Chapter 1

65824_2Chapter01_000.pdf

Chapter 1

Introduction to Cost Accounting

Learning Objectives

LO1Explain the uses of cost accounting

data.

LO2Describe the ethical responsibilities

and certification requirements for management accountants.

LO3Describe the relationship of cost

accounting to financial and managerial accounting.

Learning Objectives

LO4Identify the three basic elements of

manufacturing costs.

LO5Illustrate basic cost accounting

procedures.

LO6Distinguish between the two basic

types of cost accounting systems.

LO7Illustrate a job order cost system.

The Need for Cost

Accounting

ƒCost accounting provides the detailed cost

data that management needs to control current operations and plan for the future. ƒCompanies must control costs in order to keep prices competitive. ƒ is more crucial than ever in remaining competitive.

Types of Businesses That

Use Cost Accounting

ƒManufacturers (Ford, General Motors)

ƒMerchandisers (WalMart, Kmart)

ƒWholesalers (Beverage Distributors)

ƒFor-profit Service Businesses (CPAs,

Attorneys)

ƒNot-for-profit Service Agencies (United

Way, Red Cross)

The Manufacturing

Process

ƒThis process involves the conversion of

direct (raw) materials, direct labor, and factory overhead into finished goods.

ƒProduct quality is an important competitive

weapon in manufacturing.

ƒMany companies require their suppliers to

be ISO 9000 certified.

ISO 9000 Certification

ƒThe International Organization for

Standardization created a set of five

international standards for quality management, ISO 9000-9004.

ƒThese standards require that

manufacturers have a well-defined quality control system and they consistently maintain a high level of quality.

Determining Product

Costs and Pricing

ƒCost accounting is used to determine

products costs and help with marketing decisions.

1.Determining the selling price of a

product.

2.Meeting competition.

3.Bidding on contracts.

4.Analyzing profitability.

Planning and Control

ƒPlanningis the process of establishing

objectives or goals for the firm and determining the means by which the firm will attain them. Effective planning is facilitated by the following:

1.Clearly defined objectives of the

manufacturing operation.

2.A production plan that will assist and guide

the company in reaching its objectives.

Planning and Control

(cont.)

ƒControlis the process of monitoring the

whether the objectives identified in the planning process are being accomplished.

Effective control is achieved through the

following:

1.Assigning responsibility.

2.Periodically measuring and comparing

results.

3.Taking necessary corrective action.

Responsibility Accounting

ƒResponsibility accountingis the assignment

of accountability for costs or production results to those individuals who have the most authority to influence them. ƒA cost centeris a unit of activity within the factory to which costs may be practically and equitably assigned. The manager of a cost center is responsible for those costs that the manager controls.

Reporting

ƒCost and production reportsfor a cost

center reflect all cost and production data identified with that center.

ƒThe performance reportwill include only

those costs and production data that the

ƒA variance is the favorableor unfavorable

difference between actual costs and budgeted costs.

Performance Report

Example

5HQMOGLಬV 5HVPMXUMQP

Performance Report

September 30, 2006

Budgeted

Actual

Variance

Expense

September

Year-to-Date

September

Year-to-Date

September

Year-to-Date

Kitchen Wages

$5,500 $47,000 $5,200 $46,100 $300 F $900 F Food

17,700

155,300

18,300

157,600

600 U

2,300 U

Supplies

3,300

27,900

3,700

29,100

400 U

1,200 U

Utilities

1,850

15,350

1,730

16,200

120 F
850 U
Total $28,350 $245,550 $28,930 $249,000 $580 U $3,450 U

F = Favorable

U = Unfavorable

Management Accounting

ƒThe Institute of Management Accountants

(IMA) is the largest organization of accountants in industry. The Certified

Management Accountant (CMA) is

comparable to the Certified Public

Accountant (CPA) for public accountants.

ƒFor more information, please visit the

www.imanet.org

Cost Accounting vs.

Financial and Managerial

Accounting

Characteristics

Financial Accounting

Managerial Accounting

Users:

‡External Parties

‡Managers

Managers

Focus:

Entire business

Segments of the business

Uses of Cost Information:

Product costs for

calculating cost of goods sold and finished goods, work in process, and raw materials inventory using historical costs and GAAP.

‡Budgeting

‡Special decisions such as

make or buy a component, keep or replace a facility, and sell a product at a special price.

‡Nonfinancial information

such as defect rates, % of returned products, and on- time deliveries

Cost Accounting System

Cost Accounting vs.

Financial and Managerial

Accounting (cont.)

ƒCost accounting

includes those parts of both financial and management accounting that collect and analyze cost information.

Cost of Goods Sold

Merchandiser

Manufacturer

Beginning merchandise

inventory

Plus purchases

Merchandise available for sale

Less ending merchandise

inventory

Cost of good sold

Beginning finished goods

inventory

Plus cost of goods

manufactured

Finished goods available for

sale

Less ending finished goods

inventory

Cost of good sold

Inventories

ƒMost manufacturers maintain a perpetual

inventory systemthat uses FIFO, LIFO, or moving average methods of costing.

ƒAn inventory ledgeris maintained to provide

support for the control accounts.

ƒSome manufacturers may use a factory

ledger,which contain all of the accounts relating to manufacturing.

Inventories

Merchandiser

Current assets:

Cash

Accounts receivable

Merchandise

inventory

Manufacturer

Current assets:

Cash

Accounts receivable

Inventories:

Finished goods

Work in process

Materials

Elements of

Manufacturing Costs

ƒDirect materials

ƒMaterials that become part of the finished good and can be readily identified.

ƒDirect labor

ƒLabor of employees who work directly on the

product manufactured.

ƒFactory overhead

ƒIncludes all costs related to production other than direct materials and direct labor.

Prime Cost and

Conversion Cost

Direct Materials

Direct Labor

Factory Overhead

Prime Cost

Conversion

Cost

Elements

of Cost

Flow of Manufacturing

Costs

Direct Materials

Direct Labor

Factory Overhead

Work in Process

(Assets)

Finished Goods

(Assets)

Cost of Goods Sold

(Expenses)

Illustration of Accounting

for Manufacturing Costs

ƒMaterialsxx

ƒAccounts Payablexx