COSTING Ryan Nguyen CONTENT BASIC CONCEPTS AND CLASSIFICATION OF COSTS 7/14/20XX UNIT COSTS CALCULATING PROFITS UNDER MARGINAL COSTING AND ABSORPTION COSTING AND COMPARISON OF RESULTS 2 Basic concepts and classification of costs 1. WHAT IS MANAGEMENT ACCOUNTING? 2. BASIC MANAGEMENT ACCOUNTING CONCEPTS 3. COST CLASSIFICATION FOR INVENTORY VALUATION AND PROFIT MEASUREMENT 4. COST CLASSIFICATION FOR PLANNING AND DECISION MAKING 5. COST CLASSIFICATION FOR CONTROL 7/14/20XX 3 What is management accounting? 1. The management accounting The management accountant should be able to provide information for managers to assist in the following: 7/14/20XX 4 The management accounting COSTING PLANNING Management need information to establish what the costs are for goods or services already produced. This is useful in order that they can: • Calculate the profit that a unit will generate • Set prices • Value inventory in the balance sheet Managers also need to be provided with information to help create forecasts or estimates in other to plan for the future: • Defining objective: what are the costs of goods or services likely to be ? • Strategic-level planning: Asking questions such as “What is it we do?” , “Who do we do it for?” and “How can we do it better?” • Tactical resource planning: assessing the purchasing/production requirements of the business. How much labor, raw material, machine hours, cash and so on are required in the forthcoming period? DECISION MAKING CONTROL These are many decisions managers may have to make such as: • What should we produce? • How should we finance the business? • Is a project worthwhile? Once plans have been made they must be reviewed to ensure the company is following them, and any identified material inefficiencies must be addressed: • Planning is nothing without control 7/14/20XX The management accounting PERFORMANCE EVALUATION CONTROL Once plans have been made they must The performance of divisions and employees can be reviewed to ensure the company is be assessed by comparing their performance following them, and any identified against budgets or divisional or material inefficiencies must individual be targets. This should aid employee motivation and addressed: ensure that individual objectives align with that • Planning is nothing without control of the organisation (goal congruence) => Management accounting systems are not restricted to manufacturing operations. They are also used in service industries, government departments and not for profit organizations, including charities. 7/14/20XX What is management accounting? 2. Financial accounting VS Management accounting • Financial accounting are usually prepared for stakeholders external to an organisation • Management accounts are usually prepared for the internal managers of an organisation 7/14/20XX 7 Financial accounting VS Management accounting 7/14/20XX 8 Basic management accounting concepts COST OBJECTS A cost object is anything for which costs can be measured. This should be appropriate for the type of company being considered. “How much does X cost?” 7/14/20XX 10 COST OBJECTS Examples of cost objects include: • A unit of product (eg a car) • A unit of service (eg a valet service of a car) • A department of function (eg the accounts department) • A project (eg the installation of a new computer system) 7/14/20XX 11 COST UNITS A cost unit is the basic measure (unit) of product or service in relation to which costs are determined. “How is an organization's output measured?” Note: The output of a service organisation is much harder to measure than that of a manufacturer, because out put is not standardized 7/14/20XX 12 COST UNITS Example 1: For a steelworks, a hospital and a freight organisation, identify a cost unit they might use? 7/14/20XX 13 COST UNITS 7/14/20XX 14 Cost units and cost objects Example 2: Identify which of the following cost objects would be suitable cost units for a hotel 7/14/20XX Pitch deck title 15 Cost units and cost objects Example 2: Identify which of the following cost objects would be suitable cost units for a hotel 7/14/20XX Pitch deck title 16 Cost classification for inventory valuation and profit measurement 1. Functions and departments 2. Classification by function 3. Classification by nature 4. Non-production costs can also be broken down further by their nature to aid analysis 5. Direct and indirect costs 6. Cost card 7. Production costs and period cost 7/14/20XX Pitch deck title 17 Functions and departments An organisation may be divided into a number of different functions, within which there are a number of departments. A manufacturing organisation might be structured as follow 7/14/20XX 18 Classification by function Cost classification is the arrangement of cost items into logical groups, for example by their function (administration, production etc.) or by their nature (materials, wages etc.). The eventual aim of costing is to determine the cost of producing a product/service. A company may first arrange cost items into groups by function. At the highest level there could be groups of production costs and groups of non-production costs. 7/14/20XX 19 Classification by function 7/14/20XX 20 Classification by nature 1. Production costs can the be broken down further by their nature 2. Non-production costs can also be broken down further by their nature to aid analysis 7/14/20XX 21 Production costs can the be broken down further by their nature 7/14/20XX 22 Non-production costs can also be broken down further by their nature to aid analysis 7/14/20XX 23 Give example of non-production costs under each of the 4 headings below 7/14/20XX 24 Give example of non-production costs under each of the 4 headings below 7/14/20XX 25 Direct and Indirect costs A direct cost is a cost that can be traced in full to the product, service or department that is being costed Prime cost = total direct costs Indirect production costs are those costs which are incurred in the course of making a product/service but which cannot be identified with a particular cost unit. Indirect production costs are often referred to as production overheads. 7/14/20XX 26 Identify and group the costs involved in the production of a CD 7/14/20XX 27 Identify and group the costs involved in the production of a CD 7/14/20XX 28 Identify any direct or indirect non-production costs associated with the production and sale of a CD 7/14/20XX 29 Identify any direct or indirect non-production costs associated with the production and sale of a CD 7/14/20XX 30 Cost card 7/14/20XX 31 Cost card 7/14/20XX 32 Product costs and period costs 7/14/20XX 33 Cost classification for planning and decision making 1. COST BEHAVIOUR PATTERNS 2. FIXED COSTS 3. VARIABLE COST 4. SEMI-VARIABLE COST (OR SEMI-FIXED COST OR MIXED COSTS) 5. COST BEHAVIOUR AND TOTAL AND UNIT COSTS 6. THE RELEVANT RANGE 7/14/20XX 34 Cost behavior patterns 7/14/20XX 35 Fixed costs 7/14/20XX 36 Variable costs 7/14/20XX 37 Semi-variable cost (or semi-fixed cost or mixed costs) 7/14/20XX 38 Semi-variable cost (or semi-fixed cost or mixed costs) 7/14/20XX 39 Cost behaviour and total and unit costs 7/14/20XX 40 Cost behaviour and total and unit costs 7/14/20XX 41 Cost behaviour and total and unit costs 7/14/20XX 42 Tick the appropriate box for each cost 7/14/20XX 43 Tick the appropriate box for each cost 7/14/20XX 44 The relevant range 7/14/20XX 45 The relevant range 7/14/20XX 46 7/14/20XX Pitch deck title 47 COST CLASSIFICATION FOR CONTROL 1. RESPONSIBILITY ACCOUNTING 2. CONTROLLABLE AND UNCONTROLLABLE COSTS 7/14/20XX Pitch deck title 48 Responsibility accounting 7/14/20XX 49 Controllable and uncontrollable costs 7/14/20XX 50 Controllable and uncontrollable costs 7/14/20XX 51 Identify in the following scenarios whether or not the cost in question is controllable or not controllable 7/14/20XX 52 Identify in the following scenarios whether or not the cost in question is controllable or not controllable 7/14/20XX 53 SUMMARY 7/14/20XX Pitch deck title 54 SUMMARY 7/14/20XX Pitch deck title 55 UNIT COSTS Inventory valuation First in, First out (FIFO) Last in, First out (LIFO) Average pricing Inventory valuation and profitability Absorption costing (AC) Alternative approaches to costing 7/14/20XX 56 INVENTORY VALUATION VALUING INVENTORY IN CHARGING UNITS OF PRICING METHODS IN FINANCIAL ACCOUNTING INVENTORY TO COST OF INVENTORY VALUATION PRODUCTION OR COST OF SALE 7/14/20XX 57 Valuing inventory in financial accounts For financial accounting purposes, inventories are valued at the lower of cost and net realizable value. In practice, only when the period ends will the value of the inventory in hand be reconsidered so that items with a net realizable value below their original cost can be revalued downwards. 7/14/20XX 58 Valuing inventory in financial accounts For financial accounting purposes, inventories are valued at the lower of cost and net realizable value. In practice, only when the period ends will the value of the inventory in hand be reconsidered so that items with a net realizable value below their original cost can be revalued downwards. 7/14/20XX Pitch deck title 59 Charging units of inventory to cost of production or cost of sales 7/14/20XX 60 Charging units of inventory to cost of production or cost of sales 7/14/20XX 61 Charging units of inventory to cost of production or cost of sales 7/14/20XX 62 In the following sections we will consider each of the pricing methods detailed above, using the following transactions to illustrate the principles in each case: 7/14/20XX 63 FIFO (First in, First out) FIFO (First in, First out) assumes that materials are issued out of inventory in the order in which they were delivered into inventory: issues are priced at the cost of the earliest delivery remaining in inventory. Example: Use FIFO to calculate the cost of issues and the closing inventory value of the transactions above. Pitch deck title 64 FIFO (First in, First out) 7/14/20XX 65 FIFO (First in, First out) 7/14/20XX 66 FIFO (First in, First out) 7/14/20XX 67 LIFO (Last in, First out) LIFO (LAST IN, FIRST OUT) assumes that materials are issued out of inventory in the reverse order from that in which they were delivered: the most recent deliveries are issued before earlier ones, and issues are priced accordingly. Example: Use LIFO to calculate the cost of issues and the closing inventory value of the same transactions outlined at the start of the section. 7/14/20XX Pitch deck title 68 LIFO (Last in, First out) 7/14/20XX 69 LIFO (Last in, First out) 7/14/20XX 70 AVERAGE PRICING 1. Cumulative weighted average pricing The cumulative weighted average pricing method calculates a weighted average price for all units in inventory. A new weighted average price is calculated whenever a new delivery of materials is received into stores. Each issue of materials is priced at the most recent weighted average price. 7/14/20XX 71 Cumulative weighted average pricing Example: Use cumulative weighted average pricing to calculate the cost of issues and the closing inventory value of the transactions outlined at the start of the section 7/14/20XX Pitch deck title 72 Cumulative weighted average pricing With all average price systems where it is required that prices be kept up to date, in which one of the following situations is it not necessary to recalculate the average price? 7/14/20XX Pitch deck title 73 Cumulative weighted average pricing 7/14/20XX Pitch deck title 74 AVERAGE PRICING 2. Periodic weighted average pricing 7/14/20XX 75 Periodic weighted average pricing Example: Use periodic weighted average pricing to calculate the issue costs and closing inventory of the transactions. 7/14/20XX 76 Inventory Valuation And Profitability 7/14/20XX 77 Comparison of inventory valuation methods 7/14/20XX 78 Absorption costing (AC) 7/14/20XX 79 Absorption costing steps 7/14/20XX 80 Absorption Costing Steps 7/14/20XX 81 Absorption Costing Steps Step 1: Allocation and apportionment of production overheads to cost centres The first stage in valuing the overhead cost of a cost unit is to allocate and apportion overheads between the cost centres 7/14/20XX 82 Absorption Costing Steps 7/14/20XX 83 Absorption Costing Steps 7/14/20XX 84 Absorption Costing Steps Step 2: Reapportionment of service cost centre overhead 7/14/20XX 85 Absorption Costing Steps Step 2: Reapportionment of service cost centre overhead 7/14/20XX 86 Absorption Costing Steps 7/14/20XX 87 Absorption Costing Steps 7/14/20XX 88 Absorption Costing Steps Step 3: Absorption of overheads into production (Cost units) 7/14/20XX 89 7/14/20XX 90 7/14/20XX 91 Example: 7/14/20XX 92 Example: 7/14/20XX 93 Example: 7/14/20XX 94 Example: 7/14/20XX 95 7/14/20XX 96 7/14/20XX 97 Example: 7/14/20XX 98 Example: 7/14/20XX 99 Example: 7/14/20XX 100 Example: 7/14/20XX 101 7/14/20XX 102 Alternative approaches to costing 7/14/20XX 103 Alternative approaches to costing 7/14/20XX 104 Alternative approaches to costing 7/14/20XX 105 Alternative approaches to costing 7/14/20XX 106 Specific order costing 7/14/20XX 107 Specific order costing 7/14/20XX 108 Process (Continuous operation) costing 7/14/20XX 109 Process (Continuous operation) costing 7/14/20XX 110 Example: 7/14/20XX 111 7/14/20XX 112 7/14/20XX 113 7/14/20XX 114 7/14/20XX 115 7/14/20XX 116 7/14/20XX 117 7/14/20XX 118 CALCULATING PROFITS UNDER MARGINAL COSTING & ABSORPTION COSTING & COMPARISON OF RESULTS Marginal cost and marginal costing 7/14/20XX Calculating a profit or loss under marginal costing Calculating a profit or loss under absorption costing Pitch deck title Reconciliation of absorption and marginal costing profit 119 MARGINAL COST AND MARGINAL COSTING 7/14/20XX 120 MARGINAL COST AND MARGINAL COSTING 7/14/20XX 121 Calculating A Profit Or Loss Under Marginal Costing 7/14/20XX 122 Example: 7/14/20XX 123 Example: 7/14/20XX 124 Example: 7/14/20XX 125 Example: 7/14/20XX 126 CALCULATING A PROFIT OR LOSS UNDER ABSORPTION COSTING 7/14/20XX 127 Example: 7/14/20XX 128 Example: 7/14/20XX 129 Example: 7/14/20XX 130 RECONCILIATION OF ABSORPTION AND MARGINAL COSTING PROFIT 7/14/20XX 131 Example: Reconcile the profit figure, using the following proforma 7/14/20XX 132 7/14/20XX 133 trắc nghiệm 7/14/20XX 134 7/14/20XX 135 THANK YOU Ryan Nguyen 0939 148 188 nguyentandat2892@gmail.com 7/14/20XX 136
