Cost Accounting Fundamentals
4th Edition
Steven M. Bragg
Table of Contents
Chapter 1 – Overview of Cost Accounting ........................................................................................... 1
Learning Objectives ............................................................................................................................. 1
Introduction ......................................................................................................................................... 1
Financial Reporting.............................................................................................................................. 1
Management Reporting ....................................................................................................................... 1
Problem Resolution ............................................................................................................................. 3
Price Setting ........................................................................................................................................ 3
Cost Investigation ................................................................................................................................ 4
Budget Formulation ............................................................................................................................. 5
Constraint Analysis .............................................................................................................................. 5
Cost Accumulation Systems ................................................................................................................ 5
Summary............................................................................................................................................. 6
Review Questions................................................................................................................................ 7
Review Answers .................................................................................................................................. 8
Chapter 2 – The Cost Accountant Job Description.............................................................................. 9
Learning Objectives ............................................................................................................................. 9
Introduction ......................................................................................................................................... 9
To Whom Does the Cost Accountant Report? ...................................................................................... 9
What Are the Principal Accountabilities of the Cost Accountant? .......................................................... 9
What Are the Qualifications of a Cost Accountant? ............................................................................ 11
Who Does the Cost Accountant Supervise? ....................................................................................... 11
Summary........................................................................................................................................... 11
Review Questions.............................................................................................................................. 12
Review Answers ................................................................................................................................ 13
Chapter 3 – Types of Costs ................................................................................................................. 14
Learning Objectives ........................................................................................................................... 14
Introduction ....................................................................................................................................... 14
Actual Costs ...................................................................................................................................... 14
Avoidable Costs ................................................................................................................................ 14
Committed Costs ............................................................................................................................... 14
Conversion Costs .............................................................................................................................. 15
Deferred Costs .................................................................................................................................. 15
Differential Costs ............................................................................................................................... 16
Direct Costs....................................................................................................................................... 16
Discretionary Costs ........................................................................................................................... 17
Expired Costs .................................................................................................................................... 17
Fixed Costs ....................................................................................................................................... 17
Historical Costs ................................................................................................................................. 17
Indirect Costs .................................................................................................................................... 18
Irrelevant Costs ................................................................................................................................. 18
Marginal Costs .................................................................................................................................. 18
Normal Costs..................................................................................................................................... 19
Period Costs...................................................................................................................................... 19
Replacement Costs ........................................................................................................................... 19
Semi-Fixed Costs .............................................................................................................................. 20
Step Costs......................................................................................................................................... 20
Sunk Costs ........................................................................................................................................ 20
Traceable Costs ................................................................................................................................ 21
Variable Costs ................................................................................................................................... 21
Summary........................................................................................................................................... 21
Review Questions.............................................................................................................................. 22
Review Answers ................................................................................................................................ 23
Table of Contents
Chapter 4 – Inventory Valuation ......................................................................................................... 24
Learning Objectives ........................................................................................................................... 24
Introduction ....................................................................................................................................... 24
Valuation Step 1: The Quantity of Inventory on Hand ......................................................................... 24
The Periodic Inventory System .......................................................................................................... 24
The Perpetual Inventory System ........................................................................................................ 25
The Gross Profit Method .................................................................................................................... 26
Valuation Step 2a: Inventory Costing ................................................................................................. 27
The First In, First Out Method ............................................................................................................ 27
The Last In, First Out Method ............................................................................................................ 28
The Dollar-Value LIFO Method .......................................................................................................... 29
The Link-Chain Method ..................................................................................................................... 31
The Weighted Average Method ......................................................................................................... 33
Standard Costing ............................................................................................................................... 34
The Retail Inventory Method .............................................................................................................. 34
Valuation Step 2b: Inventory Costing ................................................................................................. 35
Job Costing ....................................................................................................................................... 35
Process Costing ................................................................................................................................ 35
By-Product and Joint Product Costing................................................................................................ 35
Valuation Step 3: Overhead Allocation ............................................................................................... 35
Valuation Step 4: Inventory Valuation ................................................................................................ 38
The Lower of Cost or Market Rule ..................................................................................................... 38
Obsolete Inventory Accounting .......................................................................................................... 40
Summary........................................................................................................................................... 41
Review Questions.............................................................................................................................. 42
Review Answers ................................................................................................................................ 43
Chapter 5 – Job Costing...................................................................................................................... 44
Learning Objectives ........................................................................................................................... 44
Introduction ....................................................................................................................................... 44
Overview of Job Costing .................................................................................................................... 44
When Not to Use Job Costing ............................................................................................................ 45
Accounting for Direct Materials in Job Costing ................................................................................... 45
Accounting for Labor in Job Costing................................................................................................... 46
Accounting for Actual Overhead Costs in Job Costing........................................................................ 47
Accounting for Standard Overhead Costs in Job Costing ................................................................... 48
The Importance of Closing a Job ....................................................................................................... 49
The Role of the Subsidiary Ledger in Job Costing .............................................................................. 49
Job Costing Controls ......................................................................................................................... 50
Summary........................................................................................................................................... 51
Review Questions.............................................................................................................................. 52
Review Answers ................................................................................................................................ 53
Chapter 6 – Process Costing .............................................................................................................. 54
Learning Objective............................................................................................................................. 54
Introduction ....................................................................................................................................... 54
Overview of Process Costing ............................................................................................................. 54
The Weighted Average Method ......................................................................................................... 55
The Standard Costing Method ........................................................................................................... 56
The First In, First Out Method ............................................................................................................ 57
The Hybrid Accounting System .......................................................................................................... 59
Process Costing Journal Entries ........................................................................................................ 59
Problems with Process Costing ......................................................................................................... 60
Summary........................................................................................................................................... 61
Review Questions.............................................................................................................................. 62
Review Answers ................................................................................................................................ 63
ii
Table of Contents
Chapter 7 – Standard Costing ............................................................................................................. 64
Learning Objectives ........................................................................................................................... 64
Introduction ....................................................................................................................................... 64
Overview of Standard Costing ........................................................................................................... 64
Advantages of Standard Costing........................................................................................................ 64
Disadvantages of Standard Costing ................................................................................................... 65
How to Create a Standard Cost ......................................................................................................... 66
Historical, Attainable, and Theoretical Standards ............................................................................... 66
How to Account for Standard Costs ................................................................................................... 67
Overview of Variances ....................................................................................................................... 68
The Purchase Price Variance ............................................................................................................ 68
Material Yield Variance ...................................................................................................................... 69
Labor Rate Variance.......................................................................................................................... 70
Labor Efficiency Variance .................................................................................................................. 70
Variable Overhead Spending Variance .............................................................................................. 71
Variable Overhead Efficiency Variance .............................................................................................. 72
Fixed Overhead Spending Variance................................................................................................... 72
Selling Price Variance........................................................................................................................ 73
Sales Volume Variance ..................................................................................................................... 73
Problems with Variance Analysis ....................................................................................................... 74
The Controllable Variance ................................................................................................................. 74
The Favorable or Unfavorable Variance ............................................................................................. 75
Where to Record a Variance .............................................................................................................. 75
Which Variances to Report ................................................................................................................ 75
How to Report Variances ................................................................................................................... 76
Summary........................................................................................................................................... 77
Review Questions.............................................................................................................................. 78
Review Answers ................................................................................................................................ 79
Chapter 8 – Joint and By-Product Costing ......................................................................................... 80
Learning Objectives ........................................................................................................................... 80
Introduction ....................................................................................................................................... 80
Split-Off Points and By-Products........................................................................................................ 80
Why We Allocate Joint Costs ............................................................................................................. 81
How to Allocate Joint Costs ............................................................................................................... 81
How to Determine Prices for Joint Products and By-Products............................................................. 82
Special Concerns With By-Product Costing........................................................................................ 82
Summary........................................................................................................................................... 83
Review Questions.............................................................................................................................. 84
Review Answers ................................................................................................................................ 85
Chapter 9 – Waste Accounting ........................................................................................................... 86
Learning Objectives ........................................................................................................................... 86
Introduction ....................................................................................................................................... 86
Definition of Spoilage ......................................................................................................................... 86
Accounting for Normal Spoilage ......................................................................................................... 86
Accounting for Abnormal Spoilage ..................................................................................................... 87
Accounting for the Sale of Spoilage ................................................................................................... 88
Cost Allocation to Spoilage ................................................................................................................ 88
Definition of Rework .......................................................................................................................... 88
Reporting Rework .............................................................................................................................. 89
Accounting for Rework....................................................................................................................... 89
Definition of Scrap ............................................................................................................................. 90
Accounting for Scrap ......................................................................................................................... 90
Impact of Waste on Manufacturing Systems ...................................................................................... 91
Summary........................................................................................................................................... 91
iii
Table of Contents
Review Questions.............................................................................................................................. 92
Review Answers ................................................................................................................................ 93
Chapter 10 – Product Pricing .............................................................................................................. 94
Learning Objectives ........................................................................................................................... 94
Introduction ....................................................................................................................................... 94
What Does This Cost? ....................................................................................................................... 94
The Issue of Pricing Duration ............................................................................................................. 95
The Issue of Overhead Costs ............................................................................................................ 96
The Issue of Overhead Application .................................................................................................... 96
What Does This Cost, Part Two ....................................................................................................... 100
The Issue of the Bottleneck ............................................................................................................. 100
What Does This Cost, Part Three .................................................................................................... 101
Summary......................................................................................................................................... 101
Review Questions............................................................................................................................ 102
Review Answers .............................................................................................................................. 103
Chapter 11 – Target Costing ............................................................................................................. 104
Learning Objectives ......................................................................................................................... 104
Introduction ..................................................................................................................................... 104
The Basic Steps of Target Costing................................................................................................... 104
Value Engineering Considerations ................................................................................................... 105
The Cost Reduction Program........................................................................................................... 106
The Milestone Review Process ........................................................................................................ 106
Problems with Target Costing .......................................................................................................... 107
The Members of a Design Team ...................................................................................................... 108
The Role of the Cost Accountant in Target Costing .......................................................................... 108
Data Sources for Target Costing ...................................................................................................... 109
The Product Life Cycle and Target Costing ...................................................................................... 110
Summary......................................................................................................................................... 110
Review Questions............................................................................................................................ 111
Review Answers .............................................................................................................................. 112
Chapter 12 – Transfer Pricing ........................................................................................................... 113
Learning Objectives ......................................................................................................................... 113
Introduction ..................................................................................................................................... 113
Overview of Transfer Pricing ............................................................................................................ 113
Market Price Basis for Transfer Pricing ............................................................................................ 114
Adjusted Market Price Basis for Transfer Pricing.............................................................................. 115
Negotiated Basis for Transfer Pricing ............................................................................................... 115
Contribution Margin Basis for Transfer Pricing ................................................................................. 116
Cost Plus Basis for Transfer Pricing ................................................................................................. 116
Cost Anomalies in a Cost-Based Transfer Price ............................................................................... 117
Pricing Problems Caused by Transfer Pricing .................................................................................. 117
The Tax Impact of Transfer Prices ................................................................................................... 118
Summary......................................................................................................................................... 120
Review Questions............................................................................................................................ 121
Review Answers .............................................................................................................................. 122
Chapter 13 – Direct Costing .............................................................................................................. 123
Learning Objectives ......................................................................................................................... 123
Introduction ..................................................................................................................................... 123
Overview of Direct Costing .............................................................................................................. 123
Contribution Margin versus Gross Margin ........................................................................................ 124
Direct Costing as an Analysis Tool ................................................................................................... 124
Direct Costing Pitfalls....................................................................................................................... 129
Summary......................................................................................................................................... 131
iv
Table of Contents
Review Questions............................................................................................................................ 132
Review Answers .............................................................................................................................. 133
Chapter 14 – Activity-Based Costing ................................................................................................ 134
Learning Objectives ......................................................................................................................... 134
Introduction ..................................................................................................................................... 134
The Problem with Overhead Allocation ............................................................................................ 134
Overview of Activity-Based Costing.................................................................................................. 136
Activity-Based Management ............................................................................................................ 141
Advantages of Activity-Based Costing.............................................................................................. 141
Problems with Activity-Based Costing .............................................................................................. 143
The Incremental Cost Reduction Fallacy .......................................................................................... 145
The Bill of Activities ......................................................................................................................... 145
System Scope Issues ...................................................................................................................... 146
System Integration Issues................................................................................................................ 146
Summary......................................................................................................................................... 147
Review Questions............................................................................................................................ 148
Review Answers .............................................................................................................................. 149
Chapter 15 – Constraint Analysis ..................................................................................................... 150
Learning Objectives ......................................................................................................................... 150
Introduction ..................................................................................................................................... 150
Constraint Analysis Operational Terminology ................................................................................... 150
Overview of Constraint Analysis....................................................................................................... 150
The Cost of the Bottleneck............................................................................................................... 152
Local Optimization ........................................................................................................................... 153
Constraint Analysis Financial Terminology ....................................................................................... 154
Constraint Analysis from a Financial Perspective ............................................................................. 154
The Constraint Analysis Model ........................................................................................................ 154
The Decision to Sell at a Lower Price............................................................................................... 156
The Decision to Outsource Production ............................................................................................. 157
The Capital Investment Decision...................................................................................................... 158
The Decision to Cancel a Product .................................................................................................... 159
Comparison of Activity-Based Costing to Constraint Analysis........................................................... 160
Summary......................................................................................................................................... 160
Review Questions............................................................................................................................ 161
Review Answers .............................................................................................................................. 162
Chapter 16 – Capital Budgeting Analysis ......................................................................................... 163
Learning Objectives ......................................................................................................................... 163
Introduction ..................................................................................................................................... 163
Overview of Capital Budgeting ......................................................................................................... 163
Bottleneck Analysis ......................................................................................................................... 164
Net Present Value Analysis ............................................................................................................. 164
The Payback Method ....................................................................................................................... 166
Capital Budget Proposal Analysis .................................................................................................... 167
The Outsourcing Decision................................................................................................................ 168
The Capital Budgeting Application Form .......................................................................................... 169
The Post Installation Review............................................................................................................ 171
The Lease versus Buy Decision ....................................................................................................... 172
Summary......................................................................................................................................... 173
Review Questions............................................................................................................................ 174
Review Answers .............................................................................................................................. 175
Chapter 17 – Cost Collection Systems ............................................................................................. 176
Learning Objectives ......................................................................................................................... 176
Introduction ..................................................................................................................................... 176
v
Table of Contents
Data Entry Accuracy ........................................................................................................................ 176
Data Entry with Bar Codes............................................................................................................... 177
Data Entry with Radio Frequency Identification (RFID) ..................................................................... 178
Document Imaging .......................................................................................................................... 179
Special Considerations for Labor Tracking ....................................................................................... 180
The Duration of Cost Collection ....................................................................................................... 183
The Chart of Accounts ..................................................................................................................... 184
The Account Code Structure ........................................................................................................ 184
The Account Code Format ........................................................................................................... 185
Accounts for the Cost Accountant ................................................................................................ 185
Other Sources of Cost Information ................................................................................................... 187
Summary......................................................................................................................................... 188
Review Questions............................................................................................................................ 189
Review Answers .............................................................................................................................. 190
Chapter 18 – Cost Variability ............................................................................................................ 191
Learning Objectives ......................................................................................................................... 191
Introduction ..................................................................................................................................... 191
Mixed Costs .................................................................................................................................... 191
Labor-Based Fixed Costs ................................................................................................................ 192
Costs Based on Purchase Quantities ............................................................................................... 193
Costs Based on Production Batch Sizing ......................................................................................... 194
Cost Based on Step Costs ............................................................................................................... 194
Time-Based Costs ........................................................................................................................... 195
Experience-Based Costs ................................................................................................................. 196
Incorporating Cost Variability into Reports ....................................................................................... 197
Summary......................................................................................................................................... 199
Review Questions............................................................................................................................ 200
Review Answers .............................................................................................................................. 201
Chapter 19 – Cost of Quality ............................................................................................................. 202
Learning Objectives ......................................................................................................................... 202
Introduction ..................................................................................................................................... 202
Types of Quality .............................................................................................................................. 202
Costs Impacted by Quality ............................................................................................................... 203
Reporting on the Cost of Quality ...................................................................................................... 204
Summary......................................................................................................................................... 206
Review Questions............................................................................................................................ 207
Review Answers .............................................................................................................................. 208
Glossary ............................................................................................................................................. 209
Index .................................................................................................................................................. 213
vi