Cost Accounting Fundamentals

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Cost Accounting Fundamentals Essential Concepts and Examples Steven M. Bragg

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... 10 Learning Objective... 10 Introduction... 10 To Whom Does the Cost Accountant Report?... 10 What Are the Principal Accountabilities of the Cost Accountant?... 10 What Are the Qualifications of a Cost Accountant?... 12 Who Does the Cost Accountant Supervise?... 13 Summary... 13 Review Questions... 14 Review Answers... 15 Chapter 3 Inventory Valuation... 16 Learning Objective... 16 Introduction... 16 Valuation Step 1: The Quantity of Inventory on Hand... 16 The Periodic Inventory System... 16 The Perpetual Inventory System... 17 The Gross Profit Method... 18 Valuation Step 2a: Inventory Costing... 19 The First In, First Out Method... 19 The Last In, First Out Method... 20 The Weighted Average Method... 22 Standard Costing... 23 The Retail Inventory Method... 23 Valuation Step 2b: Inventory Costing... 24 Job Costing... 24 Process Costing... 24 By-Product and Joint Product Costing... 24 Valuation Step 3: Overhead Allocation... 25 Valuation Step 4: Inventory Valuation... 28 The Lower of Cost or Market Rule... 28 Obsolete Inventory Accounting... 29

Summary... 30 Review Questions... 31 Review Answers... 32 Chapter 4 Job Costing... 33 Learning Objective... 33 Introduction... 33 Overview of Job Costing... 33 When Not to Use Job Costing... 34 Accounting for Direct Materials in Job Costing... 34 Accounting for Labor in Job Costing... 35 Accounting for Actual Overhead Costs in Job Costing... 36 Accounting for Standard Overhead Costs in Job Costing... 37 The Importance of Closing a Job... 38 The Role of the Subsidiary Ledger in Job Costing... 38 Job Costing Controls... 39 Summary... 40 Review Questions... 41 Review Answers... 42 Chapter 5 Process Costing... 43 Learning Objective... 43 Introduction... 43 Overview of Process Costing... 43 The Weighted Average Method... 44 The Standard Costing Method... 45 The First In, First Out Method... 46 The Hybrid Accounting System... 48 Process Costing Journal Entries... 49 Problems With Process Costing... 50 Summary... 51 Review Questions... 52 Review Answers... 53 Chapter 6 Standard Costing... 54 Learning Objective... 54 Introduction... 54 Overview of Standard Costing... 54 Advantages of Standard Costing... 54 Disadvantages of Standard Costing... 55 How to Create a Standard Cost... 56 Historical, Attainable, and Theoretical Standards... 57 How to Account for Standard Costs... 57 Overview of Variances... 58 The Purchase Price Variance... 59 Material Yield Variance... 60 Labor Rate Variance... 61 Labor Efficiency Variance... 61 Variable Overhead Spending Variance... 62 Variable Overhead Efficiency Variance... 63 Fixed Overhead Spending Variance... 63

Selling Price Variance... 64 Sales Volume Variance... 65 Problems with Variance Analysis... 65 The Controllable Variance... 66 The Favorable or Unfavorable Variance... 66 Where to Record a Variance... 67 Which Variances to Report... 67 How to Report Variances... 68 Summary... 68 Review Questions... 70 Review Answers... 71 Chapter 7 Joint and By-Product Costing... 72 Learning Objective... 72 Introduction... 72 Split-Off Points and By-Products... 72 Why We Allocate Joint Costs... 73 How to Allocate Joint Costs... 73 How to Determine Prices... 74 Special Concerns With By-Product Costing... 75 Summary... 75 Review Questions... 76 Review Answers... 77 Chapter 8 Waste Accounting... 78 Learning Objective... 78 Introduction... 78 Definition of Spoilage... 78 Accounting for Normal Spoilage... 78 Accounting for Abnormal Spoilage... 80 Accounting for the Sale of Spoilage... 80 Cost Allocation to Spoilage... 80 Definition of Rework... 81 Reporting Rework... 81 Accounting for Rework... 82 Definition of Scrap... 82 Accounting for Scrap... 82 Impact of Waste on Manufacturing Systems... 83 Summary... 84 Review Questions... 85 Review Answers... 86 Chapter 9 Product Pricing... 87 Learning Objective... 87 Introduction... 87 What Does This Cost?... 87 The Issue of Pricing Duration... 88 The Issue of Overhead Costs... 89 The Issue of Overhead Application... 90 Corporate Overhead Costs... 92 What Does This Cost, Part Two... 94

The Issue of the Bottleneck... 94 What Does This Cost, Part Three... 95 Summary... 96 Review Questions... 97 Review Answers... 98 Chapter 10 Target Costing... 99 Learning Objective... 99 Introduction... 99 The Basic Steps of Target Costing... 99 Value Engineering Considerations... 100 The Cost Reduction Program... 101 The Milestone Review Process... 102 Problems with Target Costing... 102 The Members of a Design Team... 103 The Role of the Cost Accountant in Target Costing... 103 Data Sources for Target Costing... 104 The Product Life Cycle and Target Costing... 105 Summary... 106 Review Questions... 107 Review Answers... 108 Chapter 11 Transfer Pricing... 109 Learning Objectives... 109 Introduction... 109 Overview of Transfer Pricing... 109 Market Price Basis for Transfer Pricing... 110 Adjusted Market Price Basis for Transfer Pricing... 111 Negotiated Basis for Transfer Pricing... 111 Contribution Margin Basis for Transfer Pricing... 112 Cost Plus Basis for Transfer Pricing... 112 Cost Anomalies in a Cost-Based Transfer Price... 113 Pricing Problems Caused by Transfer Pricing... 113 The Tax Impact of Transfer Prices... 114 Summary... 116 Review Questions... 117 Review Answers... 118 Chapter 12 Direct Costing... 119 Learning Objective... 119 Introduction... 119 Overview of Direct Costing... 119 Contribution Margin Versus Gross Margin... 120 Direct Costing as an Analysis Tool... 121 Automation Investments... 121 Cost Reporting... 121 Customer Profitability... 122 Internal Inventory Reporting... 123 Profit-Volume Relationship... 123 Outsourcing... 125 Direct Costing Pitfalls... 126

Summary... 128 Review Questions... 129 Review Answers... 130 Chapter 13 Activity-Based Costing... 131 Learning Objective... 131 Introduction... 131 The Problem With Overhead Allocation... 131 Overview of Activity-Based Costing... 134 Activity-Based Management... 139 Advantages of Activity-Based Costing... 139 Problems with Activity-Based Costing... 142 The Incremental Cost Reduction Fallacy... 143 The Bill of Activities... 144 System Scope Issues... 144 System Integration Issues... 145 Summary... 145 Review Questions... 147 Review Answers... 148 Chapter 14 Constraint Analysis... 149 Learning Objective... 149 Introduction... 149 Constraint Analysis Operational Terminology... 149 Overview of Constraint Analysis... 150 The Cost of the Bottleneck... 151 Local Optimization... 152 Constraint Analysis Financial Terminology... 153 Constraint Analysis from a Financial Perspective... 153 The Constraint Analysis Model... 154 The Decision to Sell at a Lower Price... 156 The Decision to Outsource Production... 157 The Capital Investment Decision... 157 The Decision to Cancel a Product... 159 Comparison of Activity-Based Costing to Constraint Analysis... 160 Summary... 160 Review Questions... 161 Review Answers... 162 Chapter 15 Capital Budgeting Analysis... 163 Learning Objective... 163 Introduction... 163 Overview of Capital Budgeting... 163 Bottleneck Analysis... 164 Net Present Value Analysis... 165 The Payback Method... 166 Capital Budget Proposal Analysis... 167 The Outsourcing Decision... 168 The Capital Budgeting Application Form... 169 The Post Installation Review... 172 The Lease Versus Buy Decision... 172

Summary... 174 Review Questions... 175 Review Answers... 176 Chapter 16 Cost Collection Systems... 177 Learning Objective... 177 Introduction... 177 Data Entry Accuracy... 177 Data Entry with Bar Codes... 178 Data Entry with Radio Frequency Identification (RFID)... 180 Document Imaging... 180 Special Considerations for Labor Tracking... 182 The Duration of Cost Collection... 185 The Chart of Accounts... 185 The Account Code Structure... 186 The Account Code Format... 187 Accounts for the Cost Accountant... 188 Other Sources of Cost Information... 189 Summary... 191 Review Questions... 192 Review Answers... 193 Chapter 17 Cost Variability... 194 Learning Objective... 194 Introduction... 194 Mixed Costs... 194 Labor-Based Fixed Costs... 195 Costs Based on Purchase Quantities... 196 Costs Based on Production Batch Sizing... 197 Cost Based on Step Costs... 198 Time-Based Costs... 198 Experience-Based Costs... 199 Incorporating Cost Variability into Cost Reports... 201 Summary... 202 Review Questions... 204 Review Answers... 205 Chapter 18 Cost of Quality... 206 Learning Objective... 206 Introduction... 206 Types of Quality... 206 Costs Impacted by Quality... 207 Reporting on the Cost of Quality... 208 Summary... 210 Review Questions... 211 Review Answers... 212 Appendix Selected Topics... 213 What is Actual Costing?... 213 What is an Avoidable Cost?... 214

What is a Burden Rate?... 214 What is a Committed Cost?... 215 What are Conversion Costs?... 215 What is a Deferred Cost?... 215 What is a Differential Cost?... 215 What is a Direct Cost?... 216 What is a Discretionary Cost?... 217 What is an Expired Cost?... 217 What is Historical Cost?... 217 What is an Indirect Cost?... 218 What is an Irrelevant Cost?... 218 What is Marginal Cost?... 218 What is Normal Costing?... 219 What is a Period Cost?... 219 What is Replacement Cost?... 220 What is a Step Cost?... 220 What is a Sunk Cost?... 220 What is a Traceable Cost?... 220 Index... 222

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