Cost & Management Accounting - MGT402 Power Point Slides Lecture 01
Cost Accounting Lecture 1
Transcript of Cost Accounting Lecture 1
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Cost AccountingCost Accounting
BBA 6th
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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.
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Cost Accounting by Matz, and Usry.
Practical problems in cost accounting by Jain and
Narang.
Cost Accounting by Horngren
Recommended BooksRecommended Books
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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
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Financial accounting provides general purpose financial information to those who are outsidethe organization.
Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting
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Comparing Managerial And Financial Accounting
Managerial Accounting vs Financial Managerial Accounting vs Financial AccountingAccounting
Managerial Accounting vs Financial Managerial Accounting vs Financial AccountingAccounting
Illustration 1-1
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Relationship of Financial, Management, and Cost
Accounting
FINANCIALACCOUNTING
MANAGEMENTACCOUNTING
COSTACCOUNTING
Product Costs
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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
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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
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Organizational StructureOrganizational Structure
Illustration 1-2
Organization charts show
the interrelationships of
activities and the delegation
of authority and
responsibility within the
company.
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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?
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Behavior
Traceability
Controllability
Relevance
Function
Managerial Cost ConceptsManagerial Cost ConceptsManagerial Cost ConceptsManagerial Cost Concepts
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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
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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
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The degree of control depends on thelevel of management in the organization.
More C
ontrolM
ore
Con
trol
Very little control
Classification by ControllabilityClassification by Controllability
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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
Classification by Relevance:Sunk Costs
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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
Classification by Relevance:Out-of-Pocket Costs
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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
Classification by Relevance: Opportunity Costs
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Managerial Cost ConceptsManagerial Cost ConceptsManagerial Cost ConceptsManagerial Cost Concepts
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
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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.
SO 3 Define the three classes of manufacturing costs.SO 3 Define the three classes of manufacturing costs.
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Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs
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
SO 3 Define the three classes of manufacturing costs.SO 3 Define the three classes of manufacturing costs.
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Direct Labor
Work of factory employees
that can be physically and
directly associated with
converting raw materials into
finished goods.
Labor
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.
Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs
SO 3 Define the three classes of manufacturing costs.SO 3 Define the three classes of manufacturing costs.
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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
Manufacturing CostsManufacturing CostsManufacturing CostsManufacturing Costs
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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
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Charged to expense as incurred.
Non-manufacturing costs.
Includes all selling and administrative expenses.
Product Versus Period CostsProduct Versus Period CostsProduct Versus Period CostsProduct Versus Period Costs
Period Costs
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Product Versus Period CostsProduct Versus Period CostsProduct Versus Period CostsProduct Versus Period Costs
Illustration 1-4
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Product Versus Period CostsProduct Versus Period CostsProduct Versus Period CostsProduct Versus Period Costs
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
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Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
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”
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Cost of Goods Sold Components – (Periodic Inventory System)
Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Illustration 1-5
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Cost of goods sold sections of merchandising and manufacturing income statements Illustration 1-6
Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
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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.
Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Illustration 1-7
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Cost of Goods Manufactured Schedule
Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Illustration 1-8
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Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Illustration 1-9Inventory accounts for a manufacturer
The balance sheet for a merchandising company shows just one category of inventory.
Balance Sheet
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Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Manufacturing Costs in Financial Manufacturing Costs in Financial StatementsStatements
Illustration 1-10
Current assets sections of
merchandising and manufacturing
balance sheets
Balance Sheet