chapter 1horowitk/documents/chapter01_000.pdf · chapter 1 introduction to cost accounting. ......
TRANSCRIPT
Chapter 1
Introduction to Cost Accounting
Learning Objectives
LO1 Explain the uses of cost accounting
data.
LO2 Describe the ethical responsibilities
and certification requirements for
management accountants.
LO3 Describe the relationship of cost
accounting to financial and
managerial accounting.
Learning Objectives
LO4 Identify the three basic elements of
manufacturing costs.
LO5 Illustrate basic cost accounting
procedures.
LO6 Distinguish between the two basic
types of cost accounting systems.
LO7 Illustrate a job order cost system.
The Need for Cost
Accounting
Cost accounting provides the detailed cost
data that management needs to control current
operations and plan for the future.
Companies must control costs in order to keep
prices competitive.
In today’s global environment, cost information
is more crucial than ever in remaining
competitive.
Types of Businesses That
Use Cost Accounting
Manufacturers (Ford, General Motors)
Merchandisers (WalMart, Kmart)
Wholesalers (Beverage Distributors)
For-profit Service Businesses (CPAs,
Attorneys)
Not-for-profit Service Agencies (United
Way, Red Cross)
The Manufacturing
Process
This process involves the conversion of
direct (raw) materials, direct labor, and
factory overhead into finished goods.
Product quality is an important competitive
weapon in manufacturing.
Many companies require their suppliers to
be ISO 9000 certified.
ISO 9000 Certification
The International Organization for Standardization created a set of five international standards for quality management, ISO 9000-9004.
These 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
Cost 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
Planning is 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.)
Control is the process of monitoring the
company’s operations and determining
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
Responsibility accounting is the assignment
of accountability for costs or production results
to those individuals who have the most
authority to influence them.
A cost center is 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
Cost and production reports for a cost center reflect all cost and production data identified with that center.
The performance report will include only those costs and production data that the center’s manager can control.
A variance is the favorable or unfavorabledifference between actual costs and budgeted costs.
Performance Report
Example
Renaldi’s Restaurant
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
The 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.
For more information, please visit the IMA’s website at 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.)
Cost 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
Most manufacturers maintain a perpetual
inventory system that uses FIFO, LIFO, or
moving average methods of costing.
An inventory ledger is maintained to provide
support for the control accounts.
Some 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
Direct materials Materials that become part of the finished good
and can be readily identified.
Direct labor Labor of employees who work directly on the
product manufactured.
Factory overhead Includes 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
Materials xx
Accounts Payable xx
Work in Process (Direct Materials) xx
Factory Overhead (Indirect Materials) xx
Materials xx
Payroll xx
Wages Payable xx
Wages Payable xx
Cash xx
Work in Process (Direct Labor) xx
Factory Overhead (Indirect Labor) xx
Selling & Admin Exp (Salaries) xx
Payroll xx
Factory Overhead (Depr. Bldg) xx
Selling & Admin Exp (Depr. Bldg) xx
Accum. Depr. – Bldg xx
Factory Overhead (Depr. Mach & Eq) xx
Accum. Depr. – Mach & Eq xx
Factory Overhead (Utilities) xx
Selling & Admin Exp (Utilities) xx
Accounts Payable xx
Selling & Admin Exp xx
Accounts Payable xx
Work in Process xx
Factory Overhead
xx
Finished Goods xx
Work in Process xx
Accounts Payable xx
Cash xx
Accounts Receivable xx
Sales xx
Cost of Goods Sold xx
Finished Goods xx
Cash xx
Accounts Receivable xx
Cost Accounting Systems
Job Order Cost System
Output consists of special or custom-made products.
Provides a separate record for the cost of each quantity of these special or custom-made products.
Process Cost System
Accumulates costs for each department or process in the factory.
Job Order Cost System
Direct Materials
Direct Labor
Factory Overhead
Work in Process
Account
Finished Goods
Account
Job Cost Sheets
Process Cost System
Work in Process
Dept. 1
Work in Process
Dept. 2 Finished Goods
Factory
Overhead
Direct
Labor
Direct
Materials
Direct
Materials
Direct
Labor
Factory
Overhead
Standard Cost System
May be used with either a job order or a
process cost system.
Uses predetermined standard costs to furnish a
measurement that helps management make
decisions regarding the efficiency of operation.
Standard costs are costs that would be incurred
under efficient operating conditions and are
forecast before the manufacturing process
begins.
Appendix
Standards of Ethical Conduct for
Management Accountants
Members of the IMA have an obligation to the public, their profession, the organizations they serve, and themselves to maintain the highest standards of ethical conduct.
1. Competence
2. Confidentiality
3. Integrity
4. Credibility
Appendix (cont.)
Resolution of Ethical Conflict
When applying the standards of ethical
conduct, IMA members may encounter
problems in identifying unethical behavior or
in resolving an ethical conflict.
1. Discuss problems with the immediate superior except
when it appear that the superior is involved.
2. Clarify relevant ethical issues by confidential discussion
with an objective advisor.
3. Consult your own attorney as to legal obligations and
rights concerning the ethical conflict.