1. 1 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola CHAPTER 13 Cost Accounting and Reporting Systems

2. 2 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Learning Objectives Explain the role of cost accounting as it relates to financial and management accounting. Explain the strategic role cost management plays in the organisation’s value chain. Explain the difference between direct and indirect costs. Explain the difference between product and period costs. Explain the general operation of a product costing system. Calculate predetermined overhead application rates. Present a statement of cost of goods manufactured. Explain the difference between absorption and direct costing. Apply activity-based costing.

3. 3 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Overview Cost accounting is a subset of management accounting. It relies on the accumulation and determination of product, process or service costs for the purposes of assigning these costs to a cost object. Accurate cost information is necessary to help managers make pricing decisions and evaluate productivity and efficiency.

4. 4 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Cost Accounting Financial accounting - focus on external reporting Cost accounting - focus on cost accumulation and assignment Management accounting - focus on internal reporting

5. 5 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Strategic, operational, and financial Planning Planning and control cycle Data collection and performance feedback Implement plans Revisit plans Performance analysis: Plans vs actual results (Controlling) Decision Making Executing operational activities (Managing)

6. 6 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Value Chain Functions The sequence of functions and activities that, over the life of the product or service, adds value for the customer. Production Distribution Design Marketing Research and Development Desired ROA Customer Service

7. 7 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Cost Accumulation and Assignment Cost Pool Cost Object Cost Assignment Cost Object Cost Assignment Cost Object Cost Assignment Cost objects are products, jobs, and services. Cost Accumulation

8. 8 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Direct Costs and Indirect Costs Direct costs: Can be easily and conveniently traced to a unit of product or other cost objective. Would not be incurred if the product or activity were discontinued. Indirect costs: Cannot be easily and conveniently traced to a unit of product or other cost object. Would be incurred even if the product or activity were discontinued.

9. 9 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Costs for Cost Accounting Purposes Financial Accounting Cost is a measure of resources used or given up to achieve a stated purpose. Cost Accounting Costs are assigned to products and become expenses when products are sold.

10. 10 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Manufacturers... –buy raw materials –produce and sell finished goods. Retailers... –buy finished goods –sell finished goods. Costs for Cost Accounting Purposes

11. 11 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Costs for Cost Accounting Purposes Manufacturer Ingredients Human effort Machine support + + Balance Sheet Inventory Income Statement Cost of Goods Sold Sold to Customers = Manufactured product Focus of chapter

12. 12 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Costs for Cost Accounting Purposes Balance Sheet Inventory Income Statement Cost of Goods Sold Retailer Purchased product Sold to customers

13. 13 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Costs for Cost Accounting Purposes Ingredients Human effort Machine support + + RAW MATERIALS DIRECT LABOUR MANUFACTURING OVERHEAD

14. 14 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Includes all manufacturing costs except raw material and direct labor. Factory utilities, property taxes and insurance Maintenance and cleaning Depreciation for factory buildings and equipment Production supervision salaries. Costs for Cost Accounting Purposes Manufacturing Overhead Overhead is an indirect cost – it is not feasible to specifically relate overhead items to individual products or services.

15. 15 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Costs not included in inventory are reported on the income statement in the accounting period in which they are incurred. Selling, general and administrative costs. Costs for Cost Accounting Purposes Period Costs

16. 16 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Planning and control functions. Providing products or services to customers. Assessing the efficiency and effectiveness of operations. Determining unit manufacturing costs. Cost accounting systems provide information supporting decision making. Cost Accounting Systems

17. 17 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Disclose inventories and cost of goods sold. Track resources consumed by products and services. Manage activities that consume resources. Evaluate and reward employee performance. Cost accounting systems are the procedures and techniques used by management. Cost Accounting Systems

18. 18 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Cost Accounting Systems Raw Materials Work in Process Finished Goods A manufacturing cost accounting system involves three inventory accounts: Cost of parts, assemblies and materials. Used to accumulate all of the manufacturing costs. Cost of completed items.

19. 19 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Balance Sheet Inventories Income Statement Expenses Finished Goods Cost of Goods Sold Work in Process Direct Labor Manufacturing Overhead Selling and Administrative Period Costs Selling and Administrative Cost Accounting Systems Costs Raw Materials Material Purchases

20. 20 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola THE JOB Direct labor Raw material Manufacturing overhead (OH) Applied to each job using a predetermined rate. Cost Accounting Systems Traced directly to each job via usage records. Traced directly to each job via time records.

21. 21 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Estimated total manufacturing overhead cost for the coming period Estimated total units in the allocation base for the coming period POAR = The pre-determined overhead application rate (POAR) used to apply overhead to jobs is determined before the period begins. Ideally, the allocation base is a cost driver that causes overhead – often direct labor hours. Cost Accounting Systems

22. 22 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Overhead applied = POAR × Actual activity Actual amount of the cost driver such as units produced, direct labour hours or machine hours incurred during the period. Based on estimates, and determined before the period begins. Cost Accounting Systems

23. 23 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Cost Accounting Systems The predetermined overhead application rate (POAR) is based on estimates. At the end of the year: Total actual overhead costs Costs applied to production = The difference is known as a variance as either under or over applied overhead and must be transferred to another account.

24. 24 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Work in Process Finished Goods Cost of Goods Sold May be allocated to these accounts proportionately. May be transferred directly to cost of goods sold. Cost of Goods Sold Smaller variance OR Cost Accounting Systems Material variance

25. 25 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Prepared to assist managers in understanding and evaluating the overall cost of manufacturing products. Statement of cost of goods manufactured

26. 26 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Used for production of large, discrete, high- cost items (eg yachts) Built to order rather than mass produced Many costs can be directly traced to each job Cost Accounting Systems Process Costing Job Order Costing

27. 27 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Cost Accounting Systems Used for production of small, homogeneous, low-cost items Mass produced in automated continuous production process Costs cannot be directly traced to each unit of product. Process Costing Job Order Costing

28. 28 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Raw materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling and admin expenses Fixed selling and admin expenses Variable costing Absorption costing Product costs Period costs Product costs Period costs Absorption and Variable Costing Absorption costing must be used for financial and income tax reporting purposes.

29. 29 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Absorption and Variable Costing Significance of difference: Increase in inventory Fixed manufacturing overhead component Absorption costing Asset in the Balance Sheet Increase in inventory Fixed manufacturing overhead component Direct costing Expense in the Income Statement

30. 30 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Overhead costs have become an increasingly significant part of product cost. Activity-based Costing (ABC) The application of overhead on the basis of a few broad rates (based on direct labour or machine hours) has been replaced in many firms by activity-based costing (ABC).

31. 31 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Activity-based Costing (ABC) Activity-based costing (ABC) involves identifying the activity that causes the cost to be incurred. For example, machine set-up, quality inspection, materials handling activities. COST DRIVERS

32. 32 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola Activity-Based Costing (ABC) Predetermined cost per activity Number of times each activity is performed Total cost of each activity Cost per activity = Activity-based costs are applied to products, manufacturing processes, and even administrative and marketing efforts.

33. 33 Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola More clearly focuses on the activities causing costs. More accurate product costs for: –pricing decisions –product elimination decisions –managing activities that cause costs. Benefits should always be compared to costs of implementation. The Benefits of ABC