Cost Accounting

Chapter 1 Click to edit Master subtitle style Introduction to cost accounting

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COST ACCOUNTING MANUFACTURING COST CONCEPT

ALL BUSINESS ENTITIES REQUIRES COST INFORMATION. MANUFACTURING PROCESS

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USES OF COST ACCOUNTING DATA

DETERMINING PRODUCT COST AND PRICING PLANNING AND CONTROL

ASSIGNING RESPONSIBILITY PERIODICALLY MEASURING AND COMPARING RESULTS TAKING NECESSARY CORRECTIVE ACTION

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Deal With Firms Which Are Manufacturers A Manufacturing A/C Is Prepared In Addition To The Trading And Income Statement Accounts

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Comparing Merchandising and Manufacturing Activities

Buy finished goods.

Buy raw materials. Produce and sell finished goods.

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Manufacturing Cost Concepts

Financial Accounting
Cost is a measure of resources used or given up to achieve a stated purpose.

Managerial Accounting
Product costs are the costs a company assigns to units produced.

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Comparing Financial Accounting and Management Accounting

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MANAGERIAL COST CONCEPTS

Manufacturing consists of activities and processes that convert raw materials into finished goods.

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Direct Costs and Indirect Costs

Indirect costs

Costs that can be easily and conveniently traced to a unit of product or other cost objective. Examples:

Costs cannot be easily and conveniently traced to a unit of product or other cost object. Example: Manufacturing overhead

Direct material Direct labor

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Manufacturing costs

Manufacturing costs are usually classified as follows: 1. Direct materials, 2. Direct labor, and 3. Manufacturing overhead.

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Manufacturing Costs
Direct Materials Direct Labor Manufact uring Overhead

The Product

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Direct Materials

Raw materials are the basic materials and parts that are to beused in the manufacturing process. Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials.

Example: A radio installed in an automobile

Direct Labor

Direct labor is the work of factory employees that can be physically and directly associated with converting raw materials into finished goods.

Those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workers

Manufacturing/Factory Overheads

Manufacturing costs that cannot be traced directly to specific units produced. Manufacturing/factory overhead consists of costs that are indirectly associated with the manufacture of the finished product.

Examples: Indirect labor and indirect materials Wages paid to employees who are not directly involved in production work. Materials used to support the production process.
Examples: lubricants and cleaning supplies used in the automobile assembly plant.

Examples: maintenance workers, janitors and security guards.

Overhead
Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product. These costs may also be manufacturing costs that cannot be classified as direct materials or direct labor. Manufacturing overhead includes 1 indirect materials; 2 indirect labor; 3 depreciation on factory buildings and machines 4 insurance, taxes, and maintenance on factory facilities.
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COST OF GOODS SOLD COMPONENTS

Under a periodic inventory system, the income statements of a merchandiser and a manufacturer differ in the cost of goods sold section.

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ILLUSTRATION COST OF GOODS SOLD COMPONENTS

Merchandiser Beginning Merchandise Inventory

Cost of Goods Purchased Manufacturer

Ending Merchandise Inventory

=
Cost of Goods Sold

Beginning Finished Goods Inventory

Cost of Goods Manufactured

Ending Finished Goods Inventory

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Nonmanufacturing Costs
Administration / Operating costs Marketing and selling costs

a)

a)

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ADMINISTRATION EXPENSES
l All executive, organizational, and clerical costs. l Examples: - managers salaries - legal and accountancy charges - depreciation of accounting machinery & secretarial salaries
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SELLING AND DISTRIBUTION EXPENSES

commission

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PRODUCT COSTS

Costs that are a necessary and integral part of producing the finished product. include each of the manufacturing cost elements (direct materials, direct labor, and manufacturing overhead)

These costs are not expensed to cost of goods sold under the matching principle until the
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finished goods inventory is sold.

PRODUCT COSTS (Cont)

Direct materials and direct labor are often referred to as prime costs due to their direct association with the manufacturing of the finished product. Direct labor and manufacturing overhead are often referred to as conversion costs since they are incurred in converting raw materials into finished goods.
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Classifications of Costs
Manufacturing costs are often combined as follows:
Direct Materials Direct Labor Manufacturing Overhead

Prime Cost
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Conversion Cost

PERIOD COSTS
a) are identifiable with a specific time period, b) relates to nonmanufacturing non-inventoriable costs, and c) include selling and administrative expenses.

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ILLUSTRATION: PRODUCT VERSUS PERIOD COSTS

Manufacturing Costs

Direct Labor Manufacturing Overhead Period Costs

Nonmanufacturing Costs
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Selling Expenses Administrative Expenses

{ {

Direct Materials

Prime Costs Conversion Costs

Flow of cost associated with production

Material inventory
DM purchase d

DM used

WIP inventory

Cost of finished goods

Finished goods INV

Product is sold

COG S

DL used

MOH used

DL payable

MOH

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VARIABLE FACTORY OVERHEADS

Supplies Fuel Power Small tools Spoilage, salvage and reclamation expenses Receiving costs Hauling within plant Royalties Communication costs

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FIXED FACTORY OVERHEADS

Salaries of production executives Depreciation Property tax Patent amortization Wages of security guards and fire fighters Maintenance and repairs of building and grounds

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SEMI VARIABLE FACTORY OVERHEADS

Supervision Inspection Payroll department services Personnel department services Factory office services Materials and inventory services Cost department services Maintenance and repairs of machinery and equipment Compensation insurance Health and accident insurance

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Controllable and Uncontrollable costs

Controllable costs:
Costs that can be controlled or heavily influenced by the manager.

Uncontrollable costs:
Costs that a manager cannot influence significantly.

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Manufacturing operations and Manufacturing Costs

Job Shop:
Low production volume; little standardization; one of a kind product.

Batch:
Multiple products; low volume

Assembly line:
A few major products; higher volume. Mass customization: Higher production volume; many standardized components ; customized components of components.

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More cost classifications

Opportunity costs:
Is defined as a benefit that is sacrificed when the choice of one action preludes taking an alternative course of action.

Out of pocket costs:

Sunk costs:
Costs that have been incurred in the past. They do not affect future costs and cannot be changed by any current or future action. Irrelevant to all future decisions.

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Differential costs:

More cost classifications

It is the amount by which the cost differs under two alternative actions.

Incremental costs:
The increase in cost from one alternative to another.

Marginal costs:
Additional costs incurred when an additional unit is produced.

Average costs:
It is the total cost for whatever quantity is manufactured, divided by the number of units

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Standard costs:
Pre determined costs for direct materials, direct labor and factory overhead. They are established by using information accumulated from past experience and data secured from research studies.

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