introduction to cost - Chapter 1 Cost Accounting Chapter...

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Unformatted text preview: Chapter 1 Cost Accounting Chapter 19-1 Acct 531, Ninth Edition Study Study Objectives Objectives 1. Explain the distinguishing features of accounting. 2. Identify the three broad functions of management. 3. Define the three classes of manufacturing costs. 4. Distinguish between product and period costs. 5. Explain the difference between a merchandising and a manufacturing income statement. 6. Indicate how cost of goods manufactured is determined. 7. Explain the difference between a merchandising and a manufacturing balance sheet. 8. Identify trends in accounting. Chapter 19-2 Accounting Accounting Accounting Basics Compare Managerial and Financial Accounting Management Functions Business Ethics Chapter 19-3 Cost Concepts Manufacturing Costs Product vs. Period Costs Manufacturing Costs in Financial Statements Income Statement Balance Sheet Cost Concepts – A Review Accounting Today Service Industry Trends Managerial Accounting Practices Cost Accounting Chapter 19-4 Cost accounting involves the techniques for: determining the costs of products, processes, projects, etc. in order to report the correct amounts on the financial statements, and assisting management in making decisions and in the planning and control of an organization. For example, cost accounting is used to compute the unit cost of a manufacturer's products in order to report the cost of inventory on its balance sheet and the cost of goods sold on its income statement. This is achieved with techniques such as the allocation of manufacturing overhead costs and through the use of process costing, operations costing, and job-order costing systems. Cost Accounting Cost accounting assists management by providing analysis of cost behavior, cost-volume-profit relationships, operational and capital budgeting, standard costing, variance analyses for costs and revenues, transfer pricing, activity-based costing, and more. Cost accounting had its roots in manufacturing businesses, but today it extends to service businesses. For example, a bank will use cost accounting to determine the cost of processing a customer's check and/or a deposit. This in turn may provide management with guidance in the pricing of these services. Chapter 19-5 Managerial Managerial Accounting Accounting Basics Basics Cost Accounting Activities Explain manufacturing and nonmanufacturing costs and how they are reported. Compute cost of providing a service or manufacturing a product. Determine behavior of costs and expenses as activity changes. Chapter 19-6 Managerial Managerial Accounting Accounting Basics Basics Cost Accounting Activities (continued) Assist management in profit planning and formalizing these plans in the form of budgets. Help to control costs by comparing actual results with planned objectives and standard costs. Accumulate and present data for making decisions. Chapter 19-7 Managerial Managerial Accounting Accounting Basics Basics Distinguishing Features Applies to all types of business Service, Merchandising, and Manufacturing Applies to all forms of businesses – Proprietorships, Partnerships, and Corporations Applies to not-for-profit and profit oriented companies Chapter 19-8 Managerial Managerial Accounting Accounting Basics Basics Distinguishing Features: Continued More responsible for strategic cost management Teams with people from production, marketing, engineering, etc. Aid in making critical decisions Chapter 19-9 Comparing Comparing Managerial Managerial and and Financial Financial Accounting Accounting Similarities Both deal with economic events of a business – Thus, interests overlap Both require that economic events be quantified and communicated to interested parties – Determining unit cost is part of managerial accounting, Reporting cost of goods manufactured is a part of financial accounting Chapter 19-10 SO 1 Explain the distinguishing features of managerial accounting Comparing Comparing Managerial Managerial and and Financial Financial Accounting Accounting Differences Chapter 19-11 Illustration 19-1 SO 1 Explain the distinguishing features of managerial accounting Comparing Comparing Managerial Managerial and and Financial Financial Accounting Accounting Review Question Cost accounting: a. Pertains to the entity as a whole and is highly aggregated. aggregated b. Places emphasis on making decisions. c. Is related to cost data. d. Is governed by generally accepted accounting principles. Chapter 19-12 SO 1 Explain the distinguishing features of managerial Management Management Functions Functions Management Functions Management’s activities and responsibilities can be classified into the following three broad functions: Planning Directing Controlling Chapter 19-13 SO 2 Identify the 3 broad functions of management. Management Management Functions Functions Planning Look ahead and establish objectives such as – Maximize short-term profit Commit to environmental protection Key Objective: Add value to the business Value measured by trading price of stock and by potential selling price of the company Chapter 19-14 SO 2 Identify the 3 broad functions of management. Management Management Functions Functions Directing Coordinate diverse activities and human resources Implement planned objectives Provide incentives to motivate employees Hire and train employees including executives, managers, and supervisors Produce smooth-running operation Chapter 19-15 SO 2 Identify the 3 broad functions of management. Management Management Functions Functions Controlling Keep activities on track Determine whether goals are met Decide changes needed to get back on track May use an informal or formal system of evaluations Chapter 19-16 Good decision making is the outcome of good judgment in planning, directing, and controlling. SO 2 Identify the 3 broad functions of management. Management Management Functions Functions Review Question The management of an organization performs several broad functions. They are: a. Planning, directing, and selling. selling b. Directing, manufacturing, and controlling. c. Planning, manufacturing, and controlling. d. Planning, directing, and controlling. Chapter 19-17 SO 2 Identify the 3 broad functions of management. Good Good Ethics Ethics –– Good Good Business Business Business Ethics Business scandals caused massive investment losses and employee layoffs. Corporate fraud has increased 13% in last 5 years. Employee fraud – 60% of all fraud Intentional misstatement of financial reports financial reporting fraud Most costly to companies Chapter 19-18 SO 2 Identify the 3 broad functions of management. Good Good Ethics Ethics –– Good Good Business Business Creating Proper Incentives Systems to monitor and evaluate employees may produce incentives for unethical actions. Employees may feel that they must succeed no matter what. Ineffective and unrealistic controls may result in declining product quality. Chapter 19-19 SO 2 Identify the 3 broad functions of management. Good Good Ethics Ethics –– Good Good Business Business Code of Ethical Standards Sarbanes-Oxley Act of 2002 Clarifies management’s responsibilities. Certifications by CEO and CFO fairness of financial statements and adequacy of internal control Selection criteria for Board of Directors and Audit Committee Substantially increased penalties for misconduct IMA Statement of Ethical Professional Practices Chapter 19-20 SO 2 Identify the 3 broad functions of management. Managerial Managerial Cost Cost Concepts Concepts Manufacturing Costs Manufacturing consists of activities to convert raw materials into finished goods. In contrast, a merchandising firm sells goods in the form in which they were bought. Categories of manufacturing costs include: Illustration 19-2 Chapter 19-21 SO 3 – Define the three classes of manufacturing costs. Manufacturing Manufacturing Costs Costs Materials Raw Materials Basic materials used in manufacturing Direct Materials Raw materials that can be physically and directly associated with the finished product Chapter 19-22 SO 3 Define the three classes of manufacturing costs. Manufacturing Manufacturing Costs Costs Materials Indirect Materials Raw materials that cannot be easily associated with the finished product Not physically part of the finished product or they are an insignificant part of finished product in terms of cost Considered part of manufacturing overhead Chapter 19-23 SO 3 Define the three classes of manufacturing costs. Manufacturing Manufacturing Costs Costs Labor Direct Labor Work of factory employees that can be physically and directly associated with converting raw materials into finished goods Indirect Labor Work of factory employees that has no physical association with the finished product or for which it is impractical to trace to the goods produced Chapter 19-24 SO 3 Define the three classes of manufacturing costs. Manufacturing Manufacturing Costs Costs Manufacturing Overhead Costs that are indirectly associated with manufacturing the product Includes all manufacturing costs except direct materials and direct labor Chapter 19-25 SO 3 Define the three classes of manufacturing costs. Manufacturing Manufacturing Costs Costs Review Which of the following is not an element of Question manufacturing overhead?: a. Sales manager’s salary. b. Plant manager’s salary. c. Factory repairman’s wages. d. Product inspector’s salary. Chapter 19-26 SO 3 Define the three classes of manufacturing costs. Product Product Versus Versus Period Period Costs Costs Product Costs Components: direct material cost, direct labor cost, and manufacturing overhead A necessary and integral part of producing the product Recorded as inventory when incurred Not an expense until the finished goods inventory is sold, then record as cost of goods sold Chapter 19-27 SO 4 Distinguish between product and period costs. Product Product Versus Versus Period Period Costs Costs Period Costs Matched with revenue of a specific time period and charged to expense as incurred Non-manufacturing costs Deducted from revenues in period incurred to determine net income Includes all selling and administrative expenses Chapter 19-28 SO 4 Distinguish between product and period costs. Product Product Versus Versus Period Period Costs Costs Illustration 19-3 Chapter 19-29 SO 4 Distinguish between product costs and period costs. Manufacturing Manufacturing Costs Costs in in Financial Financial Statements Statements Income Statement The income statement for a manufacturer is similar to that of a merchandiser except for the cost of goods sold section. Chapter 19-30 SO 5 Explain the difference between a merchandising and a manufacturing income statement. Manufacturing Manufacturing Costs Costs in in Financial Financial Statements Statements Cost of Goods Sold Components Illustration 19-4 Merchandiser versus Manufacturer Chapter 19-31 SO 5 Explain the difference between a merchandising and a manufacturing income statement. Manufacturing Manufacturing Costs Costs in in Financial Financial Statements Statements Cost of Goods Sold Section of the Income Statement Illustration 19-5 Chapter 19-32 SO 5 Explain the difference between a merchandising and a manufacturing income statement. Manufacturing Manufacturing Costs Costs in in Financial Financial Statements Statements Determining the Cost of Goods Manufactured Illustration 19-6 Work in Process – partially completed units of product Total Manufacturing Costs – sum of direct material costs, direct labor costs, and manufacturing overhead; all incurred in the current period Chapter 19-33 SO 6 Indicate how cost of goods manufactured is determined. Manufacturing Manufacturing Costs Costs in in Financial Financial Statements Statements Illustration 19-7 Chapter 19-34 SO 6 Indicate how cost of goods manufactured is determined. Manufacturing Manufacturing Costs Costs in in Financial Financial Statements Statements Balance Sheet - Inventories Merchandising Company One category of inventory: Merchandise Inventory Illustration 19-8 Chapter 19-35 Manufacturing Company May have three inventories: Raw Materials Work in Process Finished Goods SO 7 Explain the difference between a merchandising and a manufacturing balance sheet. Manufacturing Manufacturing Costs Costs in in Financial Financial Statements Statements Balance Sheet - Inventories Illustration 19-9 Chapter 19-36 SO 7 Explain the difference between a merchandising and a manufacturing balance sheet Manufacturing Manufacturing Costs Costs in in Financial Financial Statements Statements Review Question Direct Materials are a: Product Cost Chapter 19-37 Manufacturing Overhead Period Cost a. Yes Yes No b. Yes No No c. Yes Yes Yes d. No No No Managerial Managerial and and cost cost Accounting Accounting Today Today Service Industry Trends U.S. economy has shifted toward an emphasis on providing services rather than goods Over 50% of U.S. workers are now employed by service companies Trend is expected to continue in the future Most of the techniques learned for manufacturing firms are applicable to service companies Chapter 19-38 SO 8 Identify trends in management and cost accounting. Managerial Managerial and and cost cost Accounting Accounting Today Today Managerial Accounting Practices Value Chain Refers to all activities associated with providing a product or service For a manufacturing firm these include the following: Illustration 19-12 Chapter 19-39 SO 8 Identify trends in management and cost accounting. Managerial Managerial and and cost cost Accounting Accounting Today Today Managerial Accounting Practices Just-In-Time (JIT) Inventory Methods Inventory system in which goods are manufactured or purchased just in time for use Quality Increased emphasis on product quality because goods are produced only as needed Total Quality Management (TQM) - a philosophy of zero defects Chapter 19-40 SO 8 Identify trends in management and cost accounting. Managerial Managerial and and cost cost Accounting Accounting Today Today Managerial Accounting Practices Activity-Based-Costing (ABC) Allocates overhead based on use of activities Results in more accurate product costing and scrutiny of all activities in the value chain Balanced Scorecard Evaluates operations in an integrated fashion Uses both financial and non-financial measures Links performance measures to overall company objectives Chapter 19-41 SO 8 Identify trends in management and cost accounting. Managerial Managerial Accounting Accounting Today Today Review Question Which of the following managerial and cost accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner? a. Just-in-time inventory. b. Total-quality management. c. Balanced scorecard. d. Activity-based costing. Chapter 19-42 SO 8 Identify trends in management and cost accounting. ...
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