Notes for cost accounting 1 PDF

Preview

Summary

Summary of chapters covered in Cost 1, with additional notes added from lectures....

Description

Chapter 5 – Activity Based Costing & Management Traditional Costing  Traces DM & DL costs to cost object  Pools all other manufacturing costs into indirect costs and allocates them to cost object  Peanut-butter costing: assigning MOH costs to different products using the same rate

Product undercosting – product consumes high level of resources but is allocated low costs per unit Product overcosting – product consumes low level of resources but is allocated high costs per unit Product-cost cross-subsidization – if a company undercosts one of its products, it will overcost at least one of its other products o Common in situations where costs are uniformly spread o Overcosted products seem less profitable and undercosted products seem more profitable o Overcosted products are subsidizing undercosted products Guidelines for Refining a Costing System Direct-cost tracing – identify as many direct costs as is economically feasible (reduce number of indirect costs) Indirect-cost pools – expand number of indirect-cost pools (all costs in pool have same relationship with single cost driver) Cost-allocation bases – use cost driver as cost allocation base for each pool Activity-Based Costing Systems Activity based costing (ABC): assignment of indirect, mixed cost pools to distinct outputs where the outputs produced consume costs differently during the production process o Focuses on individual activities as cost objects o Calculates costs of individual activities and assigns costs to cost objects based on activities undertaken Activity: an event, task, or unit of work w/ a specified purpose Activity cost pool: accumulation of all costs req’d to pay for a defined activity that indirectly supports production of outputs

Cost Hierarchies Categorize various activity cost pools based on different types of cost drivers/cost-allocation bases  Output unit-level costs – costs of activities performed to produce individual units of a product/service; proportional to production volumes/sales volumes  Batch-level costs – costs of activities performed for each batch; not related to number of units in batch  Product-sustaining costs – costs of activities that support individual products/services regardless of number of units or batches in which products are produced  Facility-sustaining costs – costs of activities that support the organization as a whole; unaffected by quantities of products, batches, units, or customers Implementing Activity-Based Costing 1. Identify the products that are the chosen cost objects 2. Identify direct costs of the products 3. Select activities and cost-allocation bases to use for allocating indirect costs to the products 4. Identify indirect costs associated w/ each costallocation base 5. Compute rate per unit of each cost-allocation base 6. Compute indirect costs allocated to the products 7. Compute total cost of products by adding all direct and indirect costs assigned to the products Signs that ABC could help a firm: o Significant amounts of indirect costs allocated using only one or two cost pools o All/most indirect costs identified as output unitlevel costs o Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity o Products that company is well-suited to produce/sell show small profits, whereas products that a company is less suited to produce/sell show large profits o Operations staff has substantial disagreement w/ reported costs of manufacturing and marketing products/services

Chapter 6 – Master Budget & Responsibility Accounting Budget: a quantitative expression of a proposed plan of action by management for a set time period Advantages of Budgets  Compel planning and monitoring of implementation of plans  Provide reliable performance assessment criteria  Promote communication and coordination within organization Kaizen budgeting: budgeting to implement a strategy of systematic elimination of waste in every business process o Focused on eliminating activities that create cost but add no value o Establishes steadily decreasing budget numbers or targets for costs in order to have less waste and more efficiency Activity based budgeting (ABB): strategy to identify and control costs that focuses on the cost of activities necessary to produce and sell products/services o Develops budgets based on level of various activities needed to fulfill organizational goals Steps in Developing Master Operating Budget 1. Revenue budget 2. Production budget (units) 3. DM usage budget & DM purchases budget 4. DML budget 5. MOH costs budget 6. Ending inventories budget 7. COGS budget 8. Operating expense (period cost) budget 9. Budgeted income statement Based on operating budgets: 1. Capital expenditures budget 2. Cash budget 3. Budgeted balance sheet 4. Budgeted cash flow statement

Chapter 7 – Flexible Budgets & Variances Favourable (F) variance: results in operating income that exceeds budgeted amount Unfavourable (U) variance: results in operating income less than budgeted amount

Flexible Budget Variance o Total of differences btwn. actual results and flexible budget amounts o Divided into rate (price) variance and efficiency variance FBV = RV + EV

Static budget: based on budgeted level of output – no adj. made Flexible budget: budgeted revenues/costs adj. based on actual quantity produced and sold o Uses actual quantity produced/sold o Uses budgeted revenues/costs (from static budget) o Uses FC from static budget

Rate (price) variance: Difference btwn. actual and budgeted price multiplied by actual input quantity Static Budget Variance o Difference btwn. actual results and static budget amounts o Consists of flexible budget variance and sales volume variance SBV = FBV + SVV

Efficiency variance: Difference btwn. actual and budgeted quantity used multiplied by budgeted input price

Rate/efficiency variances for direct materials:

Flexible budget variance: o Total of differences btwn. actual results and flexible budget amounts for actual output achieved o Differences arise because actual revenues/costs were different from budgeted amounts FBV = Actual results – Flexible budget amount Sales volume variance: o Difference btwn. flexible budget and static budget amounts o Differences arise due to differences in quantity sold SVV = Flexible budget amount – Static budget amount

*For DM, FBV only = rate variance + efficiency variance when DM purchased = DM used* Reasons for unfavourable DM rate (price) variance: o Incorrect standards o Unable to get quantity discount o Unexpected price changes Reasons for unfavourable DM efficiency variance: o Incorrect standards o Poor quality of materials o Inefficient machines

Journal Entries F variance = credit U variance = debit Record materials purchased: Dr. Materials Control (AQ x SP) Dr./Cr. DM Rate Variance Cr. A/P Control (AQ x AP) (actual amount purchased)

Record materials used: Dr. WIP Control (SQ x SP) Dr./Cr. DM Efficiency Variance Cr. DM Control (AQ x SP) Record manufacturing labour: Dr. WIP Control (SQ x SP) Dr./Cr. DML Rate Variance Dr./Cr. DML Efficiency Variance Cr. Wages Payable Control (AQ x AP) (actual wage amount)

Chapter 8 – Flexible Budgets and Variances Fixed Overhead

U variances → Dr. COGS | F variances → Cr. COGS Variable Overhead

o o o

*No efficiency variance for FMOH* ∴ rate variance = flexible budget variance = static budget variance Flexible budget amount = static budget amount for FMOH Since FC don’t Δ w/ sales, no sales volume variance for FMOH

FMOH spending (rate) variance – difference btwn. actual FMOH costs incurred & budgeted lump sum amount (from static budget/flexible budget) o Spent more/less on FMOH than expected FMOH production volume variance – difference btwn. budgeted FMOH and FMOH allocated for actual quantity of output o Arises due to misallocation of FMOH o Produced @ different level of activity than expected

VMOH spending (rate) variance – measures effectiveness of purchasing VMOH and controlling use of VMOH driver

VMOH efficiency variance – measures efficiency w/ which cost driver has been used to produce output Journal Entries for VMOH Variances F variance = credit U variance = debit Record actual VMOH costs incurred: Dr. VMOH Control (actual costs) Cr. A/P etc.

Journal Entries for FMOH Variances F variance = credit U variance = debit

Record VMOH costs allocated: Dr. WIP Control Cr. VMOH Allocated

Record actual FMOH costs incurred: Dr. FMOH Control (actual costs) Cr. A/P etc.

Record variances: Dr. VMOH Allocated Dr./Cr. VMOH Rate Variance Dr./Cr. VMOH Efficiency Variance Cr. VMOH Control

Record FMOH costs allocated: Dr. WIP Control Cr. FMOH Allocated Record variances: Dr. FMOH Allocated Dr./Cr. FMOH Rate Variance Dr./Cr. FMOH Production Volume Variance Cr. FMOH Control Write off to COGS:

Write off to COGS: U variances → Dr. COGS | F variances → Cr. COGS What do the variances represent?  Outdated standards  Incorrect cost driver used  Actual production ≠ budgeted production  Actual MOH costs ≠ budgeted MOH costs  Capacity used more efficiently than anticipated

Chapter 9 – Income Effects of Inventory Valuation 

Theoretical capacity – amount of output theoretically possible if there were never any delays/interruptions in production



Practical capacity – amount of output practically possible after taking into account req’d idle time for maintenance, holidays, etc.



Normal capacity – level of output that will satisfy average customer demand over specified time period; complies w/ ASPE/IFRS



Master-budget capacity – level of output that will satisfy customer demand for specified time period; complies w/ CRA

Absorption costing: method of inventory valuation in which inventory absorbs both variable and fixed manufacturing costs; classifies all non-manufacturing costs as period costs Disadvantages of absorption costing: o Enables managers to increase operating income in short run by increasing production o If sales < production, operating income higher w/ absorption costing o Managers may switch production to orders that absorb highest amount of fixed manufacturing costs Variable costing: method of inventory valuation in which only variable manufacturing costs are included as inventoriable costs; classifies all fixed and nonmanufacturing costs as period costs...