Principles of Cost Accounting
15th edition
Edward J. VanDerbeck
© 2011 Cengage Learning. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in
part, except for use as permitted in a license
distributed with a certain product or service or
otherwise on a password-protected website for
classroom use.
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Chapter 1
Introduction to Cost Accounting
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Learning Objectives
LO1 Explain the uses of cost accounting
data.
LO2 Describe the ethical responsibilities,
and certification requirements for
management accountants, as well as
corporate governance.
LO3 Describe the relationship of cost
accounting to financial and
management accounting. 3
Learning Objectives (cont.)
LO4 Identify the three basic elements of
manufacturing costs.
LO5 Illustrate basic cost accounting
procedures.
LO6 Distinguish between the two basic
types of cost accounting systems.
LO7 Illustrate a job order cost system.
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Cost Accounting
Cost accounting provides the detailed cost data
that management needs to control current
operations and plan for the future.
Management uses cost accounting information
to decide how to allocate resources to the most
efficient and profitable areas of the business.
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Types of Businesses Entities
That Use Cost Accounting
Manufacturers (Ford, General Motors)
Merchandisers
Retailers (WalMart, Kmart)
Wholesalers (Beverage Distributors)
For-profit Service Businesses (CPAs,
Attorneys)
Not-for-profit Service Agencies (United Way,
Red Cross)
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The Manufacturing Process
This process involves the conversion of
direct (raw) materials, direct labor, and
factory overhead into finished goods.
Product quality is an important competitive
weapon in manufacturing.
Many companies require their suppliers to
be ISO 9000 certified.
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ISO 9000 Certification
The International Organization for
Standardization created a set of five
international standards for quality
management, ISO 9000-9004.
These standards require that manufacturers
have a well-defined quality control system
and they consistently maintain a high level
of quality.
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Determining Product
Costs and Pricing
Cost accounting is used to determine
products costs and help with marketing
decisions.
1. Determining the selling price of a product.
2. Meeting competition.
3. Bidding on contracts.
4. Analyzing profitability.
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Planning and Control
Planning is the process of establishing
objectives or goals for the firm and
determining the means by which they will be
met. Effective planning is facilitated by the
following:
1. Clearly defined objectives of the
manufacturing operation.
2. A production plan that will assist and guide
the company in reaching its objectives.
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Planning and Control (cont.)
Control is the process of monitoring the
company’s operations and determining
whether the objectives identified in the
planning process are being accomplished.
Effective control is achieved through the
following:
1. Assigning responsibility.
2. Periodically measuring and comparing results.
3. Taking necessary corrective action.
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Responsibility Accounting
Responsibility accounting is the assignment
of accountability for costs or production results
to those individuals who have the most authority
to influence them.
A cost center is a unit of activity within the
factory to which costs may be practically and
equitably assigned. The manager of a cost
center is responsible for those costs that the
manager controls.
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Reporting
Cost and production reports for a cost
center reflect its costs, in dollars, and its
production activity.
The performance report will include only
those costs and production data that the
center’s manager can control.
A variance is the favorable (F) or
unfavorable (U) difference between actual
costs and budgeted costs.
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Performance Report Example
Leonardo’s Italian Cafe
Performance Report - Kitchen
September 30, 2011
Budgeted Actual Variance
Expense September Year-to-Date September Year-to-Date September Year-to-Date
Kitchen Wages $5,500 $47,000 $5,200 $46,100 $300 F $900 F
Food 17,700 155,300 18,300 157,600 600 U 2,300 U
Supplies 3,300 27,900 3,700 29,100 400 U 1,200 U
Utilities 1,850 15,350 1,730 16,200 120 F 850 U
Total $28,350 $245,550 $28,930 $249,000 $580 U $3,450 U
F = Favorable
U = Unfavorable
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Performance Report
Leonardo’s Italian Cafe
Performance Report – Kitchen
OCTOBER 31, 2012
Budgeted Actual Variance
Expense October Year-to-Date October Year-to-Date October Year-to-Date
Kitchen Wages $8,500 $72,600 $7,200 $70,100 A A
Food 27,700 250,000 28,300 257,600 B B
Supplies 4,000 28,000 3,700 30,000 C C
Utilities 2,650 28,100 1,910 21,800 D D
Total $42,850 $378,700 $41,110 $379,500 E E
F = Favorable
U = Unfavorable
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Variance
October Year-to-Date
A. 1300 F A 2500 F
B 600 U B 7600 U
C 300 F C 2000 U
D 740 F D 6300 F
E 1740 F E 800 U
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Management Accounting
The Institute of Management Accountants
(IMA) is the largest organization of
accountants in industry. The Certified
Management Accountant (CMA) is
comparable to the Certified Public
Accountant (CPA) for public accountants.
For more information, please visit the IMA’s
website at www.imanet.org
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Corporate Governance
Corporate governance is the means by
which a company is directed and controlled.
The Sarbanes-Oxley Act (SOX) of 2002 was
written to reduce abuse and improve
corporate governance.
The Public Company Accounting Oversight
Board (PCAOB) was established to provide
oversight of the accounting profession.
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Relationship of Cost Accounting to
Financial and Managerial Accounting
Cost Accounting System
Characteristics Financial Accounting Managerial Accounting
Users: •External Parties
•Managers Managers
Focus: Entire business Segments of the business
Uses of Cost Information: Product costs for calculating cost •Budgeting
of goods sold and finished goods, •Special decisions such as make
work in process, and raw or buy a component, keep or
materials inventory using replace a facility, and sell a
historical costs and GAAP. product at a special price.
•Nonfinancial information such as
defect rates, % of returned
products, and on-time deliveries
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Relationship of Cost Accounting to
Financial and Managerial Accounting
(cont.)
Cost accounting includes those
parts of both financial and
managerial accounting that collect
and analyze cost information.
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Cost Accounting vs. Financial and
Managerial Accounting (cont.)
Financial
Cost Management
Accounting
Accounting Accounting
Cost of Goods Sold
Merchandiser Manufacturer
Beginning Beginning
merchandise inventory finished goods inventory
Plus: Plus:
Purchases (merchandise) cost of goods manufactured
Merchandise Finished goods
available for sale available for sale
Less: Less:
ending merchandise inventory ending finished goods inventory
Cost of good sold Cost of good sold
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Exercise Page 51
E1-2? E1-3?
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Exercise Page 51
E1-2 E1-3?
188,000 335,000
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Inventories
Merchandiser Manufacturer
Current assets: Current assets:
Cash Cash
Accounts receivable Accounts receivable
Inventories: Inventories:
Merchandise Finished goods
inventory Work in process
Materials
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Inventories (cont.)
Most manufacturers maintain a perpetual
inventory system that provides a continuous
record of purchases, issues, and balances of all
goods in stock.
A periodic inventory system does not provide
a continuous record.
An inventory ledger is a subsidiary ledger
maintained to provide support for the control
accounts.
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Elements of Manufacturing
Costs
Direct materials
Materials that become part of the finished good and
can be readily identified.
Direct labor
Labor of employees who work directly on the product
manufactured.
Factory overhead
Includes all costs related to production other than
direct materials and direct labor.
SELLING AND ADMINISTRATIVE EXPENSES
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PAGE 51 => DM/DL/FOH/SAE
E1-4 a. DM
a. Steel used in an overhead door plant. b. DM
b. Cloth used in a shirt factory. c. DM
c. Fiberglass used by a sailboat builder. d. SAE
d. Cleaning solvent for the factory floor. e. DL
e. Wages of a binder employed in a printing plant. f. FOH
f. Insurance on factory machines. g. FOH
g. Rent paid for factory buildings. h. FOH
h. Wages of the Machining Department supervisor. i. DM
i. Leather used in a shoe factory.
j. FOH
j. Wages of a factory janitor.
k. Electric power consumed in operating factory machines.
k. FOH
l. Depreciation on corporate offices. l. FOH
m. Fuel used in heating a factory. m. FOH
n. Paint used in the manufacture of jet skis. n. FOH
o. Wages of an ironworker in the construction business. o. DL
p. Electricity used in lighting sales offices p. FOH
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Prime Cost and Conversion Cost
Direct Materials
Elements Prime Cost
of Cost
Direct Labor
Conversion
Factory Overhead Cost
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Flow of Manufacturing Costs
Direct Materials
Work in Process Finished Goods Cost of Goods Sold
Direct Labor
(Assets) (Assets) (Expenses)
Factory Overhead
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Illustration of Accounting for
Manufacturing Costs
Materials xx Work in Process
Accounts Payable xx (Direct Labor) xx
Factory Overhead
Work in Process (Indirect Labor) xx
(Direct Materials) xx Selling & Admin Exp
Factory Overhead (Salaries) xx
(Indirect Materials) xx Payroll xx
Materials xx
Factory Overhead
Payroll xx (Depr. Bldg) xx
Wages Payable xx Selling & Admin Exp
(Depr. Bldg) xx
Wages Payable xx Accum. Depr. – Bldg xx
Cash xx
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Illustration of Accounting for
Manufacturing Costs (cont.)
Factory Overhead Finished Goods xx
(Depr. Mach & Eq) xx Work in Process xx
Accum. Depr. –
Mach & Eq xx Accounts Payable xx
Cash xx
Factory Overhead
(Utilities) xx Accounts Receivable xx
Selling & Admin Exp Sales xx
(Utilities) xx Cost of Goods Sold xx
Accounts Payable xx Finished Goods xx
Selling & Admin Exp xx Cash xx
Accounts Payable xx Accounts Receivable xx
Work in Process xx
Factory Overhead xx
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Cost Accounting Systems
Job Order Cost System
Output consists of special or custom-made
products.
Provides a separate record for the cost of
each quantity of these special or custom-
made products.
Process Cost System
Accumulates costs for each department or
process in the factory.
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Job Order Cost System
Direct Materials Work in Process Finished Goods
Direct Labor Account Account
Factory Overhead
Job Cost Sheets
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Process Cost System
Work in Process
Work in Process
Dept. 2 Finished Goods
Dept. 1
Direct Direct Direct Direct
Materials Labor Materials Labor
Factory Factory
Overhead Overhead
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Standard Cost System
May be used with either a job order or a
process cost system.
Uses predetermined standard costs to furnish a
measurement that helps management make
decisions regarding the efficiency of operation.
Standard costs are costs that would be incurred
under efficient operating conditions and are
forecast before the manufacturing process begins.
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Appendix
IMA Statement of Ethical Professional Practice
Members of the IMA shall behave ethically.
They have an obligation to the public, their
profession, the organizations they serve,
and themselves to maintain the highest
standards of ethical conduct.
1. Competence
2. Confidentiality
3. Integrity
4. Credibility
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Appendix (cont.)
Resolution of Ethical Conflict
When applying the standards of ethical conduct, IMA
members may encounter problems in identifying
unethical behavior or in resolving an ethical conflict.
1. Discuss issues with your immediate supervisor except when it
appears that the supervisor is involved.
2. Clarify relevant ethical issues by initiating a confidential discussion
with an IMA Ethics Counselor or other impartial advisor to obtain a
better understanding of possible courses of action.
3. Consult your own attorney as to legal obligations and rights
concerning the ethical conflict.
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Group Homework
page 57-58 (p1-5/p1-6 & p1-8/p1-9)
page 108 (E2-3 & E2-5)
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