Cost Accounting (R. Johnson)

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3 Business Strategies:

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customer intimacy, operational excellence, product leadership

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• Customer intimacy

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o Welcoming, individual treatment
o e.g. starbucks

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• Operational excellence

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o Same thing everywhere
o E.g. Walmart, McDonalds

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• Product leadership

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o High quality
o E.g. BMW, Apple

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JIT

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• A facet of lean production in which a pull system is created where production is not initiated until a customer has ordered a product

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Lean thinking model

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• Aka pull manufacturing
• E.g. Toyota model
• Remove non value added things
• Making exactly what is required

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Theory of constraints

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• Constraint- anything that prevents you from getting more of what you want
• Effectively managing constraints is the key to success- focus on improving the weakest link in your process

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Six sigma

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• A process improvement that relies on customer feedback and fact based data gathering and analysis techniques to drive process improvement
• Associated with zero defects

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Management Activities

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planning, directing and motivating, controlling

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• Planning

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o Overall strategy: alternatives, budget is formally expressed

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• Directing and motivating

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o Task oriented, “day to day” middle management

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• Controlling

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o Feedback on planning, measurement and analyzing

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Sarbaines-Oxley Act

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• A response to scandal cycle (2002)
• Higher regulation, increased reporting, mandatory jail sentences, CFO/CEO required certification and increased liability, required auditing and internal control, established PCAOB

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Inventory

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DM, DL, OH (dirty/dusty rule)

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• Direct Materials

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o All tangible materials that go directly into the product
o easily traceable to the product, typically substantial

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• Direct Labor

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o Labor that goes directly into making the product, aka “touch labor”

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• Manufacturing Overhead

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o Product cost, not easily traced
o A control/ temporary account

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Prime and conversion costs- incurred to convert materials into the finished product

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• Prime: DM and DL
• Conversion: DL and OH

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schedule of Cost of goods manufactured (aka cost sheet)

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Raw Materials + DL + Man. OH= total manufacturing cost + beg. WIP - end. WIP= COGM

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Job order costing

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• Different products, jobs, services
• Track costs per each job, including DM, DL, OH
• Finite job process

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how to: Apply OH

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• Predetermined OH rate, calculated estimation
• OH= estimate of total OH cost ($)/ estimated allocation base (hrs)
• Allocation base- DL hours, machine hours, etc.

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actual vs. applied OH

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actual (real events) vs. applied (our estimate)

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process costing

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• homogeneous product
• difficult to track costs, based on finished products
• on going process

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equivalent units (FIFO method)

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• hard to measure output (process costing)
• two concepts:
o measure work done
o if we completed goods based on work done, how many units woud we have produced?

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goals of equivalent units

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o Track inventory
o Figure a cost/ unit

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equivalent units

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• Equivalent units= BI + S&C + EI

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• S&C=

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o units transferred out – beginning inventory
o started units – ending inventory
• units transferred out= beginning inventory + S&C

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• cost per equivalent unit=

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• cost per equivalent unit= cost added during the period/ equivalent units of production

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• cost of UTO =

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• cost of UTO = beg. WIP cost + cost to complete Beg WIP + cost of S&C

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operation costing

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• hybrid between job order and process costing
• used when products have some common and some individual characteristics

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• variable costs (traditional)

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o varies with the level of activity/ output
o fixed per unit
o total cost goes up with activity

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• step-variable costs

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o general upward trend
o jump in small steps
o jumps are not as severe as fixed costs

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• fixed costs

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o fixed regardless of level of activity/ output (within the relevant range)
o varies on a per unit basis

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• committed fixed costs

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o not easily changed (physically, strategic)
o long term in nature (key salaries)

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• discretionary fixed costs

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o annually renewed costs (advertising, internships, research, investments, certain salaries)
o annually reviewed in the budget
o not disruptive to the mission
o easy to cut, first to be cut

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accounting vs. engineering approach

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• accounting:
o based on prior knowledge of the how the cost behaves
• engineering
o involves an analysis of what cost behavior should be

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3 methods for describing costs

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scatter-graph, high-low method, least squares regression method

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• scatter graph

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o fixed, variable (guesstimate)

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• high-low

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o more accurate than graphing
o pick 2 points and solve for variable cost per unit
o choose points based on activity NOT costs
o use formula to solve (y = a + bx)

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• least squares regression

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o looking for R2 = 1
o most accurate method
o required the most work
o requires a computer/ calculator

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contribution format income statement

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• sales
less: variable costs
contribution margin (contributes to FC and NI)
less: fixed costs
net income

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targeted profit

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• targeted sales (units) = (targeted profit + FC)/ (cm/unit)
• targeted sales ($) = (targeted profit + FC)/ cm ratio

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BEP (sales and units)

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• BEP (sales) = FC/ (cm/unit)
• BEP ($) = FC/ cm ratio

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Operating leverage

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a measure of how sensitive NOI is to a % change in $ sales
• Degree of operating leverage = CM/ NOI

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Margin of safety

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• Margin of safety ($) = total sales – break even sales
• Margin of safety (%) = margin of safety ($)/ total sales ($)

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Activity based costing

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• Provides a better way to focus on OH than traditional methods• Does not replace job-order and process costing, just supplements it

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• Method of ABC

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o Define activities, activity cost pools, and activity measures
o Assign OH to cost pools, through interviews and analysis
o Calculate activity rates
o Assign OH costs to cost objects (customers or jobs)
o Report/ evaluate

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• Activity-based management

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- focusing on activities to eliminate waste, decrease processing time, and reduce defects

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• Benchmarking

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an approach to indentifying activities with the greatest room for improvement

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Budgeting

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• Used for planning and controlling

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Responsibility accounting

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• A manager should be held responsible for those only items that the manager can actually control to a significant extent

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Self-imposed budget

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• A budget that is prepared with the full cooperation and participation of managers at all levels

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Master budget

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• Several interdependent budgets that formally lay out the company’s sales, production, and financial goals and culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet