Cost accounting - Job & Process Costing Flashcards
Responsibility accounting - 4. types
- Cost—accountable for costs only – E.g., Production, IT, HR
- Revenue—accountable for revenues only – E.g., Sales
- Profit—accountable for revenues and costs – E.g., A combined production and sales department
- Investment —accountable for investments, revenues, and costs
Profit and investment centers better than cost and revenue, managers can be held responsible for their own profit/loss and their return-on-investment.
- Each responsibility center has its own targets, budgets, and evaluation
- Cheat the system by selling at a discount, high costs for cost center if only rev and cost
- Cost center can cut back services, nothing to sell — rev gets the blame
- Responsibility center responsibilities include staying in budget, variance useful information for management for decision making, all profit inclined
Performance Measurement: good measures, balanced scorecard
- Good performance measures
- goal alignment,
- controllability — employees own responsibility for the work and results = performance
- Balanced scorecard
- Evaluate based on overall strategy, instead of only financial to align them with the ultimate goal
- Performance measures for each goal: learning, internal business, customer, financial
Estimating Costs - work-measurement method, Conference method, Account analysis method, High-Low Method
- Work-measurement method is a technique used in industrial engineering to analyze and measure the time and motion involved in completing a task. This method involves breaking down a complex task into smaller, more manageable parts and timing each component. By analyzing the data collected, industrial engineers can identify areas of inefficiency and develop strategies to improve the process, reduce waste, and increase productivity.
- Conference method
– Ask experts for the cost function
– Fast, but experts aren’t always right — based on estimations - Account analysis method
– Use accounting theory to classify costs -
Quantitative analysis — High-Low Method, Regression Method
– Data-driven, mathematical; only works within a relevant range
– Independent variables: cost drivers
– Dependent variable: cost of a cost objectDone through linear regression line of Quentities (x) and Cost (y) in each month—> estimations of average costs through regression lineProblem: Doesn’t consider all costs, marginal/average, fixed/variable — more data
CVP formula, CM/U, TCM, simple break-even,
- CVP Formula: (p-v)Q = π + F
- simple break-even: (p-v)Q - F = 0 or Q = F / (P-V)
CM/U - p-v
TCM - Q(p-v)
C = Total Cost
F = Fixed Cost
v = Variable Cost per Unit (aka marginal cost)
Q = Quantity of Units Produced
R = Total Revenue
p = Selling Price per Unit
π = Operating Profit (before taxes)
Overhead Base
In management accounting, rent, utilities, and salaries of support staff etc.
To allocate overhead costs to specific products or services, managers use an allocation base, also known as a cost driver/object.
This is a method of assigning costs based on the activities that drive them, such as machine hours, labor hours, or number of units produced.
The allocation base (manufacturing overhead etc.) is used to create cost pools, which are temporary holding grounds for indirect costs. These costs are then allocated to specific products or services based on the amount of the allocation base used by each product or service.
This allows managers to get a more accurate understanding of the true cost of producing each product or service.
Cost Pool
A cost pool is a temporary holding ground for indirect costs that cannot be easily traced to a specific product or service.
Indirect costs, such as rent or utilities, are accumulated in cost pools and then allocated to specific products or services based on the amount of the allocation base used by each product or service.
For example, the allocation base for a cost pool related to rent might be square footage used by each product or service. The cost of rent would then be allocated to each product or service based on the amount of square footage it uses.
Allocation Base
An allocation base is a method used to distribute costs or resources among different departments or products, based on a common factor such as number of units produced, hours worked, or square footage used. It is used in cost accounting and financial analysis — way to apply costs from the cost pool to the cost object.
Actual Costing, How to Allocate Overhead
Direct costs, apply at actual costs, but unsure of payments and budget since no certanity about the cash flows.
Overhead, end of period:
( Actual OH / Actual Base ) x Actual Base used for this job
Normal Costing, How to Allocate Overhead
Direct costs, apply at actual costs
Overhead, beginning of period based on estimations
( Est. OH / Est. Base ) x Actual Base Used for This job
Standard Costing & How to Allocate Overhead
Instead of what happened (actual) or combination of budget rates and usage (normal) - costs based on what should happen
End of period compare actual costs with these “standard costs” , the differences are variances.
Everything gets a “standard” cost, use budgeted numbers for both direct costs and overhead:
( Est. OH / Est. Base ) x Est. Base for this Job (instead of actual base)
ROI
subtracting the beginning value from the current value and then dividing the number by the beginning value
Residual Income as a performance method
the cost of capital - the operating income of a division.
It incentivizes managers to generate profits that exceed the cost of capital, which ultimately benefits the company as a whole.
Economic value added (EVA)
EVA = the net operating profit after taxes - (WACC x total assets - total liabilities)
Companies that generate positive EVA are considered to have created value for their shareholders, while those that generate negative EVA are considered to have destroyed value.
Return on sales as a performance method
ROS = Net Income / Sales
Assumptions of CVP
- Constant cost structure
– We know it, and it’s not changing, constant variables for costs
– Within relevant range
– Linear, revenues and costs due to same driver - No starting or ending inventory
