Chapter 1: Introduction to Cost Accounting Cost Accounting: Foundations and Evolutions, 8e Kinney ● Raiborn © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives What are the relationships among financial, management, and cost accounting? What are the sources of authoritative pronouncements for the practice of cost accounting? What are the sources of ethical standards for cost accountants? What is a mission statement, and why is it important to organizational strategy? What must accountants understand about an organization’s structure and business environment in order to perform effectively in that organization? What is a value chain, and what are the major value chain functions? How is a balanced scorecard used to implement an organization’s strategy? What are the sources of ethical standards for cost accountants? Why is ethical behavior so important in organizations? © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Accountants Financial accountants provide information to external parties Managerial accountants provide information to internal users Investors Creditors Regulators Donors Managers Cost accountants provide information to both internal and external users Product cost information Accounting is the language of business. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Relationship of Financial, Management, and Cost Accounting Product Costs FINANCIAL ACCOUNTING COST MANAGEMENT ACCOUNTING ACCOUNTING © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Types of Accounting Financial Meet external information needs Comply with GAAP Management Meet internal information needs Does not have to comply with GAAP © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Financial versus Managerial Financial External focus Whole organization Historical Quantitative Monetary Verifiable GAAP Formal recordkeeping Managerial Internal focus Segments or divisions Current/projected Quantitative/qualitative Monetary and nonmonetary Timely/reasonable estimate Benefits exceed costs Formal and informal recordkeeping © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Product Cost Information External parties—stockholders, creditors, regulators, and donors For investment and credit decisions Complies with GAAP Enterprise focus Internal parties Planning, controlling, and decision making Evaluating performance Includes upstream and downstream costs Disaggregated © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Accounting Bodies Financial Public Company Accounting Oversight Board (PCAOB) Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) Management Institute of Management Accountants (IMA) Society of Management Accountants of Canada Cost Accounting Standards Board (CASB) © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Management Accounting Organizations IMA Statements on Management Accounting (not legally binding) Society of Management Accountants of Canada Management Accounting Guidelines (not legally binding) Cost Accounting Standards Board (CASB) Government contracting standards (legally binding) © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Organizational Strategy 1. Develop mission statement 2. Implement strategy 3. Deploy resources to create value for customers and shareholders 4. Recognize that each organization is unique—thus unique strategies must be developed © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Organizational Strategy 1. Develop mission statement 2. Implement strategy Establish appropriate measures of accomplishment Develop, implement, and monitor necessary information systems © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Five Factors in Organizational Strategy Core competencies Organizational structure Management style and organizational culture Organizational constraints Environmental constraints © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Organizational Strategies Core competency—critical function or activity providing a competitive advantage Cost leadership strategy—undercut competitor prices Product differentiation strategy—superior quality products or unique services sold at a premium © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Strategy Questions What are the most important factors in your organization’s operating environment? Economy, population demographics, competitors, suppliers, resource availability, innovation, environment What are your organization’s core competencies? Have you organization’s core competencies become competitive advantages? What is your organizations current position relative to your competitors? What are your customers’ purchase or selection criteria? What is the organizational vision identified by your management, shareholders, and other internal and external stakeholders? Does your organization have the appropriate resources (financial, personnel, and technological) to fulfill its vision? Have appropriate performance measurements been established to determine if progress is being made towards your organization’s mission and vision? Are operating conditions continuously monitored to detect changes so that your organization can adapt with flexibility and sensitivity, especially to new trends in technology? Is the vision supported by identifiable goals and objectives? © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Organizational Structure Distribution of authority and responsibility in an organization Authority—right to use resources to accomplish a task or achieve an objective Responsibility—obligation to accomplish a task or achieve an objective Line manager works directly toward attaining organizational goals Staff employees give assistance and advice to line managers Treasurer and Controller © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Organizational Constraints Four common organizational constraints Monetary capital Intellectual capital Technology Environmental constraints © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Value Chain A set of value-adding functions and processes that converts inputs into products or services Research and Development Product Design Supply Production Marketing Distribution Customer Service Communicate strategy to all members of the value chain. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Components of the Value Chain © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Balanced Scorecard © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Balanced Scorecard Perspectives Learning and Growth Internal Business Things to do well to meet customer needs and expectations Customer Value Use the organization’s intellectual capital to adapt to changing customer needs or to influence new customers’ needs and expectations through product or service innovations How well the organization is doing relative to important customer criteria Financial Address stockholders/stakeholders concerns about profitability and organizational growth © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Balanced Scorecard Measures Short-term and long-term Internal and external Financial and nonfinancial © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Professional Ethics Earnings management—deliberate accounting adjustments to “hit” profit targets Often adjustments involve cost accounting Product costs Inventory valuations Stretching legitimate accounting techniques Outright fraud © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Potential Ethical Issues Earnings management Low cost production at any cost Whistle-blower retaliation Fixing prices Bribery and other corruption Hiding managerial acts © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Ethics and Legislation Sarbanes-Oxley Act—CEOs and CFOs personally accountable for the accuracy of their organization’s financial reporting False Claims Act—whistle-blower protection and penalties for failure to blow the whistle (disclose known financial frauds) Dodd-Frank Act—encourages whistle-blowing with awards from 10 to 30 percent of amount recouped © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Ethics and Management Accounting Standards of Ethical Conduct for Management Accountants Competence Confidentiality Integrity Credibility © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Ethics in Multinationals Foreign Corrupt Practices Act—prohibits bribes to obtain/retain business Organization of Economic Cooperation and Development Convention—crime to offer, promise, give bribes to obtain/retain internal business deals © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Questions What is the relationship among financial, management, and cost accounting? How is the balanced scorecard used to implement an organization’s strategy? Where can an accountant find ethical standards for cost accounting? © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 2: Cost Terminology and Cost Behaviors Cost Accounting: Foundations and Evolutions, 8e Kinney ● Raiborn © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives Why are costs associated with a cost object? What assumptions do accountants make about cost behavior, and why are such assumptions necessary? How are costs classified on financial statements, and why are such classifications useful? How does the conversion process occur in manufacturing and service companies? What are the product cost categories, and what items comprise those categories? How and why does overhead need to be allocated to products? How is cost of goods manufactured calculated and used in preparing an income statement? © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Monetary measure of resources given up to attain an objective (such as acquiring a good or delivering a service) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Categories Association with cost object Cost object is anything for which management wants to collect or accumulate costs Reaction to changes in activity Classification on the financial statements © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Association with a Cost Object Direct—traceable to a cost object Indirect—not conveniently or practically traceable to a cost object Treated as overhead Allocated © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Reaction to Changes in Activity Variable Fixed Mixed Step Relevant Range—normal operating range © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Reaction to Changes in Activity Variable cost Fixed Cost $ $ # of Units # of Units Within the relevant range © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Reaction to Changes in Activity Variable cost Total $ Total Fixed Cost $ # of Units Unit $ # of Units Unit $ Within the # of Units relevant range # of Units © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Total and Unit Cost Behavior Total Cost Variable Cost Fixed Cost Varies in direct proportion to changes in activity Remains constant throughout the relevant range Unit Cost Remains constant throughout the relevant range Varies inversely with changes in activity throughout the relevant range © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Reaction to Changes in Activity Step Cost (fixed) Mixed Cost variable $ $ fixed # of Units # of Units Within the relevant range © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Determining Cost Behavior Cost Predictor Cost Driver Activity accompanied by consistent, observable changes in a cost item Activity that has a direct cause-effect relationship on cost Predicts but may not cause the cost to change Directly causes the cost to change © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Classification on the Financial Statements Unexpired—balance sheet assets Expired—income statement expenses Product—inventoriable costs Prime—direct material and direct labor Conversion—direct labor and overhead Product costs are unexpired before sale Product costs are expired when sold Period—expensed in period incurred © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Product Costs Product costs Direct material—Measurable part of a product Direct labor—Labor used to manufacture a product or perform a service Overhead—Indirect production cost First appear on the balance sheet in inventory accounts Transferred to the income statement when product is sold © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Period Costs Period costs Selling and administrative costs Distribution costs Cost to warehouse, transport, and/or deliver a product or service Major impact on managerial decision making Appear on the income statement when incurred Expensed when incurred © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Conversion Process Change inputs into outputs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Conversion Process Input Output Purchase raw materials or supplies Product or Service CONVERSION © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Degrees of Conversion Low Low Department stores Gas stations Jewelry stores Travel agencies Moderate High Moderate Moderate Florists Meat markets Oil-change businesses High Manufacturing Construction Agriculture Architecture Auditing Mining Printing Restaurants © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Service Company Input Purchase supplies Use supplies, labor, overhead to provide service Significant amount of labor Tangible or intangible output Output Sell to customer © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Retail Company Input Purchase products for resale Purchase finished goods Resell to customers Output Warehouse and/or display Sell to customer © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Manufacturer Significant amount of labor and machinery Tangible output Input Output Purchase raw materials and supplies Finished product Production Center add labor and overhead Sell to customer © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Accumulation in a Manufacturing Company Materials Inventory Work in Process Inventory Finished Goods Inventory Balance Sheet Cost of Goods Sold Income Statement © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Product Cost—Direct Direct Material Conveniently and economically traced to cost object Direct Labor To manufacture a product or perform a service Includes wages paid to direct labor employees, production bonuses, payroll taxes May include holiday and vacation pay, insurance, retirement benefits © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Product Cost—Indirect Overhead—indirect production costs Fringe benefits, if cannot be easily traced to product Overtime, if due to random scheduling Cost of quality Prevention costs Appraisal costs Failure costs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Product Cost Behavior Direct Material Variable Direct Labor Variable Overhead Variable, fixed, or mixed © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Overhead Cost Allocation Assign indirect costs to one or more cost objects To determine full absorption cost (GAAP) To motivate management To compare alternative courses of action for planning, controlling, and decision making Allocation process should be rational and systematic © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Overhead Cost Allocation Assign indirect costs to one or more cost objects To determine full absorption cost (GAAP) To motivate management To compare alternative courses of action for planning, controlling, and decision making Allocation process should be rational and systematic © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Allocating Overhead Actual Cost System Product Cost Cost Used Direct Materials Actual Direct Labor Actual Overhead Actual © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Allocating Overhead: Actual Cost System The Actual Cost System is not timely All costs must be known before calculating product cost © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Allocating Overhead: Actual vs. Normal Product Cost Direct Materials Actual Cost System Actual Normal Cost System Actual Direct Labor Actual Actual Overhead Actual Predetermined Overhead Rate © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Predetermined Overhead Rate Allows overhead to be assigned during the period Compensates for fluctuations that are not related to activity level in activity level that do not affect fixed overhead © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Flow of Product Costs Raw Materials Inventory Accounts Payable XXX Work in Process Inventory Raw Materials Inventory XXX XXX XXX Work in Process Inventory XXX Variable Overhead Control XXX Fixed Overhead Control XXX Salaries/Wages Payable XXX © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Flow of Product Costs Variable Overhead Control XXX Fixed Overhead Control XXX Utilities Payable XXX Supplies Inventory XXX Accumulated Depreciation–Equipment XXX Other accounts XXX © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Flow of Product Costs Work in Process Inventory Variable Overhead Control Fixed Overhead Control XXX Finished Goods Inventory Work in Process Inventory XXX XXX XXX XXX © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Flow of Product Costs Accounts Receivable Sales XXX XXX Cost of Goods Sold XXX Finished Goods Inventory XXX Matches revenues and expenses on the income statement © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Statement of Cost of Goods Manufactured—Raw Materials Used Beginning balance Purchases of materials Raw materials available Ending balance Total raw materials used $ 73,000 280,000 $353,000 <69,000> $284,000 To Statement of Cost of Goods Manufactured © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Statement of Cost of Goods Manufactured Beginning work in process Raw materials used Direct labor Variable overhead Fixed overhead $145,000 $284,000 436,000 115,200 98,880 Current period manufacturing costs 934,080 Total costs to account for $1,079,080 Ending work in process <20,880> Cost of goods manufactured $1,058,200 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Schedule of Cost of Goods Sold Beginning Finished Goods $ 87,400 Cost of Goods Manufactured 1,058,200 Cost of Goods Available for Sale $1,145,600 Ending Finished Goods <91,600> Cost of Goods Sold $1,054,000 From Schedule of Cost of Goods Manufactured © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Income Statement Revenue Cost of Goods Sold Gross Profit Operating Expenses Operating Income XXXX <1,054,000> XXXX <XXXX> XXXX From Schedule of Cost of Goods Sold © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Questions What is the difference between a fixed and variable cost? What are the three components of product cost? What are the three inventory accounts for a manufacturing company? © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ethical Issues Expired costs—not on the balance sheet Period costs—not inventory Product costs—not selling or administrative costs Direct labor—not overstated Ending inventory—not overstated © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
