Contents. Preface... CHAPTER 1 The context of costing CHAPTER 2 Cost classification and terminology Page

Transcription

1 Contents Page Preface... v CHAPTER 1 The context of costing... 1 LEARNING OUTCOMES... 1 CHAPTER OUTLINE... 1 THE NEED FOR RELEVANT ACCOUNTING INFORMATION... 2 THE DIFFERENT FIELDS OF ACCOUNTING... 2 Financial accounting... 3 Management accounting... 3 THE PLACE AND FUNCTION OF COST ACCOUNTING... 4 THE FUNCTION OF MANAGEMENT ACCOUNTING... 5 Planning decisions... 5 Control decisions... 5 COST ACCOUNTING SYSTEMS... 6 Cost determination... 6 Cost recording... 6 Cost analysis... 7 Cost management... 7 Cost reporting... 7 ETHICAL CONDUCT... 7 THE CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS (CIMA)... 8 THE AIM OF THIS BOOK... 9 PERSPECTIVES ON COSTING... 9 SUMMARY KEY TERMS AND CONCEPTS EXCERCISES CHAPTER 2 Cost classification and terminology LEARNING OUTCOMES xi

2 xii Fundamentals of Cost and Management Accounting CHAPTER OUTLINE THE CONCEPT OF COST COST OBJECTS ACCOUNTING FOR COST COST CLASSIFICATION Classification of costs by their nature Classifying costs by their timing Classifying costs by their function Classifying costs according to their behaviour Variable costs Fixed cost Step cost Mixed cost PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 3 Elements of cost LEARNING OUTCOMES CHAPTER OUTLINE MATERIAL COST TERMINOLOGY INVENTORY PILING INVENTORY ACTIVITIES Acquisition Storage Distribution and consumption Inventory valuation JUST IN TIME INVENTORY-HOLDING (JIT) ACCOUNTING ENTRIES SUMMARY REVIEW PROBLEMS MATERIAL LABOUR EMPLOYEE AND EMPLOYER EXPECTATIONS Productivity Humanitarian factors that have an influence on labour productivity External factors that have an influence on productivity.. 55 PERSONNEL ADMINISTRATION EMPLOYMENT RECORDS Personnel records Clock cards Job cards... 58

3 Contents xiii Production reports ASSIMILATION OF INFORMATION LABOUR REMUNERATION Methods of remuneration Important terminology Calculation of remuneration WAGE INCENTIVE SCHEMES Straight piecework Taylor s differential piecework system Halsey bonus scheme Emerson s efficiency scheme Bonus points Measured day work Group bonus systems, share incentive schemes and profitsharing schemes RECOVERY OF DIRECT LABOUR COSTS LEARNING CURVE The learning curve effect Learning curve formula Application value Challenges with the application of the learning curve SUMMARY REVIEW PROBLEMS LABOUR MANUFACTURING OVERHEADS COST PRICE CALCULATION AND MANUFACTURING OVERHEADS Problems associated with overheads Classification and analysis of overheads TOTAL MANUFACTURING OVERHEADS AND THE LINEAR FUNCTION TECHNIQUES FOR DIVIDING MANUFACTURING OVERHEADS Scatter diagram High-low method Simple regression Multiple regression SUMMARY REVIEW PROBLEM MANUFACTURING OVERHEADS MARKETING COSTS BASES FOR APPORTIONMENT PLANNING AND CONTROL Products Sales representatives Areas Size of orders SUMMARY REVIEW PROBLEM MARKETING PERSPECTIVES ON COSTING... 98

4 xiv Fundamentals of Cost and Management Accounting KEY TERMS AND CONCEPTS EXCERCISES CHAPTER 4 Cost-volume profit analysis LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION MARGINAL COST ACCOUNTING APPROACH CVP ANALYSIS USING THE MARGINAL INCOME APPROACH CONTRIBUTION BREAK-EVEN USING THE MARGINAL INCOME APPROACH BREAK-EVEN USING THE MARGINAL INCOME RATIO APPROACH APPLICATIONS OF CVP Expected profit Calculating the margin of safety Evaluating the impact on profit of changes in cost and/or quantity Change in selling price Change in variable costs Change in fixed costs Product mix CHANGE-OVER POINT BREAK-EVEN ANALYSIS USING A GRAPHICAL APPROACH Break-even graphs CVP ANALYSIS USING AN ALGEBRAIC AND EQUATION APPROACH Algebraic method Equation method CVP ANALYSIS IN SERVICE INDUSTRIES COST STRUCTURE AND THE OPERATING LEVERAGE FACTOR EVALUATING CVP ANALYSIS PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 5 Relevant information for short-term decision making LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION COST CONCEPTS FOR DECISION-MAKING

5 Contents xv Differential costs Opportunity costs Relevant costs Imputed costs Sunk costs TYPES OF SHORT-TERM DECISIONS Price determination Acceptance of a special order Elimination of non-profitable products Purchasing or manufacturing of a product/part Joint products Closing down a factory or continuing with production Capital investment decisions THE INFLUENCE OF LIMITING FACTORS LINEAR PROGRAMMING (LP) UNCERTAINTY IN DECISION-MAKING PROBABILITY IN DECISION-MAKING PAYOFF TABLES AND DECISION TREES Payoff tables Decision trees PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 6 The flow of cost information LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION PLANNING Establishment Factory layout The production line Labour Material (Raw material) THE MANUFACTURING PROCESS CONTROL THE FLOW OF COSTS ACCOUNTING FOR A MANUFACTURING ENTERPRISE COST FLOWS INVENTORY ACCOUNTS IN A MANUFACTURING ENTERPRISE THE STATEMENT OF PROFIT AND LOSS OF A MANUFACTURING ENTERPRISE193 COLUMNAR FORM OF COST AND STATEMENT OF PROFIT AND LOSS

6 xvi Fundamentals of Cost and Management Accounting PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS EXCERCISES CHAPTER 7 Manufacturing overhead calculation and allocation: A traditional approach LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION BUDGETED MANUFACTURING OVERHEADS APPLIED MANUFACTURING OVERHEADS ACTUAL MANUFACTURING OVERHEADS OVER OR UNDERAPPLIED MANUFACTURING OVERHEADS DEPARTMENTALISATION OF MANUFACTURING OVERHEADS PRIMARY ALLOCATION OF MANUFACTURING OVERHEADS SECONDARY ALLOCATION OF MANUFACTURING OVERHEADS APPLICATION TO THE PRODUCTS AND/OR JOBS REPEATED ALLOCATION METHOD ACTIVITY-BASED COSTING (ABC) PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 8 Variable and absorption costing LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION THE APPLICATION OF DIRECT AND ABSORPTION COSTING Inventory valuation Statement of Profit or Loss: Comparing absorption costing to variable costing Revenue, production and income relationships Impact of revenue fluctuations Reconciliation of the variable costing profit with the absorption costing profit PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS

7 Contents xvii EXCERCISES CHAPTER 9 Activity-based costing (ABC) LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION ABC system design Step 1: Identify activities Step 2: Identify cost drivers for each activity Step 3: Cost pool creation Step 4: Trace activity costs to cost objectives Step 5: Cost pooling into activities centres Step 6: Tracing the activity costs to cost their cost objectives AN ILLUSTRATIVE EXAMPLE OF ABC Criteria for use of an ABC system PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 10 Job costing systems LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION THE JOB DESCRIPTION COST DETERMINATION OF A JOB INVENTORY LEDGERS COMPREHENSIVE EXAMPLE OF A JOB COSTING SYSTEM The recording of material costs The recording of labour costs The recording of manufacturing overheads The recording of completed/finished goods SPOILT UNITS Spoilt products Wastage Shrinkage and evaporation Normal wastage Abnormal wastage Scrap ACCOUNTING FOR SPOILT WORK IN JOB COSTING SYSTEMS As a general manufacturing cost Job-related normal wastage Re-processing costs

8 xviii Fundamentals of Cost and Management Accounting CONTRACT COSTING PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 11 Process costing LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION DEPARTMENTALISATION AND UNIT COSTS PRODUCT AND COST FLOWS PROCESS COST REPORTS SINGLE PRODUCT: SINGLE PROCESS (NO OPENING OR CLOSING INVENTORY) SINGLE PRODUCT: MULTIPLE PROCESSES THE CALCULATION OF INCOMPLETE UNITS IN THE CLOSING INVENTORY OF A PROCESS EQUIVALENT COMPLETE UNITS WAYS OF USING MANUFACTURING RESOURCES INCOMPLETE UNITS IN CLOSING INVENTORY INCOMPLETE UNITS IN OPENING INVENTORY ALTERNATIVE LAYOUT FOR THE COMBINED PRODUCTION COST REPORT 315 INCREASE IN UNITS AS A RESULT OF THE ADDITION OF MATERIAL ACCOUNTING FOR SPOILT UNITS ACCOUNTING FOR WASTAGE WHERE THE WEIGHTED AVERAGE METHOD IS APPLIED ACCOUNTING FOR WASTAGE WHERE THE FIFO METHOD IS APPLIED PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 12 Joint and by-products LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION CLASSIFICATION INTO JOINT AND BY-PRODUCTS

9 Contents xix Common costs Additional processing costs Costing methods for joint products COSTING METHODS FOR BY-PRODUCTS BY-PRODUCTS AND WASTE MATERIAL PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 13 Budgets LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION THE CONCEPTS BUDGET AND BUDGET CONTROL Budgets Budget control THE FUNCTIONS OF BUDGETS AND BUDGET CONTROL Planning Co-ordination Control AIMS OF BUDGET CONTROL ADVANTAGES OF BUDGETS AND BUDGETS CONTROL DISADVANTAGES OF BUDGETS IMPORTANT ASPECTS FOR THE PREPERATION OF BUDGETS The human factor Budget period Budget personnel Budget factor TYPES OF BUDGETS OF A MANUFACTURING ENTERPRISE Sales budget Production budget Plant utilisation budget Trading purchases budget Direct material or raw material budget Labour budget Manufacturing overheads budget Production cost budget Ending finished goods inventory budget Marketing cost budget Administrative budget Research and development budget Capital budget Cash budget Budgeted Statement of Profit and Loss

10 xx Fundamentals of Cost and Management Accounting Budgeted Statement of Financial Position Master budget ZERO-BASED BUDGETING (ZBB) RESPONSIBILITY ACCOUNTING AND COST CONTROL Responsibility centres Responsibility budgets Controllable and uncontrollable costs Reporting FLEXIBLE BUDGETING ACTIVITY-BASED BUDGETING (ABB) NON-FINANCIAL PERFORMANCE INDICATORS PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 14 Standard costing LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION AIMS CHARACTERISTICS OF STANDARD COSTING THE USES OF STANDARDS AND STANDARD COSTS THE CLASSIFICATION OF STANDARDS ADVANTAGES OF STANDARD COSTING THE IMPLEMENTATION OF A STANDARD COSTING SYSTEM MATERIAL STANDARDS AND VARIANCES MATERIAL PRICE VARIANCE Purchase price variance Issue price variance MATERIAL QUANTITY VARIANCE MATERIAL SUB-VARIANCES RECORDING OF MATERIAL COSTS LABOUR STANDARDS AND VARIANCES LABOUR RATE VARIANCE LABOUR EFFICIENCY VARIANCE SUB-VARIANCES RECORDING OF LABOUR COSTS MANUCTURING OVERHEADS STANDARDS AND VARIANCE

11 Contents xxi SEPARATE VARIABLE AND FIXED MANUFACTURING OVERHEADS VARIANCES Variable manufacturing overheads variances Fixed manufacturing overheads variances Causes of manufacturing overheads variances COMBINED VARIABLE AND FIXED MANUFACTURING OVERHEADS VARIANCES Two-variance analysis method Three-variance analysis method RECORDING OF MANUFACTURING OVERHEADS STANDARD COSTING RATIOS SALES VARIANCES Analysis of variances PROBLEMS IN APPLICATION RECONCILIATION OF ACTUAL COSTS WITH STANDARD COSTS PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 15 Performance evaluation LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION CHOICE OF ORGANISATIONAL STRUCTURE RESPONSIBILITY CENTRES ADVANTAGES OF DECENTRALISATION DISADVANTAGES OF DECENTRALISATION DIVISIONAL PERFORMANCE MEASUREMENT Profit Rate of return Residual income Advantages of residual income NON FINANCIAL PERFORMANCE MEASUREMENT THE BALANCED SCORECARD Customer perspective: How do customers see us? Internal business perspective: What must we excel at? Innovation and learning perspective: Can we continue to improve and create value? Financial perspective: How do we look to shareholders? USING THE BALANCED SCORECARD PERSPECTIVES ON COSTING

12 xxii Fundamentals of Cost and Management Accounting SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 16 Transfer pricing in decentralised enterprises LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION CRITERIA FOR THE DEVELOPMENT OF TRANSFER PRICES Goal congruence Performance evaluation Autonomy Administrative cost COMPANY POLICIES GOVERNING INTER-UNIT TRANSFERS TRANSFER PRICING Market-based transfer prices Cost based transfer prices Negotiated price Dual transfer prices AN ILLUSTRATIVE EXAMPLE OF TRANSFER PRICING INTERNATIONAL TRANSFERS PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS REVIEW PROBLEMS EXCERCISES CHAPTER 17 An introduction to costing in the modern business environment LEARNING OUTCOMES CHAPTER OUTLINE INTRODUCTION MATERIAL REQUIREMENTS PLANNING MANUFACTURING RESOURCE PLANNING ENTERPRISE RESOURCE PLANNING TOTAL QUALITY MANAGEMENT Just in time Lean management Kaizen SIX SIGMA Key principles of Six Sigma include: Advantages of Six Sigma include:

13 Contents xxiii Disadvantages of Six Sigma include: BUSINESS PROCESS RE-ENGINEERING Where to apply BPR? How to implement Business Process Re-engineering Practical application limitations PERSPECTIVES ON COSTING SUMMARY KEY TERMS AND CONCEPTS