Cost Accounting

Accounting Information System
Consists of interrelated manual and computer parts and uses processes such as collecting, recording, summarizing, analyzing, and managing data to transform inputs into information that is provided to users
Two Major Subsystems:
(1) Financial accounting information system
(2) Cost management information system
Financial Accouting Information System
(One of the two main subsystems of the accounting information system)
External users, well-specified economic events as inputs, SEC, FASB, financial statements, used for investment decisions, stewardship evaluation, activity monitoring, regulatory measures.
Cost Managment Information System
(One of the two main subsystems of the accounting information system)
Internal user, inputs and processes must satisfy management objectives.
Three Broad Objectives:
(1) Costing out services, products, and other objects of interest to management
(2) Planning and control
(3) Decision making
Two Subsystems:
(1) Cost Accounting Information System
(2) Operational Control Information System
Cost Accounting Information System
(One of the two subsystems of the cost management information system)
Designed to assign costs to cost objects, need to be accurate for managers and meet financial reporting criteria (if this cannot be done with one cost then two must be derived)
Operational Control Information System
(One of the two subsystems of the cost management information system)
Designed to provide accurate and timely feedback concerning the performance of managers and other relative to their planning and control of activities. Determine what activities should be preformed and how well they are preformed
Activities Signifigant To The Advancement of Information Technology
(1) Computer integrated applications that monitor automated manufacturing. The outcome-operational information system that integrates manufacturing with marketing and accounting data EX: ERP system
(2) Analytic software and hardware availability of PC’s, online annalistic programs (OLAP), and decision support systems (DSS) EX: ABC software
(3) Electronic commerce or any form of business that is executed using informations and communications technology EX: electronic data exchange (EDI), internet trading,
Theory of Constraints
method used to continuously improve manufactuing and nonmanufacturing activities, Begins by realizing all resources are finite. Performance must be maximized subject to the constraint. Constraint must be elevated to improve performance.
Decision Support System
(a component of the second advancement of information technology) DSS and OLAP supply managers with the ability to use the informaiton provided by the company’s information system. ABC software typically intercaces with DSS software to facilitate applications such as cost estimating, product pricing, and planning and budgeting.
Responsibilities of the Cost and Management Consultant
Responsible for generating financial information for internal and external reporting
(1) Planning
(2) Controlling
(3) Continuous Improvement
(4) Decision Making
Standards for Ethical Conduct
(1) Competence (2) Confidentiality (3) Integrity (4) Credibility
(one of the four standards for ethical conduct) continually developing knowlege and skills, do job in accordance with relevant laws, provide information and reccomendations that are accurate clear concise and timely, communicate limitations
(one of the four standards for ethical conduct) keep info confidential, inform all relevantparties regarding use of confidential activites, monitor subordinates for complience,
(one of the four standards for ethical conduct) mitigate conflicts of interest, don’t engage in activities that might discredit the profession, ex of this is taking a savings bond from a supplier
(one of the four standards for ethical conduct) communicate info fairly and objectively, disclose all relevant info, disclose delays or dificiencies in info
Direct Costs
causal relationship, directly tracible, direct materials, direct labor,
Methods of Assigning Costs
(1) Direct Tracing (2) Driver Tracing (3) Allocation
Direct Tracing
(One of the three methods of assigning costs) accomplished through physical observation, direct costs, direct materials, direct labor
Driver Tracing
(one of the three methods of cost assignment) cause and effect reasoning, use drivers to assign costs to cost objects,
(one of the three methods of cost assignment) no causal relationship between cost and cost object, based on convience or assumed linkage, assign it in proportion to the direct labor, reduces overall accuracy,
Production (Product) costs
(this would include warehouse storage for direct materials NOT finished goods) costs associated with manufacturing goods direct materials, direct labor, manufacturing overhead (nonproduction costs are those associated with the function of selling and administration)
Costs included in factory overhead
depreciation on building and equipment, maintenance, supplies, supervision, materials handling, power, property taxes, landscaping, security, indirect materials (insignifigant part of the final product) usually the cost of overtime with direct labor,
Prime Costs
Sum of direct materials and direct labor
Conversion cost
sum of direct labor and overhead cost (interpreted to be the cost of converting raw materials into a final product)
Traditional cost accounting
assumes that all costs can be classified as fixed or variable with repect to changes in the units or volume of a product produced. Uses only unit based activity drivers
Activity Based Cost Accounting
emphasizes tracing over allocation, non unit based activity drivers (some unit based activity drivers), tends to be more tracing intensive, control of activities not costs is the key to successful control in the advanced manfacturing enviroment,
Unit Drivers
Unit Based Drivers: related to volume or number of units manufactured, machine hours, direct labor hours/// factors that measure the demands placed on unit level activities by products, unit level activitie are activitie preformed each and every time a unit of production is produced Five most common include (1) units produced (2) Direct labor hours (3) direct labor dollars (4) machine hours (5) direct material dollars, increase as units produced increases
Relevant Range
the range over which the assumed cost relationship is valid for the normal operations of a firm, total cost of conversion remains constant,
Expected activity level
the production level the firm expects to attain for the comming year (tends to reflect customer demand more than firms production capabilities)
Normal activity level
the average activity usagethat a firm experiences in the long term (normal colume is computed over more than one year) (tends to reflect customer demand more than firms production capabilities)
Theoretical activity level
is the absolute maximum production activity of a manufacturing firm it is the output that can be realized if everything operates perfectly (tends to reflect firms production capabilities rather than consumer demand)
Practical activity level
is the maximum output that can be realized if everthing operates efficiently (efficient operation allows for some imperfections such as normal equipment breakdowns, some shortages and workers operating at less than peak capability (tends to reflect firms production capabilities rather than consumer demand)
Normal Cost System
cost system that uses predetermined overhead rates and actual costs for direct materials and direct labor
Departmental rates (volume based)
overhead costs are assigned to indivdual production departments creating departmental overhead cost pools (STAGE 1) producing departments are cost objects and budgeted overhead is assigned to departments using driver tracing and allocation (STAGE 2) once costs assigned to individual production departments then unit level drivers such as direct labor hours and machine hours and used to compute predetermined overhead rates (STAGE 3) overhead is assigned to products by multiplying the departmental rates by the amount of the driver in the respective department
Plantwide rates (volume based)
all budgeted overhead costs are assigned to a plantwide pool next plantwide rate is computed using a single unit level driver which is usually direct labor hours finally overhead costs are assinged to products by multipling the rate by the actual total direct labor hours used by each product
Non Unit Based Drivers
Non unit based drivers: based on activities non related to volume or number of units/// are factors other than the number of units produced that measure the demands that cost objects place on activites,
Method of overcoming the distortions caused by unit level rates
expand the number of rates used so that the rates reflect the actual consumption of overhead costs by the various products (assign costs by multiplying activity rates and amount of activity consumed, calculate indivudal rates for each activity with activity drivers, increase the number of rates used that reflect the diverse activity and non unit overhead drivers)
Activity Based Costing System
first traces costs to activities and then to products. Underlying assumption is that activities consume resoucers and products activities
Classifications of Activities
(1) Unit level (2) batch level (3) product level (4) factory level
Unit level activities
(one of the four classifications of activities) those preformed each time a unit is produced ex. grinding, polishing, assembly
Batch level activities
(one of the four classifications of activities) assigned using non unit based drivers preformed each time a batch is produced, these costs cary with the number of batches but are fized and independant f the number of units in each batch EX. set ups, inspections (if done by sampling units froma batch), purchasing, materials handeling
Product Level Activities
(one of the four classifications of activities) preformed that enable the various products of a company to be produced, these costs tend to increase as the number of diffrent products increase EX, engineering changes to products, developing product testing procedures, introducing new products, expediting goods
Facility Level Activities
(one of the four classifications of activities) those that sustain a factory’s general manufactuirng process EX providing facilities, maintaining grounds, plant security
Normal cost system
uses predetermined overhead rates and actual costs for direct materials and direct labor
Actual cost system
uses actual cost for direct materials, direct labor and overhead to determine unit cost
Account Analysis Method
can be used to estimate costs by classifying accounts in the general ledger as fixed or variable, once the fixed category is known the average monthly cost can be calculated for fixed costs, then variable costs must be separted by drivers, from this the total variable costs are devided by their drivers and a formula is created
Industrial engineering method
method of determining cost behacior though oberservation and analysis of just what activities in what amounts are needed to complete a process
High Low Method
the high point is the point with the highest activity level and the low point in the point with the lowest activity level (points are determined by the independant variable (not the dependant variable))
Method of least squares
the measure of closeness is the sum of the squared deviations (wanting the smallest sum of squared deviations)
Coefficient of determination
R2 is the percentage of variability in the dependent variable (higher the percentage the better)
Coefficient of correlation
R is the positive or negative correlation between the two variable -1 to 1 closer to zero the less the degree of correlation
Multiple regression
when least squares is used to fit an equation involving two or more independent variables the method is called multple regression, two or more activity drives y=mx + nx +b
Calculating a confidence interval using a T value
= Predicted cost +/- (t value X standard error) {predicted costs – (t value x standard error)
Learning curve method
as experience goes up time required to produce one unit goes down experience curve relates cost to increased efficiency such that the more often a task is preformed the lower will be the cost of doing it
In order to assembe cost information and determine how to value things what must cost managers do
(1) costing and quality analysis (2) differentiating between value and non value added activities (3) measuring productivity
Non producion costs
associated with selling or admin (storing finished goods is a non production cost)
Functional based cost management system
unit based drives, allocaiton intensive, varrow and rigid product costing
Unit level product costing
direct materials and direct abor directly to products and assigns overhead to departmental pools which are assigned to products using the predetermined overhead rates based on unit level drives
Allocation for under/over applied overhead if material
allocated to WIP finished goods and COGS in proportion of ending balances
Allocation for under/over applied overhead if immaterial
assigned to COGS
Ways to reduce complexity of ABC system
(1) time drive ABC – before the fact simplification (2) Approximently relavent ABC – after the fact (3) Equally accurate ABC – after the fact
Time driven ABc
(one of three methods of simplifying ABC system) eliminated need for detailed interviewing and surveying, first calculate total operating cost, then calculate activity cost rate, then estimates time to preform one unit of activity
Approximatly relevant ABC
(one of three methods of simplifying ABC system) after the fact simplification, number of drivers used to assign costs can be reduced by using drivers associated with the most expensive activities
Committed resources
may exceed demand for their usage
Resource usage
cost of total capacity minus the cost of unused capacity
The effect of uniform production levels on unit produciton costs can be acheived by
using a factory overhead rate based on a normal activity level which is the average activity usage that a firm experiences in the long term (this is computed from more than one year)