
[advertising; depr; salary] - Product Level ‒ activities performed for specific products/product group (i.e. product design
Manu – DM/DL/MOH within factory | Non-manu – SGA/outside factory costs) Ch3 – Product Costing System
Direct costs: easy to trace to particular cost object [more wider defined, more DC traceable] - Facility Level ‒ non-specific costs that cant be attributed to above 3, but for manufacturing 2.1 Product Costing
facility (i.e. facility rental; facility manager salary) ST profitability: manufacturing + downstream costs (mkt/distribution/customer service)
Direct - Consumed in manufacturing process LT profitability: pricing/product mix – ALL costs
Material - physically incorporated into finished products (EXCL small items) 2.2 Cost Behaviours A. Job Costing (unique single G&S) – manufactured to order/customised/distinct jobs
- can be directly traced to products A. Variable costs: Y = a + bX - requires tracing & allocation to each job + maintain each job’s costs i.e. consultancy svc
- a variable costs (wrt production output) - where Y: Total Costs; a: fixed costs; b: slope or variable cost per unit of X; X: cost driver B. Process Costing (identical bulk G&S) – same cost/unit. Assign all pdn cost to process/dpt →
Direct - directly traced to a product - salary of workers directly working on pdts (EXCL - Variable cost change in direct proportion in level of activity avg across all units produced
Labor supervisors) - Variable cost per unit remains constant. 2.2 Allocating OH costs
- usually treated as a variable cost unless contractual arrangements that B. Engineered Cost ‒ cost that bears a defined physical relation to level of output. i.e. a certain DC: traced directly to each job/process
pays fixed salary amount of direct material that is a must for each product, so can predict engineered cost if we OH: X trace directly – allocated
MOH - cannot be directly traced to product know level of output Documents used
(indirect - can be both fixed or variable C. Fixed costs - Bill of materials ‒ list all materials required for a job
manu) - EXAMPLES: cost of indirect materials (small items) & indirect labour - remain unchanged in total as level of activity changes - Material requistion form ‒ authorise movement of RM from warehouse to jobs ⇒ Actual DM
(supervisors; security guards of manu plants); depreciation; insurance on - Fixed cost per unit decreases as activity level increase [used for costing
factory equipment; utilities/rental; manufacturing support departments (not product costs but not in mgmt decision - X reflect how it behave] - Direct labour time sheets ‒ record labour hours spent on jobs ⇒ Actual DL costing
directly producing goods i.e. equipment maintenance/security guard; (Types): Discretionary ‒ cost resullting from mgmt decision, decision can be changed easily; - Job cost sheet ‒ summarise DM; DL; MOH incurred
automated machines; tools & machine supplies; fixed council rates Committed ‒ cost resulting from organisation basic structure & facilities, difficult to change in ST
quality checkers overtime premium & idle time of factory workers - cant trace, D. Step-fixed costs - remain fixed over a wide range of activity levels but
multiple products typically: change outside that range i.e. managers' salaries: fixed within x hours, if
Overtime Premium Computation: OT1.5x, Base 40h + OT 5h, base pay $10/h reach another "tier", another fixed salary payout
⇒ Direct labour costs = $10 x (40+5)h = $450 E. Step-variable - increases in small steps
⇒ OT Premium = $5 x 5h = $25 instead of continuously
Prime cost: DM + DL (major costs) - usually include inputs purchased & used in
Conversion costs: DL + MOH small increments i.e. batch packaging materials
Product costs (Manu costs) = DM + DL + MOH F. Semi-variable (mixed) costs – both fixed &
variable component i.e. delivery truck
Non-manu - Selling: Costs necessary to secure order & deliver products i.e. marketing;
G. Curvilinear costs - activity level impact marginal cost. semi-variable
(outside promotion; sales; delivery
cost pattern is used to approximate curvilinear cost i.e. electricity
factory - Admin: All other organisational supporting costs that are non selling & non
Relevant Range: range of activity over which a particular cost behaviour pattern is assumed to be
/SGA) manu
valid (or can be defined and approximated)
- once outside the relevant range ⇒ the cost behaviour pattern may not hold
Costs across Value Chain - (i) (Upstream) R&D; Design; Supply ⇒ Period costs; (ii) Manu & Pdn ⇒
- Helps Approximating Variable Cost function ⇒ when QTY produced is below or above certain
Product costs; (iii) Mkt, Distribution; Customer service ⇒ Period costs
amount (too much or too little) - Total variable costs against Q will no longer be linear (no longer
1) Purchase of RM: Dr. RM inv Cr. AP
proportional)
1.3 Cost Flow 2) Txf DM to job 1 (record DM cost when used): Dr. WIP inv – Job 1 Cr. RM inv
Material is purchased ⇒ RM inventory or Direct labour and manufacturing overhead ⇒ WIP 3) Charging DL to job 1 (record DL cost when wages paid out): Dr. WIP inv – Jobb 1 Cr. Wages/P
2.3 Cost Estimation & Prediction
inventory. 4) Applied MOH (est/budgeted): Dr. WIP inv – Job 1 Cr. Manu OH (applied)
A. Managerial Judgement:
Direct materials consumed in production: RM inventory ⇒ WIP inventory. 5) Actual MOH: Dr. MOH(actual) Cr. Manu supplies; Wages/P; Prepaid rent; Acc. Depr on Equpm
- uses experience & knowledge of the manager to estimates future costs by examining past
Products are completed: WIP inventory ⇒ FG inventory. 6) Completion of Pdn Job 2: Dr. FG inv Cr. WIP inv – Job 2
costs and identifying factors that might affect costs in the future
Products are sold: FG inventory ⇒ COGS 7) Sales of goodss: Dr. A/R or cash Cr. Sales Rev, Dr. COGS Cr. FG inv
B. Engineering method:
> Schedule of Cost of Goods Manufactured 8) End of period closing of MOH to COGS (MTHD 1)
- Uses time and motion studies (a.k.a. task analysis or work measurement) for estimating cost
- RM inventory: → Beg + RM purchased - End = RM used in production behaviour. Observation and task analysis of the steps performed provide data on time needed for If MOH underapplied, actual > applied, MOH Dr bal → Dr. COGS⬆ Cr. MOH
- Manufacturing Costs → Direct materials + Direct labor + MOH = Total Manu Costs each step, employees required and materials to perform the steps If MOH overapplied, actual < applied, MOH cr bal → Dr. MOH, Cr. COGS⬇
- WIP inventory → Beg + Total Manu Costs - End = Cost of Goods Manufactured C. Quantitative Analysis of historical data to identify relationships between costs and activities 9) End of period closing of MOH to 3 ACCOUNTS (WIP, FG, COGS) (MTHD 2)
> Schedule of Cost of Goods Sold [IN ORDER OF INCREASING RELIABILITY] - Allocate based on % of total applied MOH [typically don’t unless specifically required]
- FG inventory → Beg + Cost of Goods Manufactured - End = COGS Method 1 - Scatter Diagram Plots | Using data points to eyeball & detect linear relationship
- draw line through data points with equal no. of points above & below the line ⇒ ensure straight Ch4 – Process Costing System
line passes at least 1 point Process Costing: (1) Estimate cost of pdn process; (2) Calc avg cost per unit
- only within relevant range - can be done w/o opening or closing WIP inventory
- Weighted Average Method!
- Production cost takes into account: (i) Beg WIP; (ii) units started & completed in period; (iii) End - Acc. Conversion costs: traced by department, allocated to all units passing through that
WIP (incomplete) department (like process costing). Applied to products using:
- DM put into process at 1 or more discrete points | DL & MOH (Conversion Cost) used uniformly & predetermined application rate = budgeted conv. cost ÷ budgeted level of cost driver (qty)
continually through production - Assuming no beg & end WIP inventory (no partially completed batches existed at beg/end of
- for Ending WIP, where products are partially completed ⇒ need to convert to Equivalent Units accounting period (so dont need to calculate for EU):
(smaller, fully completed units)
- DM added to process already = 100% EU | DL/MOH (Conversion Cost) 50% complete = 50% EU

Step 1: Analyse physical flow of units

BEG WIP physical units + physical units started - physical units completed & transferred out =
physical units in END WIP
Step 2: Calculate EU for DM & Conversion
EU only relevant for END WIP: 100% for DM that was already added, and % completion for
conversion costs
Step 3: Calculate unit costs
- Cost per EU for DM = Total DM cost / Total EU for DM
- Total DM: includes costs of BEG WIP (DM) & DM costs incurred in the month
- Applies to conversion costs the same way
Step 4: Analyse total costs
- Cost of goods completed & transfered out in the month = No. units txf out x total cost per EU Ch5 – Activity-based Costing & Service Costing
- Cost remaining in end WIP: Traditional Activity-based (ABC)
- cost of DM remaining = No. of EU of DM x cost per EU of DM - DC traced to pdts; MOH allocated to pdts Measure both cost of cost
- cost of conversion remaing = No. of EU of conversion x cost of EU of conversion - Calc of MOH rate using vol-based cost driver obj + performance of
- Sum of above = total cost of accounted for (beg + total incurred cost of DM, DL, MOH in the mth) ☹ X INCLUDE Non-manu costs (not assigned to pdts) activities
☹ X adapt to changing business envmt (i.e. growing - costing view: better
automation; greater pdt diversity; more invmt in downstream estimate costs by
activities) improving allocation of
☹ Inaccurate pdt cost when: MOH to pdt
- more cost pools
> proportion of DL cost decrease/proportion of vol-unrelated
- activity view: info to
MOH cost increase
better manage
> non-manu costs but pdt related becomes substantial (but
activities/costs; create
prev not included)
value
> product diversity increases
Tend to:
Overstate cost of high-volume, simple pdt (large batches)
Understate cost of low-volume, complext pdt (small batches)
• ABC is not limited to a single driver when allocating costs to products: Not all costs vary with
units and ABC allows users to select non-unit level cost drivers.
- TC assumes product costs are driven by volume-based cost drivers.
JE of Transfer of COG completed & transfered to finishing department:
- TC may incorrectly allocate non-unit level costs, e.g., batch level costs
> Dr. WIP inventory: finishing dept – Cr. WIP inventory: mixing dept
• ABC can resolve the issue of over-costing of simple product and undercosting of complex
FIFO vs Weighted Avg:
product - Consumption ratios by different products often differ greatly among activities, no
FIFO: cost per EU based on only cost incurred in the mth (dont add BEG WIP) ÷ EU of work done in
single cost driver will accurately assign costs for all activities.
mth. If no beg wip, both method same
• Costs of ABC: Complexity; More time and financial resources to maintain accuracy of data
Treatment for system with multiple dept/treatment - partially completed goods txf to nxt dept
and product costs
for next steps in production - finishing department:
• Benefits of ABC: More accurate product costs; Better decisions about pdt mix and pricing
WIP Inventory Mixing Department: Terminology:
- Dr. DM, Conversion costs (DL + MOH) | Cr. COG (partially) completed & transferred out Activity: A unit of work performed within the organisation
WIP Inventory Finishing Department: Activity driver: A cost driver used to estimate the cost of an activity consumed by the cost object
- Dr. Transferred in cost (same as COG above); new DM + new Conversion costs (DL+MOH) Cost driver: A factor or activity that causes a cost to be incurred
Resource driver: A cost driver used to estimate the cost of resources consumed by an activity
Root cause cost driver: The underlying factors that cause activities to be performed and their
costs to be incurred
Simple ABC Comprehensive ABC
Allocate MOH to pdts Allocates all pdt-related costs (except DM) to
Normal Spoilage: inherent in production process, occurs even under efficient operating
- only analyse MOH cost & activities pdts & for activity mgmt. [DL, MOH, Non-
conditions (unavoidable)
- DL & DM directly traced manu] (pdt cost on cause-effect basis)
- treatment: included as part of the cost of good completed & transferred out, included in
- Non-manu expensed off as period exp - DM alr had accurate est, dunnid allocated
inventory valuation
- Dr. WIP inventory - finishing | Cr. WIP inventory - mixing @ $690,150 1) Identify major MOH activities + 1) Identify major MOH activities centres, then
Abnormal Spoilage: should not occur under efficient ops condition - not part of normal pdn cost determine total budgeted cost of each its activity & resource drivers within each
- treatment: expensed in current period of P&L as "loss on abnormal spoilage" activities centre + determine total est cost of each
- Dr. WIP inventory - finishing $630,900, Dr. Loss on abnormal spoilage $59,250 | Cr. WIP 2) Identify activity drivers of each activity + activities within activity centre
inventory - mixing @ $690,150 est cost per unit of activity driver = budget 2) Assign activity cost to product: select
Other issues activity cost/budget activity driver qty suitable activity driver for each activity,
- % completion is just rough estimates 3) MOHactual per activity = Activity rate^ * estimate cost per unit of activity driver, assign
- POHR may be used in product costing - smooths out effects of fluctuations in actual cost & cost actual qty of activity driver consumed actual activity cost to pdts based on qty of
drivers, but may have over/underapplied costs activity driver consumed
- such over/underapplication of cost could also provide useful info for control (management pov) Comprehensive ABC system:
Hybrid Costing (Operating Costing): • More detailed and accurate assignment of DL&MOH; Incl of non-manu product related costs
- for business with repetitive product process but have a range of products that differ in some • More detailed identification and analysis of activities across the business that may be
significant aspects i.e. batch manufacturing process (with a mix of indiv inputs & repetitive useful for activity-based management – but More costly to implement due to its complexity
process) For: high OH cost; OH not directly related to pdn volume; diverse pdt range; high complecity/
- Treatment: diverse batch size; high stakes when inaccurate decision based on costing; low cost adopting
- DM: traced to individual batches (like job costing) such system due to sophisticated IT support
> Unit Level 5B - Service Costing
Activities – Org that deliver help, utility or care; provide an experience, infor/other intellectual content
performed for each - DL cost are substantial – producing & delivery services (simultaeneously)
unit
(directly tied to - All other cost (upstream-R&D, design; downstream-mkt, customer) classified as indirect/OH cost
pdn/ processing of - no inventory cost
each unit) A. Professional Service Firms:
> Batch Level – - Staff > Equipment; Front office main activity
performed for each B. Mass Service Entities (i.e. bus):
batch, not each unit - Many customers, limited contact time/customisation; Staff non-professional;
at one timeCentr
> Machine-related – costs that could relate to - Focus: final delivery, not how things are delivered -> back office is key – incl equipment &
> Product level – single activity driver: #machine h infrastructures
specific -operating & maintenance: wages of pdn
worker; depr machines; insurance C. Service Shops (in btw professional & mass services) i..e F&B, insurance
products/pdt line
> Facility level – support business as a whole
> Facility level – (cant related to pdn of specific pdt) Job costing
support business as -depr & maintenance of building; manager
salary; share of corp costs of pdn facilities i.e. - DL traceable
a whole council rates/tax/building insurance - Job billing used

Hybrid costing

Process costing
- diff svc consue
similar resources
- cost tracked
directly/allocated
to pdn process
Job costing (Svc):
- Hourly labour rate = Total annual salary / Total billable hours (after leave, PH, non-client h)
- OH cost (i.e. IT, comms, electricity, rent)
- cost driver usually professional labour hours/dollars
- POHR = budgeted (IT/rent..) overheads / budgeted professional labour costs
- Billing system – Svc charge-out rates
- Charge-out rate = hourly labour cost + OH cost per hour * (req PM + 100%)
Process costing (Svc):
Insignificant direct cost | Substantial equipment costs; initial IT costs | backend (IT, comms)
>Estimate cost per transaction: info for cost control & fee settings + assess txn P&L
- Degree of completion & txf-in costs not relevant
- Cost per txn incl high proportion of indirect cost, not variable manner – careful
Hybrid Costing (Svc):
Assign cost of customised elements directly + Avg cost of standardised process

Flow of costs in svc:

- costs shown as operating expense (not COGS / cost of sales) as no inventory
- indiv svc costs not accumulated separately
- svc costing system support mgmt needs > financial reporting which no need to est cost

Est cost of service to: set fees; assess service profitability; determine which svc/client to
promote/refine/withdraw; plan & control costs

Cons of ABC for service:

Then use rate and actual qty (using bill of material) to find actual cost: - indiv activities difficult to identify if non-reptitive (onetime/customised)
- Svc output diff from each client
- Signficant proportion of facility costs
- Possible to implement in airline & logs