Principles of Cost

Accounting 13E
Edward J. VanDerbeck
Chapter 1

Introduction to Cost Accounting

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.
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.
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.
Types of Businesses That
Use Cost Accounting
 Manufacturers (Ford, General Motors)
 Merchandisers (WalMart, Kmart)
 Wholesalers (Beverage Distributors)
 For-profit Service Businesses (CPAs,
Attorneys)
 Not-for-profit Service Agencies (United
Way, Red Cross)
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.
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.
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.
Planning and Control
 Planning is the process of establishing
objectives or goals for the firm and
determining the means by which the firm
will attain them. Effective if facilitated by
the following:
 Clearly defined objectives of the
manufacturing operation.
 A production plan that will assist and guide
the company in reaching its objectives.
Planning and Control
(Cont.)
 Control is the process of monitoring the
company’s operations and determining whether
the objectives identified in the planning process
are being accomplished. Effective control is
achieved through the following:
 Assigning responsibility.
 Periodically measuring and comparing results.
 Taking necessary corrective action.
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.
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.
Performance Report
Example
Renaldi’s Restaurant
Performance Report

September 30, 2005

Budgeted Actual Variance
Expense September Year-to-Date September Year-to-Date September Year-to-Date

Kitchen $5,500 $47,000 $5,200 $46,100 $300 F $900 F

Wages
Food 17,700 155,300 18,300 157,600 600 U 2,300 U

Supplies 3,300 27,900 3,700 29,100 400 U 1,200 U

Utilities 1,850 15,350 1,730 16,200 120 F 850 U

Total $28,350 $245,550 $28,930 $249,000 $580 U $3,450

F = Favorable U = Unfavorable
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.
 For more information, please visit the
IMA’s website at www.imanet.org
Cost Accounting vs.
Financial and Managerial
AccountingCost Accounting System
Characteristics Financial Accounting Managerial Accounting
Users: •External Parties Managers
•Managers
Focus: Entire business Segments of the business
Uses of Cost Information: Product costs for •Budgeting
calculating cost of goods •Special decisions such as
sold and finished goods, make or buy a component,
work in process, and raw keep or replace a facility,
materials inventory using and sell a product at a
historical costs and GAAP. special price.
•Nonfinancial information
such as defect rates, % of
return products, and on-
time deliveries
Cost Accounting vs.
Financial and Managerial
Accounting (cont.)
 Cost accounting
includes those parts
of both financial and
management
accounting that
collect and analyze
cost information.
Cost of Goods Sold

Merchandiser Manufacturer
Beginning merchandise Beginning finished goods
inventory inventory

Plus purchases Plus cost of goods

manufactured
Merchandise available for sale
Finished goods available for
Less ending merchandise sale
inventory Less ending finished goods
Cost of good sold inventory
Cost of good sold
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.
Inventories

Merchandiser Manufacturer
Current assets:
Current assets:
Cash
Cash Accounts receivable
Accounts receivable Inventories:
Finished goods
Mdse. inventory Work in process
Materials
Elements of
Manufacturing Costs
 Direct materials
 Materials that become part of and can be
readily identified.
 Direct labor
 Labor of employees who work directly on the
product manufactured.
 Factory overhead
 Includes all costs related to production other
than direct materials and direct labor.
 Prime Cost and
Conversion Cost

Direct Materials
Elements Prime Cost
of Cost
Direct Labor
Conversion
Factory Overhead Cost
 Flow of Manufacturing
Costs

Direct Materials
Work in Process Finished Goods
Direct Labor
(Assets) (Assets)
Factory Overhead

Cost of Goods Sold

(Expenses)
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.
Job Order Cost System

Direct Materials
Direct Labor Job Cost Sheets Finished Goods
Factory Overhead

Work in Process
Account
Process Cost System

Work in Process
Work in Process
Dept. 2 Finished Goods
Dept. 1

Direct Direct Direct Direct

Materials Labor Materials Labor

Factory Factory
Overhead Overhead
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.
Appendix
Standards of Ethical Conduct for
Management Accountants
 Members of the IMA have an obligation to
the public, their profession, the
organizations they serve, and themselves to
maintain the highest standards of ethical
conduct.
 Competence
 Confidentiality
 Integrity
 Objectivity
Appendix (cont.)
 Resolution of Ethical Conflict
 When applying the standards of ethical conduct, IMA members
may encounter problems in identifying unethical behavior or in
resolving an ethical conflict.
 Discuss problems with the immediate superior except when it
appears that the superior is involved.
 Clarify relevant ethical issues by confidential discussion with an
objective advisor.
 Consult your own attorney as to legal obligations and rights
concerning the ethical conflict.
 If the conflict remains after exhausting the preceding actions,
resign from the organization and submit an informative
memorandum to an appropriate member of the organization.