IENG 216 Cost Accounting

Flexible Budgeting Geared towards a range of activities Dynamic rather than static

Flexible Budgeting Geared towards a range of activities Dynamic rather than static Need to understand rudiments of cost accounting Job order costing Process costing Activity based costing

Job Order Costing K-Corp collects its cost data by the job order cost system. For each job, they know the amount and material costs. Direct labor costs are $9.50 per hour. Factory overhead rate is computed at $4.50 per hour.

Process Costing A Company produces and sells a chemical product. During a given month the company purchases 15,000 gallons of chemicals at a cost of $30,000. 10,000 gallons are completed and transferred to the next department. 5,000 gallons are 20% complete as to conversion. Factory overhead for the month is $20,000.

Activity Based Costing Historically direct labor & material constitute significant elements of cost of goods sold Current overhead costs dominate the cost of production Activity-based costing is designed to meet the challenge of a changing cost mix by associating manufacturing costs with activities which drive them

ABC Two-Step Process Define Cost Pools (usually support functions) Identify Cost Drivers (trace costs to the cost pools)

ABC Example A multinational firm uses traditional accounting to allocate manufacturing and management support costs. However, travel is typically allocated on the basis of employees at plants in France, Germany, Italy, and Greece. Consequently, some plants are likely generating much more management travel than others. The ABC system is chosen to more precisely allocate travel costs to major product lines.

ABC Example

ABC Example 1. Determine Cost Pool

ABC Example 2. Determine Cost Driver

ABC Example Driver Distribution

ABC Example Allocation of Costs

Value Added Examines the difference between the net operating profit (after tax) and the cost of capital Four ways to create value for shareholder increase profit margins without increasing capital invest in projects that earn more than cost of capital free-up capital than earns less than cost of capital use debt to reduce the cost of capital

Value Added Which is the better firm from a shareholder’s point of view?

Value Added Firm B has largest Economic Value Added (EVA)

Value Added Firm B has largest Economic Value Added (EVA) Maximizing ROI is not the right objective!