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Chapter 13
Cost Accounting and Reporting
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© 2008
The©McGraw-Hill
Companies,
Inc., All
Reserved.
Copyright
2011 by The McGraw-Hill
Companies,
Inc.,Rights
All Rights
Reserved.
1-2
LO1
Cost Accounting
Financial
Accounting
Managerial
Accounting
Focus on
External
Reporting
Focus on
Internal
Reporting
Cost
Accounting
Focus on
Cost Accumulation
& Assignment
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1-3
Value Chain Functions
LO2
Research
and
Development
Design
Production
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The sequence of
functions and activities
that, over the life
of the product or
service, adds value
for the customer.
Marketing
Desired
ROI
Customer
Service
Distribution
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LO2
Cost Accumulation and Assignment
Cost
Object
Cost
Pool
Cost Assignment
Cost
Object
Cost
Object
Cost objects are products, jobs, and services.
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Direct Costs and Indirect
Costs
LO3
Direct costs


Can be easily and
conveniently traced to a
unit of product or other
cost objective.
Would not be incurred if
the product or activity
was discontinued.
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Indirect costs


Cannot be easily and
conveniently traced to a
unit of product or other
cost object.
Would be incurred even
if the product or activity
was discontinued.
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Costs for Cost Accounting
Purposes
LO4
Merchandisers . . .
 Buy finished goods.
 Sell finished goods.
Current Assets

Cash

Receivables

Prepaid Expenses

Merchandise Inventory
Manufacturers . . .
 Buy raw materials.
 Produce and sell
finished goods.
Current Assets
 Cash
 Receivables
 Prepaid Expenses
 Inventories


MegaLoMart
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
Raw Materials
Work in Process
Finished Goods
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LO4
Product Costs and Period Costs
Costs
Balance Sheet
Inventories
Material Purchases
Raw Materials
Direct Labor
Work in
Process
Manufacturing
Overhead
Selling and
Administrative
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Finished
Goods
Period Costs
Income
Statement
Expenses
Cost of
Goods
Sold
Selling and
Administrative
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LO5
Cost Accounting Systems
Determining unit
manufacturing
costs.
Planning and
control
functions.
Cost accounting systems provide the
INFORMATION
that supports successful decision-making.
Assessing the
efficiency and
effectiveness
of operations.
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Providing
products or
services to
customers.
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Cost Accounting Systems
LO5
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.
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Track resources
consumed by
products and
services.
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Cost Accounting Systems
LO6
The predetermined overhead rate
(POHR) used to apply overhead to
jobs is determined before the period
begins.
POHR =
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.
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LO6
Cost Accounting Systems
Smaller
amounts
If Manufacturing
Overhead is . . .
UNDERAPPLIED
Alternative 1
Close to Cost
of Goods Sold
Alternative 2
INCREASE
Cost of Goods Sold
INCREASE
Work in Process
Finished Goods
Cost of Goods Sold
DECREASE
Cost of Goods Sold
DECREASE
Work in Process
Finished Goods
Cost of Goods Sold
(Applied OH is less
than actual OH)
OVERAPPLIED
(Applied OH is greater
than actual OH)
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Allocation
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LO8
Cost Accounting Systems - Absorption
Process
Costing
Job Order
Costing
 Costs are accumulated by job.
 Used for production of large, unique, high-cost items.
 Built to order rather than mass produced.
 Many costs can be directly traced to each job.
Typical job order cost applications:
• Special-order printing
• Building construction
Also used in service industries
• Hospitals
• Law firms
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LO8
Cost Accounting Systems - Absorption
Process
Costing
Job Order
Costing
 Costs are accumulated by departments.
 Used for production of small, identical, low-cost items.
 Mass produced in an automated continuous process.
 Costs cannot be directly traced to each unit of product.
 Production is stated in “equivalent” units.
Typical process cost applications:
• Petrochemical refinery
• Paint manufacturer
• Paper mill
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LO8
Cost Accounting Systems
Absorption Costing and Variable Costing
Absorption
Costing
Variable
Costing
Direct Materials
Product
Costs
Product
Costs
Direct Labor
Variable Manufacturing Overhead
Fixed Manufacturing Overhead
Period
Costs
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Variable Selling and Administrative Expenses
Period
Costs
Fixed Selling and Administrative Expenses
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Activity-Based Costing (ABC)
LO9
Identify activities and assign costs to those
activities.
Central idea . . .

Products require activities.

Activities consume resources.
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A
A
B C
C
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Identifying Cost Drivers
LO9
Most cost drivers are related to either volume or
complexity of production.

Examples: machine time, machine setups, purchase
orders, production orders.
Three factors are considered in choosing a cost
driver:

Causal relationship.

Benefits received.

Reasonableness.
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