Costing f (tai lieu tham khao ve chi phi)

Data Collected By: Hamed Ali Mohamed
Costing Fundamentals
‫التكاليف‬ ‫ادارة‬
–
‫الثاني‬ ‫الجزء‬

Process-Costing
Systems
7/23/2022 Hamed Ali
@Hamed.Ali.Mohamed2@gmail.com 2
Part One

Process costing
Characteristics
Identical units
Continuous flow production
Never “complete”
Move from process (or department) to process
Costs are accumulated by process for a time
period
Allocated to “equivalent units” of output
during the period
7/23/2022 Hamed Ali
@Hamed.Ali.Mohamed2@gmail.com 1-3

Equivalent units
Amount of finished units that could have
been completed, given the materials or
effort involved
Three units started into production
One is completed
One is ¾ completed
One is ¼ completed
Two equivalent units are produced (1 + ¾ +
¼)
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Equivalent units
May have different number of equivalent units
for materials, labor and overhead
Using the previous example, assume
all materials are added at the beginning
1 + 1 + 1 = 3 equivalent units for materials
conversion costs are added throughout the
process
1 + ¾ + ¼ = 2 equivalent units for conversion
costs
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Equivalent units
 Try this one
At the beginning of the period
5 units, each ½ complete, are in process
During the period
27 more units are put into production
At the end of the period
6 units, each ¾ complete, are still in process
How many equivalent units were produced?
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The process
Step 1 – Summarize flow of physical units
How many were in beginning inventory?
How many were started?
How many are still in ending inventory?
Step 2 – Calculate equivalent units
Beginning inventory was completed
Of the units started
Some were completed
Some are in ending inventory
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The process
Step 3 – Summarize costs to be accounted
for
Cost in beginning inventory
Cost added during the period
Step 4 – Calculate cost per equivalent unit
Step 5 – Assign costs to completed units
and ending inventory
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Production cost report
Part 1 – Units
Summary of physical and equivalent units
Where did they come from?
Where did they go?
Part 2 – Costs
Summary of costs
Calculation of cost per equivalent units
Assignment of costs
Transferred out
Work in process
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(Step 1)
Flow of units
Physical
units
Direct
materials
Conversion
costs
Units to be accounted for:
Beginning work in process inventory
Units started this period
Total units to be accounted for -
Units accounted for: (Step 3)
Completed and transferred out
In ending work in process inventory
Total units accounted for - - -
Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory
Cost added in current period
Total costs to be accounted for -
$ -
$ -
$
Cost per equivalent unit (Step 4)
Costs accounted for: (Step 5)
Cost assigned to units transferred out
Cost in ending work in process inventory
Total costs accounted for -
$
Equivalent units
(Step 2)
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Example 1
No beginning inventory
18,000 units started
2,000 in ending work in process inventory
40% complete as to materials
30% complete as to conversion cost
Current period costs
Materials - $45,360
Conversion costs - $68,060
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(Step 1)
Flow of units
Physical
units
Direct
materials
Conversion
costs
Beginning work in process inventory -
Units started this period 18,000
Total units to be accounted for 18,000
Completed and transferred out 16,000 16,000 16,000
In ending work in process inventory 2,000 800 600
Total units accounted for 18,000 16,800 16,600
Flow of costs
Cost in beginning work in process inventory -
$ -
$ -
$
Cost added in current period 113,420 45,360 68,060
Total costs to be accounted for 113,420
$ 45,360
$ 68,060
$
Cost per equivalent unit (Step 4) 2.70
$ 4.10
$
Cost assigned to units transferred out 108,800
$ 43,200
$ 65,600
$
Cost in ending work in process inventory 4,620 2,160 2,460
Total costs accounted for 113,420
$ 45,360
$ 68,060
$
Equivalent units
(Step 2)
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Example 2
 Beginning and ending inventories
4,000 units in beginning work in process
50% complete as to conversion costs
3,000 units in ending work in process
Costs
Materials: Beg. WIP - $7,040, current - $51,660
Conversion: Beg. WIP - $1,500, current - $20,400
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(Step 1)
Flow of units
Physical
units
Direct
materials
Conversion
costs
Beginning work in process inventory 4,000
In ending work in process inventory 3,000 1,800 1,500
Flow of costs
Cost in beginning work in process inventory 8,320
$ 6,720
$ 1,600
$
$ 58,380
$ 22,000
$
$ 0.80
$
$ 54,600
$ 20,800
$
$ 58,380
$ 22,000
$
Equivalent units
(Step 2)
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Example 3
 Costs transferred from prior department
Units and costs transferred out of previous department
(example 2) to department 2
Cumulative costs from prior department are treated
as a separate cost category in current department
Units are 100% complete as to prior department
Transferred-in units are the “units started” in the
current department
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Example 3
In department 2
Costs
Materials: Beg. WIP - $420, current - $14,940
Conversion: Beg. WIP - $840, current - $34,720
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(Step 1)
Flow of units
Physical
units
Prior
department
Direct
materials
Conversion
costs
Completed and transferred out 25,000 25,000 25,000 25,000
In ending work in process inventory 2,000 2,000 600 400
Total units accounted for 27,000 27,000 25,600 25,400
Flow of costs
$ 2,630
$ 420
$ 840
$
Cost added in current period 125,060
$ 75,400 14,940 34,720
$ 78,030
$ 15,360
$ 35,560
$
$ 0.60
$ 1.40
$
$ 72,250
$ 15,000
$ 35,000
$
Cost in ending work in process inventory 6,700 5,780 360 560
$ 78,030
$ 15,360
$ 35,560
$
(Step 2)
Equivalent units
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First-in, first-out method
Previous examples used weighted average
method
Costs in beginning inventory were combined
with current period costs
First-in, first-out method separates the two
Assumes units in beginning inventory were
finished first
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Equivalent unit calculation includes
Work done to complete the units in beginning
inventory
Work done on new units started
100% for those started and completed
<100% for those started but not completed
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 Beginning inventory costs are only assigned to
units in beginning inventory
Some current period costs are added to complete them
 Units started are only assigned current period
costs
 Costs accounted for includes
Beginning inventory cost transferred out
Current costs added to complete beginning inventory
Current costs of units started and completed
Current costs in ending inventory
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 Example 2 using FIFO method
Costs
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Example 2 - FIFO
(Step 1)
Flow of units
Physical
units
Direct
materials
Conversion
costs
Beginning inventory completed 4,000 800 2,000
Started and transferred out 22,000 22,000 22,000
Total units transferred out 26,000 22,800 24,000
Equivalent units
(Step 2)
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Example 2 - FIFO
Flow of costs
$ 7,040
$ 1,500
$
$ 58,700
$ 21,900
$
Cost per equivalent unit (Step 4) (Current period
costs / equivalent units) 2.1000
$ 0.8000
$
Cost from beginning inventory transferred out 8,540
$ 7,040
$ 1,500
$
Cost to complete beginning inventory 3,280 1,680 1,600
Total cost for beginning inventory 11,820
$ 8,720
$ 3,100
$
Cost assigned to units started and completed 63,800 46,200 17,600
Total cost of units transferred out 75,620
$ 54,920
$ 20,700
$
$ 58,700
$ 21,900
$
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Accounting for spoilage
Spoiled units have incurred some cost but
are not transferred to the next stage
Treated as a separate line item for
Units accounted for
Equivalent units
Costs accounted for
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Accounting for spoilage
 Example 2 with spoilage
80% complete as to materials, 50% as to conversion costs
800 units spoiled
Costs
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(Step 1)
Flow of units
Physical
units
Direct
materials
Conversion
costs
Spoiled units 800 400 240
Flow of costs
$ 7,040
$ 1,500
$
$ 58,700
$ 21,900
$
$ 0.8010
$
$ 55,058
$ 20,827
$
Cost assigned to spoiled units 1,039
$ 847
$ 192
$
Cost in ending work in process inventory 3,676 2,795 881
$ 58,700
$ 21,900
$
Equivalent units
(Step 2)
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Hamed Ali
@Hamed.Ali.Mohamed2@gmail.com
1-26

Journal entries
Same as for job-order costing
Dollar value of units transferred out
represents the cost moving from WIP to
the next stage in the process
Another WIP account (department)
Finished goods inventory
Dollar value of spoiled goods is debited to
an expense account
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Operation costing
Hybrid of job-order and process-costing
Products goes through a combination of
common processes and individual
processes
No special accounting required
Units may be transferred out of a process to
become a separate job or vice-versa
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Chapter 3: Process Costing
Chapter Themes:
 Inventories are still very
important.
 Think about how costs
can be attached to large
numbers of homogeneous
products.
 Compare and contrast
Job-Order and Process
Cost systems.
Learning Objectives:
1. Describe how products flow
through departments and how
costs flow through accounts.
2. Discuss the concept of an
equivalent unit.
3. Calculate the cost per equivalent
unit.
4. Calculate the cost of goods
completed and the ending Work in
Process balance in a processing
department.
5. Describe a production cost report.
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Product Cost Flows
Just as a product passes
through several departments
prior to completion, costs flow
through several accounts
before the product is recorded
in finished goods.
Related Learning Objectives:
equivalent unit.
unit.
department.
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Product Flows Through Departments
Products typically flow
through two or more
departments. Materials, labor
and overhead are added in
each department. Material is
often added at the beginning
of the process. Labor and
Overhead are often grouped
together and added uniformly
throughout the process.
Recall that Labor and
Overhead are referred to as
conversion costs.
equivalent unit.
unit.
department.
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Cost Flows Through Accounts
In addition to materials, labor
and overhead, a processing
department may have a cost
called transferred-in cost. This
cost is incurred in one
department and then
transferred to the next. And it
is treated like any other
manufacturing cost (material,
labor, overhead) with respect
to that department.
equivalent unit.
unit.
department.
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Calculating Unit Cost
Process Costing is essentially
a system of averaging.
Specifically, manufacturing
costs incurred during a
specific time period are
divided by a number called
equivalent units to calculate
an average unit cost.
equivalent unit.
unit.
department.
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Equivalent Units
In calculating unit cost, it is
necessary to compute
equivalent units. When
partially completed units are
converted to whole units they
are referred to as equivalent
units. A good analogy is the
concept of a full-time
equivalent (FTE) employee. 6
half-time (20 hours per week)
employees make 3 full-time
equivalents.
equivalent unit.
unit.
department.
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Cost Per Equivalent Unit
The average unit cost in a
process costing system is
referred to as a cost per
equivalent unit. The formula is
as follows: Cost per
equivalent unit = (Cost in
beginning WIP + Cost incurred
in current period)/(Units
completed + Equivalent units
in ending WIP).
equivalent unit.
3. Calculate the cost per
equivalent unit.
department.
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Calculating and Applying Cost per
Equivalent Unit: Mixing Department
Example
See if you can calculate cost
per equivalent unit based on
the following information in
the Mixing Department.
Unit Information:
Beginning WIP 10,000 gallons,
80% complete with respect to
labor and overhead. 70,000
gallons started and 60,000
completed. Ending WIP 20,000
gallons 50% complete.
equivalent unit.
unit.
completed and the ending Work
in Process balance in a
processing department.
More
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Example
Cost Information:
Beginning WIP $18,000
materials, $7,800 labor and
$23,400 overhead. During the
month $142,000 of material
cost and $62,200 of labor cost
was added. Overhead is
applied at a predetermined
rate of $3 per dollar of labor or
$186,600. See the next slide
for the solution.
equivalent unit.
unit.
More
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Example (solution)
$6 per unit. Related Learning Objectives:
equivalent unit.
unit.
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Production Cost Report
A Production Cost Report is
an end-of-the-month report for
a process costing system that
provides a reconciliation of
units and a reconciliation of
costs as well as details of the
cost per equivalent unit
calculations.
equivalent unit.
unit.
department.
5. Describe a production cost
report.
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Reconciliation of Units
Assuming no units are lost
due to shrinkage, the number
of units in beginning WIP plus
the number of units started
should be equal to the number
of units completed plus the
number of units left in ending
WIP. [Inventory is very
important.]
equivalent unit.
unit.
department.
report.
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Reconciliation of Costs
For each period, the total cost
that must be accounted for is
the sum of the costs in
beginning WIP plus costs
incurred during the period.
This sum must be equal to the
costs transferred out plus
whatever cost is left over in
ending WIP.
equivalent unit.
unit.
department.
report.
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Basic Steps in Process Costing: A
Summary
1. Account for the number
of equivalent units.
equivalent unit for
material, labor and
overhead.
3. Assign cost to items
completed and items in
ending WIP.
4. Account for the amount
of product cost.
equivalent unit.
equivalent unit.
report.
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Managerial Accounting
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Part two

Difference Between Job-Order
and Process Costing Systems
Job-Order Costing Systems assign costs to
heterogeneous jobs.
Process Costing Systems spread total
manufacturing costs over total, homogenous, units
produced.
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Difference Between Job-Order
and Process Costing Systems
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Product and Cost Flows
1. Product Flows Through Departments
2. Cost Flows Through Accounts
3. Conversion Costs
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Product Flows Through
Departments
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Cost Flows Through Accounts
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Calculating Unit Cost
To compute unit costs it is first necessary to compute
Equivalent Units.
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How Equivalent Units are
Calculated
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Cost Per Equivalent Unit
Average unit cost in a Process Costing System is
calculated as follows:
Cost Per Equivalent Unit =
Cost in BWIP + Costs incurred currently
Units completed + Equivalent units in EWIP
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Calculating and Applying Cost Per
Equivalent Unit: Mixing Department Example
Units:
BWIP:10,000 gallons, 80% complete labor/overhead
Started:70,000 gallons, 60,000 completed
EWIP:20,000 gallons, 50% complete.
Costs:
BWIP:$18,000 material, $7,800 labor, $23,400 overhead
Added:$142,000 of material, $62,200 labor
Overhead: applied at a predetermined rate of $3 per dollar of
labor or $186,600.
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Calculating and Applying Cost
Per Equivalent Unit: Mixing
Department Example
Calculate: Cost per equivalent unit.
Answer: $6
Solution:
Material: $160,000/80,000=$2
Labor: $ 70,000/70,000=$1
Overhead: $210,000/70,000=$2
Total Costs/Unit: =$6
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Example
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Production Cost Report
Production Cost Report Contains:
1. Reconciliation of units.
2. Reconciliation of costs.
3. Details of the cost per equivalent unit calculations.
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Reconciliation of Units
BWIP + the number of units started = the
number of units completed EWIP.
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Reconciliation of Costs
BWIP + costs added = costs transferred
out + EWIP.
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Basic Steps in Process Costing: A
Summary
1. Account for the number of physical units.
2. Calculate the cost per equivalent unit for
material, labor and overhead.
3. Assign cost to items completed and items in
EWIP.
4. Account for the amount of product cost.
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Dealing With Transferred-In Costs
1. Process Costing Systems generally use
several processes; not just one.
2. Transferred-In costs are treated just like other
product costs (l.e. material, labor and
overhead).
3. Ultimately all costs, including those transferred
in, are transferred to Finished Goods.
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Process Costing and Incremental
Analysis
1. Decisions are based on costing information
obtained through Process Costing Systems.
2. Incremental Analysis is frequently used to
make these decisions.
3. Be wary and recall that Process Costing
Systems capture both fixed and variable costs.
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Differential Analysis
 Leasing or selling equipment.
 Discontinuing an unprofitable segment.
 Manufacturing or purchasing a needed part.
 Replacing usable fixed assets.
 Processing further or selling an intermediate
product.
 Accepting additional business at a special price.
Differential analysis is used for analyzing:
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Differential Analysis
Decisions
Differential
Analysis
Alternative A
or
Alternative B
Differential revenue
– Differential costs
Differential income or loss
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Discontinue
a Segment
or Product
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Sales $100,000 $900,000 $1,000,000
Cost of goods sold:
Variable costs $ 60,000 $420,000 $ 480,000
Fixed costs 20,000 200,000 220,000
Total cost of goods sold $ 80,000 $620,000 $ 700,000
Gross profit $ 20,000 $280,000 $ 300,000
Operating expenses:
Variable expenses $ 25,000 $155,000 $ 180,000
Fixed expenses 6,000 45,000 51,000
Total operating expenses $ 31,000 $200,000 $ 231,000
Income (loss) from operations $ (11,000) $ 80,000 $ 69,000
Battle Creek Cereal Co.
Condensed Income Statement
For the Year Ended August 31, 2006
Differential items
Variable cost $ 60,000
Sales $100,000
Variable expenses $ 25,000
Bran
Flakes
Other
Cereals Total
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Battle Creek Cereal Co.
Condensed Income Statement
For the Year Ended August 31, 2006
Differential items
Sales $100,000 $900,000 $1,000,000
Cost of goods sold:
Variable costs $ 60,000 $420,000 $ 480,000
Fixed costs 20,000 200,000 220,000
Total cost of goods sold $ 80,000 $620,000 $ 700,000
Gross profit $ 20,000 $280,000 $ 300,000
Operating expenses:
Variable expenses $ 25,000 $155,000 $ 180,000
Fixed expenses 6,000 45,000 51,000
Total operating expenses $ 31,000 $200,000 $ 231,000
Income (loss) from operations $ (11,000) $ 80,000 $ 69,000
Variable cost $ 60,000
Sales $100,000
Variable expenses $ 25,000
Bran
Flakes
Other
Cereals Total
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Hamed Ali
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Proposal to Discontinue Bran Flakes
September 29, 2006
Differential revenue from annual sales
of Bran Flakes:
Revenue from sales $100,000
Differential cost of annual sales of Brian Flakes:
Variable cost goods sold $60,000
Variable operating expenses 25,000 85,000
Annual differential income from sales of
Bran Flakes $15,000
Continue!
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or
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Currently, a firm manufactures the dashboards that it
uses in making automobiles. The cost of manufacturing
this part is summarized below. An outside supplier has
offered to provide the part for $240. Should the car
manufacturer accept the offer?
Direct materials $ 80
Direct labor 80
Variable factory overhead 52
Fixed factory overhead 68
Total cost per unit $280
INITIAL REACTION—DON’T MAKE
INTERNALLY
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Proposal to Manufacture Automobile Part
February 15, 2006
Purchase price of part $240.00
Differential cost to manufacture:
Direct materials $80.00
Direct labor 80.00
Variable factory overhead 52.00 212.00
Cost savings from manufacturing part $ 28.00
The fixed factory overhead is excluded
because it is not relevant—so continue
making the part.
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Hamed Ali
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Replace or Keep
Equipment
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Assume that a business is considering the disposal of
several identical machines having a total book value of
$100,000 and an estimated remaining life of five years.
The old machines can be sold for $25,000. They can be
replaced by a single high-speed machine at a cost
$250,000. The new machine has a n estimated useful life
of five years and no residual value. Analyses indicate an
estimated annual reduction in variable manufacturing costs
from $225,000 with the old machine to $150,000 with the
new machine. No other changes in the manufacturing
costs or the operating expenses are expected. Should the
new machine be purchased?

Annual variable costs—present equipment $225,000
Annual variable costs—new equipment 150,000
Annual differential decrease in cost $ 75,000
Number of years applicable x 5
Total differential decrease in cost $375,000
Proceeds from sale of present equipment 5,000 $400,000
Cost of new equipment 250,000
Net differential decrease in cost, 5-years $150,000
Annual net differential—new equipment $ 30,000
Proposal to Replace Equipment
November 28, 2006
Buy the new equipment!
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Process or Sell
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Differential revenue from further processing
per batch:
Revenue from sale of gasoline [(4,000 gallons –
800 gallons evaporation) x $1.25] $4,000
Revenue from sale of kerosene (4,000 gallons
x $0.80) 3,200
Differential revenue $800
Differential cost per batch:
Additional cost of producing gasoline 650
Differential income from further processing
gasoline per batch $150
Proposal to Process Kerosene Further
October 1, 2006
Process further!
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Accept
Business at a
Special Price
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The monthly capacity of a sporting goods
business is 12,500 basketballs. Current sales and
production are averaging 10,000 basketballs per
month. The current manufacturing cost is $20
(variable, $12.50; fixed, $7.50). The domestic
selling price is $30.
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The manufacturer receives an offer from an
exporter for 5,000 basketballs at $18 each.
Production can be spread over three months, so
these basketballs can be manufactured using
normal capacity. Domestic sales would not be
affected.
Should the offer be accepted or rejected?
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Hamed Ali
1-79

Differential revenue from accepting offer:
Revenue from sale of 5,000 additional units at $18 $90,000
Differential cost of accepting offer:
Variable cost of 5,000 additional units at $12.50 62,500
Differential income from accepting offer $27,500
Proposal to Sell Basketballs to Exporter
March 10, 2006
Accept the offer!
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Setting Normal
Product Selling Prices
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Part Three

Setting Normal Product Selling Prices
1. Demand-based methods
2. Competition-based methods
Cost-Plus Methods
Market Methods
1. Total cost concept
2. Product cost concept
3. Variable cost concept
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Hamed Ali

Market Methods
Demand-based methods set
the price according to the
demand for the product.
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Market Methods
Competition-based methods set
the price according to the price
offered by the competitors.
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Using the Total cost concept,
all cost of manufacturing a
product...
Manufacturing
Cost
Total Cost Concept
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…plus the selling and
administrative expenses...
Manufacturing
Cost
Selling Expenses
Administrative
Expenses
Total Cost Concept
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…are included in the cost to
which the markup is added.
Manufacturing
Cost
Selling Expenses
Administrative
Expenses
Total cost
Desired Profit
Total Cost Concept
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The company’s
desired profit is
$160,000.
Manufacturing
Cost
Selling Expenses
Administrative
Expenses
Desired Profit
Desired
selling price
Total Cost Concept
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Per Unit Total
Cost Cost
Cost Structure Example (100,000 units)
Variable Costs (per unit):
Direct materials $ 3.00 $ 300,000
Direct labor 10.00 1,000,000
Factory overhead 1.50 150,000
Selling and administrative 1.50 150,000
Total variable costs $16.00 $1,600,000
Fixed Costs:
Factory overhead .50 50,000
Selling and administrative .20 20,000
Total fixed costs . 70 70,000
Total costs $16.70 $1,670,000
Total Cost Concept
7/23/2022 Hamed Ali

Only the desired profit is
covered in the markup.
Markup Percentage:
Desired profit $160,000
Total costs $1,670,000
= 9.6%
=
Total cost per calculator $16.70
Markup ($16.70 x 9.6%) 1.60
Selling price $18.30
Total Cost Concept
7/23/2022
Hamed Ali
1-90

Proof that a sale of 100,000 computers at $18.30
each will generate a desired profit of $160,000.
Sales (100,000 units x $18.30) $1,830,000
Expenses:
Variable (100,000 units x $16.00)$1,600,000
Fixed ($50,000 + $20,000) 70,000 1,670,000
Income from operations $ 160,000
Digital Solutions Inc.
Income Statement
For the Year Ended December 31, 2006
Total Cost Concept
7/23/2022 Hamed Ali

Product Cost Concept
Using the product cost concept only the
manufacturing costs are included in the
amount to which the markup is applied.
7/23/2022 Hamed Ali

Per Unit Total
Cost Cost
Cost Structure Example (100,000 units)
Variable Costs:
Direct materials $ 3.00 $ 300,000
Direct labor 10.00 1,000,000
Factory overhead 1.50 150,000
Selling and administrative 1.50 150,000
Total variable costs $16.00 $1,600,000
Fixed Costs:
Factory overhead .50 50,000
Selling and administrative .20 20,000
Total fixed costs .70 70,000
Total costs $16.70 $1,670,000
Product Cost = $15 per unit
7/23/2022
Hamed
Ali
1-93

Manufacturing
Cost
Product Cost
Markup
Administrative
Expense
+
Selling Expense
+
Desired Profit
7/23/2022 Hamed Ali

Markup
percentage
Desired profit +
Total manufacturing costs
=
Total selling and
administrative expenses
7/23/2022 Hamed Ali

Markup
percentage
= 22%
Markup
percentage
=
$160,000 + $170,000
$1,500,000
DM ($3 x 100,000) $ 300,000
DL ($10 x 100,000) 1,000,000
Factory overhead:
Variable ($1.50 x 100,000) 150,000
Fixed 50,000
Total manufacturing costs $1,500,000
7/23/2022 Hamed Ali

Manufacturing cost per calculator $15.00
Markup ($15 x 22%) 3.30
7/23/2022 Hamed Ali

Variable Cost Concept
The variable cost concept uses total of the
variable manufacturing costs and the variable
selling and administrative expenses as the
amount to apply a markup.
7/23/2022 Hamed Ali

Product Cost
Markup
Variable
Manufacturing
Cost
+
Variable
Administrative
and Selling
Expenses
Total Fixed
Costs +
Desired
Profit
7/23/2022
Hamed Ali
1-99

Markup
percentage
Desired profit +
Total variable costs
=
Total fixed costs
7/23/2022 Hamed Ali

Markup
percentage
=
$160,000 + $50,000 + $20,000
$1,600,000
Markup
percentage
= 14.4%
Direct materials ($3 x 100,000) $ 300,000
Direct labor ($10 x 100,000) 1,000,000
Variable factory overhead
($1.50 x 100,000) 150,000
Variable selling and administrative
expenses ($1.50 x 100,000) 150,000
Total variable costs $1,600,000
7/23/2022
1-101

Variable cost per calculator $16.00
Markup ($16 x 14.4%) 2.30
7/23/2022 Hamed Ali

Target Costing
Using target costing the cost is determined by
subtracting a desired profit from the selling price.
Present Future
Actual
Cost
Target
Cost
Profit
Profit
Present Market Price
Required
cost
reduction
Expected
Market Price
7/23/2022 Hamed Ali

Bottlenecks
7/23/2022 Hamed Ali
Part Four

Sales price $130 $140 $160
Variable cost 40 40 40
Contribution margin $ 90 $100 $120
Bottleneck hours 1 4 8
Small Medium Large
Wrench Wrench Wrench
Product Profitability Under Production Bottlenecks
The number of heat treatment
hours per unit for each product.
7/23/2022 Hamed Ali

Sales price $130 $140 $160
Variable cost 40 40 40
Contribution margin $ 90 $100 $120
Bottleneck hours ÷ 1 ÷ 4 ÷ 8
Bottleneck contribution $ 90 $ 25 $ 15
Small Medium Large
Wrench Wrench Wrench
Largest contribution margin
per bottleneck hour
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Hamed Ali
1-106

How much should the firm charge
for the large wrench in order to
deliver the same contribution as
the small wrench?
7/23/2022 Hamed Ali

Contribution
margin per
bottleneck hour
per small wrench
=
Revised price of
large wrench
Variable cost per
large wrench
–
Bottleneck hours per large wrench
$90 =
Revised price of
large wrench –
8
$40
$720 = Revised price of large wrench – $40
$760 = Revised price of large wrench
7/23/2022 Hamed Ali

Revised price of large wrench per formula
on the previous slide $760
Less: Variable cost per unit of large wrench 40
Contribution margin per unit of large wrench $720
Bottleneck hours per unit of large wrench ÷ 8
Revised contribution margin per bottleneck hour $ 90
7/23/2022 Hamed Ali

Direct
Materials
Direct
Labour
Mfg..
Overhead
Traceable
Costs must be assigned using
an activity base and predetermined
overhead rate
Unit Cost
for Finished
Goods
Mfg.. Process Cost of Process
Mfg.. Process
(Work-in-
Process)
Sequential Processing
or
Parallel Processing
Process Costing Cost Flow
7/23/2022 Hamed Ali

• Homogeneous units pass through a series
of similar processes.
• Each unit in each process receives a similar
dose of manufacturing costs.
• Manufacturing costs are accumulated for a
process for a given period of time.
• Manufacturing cost flows and the
associated journal entries are generally
similar to job-order costing.
Characteristics of Process Costing
7/23/2022 Hamed Ali

Characteristics of Process Costing
(Continued)
• The departmental production report is the
key document for tracking manufacturing
activity and costs.
• Unit costs are computed by dividing the
departmental costs of the period by the
output for the period.
7/23/2022 Hamed Ali

Units
Started
Work in
Process
Units in
EWIP
Units
Completed
Units in
BWIP
1,000 units - 20% materials added;
60% conversion costs added
10,000 units;
1,500 units - 1/3 materials added;
50% conversion costs added
9,500 units
Units of Input = Units of Output
Units in BWIP + Units Started = Units in EWIP + Units Completed
1,000 + 10,000 = 1,500 + 9,500
The Concept of Equivalent Units
7/23/2022 Hamed Ali

The Concept of Equivalent Units
(Continued)
Equivalent Units Calculation:
Direct Materials Conversion Costs
Units Completed 9,500 9,500
Ending WIP 500 750
Total Units Processed *10,000 *10,250
Processed This Period **9,800 **9,650
*Equivalent units for weighted average (total units worked on)
** Equivalent units for FIFO (units worked on this period)
Beg. WIP Inventory (200) (600)
7/23/2022 Hamed Ali

A Cost Analysis
Cost of
Units Started
Work in
Process
Costs added
to EWIP
Cost of Units
Completed
Cost added
to BWIP
1,000 units - $5,000 materials added;
$10,000 conversion costs added
10,000 units; $23,000
mat’l added; $120,175
conversion cost added
1,500 units
9,500 units
Input Costs = Output Costs
$158,175 = $158,175
7/23/2022 Hamed Ali

Steps For Costing out Production in
Process Costing
1. Analysis of the flow of Physical units
2. Calculation of equivalent units
3. Computation of unit cost
4. Valuation inventory
5. Cost reconciliation
7/23/2022 Hamed Ali

Weighted Average Costing
Step 1- Inputs/Outputs in Units
Inputs: Outputs:
BWIP 1,000 EWIP 1,500
Started 10,000 Completed 9,500
Total 11,000 Total 11,000
7/23/2022 Hamed Ali

(Continued)
Weighted
Average
Step 2 - Equivalent Units
Materials Conversion Costs
EWIP 500 750
Completed 9,500 9,500
Units Worked On 10,000 10,250
BWIP (200) (600)
Units This Period 9,800 9,650
FIFO
7/23/2022 Hamed Ali

(Continued)
Step 3 - Unit Cost Calculation
BWIP Added This Period Total Unit Cost
Mat’l $ 5,000 $ 23,000 *$ 28,000 $ 2.80
C. Costs 10,000 120,175 *130,175 12.70
Total $15,000 $143,175 *$158,175 $15.50
Total Input Cost
*Divide total cost added to the system by the
weighted average equivalent units.
7/23/2022 Hamed Ali

(Continued)
Step 4 Value of Goods Completed and EWIP
(Reconciliation of input and output costs)
Cost of Goods Transferred
9,500 x 15.50 = $147,250
EWIP
Materials 500 x $2.80 = $1,400
C. Cost 750 x $12.70 = $9,525 $ 10,925
Total $158,175
Total Output Cost
7/23/2022 Hamed Ali

Nonuniform inputs: An illustrative example
Materials are added at the beginning of the process.
Units in process, May 1, 60% complete 2,000
Units completed and transferred out 10,000
Units in Process, May 31, 40% Complete 1,000
Costs:
BWIP Cost Added
Materials $300 $3,000
Conversion Costs 600 4,600
Step I - Physical Flow:
Units to account for Units accounted for
Units, BWIP 2,000 Units completed 10,000
Units started 9,000 Units, EWIP 1,000
7/23/2022 Hamed Ali

Nonuniform inputs example cont’d
Step II - Equivalent Units (Weighted Average):
Material Conversion
Units completed 10,000 10,000
EWIP 1.000 400
Total equivalent 11,000 10,400
Step III - Unit Cost
Unit Cost = $3,300/11,000 + $5,200/10,400
= $0.30 (materials) + $0.50 (conversion)
= $0.80
Step IV - Valuation of Inventories
Goods transferred out
$0.80 X 10,000 = $8,000
EWIP: ($0.30 X 1,000) + ($0.50 X 400) = $500
7/23/2022 Hamed Ali

Nonuniform inputs example cont’d
Step V - Cost Reconciliation
Costs assigned
Goods transferred $8,000
EWIP 500
8,500
Cost to account for
BWIP $ 900
Costs added 7,600
Total 8,500
7/23/2022 Hamed Ali

FIFO Costing
Step 1- Inputs/Outputs in Units
Inputs: Outputs:
BWIP 1,000 EWIP 1,500
Started 10,000 Completed 9,500
*Step one is the same for weighted average and FIFO
7/23/2022 Hamed Ali

Step 2 - Equivalent Units
Materials Conversion Costs
EWIP 500 750
Completed 9,500 9,500
Units Worked On 10,000 10,250
BWIP (200) (600)
Units This Period 9,800 9,650
Weighted
Average
FIFO
*This step is the same for weighted average and FIFO
FIFO Costing (Continued)
7/23/2022 Hamed Ali

Step 3 - Unit Cost Calculation
BWIP Added This Period Total Unit Cost
Mat’l $ 5,000 *$ 23,000 $ 28,000 $ 2.35
C. Costs 10,000 *120,175 130,175 12.45
Total $15,000 *$143,175 $158,175 $14.80
Total Input Cost
*Divide total cost added this period by the
equivalent units worked on this period (FIFO units).
7/23/2022 Hamed Ali

Step 4 - Value of Goods Completed and EWIP
(Short-cut method)
Total Input Costs = $158,175.00
Less: EWIP
Materials 500 x $2.35 = $1,175.00
C. Cost 750 x $12.45 = 9,337.50 10,512.50
Cost of Goods Completed $147,662.50
7/23/2022 Hamed Ali

Beginning WIP
Added last period = $15,000
Added this period:
Materials 800 x $2.35 = $1,880
Conversion costs 400 x $12.45 = $4,980 $21,860
Started and Completed 8,500 x $14.80 125,800
Ending WIP
Materials 500 x $2.35 = $1,175
Conversion Costs 750 X $12.45 = 9,337.50 10,512.5
*$158,175
*Rounding error Total Output Cost
Step 4a - Reconciliation of Costs
7/23/2022 Hamed Ali

COST CLASSIFICATIONS
Functional
Product
Marketing
R&D
Admin
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Cost Concepts - 130
Functional – Product Detail
Product
Marketing
R&D
Admin
Materials
Labor
Mfg.
Overhead
Prime costs = Dir. Materials + Dir. Labor
Conversion costs = Dir. Labor + Total Mfg.
Overhead
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Cost Concepts - 131
Behavioral
Product
Marketing
R&D
Admin
Fixed
Variable
7/23/2022 Hamed Ali

Cost Concepts - 132
Responsibility
Product
Marketing
R&D
Admin
Fixed
Variable
A
B
C
7/23/2022 Hamed Ali

Cost Concepts - 133
COST RELATIONSHIPS: MANUFACTURING COMPANY
Direct Mat.
(Beg)
Direct Mat.
Purchases
Direct Mat.
(End)
Direct labor
incurred
Direct Mat.
Used
+
-
Overhead costs
applied
Tot. Mfg. Costs
incurred
Cost of Goods
Mfg.
Cost of Goods
Sold
WIP (Beg)
WIP (End)
+
+
-
-
Fin Goods
(End)
Fin Goods
(Beg)
+
+
PRIOR
PERIOD
NEXT
PERIOD
7/23/2022
Hamed Ali

Cost Concepts - 134
Income Statement
Manufacturing Company
Beg. WIP
+ Direct Mat’l
Used
+ Direct Labor
+ Mfg. Overhead
- End. WIP
=
Cost of Goods Mfg.
Beg. Fin. Goods
+
$2,400,000
Cost of Goods Mfg.
-
End. Finished Goods
=
$2,600,000
Cost of Goods Sold
$4,000,000
Sales
-
$2,600,000
Cost of Goods Sold
=
$1,400,000
Gross Margin
-
• Selling expenses
• Admin. expenses
• Income taxes
$900,000
Other Oper.Expenses
=
$500,000
Net Income
7/23/2022 Hamed Ali

Cost Concepts - 135
• Selling Expenses
• Administrative Expenses
• Income taxes
• Direct Materials/ Supplies
• Direct Labor
• Indirect Costs or Overhead
INCOME STATEMENT
Service Organization
$2,600,000
Cost of Services
$900,000
Operating Expenses
$4,000,000
Sales
$500,000
Net Income
$1,400,000
Gross Margin
-
=
-
=
7/23/2022 Hamed Ali

Cost Concepts - 136
Total fixed costs do not respond to changes
in unit level cost drivers within a period.
Total
fixed
costs (Y)
Total activity (X)
0
0
Basic Cost Behavior Patterns
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Hamed Ali

Cost Concepts - 137
Committed fixed costs are
required to maintain the current
service or production capacity to fill
previous legal commitments.
Fixed Costs
7/23/2022 Hamed Ali

Cost Concepts - 138
Discretionary fixed costs are
set at a fixed amount each year at
the discretion of management.
Fixed Costs
7/23/2022 Hamed Ali

Cost Concepts - 139
Total variable costs increase in proportion
to increases in unit level cost drivers.
Total
variable
costs (Y)
Total activity (X)
0
0
7/23/2022 Hamed Ali

Cost Concepts - 140
Total mixed costs contain fixed and variable
cost elements. They increase, but not in direct
proportion to increases in unit level cost drivers.
Total
mixed
costs (Y)
Total activity (X)
0
0
Sometimes
called
semivariable
costs
7/23/2022
Hamed Ali

Cost Concepts - 141
Total step costs are constant over a range of
activity for a unit level cost driver but moves to
a different amount at different ranges.
Total
step
costs (Y)
Total activity (X)
0
0
7/23/2022
Hamed Ali

Cost Concepts - 142
• Variable costs--The cost of the
ingredients used to make the pizzas
• Fixed costs--Depreciation, property taxes,
and property insurance
• Mixed costs--Cost of electricity
• Step costs--Employee wages
Pizza Hut
7/23/2022 Hamed Ali

Cost Concepts - 143
Total
costs
(Y)
Value of independent variable (X)
0
0
Fixed costs (a)
Variable costs (b)
Total costs
Y = a + bX
Variable costs are
layered on top of fixed
costs.
Slope,
b =
Y
X
Total Cost Behavior With A Single
Unit Level Cost Driver
7/23/2022
Hamed Ali

Cost Concepts - 144
Y = a + bX
total costs
vertical axis intercept
(an approximation of
fixed costs)
slope (an
approximation of
variable costs per unit
of X) value of
independent
variable
Equation for Total Costs
7/23/2022 Hamed Ali
@Hamed.Ali.Mohamed2@gmail.c

Methods for Separating Mixed Cost
Into Fixed and Variable Components
• Scatterplot Method
• The High-Low Method
• Specific quantitative methods
– The Method of Least Squares
7/23/2022 Hamed Ali

Cost Concepts - 146
Month Utility Costs Unit Produced
January $2,000 200
February 2,500 400
March 4,500 600
April 5,000 800
May 7,500 1,000
Mixed Costs: An Example
7/23/2022 Hamed Ali

Cost Concepts - 147
Units Produced
Utility
Cost
$8,000
6,000
4,000
2,000
0
200 400 600 800 1,000
.
Scatterplot Method
.
.
.
.
Analyst can fit line
based on his or her
experience
Important: Cost function is only
relevant within relevant range
7/23/2022 Hamed Ali

Cost Concepts - 148
High activity period
Low activity period
Number of Packaging
Shipments Costs
January 6,000 $17,000
February 9,000 26,000
March 12,000 32,000
April l0,000 20,000
Variable cost
per unit (b) =
Difference in total costs
Difference in activity
b = $32,000 - $17,000
12,000 - 6,000
Continued on next
slide
High-Low Cost Estimation
7/23/2022 Hamed Ali

Cost Concepts - 149
Variable cost
per unit (b) = $2.50
January
a = Total costs - Variable costs
$17,000 = a + ($2.50 x 6,000 shipments)
a = $2,000
March
$32,000 = a + ($2.50 x 12,000 shipments)
a = $2,000
Same answer!
7/23/2022 Hamed Ali

Cost Concepts - 150
Y = $2,000 x $2.50X
Total packing
department costs
Number of
shipments
7/23/2022 Hamed Ali

Cost Concepts - 151
Direct materials, the cost of
primary raw materials converted
into finished goods. The word
“direct” indicates costs that are
easily or directly traced to a
finished product or service.
Direct labor, the wages earned by
production employees for the time they
spend converting raw materials into
finished products.
Manufacturing overhead includes all
manufacturing costs other than direct
materials and direct labor.
Composition of
Manufacturing Costs
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Hamed Ali

Cost Concepts - 152
Direct
Materials
Direct
Labor
Overhead to
be Assigned
Finished
Goods
Conventional Product Costing
Work in
Process
Traceable
Indirect ?
7/23/2022 Hamed Ali

Cost Concepts - 153
• Prime costs = Direct materials +
Direct labor
• Conversion costs = Direct labor +
Manufacturing overhead
(fixed & variable)
Composition of
Manufacturing Costs
7/23/2022 Hamed Ali

Cost Concepts - 154
Percent of Total
Manufacturing
Costs
0
100
1900 1950 2000
Year
Total
manufacturing
costs
Direct materials has increased
Direct labor has decreased
Manufacturing overhead has
increased
Changing Composition of
Total Manufacturing Costs
7/23/2022
Hamed Ali

Cost Concepts - 155
The Basic Concept of
Overhead Application
Applied overhead = Overhead rate x Actual activity
• Applied overhead is the basis for computing per-unit
overhead cost
• Applied overhead is rarely equal to a period's actual
overhead costs.
Key considerations
7/23/2022 Hamed Ali

Cost Concepts - 156
CONVENTIONAL PRODUCT COSTING
Overhead Application
Predetermined Total budgeted overhead
Overhead Rate = Expected level of activity *
• Conventional costing typically used volume (or a
surrogate for volume such as DLH)
• Problems
- Budgeted overhead contains both fixed and
variable costs
- Selection of expected level of activity
7/23/2022 Hamed Ali

Cost Concepts - 157
Select An Appropriate Activity
Base
Criterion:
Cause and Effect
Relationship
Possible Measures of
Production Activity
1. Units produced
2. Direct labor
hours
3. Direct labor dollars
4. Machine hours
5. Direct materials
Choice of Activity
Base to be Used
for Computing the
Predetermined
Overhead Rate
7/23/2022 Hamed Ali

Cost Concepts - 158
Comparison of Traditional and
Contemporary Cost Management Systems
Cost
Information
System
Traditional Contemporary
1. Unit-based drivers
2. Allocation intensive
3. Narrow view of
product costs
4. Focus on cost mgt.
5. Little activity information
6. Maximizes unit
production
7. Uses financial measures
of performance
1. Uses of nonunit drivers
2. Tracing intensive
3. Expanded product costing
4. Managing activities
5. Detailed activity
information
6. System-wide performance
appraisals
7. Use of nonfinancial
measures of performance
7/23/2022 Hamed Ali

Project Cost Management
7/23/2022 Hamed Ali
Part Five

What is Project Cost
Management?
• Project Cost Management includes the processes
involved in estimating, budgeting, and controlling
costs so that the project can be completed within
the approved budget..
• The major processes of Project Cost
Management include cost estimating, cost
budgeting , and cost control.
7/23/2022 Hamed Ali

Project Cost management
Cost
Budgeting
Cost
Estimation Cost
Control
Planning Monitoring and
control
7/23/2022 Hamed Ali

Net Present Value (NPV) or (DCF)
This is the method of determining today’s value of
future money. It is the opposite of compounding,
which is the future value of today’s money.
Future Value Profit
NPV (DCF)= Total of
(1+Interest Rate) n
7/23/2022 Hamed Ali

NPV Example
• A project of 100,000 initial investment with a
net cash flow of 25,000 per year for a period of
8 years, Required Rate (interest) is 15% and
inflation rate of 3% per year, the DCF or NPV
will be:
25,000
S (t=1:8) - 100,000 = 1939
(1+.15+.03)t
7/23/2022 Hamed Ali

Project Selection Method
Term Indicates
•Present Value (PV) The value today of future cash flows
•Net Present Value (NPV) The sum of the present value of all income and
expenditures of a project. Greater than 0 is
good.
•Internal Rate of Return (IRR) The determination of the discount rate at the
point of NPV = 0.
•Payback Period The amount of time that will pass before the net
revenues = costs incurred.
•Benefit Cost Ratio (BCR) A comparison of revenue to costs. Greater than
1 is good.
•Opportunity Costs The loss of selecting one project vs. another.
7/23/2022 Hamed Ali

Practice Exercise: Which Project
would you select?
Project A Project B Choice
NPV $ 95,000 $ 75,000
IRR 13 % 17 %
Payback Period 16 months 21 months
Benefit : Cost ratio
BCR
2.79 1.3
Project A
Project B
Project A
Project A
7/23/2022 Hamed Ali

Life Cycle Costing VS. Value Engineering
• Life-Cycle Costing (LCC) is a technique to establish the cost
of a product or service system. It is a structured approach that
addresses all the cost of the product or service over its
anticipated life time. The results of an LCC analysis can be used
to assist management in the decision-making process.
– LCC = R&D costs + production cost + construction cost + operation
and maintenance cost + product retirement and phase-out cost.
• Value Engineering is a creative approach used to
optimize life-cycle costs, save time, increase profits, improve
quality, expand market share, solve problems, and/or use
resources more effectively.
7/23/2022
Hamed Ali
1-166

COST ESTIMATING
Developing approximation of the
cost of resource needed to
complete the project activities
7/23/2022 Hamed Ali

Types of Estimates and Degree of
Accuracy
Type Accuracy Project
Phase
Order of Magnitude
(rough order of magnitude
(ROM))
-25% to +75% Initiation
Budget Estimate -10% to +25% Planning
Definitive Estimate -5% to +10% Planning
7/23/2022 Hamed Ali

COST ESTIMATING
1. Enterprise
Environmental
Factors
2. Organizational
Process Assets
3. Project Scope
Statement
4. Work Breakdown
Structure
5. WBS Dictionary
6. Project
Management Plan
Inputs
1. Analogous
Estimating
2. Determine Resource
Cost Rates
3. Bottom-up
Estimating
4. Parametric
Estimating
5. Project Management
Software
6. Vendor Bid Analysis
7. Reserve Analysis
8. Cost of Quality
Tools & Techniques
1. Activity Cost
Estimates
2. Activity Cost
Estimate
Supporting Detail
3. Requested Changes
4. Cost Management
Plan (Updates) `
Outputs
7/23/2022
Hamed Ali
1-169

Fundamentals of Cost Estimating
Cost vs. Price
• Cost Estimating is the determination of
approximately how much will it cost the
performing organization to provide the product or
service involved.
• Pricing is a business decision that determines
how much to charge for the product or service
Cost + profit = Price
7/23/2022 Hamed Ali

Types of Costs
Exercise : Can you name examples from your project work of
the following most commonly used types of cost?
Type Description Examples
Fixed costs Project costs that remain constant regardless
of phase or output.
Variable costs Project costs that vary in relation to the
output.
Direct costs Costs that are directly attributable to the
project being estimated.
Indirect costs Costs that are attributable to more than one
project. Also known as overhead.
Cost reserves Amount of money needed above the estimate
to reduce risk of overruns of project
objectives to a level acceptable to the
organization.
7/23/2022 Hamed Ali

Inputs to Cost Estimating
• Enterprise Environmental Factors
– Marketplace conditions
– Commercial databases
• Organizational Process Assets
– Cost estimating Policies, templates
– Historical information ,Project files, Lessons learned
• Project Scope Statement
• Work Breakdown Structure
• WBS Dictionary
• Project Management Plan
7/23/2022 Hamed Ali

Inputs to Cost Estimating
• Project Management Plans:
– Schedule management plan.
– Staffing management plan
– Risk register
7/23/2022 Hamed Ali

Tools of cost Estimation
1. Analogous (Top-Down) Estimating: uses the cost of a previous,
similar project as basis of estimating the cost of the current project.
2. Parametric Estimating: uses project characteristics (parameters) in
a mathematical model to predict project costs.
3. Bottom-up Estimating: Estimating the cost of individual work
items and then rolling up the costs to arrive at a project total.
4. Computerized Tools: can facilitate rapid consideration of costing
alternatives.
5. Other : Ex. vendor bid analysis. Determine resource cost rates,
Reserve Analysis, Cost of Quality
7/23/2022 Hamed Ali

Outputs of Cost Estimating
• Activity Cost Estimates
– A quantitative assessment of the likely costs
of the resources required to complete
schedule activities.
• Activity Cost Estimate Supporting Detail
• Requested Changes
• Cost Management Plan (Updates)
7/23/2022 Hamed Ali

• Q: Analogous estimating:
a. Uses bottom-up estimation techniques
b. Is used most frequently in the executing
phase of the project
c. Uses top-down estimation techniques
d. Uses actual detailed Historical costs
7/23/2022 Hamed Ali

General Accounting Terms
• Opportunity Cost
– The opportunity given up by selecting one project over another.
NOTE: This does not require any calculation. See the example
below.
• Law of Diminishing Returns
– more you put into something, less you get out of it. For example,
adding twice as many resources to an activity may not get the
activity done in half the time.
• Working Capital
– Current assets minus current liabilities, or the amount of money
the company has available to invest, including investment in
projects.
7/23/2022 Hamed Ali
@Hamed.Ali.Mohamed2@gmail.c 1-177

COST BUDGETING
• Aggregating the estimated cost of
individual activities or work package to
establish a cost baseline
7/23/2022 Hamed Ali

COST BUDGETING
1. Project Scope
Statement
2. Work Breakdown
Structure
3. WBS Dictionary
4. Activity Cost
Estimates
5. Activity Cost
Estimate Supporting
Detail
6. Project Schedule
7. Resource Calendars
8. Contract
9. Cost Management
Plan
Inputs
1. Cost Aggregation
2. Reserve Analysis
3. Parametric
Estimating
4. Funding Limit
Reconciliation
Tools & Techniques
1. Cost Baseline
2. Project Funding
Requirements
3. Cost Management
Plan (Updates)
Outputs
Hamed Ali

Inputs to Cost Budgeting
• Project Scope Statement
• Work Breakdown Structure
• WBS Dictionary
• Activity Cost Estimates
• Activity Cost Estimate Supporting Detail
• Project Schedule
• Resource Calendars
• Contract
• Cost Management Plan
7/23/2022 Hamed Ali

Tools & Techniques for Cost
Budgeting
• Cost Aggregation
• Reserve Analysis
• Parametric Estimating
• Funding Limit Reconciliation
7/23/2022 Hamed Ali

Parametric cost estimating involves:
a. Calculating individual cost estimates for each work
package.
b. Using rates and factors based on historical experience
to estimate costs.
c. Using the actual cost of a similar project to estimate
total project costs.
d. Calculate cost based on detailed WBS
7/23/2022 Hamed Ali

Funding Limit Reconciliation
• The expenditure of funds is reconciled with
the funding limits set by the customer
• Reconciliation will necessitate the
scheduling of work to be adjusted to smooth
or regulate those expenditures
• Rescheduling can impact the allocation of
resources.
• The final product of these planning iterations
is a cost baseline
7/23/2022
Hamed Ali

Outputs For Cost Budgeting
• Cost Baseline
• Project Funding Requirements
• Cost Management Plan (Updates)
7/23/2022 Hamed Ali

Cost Baseline
• A time-phased budget that is used as a basis against
which to measure, monitor, and control overall cost
performance on the project.
• The cost baseline is a component of the project
management plan.
• Many projects, especially large ones, have multiple cost
or resource baselines
• For example, management may require that the project
manager track internal costs (labor) separately from
external costs (contractors and construction materials) or
total labor hours.
7/23/2022 Hamed Ali

Project Funding Requirements
• Funding requirements, total and periodic (e.g.,
annual or quarterly), are derived
from the cost baseline
• Can be established to exceed, usually by a
margin, to allow for either early progress or cost
overruns.
• Funding usually occurs in incremental amounts
that are not continuous
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Cash Flow, Cost Baseline and
Funding Display
7/23/2022 Hamed Ali

COST CONTROL
• Influencing the factors that create cost
variance and controlling changes to the
project budget.
7/23/2022 Hamed Ali

COST CONTROL
1. Cost Baseline
2. Project Funding
Requirements
3. Performance
Reports
4. Work Performance
Information
5. Approved Change
Requests
6. Project
Management Plan
7.
Inputs
1. Cost Change
Control System
2. Performance
Measurement
Analysis
3. Forecasting
4. Project
performance
Review
5. Project
management
Software
6. Variance Analysis
Tools & Techniques
1. Cost Estimates
(Updates)
2. Cost Baseline
(Updates)
3. Performance
Measurements
4. Forecasted
Completion
6. Recommended
Corrective Actions
7. Organizational
Process Assets
(Updates)
8. Project Management
Plan (Updates)
Outputs
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Hamed Ali
1-190

Cost Control (1/2)
• Project cost control includes:
– Influencing the factors that create changes to
the cost baseline
– Ensuring requested changes are agreed upon
– Managing the actual changes when and as
they occur
– Assuring that potential cost overruns do not
exceed the authorized funding periodically and
in total for the project
7/23/2022 Hamed Ali

Cost Control (2/2)
– Recording all appropriate changes accurately
against the cost baseline
– Preventing incorrect, inappropriate, or
unapproved changes from being included in
the reported cost or resource usage
– Informing appropriate stakeholders of
approved changes
– Acting to bring expected cost overruns within
acceptable limits.
7/23/2022 Hamed Ali

A. Inputs
• Cost Baseline
• Project Funding Requirements
• Performance Reports
• Work Performance Information
• Approved Change Requests
• Project Management Plan
7/23/2022 Hamed Ali

B. Tools & Techniques
• Cost Change Control System
• Performance Measurement Analysis
• Forecasting
• Project performance Review
• Project management Software
• Variance Analysis
7/23/2022 Hamed Ali

Cost & Schedule Control System
Criteria
• BCAC : Budget Cost At Completion BAC
• BCWS : Budget Cost Work Schedule PV
• BCWP : Budget Cost Work Performed EV
• ACWP : Actual Cost Work Performed AC
• ECAC : Estimated Cost At Completion EAC
• ECTC : Estimated Cost to Complete ETC
• CPI : Cost Performed Index
• CV : Cost Variance
• SPI : Schedule Performed Index
• SV : Schedule Variance
• CVP : Cost Variance%
• SVP : Schedule Variance%
• C/SCSC
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Performance Report Graph
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Earned Value Analysis Summary
Term Equation Indicates
Schedule Variance SV = EV - PV Good if >=0
Cost Variance CV = EV - AC Good if >=0
Schedule Performance
Index
SPI = EV/PV Good if >=1
Cost Performance Index CPI = EV/AC Good if >=1
Estimate at Completion EAC = BAC/CPI Actual cost
Estimate to Complete ETC = EAC – AC How much more
will
be spent
Variance at Completion VAC = BAC - EAC Good if >=0
7/23/2022 Hamed Ali

+CV
+SV
-CV
+SV
+CV
-SV
-CV
-SV
Under Over
Ahead
Behind
Schedule
Interpretation of Variances
Budget
7/23/2022 Hamed Ali

Cost and Schedule Variance
NOW
EAC
MR
BAC
Cost Variance
Schedule Variance
$$
Time
Contract Budget Base
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Hamed Ali
1-199

C. Outputs
• Cost Estimates (Updates)
• Cost Baseline (Updates)
• Performance Measurements
• Forecasted Completion
• Recommended Corrective Actions
• Organizational Process Assets (Updates)
• Project Management Plan (Updates)
7/23/2022 Hamed Ali

The Costs of
Production
7/23/2022 Hamed Ali
Part Six

Economic Costs
• Opportunity cost: The highest-valued
alternative that must be given up to engage
in an activity.
• Explicit costs A cost that involves spending
money.
• Implicit costs A non-monetary opportunity
cost.
• Normal profit is a cost, the minimum
payment to retain factors of production by a
firm, a fixed cost?
7/23/2022
Hamed Ali

Economic, or Pure, Profits
• Economic profit
– the difference between total revenue and
opportunity cost of all inputs
– Accounting vs economic profit
• Accounting profit includes economic profit
and all implicit costs
Economic
profit
Total
revenue
Opportunity cost
of all inputs
= –
7/23/2022 Hamed Ali

Economic
Profits
Implicit costs
(including a
normal profit)
Explicit
Costs
Accounting
costs (explicit
costs only)
Accounting
Profits
Economic
(Opportunity)
Costs
Total
Revenue
Profits to an
Economist
Profits to an
Accountant
Summary of Costs and Profits
7/23/2022 Hamed Ali

Short and Long Run
• Variable Costs
– Factors of production whose quantity can be
increased or decreased during a particular
period
• Fixed Costs
– Factors of production whose quantity cannot be
increased or decreased during a particular
period
7/23/2022 Hamed Ali

Short and Long Run (cont.)
• Short run
– a period of time where at least one factor is
fixed, usually capital stock is fixed, and all
others are variable.
• Long run
– a time period where all factors of production,
even the capital stock, can be varied
– How long is the short run? The time required for
a firm to alter its capital stock. This will vary
depending on the nature of the firm
7/23/2022 Hamed Ali

Short-Run Production Costs
• Law of Diminishing Returns
– as successive units of a variable resource (say,
labour) are added to a fixed resource (say,
capital) beyond some point the extra, or
marginal product attributable to each additional
unit of the variable resource will decline
– Hence, the SR supply curve will be upward
sloping for firms and the industry
7/23/2022 Hamed Ali

0
1
2
3
4
5
6
7
8
9
0
10
25
37
47
55
60
63
63
62
] 10.0
12.5
12.3
11.8
11.0
10.0
9.0
7.9
6.9
]
]
]
]
]
]
]
]
Inputs of
the
variable
resource
Extra or
marginal
product
Average
product
Total
product
10
15
12
10
8
5
3
0
–1
7/23/2022 Hamed Ali

Short-Run Production Costs
• Marginal Product (MP)
– additional output resulting from the addition of
an extra unit of a resource
• Average Product (AP)
– the total output per unit of resource employed
– total product divided by number of workers
• Total Product (TP)
– the total output of a good produced by a firm
7/23/2022 Hamed Ali

Law of Diminishing Returns
Total
Product,
TP
Quantity of Labour
Average
Product,
AP,
and
Marginal
Product,
MP
Quantity of Labour
Marginal
Product
Average
Product
Total
Output
7/23/2022
Hamed Ali
1-210

Fixed, Variable & Total Costs
• Fixed costs
– do not vary with changes in output
• Variable costs
– vary with changes in output
• Total costs
– the sum of fixed and variable costs at each
level of output
7/23/2022 Hamed Ali

Total Costs
Quantity
Costs
(dollars)
TC
Total
Cost
Fixed Cost
TVC
Variable Cost
TFC
7/23/2022 Hamed Ali

Marginal Costs
• Marginal Cost (MC)
– the extra, or additional cost of producing one
more unit of output
Marginal Cost =
Change in Total Costs
Change in Quantity
7/23/2022 Hamed Ali

Marginal Costs
Quantity
Short-run
average
costs
(dollars)
AFC
AVC
ATC
MC
The distance between ATC and AVC is AFC so these two curves should converge.
7/23/2022
Hamed Ali
1-214

Marginal Costs & Marginal Products
• Given the price of the variable resource,
increasing returns (marginal product) will
be reflected in a declining marginal cost,
and diminishing returns (marginal
product) in a rising marginal cost.
• Marginal costs are driven by variable and
not fixed costs.
• Marginal costs curve is the supply curve,
which is discussed in the next topic.
7/23/2022 Hamed Ali

Marginal Cost Relationships
• When MC > ATC
– ATC increases
• When MC < AC
– ATC falls
• When ATC = MC
– ATC is at its minimum
7/23/2022 Hamed Ali

Long-Run Production Costs
• All factors variable
– all costs are variable
• Long-run cost curve
– shape depends on economies of scale
– scale is defined as different levels of plant
utilisation
7/23/2022 Hamed Ali

Long-Run Production Costs (cont.)
Unit
Costs
Output
For every plant capacity size...
there is a short-run ATC curve,
and every ATC has a minimum cost
7/23/2022 Hamed Ali

Unit
Costs
Output
An infinite number of such
cost curves can be constructed
7/23/2022 Hamed Ali

Unit
Costs
Output
The long-run ATC just
‘envelops’ all the short-run ATC
curves
7/23/2022 Hamed Ali

Long-run ATC
Unit
Costs
Output
7/23/2022 Hamed Ali

Economies and Diseconomies of Scale
• Internal economies of scale
• External economies of scale
• Economies of scale
– ATC falls as plant size increases
• Diseconomies of scale
– ATC increases as plant size increases
• Constant returns of scale
– ATC constant as plant size increases
7/23/2022 Hamed Ali

Diseconomies
of scale
Constant returns
to scale
Economies
of scale
Long-Run ATC Curves
Unit
Costs
Output
Long-run ATC
7/23/2022 Hamed Ali

Minimum Efficiency Scale
• MES is the smallest level of output at
which a firm can minimise long-run
average costs
• Natural monopoly, has a MES that is large
than the demand of the industry, so one
firm can produce at a lower cost than if
two or more firms were in the industry.
7/23/2022 Hamed Ali

Economies of scope
In economies of scope, firms should take
cost advantages by providing a variety of
related products to make full use of the
inputs rather than specializing in the
delivery of a single product. Sharing or joint
utilization of inputs among similar products
are the main reason for economies of scale.
7/23/2022 Hamed Ali

Fixed & variable
costs and Break-
Even Analysis
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Part Seven

2-227
Costs
Fixed Costs Variable Costs
Types of Cost
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2-228
For Manufacturer or Provider of Service
 Covers materials, labor and factory overhead
applied directly to production
For Reseller (Wholesaler or Retailer)
 Covers primarily the cost of merchandise
Variable Costs – Cost of
Goods Sold
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2-229
Other Variable Costs
Expenses not directly tied to production but vary
directly with volume
Examples include:
 Sales commissions, discounts, and delivery
expenses
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2-230
Result from attempts to generate sales volume
Examples include:
 Advertising, sales promotion, and sales
salaries
Fixed Costs – Programmed Costs
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2-231
Costs required to maintain the organization
Examples include nonmarketing
expenditures, such as:
 rent, administrative cost, and clerical
salaries
Fixed Costs – Committed Costs
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2-232
Margins
The difference between the selling price and the
“cost” of a product or service
Margins are expressed in both dollar terms or as
percentages on:
 a total volume basis, or
 an individual unit basis
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2-233
Gross Margin or Gross Profit
On a total volume basis:
The difference between total sales revenue
and total cost of goods sold
On a per-unit basis:
The difference between unit selling price and
unit cost of goods sold
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2-234
Gross Margin
Total Gross Margin Dollar Amount Percentage
Net Sales $100 100%
Cost of Goods Sold - 40 - 40
Gross Profit Margin $ 60 60%
Unit Gross Margin
Unit Sales Price $1.00 100%
Unit Cost of Goods Sold - 0.40 - 40
Unit Gross Profit Margin $0.60 60%
7/23/2022
Hamed Ali

2-235
Trade Margin (Markup)
Suppose a retailer purchases an item for $10 and sells it at $20.
Retailer Margin as a percentage of cost is:
($10 / $10) x 100 = 100 %
Retailer Margin as a percentage of selling price is:
($10 / $20) x 100 = 50 %
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2-236
Trade Margin
Unit Cost of
Goods Sold
Unit
Selling Price
Gross Margin
as a % of
Selling Price
Manufacturer $2.00 $2.88 30.6%
Wholesaler $2.88 $3.60 20.0%
Retailer $3.60 $6.00 40.0%
Consumer $6.00
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2-237
Net Profit Margin
(before taxes)
Dollar Amount Percentage
Net Sales $ 100,000 100%
Cost of Goods Sold - 30,000 - 30
Selling Expenses - 20,000 - 20
Fixed Expenses - 40,000 - 40
Gross Profit Margin $ 70,000 70%
Net Profit Margin $ 10,000 10%
7/23/2022
Hamed Ali

Kellogg’s Cereal Margins at a Price
of $2.72 per box
Kellogg’s Direct Unit Manufacturing Cost
Grain $.18
Other Ingredients .23
Packaging .31
Labor .18
Mfg. Overheads .34
Cost of Goods Sold $1.24 ––––––– 54.4% Gross Margin
($2.72 - $1.24)/$2.72
Promotions (excluding Advertising) + .20
Total Unit Variable Cost $1.44
Manufacturer Contribution to Fixed Cost
and Profit $1.28 ––- 47% Contribution Margin
($2.72-$1.44)/$2.72
Kellogg’s Selling Price to Grocery Store $2.72
Grocery Store Margin .68 ––- 20% Trade Margin
($3.40 - $2.72)/$3.40
Grocery Store Selling Price $3.40
7/23/2022
Hamed Ali

2-239
Contribution Analysis
Contribution is…
The difference between total sales revenue and
total variable costs
OR on a per-unit basis
The difference between unit selling price and unit
variable cost
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2-240
Break-even point is the unit or dollar sales at which
an organization neither makes a profit nor a loss.
At the organization’s break-even sales volume:
Total Revenue = Total Cost
Break-Even Analysis
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2-241
Break-even Analysis Example
Fixed Costs = $50,000
Price per unit = $5
Variable Cost = $3
Contribution = $5 - $3 = $2
Breakeven Volume = $50,000  $2
= 25,000 units
Breakeven Dollars = 25,000 x $5
= $125,000
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242
Costing
Principles
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Part Eight

243
Cost and management accounting
• Provides management with costs for
products, inventories, operations or
functions and compares actual to
predetermined data
• It also provides a variety of data for many
day-to-day decision as well as essential
information for long-range decisions
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244
Functions of managerial accounting
• Determining the cost
• Providing relevant information for better
decision-making
• Providing information for planning,
control, decision-making and application
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245
Planning
• Deals with the estimation of product costs,
setting up of costing system to record cost
data, preparation of cost standards and
budgets, planning of materials and
manpower resources, analyzing cost
behavior with changes in levels of activity
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246
Control
• Deals with the maintenance of product
costing record, comparison of actual
performance with standards or budgets,
anlaysis of variances, recommendation of
corrective actions, controlling cost to
ensure operational efficiency and
effectiveness
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247
Decision-making
• Deals with whether it is more profitable to
make or buy a component, determine the
economic order quantity and production
batch size, replace fixed asset, add or drop
products, decide pricing
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248
Application
• Cost accounting has extended from
manufacturing operations to a variety of service
industries such as hotels, bands, airline, etc
• Cost accounting system should be flexible and
adaptable to meet the new business
environment and the changing nature of the
company
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249
Element of cost
• Cost object
• Cost
• Cost unit
• Cost centre
• Profit centre
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250
Cost object
• It is an activity or item or operation for which
a separate measurement of costs is desired
• E.g. the cost of operating the personnel
department of a company, the cost of a
repair fob, and the cost for control
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251
Cost
• It is the amount of expenditure incurred
on a specific cost object
• Total cost = quantity Produced * cost per
unit (unit cost)
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252
Cost unit
• It is a quantitative unit of product or
service in which costs are ascertained,
e.g. cost per table made, cost per metre
of cloth
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253
Cost centre
• It is a location or function of an organization
in respect of which costs are ascertained
• E.g. the rent, rates and maintenance of
buildings; the wages and salaries of
storekeepers
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254
Profit centre
• It is location or function where managers are
accountable for sales revenues and
expenses
• E.g. division of a company that is
responsible for the sales of products
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255
Cost classification
• Direct cost
• Indirect cost (overhead)
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256
Direct cost
• Cost that can be identified specifically with
or traced to a given cost object
• The direct costs consist of the following
three elements:
– Direct materials
– Direct labour
– Direct expenses
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257
Direct materials
• The cost of materials – the cost of materials
used entering into and becoming the
elements of a product or service
• E.g. fabrics in garments
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258
Direct labour
• The cost of remuneration for working time
• E.g. assembly workers’ wages in toy
assembly
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259
Direct expenses
• Other costs which are incurred for a specific
product or service
• E.g. royalties
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260
Indirect cost (overhead)
• Cost that cannot be identified specifically
with or traced to a given cost object
• They are identified with cost centers as
overheads
– Indirect materials
– Indirect labour
– Indirect expenses
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261
Indirect materials
• Such as stationery, consumable supplies,
spare parts for machine that assist to the
production of final products
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262
Indirect labour
• Such as salaries of factory supervision and
office staff that do not directly involve in
production of the final product
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263
Indirect expenses
• Such as rent, rates, depreciation,
maintenance expenses that do not have
instant relationships with the manufacturing
processes.
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264
Cost accumulation
•Prime cost = direct materials + direct labour + direct expenses
•Production cost = Prime cost + factory overhead
OR
= Direct materials + Conversion cost
*Conversion cost is the production cost of converting raw materials into
finished product
•Total cost = Prime cost + Overheads (admin, selling,distribution cost)
OR
= Production cost + period cost (administrative, selling,
distribution and finance cost)
•Period cost is treated as expenses and matched against sales for calculating
profit, e.g. office rental
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265
Cost coding
• A code is a system of symbols designed
to be applied to a classified set of items to
give a brief, accurate reference, facilitating
entry, collation and analysis
• Coding is important in modern
computerised accounting systems for
catergories various composite accounting
items
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266
Reasons
• To reducing error owing to descriptions
• Enable easy recalling
• Reduce computer file size as a code
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267
Cost behaviour
• Costs can be classified into variable, fixed,
semi-variable, or step-costs according to
how they behave with respect of changes
in activity levels
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268
Variable cost
• It increases or decreases in direct
proportion to levels of activity, but the unit
variable cost remains constant
• E.g. cost of food served in a restaurant
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269
Fixed cost
• Total fixed cost remains constant over a
relevant range of activity level but unit fixed
cost falls with an increase in activity
volume
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270
Semi-variable cost
• It processes characteristics of both fixed
and variable cost
• It increases or decreases with activity
level but not in direct proportion
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271
Step cost
• It remains constant for a range of activity
levels, then, on further increase in activity,
the cost jumps to a new level and remains
constant over a certain range until the next
jump occurs
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272
Cost for stock valuation
• Unexpired and expired cost
• Product and period cost
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273
Unexpired cost
• Unexpired costs are the resources that
have been acquired and are expected to
contribute to the future revenue
• They will be recorded as assets in
current period
• They will be charged as expenses when
they have been consumed in the
generation of revenue
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274
Expired costs
• Expired costs are the expenses
attributable to the generation of revenue in
the current period
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275
Product cost
• Product cost are related to the goods purchased
or produced for resale
• If the products are sold, the product cost will be
included in the cost of goods sold and recorded
as expenses in current period
• If the products are unsold, the product costs will
be included in the closing stock and recorded as
assets in the balance sheet
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276
Period cost
• Period cost related to the operation of a
business
• They are treated as fixed cost and
charged as expenses when they are
incurred
• They should not be included in the stock
valuation
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277
Comparison of cost,
management and
financial accounting
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Part Nine

278
Meanings
• Financial accounting
• Cost accounting
• Management accounting
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279
Financial accounting
• Provides information to users who are
external to the business
• It reports on past transactions to draw up
financial statements
• The format are governed by law and
accounting standards established by the
professional accounting policies
7/23/2022 Hamed Ali

280
Cost accounting
• Is concerned with internal users of
accounting information, such as operation
managers
• The generated reports are specific to the
requirement of the management
• The reporting can be in any format which
suits the user
7/23/2022 Hamed Ali

281
Management accounting
• Comprises all cost accounting functions
• The accounting for product and service
costs, management accounting extends to
use various internal accounting reports for
planning, control and decision making
7/23/2022 Hamed Ali

282
Cost and management
accounting
Vs.
7/23/2022 Hamed Ali

283
Management
(cost)accounting
Nature Records material,
labour and overhead
costs in product or
job
Reports produced
are for internal
management and
contol
Records company
transaction events
External financial
statements are
produced
Accounting
system
Not based on the
double entry system
Follows the double
entry system
7/23/2022 Hamed Ali

284
Management
(cost)accounting
Accounting
principles
No need to use
accounting principles
Adopt any
accounting techniques
that generates useful
accounting
information
Use Generally
Accepted Accounting
Principles for recording
transactions
Users of
information
Used by different
levels of management
or departments
responsible for
respective activities
Used by external
parties: shareholders,
creditors, government,
etc
7/23/2022 Hamed Ali

Costing f (tai lieu tham khao ve chi phi)

Costing f (tai lieu tham khao ve chi phi)

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