Cost Accounting Lecture 1

Cost AccountingCost Accounting

BBA 6th

Course Outlines

1. The nature, scope and importance of cost accounting

2. Preparation of income statement and balance sheet.

3. The concept of cost, classification of cost.

4. The cost accounting system and cycle.

5. The factory and general ledger.

6. Job order costing and process costing including the preparation cost of production report and the treatment of beginning inventory.

7. By product and joint product.

8. Method of allocation of joint cost.

Cost Accounting by Matz, and Usry.

Practical problems in cost accounting by Jain and

Narang.

Cost Accounting by Horngren

Recommended BooksRecommended Books

Managerial AccountingManagerial AccountingManagerial AccountingManagerial Accounting

Managerial accounting, also called

management accounting, is a field of

accounting that provides economic and financial

information for managers and other internal

users.

Managerial accounting applies to all types of

businesses. Corporations Proprietorships Partnerships Not-for-profit

Financial accounting provides general purpose financial information to those who are outsidethe organization.

Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting

Comparing Managerial And Financial Accounting

Managerial Accounting vs Financial Managerial Accounting vs Financial AccountingAccounting

Illustration 1-1

Relationship of Financial, Management, and Cost

Accounting

FINANCIALACCOUNTING

MANAGEMENTACCOUNTING

COSTACCOUNTING

Product Costs

Cost accounting is defined as “a technique or method

for determining the cost of a project, process, or thing.

. . . This cost is determined by direct measurement,arbitrary assignment, or systematic and rational allocation.”

Cost AccountingCost Accounting

Management FunctionsManagement Functions

PlanningPlanning

Maximize short-term Maximize short-term profit and market profit and market shareshare

Commit to Commit to environmental environmental protection and social protection and social programsprograms

Add value to the Add value to the businessbusiness

DirectingDirecting ControllingControlling

Coordinate diverse Coordinate diverse activities and human activities and human resourcesresources

Implement planned Implement planned objectivesobjectives

Provide incentives to Provide incentives to motivate employeesmotivate employees

Hire and train Hire and train employeesemployees

Produce smooth-Produce smooth-running operationrunning operation

Keeping activities on Keeping activities on tracktrack

Determine whether Determine whether goals are metgoals are met

Decide changes Decide changes needed to get back on needed to get back on tracktrack

May use an informal May use an informal or formal system of or formal system of evaluationsevaluations

Organizational StructureOrganizational Structure

Illustration 1-2

Organization charts show

the interrelationships of

activities and the delegation

of authority and

responsibility within the

company.

Managerial Cost ConceptsManagerial Cost ConceptsManagerial Cost ConceptsManagerial Cost Concepts

Managers should ask questions such as the

following.

1. What costs are involved in making a product or

providing a service?

2. If we decrease production volume, will costs

decrease?

3. What impact will automation have on total costs?

4. How can we best control costs?

Behavior

Traceability

Controllability

Relevance

Function

Cost behavior means how a cost will react to changes in the level of business activity.

A fixed cost does not change with changes in the volume of activity

A variable cost changes in proportion to changes in the volume

of activity

A mixed cost refers to a combination of fixed and variable

Classification by BehaviorClassification by Behavior

Direct costs Costs traceable to a

single cost object. Examples: material

and labor cost for a product.

Indirect costs Costs that cannot be

traced to a single cost object.

Example: maintenance expenditures benefiting two or more departments.

Classification by TraceabilityClassification by Traceability

The degree of control depends on thelevel of management in the organization.

More C

ontrolM

Very little control

Classification by ControllabilityClassification by Controllability

All costs incurred in the past that cannot be avoided or changed.

Sunk costs should not be considered in decisions.

Example: You bought an automobile that cost $15,000 two years ago. The $15,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $15,000 cost.

Classification by Relevance:Sunk Costs

A cost that requires a future outlay of cash.

Out-of-pocket costs should be considered in decisions.

Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend the $25,000 or not in the future

Classification by Relevance:Out-of-Pocket Costs

The potential benefit lost by choosing a specific action from two or more alternatives

Example: If you were not attending college, you

could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000.

Classification by Relevance: Opportunity Costs

SO 3 Define the three classes of manufacturing costs.SO 3 Define the three classes of manufacturing costs.

Manufacturing consists of activities and

processes that convert raw materials into

finished goods.

Manufacturing Costs

Illustration 1-3

Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs

Materials

Raw Materials

Basic materials and parts used in manufacturing process.

Direct Materials

Raw materials that can be physically and directly associated with the finished product during the manufacturing process.

Indirect Materials

Raw materials that cannot be easily associated with the finished product.

Not physically part of the finished product or they are an insignificant part of finished product in terms of cost.

Considered part of manufacturing overhead.

Materials

Direct Labor

Work of factory employees

that can be physically and

directly associated with

converting raw materials into

finished goods.

Indirect Labor

Work of factory employees that has no physical

association with the finished product or for which

it is impractical to trace costs to the goods

produced.

Costs that are indirectly associated with manufacturing the finished product.

Includes all manufacturing costs except direct materials and direct labor.

Also called factory overhead, indirect manufacturing costs, or burden.

Manufacturing Overhead

Components:

Costs that are an integral part of producing the

product.

Recorded in “inventory” account.

Not an expense (COGS) until the goods are sold.

Product Versus Period CostsProduct Versus Period CostsProduct Versus Period CostsProduct Versus Period Costs

Product Costs

Direct materials Direct labor Manufacturing overhead

Charged to expense as incurred.

Non-manufacturing costs.

Includes all selling and administrative expenses.

Period Costs

Illustration 1-4

A bicycle company has these costs: tires, salaries of employees who put tires on the wheels, factory building depreciation, wheel nuts, spokes, salary of factory manager, handlebars, and salaries of factory maintenance employees. Classify each cost as direct materials, direct labor, or overhead.

Direct MaterialsDirect Materials

TiresTires

Wheel nutsWheel nuts

SpokesSpokes

HandlebarsHandlebars

Direct LaborDirect Labor OverheadOverhead

Salaries of employees Salaries of employees who put tires on the who put tires on the wheels.wheels.

Factory depreciationFactory depreciation

Factory manager Factory manager salarysalary

Factory maintenance Factory maintenance employees salaryemployees salary

Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements

Under a periodic inventory system, the

income statements of a merchandiser and a

manufacturer differ in the cost of goods sold

section.

Manufacturing Costs

“COGS”

Cost of Goods Sold Components – (Periodic Inventory System)

Illustration 1-5

Cost of goods sold sections of merchandising and manufacturing income statements Illustration 1-6

Determining the Cost of Goods Manufactured

Total Work in Process – (1) cost of beginning work in process and (2) total manufacturing costs for the current period.

Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead in the current year.

Illustration 1-7

Cost of Goods Manufactured Schedule

Illustration 1-8

Illustration 1-9Inventory accounts for a manufacturer

The balance sheet for a merchandising company shows just one category of inventory.

Balance Sheet

Illustration 1-10

Current assets sections of

merchandising and manufacturing

balance sheets

Balance Sheet

Cost Accounting Lecture 1

Documents

Transcript of Cost Accounting Lecture 1

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