1. Dr.S.S.Jadhav
Cost Accounting

2. Learning Objectives
LO1 Explain the uses of cost accounting data. LO2 Describe the ethical responsibilities and certification requirements for management accountants. LO3 Describe the relationship of cost accounting to financial and managerial accounting.

3. Learning Objectives
LO4 Identify the three basic elements of manufacturing costs. LO5 Illustrate basic cost accounting procedures. LO6 Distinguish between the two basic types of cost accounting systems. LO7 Illustrate a job order cost system.

4. The Need for Cost Accounting
Cost accounting provides the detailed cost data that management needs to control current operations and plan for the future.
Companies must control costs in order to keep prices competitive.
In today’s global environment, cost information is more crucial than ever in remaining competitive.

5. Types of Businesses That Use Cost Accounting
Manufacturers (Ford, General Motors)
Merchandisers (WalMart, Kmart)
Wholesalers (Beverage Distributors)
For-profit Service Businesses (CPAs, Attorneys)
Not-for-profit Service Agencies (United Way, Red Cross)

6. The Manufacturing Process
This process involves the conversion of direct (raw) materials, direct labor, and factory overhead into finished goods.
Product quality is an important competitive weapon in manufacturing.
Many companies require their suppliers to be ISO 9000 certified.

7. ISO 9000 Certification
The International Organization for Standardization created a set of five international standards for quality management, ISO
These standards require that manufacturers have a well-defined quality control system and they consistently maintain a high level of quality.

8. Determining Product Costs and Pricing
Cost accounting is used to determine products costs and help with marketing decisions.
Determining the selling price of a product.
Meeting competition.
Bidding on contracts.
Analyzing profitability.

9. Planning and Control
Planning is the process of establishing objectives or goals for the firm and determining the means by which the firm will attain them. Effective planning is facilitated by the following:
Clearly defined objectives of the manufacturing operation.
A production plan that will assist and guide the company in reaching its objectives.

10. Planning and Control (cont.)
Control is the process of monitoring the company’s operations and determining whether the objectives identified in the planning process are being accomplished. Effective control is achieved through the following:
Assigning responsibility.
Periodically measuring and comparing results.
Taking necessary corrective action.

11. Responsibility Accounting
Responsibility accounting is the assignment of accountability for costs or production results to those individuals who have the most authority to influence them.
A cost center is a unit of activity within the factory to which costs may be practically and equitably assigned. The manager of a cost center is responsible for those costs that the manager controls.

12. Reporting
Cost and production reports for a cost center reflect all cost and production data identified with that center.
The performance report will include only those costs and production data that the center’s manager can control.
A variance is the favorable or unfavorable difference between actual costs and budgeted costs.

13. Performance Report Example
Renaldi’s Restaurant
Performance Report
September 30, 2006
Budgeted
Actual
Variance
Expense
September
Year-to-Date
Kitchen Wages
$5,500
$47,000
$5,200
$46,100
$300 F
$900 F
Food
17,700
155,300
18,300
157,600
600 U
2,300 U
Supplies
3,300
27,900
3,700
29,100
400 U
1,200 U
Utilities
1,850
15,350
1,730
16,200
120 F
850 U
Total
$28,350
$245,550
$28,930
$249,000
$580 U
$3,450 U
F = Favorable
U = Unfavorable

14. Management Accounting
The Institute of Management Accountants (IMA) is the largest organization of accountants in industry. The Certified Management Accountant (CMA) is comparable to the Certified Public Accountant (CPA) for public accountants.
For more information, please visit the IMA’s website at

15. Cost Accounting vs. Financial and Managerial Accounting
Cost Accounting System
Characteristics
Financial Accounting
Managerial Accounting
Users:
External Parties
Managers
Focus:
Entire business
Segments of the business
Uses of Cost Information:
Product costs for calculating cost of goods sold and finished goods, work in process, and raw materials inventory using historical costs and GAAP.
Budgeting
Special decisions such as make or buy a component, keep or replace a facility, and sell a product at a special price.
Nonfinancial information such as defect rates, % of returned products, and on-time deliveries

16. Cost Accounting vs. Financial and Managerial Accounting (cont.)
Cost accounting includes those parts of both financial and management accounting that collect and analyze cost information.

17. Cost of Goods Sold Merchandiser Manufacturer
Beginning finished goods inventory
Plus cost of goods manufactured
Finished goods available for sale
Less ending finished goods inventory
Cost of good sold
Beginning merchandise inventory
Plus purchases
Merchandise available for sale
Less ending merchandise inventory
Cost of good sold

18. Inventories
Most manufacturers maintain a perpetual inventory system that uses FIFO, LIFO, or moving average methods of costing.
An inventory ledger is maintained to provide support for the control accounts.
Some manufacturers may use a factory ledger, which contain all of the accounts relating to manufacturing.

19. Inventories Merchandiser Current assets: Cash Accounts receivable
Merchandise inventory
Manufacturer
Current assets:
Cash
Accounts receivable
Inventories:
Finished goods
Work in process
Materials

20. Elements of Manufacturing Costs
Direct materials
Materials that become part of the finished good and can be readily identified.
Direct labor
Labor of employees who work directly on the product manufactured.
Factory overhead
Includes all costs related to production other than direct materials and direct labor.

21. Prime Cost and Conversion Cost
Direct Materials
Direct Labor
Factory Overhead
Prime Cost
Elements of Cost
Conversion Cost

22. Flow of Manufacturing Costs
Direct Materials
Direct Labor
Factory Overhead
Work in Process
(Assets)
Finished Goods
(Assets)
Cost of Goods Sold
(Expenses)

23. Illustration of Accounting for Manufacturing Costs
Materials xx
Accounts Payable xx
Work in Process (Direct Materials) xx
Factory Overhead (Indirect Materials) xx
Materials xx
Payroll xx
Wages Payable xx
Wages Payable xx
Cash xx
Work in Process (Direct Labor) xx
Factory Overhead (Indirect Labor) xx
Selling & Admin Exp (Salaries) xx
Payroll xx
Factory Overhead (Depr. Bldg) xx
Selling & Admin Exp (Depr. Bldg) xx
Accum. Depr. – Bldg xx
Factory Overhead (Depr. Mach & Eq) xx
Accum. Depr. – Mach & Eq xx
Factory Overhead (Utilities) xx
Selling & Admin Exp (Utilities) xx
Accounts Payable xx
Selling & Admin Exp xx
Work in Process xx
Factory Overhead xx
Finished Goods xx
Work in Process xx
Accounts Payable xx
Cash xx
Accounts Receivable xx
Sales xx
Cost of Goods Sold xx
Finished Goods xx
Cash xx
Accounts Receivable xx

24. Cost Accounting Systems
Job Order Cost System
Output consists of special or custom-made products.
Provides a separate record for the cost of each quantity of these special or custom-made products.
Process Cost System
Accumulates costs for each department or process in the factory.

25. Job Order Cost System Direct Materials Direct Labor Factory Overhead
Work in Process
Account
Finished Goods
Account
Job Cost Sheets

26. Process Cost System Work in Process Dept. 1 Work in Process Dept. 2
Finished Goods
Direct
Materials
Direct
Labor
Direct
Materials
Direct
Labor
Factory
Overhead
Factory
Overhead

27. Standard Cost System
May be used with either a job order or a process cost system.
Uses predetermined standard costs to furnish a measurement that helps management make decisions regarding the efficiency of operation.
Standard costs are costs that would be incurred under efficient operating conditions and are forecast before the manufacturing process begins.

28. Appendix Standards of Ethical Conduct for Management Accountants
Members of the IMA have an obligation to the public, their profession, the organizations they serve, and themselves to maintain the highest standards of ethical conduct.
Competence
Confidentiality
Integrity
Credibility

29. Appendix (cont.) Resolution of Ethical Conflict
When applying the standards of ethical conduct, IMA members may encounter problems in identifying unethical behavior or in resolving an ethical conflict.
Discuss problems with the immediate superior except when it appear that the superior is involved.
Clarify relevant ethical issues by confidential discussion with an objective advisor.
Consult your own attorney as to legal obligations and rights concerning the ethical conflict.