Download Cost accounting

CHAPTER 13
Cost Accounting and Reporting
Systems
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
1
Learning Objectives
•
•
•
•
Explain the role of cost accounting as it relates to financial and
management accounting.
Explain the strategic role cost management plays in the
organisation’s value chain.
Explain the difference between direct and indirect costs.
Explain the difference between product and period costs.
Explain the general operation of a product costing system.
•
•
•
•
Calculate predetermined overhead application rates.
Present a statement of cost of goods manufactured.
Explain the difference between absorption and direct costing.
Apply activity-based costing.
•
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
2
Overview
• Cost accounting is a subset of management
accounting.
• It relies on the accumulation and determination of
product, process or service costs for the
purposes of assigning these costs to a cost
object.
• Accurate cost information is necessary to help
managers make pricing decisions and evaluate
productivity and efficiency.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
3
Cost Accounting
Financial accounting - focus on external
reporting
Cost accounting - focus on cost accumulation
and assignment
Management
accounting - focus on internal reporting
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
4
Decision Making
Strategic,
operational,
and financial
Planning
Planning and control cycle
Performance
analysis:
Plans vs
actual results
(Controlling)
Data collection and
performance feedback
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
Executing
operational
activities
(Managing)
5
Value Chain Functions
Research
and
Development
Design
Production
The sequence of
functions and
activities
that, over the life
of the product or
service, adds value
for the customer.
Marketing
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
Desired
ROA
Customer
Service
Distribution
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Cost Accumulation and Assignment
Cost Accumulation
Cost
Pool
Cost
Object
Cost Assignment
Cost
Object
Cost
Object
Cost objects are products, jobs, and services.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
7
Direct Costs and Indirect Costs
Direct costs:
Indirect costs:
• Can be easily and
conveniently traced
to a unit of product
or other cost
objective.
• Cannot be easily
and conveniently
traced to a unit of
product or other
cost object.
• Would not be
incurred if the
product or activity
were discontinued.
• Would be incurred
even if the product
or activity were
discontinued.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
8
Costs for Cost Accounting Purposes
Financial
Accounting
Cost is a measure of
resources used or
given up to achieve a
stated purpose.
Cost Accounting
Costs are assigned
to products and
become expenses
when products are
sold.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
9
Costs for Cost Accounting Purposes
Retailers. . .
– buy finished goods
– sell finished goods.
Manufacturers . . .
– buy raw materials
– produce and sell
finished goods.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
10
Costs for Cost Accounting Purposes
Balance Sheet
Inventory
Manufacturer
Income Statement
Cost of Goods Sold
Ingredients
+
Human effort
=
Manufactured
product
Sold to
Customers
+
Machine support
Focus of chapter
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
11
Costs for Cost Accounting Purposes
Balance Sheet
Inventory
Retailer
Income Statement
Cost of Goods Sold
Purchased
product
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
Sold to
customers
12
Costs for Cost Accounting Purposes
Ingredients
RAW MATERIALS
+
Human effort
+
Machine support
DIRECT LABOUR
MANUFACTURING
OVERHEAD
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
13
Costs for Cost Accounting Purposes
Manufacturing Overhead
Includes all
manufacturing costs
except raw material
and direct labor.
• Factory utilities, property taxes and insurance
• Maintenance and cleaning
• Depreciation for factory buildings and equipment
• Production supervision salaries.
Overhead is an indirect cost – it is not feasible to
specifically relate overhead items to individual
products or services.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
14
Costs for Cost Accounting Purposes
Period Costs
•
Costs not included in inventory are reported
on the income statement in the accounting
period in which they are incurred.
•
Selling, general and administrative costs.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
15
Cost Accounting Systems
Determining unit
manufacturing
costs.
Planning and
control
functions.
Cost accounting systems provide information
supporting decision making.
Assessing the
efficiency and
effectiveness
of operations.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
Providing
products or
services to
customers.
16
Cost Accounting Systems
Evaluate and
reward
employee
performance.
Disclose
inventories
and cost of
goods sold.
Cost accounting systems are the procedures
and techniques used by management.
Manage activities
that consume
resources.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
Track resources
consumed by
products and
services.
17
Cost Accounting Systems
A manufacturing cost accounting system
involves three inventory accounts:
Raw Materials
Cost of parts, assemblies and
materials.
Work in Process
Used to accumulate all of the
manufacturing costs.
Finished Goods
Cost of completed items.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
18
Cost Accounting Systems
Costs
Material
Purchases
Direct Labor
Manufacturing
Overhead
Selling and
Administrative
Balance Sheet
Inventories
Income
Statement
Expenses
Raw Materials
Work in
Process
Finished
Goods
Period Costs
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
Cost of
Goods
Sold
Selling and
Administrative
19
Cost Accounting Systems
Raw
material
Traced directly
to each job via
usage records.
THE JOB
Direct
labor
Traced directly
to each job via
time records.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
Manufacturing
overhead (OH)
Applied to each
job using a
predetermined
rate.
20
Cost Accounting Systems
The pre-determined overhead application rate (POAR)
used to apply overhead to jobs is determined before the
period begins.
POAR =
Estimated total manufacturing
overhead cost for the coming period
Estimated total units in the
allocation base for the coming period
Ideally, the allocation base is a cost
driver that causes overhead – often
direct labor hours.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
21
Cost Accounting Systems
Based on estimates, and
determined before the
period begins.
Overhead applied = POAR × Actual activity
Actual amount of the cost driver such
as units produced, direct labour hours
or machine hours incurred during the
period.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
22
Cost Accounting Systems
The predetermined overhead application rate (POAR) is
based on estimates. At the end of the year:
Total actual overhead
costs
=
Costs applied to
production
The difference is known as a variance as either
under or over applied overhead and must be
transferred to another account.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
23
Cost Accounting Systems
Material variance
Smaller variance
May be allocated
to these accounts
proportionately.
May be transferred
directly to cost of goods
sold.
OR
Work in
Process
Finished
Goods
Cost of
Goods Sold
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
Cost of
Goods Sold
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Statement of cost of goods
manufactured
Raw materials
Opening inventory
Purchases
Raw materials available for use
Less: Closing inventory
Cost of raw materials used
Direct labour cost
Manufacturing overhead applied
Total manufacturing costs incurred
Add: Work in process inventory - opening
Prepared to
assist
managers in
understanding
and evaluating
the overall
cost of
manufacturing
products.
Less: Work in process inventory - closing
Cost of goods manufactured for period
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
25
Cost Accounting Systems
Process
Costing
Job Order
Costing
• Used for production of large, discrete,
highcost items (eg yachts)
• Built to order rather than mass produced
• Many costs can be directly traced
to each job
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
26
Cost Accounting Systems
Process
Costing
Job Order
Costing
• Used for production of small,
homogeneous, low-cost items
• Mass produced in automated
continuous production process
• Costs cannot be directly traced to
each unit of product.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
27
Absorption and Variable Costing
Absorption
costing
Absorption costing must be used for
financial and income tax reporting
purposes.
Variable
costing
Raw materials
Product
costs
Direct labour
Product
costs
Variable manufacturing overhead
Fixed manufacturing overhead
Period
costs
Variable selling and admin expenses
Period
costs
Fixed selling and admin expenses
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
28
Absorption and Variable Costing
Significance of difference:
Absorption costing
Direct costing
Increase in inventory
Increase in inventory
Fixed manufacturing
overhead component
Fixed manufacturing
overhead component
Asset in the Balance Sheet
Expense in the Income
Statement
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
29
Activity-based Costing (ABC)
Overhead costs have
become an increasingly
significant part of
product cost.
The application of overhead on the basis of a
few broad rates (based on direct labour or
machine hours) has been replaced in many
firms by activity-based costing (ABC).
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
30
Activity-based Costing (ABC)
Activity-based costing (ABC) involves identifying
the activity that causes the cost to be incurred.
COST DRIVERS
For example, machine set-up, quality inspection,
materials handling activities.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
31
Activity-Based Costing (ABC)
Predetermined cost per activity
Cost per =
activity
Total cost of each activity
Number of times each
activity is performed
Activity-based costs are applied to products, manufacturing
processes, and even administrative and marketing efforts.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
32
The Benefits of ABC
•
More clearly focuses on the activities
causing costs.
•
More accurate product costs for:
– pricing decisions
– product elimination decisions
– managing activities that cause costs.
•
Benefits should always be compared to
costs of implementation.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
33