Chapter 1: Introduction to Cost Accounting Sunday, 15 September 2024 11:50 am LEARNING OBJECTIVES: • • • • Distinguish between financial, managerial, and cost accounting. Distinguish between merchandising and manufacturing operations. Identify the uses of cost accounting data. Distinguish between job order costing and process costing. Main and Primary Objective of Accounting • To provide financial information about an entity to different types of users. • Internal users - managers for planning, controlling, and decision-making. • External users - government who provide funds and who have various interests in the operation of the entity. Cost Accounting • Expanded phase of financial or general accounting • Informs the management promptly with the cost of rendering a particular service, buying and selling a product, and producing a product. • The field of accounting that measures, records, and reports information about costs. • Essential and useful for all types of activities in all types of organizations. • Important to for-profit and non-profit organizations - governmental agencies, churches, and charities. Information System • Provide necessary financial data to business. • Necessary to ALL TYPES OF BUSINESS ENTITIES - manufacturing, merchandising, and service businesses. Manufacturing vs. Merchandising Business • Both are concerned with purchasing, storing, and selling goods. • Both must have efficient management and adequate sources of capital. • Both may employ hundreds or thousands of workers. MANUFACTURING • Makes goods to sell. • The purchase of materials is only the beginning of a long process of making goods to sell. • Involves the process of converting raw materials into finished goods through application of labor and factory expenses. MERCHANDISING • Buys items in marketable form to be resold to customers. • Once it has acquires and stored goods, it is ready to carry out the marketing function. COMPARISON OF FINANCIAL, MANAGERIAL, AND COST ACCOUNTING FINANCIAL ACCOUNTING VS. MANAGERIAL ACCOUNTING • Two major types of accounting. FINANCIAL ACCOUNTING • The use of accounting information for external parties - investors and creditors. Cost Accounting Page 1 • The use of accounting information for external parties - investors and creditors. • Primarily concerned with financial statements for external use - funding and interest in the financial operations of the entity. • Suppliers of funds - stockholders (owner of corporation), partners (owner of partnership) and sole proprietors. • Focus on the enterprise as a whole. • Based om historical data. • Information may be: Historical, quantitative, monetary, and verifiable. • Data are historical and backed by documents. • Presented in the form of: Financial statements, tax returns, and other formal reports. MANAGERIAL ACCOUNTING • Focuses on parties within the organization. • Commonly addresses individual or divisional concerns. • Information may be current, forecasted, quantitative, qualitative, monetary, nonmonetary. • Data are futuristic and some of the costs are not recorded. • More concerned on the timeliness of the information. Measuring bases in Managerial Accounting: • An economic measure - pesos. • Physical measure - pounds, gallons, tons, or units. • Relationship measure - ratios. COST ACCOUNTING • The intersection between financial and managerial accounting. • Information is needed in both financial and managerial. • Provides product cost information to both external and informal parties • Provides basis for determining product cost and aids management in planning and controlling operations. USES OF COST ACCOUNTING DATA 1. Determining the selling price 2. Meeting Competition 3. Bidding on contracts 4. Analyzing Profitability Planning and Control Planning - establishing objectives or goals for the firm and the means to achieve it. 3 Components of Planning 1. Strategic Planning - setting long range goals and objectives to determine overall direction of the company. 2. Tactical Planning - concerned with short range and emphasizes plans to achieve the strategic goals. 3. Operations Planning - relates to day-to-day implementation of tactical plans. Emphasizes the coordination of the major factors of production. (Materials, Labor, and Facilities.) Control - process of monitoring the company's operations, determining whether the objectives are met. TWO BASIC PRODUCT-COSTING SYSTEMS 1. Job Order Costing 2. Process Costing JOB ORDER COST ACCOUNTING SYSTEM • Used by companies making one-of-a-kind or special-order products. • Unit Cost = Total manufacturing Cost / number of good units produced. Cost Accounting Page 2 • Unit Cost = Total manufacturing Cost / number of good units produced. • May also be used for producing a set quantity of a product for inventory replenishment. Primary Characteristics of Job Order Cost • It collects all manufacturing costs and assigns them to specific job or batches of product. • It measures costs for each completed job, rather than for set time periods. • Uses just one Work in Process Inventory Control account in the general ledger. And is supported by a subsidiary ledger of job order cost cards or sheets for each job in process at any point of time. PROCESS COST ACCOUNTING SYSTEM 1. Used by companies that make a large number of similar products or maintain continuous production flow. Primary Characteristics of Process Cost Accounting • Manufacturing costs are grouped by department or work center, with little concern for specific job orders. • Emphasizes a weekly or monthly time period rather than the time taken to complete a specific order. • Uses several Work In Process Inventory Accounts - one for each department or work center in the manufacturing process. OPERATION COSTING • A hybrid costing system often used in repetitive manufacturing where finished products have common, as well as distinguishing characteristics. BATCH - large orders of identical units as a group through the same production sequence. Cost Accounting Page 3 Chapter 2: Cost-Concepts and Classifications Monday, 16 September 2024 2:42 pm LEARNING OBJECTIVES: • • • • • • • • Distinguish between cost, expenses, and losses. Distinguish between direct and indirect costs. Define the three integral components of a product. Define prime costs and conversion costs. Define variable, fixed, and mixed costs and discuss the effects of changes in volume on these costs. Distinguish between common costs and joint costs. Distinguish between capital expenditures and revenue expenditures. Identify the costs for planning, control, and analytical processes. Cost - the cash or cash equivalent value sacrifices for goods and services that are expected to bring a current or future benefit to the organization. CLASSIFICATION OF COSTS A. Manufacturing Costs/Product costs 1. Direct Materials 2. Direct Labor 3. Factory Overhead B. Non-Manufacturing Costs/Period Costs 1. Marketing or Selling expenses 2. General and administrative expenses COSTS CLASSIFIED AS TO VARIABILITY A. Variable Cost B. Fixed Cost C. Mixed Cost COSTS CLASSIFIED AS TO RELATION TO MANUFACTURING DEPARTMENTS A. Direct Departmental Charges B. Indirect Departmental Charges COSTS CLASSIFIED TO THEIR NATURE AS COMMON OR JOINT A. Common Cost B. Joint Cost COSTS CLASSIFIED AS TO RELATION TO AS ACCOUNTING PERIOD A. Capital Expenditures B. Revenue Expenditures COSTS FOR PLANNING, CONTROL, AND ANALYTICAL PROCESSES A. Standard Costs B. Opportunity Cost C. Differential Cost D. Relevant Cost E. Out-of-pocket Cost F. Sunk Cost G. Controllable Cost Manufacturing Costs/Product costs Direct Materials Cost Accounting Page 4 Direct Materials • The basic ingredients that are transformed into finished products. • Those that can be traced to the finished product and may be form of the product. Direct Labor • Represent the amount paid as wages to those working directly on the product. • Machine operators, maintenance workers, managers and supervisors, support personnel, and people who handle, inspect, and store materials. Direct Labor Costs • Include all labor costs for specific work performed on products that can be conveniently and economically traced to end products. Indirect Labor Cost • All labor costs for specific work performed on products that cannot be conveniently and economically traced to end products. Prime Cost • Direct Materials + Direct Labor Conversion Cost • Direct Labor + Factory Overhead Total Manufacturing Cost • Direct Materials + Direct Labor + Factory Overhead Factory Overhead • Are varied collection of production-related costs that cannot be practically or conveniently traced directly to end products. A. Non-Manufacturing Costs/Period Costs 1. Marketing or Selling expenses ○ Include all costs necessary to secure customer orders and get the finished product or service into the hands of the customer. ○ All organizations have marketing costs regardless of nature. 2. General and administrative expenses ○ Include all executive organizational, and clerical expenses that cannot logically be included under either production or marketing. ○ All organizations have administrative expenses. COSTS CLASSIFIED AS TO VARIABILITY Relevant Range - when the managerial accountant often limits the description to a specific range of activity to specify cost behavior. A. • • B. • • Variable Cost Items of cost which very directly, in total in relation to volume of production. Cost per unit remain constant as volume changes within a relevant range. Fixed Cost Items of cost which remain constant in total, irrespective of the volume of production. Cost per unit decreases as volume increases, and increases as volume decreases. ○ Committed Fixed Cost - represent relatively long term commitments on the part of management as a result of past decision. ○ Managed Fixed Cost - costs that incurred on a short term basis and can be more easily modified in response to changes in management objectives. C. Mixed Cost • Items of cost with fixed and variable components. ○ Semi-variable - the fixed portion usually represents a minimum fee for making a particular item or service. The variable portion is the cost charged for actually using the service. ○ Step Costs - the fixed part changes abruptly at various activity levels because these cost are acquired in indivisible portions. Cost Accounting Page 5 acquired in indivisible portions. - Similar to a fixed cost within a very small relevant range. COSTS CLASSIFIED AS TO RELATION TO MANUFACTURING DEPARTMENTS A. Direct Departmental Charges - immediately charged to the particular manufacturing departments that incurred the costs. B. Indirect Departmental Charges - originally charged to some other manufacturing departments or accounts but are later allocated or transferred to another department COSTS CLASSIFIED TO THEIR NATURE AS COMMON OR JOINT A. Common Cost - Costs of facilities or services employed in two or more accounting periods, operations, commodities, or services. - These are subject to allocation. B. Joint Cost - Costs of materials, labor, and overhead incurred in the manufacture of two or more products at the same time. - Indivisible and not specifically identifiable with any of the products being simultaneously produced. - Subject to allocation. COSTS CLASSIFIED AS TO RELATION TO AS ACCOUNTING PERIOD A. Capital Expenditures - intended to benefit more than one accounting periods and is recorded as an asset. B. Revenue Expenditures - will benefit current period only and is recorded as an expense. COSTS FOR PLANNING, CONTROL, AND ANALYTICAL PROCESSES A. Standard Costs - predetermined cost for direct materials, direct labor, and factory overhead. - Established by using information accumulated from past experiences and data secured from research studies. - A budget for the production of one unit of product or service. - Cost chosen by the managerial accountant to serve as the benchmark in the budgetary control system. B. Opportunity Cost - The benefit given up when one alternative is chosen over another. - Not usually recorded in the accounting system. - Should be considered when evaluating alternatives for decision-making. C. Differential Cost - Cost that is present under one alternative but is absent in whole or in part under another alternative. - An increase in another is incremental cost. - A decrease is decremental cost. ○ Marginal Revenue - the revenue that can be obtained from selling one more unit of product. ○ Marginal Cost - cost involved in producing one more unit of product. D. Relevant Cost - A future cost that changes across the alternatives. E. Out-of-pocket Cost - Cost that requires the payment of money (or other assets) as a result of their incurrence. F. Sunk Cost - Cost for which an outlay has already been made and it cannot be changed by present or future decision. G. Controllable Cost - A cost is said to be controllable at the a particular level of management if that level has power to authorize the cost. SUMMARY OF IMPORTANT FORMULAS: Cost Accounting Page 6 SUMMARY OF IMPORTANT FORMULAS: 1. TOTAL VARIABLE COST - Variable cost per unit x total output 2. TOTAL COST - Total Variable Cost / Total Fixed Cost 3. VARIABLE RATE - Highest point cost - Lowest point cost / Highest Output - Lowest Output 4. FIXED COST - Total Cost at Highest - (variable rate x output at highest point) 5. FIXED COST - Total Cost at Highest - (variable rate x output at lowest point) Cost Accounting Page 7 Chapter 3: The Cost Accounting Cycle Monday, 16 September 2024 9:27 pm LEARNING OBJECTIVES: • Understand the cost accounting cycle. • Differentiate service, merchandising, and a-manufacturing entities. • Distinguish between and account for direct and indirect materials and labor as they are used in the production process. • Prepare the different financial statements for a service entity, merchandising entity, and manufacturing entity. MATERIALS INVENTORY - Made up of the balances of materials and supplies on hand. - Cost of items in inventory are assigned. WORK IN PROCESS INVENTORY - All manufacturing costs incurred and assigned to products being produced. - It has no counterpart in merchandise accounting. FINISHED GOODS INVENTORY - Costs are moved from Work in Process to Finished Goods. - Where goods ready for sale are accounted for. ELEMENTS OF MANUFACTURING COST 1. Direct Materials 2. Direct Labor 3. Factory Overhead COST OF GOODS SOLD STATEMENT STATEMENT OF COMPREHENSIVE INCOME (MANUFACTUIRNG CO.) Cost Accounting Page 8 STATEMENT OF COMPREHENSIVE INCOME (MANUFACTUIRNG CO.) MANUFACTURING COST FLOW Cost Accounting Page 9 Chapter 4: Job Order Costing Monday, 16 September 2024 10:01 pm LEARNING OBJECTIVES: • Define job order costing and identify the types of industries that would be most to use this system. • Demonstrate the mechanics of a job order costing system. • Differentiate among the forms used in the purchase and issuance of materials such as a purchase requisition, a purchase order, a receiving report, and a materials requisition. • Distinguish between the periodic and perpetual cost accumulation systems used to account for materials issued to production and for ending materials inventory. • Prepare a job order cost sheet. Job Order Cost Procedure - keeps the cost of various jobs or contracts separate during their manufacture or construction. - Factories, workshops, and repair shops as well work by builders, construction engineers, shipbuilders, and printers. - Presupposes the possibility of physically identifying the jobs produced and of charging each with its own cost. Lot - The quantity of product that can be conveniently and economically produced. - Cost are accumulated for each lot Job Order Costing - Each job is an accounting unit to which materials, labor, and factory overhead costs are assigned by means of job order numbers. Job Order Sheet - Where the summary cost of each order produced for a given customer or the cost of each lot to be placed in stock is recorded. - Designed to collect the costs of materials, labor, and factory overhead applicable to a specific job. - Subsidiary records and are controlled by the work in process account. - Upper section: Job number, name of customer, description of items produced, quantity, date started, and date completed. - Main Portion: Cost of materials, labor, and factory overhead applied in each department or cost center. MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING 1. JOB-ORDER COST SHEET - These records accumulate product costs of specific units or small batches of units for both product costing and control purposes. - The file of job order cost sheets for uncompleted jobs serves as a perpetual book inventory and the subsidiary ledger for Work In Process Control. - A separate cost sheet is prepared for each job. 2. - MATERIALS STOCKCARD These records are the perpetual book inventory of costs and quantities of materials on hand. The file of materials stock cards for unused materials is the subsidiary ledger for Materials Control. A separate stock card is prepared for each type of material on hand. Cost Accounting Page 10 3. FINISHED GOODS STOCKARD - These records are the perpetual book inventory of costs and quantities of completed goods held for sale. - The file of finished goods stock cards for unsold goods is the subsidiary ledger of Finished Goods Control. 4. FACTORY OVERHEAD CONTROL COST RECORD - These records accumulate detailed manufacturing overhead costs by department. - The file of these records for the accounting period is the subsidiary ledger for Factory Overhead Control. 5. MATERIALS REQUISITION, TIME TICKET AND CLOCK CARD - As the source documents for charging costs to jobs and department. - To aid in fixing responsibility for control and usage of materials and labor. ACCOUNTING PROCEDURES FOR MATERIALS DEBIT CREDIT 1. Inventory Beginning 1. Cost of direct materials issued. 2. Purchase of materials. 2. Cost of indirect materials issued. 3. Freight-in (using direct charging) 3. Cost of materials returned to suppliers. 4. Cost of excess materials returned from factory. ACCOUNTING PROCEDURES FOR LABOR (PAYROLL) DEBIT 1. Total wages and salaries earned by factory personnel during the payroll period. Cost Accounting Page 11 CREDIT 1. Total Payroll during the payroll period at the same time debiting work in process for direct labor, and overhead for indirect labor. ACCOUNTING PROCEDURES FOR LABOR (ACCRUED FACTORY PAYROLL) DEBIT 1. Total amount of wages paid to factory personnel at the same time crediting accounts payable or cash. CREDIT 1. Balancing Beginning 2. Total amount of wages and salaries of factory personnel at the same time debiting payroll. ACCOUNTING FOR FACTORY OVERHEAD Factory Overhead Control Account - used to accumulate actual overhead incurred. Factory Overhead Applied Account - used to accumulate estimated factory overhead applied to production. Over/Under Applied Overhead - difference between the actual overhead incurred and the applied overhead. - If actual is bigger than applied, the variance is called under-applied. - If applied is bigger than actual, the variance is called over-applied. Basis of Predetermined Rate: 1. Units of production 2. Direct Material Cost 3. Direct Labor Hours 4. Direct Labor Cost 5. Machine Hours Cost Accounting Page 12 MANUFACTURING OVERHEAD CONTROL DEBIT 1. Cost of Indirect Materials and supplies issued, crediting materials. CREDIT 1. Total debit footing at the end of the accounting period when closing the books. 2. Cost of indirect labor, crediting payroll. 3. Cost if indirect expense purchased from outsiders. 4. Cost of other indirect expense incurred by the company. MANUFACTURING OVERHEAD APPLIED DEBIT CREDIT 1. Total credit footings at the end of the accounting period upon closing of the books. 1. Cost of overhead allocated to production and computed by multiplying the actual factor by the predetermined rate, debiting work in process. WORK IN PROCESS ACCOUNT - Controlling account used to record the flow of the elements of cost through the factory during a given period. DEBIT CREDIT 1. Cost of beginning inventory 1. Cost of materials, labor, and FOH applied to jobs completed during the period, debiting finished goods. 2. Cost of direct materials issued to production, crediting materials. 2. Cost of direct materials returned to the warehouse, debiting materials. 3. Cost of direct labor applied to production, crediting payroll. 4. Amount of overhead applied, crediting applied overhead. FINISHED GOODS Cost Accounting Page 13 FINISHED GOODS - A controlling account used to record the flow of the cost of goods completed and transferred to the finished goods storeroom during the period. DEBIT 1. Cost of inventory at the beginning. CREDIT 1. Cost of finished goods sold during the period at the same time debiting cost of goods sold. 2. Factory cost of job order completed at the same time crediting work in process. 3. Cost of goods returned by the customer at the same time crediting cost of goods sold. COST OF GOODS SOLD - An account used to accumulate the cost of finished goods disposed through sale to customers. DEBIT CREDIT 1. Cost of finished goods disposed through sale to customers, crediting finished goods. 1. Cost of finished goods returned by customers, debiting the finished goods account. 2. Adjustments for under-applied factory overhead. 2. Adjustment of over-applied factory overhead. 3. Balance of the account at the end of the period, debiting income summary. TREATMENTS FOR DEFECTS AND SPOILAGES IN JOB ORDER COSTING DEFECTIVE UNITS - those that can be corrected by reprocessing. - Entail additional reprocessing cost, SPOILED GOODS - partially or fully completed units that are not correctable either because it is not economical to correct them. - Either disposed, inventoried at nominal value, or sold immediately as seconds. - Unrecovered costs occur. IF the imperfections occur because of actions taken by the customer or because of the job specifications, the losses are charged to the specific job. (Debit to Work in Process). Shared by all manufactured units under the job order. IF the defects or spoilage occur because of internal failures - error by worker or defective materials, the losses are charged as actual overhead. (Debit to Factory Overhead Control). Shared by all manufactured units during the period. Cost Accounting Page 14 SCRAPS AND WASTES MATERIALS SCRAPS - left over from the production process that cannot be put back to production for the same purpose, but may be usable for a different purpose or may be sold to outsiders for a nominal amount. - IF scraps is traceable for specific job. Scrap Materials Work in Process - IF scraps is not traceable to a specific job. Scrap Materials Miscellaneous Income - If it is discovered from factory supplies, the credit is FOH Control. WASTES - left over from the production process that has no further use or resale value, may require cost for their disposal. - Disposal Allocated to All Jobs Factory Overhead Control Accounts Payable - Disposal allocated to Specific Job Work in Process Accounts Payable Cost Accounting Page 15 Cost Accounting Page 16 Chapter 5: Just-in-Time and Backflush Costing Monday, 16 September 2024 10:02 pm LEARNING OBJECTIVES: - Understand the JIT Philosophy - Know and Understand the five key elements involved in the operation of a JIT system. - Differentiate the JIT System from the traditional costing system. JUST-IN-TIME - The raw materials are received just in time to go into production. - Manufactured parts are completed just in time to be assembled into products - Products are completed just in time to be shipped to customers. The distinguishing characteristic of JIT costing is that production costs are accumulated with inventory at later stages of the production process. The rationale for this difference is that JIT assumes that small (if any) quantities of direct materials, work-in-process, and finished goods inventories will be maintained. Since JIT assumes that the work-in-process and finished goods inventory maintained by the organization will be minimal, labor and overhead are normally accumulated directly in cost of goods sold account. At the end of the period, the labor and overhead costs associated with any unsold or uncompleted items are "backed out" and included in either finished goods or work-in-process, respectively. For this reason, JIT costing is often referred to as backflush costing. There are five key elements involved in the operation of a JIT system. 1. A company must learn to rely on a few suppliers who are willing to make frequent (even daily) deliveries in small lots. 2. A company must improve its product flow lines by creating an individual flow line for each separate product. 3. A company must reduce the setup time between production runs. One way to do this is through employee training. Another way is through automation by creating a flexible manufacturing system (FMS). An FMS is just one part of the overall concept of computer-integrated manufacturing, in which a company's business functions are integrated with its manufacturing functions. 4. A company must develop a system of total quality control (TQC) over its parts and materials. In the absence of TQC, it would be impossible to successfully implement a JIT system. TQC starts with suppliers, who must inspect goods before they are shipped to ensure that the goods are free of defects. The company's own employees are responsible to inspect their own work before sending partially completed units on to the next workstation. Cost Accounting Page 17 units on to the next workstation. 5. A company must develop a flexible work force. Since the plant layout in JIT environment is different from that of a conventional factory, workers must be multi-skilled. In addition to being able to operate al of the machines in a manufacturing cell, workers must also be able to perform routine maintenance on these machines. An individual firm in the present environment can, by careful scheduling of production based on market projections (or, even better, based on actual orders), reduce the level of finished goods inventory. By using such production schedules and working with a limited number of suppliers of raw materials, the level of raw materials inventory can also be minimized Processing time and the amount of work-in-process inventory can also be minimized by rearranging production facilities into manufacturing cells (mini factories) which include all the machines required to produce a particular part. Such an arrangement reduces the amount of movement partially-processed units required in the production process. Just-in-time (JIT) costing differs from traditional costing with regards to the accounts used and the timing of cost recording. There are basically three major differences: 1. Instead of using separate accounts for Material and Work in Processed as in traditional costing JIT costing combines these into a Raw and in Process account 2. Direct labor is usually considered a minor cost time in a JIT setting so no separate account for direct labor is created. Direct labor and factory overhead are usually charged to a Conversion Cost account or sometimes direct to Cost of Goods Sold account. 3. In traditional costing overhead is applied to products as they are being produced and is recorded into the Work in Process account. In JIT costing, overhead is not applied to production until they are completed. When products are completed under JIT costing, labor and overhead is added to Cost of Goods Sold, since the goods are sold soon after production is completed Backflushing is also known as backflush costing or backflush accounting It is a shortened version of the traditional method of accounting for cost. Under job order costing and process costing numerous subsidiary records of the cost of the work in process are maintained and these records are updated by many accounting entries. Under JIT system, where the time from the receipt of the materials to the completion of product is reduced to a few hours, the usefulness of tracking the cost of the WIP becomes impractical The purpose of backflush costing is to simplify and to reduce the number of events that are measured and recorded in the accounting system. If we compare it to job order costing and process costing, it will be noted that there is no detailed tracking of the cost of work in process. Under backflush costing the inventories are not adjusted during the accounting period to reflect the different production costs instead adjustments are made at the end of the period. Detained subsidiary records are not maintained of units in process. Backflush costing eliminates some of the accounting steps under traditional costing and some of the general ledger accounts are combined into one. Example will be the materials account and work in process account which are combined into one account Raw and In Process. Raw materials received are put immediately into production so materials and work in process are combined in a single account. Under job order costing and process costing, the cost of the completed units is determined by assigning the three elements of cost-direct materials, direct labor and factory overhead to the work in process at various stages during production. Under backflush costing some or all elements of the cost of output are determined only after the production is completed. Cost Accounting Page 18
