...Cost Accounting David Norris Western Governors University Accounting doesn’t have the best reputation but for as long as there has been money, there has been a need for accounting. Long gone are the days of the smoke filled room piled floor to ceiling with the leger books of the entrepreneur. Using state of the art technology and creative techniques, today’s accounting is a vital component of the corporate world helping to build financial foundations that encourage long term growth and profitability. Cost accounting is the managerial financial budgeting tool of the accounting domain that deals specifically with cost and production. Cost accounting assists companies to understand the cost of product versus service and this helps to prepare bids and proposals and assembles information for planning and control which are needed to evaluate performance. Any business can use cost accounting but it is most effective with corporations that manufacture mass produced products and have a large employee base. Cost accounting is also becoming a valuable asset within the medical industry. In the ultra-competitive market of health care, hospitals are using price strategies, one of the new methods used in accounting, to entice customers and keep patients happy. Cost accounting techniques have developed as quickly as industry has in the 21st century. Basic accounting has become antiquated as new, creative approaches to financial stability emerge. Methods such...
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...1. What is Cost Accounting and how it is related to Management and Financial Accounting? Cost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. COST VS. FINANCIAL ACCOUNTINGFinancial accounting aims at finding out results of accounting year in the form of Profit and Loss Account and Balance Sheet while Cost accounting aims at computing cost of production/service in a scientific manner and facilitate cost control and cost reduction. Financial accounting reports the results and position of business to government, creditors, investors, and external parties while Cost Accounting is an internal reporting system for an organization’s own management for decision making.In financial accounting, cost classification based on type of transactions, e.g. salaries, repairs, insurance, stores etc. In Cost accounting, classification is basically on the basis of functions, activities, products, process and on internal planning and control and information needs of the organization while Financial accounting aims at presenting ‘true and fair’ view of transactions, profit and loss for a period and Statement of financial position (Balance Sheet) on a given date. It aims at computing...
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... | COST ACCOUNTING AREA: CONTROL IMBA NUMBER OF SESSIONS: 20 PROFESSOR: SALVADOR CARMONA □ Ph.D (Accounting). Universidad de Sevilla. □ Last version, November 2006 COURSE DESCRIPTION A cost accounting system collects and classifies costs and assigns them to cost objects. The goal of a cost accounting system is to measure the cost of designing, developing, producing (or purchasing), selling, distributing, and servicing particular products or services. Cost allocation is at the heart of most accounting systems. Cost behavior -how the activities of an organization affect its costs- is also fundamental to cost accounting systems. The data provided by a cost accounting system is used for various purposes, which include product costing, planning and control, and decision making. This course mainly focuses on the first of these objectives -products costing. COURSE GOALS Students, as future managers, will utilize, at a minimum, the output of cost systems, which are the primary internal information systems in a firm. Students taking this course will gain an understanding of cost accounting systems, which includes a familiarization with: The goals of cost accounting systems; the fundamental features and design of cost accounting systems; and the various uses of the data provided by cost accounting decisions. A sound understanding of these issues is necessary to interpret cost accounting system outputs; to transform them from...
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...CHAPTER 1 QUESTIONS 1. The function of cost accounting is to provide the cost accounting information that is the basis for planning and controlling current and future operations. It provides the cost figures and analyses that management needs in order to find the most efficient methods of operating, achieving control of costs, and determining selling prices. 2. Originally issued for companies marketing products in Europe, a set of international standards for quality management, known as the ISO 9000 family, was designed by the International Organization for Standardization. Obtaining ISO 9000 is important because many companies will only contract with ISO 9000 suppliers. 3. Manufacturers convert purchased materials into finished goods by using labor, technology, and facilities. Merchandisers purchase completed products for resale. Service businesses or agencies sell or provide services rather than products. 4. A manufacturer differs from a merchandiser in these ways: a. The merchandiser buys items to sell while the manufacturing business must make the items it markets. b. Usually the manufacturer has a greater investment in physical facilities. c. The manufacturer will incur some costs peculiar to this type of industry, such as machine maintenance, materials handling, and inspection of manufactured goods. The two types of operations are similar in that they are both concerned with purchasing, storing, and selling goods;...
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...COST ACCOUNTING VS FINANCIAL ACCOUNTING http://www.tutorialspoint.com/accounting_basics/cost_accounting_vs_financial_accounting.htm Copyright © tutorialspoint.com Both cost accounting and financial accounting help the management formulate and control organization policies. Financial management gives an overall picture of profit or loss and costing provides detailed product-wise analysis. No doubt, the purpose of both is same; but still there is a lot of difference in financial accounting and cost accounting. For example, if a company is dealing in 10 types of products, financial accounting provides information of all the products in totality under different categories of expense heads such as cost of material, cost of labor, freight charges, direct expenses, and indirect expenses. In contrast, cost accounting gives details of each overhead product-wise, such as much material, labor, direct and indirect expenses are consumed in each unit. With the help of costing, we get product-wise cost, selling price, and profitability. The following table broadly covers the most important differences between financial accounting and cost accounting. Point of Differences Financial Accounting Cost Accounting Meaning Recoding of transactions is part of financial accounting. We make financial statements through these transactions. With the help of financial statements, we analyze the profitability and financial position of a company. Cost accounting is used to calculate cost of the product...
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...Managerial Accounting! I hope everyone is doing well as we dive into the topic of Activity Based Management (ABM). Here are my thoughts: What are ABM and ABC, and how can both be used by management? ABM is a business process model focusing on the control of production or performance activities so that they improve customer value and enhance profitability. Basically, ABM helps companies and mangers to produce more efficiently, determine product or service costs more accurately and control and evaluate performance more effectively. On the other hand, Activity Based Costing (ABC) is a cost accounting system that focuses on an organization’s activities, collects costs on the basis of the underlying nature and extent of those activities, and uses the gathered information to determine product/service cost accumulation and assess the appropriateness of activity elimination. ABC focuses on attaching costs to products and services based on the activities conducted to produce, perform, distribute, and support those products and services. Under ABC, managers can recognize that costs are incurred at different organizational levels, accumulate related costs into individual cost pools, and use multiple cost drivers to assign costs to products and services. In summary, ABC and ABM are effective in supporting continuous improvement, short lead times, and flexible manufacturing by helping managers to identify and monitor significant technology costs; trace many technology costs directly...
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...standard motors accounted for large proportion of annual volume, and it was extremely competitive in the relevant market. Its production process was manufacturing a single type of motor in a long run. The problem for Siemens to operate during the initial period was high costs of their products against lower labour rates of its competitors, but the firm still made profit under pressure of reduce costs. After expanding its program, EMW found that it could be more profitable if it produced low volume customized alternating current motors in small production runs. Thus, the firm changed its strategy to mainly manufacture A/C motors and created a relative good production environment to support its new strategy. The new production process for the manufacture of A/C motors was costly and automated by dedicated automated machines. According to the new strategy, the cost allocation system was changed as well. In addition, the new cost system made the firm more profitable and competitive than old one. 2. Describe in detail how the old cost system operates. Your answer should include a detailed description of how all costs are treated. The old cost system was only fit for standard motors other than customized motors. Within old cost system, the direct material and direct labour were distributed to the products directly and...
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...Cost Accounting Tabitha Smith ACC 310 Christine Errico January 12, 2011 Cost Accounting What is cost accounting? Cost accounting as referred to as managerial accounting is a system of accounting used specifically by managers (Lanen, Anderson, & Maher, 2011, p. 6). Cost accounting measures, records and reports information about costs to help managers to form a well informed decisions for an organization (Lanen, Anderson, & Maher, 2011, p. 6). Cost accounting methods and their use, budgets including discipline, construction, and elements, and variance analysis are important aspects of cost accounting as a whole, which is an important tool for a successful organization. The main goal of cost accounting is to help managers to maximize value within their organization (Lanen, Anderson, & Maher, 2011, p. 3). One of the fundamental services of cost accounting is to provide information to the manager to guide them to make effective valuable decisions (Lanen, Anderson, & Maher, 2011, p. 3). An essential objective of cost accounting is to create an effective value chain (Lanen, Anderson, & Maher, 2011, p. 4). A value chain is a set of activities in which raw materials are converted into goods and services for consumers to purchase (Lanen, Anderson, & Maher, 2011, p. 4). An organization is responsible to coordinate with their vendors and suppliers along with their distributors and customers to accomplish their objective (Lanen, Anderson...
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...Cost Allocation Methods Don Lowery University of Phoenix The focus of this paper is to identify the basic aspects of the direct and step-down methods of cost allocation. Included will be a comparison of the two methods and their strengths and weaknesses. Direct Method Horngren defines the direct method of cost allocation as “a method for allocating service department costs that ignores other service departments when any given service department’s costs are allocated to the operating departments” (2008, p. 531). This method does not take into account the services provided between departments and allocates costs of those departments directly to operating departments. If a service department, for example, a facilities department, provides a significant amount of service to another service department, perhaps a production floor, cost allocations are not made between the two departments (Unknown, 2009, p. 1). All costs are directly allocated to the operating departments, bypassing the other service departments. The direct method is useful for simple understanding of costs directly accountable to a specific determinant such as square footage of a plant or labor hours of personnel. Step-Down Method The step-down method of cost allocation is defined by Horngren as “A method for allocating service department costs that recognizes that some service departments support the activities in other service departments as well as those in operating departments” (2008, p. 531). The...
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...(ABC) is a costing method that first assigns cost to activities and then assigns them to products based on the products’ consumption of activities (Lanen, Anderson, & Maher, 2011). Activities are tasks that are required in order for a company to finish its product. ABC was first written about by Alexander Hamilton Church in 1901. He believed that overhead was the cost of different activities of production. He believed that in order to report accurate costs, all of the cost of that product, including portions of overhead, should be reflected in the number (Weil & Maher, 2005). It was made popular in 1988 by Robin Cooper and Robert Kaplan. They defined ABC as “an approach to solve the problems of the traditional cost management systems” (Narong, 2009). This system enabled indirect and support expenses to the driven, first to activities and processes, and then to products, services and customers allowing managers to have a better idea of where their company stands (Kaplan, & Cooper, 1998) Foreign companies were beginning to produce items at a lower cost and higher quality than the United States so therefore, companies needed to be able to accurately identify cost-saving strategies (Weil and Maher, 2005). Conventional costing methods allocated overhead based on a direct cost such as labor. The problem with this is that some activities use more overhead resources then others do and companies are unable to identify the actual costs of processes. For example, a manufacturing...
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...SUBJECT: Cost Accounting Systems Managerial accounting concerns utilizing information available that assists managers to plan, control, and execute the company’s performance. It emphasizes on the relationships of internal costs and internal control tools in a systematic way. In a manufacturing organization, a typical cost accounting system aims to identify and allocate costs reasonably so that the organization can estimate the profitability of its products. With the input of numerical information such as direct materials and direct costs, management within the organization can make decisions such as the selling price of its products. The system is also a tool for managers to control the product lines. There are several types of costing systems, including job-order system, process costing system, and activity-based system. For instance, the activity-based system is composed of cost drivers, fixed cost, variable cost, and fixed/variable overheads. Cost drivers help allocate variable cost to the production of different product lines. Process costing method distributes the cost according to the manufacturing progress of the products, while job-order costing system assigns costs to different categories of job functions. Driven by the objective of controlling relevant cost and minimizing ineffective activities, managers of the organization examines the costs from a macro perspective instead of focusing on each piece of products. Under the method of full absorption costing, costs are...
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...the mangers agree on. According to Fundamentals of Cost Accounting, “Activity-based costing (ABC) is a two-stage product costing method that assigns costs first to activities and then to the products based on each product’s use of activities”(Lanen, Anderson, Maher. 2011. P 319). While Traditional costing, is "often allocate costs based on single-volume measures such as direct-labor hours, direct- labor costs, or machine hours. While using a single volume measure as an overall cost driver seldom meets the cause-and-effect criterion desired in cost allocation, it provides a relatively cheap and convenient means of complying with financial reporting requirements"(Luehlfing). The first reason I believe that the Activity-Based Costing(ABC) is superior is because it has "the inherent flexibility to provide special reports to facilitate management decisions regarding the costs of activities undertaken to design, produce, sell, and deliver a company’s products or services. At the heart of this flexibility is the fact that ABC systems focus on accumulating costs via several key activities"(Luehlfing). The benefits that I believe that ABC has for mangers in setting goals include, "assesses costs of individual activities, based on their use of resources"(Patrick). It also "enables accurate costing of all activities to be obtained throughout an organization"(Patrick). It also makes it "easy to identify where high (and low) costs are being incurred and the cause"(Patrick). It is really...
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...Letter of Transmittal Audit & EDP Accounting Institute of Business Management Karachi Dear Sir, As per your instructions, I am hereby submitting my first report on the required topic. The report shall continue containing all the essential elements and required information which were listed briefly by you in the class. Although the task was relatively easier for me as the chosen company had its Branch Manager, a very close relative to me. I have put our whole efforts in making this report, and I am fully satisfied with it. I hope you would be happy to see my performance because I did worked a lot for it. Incase of any assistance or interpretation in this regard, you can always contact me anytime. I would be glad to be of any help. Regards, Contents Page History 5 Management Flow Chart Error! Bookmark not defined. Cost Accounting Flow Chart Error! Bookmark not defined. Process Costing: Error! Bookmark not defined. Accounting System Flow Chart Error! Bookmark not defined. Berger † Departments Error! Bookmark not defined. Types of Products Manufactured By the Company Error! Bookmark not defined. Recording Procedures Error! Bookmark not defined. Recording The Purchases & Return Of Raw Materials: Error! Bookmark not defined. Direct Labour Cost: Error! Bookmark not defined. Manufacturing Overhead Cost: Error! Bookmark not defined. Budgets Error! Bookmark not defined. Sales Budget: Error! Bookmark not defined. Production Budget: Error! Bookmark...
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...$25 for up to 1,000 texts per month and $0.05 for each text over the 1,000. Requirements a. Draw a graph of the total monthly cost of the three plans for different levels of texting. b. Which plan should you choose if you expect to make: i. 240 texts per month? ii. 780 texts per month? iii. 1,250 texts per month? a. Number of Texts | Plan A: $0.10/text | Plan B: $15 for 500 texts and $0.08 for each text over 500 | Plan C: $25 for 1000 texts and $0.05 for each text 1000 | 240 | $24.00 | $15.00 | $25.00 | 780 | $78.00 | $37.40 | $25.00 | 1250 | $125.00 | $75.00 | $37.50 | b. i. 240 texts per months Plan A: $0.10 x 240 = $24.00 Plan B: $15.00 I would choose plan b because its less expensive than plan a or c. ii. 780 texts per month Plan A: $0.10 x 780 = $78.00 Plan B: 15 + ((780-500) x $0.08) 15 + $22.40 = $37.40 Plan C: $25.00 I would choose plan c because its less expensive than the other 2. iii. 1,250 texts per month Plan A: $0.10 x 1250 = $125.00 Plan B: 15 + ((1250-500) x $0.08) 15 + $60 = $75.00 Plan C: 25 + ((1250 – 1000) x $0.05 25 + $12.50 = $37.50 I would choose plan c because its less expensive than the other 2. 2. In 3–4 sentences, define the following terms and give two examples of each: c. Direct Materials Cost The direct materials and the materials that can be traced...
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...* CHAPTER 1: COST MANAGEMENT AND STRATEGY * QUESTIONS 1-1 Firms Using Cost Management. Here are some examples; there are many possible answers. 1. Wal-Mart: to keep costs low by streamlining restocking and sales 2. Dell: to keep costs low by improving manufacturing performance and by using target costing and other management techniques 3. Citicorp: to keep costs low by using activity analysis (see exercise1-31) to identify key operations and to find those that add little or no value 4. A local school district or public agency: to keep costs low in order to provide the best possible service given available funds 5. Procter & Gamble: to assess the profitability of its different products 6. Any other large, diversified manufacturer, like Procter & Gamble: which needs to be able to analyze the relative profitability of its different products, using cost management 7. A small machine shop: which needs cost management to determine whether it should repair or replace a machine 8. A dance studio: to analyze and choose between different compensation plans for its teachers; and to determine whether it should open a new studio 1-2 Firms not expected to be significant users of cost management information: 1. Microsoft: here the focus is on forming strategic alliances, innovation and competition; cost management is more important for other firms in the information technology business, such as Hewlett-Packard, and IBM that compete in part on innovation...
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