1. IENG 216
Cost Accounting

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

3. 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

4. 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.

6. 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 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.

8. 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

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

10. 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.

11. ABC Example

12. ABC Example
1. Determine Cost Pool

13. ABC Example
2. Determine Cost Driver

14. ABC Example
Driver Distribution

15. ABC Example
Allocation of Costs

16. 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

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

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

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