Cost Accounting - An Introduction
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An introduction to costing, standard costing and production variances
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Cost Accounting - An Introduction
- 1. Costing and Cost Accounting An introduction
- 2. Why Costing? Cost decisions and the model/system will influence the achieved results – which will have dire consequences Anyone can get a Sale at a suicide price! So you have to know what that price is!
- 3. What is Cost? Cost accounting is full of: estimates, guesses, standards and depends upon amounts that are not the actual cost Many say that Cost accounting makes a guess and then accounts for the difference from actual as a variance
- 4. Cost – an ideal world! If cost remains static – without inventory Buy 10 @ $200 $ 2,000 Sell 7 @ cost = $200 1,400 Ending quantity 600
- 5. Cost – an ideal world! If cost remains static – with inventory Start 3 @$200 $ 600 Buy 10 @ $200 2,000 Available for sale 2,600 Sell 5 @ cost = $200 1,000 Ending quantity 1,600
- 6. Cost – Rising price If cost remains static – with inventory (FIFO) Start 3 @ $200 $ 600 Buy 10 @ $220 2,200 Available for sale 2,800 Sell 3 @ cost ($200) 600 Sell 2 @ cost ($220) 440 1,040 Ending quantity (8) @ $220 1,760
- 7. Cost – Rising price If cost remains static – with inventory (LIFO) Start 3 @$200 $ 600 Buy 10 @ $220 2,200 Available for sale 2,800 Sell 5 @ cost ($220) 1,100 Ending quantity (3) @ 200 600 (5) @ 220 1,100 1,700
- 8. Cost – Standard If cost remains static – with inventory (Standard Cost) Start 3 @$200 $ 600 Buy 10 @ $200 (Variance=$20 each) 2,000 Available for sale 2,600 Sell 5 @ cost ($200) 1,000 Ending quantity (8) @ 200 1,600 If price went up to $220 >> Price variance = $200 (10 x $20)
- 10. Cost Accounting System Purpose of the Variance is to highlight the difference: Planned amount Actual amount We need to know if our quote was too low (because cost price is higher than we used) Or if the quantity was planned wrongly (more was needed = (underestimated) or alternately was over-estimated)
- 11. Cost Accounting System When using Standard Costs we are assuming the norm (Standard) - everything should go according to plan! Good luck with that!
- 12. Cost Accounting - decisions Costing Type - Traditional historical - Normalized historical - Standard Inventory Costing Method - FIFO - LIFO - Average - Specific Costing Method - Job - Process - Activity Interval - Period - Perpetual
- 13. Traditional Cost Accounting Account Dr Cr Inventory Actual Raw Materials Actual Labor Allocation of Overhead costs
- 14. Cost Accounting System A Variance account contains the differences from standard This is information that is basis for decisions It MUST be analyzed to get to the information EG: Materials Variance can be: 1. Price variance 2. Quantity variance
- 15. Normal Cost Accounting Account Dr Cr Inventory Actual Raw Materials Actual Labor Allocation of Overhead costs Account Dr Cr Variance
- 16. J J J J J J J J J J J J J J J J J Standard = Planned = Budgeted Standard (Planned) Cost Price variance Quantity variance Materials standard cost and variances $ Qty
- 17. J J J J J J J J J J J J J J J J J Standard = Planned = Budgeted Standard (Planned) Cost Rate variance Efficiency variance Labor standard cost and variances Qty $
- 18. J J J J J J J J J J J J J J J J J Standard = Planned = Budgeted Standard (Planned) Cost Rate variance Utilization variance Overhead allocated - standard cost and variances Qty $
- 19. J J J J J J J J J J J J J J J J J Standard = Planned = Budgeted All standard cost and variances Standard cost Materials Labor Overhead
- 20. J J J J J J J J J J J J J J J J J Standard = Planned = Budgeted All standard cost and variances Variances Materials Labor Overhead
- 21. Standard Costing Quotation >> Job/Batch Production Order Number of processes (Job/Px) Each process has: a) RM input b) Labor budget - Operation (Direct) - Operation (Indirect) - Admin/Manuf c) O/H allocated - Manuf - Admin
- 22. Standard Cost Accounting Account Dr Cr Inventory Actual Raw Materials Actual Labor Actual Overhead costs Account Dr Cr Variance
- 23. Standard Cost Accounting Account Dr Cr Inventory Actual Raw Materials Actual Labor Actual Overhead costs Account Dr Cr O/H Variance Account Dr Cr Account Dr Cr R/M Variance Labor Variance
- 25. ABC – Activity Based Costing The ABC approach allocates a cost of a facility according to the capacity – which is the divisor in the equation. Thus the idle capacity is not charged to the product but remains as an idle capacity variance. EG: If the plant is operating at 60% planned capacity – is it ‘fair’ to allocate 100% of the cost? Answer is NO – the spare (unutilized) capacity is an idle capacity (or utilization) variance – management need to know this and take corrective action – not try to pass it on to the customer.
- 26. Standard Costing Note: • Built-in continuous management • Review at completion of Job • Weekly review of all WIP • Monthly recon of RM, WIP and FG
- 27. Kaizen Costing Std Costing Kaizen Costing Rates set annually Target Rates set monthly Rates reviewed Target Rates reviewed
- 28. Standard = Planned = Budgeted Basically standard costing uses the planned cost when accounting for its manufacturing costs. All deviations from these plans are accounted for as Variances. Variances occur for reasons – which are analyzed (determined) so that we know the reason for the costs not going according to planned (standard) costs
- 29. Is your life now changed? The End
- 30. IS your life now changeD? The End 30 © 2020 CliffB, Cliff All rights reserved. The information herein is for informational purposes only and represents the current view of Cliff as of the date of this presentation. Because CliffB must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Cliff, and CliffB cannot guarantee the accuracy of any information provided after the date of this presentation. Cliff and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries. CLIFFB MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION. CliffB
Editor's Notes
- Before we start there is a saying - “anyone can get sales at suicide prices” Ultimately it is what matters to a customer. Heard from the cockpit on the launch pad – “You realize his craft was built by the lower priced contractor?” Costing starts at the concept stage – even before the design stage but design is very important to the costs of the final product The goal is information. Data may be fairly easy to collect – but collation, summary and interpretation is often difficult but critical It is NO USE AT ALL if the end product is outside the customer’s budget. So working with the customer is of paramount importance. The starting parameters form boundaries that need to be adhered to. During our discussions you will hear the word ‘allocated’ and feel that it is easy to manipulate – the answer is that ‘it depends’ Customer satisfaction is attainable only if the customer is reasonable and knowing when to say NO or withdraw is crucial to our own success The crux (bottom line – no pun intended) is that the cost decisions and model/system will influence the results – which will have dire/important consequences for us all
- Without knowledge of costs, you are making decisions blind! While a price is set by influences of the market, it is important to have some idea of what that sale will cost. In fact, my personal opinion is that a direct cost can be defined as a charge that does not take place unless the sale takes place. There are many other costs and expenses that a company has to have a basis of making decisions and measuring profit. It takes true understanding to be able to make the more difficult of the required decisions about the minimum price that you could charge especially when price depends on specific negotiations with a customer. Research, design, development and operations production costs are information that is crucial when seeking to understand what is happening in the real world. Unfortunately, misinformation is both rife and damaging – it results in wrong decisions that can influence even the continued existence of a company
- In a simple situation costs are easily identified and applied. As soon as there is any complexity, costs are hard to calculate, are easily wrong, misapplied and result in information that is misleading Costs are usually the result of a policy decision – for example the allocation of a overhead cost is an attempt for a specific sale to bear the burden of its share of that overhead. Perhaps it could be argued that if the manufacture of that job does not cause the overhead to rise (EG Rent) then the marginal cost is zero. Therefore the minimum burden the project can bear is zero. BUT should it bear part of the rent? Of course the bearing of a fair share of the costs and expenses, allocated on a reasonable basis and consistently applied is the grail situation. However, in individual cases a sale does not even have to recognize costs that are not directly applicable – special circumstance are always applicable. While exceptions can be made, a company cannot survive if it consistently does not cover its costs and make a contribution to overheads and profit. The situation where overheads are covered by the planned contribution is called the Breakeven point or volume. In the overall picture this is a zero profit volume – it has to be attained or there is no profit
- Robert Kaplan is regarded as the founder of the theoretical principles of activity based costing within the cost-management knowledge area. In the 1970s the activity based costing method was introduced in the manufacturing industry to solve problems in traditional cost calculations. Activity-based costing (ABC) aims to provide a more accurate method of product/service costing, hopefully leading to more accurate pricing decisions. ... ABC enables ‘better’ ways of allocating and eliminating overheads and improved product and customer profitability analysis. There are five steps as follows: 1. Identify costly activities required to complete products. 2. Assign overhead costs to the activities identified in step 1. 3. Identify the cost driver for each activity. 4. Calculate an overhead rate for each activity – based on capacity not production 5. Allocate overhead costs to products. Activity-based costing attempts to overcome the perceived deficiencies in traditional costing methods by more closely aligning activities with products. This requires abandoning the traditional division between product and period costs, instead seeking to find a more direct linkage between activities, costs, and products. This means that products will be charged with both the costs of manufacturing and nonmanufacturing activities. But it also means that some manufacturing costs will not be attached to products. This is quite a departure from traditional thought. With ABC a product is only charged with the cost of capacity utilized at a rate calculated ito capacity - Idle capacity is isolated and not charged to a product or service. Under traditional approaches, idle capacity is incorporated into the overhead allocation rates, thereby potentially distorting the cost of the specific output. This may limit the ability of managers to truly understand and identify the best business decisions about product pricing and targeted production levels.
- Product profitability is portrayed differently under alternative costing methods. Traditional costing >> applied overhead based on direct labor, is a small portion of the environment. The point is that skill is required to interpret any costing information and it is all a matter of opinion at the end of the day