The document discusses challenges in allocating overhead costs and different costing methods used by organizations. It explains that job-order costing is commonly used to allocate overhead costs across multiple projects by treating each job as a separate costing unit. Cost behavior and different types of costs like variable, fixed, and mixed costs are also covered. The document stresses analyzing cost concepts and behavior within costing systems to aid in planning, budgeting, and decision making.
The biggest challenge to analyzing and computing costs is the allo.docx
1. The biggest challenge to analyzing and computing costs is the
allocation of overhead. Imagine that you are building a new
home. When meeting with the contractor, he or she will give
you an approximate price to build the home. That price is based
on the builder’s cost to build the house as well as the profit
expected for the contractor. Based on the home plans and
supplier relationships, the builder can easily calculate the cost
of materials and labor of subcontractors who would carry out
the day-to-day construction.
It gets complicated when it comes to the other costs the builder
incurs. These costs, known as overheads, need to be recovered,
but they are not directly tied to the cost of your home. Examples
of such costs would be advertising, gasoline for trucks used by
supervisors to drive between construction sites, salaries for
secretaries and support staff in the office, and any other cost of
the sort. How can a builder take these costs and allocate them
fairly across all projects? In this module, you will explore job-
order costing systems—one method commonly used to allocate
overheads and estimate costs of a project provided to a
customer.
Cost management analysts work very closely with other
management colleagues to put together cost management
systems that coincide with the overall decision-making
strategies of the organization. One important component of the
cost management system is the product costing system that
accumulates all production costs and assigns them to the
appropriate products. The most commonly used product costing
systems are job-order costing and process costing.
When job-order costing is implemented, each separate job is
treated as a separate unit of output and costs are assigned as the
resources are used up. A job is defined as a single product or
small group of similar products. Job-order costing is useful for
identifying which types of jobs will be most profitable for a
company, predicting future costs, managing costs, contract
2. renegotiations, and financial reporting. When process costing is
used, all units produced during the time period are considered
output. The costs are not separated and broken down for each
individual unit as they are with job-order costing.
The first element of managerial accounting is cost behavior
within an organization. Management analysis of cost behavior
influences cost classifications and decisions made in order to
control costs. This module covers two main concepts—cost
management and how it is used in strategic decision making. In
any strategic decision making, ethics always should be top
priority. Not only is making ethical decisions the correct thing
to do, but it is also key to running an efficient, long-term
business.
For example, assume you are in charge of the pharmacy in a
hospital. In your role as manager, you need to help control the
cost of medications administered to patients. Many of these
drugs are very expensive and are never fully reimbursed by the
patients’ insurance companies. One day, an individual offers to
sell you the required medications for exactly one-half of the
cost currently paid. This individual represents a company that
has had significant issues with timely delivery in the past and
that has been subject to multiple lawsuits by other hospitals.
The company’s failure to deliver the drugs on time had caused
significant patient-care issues within those hospitals. Strictly
from a cost standpoint, you might think it would be sensible to
switch to this vendor. However, ethically, is it appropriate to
make the switch that may save cost but also risk the well-being
of patients?
Strategic decisions are the most important decisions a company
can make because they dictate future decisions and level of
organization performance. Some common examples of strategic
decisions include:
· Finding or seeking out new business opportunities that will
allow the organization to grow and expand
4. Kotter’s Eight-Step Change Model
Kotter’s Eight-Step Change Model is the most simple and
commonly used way to form a strategic plan. The
eight steps of this process are described as follows:
1) Identify a need by looking within the organization and
determining what needs to be changed.
2) Assemble a team to lead and manage the change by
identifying people within the organization who
are best suited to improve the running of the company.
3) Develop a change vision and strategy for achieving it by
finding out the best way to implement the
changes within the company.
4) Communicate the vision and strategy for change by making
the members of the change team role
models and by making all employees aware of the company’s
new vision.
5) Encourage innovation and remove obstacles by always being
open to change and not focusing on
the past.
6) Ensure short-term achievements are frequent and obvious.
7) Use successes to create opportunities for improvement in the
entire organization.
8) Reinforce a culture of change by promoting more
improvement, better leadership, and more
5. effective management.
Reference
Kotter, J. P. (1996) Leading change. New York, NY: Harvard
Business Review Press.
Operation costing is a cross between job-order costing and
process costing. This process is used when an organization
produces great amounts of similar products that require the use
of different materials, for example, pants made from many
different materials such as wool, cotton, polyester, and spandex.
In job-order costing, multiple files are used to track the costs of
materials used for the job such as data sources for product
costing, costing estimation for jobs in the future, and internal
and external financial reporting.
When using costing methods, assigning cost can be very
difficult, and the best way to do this is to use predetermined
overhead rates to assign manufacturing overhead costs. This
rate is usually determined at the beginning of the year and stays
constant for the whole year. Predetermined overhead rates
remove any fluctuations in the application of manufacturing
overhead rates to various jobs. The final product costs are said
to be normal costs because of this. The manufacturing overhead
account is important and is used very often. It records both the
actual overhead and the overhead that is applied to the work in
process inventory. When normal costing is used, the actual
overhead is almost never equal to the applied manufacturing
overhead. This difference is known as over variance. This
variance can either be overapplied or underapplied.
Underapplied variances occur when the actual cost is greater
than what was actually applied. Overapplied variances occur
when the actual cost is less than what was actually applied.
6. Standard costing and actual costing are the alternative methods
to normal costing. In actual costing, the actual costs of both
direct and indirect resources are applied to the products. In
standard costing, costs are assigned to products after applying
predetermined or standard rates for both direct and indirect
costs.
It is difficult to manage jobs, but it is important as this is how
cost is minimized, and quality is maximized. Having this
philosophy helps to maintain a high level of customer
satisfaction. One of the common ways of managing jobs is by
implementing project percentage of completion charts. This is a
chart that shows how much of the project should be completed
at a set time and how much actually has been completed.
Another commonly used method is the Gantt chart, which shows
all the necessary stages needed to complete the project and in
what order they should be completed.
Cost behavior is the volatility of product costs due to changes
in production levels or sales volumes. Product costs include
material costs, labor costs, and other overheads. Any change in
the production levels and sales volumes can affect profitability.
Here are some examples of how costs change:
· Variable costs change in proportion to total volume produced
but remain the same on a per-unit basis.
· Fixed costs differ from variable costs in that they remain
constant with change in volume produced but vary on a per-unit
basis.
· Mixed costs are a combination of fixed and variable costs.
· Step costs vary over a wide range of activity levels but remain
constant over a narrow range.
In addition to these types of costs, here are some terms you will
also learn:
· Contribution margin is the difference between the total sales
7. and the total variable costs of an organization.
· Variable-costing statement presents the net income obtained
by subtracting fixed expenses from the difference between total
sales and total variable costs.
· Cost-volume-profit analysis determines the financial impact of
the relationship between cost, volume, and profit.
· Break-even analysis determines whether or not total sales are
equal to the total costs. A company reaches the break-even point
when it is making neither a profit nor a loss.
· Variable costing is the unit cost of a product obtained by
including both direct or variable costs and excluding fixed
costs.
· Absorption costing is the unit cost of a product obtained by
including the direct as well as indirect or fixed costs.
In this module, you will become familiar with overall cost
concepts, and analyze cost behavior within various costing
systems. Methods for using costs in planning and budgeting
decisions will also be covered. Costs are used to evaluate past
performance and make crucial decisions that may impact the
entity indefinitely across all departments and levels.
Application of Concepts
You will then have the opportunity to apply accounting
concepts to management situations in your two course projects,
the Required Assignments (RAs), due inModules 3 and 5.
The biggest challenge to analyzing and computing costs is the
allocation of overhead. Imagine that you are building a new
home. When meeting with the contractor, he or she will give
you an approximate price to build the home. That price is based
on the builder’s cost to build the house as well as the profit
expected for the contractor. Based on the home plans and
supplier relationships, the builder can easily calculate the cost
of materials and labor of subcontractors who would carry out
the day-to-day construction.
It gets complicated when it comes to the other costs the builder
incurs. These costs, known as overheads, need to be recovered,
8. but they are not directly tied to the cost of your home. Examples
of such costs would be advertising, gasoline for trucks used by
supervisors to drive between construction sites, salaries for
secretaries and support staff in the office, and any other cost of
the sort. How can a builder take these costs and allocate them
fairly across all projects? In this module, you will explore job-
order costing systems—one method commonly used to allocate
overheads and estimate costs of a project provided to a
customer.
Cost management analysts work very closely with other
management colleagues to put together cost management
systems that coincide with the overall decision-making
strategies of the organization. One important component of the
cost management system is the product costing system that
accumulates all production costs and assigns them to the
appropriate products. The most commonly used product costing
systems are job-order costing and process costing.
When job-order costing is implemented, each separate job is
treated as a separate unit of output and costs are assigned as the
resources are used up. A job is defined as a single product or
small group of similar products. Job-order costing is useful for
identifying which types of jobs will be most profitable for a
company, predicting future costs, managing costs, contract
renegotiations, and financial reporting. When process costing is
used, all units produced during the time period are considered
output. The costs are not separated and broken down for each
individual unit as they are with job-order costing.
Cost behavior is the volatility of product costs due to changes
in production levels or sales volumes. Product costs include
material costs, labor costs, and other overheads. Any change in
the production levels and sales volumes can affect profitability.
Here are some examples of how costs change:
· Variable costs change in proportion to total volume produced
but remain the same on a per-unit basis.
9. · Fixed costs differ from variable costs in that they remain
constant with change in volume produced but vary on a per-unit
basis.
· Mixed costs are a combination of fixed and variable costs.
· Step costs vary over a wide range of activity levels but remain
constant over a narrow range.
In addition to these types of costs, here are some terms you will
also learn:
· Contribution margin is the difference between the total sales
and the total variable costs of an organization.
· Variable-costing statement presents the net income obtained
by subtracting fixed expenses from the difference between total
sales and total variable costs.
· Cost-volume-profit analysis determines the financial impact of
the relationship between cost, volume, and profit.
· Break-even analysis determines whether or not total sales are
equal to the total costs. A company reaches the break-even point
when it is making neither a profit nor a loss.
· Variable costing is the unit cost of a product obtained by
including both direct or variable costs and excluding fixed
costs.
· Absorption costing is the unit cost of a product obtained by
including the direct as well as indirect or fixed costs.
In this module, you will become familiar with overall cost
concepts, and analyze cost behavior within various costing
systems. Methods for using costs in planning and budgeting
decisions will also be covered. Costs are used to evaluate past
performance and make crucial decisions that may impact the
entity indefinitely across all departments and levels.
Application of Concepts
You will then have the opportunity to apply accounting
concepts to management situations in your two course projects,
the Required Assignments (RAs), due inModules 3 and 5.
Operation costing is a cross between job-order costing and
process costing. This process is used when an organization
10. produces great amounts of similar products that require the use
of different materials, for example, pants made from many
different materials such as wool, cotton, polyester, and spandex.
In job-order costing, multiple files are used to track the costs of
materials used for the job such as data sources for product
costing, costing estimation for jobs in the future, and internal
and external financial reporting.
When using costing methods, assigning cost can be very
difficult, and the best way to do this is to use predetermined
overhead rates to assign manufacturing overhead costs. This
rate is usually determined at the beginning of the year and stays
constant for the whole year. Predetermined overhead rates
remove any fluctuations in the application of manufacturing
overhead rates to various jobs. The final product costs are said
to be normal costs because of this. The manufacturing overhead
account is important and is used very often. It records both the
actual overhead and the overhead that is applied to the work in
process inventory. When normal costing is used, the actual
overhead is almost never equal to the applied manufacturing
overhead. This difference is known as over variance. This
variance can either be overapplied or underapplied.
Underapplied variances occur when the actual cost is greater
than what was actually applied. Overapplied variances occur
when the actual cost is less than what was actually applied.
Standard costing and actual costing are the alternative methods
to normal costing. In actual costing, the actual costs of both
direct and indirect resources are applied to the products. In
standard costing, costs are assigned to products after applying
predetermined or standard rates for both direct and indirect
costs.
It is difficult to manage jobs, but it is important as this is how
cost is minimized, and quality is maximized. Having this
philosophy helps to maintain a high level of customer
satisfaction. One of the common ways of managing jobs is by
12. 4) Communicate the vision and strategy for change by making
the members of the change team role
models and by making all employees aware of the company’s
new vision.
5) Encourage innovation and remove obstacles by always being
open to change and not focusing on
the past.
6) Ensure short-term achievements are frequent and obvious.
7) Use successes to create opportunities for improvement in the
entire organization.
8) Reinforce a culture of change by promoting more
improvement, better leadership, and more
effective management.
Reference
Kotter, J. P. (1996) Leading change. New York, NY: Harvard
Business Review Press.
The first element of managerial accounting is cost behavior
within an organization. Management analysis of cost behavior
influences cost classifications and decisions made in order to
control costs. This module covers two main concepts—cost
management and how it is used in strategic decision making. In
any strategic decision making, ethics always should be top
priority. Not only is making ethical decisions the correct thing
to do, but it is also key to running an efficient, long-term
business.
For example, assume you are in charge of the pharmacy in a
13. hospital. In your role as manager, you need to help control the
cost of medications administered to patients. Many of these
drugs are very expensive and are never fully reimbursed by the
patients’ insurance companies. One day, an individual offers to
sell you the required medications for exactly one-half of the
cost currently paid. This individual represents a company that
has had significant issues with timely delivery in the past and
that has been subject to multiple lawsuits by other hospitals.
The company’s failure to deliver the drugs on time had caused
significant patient-care issues within those hospitals. Strictly
from a cost standpoint, you might think it would be sensible to
switch to this vendor. However, ethically, is it appropriate to
make the switch that may save cost but also risk the well-being
of patients?
Strategic decisions are the most important decisions a company
can make because they dictate future decisions and level of
organization performance. Some common examples of strategic
decisions include:
· Finding or seeking out new business opportunities that will
allow the organization to grow and expand
· Responding to any threats to competitive advantage to protect
the company’s place in the industry
· Creating goals related to the performance of the organization
and finding ways to reach these goals in a reasonable time
frame
There are many other strategic decisions not listed that
companies make on a daily basis.
Cost management is made up of three parts:
· A philosophy to increase customer value while keeping costs
at a minimum
· An attitude that accepts all decisions made by management
will incur a cost
· Techniques to allow an organization to increase customer
value while at the same time reducing costs
In order to do these three things, managers must always collect
and interpret information to find alternate ways of doing
14. business. One common way of doing this is through a cost-
benefit analysis. A cost-benefit analysis is used to assess the
believed benefits and costs of a business move. If the benefits
outweigh the costs, the decision will be considered beneficial. If
the costs outweigh the benefits, the decision will not be
considered worthwhile.
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