12 Cost Accounting. Planning & Analysis Flashcards
(no need) More Purpose
1. ____ _____
2. ____ the ____ of the company as a whole, or evaluate
part of the company, for example:
3, To ___ the ____, basically in an industrial company
-
Making decisions about products or activities, examples:
To add a new product
To discontinue an existing product
A pricing decision
A new equipment decision
A new technology decision
Buy or produce some component
Start (or finish) some activity
Open (or close) a department within a company -
Evaluate the results of the company as a whole, or evaluate
part of the company, for example:
A department
A section
A division
A manager decision - To measure the profits, basically in an industrial company
To obtain the cost of each produced unit, in order to calculate:
the stock, and
the cost of goods sold and therefore to obtain the net income of the company.
Distinction between expenses, costs, payments and investment
Expense
In order to conduct their business, all companies have certain expenses such as personnel cost, material consumption, depreciation,…
Financial accounting rules determine which concepts are considered expenses and will appear on the profit and loss account.
Cost
This is a concept of cost accounting.
A cost is a consumption, and this is measured by the value of the elements necessary to produce a product.
There are cost items that are not considered expenses such as the opportunity cost (minimum return required by shareholders)
Payment
A payment is an outflow of cash, but not all expenses and costs are paid.
Depreciation of non-current assets, despite being a cost and an expense, is not paid.
On the other hand, there are payments that are neither cost nor expense, such as the repayment of the principal of a loan or the payment of dividends to shareholders
Investment
It refers to that part of expenditure which is not consumed in the exercise but remains in the company in order to be used in the future years. (machinery, etc.)
At the end of each year, we must calculate the investment that is consumed or spent (depreciation)
What is a cost?
the value of money that has been used up to ____ something or _____ a ____, and it is not available for use anymore.
In other words, it’s the “value paid” to ____ a product, ____ inventory, ___ merchandise(商品), or ___ equipment ready to be used in a business process.
Whether a cost is relevant for a decision depends on the ___ ___ ____ of that decision.
A cost is the value of money that has been used up to produce something or deliver a service, and it is not available for use anymore.
In other words, it’s the “value paid” to manufacture a product, purchase inventory, sell merchandise, or get equipment ready to be used in a business process.
Whether a cost is relevant for a decision depends on the specific business context of that decision.
Types of Costs
The classification of costs helps to identify which costs are relevant for __ ___.
The classification of costs helps to identify which costs are relevant for decision making.
HISTORICAL COSTS AND EXPECTED COSTS:
• Imagine that there is a historical cost of €100 to produce a table. This was the real amount paid to produce the table.
• The expected cost is the estimated amount to produce another table (same model). Also called the replacement cost. Imagine that there is an increase in the price of raw material and now the expected cost is €105.
• Apparently, historical cost (€100) is more useful because it is based on reality. The expected cost (€105) tends to be more speculative….
• However, if we want to use the costing data to make decision for the future, it is better to use the Expected Cost. The historical cost is useful to evaluate past actions.
DIRECT AND INDIRECT COSTS.
• We need to consider as a measurement unit one objective of cost, usually a product, a project or also a department.
• Direct costs are the costs clearly traceable to the cost objective.
• Indirect costs are nonspecific costs for one product or project. Indirect costs are usually shared with other units or cost objectives.
FIXED AND VARIABLE COSTS:
• Fixed and variable costs distinction is based on the level of activity, that is the quantity of products and services.
• Fixed costs do not vary according to business volume(业务量) or activity level. This is the case for most non-production costs, such as general and administrative expenses, monthly rent or depreciation of machinery
• Moreover, some production costs also remain unchanged with the production of an additional unit (example: Manufacturing overhead costs).
• In contrast, other costs do vary according to business volume. We refer to these costs as variable costs or proportional costs.
• The most obvious one is the cost of material, or the selling commission related to the sales volume.
• The distinction between fixed and variable costs allows for intermediate cases(中间情况): the so-called semi-variable or semi-fixed costs.
UNIT COST AND TOTAL COSTS.
• Up to now, we have considered (implicitly) the total cost.
• That means the total cost necessary to produce the products of a company, or at least a batch of products.
• We can also consider unit cost to produce a single unit of a product.
• Usually, we can measure the total cost of a batch of products and then we calculate the average cost of this batch or the unit cost.
First define one objective of cost: Division A(A部门), Plant 2, Line 3, Project M, Product F,…
If we choose as cost objective “Production Line 3”:
If we choose now as cost objective Product F:
üIf we choose as cost objective “Production Line 3”:
Øthe direct costs will be:
§ Raw material to produce E and F
§ Salary of “Production Line 3” personnel
§ Salary of the “Production Line 3” manager, etc.
ØAnd the indirect cost of “Production Line 3” will be:
§ General manager of the Division A
§ Plant Manager of the Plant 2
§ Building amortization (assuming that this building is also used by other production lines or
departments), etc.
Øthe direct costs of the Product F will be:
§ Raw material A and B to produce F
§ Hours of direct production personnel to produce F
ØAnd the indirect costs of Product F will be:
§ Salary of the “Production Plant 2” manager
§ General manager of the company
§ Building amortization (assuming that this building is also used by other departments), etc.
A cost is not “direct” or “indirect” per se, it is only “direct” or “indirect” in relation to a determined objective of cost.
In one extreme position, if we consider the company as a unit of magnitude, then all costs would be direct costs in relation to this reference. It is a scale issue.
When we go down one level, there will be indirect costs related to this new unit of measurement.
The more we reduce the level, the more indirect costs we have.
In the other extreme position, if we consider as a cost objective one unit of the “product F”, only the raw material would be direct cost.
Indirect costs are also called allocated costs because we need certain criteria to split this cost into different measurement units or different departments.
Distinguishing direct costs form indirect costs also depends on the available information:
For example, electrical energy could be a direct cost of “Department P” if we have installed a kilowatt-hour meter box in each department.
It might also be possible that we have a specific KWH meter box for each machinery and measure the energy consumed by each product. Then we would consider the energy cost as a direct cost of Product F.
However, it is not practical to have a measure device in each
machine or production line, for each product. In other words, there are some indirect costs that we can convert into direct costs, but it is not convenient.
Other indirect costs such as the general manager, can only be
considered direct costs when the full company is the cost objective.
A classic example of semi-variable cost is the power supply. It usually has a variable cost for every KWH consumed and a fixed amount for installed kilowatts.
• Sales expenses may also be semi-variable if salespeople receive a fixed salary and a commission that varies according to the volume of sales.
• Semi-fixed costs, on the other hand, are those that vary stepwise. For example, beyond a certain volume of production the company will have to make additional investments in production equipment or hire more workers
The distinction between variable and fixed costs is ___ specific.
- ___ frame
- ____
- country’s ___
The distinction between variable and fixed costs is context specific.
• For example, the variability of labor costs depends on the flexibility allowed by each country’s labor laws.
• Whether a given cost is altered by the decision: it often depends on the time frame of that decision:
• In a very short period almost all costs are fixed (not much can be changed overnight, not even the supply materials).
• In contrast, over a sufficiently long period all costs are semi-fixed or variable. (In the long term, for instance, it is possible to invest or disinvest in fixed assets)
• Finally, cost variability also depends on the magnitude 规模 of the increase or decrease in production volume caused by the decision.
• For example, entering a supply contract that requires a significant increase in production could involve additional investment in facilities or hiring additional workers.
SHORT-TERM OPERATIONAL DECISIONS:
Contribution Margin:
• In managerial accounting, the contribution margin is the difference between ___ and ____ (including variable production costs and other variable costs such sales commissions not related to production).
• It is expressed in ____, also in % on selling price.
• It is a useful decision criterion when quantifying alternatives in which fixed costs are not relevant.
• A rule of thumb when it comes to deciding whether to accept an order in the short term is to check whether the contribution margin is ___.
- In managerial accounting, the contribution margin is the difference between revenues and variable costs (including variable production costs and other variable costs such sales commissions not related to production).
- It is expressed in Euros / Unit, also in % on selling price.
- It is a useful decision criterion when quantifying alternatives in which fixed costs are not relevant.
- A rule of thumb when it comes to deciding whether to accept an order in the short term is to check whether the contribution margin is positive.
Break-even point
• Is the point at which total cost and total revenue are equal. There is no net loss or gain.
• It represents the sales amount- in either units or sales terms – that is required to cover all costs, fixed and variable costs
Profit = Sales – Fixed costs – Variable costs
Break-even point –> Profit = 0 –> Sales = Fixed cost + Variable cost ;
Fixed cost = Sales – Variable cost = Contribution Margin
• Break even point is the level of activity at which CM covers exactly the fixed cost.
• Once surpassed the break-even point, the company can start making a profit.
COSTING SYSTEMS
Cost accounting has 3 objectives:
üMake decisions
üCalculation of operating income
üInventory valuation
To calculate the full cost of a product, it is needed:
Calculate the direct cost of the product
Calculate indirect cost and allocate it in the product.
Cost systems is basically a framework to allocate ___ costs to the products.
Cost systems is basically a framework to allocate indirect costs to the products.
COSTING SYSTEMS: The case of a company
producing/selling only one product:
COSTING SYSTEMS: The case of a company with multiple products:
We must decide how to allocate the costs among the various products (partial or full cost)
PARTIAL COSTING SYSTEMS: DIRECT COSTING
• By using the direct cost, we consider only those costs that are attributable with an objective criteria to the corresponding cost object. So, in an industrial company we consider the raw material cost to manufacture the product.
• In some cases, we consider the costs associated with direct labor (which is directly involved in making the product) and direct commercial costs, such as commissions and transport.
• With this system we can get the profit and loss account by product.
• All other costs (indirect costs) are taken directly to the profit and loss account, without allocation to products.
FULL COSTING SYSTEMS: COST ALLOCATED BY SECTIONS: • Partial costing system may be insufficient for companies interested in knowing more accurately the impact of indirect cost in each cost object. Full costing includes all costs in the cost of the product.
- Full costing is usually applied in companies operating in industries (textile, automobile, etc.) carrying out mass production of similar units. Full cost can provide information about the cost of each process.
- The treatment of direct cost is similar in all costing systems, the difference between costing systems lies in how indirect costs are allocated to the cost objects.
- One type of full costing system is the full costing by sections.
• Full costing by sections consist of dividing the company into cost centers (or sections) to which costs are allocated.
- Sections are organizational units (responsibility centers or departments) in which the company is divided.
- Sections can be main or auxiliary depending on whether or not they are directly related to the cost object (product or service).
• Steps to calculate the cost of the product or service (cost objective):
Direct costs such as material and direct labor are charged directly to the product.
Indirect costs are allocated using a subjective criteria.
For example, staff costs are allocated according to the section where each employee works, rents are distributed using the square footage occupied by each section, the energy is distributed according to the installed power consume, depreciation is distributed according to the section where equipment is located.
The cost of the auxiliary sections are assigned to the main section in the so-called second step. In this second step, the allocation is made based on the dedication that each auxiliary section has had to the main sections.
Then we define the unit work in each section. This unit work measures the level of activity in each section. The most common units of work are physical units or raw material.
This will allow us to know the cost per unit of each section. Then multiply this cost by the number of units of work necessary to produce a unit of the product in each section.
