Cost Accounting Fundamentals

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1 Cost Accounting Fundamentals Essential Concepts and Examples Steven M. Bragg

2 Table of Contents Chapter 1 Overview of Cost Accounting... 1 Learning Objective... 1 Introduction... 1 Financial Reporting... 1 Management Reporting... 1 Problem Resolution... 3 Price Setting... 4 Cost Investigation... 4 Budget Formulation... 5 Constraint Analysis... 6 Cost Accumulation Systems... 6 Summary... 6 Review Questions... 8 Review Answers... 9 Chapter 2 The Cost Accountant Job Description Learning Objective Introduction To Whom Does the Cost Accountant Report? What Are the Principal Accountabilities of the Cost Accountant? What Are the Qualifications of a Cost Accountant? Who Does the Cost Accountant Supervise? Summary Review Questions Review Answers Chapter 3 Inventory Valuation Learning Objective Introduction Valuation Step 1: The Quantity of Inventory on Hand The Periodic Inventory System The Perpetual Inventory System The Gross Profit Method Valuation Step 2a: Inventory Costing The First In, First Out Method The Last In, First Out Method The Weighted Average Method Standard Costing The Retail Inventory Method Valuation Step 2b: Inventory Costing Job Costing Process Costing By-Product and Joint Product Costing Valuation Step 3: Overhead Allocation Valuation Step 4: Inventory Valuation The Lower of Cost or Market Rule Obsolete Inventory Accounting... 29

3 Summary Review Questions Review Answers Chapter 4 Job Costing Learning Objective Introduction Overview of Job Costing When Not to Use Job Costing Accounting for Direct Materials in Job Costing Accounting for Labor in Job Costing Accounting for Actual Overhead Costs in Job Costing Accounting for Standard Overhead Costs in Job Costing The Importance of Closing a Job The Role of the Subsidiary Ledger in Job Costing Job Costing Controls Summary Review Questions Review Answers Chapter 5 Process Costing Learning Objective Introduction Overview of Process Costing The Weighted Average Method The Standard Costing Method The First In, First Out Method The Hybrid Accounting System Process Costing Journal Entries Problems With Process Costing Summary Review Questions Review Answers Chapter 6 Standard Costing Learning Objective Introduction Overview of Standard Costing Advantages of Standard Costing Disadvantages of Standard Costing How to Create a Standard Cost Historical, Attainable, and Theoretical Standards How to Account for Standard Costs Overview of Variances The Purchase Price Variance Material Yield Variance Labor Rate Variance Labor Efficiency Variance Variable Overhead Spending Variance Variable Overhead Efficiency Variance Fixed Overhead Spending Variance... 63

4 Selling Price Variance Sales Volume Variance Problems with Variance Analysis The Controllable Variance The Favorable or Unfavorable Variance Where to Record a Variance Which Variances to Report How to Report Variances Summary Review Questions Review Answers Chapter 7 Joint and By-Product Costing Learning Objective Introduction Split-Off Points and By-Products Why We Allocate Joint Costs How to Allocate Joint Costs How to Determine Prices Special Concerns With By-Product Costing Summary Review Questions Review Answers Chapter 8 Waste Accounting Learning Objective Introduction Definition of Spoilage Accounting for Normal Spoilage Accounting for Abnormal Spoilage Accounting for the Sale of Spoilage Cost Allocation to Spoilage Definition of Rework Reporting Rework Accounting for Rework Definition of Scrap Accounting for Scrap Impact of Waste on Manufacturing Systems Summary Review Questions Review Answers Chapter 9 Product Pricing Learning Objective Introduction What Does This Cost? The Issue of Pricing Duration The Issue of Overhead Costs The Issue of Overhead Application Corporate Overhead Costs What Does This Cost, Part Two... 94

5 The Issue of the Bottleneck What Does This Cost, Part Three Summary Review Questions Review Answers Chapter 10 Target Costing Learning Objective Introduction The Basic Steps of Target Costing Value Engineering Considerations The Cost Reduction Program The Milestone Review Process Problems with Target Costing The Members of a Design Team The Role of the Cost Accountant in Target Costing Data Sources for Target Costing The Product Life Cycle and Target Costing Summary Review Questions Review Answers Chapter 11 Transfer Pricing Learning Objectives Introduction Overview of Transfer Pricing Market Price Basis for Transfer Pricing Adjusted Market Price Basis for Transfer Pricing Negotiated Basis for Transfer Pricing Contribution Margin Basis for Transfer Pricing Cost Plus Basis for Transfer Pricing Cost Anomalies in a Cost-Based Transfer Price Pricing Problems Caused by Transfer Pricing The Tax Impact of Transfer Prices Summary Review Questions Review Answers Chapter 12 Direct Costing Learning Objective Introduction Overview of Direct Costing Contribution Margin Versus Gross Margin Direct Costing as an Analysis Tool Automation Investments Cost Reporting Customer Profitability Internal Inventory Reporting Profit-Volume Relationship Outsourcing Direct Costing Pitfalls

6 Summary Review Questions Review Answers Chapter 13 Activity-Based Costing Learning Objective Introduction The Problem With Overhead Allocation Overview of Activity-Based Costing Activity-Based Management Advantages of Activity-Based Costing Problems with Activity-Based Costing The Incremental Cost Reduction Fallacy The Bill of Activities System Scope Issues System Integration Issues Summary Review Questions Review Answers Chapter 14 Constraint Analysis Learning Objective Introduction Constraint Analysis Operational Terminology Overview of Constraint Analysis The Cost of the Bottleneck Local Optimization Constraint Analysis Financial Terminology Constraint Analysis from a Financial Perspective The Constraint Analysis Model The Decision to Sell at a Lower Price The Decision to Outsource Production The Capital Investment Decision The Decision to Cancel a Product Comparison of Activity-Based Costing to Constraint Analysis Summary Review Questions Review Answers Chapter 15 Capital Budgeting Analysis Learning Objective Introduction Overview of Capital Budgeting Bottleneck Analysis Net Present Value Analysis The Payback Method Capital Budget Proposal Analysis The Outsourcing Decision The Capital Budgeting Application Form The Post Installation Review The Lease Versus Buy Decision

7 Summary Review Questions Review Answers Chapter 16 Cost Collection Systems Learning Objective Introduction Data Entry Accuracy Data Entry with Bar Codes Data Entry with Radio Frequency Identification (RFID) Document Imaging Special Considerations for Labor Tracking The Duration of Cost Collection The Chart of Accounts The Account Code Structure The Account Code Format Accounts for the Cost Accountant Other Sources of Cost Information Summary Review Questions Review Answers Chapter 17 Cost Variability Learning Objective Introduction Mixed Costs Labor-Based Fixed Costs Costs Based on Purchase Quantities Costs Based on Production Batch Sizing Cost Based on Step Costs Time-Based Costs Experience-Based Costs Incorporating Cost Variability into Cost Reports Summary Review Questions Review Answers Chapter 18 Cost of Quality Learning Objective Introduction Types of Quality Costs Impacted by Quality Reporting on the Cost of Quality Summary Review Questions Review Answers Appendix Selected Topics What is Actual Costing? What is an Avoidable Cost?

8 What is a Burden Rate? What is a Committed Cost? What are Conversion Costs? What is a Deferred Cost? What is a Differential Cost? What is a Direct Cost? What is a Discretionary Cost? What is an Expired Cost? What is Historical Cost? What is an Indirect Cost? What is an Irrelevant Cost? What is Marginal Cost? What is Normal Costing? What is a Period Cost? What is Replacement Cost? What is a Step Cost? What is a Sunk Cost? What is a Traceable Cost? Index

Unit Title: Managerial Accounting Unit Reference Number: D/502/4812 Guided Learning Hours: 160 Level: Level 5 Number of Credits: 18

Unit Title: Managerial Accounting Unit Reference Number: D/502/4812 Guided Learning Hours: 160 Level: Level 5 Number of Credits: 18 Unit objective and aim(s): This unit aims to give learners a comprehensive