Introduction-to-cost-accounting 2 — cost accounting

introduction to cost accounting basics

1. PowerPoint Authors:
Susan CoomerGalbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Introduction to Cost
Accounting

2. Prologue-2
Learning Objectives
•Explain the uses of cost accounting data.
•Describe the ethical responsibilities and
certification requirements for management
accountants.
•Describe the relationship of cost
accounting to financial and managerial
accounting.

3. Prologue-3
Learning Objectives
•Identify the three basic elements of
manufacturing costs.
•Illustrate basic cost accounting
procedures.
•Distinguish between the two basic types
of cost accounting systems.
•Illustrate a job order cost system.

4. Prologue-4
The Need for Cost Accounting
•Cost accounting provides the detailed cost
data that management needs to control
current operations and plan for the future.
•Companies must control costs in order to
keep prices competitive.
•In today’s global environment, cost
information is more crucial than ever in
remaining competitive.

5. Prologue-5
Types of Businesses That Use Cost
Accounting
•Manufacturers (Ford, Panasonic)
•Merchandisers (ShoeMart, Robinsons
Place)
•Wholesalers (Beverage Distributors)
•For-profit Service Businesses (CPAs,
Lawyers)
•Not-for-profit Service Agencies (PCSO,
Red Cross)

6. Prologue-6
The Manufacturing Process
•This process involves the conversion of
raw materials, direct labor, and factory
overhead into finished goods.
•Product quality is an important
competitive weapon in manufacturing.
•Many companies require their suppliers
to be ISO 9000 certified.

7. Prologue-7
ISO 9000 Certification
•The International Organization for
Standardization created a set of five
international standards for quality
management, ISO 9000-9004.
•These standards require that
manufacturers have a well-defined quality
control system and they consistently
maintain a high level of quality.

8. Prologue-8
Determining Product Costs and Pricing
•Cost accounting is used to determine
product costs and help with marketing
decisions.
•Determining the selling price of a product.
•Meeting competition.
•Bidding on contracts.
•Analyzing profitability.

9. Prologue-9
Work of Management
Planning
Decision
Making
Controlling

10. Prologue-10
Planning
Establish
Goals.
Specify How
Goals Will Be
Achieved.
Develop
Budgets.

11. Prologue-11
Controlling
The control function gathers feedback to
ensure that plans are being followed.
Feedback in the form of performance reports
that compare actual results with the budget
are an essential part of the control function.

12. Prologue-12
Decision Making
Decision making involves
making a selection among
competing alternatives.
What should
we be selling?
Who should
we be serving?
How should
we execute?

13. Prologue-13
Responsibility Accounting
•Responsibility accounting is the assignment of
accountability for costs or production results to
those individuals who have the most authority to
influence them.
•A cost center is a unit of activity within the factory
to which costs may be practically and equitably
assigned. The manager of a cost center is
responsible for those costs that the manager
controls.

14. Prologue-14
Reporting
•Cost and production reports for a cost center
reflect all cost and production data identified
with that center.
•The performance report will include only those
costs and production data that the center’s
manager can control.
•A variance is the difference between actual
costs and budgeted costs.

15. Prologue-15
Variance Analysis Cycle
Conduct next
period’s
operations
Identify
questions
Receive
explanations
Take
corrective
actions
Analyze
variances
Prepare standard
cost performance
report
Begin

16. Prologue-16
Management Accounting
•The Institute of Management Accountants
(IMA) is the largest organization of
accountants in the industry. The Certified
Management Accountant (CMA) is
comparable to the Certified Public
Accountant (CPA) for public accountants.

17. Prologue-17
Accounting Majors
Employers will expect you to
have strong financial
accounting skills and to help
improve organizational
performance.
The IMA estimates that 80%
of professional accountants in
the U.S. work in non-public
accounting environments.
80%

18. Prologue-18
Certified Management Accountant
A management accountant
who has the necessary qualifications
and who passes a rigorous professional
exam earns the right to be known as a
Certified Management Accountant
(CMA).

19. Prologue-19
CMA Exam
Information about becoming a CMA and the CMA program can be accessed
on the IMA’s website at http://www.imanet.org/ or by calling 1-800-638-4427.
Part 1 Financial Planning, Performance and Control
Planning, budgeting, and forecasting
Performance management
Cost management
Internal controls
Professional ethics
Part 2 Financial Decision Making
Financial statement analysis
Corporate finance
Decision analysis and risk management
Investment decisions
Professional ethics

20. Prologue-20
Financial and Managerial Accounting:
Seven Key DifferencesFinancial AccountingManagerial Accounting
1. Users External persons who Managers who plan for
make financial decisionsand control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on
versus relevanceobjectivity and verifiability relevance
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focus on
companywide reports segment reports
6. Rules Must follow GAAP / IFRS Not bound by GAAP / IFRS
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory

21. Prologue-21
Cost Accounting vs. Financial and
Managerial Accounting
•Cost accounting
includes those
parts of both
financial and
management
accounting that
collect and analyze
cost information.

22. Relationship of Financial,
Management, and Cost
Accounting
FINANCIAL
ACCOUNTING
MANAGEMENT
ACCOUNTING
COST
ACCOUNTING
Product Costs

23. Prologue-23
Process Management
Business functions making up the value chain
Product Customer
R&D Design Manufacturing Marketing Distribution Service
A business
process is a series of
steps that are followed in order to
carry out some task in
a business.

24. Prologue-24
Cost of Goods Sold
Merchandiser Manufacturer
Beginning merchandise
inventory
Plus purchases
Merchandise available for
sale
Less ending merchandise
inventory
Cost of good sold
Beginning finished goods
inventory
Plus cost of goods
manufactured
Finished goods available for
sale
Less ending finished goods
inventory
Cost of good sold

25. Prologue-25
Inventories
•Most manufacturers maintain a perpetual
inventory system that uses FIFO, LIFO, or
moving average methods of costing.
•An inventory ledger is maintained to provide
support for the control accounts.
•Some manufacturers may use a factory
ledger, which contains all of the accounts
relating to manufacturing.

26. Prologue-26
The Product
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Classifications of Manufacturing
Costs

27. Prologue-27
Direct Materials
Raw materials that become an integral
part of the product and that can be
conveniently traced directly to it.
Example: A radio installed in an automobile

28. Prologue-28
Direct Labor
Those labor costs that can be easily
traced to individual units of product.
Example: Wages paid to automobile assembly workers

29. Prologue-29
Manufacturing Overhead
Manufacturing costs that cannot be easily
traced directly to specific units produced.
Examples: Indirect materials and indirect labor
Wages paid to employees
who are not directly
involved in production
work.
Examples: maintenance
workers, janitors, and
security guards.
Materials used to support
the production process.
Examples: lubricants and
cleaning supplies used in the
automobile assembly plant.

30. Prologue-30
Nonmanufacturing Costs
Selling
Costs
Costs necessary to
secure the order and
deliver the product.
Administrative
Costs
All executive,
organizational, and
clerical costs.

31. Prologue-31
Product Costs Versus Period Costs
Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Period costs include all
selling costs and
administrative costs.
Inventory Cost of Good Sold
Balance
Sheet
Income
Statement
Sale
Expense
Income
Statement

32. Prologue-32
Quick Check ✓
Which of the following costs would be considered
a period rather than a product cost in a
manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

33. Prologue-33
Quick Check ✓
Which of the following costs would be considered
a period rather than a product cost in a
manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

34. Prologue-34
Classifications of Costs
Manufacturing costs are often
classified as follows:
Direct
Material
Direct
Labor
Manufacturing
Overhead
Prime
Cost
Conversion
Cost

35. Prologue-35
Flow of Costs: A Conceptual Overview
Finished
Goods
Cost of
Goods
Sold
Selling and
Administrative
Period CostsSelling and
Administrative
Manufacturing
Overhead
Work in
Process
Direct Labor
Balance Sheet
Costs Inventories

Income
Statement
Expenses
Material Purchases Raw Materials

36. Prologue-36
Cost Accounting Systems
•Job Order Cost System
•Output consists of special or custom-
made products.
•Provides a separate record for the cost of
each quantity of these special or custom-
made products.
•Process Cost System
•Accumulates costs for each department
or process in the factory.

37. Prologue-37
Job Order Cost System
Direct Materials
Direct Labor
Factory Overhead
Job Cost Sheets Finished Goods
Work in Process
Account

38. Prologue-38
Process Cost System
Work in Process
Dept. 1
Work in Process
Dept. 2 Finished Goods
Factory
Overhead
Direct
Labor
Direct
Materials
Direct
Materials
Direct
Labor
Factory
Overhead

39. Prologue-39
Standard Cost System
•May be used with either a job order or a
process cost system.
•Uses predetermined standard costs to furnish
a measurement that helps management make
decisions regarding the efficiency of operation.
•Standard costs are costs that would be
incurred under efficient operating conditions
and are forecast before the manufacturing
process begins.

40. Prologue-40
Code of Conduct for Management
Accountants
The Institute of Management Accountant’s (IMA)
Statement of Ethical Professional Practice
consists of two parts that offer guidelines for:
 Ethical behavior.
 Resolution for an ethical conflict.

41. Prologue-41
Competence
Follow applicable
laws, regulations,
and standards.
Maintain
professional
competence.
Provide accurate, clear,
concise, and timely decision-
support information.
IMA Guidelines for Ethical Behavior
Recognize and communicate
professional limitations that
preclude responsible
judgment.

42. Prologue-42
Confidentiality
Do not disclose confidential
information unless legally
obligated to do so.
Ensure that subordinates do
not disclose confidential
information.
Do not use
confidential
information for
unethical or illegal
advantage.
IMA Guidelines for Ethical Behavior

43. Prologue-43
Mitigate conflicts of
interest and advise others
of potential conflicts.
Abstain from activities that
might discredit the
profession.
Refrain from
conduct that
would prejudice
carrying out
duties ethically.
Integrity
IMA Guidelines for Ethical Behavior

44. Prologue-44
Communicate information
fairly and objectively.
Disclose all relevant
information that could
influence a user’s
understanding of reports
and recommendations.
Credibility
IMA Guidelines for Ethical Behavior
Disclose delays or
deficiencies in information
timeliness, processing, or
internal controls.

45. Prologue-45
IMA Guidelines for Resolution of an
Ethical Conflict
•Follow employer’s established policies.
•For an unresolved ethical conflict:
•Discuss the conflict with immediate supervisor or next
highest uninvolved managerial level.
•If immediate supervisor is the CEO, consider the board
of directors or the audit committee.
•Contact with levels above the immediate supervisor
should only be initiated with the supervisor’s knowledge,
assuming the supervisor is not involved.

46. Prologue-46
IMA Guidelines for Resolution of an
Ethical Conflict
•For an unresolved ethical conflict (continued):
•Except where legally prescribed, maintain
confidentiality.
•Clarify issues in a confidential discussion with an
objective advisor.
•Consult an attorney as to legal obligations.

47. Prologue-47
Abandoning ethical standards in business would
lead to a lower quality of life with less
desirable goods and services at higher prices.
Why Have Ethical Standards?
Without ethical standards in business, the
economy, and all of us who depend on it for
jobs, goods, and services, would suffer.
Ethical standards in business are essential for a
smooth functioning economy.

48. Prologue-48
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