Akuntansi Biaya - PPT Horngren (Teori) PDF

CHAPTER 1
The Accountants Role in the

Organization
2009 Pearson Prentice Hall. All rights reserved.
Accounting Discipline Overview

Managerial Accounting measures, analyzes and
reports financial and nonfinancial information to
help managers make decisions to fulfill
organizational goals. Managerial accounting
need not be GAAP compliant.
Financial Accounting focus on reporting to
external users including investors, creditors, and
governmental agencies. Financial statements
must be based on GAAP.
Major Differences Between

Financial & Managerial Accounting
Managerial Accounting
Financial Accounting
Decision making
Communicate financial
position to outsiders
Internal managers
External users
Future-oriented
Past-oriented
Do not have to follow GAAP;

cost vs. benefit
GAAP compliant;
CPA audited
Time Span
Ultra current to very long

time horizons
Historical monthly,
quarterly reports
Behavioral
Issues
Designed to influence
employee behavior
Indirect effects on
employee behavior
Purpose
Primary Users
Focus/Emphasis
Rules
Strategy & Management Accounting

Strategy specifies how an organization
matches its own capabilities with the
opportunities in the marketplace to
accomplish its objectives
Strategic Cost Management focuses
specifically on the cost dimension within a
firms overall strategy
Strategy & Management Accounting

Management accounting helps answer important
questions such as:
Who are our most important customers, and how do
we deliver value to them?
What substitute products exist in the marketplace,
and how do they differ from our own?
What is our critical capability?
Will we have enough cash to support our strategy or
will we need to seek additional sources?
Management Accounting and Value

Creating value is an important part of planning
and implementing strategy
Value is the usefulness a customer gains from
a companys product or service
Management Accounting and Value

Value Chain is the sequence of business functions in
which customer usefulness is added to products or
services
The Value-Chain consists of:
1.
2.
3.
4.
5.
6.
Research & Development

Design
Production
Marketing
Distribution
Customer Service
The Value Chain Illustrated
A Value Chain Implementation
Key Success Factors

The dimensions of performance that
customers expect, and that are key to the
success of a company include:
Cost and efficiency
Quality
Time
Innovation
Planning & Control Systems

Planning selects goals, predicts results,
decides how to attain goals, and
communicates this to the organization
Budget the most important planning tool
Control takes actions that implement the

planning decision, decides how to evaluate
performance, and provides feedback to the
organization
A Five-Step Decision Making Process in

Planning & Control
1.
2.
3.
4.
Identify the problem and uncertainties

Obtain information
Make predictions about the future
Make decisions by choosing between
alternatives
5. Implement the decision, evaluate performance,
and learn
Management Accounting Guidelines

Cost Benefit approach is commonly used:
benefits generally must exceed costs as a basic
decision rule
Behavioral & Technical Considerations people
are involved in decisions, not just dollars and
cents
Different definitions of cost may be used for
different applications
A Typical Organizational Structure and

the Management Accountant
Professional Ethics
The four standards of ethical conduct for
management accountants as advanced by the
Institute of Management Accountants:
Competence
Confidentiality
Integrity
Objectivity
CHAPTER 2
An Introduction to Cost Terms and Purposes
Basic Cost Terminology

Cost sacrificed resource to achieve a specific
objective
Actual cost a cost that has occurred
Budgeted cost a predicted cost
Cost object anything of interest for which a
cost is desired
Cost Object Examples at BMW

Cost Object
Illustration
Product
BMW X 5 sports activity vehicle
Service
Dealer-support telephone hotline
Project
R&D project on DVD system enhancement
Customer
Herb Chambers Motors, a dealer that purchases

a broad range of BMW vehicles
Activity
Setting up production machines
Department
Environmental, Health & Safety
Basic Cost Terminology

Cost accumulation a collection of cost data
in an organized manner
Cost assignment a general term that
includes gathering accumulated costs to a cost
object. This includes:
Tracing accumulated costs with a direct
relationship to the cost object and
Allocating accumulated costs with an indirect
relationship to a cost object
Direct & Indirect Costs

Direct costs can be conveniently and
economically traced (tracked) to a cost object
Indirect costs cannot be conveniently or
economically traced (tracked) to a cost object.
Instead of being traced, these costs are
allocated to a cost object in a rational and
systematic manner
BMW: Assigning Costs to a Cost

Object
Cost Examples
Direct Costs
Parts
Assembly line wages
Indirect Costs
Electricity
Rent
Property taxes
Factors Affecting Direct / Indirect

Cost Classification
Cost Materiality
Availability of information-gathering
technology
Operational Design
Cost Behavior
Variable costs changes in total in proportion
to changes in the related level of activity or
volume
Fixed costs remain unchanged in total
regardless of changes in the related level of
activity or volume
Costs are fixed or variable only with respect to
a specific activity or a given time period
Cost Behavior, continued

Variable costs are constant on a per-unit basis. If a
product takes 5 pounds of materials each, it stays the
same per unit regardless of one, ten or a thousand
units are produced
Fixed costs change inversely with the level of
production. As more units are produced, the same
fixed cost is spread over more and more units, reducing
the cost per unit
Cost Behavior Summarized
Variable Costs
Variable Costs
Total Dollars
Dollars
Total
Change in
in
Change
proportion with
with
proportion
output
output
Cost per
Per Unit
Unit
Unchanged in
relation to output
Moreoutput
output==More
Morecost
cost
More
Fixed Costs
Fixed Costs
Change
Change inversely
inversely with
Unchanged in
with output
Unchanged in
output
= lower cost
relation to output More output
More
output
=
lower cost
relation to output
per unit
per unit
Cost Behavior Visualized
Other Cost Concepts

Cost Driver a variable that causally affects
costs over a given time span
Relevant Range the band of normal activity
level (or volume) in which there is a specific
relationship between the level of activity (or
volume) and a given cost
For example, fixed costs are considered fixed only
within the relevant range.
Relevant Range Visualized
A Cost Caveat
Unit costs should be used cautiously. Since
unit costs change with a different level of
output or volume, it may be more prudent to
base decisions on a total dollar basis.
Unit costs that include fixed costs should always
reference a given level of output or activity
Unit Costs are also called Average Costs
Multiple Classification of Costs

Costs may be classified as:
Direct / Indirect, and
Variable / Fixed
These multiple classifications give rise to

important cost combinations:
Direct & Variable
Direct & Fixed
Indirect & Variable
Indirect & Fixed
Multiple Classification of Costs,

Visualized
Different Types of Firms

Manufacturing-sector companies create and
sell their own products
Merchandising-sector companies product
resellers
Service-sector companies provide services
(intangible products)
Types of Manufacturing Inventories

Direct Materials resources in-stock and
available for use
Work-in-Process (or progress) products
started but not yet completed. Often
abbreviated as WIP
Finished Goods products completed and
ready for sale
Types of Product Costs

Also known as Inventoriable Costs
Direct Materials
Direct Labor
Indirect Manufacturing factory costs that are not
traceable to the product. Other common names
for this type of cost include Manufacturing
Overhead costs or Factory Overhead costs.
Accounting Distinction Between

Costs
Inventoriable costs product manufacturing
costs. These costs are capitalized as assets
(inventory) until they are sold and transferred
to Cost of Goods Sold.
Period costs have no future value and are
expensed as incurred.
Cost Flows
The Cost of Goods Manufactured and the Cost
of Goods Sold section of the Income
Statement are accounting representations of
the actual flow of costs through a production
system.
Note the importance of inventory accounts in the
following accounting reports, and in the cost flow
chart
Cost Flows Visualized
Cost of Goods Manufactured
Multiple-Step Income Statement
Other Cost Considerations

Prime cost is a term referring to all direct
manufacturing costs (labor and materials)
Conversion cost is a term referring to direct
labor and factory overhead costs, collectively
Overtime labor costs are considered part of
overhead due to the inability to precisely
know the true cause of these costs
Different Definitions of Costs

for Different Applications
Pricing and product-mix decisions may use a
super cost approach (comprehensive)
Contracting with government agencies very
specific definitions of cost for cost plus
profit contracts
Preparing external-use financial statements
GAAP-driven product costs only
Different Definitions of Costs

for Different Applications
Three Common Features of

Cost Accounting & Cost Management
1. Calculating the cost of products, services, and
other cost objects
2. Obtaining information for planning & control,
and performance evaluation
3. Analyzing the relevant information for
making decisions
CHAPTER 10
Determining
How Costs Behave
Cost Functions
A cost function is a mathematical
representation of how a cost changes with
changes in the level of an activity relating to
that cost
Cost Terminology
Variable Costs costs that change in total in
relation to some chosen activity or output
Fixed Costs costs that do not change in total
in relation to some chosen activity or output
Mixed Costs costs that have both fixed and
variable components; also called semivariable
costs
Cost Function Assumptions

1. Variations in the level of a single activity (the
cost driver) explain the variations in the
related total costs
2. Cost behavior is approximated by a linear
cost function within the relevant range
Graphically, the total cost versus the level of a
single activity related to that cost is a straight
line within the relevant rage
Bridging Accounting & Statistical

Terminology
Accounting
Statistics
Variable Cost
Slope
Fixed Cost
Intercept
Mixed Cost
Linear Cost Function
The Linear Cost Function

y = a + bX
The Dependent
Variable:
The cost that is
being predicted
The Independent
Variable:
The cost driver
The Intercept:
Fixed Costs
The slope of
the line:
variable cost
per unit
Linear Cost Functions Illustrated
Criteria for Classifying Variable & Fixed

Components of a Cost
1. Choice of Cost Object different objects may
result in different classification of the same
cost
2. Time Horizon the longer the period, the
more likely the cost will be variable
3. Relevant Range behavior is predictable
only within this band of activity
The
Relevant
Range
Illustrated
Cause & Effect as it relates to

Cost Drivers
The most important issue in estimating a cost
function is determining whether a cause-andeffect relationship exists between the level of
an activity and the costs related to that level
of activity.
Cause & Effect as it relates to

Cost Drivers
A cause-and-effect relationship might arise as
a result of:
A physical relationship between the level of
activity and costs
A contractual agreement
Knowledge of operations
Note: a high correlation (connection) between

activities and costs does not necessarily mean
causality
Cost Estimation Methods

1.
2.
3.
4.
Industrial Engineering Method

Conference Method
Account Analysis Method
Quantitative Analysis Methods
1. High-Low Method
2. Regression Analysis
Industrial Engineering Method

Estimates cost functions by analyzing the
relationship between inputs and outputs in
physical terms
Includes time-and-motion studies
Very thorough and detailed, but also costly
and time-consuming
Also called the Work-Measurement Method
Conference Method
Estimates cost functions on the basis of
analysis and opinions about costs and their
drivers gathered from various departments of
a company
Pools expert knowledge
Reliance on opinions still make this method
subjective
Account Analysis Method

Estimates cost functions by classifying various
cost accounts as variable, fixed or mixed with
respect to the identified level of activity
Is reasonably accurate, cost-effective, and
easy to use, but is subjective
Qualitative Analysis
Uses a formal mathematical method to fit cost
functions to past data observations
Advantage: results are objective
Steps in Estimating a Cost Function Using

Quantitative Analysis
1. Choose the dependent variable (the cost to be
predicted)
2. Identify the independent variable or cost driver
3. Collect data on the dependent variable and the cost
driver
4. Plot the data
5. Estimate the cost function using the High-Low
Method or Regression Analysis
6. Evaluate the cost driver of the estimated cost
function
Sample Cost Activity Plot
High-Low Method
Simplest method of quantitative analysis
Uses only the highest and lowest observed
values
High Low Method Plot
Steps in the High-Low Method

1. Calculate variable cost per unit of activity
Variable
Cost per
Unit of Activity
Cost associated with

highest activity level
Highest activity level
Cost associated with

lowest activity level
Lowest activity level
(c) 2009 Pearson Prentice Hall. All rights reserved.
Steps in the High-Low Method

2. Calculate Total Fixed Costs
Total Cost from either the highest or lowest activity level
- (Variable Cost per unit of activity X Activity associated with above total cost)
Fixed Costs
3. Summarize by writing a linear equation

Y = Fixed Costs + ( Variable cost per unit of Activity * Activity )
Y = FC + (VCu * X)
Regression Analysis
Regression analysis is a statistical method that
measures the average amount of change in the
dependent variable associated with a unit change in
one or more independent variables
Is more accurate than the High-Low method because
the regression equation estimates costs using
information from all observations; the High-Low
method uses only two observations
Types of Regression
Simple estimates the relationship between
the dependent variable and one independent
variable
Multiple estimates the relationship between
the dependent variable and two or more
independent variables
Sample Regression Model Plot
Alternative Regression Model Plot
Terminology
Goodness of Fit indicates the strength of the
relationship between the cost driver and costs
Residual Term measures the distance
between actual cost and estimated cost for
each observation
Criteria for Evaluating

Alternative Cost Drivers
1. Economic Plausibility
2. Goodness of Fit
3. Significance of the Independent Variable
Nonlinear Cost Functions

1. Economies of Scale
2. Quantity Discounts
3. Step Cost Functions resources increase in lotsizes, not individual units
4. Learning Curves labor hours consumed decrease as
workers learn their jobs and become better at them
5. Experience Curve broader application of learning
curve that includes Downstream activities including
marketing and distribution
Nonlinear Cost Functions Illustrated
Types of Learning Curves

Cumulative Average-Time Learning Model cumulative
average time per unit declines by a constant
percentage each time the cumulative quantity of units
produced doubles
Incremental Unit-Time Learning Model incremental
time needed to produce the last unit declines by a
constant percentage each time the cumulative quantity
of units produced doubles
Sample Cumulative Average-Time

Model
Sample Incremental Unit-Time Model
Time Learning Model Comparative

Plots
Predicting Costs Using Alternative

Time Learning Models
The Ideal Database

1. The database should contain numerous
reliably measured observations of the cost
driver and the costs
2. In relation to the cost driver, the database
should consider many values spanning a
wide range
Data Problems
The time period for measuring the dependent
variable does not match the period for
measuring the cost driver
Fixed costs are allocated as if they are variable
Data are either not available for all
observations or are not uniformly reliable
Data Problems
Extreme values of observations occur from
errors in recording costs
There is no homogeneous relationship
between the cost driver and the individual
cost items in the dependent variable-cost
pool. A homogeneous relationship exists
when each activity whose costs are included
in the dependent variable has the same cost
driver
Data Problems
The relationship between the cost driver and
the cost is not stationary
Inflation has affected costs, the driver, or both
CHAPTER 4
Job Costing
Basic Costing Terminology

Several key points from prior chapters:
Cost Objects - including responsibility centers,
departments, customers, products, etc.
Direct costs and tracing materials and labor
Indirect costs and allocation - overhead
logically extended
Cost Pool any logical grouping of related cost objects
Cost-allocation base a cost driver is used as a basis
upon which to build a systematic method of
distributing indirect costs.
For example, lets say that direct labor hours cause indirect costs
to change. Accordingly, direct labor hours will be used to
distribute or allocate costs among objects based on their usage
of that cost driver
Costing Systems
Job-Costing: system accounting for distinct
cost objects called Jobs. Each job may be
different from the next, and consumes
different resources
Wedding announcements, aircraft, advertising
Process-Costing: system accounting for mass

production of identical or similar products
Oil refining, orange juice, soda pop
Costing Systems Illustrated
Costing Approaches
Actual Costing - allocates:
Indirect costs based on the actual indirect-cost
rates times the actual activity consumption
Normal Costing allocates:

Indirect costs based on the budgeted indirect-cost
rates times the actual activity consumption
Both methods allocate Direct costs to a cost

object the same way: by using actual directcost rates times actual consumption
Costing Approaches Summarized
Seven-step Job Costing

1. Identify the Job that is the Chosen Cost
Object
2. Identify the Direct Costs of the Job
3. Select the Cost-Allocation base(s) to use for
allocating Indirect Costs to the Job
4. Match Indirect Costs to their respective CostAllocation base(s)
Seven-step Job Costing (continued)

5. Calculate an Overhead Allocation Rate:
Actual OH Costs Actual OH Allocation Base
6. Allocate Overhead Costs to the Job:
OH Allocation Rate x Actual Base Activity For the Job
7. Compute Total Job Costs by adding all direct

and indirect costs together
Sample
Job
Cost
Document
Sample Job Cost Source Documents
Job Costing
Overview
Journal Entries
Journal entries are made at each step of the
production process
The purpose is to have the accounting system
closely reflect the actual state of the business,
its inventories and its production processes.
Journal Entries, continued

All Product Costs are accumulated in the
Work-in-Process Control Account
Direct Materials used
Direct Labor incurred
Factory Overhead allocated or applied
Actual Indirect Costs (overhead) are

accumulated in the Manufacturing Overhead
Control account

Purchase of Materials on credit:
Materials Control
Accounts Payable Control
XX
XX
Requisition of Direct and Indirect Materials (OH) into

production:
Work-in-Process Control
Manufacturing Overhead Control
Materials Control
X
Y

Incurred Direct and Indirect (OH) Labor Wages
Cash
Control
Z
X
Y

Incurring or recording of various actual
Indirect Costs:
Salaries Payable Control
Accounts Payable Control
Accumulated Depreciation Control
Prepaid Expenses Control
X
A
B
C
D
Allocation or application of Indirect Costs

(overhead) to the Work-in-Process account is
based on a predetermined overhead rate.
X
Manufacturing Overhead Allocated
X
Note: actual overhead costs are never posted directly

into Work-in-Process

Products are completed and transferred out of
production in preparation for being sold
Finished Goods Control
X

Products are sold to customers on credit
Accounts Receivable Control
Sales
X
X
And the associated costs are transferred to an expense

(cost) account
Cost of Goods Sold
Finished Goods Control
Y
Y
Note: The difference between the sales and cost of goods sold
amounts represents the gross margin (profit) on this particular
transaction
Flow of Costs Illustrated
Illustrated General Ledger

in a Job Cost Environment
Illustrated Subsidiary Ledger

in a Job Cost Environment
Accounting for Overhead

Recall that two different overhead accounts
were used in the preceding journal entries:
Manufacturing Overhead Control was debited for
the actual overhead costs incurred.
Manufacturing Overhead Allocated was credited
for estimated (budgeted) overhead applied to
production through the Work-in-Process account.

Actual costs will almost never equal budgeted
costs. Accordingly, an imbalance situation
exists between the two overhead accounts
If Overhead Control > Overhead Allocated, this is
called Underallocated Overhead
If Overhead Control < Overhead Allocated, this is
called Overallocated Overhead

This difference will be eliminated in the endof-period adjusting entry process, using one of
three possible methods
The choice of method should be based on
such issues as materiality, consistency and
industry practice
Three Methods for Adjusting

Over/Underapplied Overhead
Adjusted Allocation Rate Approach all allocations are
recalculated with the actual, exact allocation rate.
Proration Approach the difference is allocated
between Cost of Goods Sold, Work-in-Process, and
Finished Goods based on their relative sizes
Write-Off Approach the difference is simply written
off to Cost of Goods Sold
CHAPTER 18
Spoilage, Rework, and Scrap
Basic Terminology
Spoilage units of production, either fully or
partially completed, that do not meet the
specifications required by customers for good
units and that are discarded or sold for
reduced prices
Basic Terminology
Rework units of production that do not meet
the specifications required by customers but
which are subsequently repaired and sold as
good finished goods
Scrap residual material that results from
manufacturing a product. Scrap has low total
sales value compared with the total sales
value of the product
Accounting for Spoilage

Accounting for spoilage aims to determine the
magnitude of spoilage costs and to distinguish
between costs of normal and abnormal
spoilage
To manage, control and reduce spoilage costs,
they should be highlighted, not simply folded
into production costs
Types of Spoilage
Normal Spoilage is spoilage inherent in a
particular production process that arises
under efficient operating conditions
Management determines the normal spoilage rate
Costs of normal spoilage are typically included as
a component of the costs of good units
manufactured because good units cannot be
made without also making some units that are
spoiled
Types of Spoilage
Abnormal Spoilage is spoilage that is not inherent in
a particular production process and would not arise
under normal operating conditions
Abnormal spoilage is considered avoidable and controllable
Units of abnormal spoilage are calculated and recorded in the
Loss from Abnormal Spoilage account, which appears as a
separate line item no the income statement
Process Costing and Spoilage

Units of Normal Spoilage can be counted or
not counted when computing output units
(physical or equivalent) in a process costing
system
Counting all spoilage is considered preferable
Inspection Points and Spoilage

Inspection Point the stage of the production
process at which products are examined to
determine whether they are acceptable or
unacceptable units.
Spoilage is typically assumed to occur at the
stage of completion where inspection takes
place
The Five-Step Procedure for Process

Costing with Spoilage
Step 1: Summarize the flow of Physical Units
of Output identify both normal and
abnormal spoilage
Step 2: Compute Output in Terms of
Equivalent Units. Spoiled units are included in
the computation of output units
The Five-Step Procedure for Process

Costing with Spoilage
Step 3: Compute Cost per Equivalent Unit

Step 4: Summarize Total Costs to Account For
Step 5: Assign Total Costs to:
1. Units Completed
2. Spoiled Units
3. Units in Ending Work in Process
Steps 1 & 2 Illustrated
Steps 3, 4 & 5 Illustrated
Steps 1 & 2, Illustrated
Steps 3, 4 & 5, Illustrated
Steps 1 & 2, Illustrated
Steps 3, 4 & 5, Illustrated
Job Costing and Spoilage

Job costing systems generally distinguish
between normal spoilage attributable to a
specific job from normal spoilage common to
all jobs
Job Costing and

Normal Spoilage Attributable to a Specific Job:
When normal spoilage occurs because of the
specifications of a particular job, that job
bears the cost of the spoilage minus the
disposal value of the spoilage
Job Costing and

Normal Spoilage Common to all Jobs: IN some
cases, spoilage may be considered a normal
characteristic of the production process.
The spoilage is costed as manufacturing overhead
because it is common to all jobs
The Budgeted Manufacturing Overhead Rate
includes a provision for normal spoilage
Job Costing and

Abnormal Spoilage: If the spoilage is
abnormal, the net loss is charged to the Loss
From Abnormal Spoilage account
Abnormal spoilage costs are not included as a part
of the cost of good units produced
Job Costing and Rework
Three types of rework:

1. Normal rework attributable to a specific job
the rework costs are charged to that job
2. Normal rework common to all jobs the costs
are charged to manufacturing overhead and
spread, through overhead allocation, over all
jobs
3. Abnormal rework is charged to the Loss from
Abnormal Rework account that appears on the
income statement
Accounting for Scrap

No distinction is made between normal and
abnormal scrap because no cost is assigned to
scrap
The only distinction made is between scrap
attributable to a specific job and scrap
common to all jobs
Aspects of Accounting for Scrap

1. Planning & Control, including physical
tracking
2. Inventory costing, including when and how it
affects operating income
NOTE: Many firms maintain a distinct
account for scrap costs

Scrap Attributable to a Specific Job job
costing systems sometime trace the scrap
revenues to the jobs that yielded the scrap.
Done only when the tracing can be done in an
economic feasible way
No cost assigned to scrap

Scrap Common to all Jobs all products bear
production costs without any credit for scrap
revenues except in an indirect manner
Expected scrap revenues are considered when
setting is lower than it would be if the overhead
budget had not been reduced by expected scrap
revenues

Recognizing Scrap at the Time of its
Production sometimes the value of the scrap
is material, and the time between storing and
selling it can be long
The firm assigns an inventory cost to scrap at a
conservative estimate of its net realizable
value so that production costs and related
scrap revenues are recognized in the same
accounting period
CHAPTER 16
Cost Allocation:
Joint Products and Byproducts
Joint Cost Terminology

Joint Costs costs of a single production process that
yields multiple products simultaneously.
Splitoff Point the place in a joint production process
where two or more products become separately
identifiable
Separable Costs all costs incurred beyond the splitoff
point that are assignable to each of the nowidentifiable specific products
Categories of Joint Process Outputs:

1. Outputs with a positive sales value
2. Outputs with a zero sales value
Product any output with a positive sales

value, or an output that enables a firm to
avoid incurring costs
Value can be high or low

Main Product output of a joint production
process that yields one product with a high
sales value compared to the sales values of
the other outputs
Joint Products outputs of a joint production
process that yields two or more products with
a high sales value compared to the sales
values of any other outputs

Byproducts outputs of a joint production
process that have low sales values compare to
the sales values of the other outputs
Examples of Joint Cost Situations
Joint Process Overview

Steam:
An Output with Zero Sales Value
Joint Product #1
Single Production
Process
Joint Product #2
Byproduct
Reasons for Allocating Joint Costs

Required for GAAP and taxation purposes
Cost values may be used for evaluation
purposes
Cost-based Contracting
Insurance Settlements
Required by regulators
Litigation
Joint Cost Allocation Methods
Market-Based allocate using marketderived data (dollars):

1. Sales value at splitoff
2. Net Realizable Value (NRV)
3. Constant Gross-Margin percentage NRV
Physical Measures allocate using tangible

attributes of the products, such as pounds,
gallons, barrels, etc
Sales Value at Splitoff Method

Uses the sales value of the entire production
of the accounting period to calculate
allocation percentage
Ignores inventories
Joint Cost Illustration Data
Joint Cost Illustration Overview
Sales Value at Splitoff Illustration
Net Realizable Value Method

Allocates joint costs to joint products on the
basis of relative NRV of total production of the
joint products
NRV = Final Sales Value Separable Costs
Net Realizable Value Method Overview

Illustrated

Illustrated
Constant Gross Margin NRV Method

Allocates joint costs to joint products in an
way that the overall gross-margin percentage
is identical for the individual products
Joint Costs are calculated as a residual amount
Constant Gross Margin NRV Illustrated
Physical-Measure Method
Allocates joint costs to joint products on the
basis of the relative weight, volume, or other
physical measure at the splitoff point of total
production of the products
Physical Measures Illustration
Method Selection
If selling price at splitoff is available, use the Sales
Value at Splitoff Method
If selling price at splitoff is not available, use the NRV
method
If simplicity is the primary consideration, PhysicalMeasures Method or the Constant Gross-Margin
Method could be used
Despite this, some firms choose not to allocate joint
costs at all
Sell-or-Process Further Decisions

In Sell-or-Process Further decisions, joint costs
are irrelevant. Joint products have been
produced, and a prospective decision must be
made: to sell immediately or process further
and sell later.
Joint Costs are sunk
Separable Costs need to be evaluated for
relevance individually
Sell-or-Process Further Flowchart
Final
Product
#1
Joint Product #1
Further Processing Dept 1
Single Production
Process
Final
Product
#2
Joint Product #2
Further Processing Dept 2
Byproducts
Two methods for accounting for byproducts
Production Method recognizes byproduct
inventory as it is created, and sales and costs
at the time of sale
Sales Method recognizes no byproduct
inventory, and recognizes only sales at the
time of sales: byproduct costs are not tracked
separately
Byproducts Illustration Overview
Comparative Income Statements for

Accounting for Byproducts
CHAPTER 20
Inventory Management,
Just-in-Time,
and Simplified Costing Methods
Inventory Management in
Retail Organizations
Inventory Management is planning,
coordinating, and controlling activities related
to the flow of inventory into, through, and out
of an organization
Costs Associated with

Goods for Sale
Managing inventories to increase net income

requires effectively managing costs that fall
into these five categories:
1.
2.
3.
4.
5.
Purchasing Costs
Ordering Costs
Carrying Costs
Stockout Costs
Quality Costs
Management of Inventory Costs

1. Purchasing Costs the cost of goods
acquired from suppliers, including freight
2. Ordering Costs the costs of preparing and
issuing purchase orders, receiving and
inspecting the items included in the orders,
and matching invoices received, purchases
orders and delivery records to make
payments

3. Carrying Costs the costs that arise while holding
inventory of goods for sale. This includes the
opportunity cost of the investment tied up in
inventory, and costs associated with storage
4. Stockout Costs the costs that result when a
company runs out of a particular item for which there
is customer demand (stockout) and the company
must act quickly to meet the demand or suffer the
costs of not meeting it

5. Quality Costs the costs that result when
features and characteristics of a product or
service are not in conformance with
customer specifications. These costs
include:
1.
2.
3.
4.
Prevention
Appraisal
Internal Failure
External Failure
The First Step in Managing

Goods for Sale
The first decision in managing goods for sale is
how much to order of a given product
Economic Order Quality (EOQ) is a decision
model that calculates the optimal quantity of
inventory to order under a given set of
assumptions
Basic EOQ Assumptions

There are only ordering & carrying costs
The same quantity is ordered at each reorder point
Demand, purchase-order lead time, ordering costs, and
carrying costs are known with certainty
Purchasing costs per unit are unaffected by the
quantity ordered
No stockouts occur
EOQ ignores purchasing costs, stockout costs and
quality costs
EOQ Formula
EOQ =
2DP
C
D = Demand in units for specified period

P = Relevant ordering costs per purchase order
C = Relevant carrying costs of one unit in stock for the
time period used for D
Ordering & Carrying Costs Illustrated
Ordering Points
The second decision in managing goods for
sale is when to order a given product
Reorder Point the quantity level of
inventory on hand that triggers a new
purchase order
Reorder
Point
Number of units sold

per unit of time
Purchase Order
Lead Time
Ordering Points Illustrated
Inventory Management and

Safety Stock
Safety Stock is inventory held at all times
regardless of the quantity of inventory
ordered using the EOQ model
Safety stock is a buffer against unexpected
increases in demand, uncertainty about lead time,
and unavailability of stock from suppliers
Safety Stock Computation Illustration
Estimating Inventory-Related Relevant Costs
Carrying Costs
Stockout Costs
Ordering Costs
Carrying Costs
Relevant inventory carrying costs consist of
relevant incremental costs and the relevant
opportunity cost of capital
Relevant Incremental Costs those costs of
the purchasing firm that change with the
quantity of inventory held
Opportunity Costs
Relevant Opportunity Cost of Capital the
return foregone by investing capital in
inventory rather than elsewhere. This cost
equals the required rate of return multiplied
by the unit costs that vary with the number of
units purchased and are incurred at the time
the units are received
Cost of a Prediction Error
Three steps in determining the cost of a

prediction error:
1. Compute the monetary outcome from the best
action that could be taken, given the actual
amount of the cost per purchase order
2. Compute the monetary outcome from the best
action based on the incorrect amount of the
predicted cost per purchase order
3. Compute the difference between Steps 1 & 2
Just-in-Time Purchasing
Just-in-Time (JIT) Purchasing is the purchase of
materials or goods so they are delivered just
as needed for production or sales
JIT is popular because carrying costs are
actually much greater than estimated because
warehousing, handing, shrinkage and
investment costs have not been correctly
estimated
JIT Purchasing
JIT reduces the cost of placing a purchase
order because:
Long-term purchasing agreements define price
and quality terms. Individual purchase orders
covered by those agreements require no
additional negotiation regarding price or quality
Companies are using electronic links to place
purchase orders at a small fraction of traditional
methods (phone or mail)
Companies are using purchase-order cards
Relevant Costs in JIT Purchasing

Purchasing Costs
Stockout Costs
Quality Costs
Relationship Between Carrying &

Ordering Costs Illustrated
Analysis of Alternative Purchasing

Policies Illustrated
JIT Purchasing and

Supply-Chain Analysis
Supply chain describes the flow of goods, services, and
information from the initial sources of materials and
services to the delivery of products to consumers (both
inside & outside the firm)
Supply Chain members share information and
plan/coordinate activities
Supplier evaluations are critical to JIT Purchasing
implementation
Supplier Evaluation Illustrated
Inventory Management and Materials

Requirements Planning
Materials Requirements Planning (MRP) a
push-through system that manufactures
finished goods for inventory on the basis of
demand forecasts
MRP Information Inputs
MRP uses three information sources to determine

the necessary outputs at each stage of production
1.
2.
3.
Demand forecasts of final products

A bill of materials detailing the materials, components, and
subassemblies for each final product
The quantities of materials, components, and product
inventories to determine the necessary outputs at each stage
of production
MRP
Takes into account lead time to purchase materials and
to manufacture components and finished products
Sets a master production schedule specifying
quantities and timing of each item to be produced
The output of each department is pushed through the
production line whether it is needed or not
Push Through may result in an accumulation of
inventory
Inventory Management and

JIT Production
JIT (Lean) Production is a demand-pull
manufacturing system that manufactures each
component in a production line as soon as and only
when needed by the next step in the production line
Demand triggers each step of the production process,
starting with customer demand for a finished product
and working backward
Demand pulls an order through the production line
JIT Production Goals

1. Meet customer demand in a timely basis,
2. with high-quality products,
3. at the lowest possible cost.
JIT Production Features

Production is organized in manufacturing cells, a
grouping of all the different types of equipment used
to make a given product
Workers are hired and trained to be multi-skilled
(cross-trained)
Defects are aggressively eliminated
Setup time is reduced
Suppliers are selected on the basis of their ability to
deliver quality materials in a timely manner
Other Benefits of JIT Production

Lower overhead costs
Lower inventory levels
Heightened emphasis on improving quality by
eliminating the specific causes of rework,
scrap, and waste
Lower manufacturing lead times
JIT and Enterprise Resource Planning

Systems (ERP)
JIT success hinges on the speed of information flows
from customers to manufacturers to suppliers
ERP is a system with a single database that collects
data and feeds it into software applications supporting
all of a firms business activities
ERP gives managers, workers, customers and suppliers
access to operating information
ERP can be expensive, large, and unwieldy
Performance Measures and

Control in JIT
Financial performance measures such as inventory
turnover ratio
Nonfinancial performance measures of time, inventory,
and quality such as:
Manufacturing lead times

Units produced per hour
Days of inventory on hand
Setup time as a % of total manufacturing time
Number of defective units as a % of total units produced
Backflush Costing
Backflush Costing omits recording some or all of the
journal entries relating to the stages from the purchase
of direct materials to the sale of finished goods
Since some stages are omitted, the journal entries for a
subsequent stage use normal or standard costs to work
backward to flush out the costs in the cycle for which journal
entries were not made
Contrasts to traditional normal and standard costing

systems using sequential tracking: recording journal
entries at each trigger point in the production process
Special Considerations in Backflush

Costing
Backflush costing does not necessarily comply
with GAAP
However, inventory levels may be immaterial,
negating the necessity for compliance
Backflush costing does not leave a good audit

trail the ability of the accounting system to
pinpoint the uses of resources at each step of
the production process
Sample Journal Entries in Backflush Costing
Sample
General
Ledger
Flows in
Backflush
Costing
Lean Accounting
Lean Accounting is a costing method that
supports creating value for the customer by
costing the entire value stream, not individual
products or departments, thereby eliminating
waste in the accounting process
CHAPTER 14
Cost Allocation,
Customer Profitability Analysis,
and
Sales-Variance Analysis
Cost Allocation
Assigning indirect costs to cost objects
These costs are not traced
Indirect costs often comprise a large
percentage of Total Overall Costs
Purposes of Cost Allocation
Six-Function Value Chain

TIME
Research
&
Development
Design
Production
Marketing
Distribution
Customer
Service
Traditional Life Cycle approach may not yield the costs

necessary to meet the four-purpose criteria for cost allocation
Costs necessary for decision-making may pull costs from some
or all of these six functions
Criteria for Cost-Allocation Decisions

Cause and Effect variables are identified that
cause resources to be consumed
Most credible to operating managers
Integral part of ABC
Benefits Received the beneficiaries of the

outputs of the cost object are charged with
costs in proportion to the benefits received
Criteria for Cost-Allocation Decisions

Fairness (Equity) the basis for establishing a price
satisfactory to the government and its suppliers.
Cost allocation here is viewed as a reasonable or fair means
of establishing selling price
Ability to Bear cost are allocated in proportion to the

cost objects ability to bear them
Generally, larger or more profitable objects receive
proportionally more of the allocated costs
Cost Allocation Illustrated
Corporate and Division Overhead Allocation Illustrated
Customer Revenues and

Customer Costs
Customer-Profitability Analysis is the reporting
and analysis of revenues earned from customers
and costs incurred to earn those revenues
An analysis of customer differences in revenues
and costs can provide insight into why differences
exist in the operating income earned from
different customers
Customer Revenues
Price discounting is the reduction of selling prices
to encourage increases in customer purchases
Lower sales price is a tradeoff for larger sales volumes
Discounts should be tracked by customer and

salesperson
Customer Cost Analysis

Customer Cost Hierarchy categorizes costs
related to customers into different cost pools
on the basis of different:
types of drivers
cost-allocation bases
degrees of difficulty in determining cause-andeffect or benefits-received relationships
Customer Cost Hierarchy Example

1.
2.
3.
4.
5.
Customer output unit-level costs

Customer batch-level costs
Customer-sustaining costs
Distribution-channel costs
Corporate-sustaining costs
Other Factors in Evaluating Customer

Profitability
Likelihood of customer retention

Potential for sales growth
Long-run customer profitability
Increases in overall demand from having wellknown customers
Ability to learn from customers
Customer Profitability Analysis Illustrated
Sales Variances
Level 1: Static-budget variance the difference
between an actual result and the static-budgeted
amount
Level 2: Flexible-budget variance the difference
between an actual result and the flexible-budgeted
amount
Level 2: Sales-volume variance
Level 3: Sales Quantity variance
Level 3: Sales Mix variance
Sales-Mix Variance
Measures shifts between selling more or less of higher
or lower profitable products
Sales-Mix
Variance =
Actual
Actual
Units of
X Sales-Mix
All
Percentage
Products
Sold
Budgeted
Sales-Mix X
Percentage
Budgeted
Contribution
Margin per Unit
Sales-Quantity Variance
SalesQuantity =
Variance
Actual
Units of All
Products
Sold
Budgeted
Units of all
Products X
Sold
Budgeted
Sales-Mix
Percentage
Budgeted
Contribution
Margin per Unit
Flexible-Budget and Sales-Volume

Variances Illustrated
Sales-Mix and Quantity Variances

Illustrated
Market-Share Variance
MarketShare
=
Variance
Actual
Actual
Market
X Market
Size in
Share
Units
Budgeted
Market X
Share
Budgeted
Contribution
Margin per
Composite Unit
for Budgeted
Mix
Market-Size Variance
Market-Size
Variance =
Actual
Market
Size
Budgeted
Market X
Size
Budgeted
Market
Share
Budgeted
Contribution
Margin per
Composite Unit
for Budgeted
Mix
Market-Share and Size Variances

Illustrated
Market-Share and Market-Size Variances

Limitation: reliable information on the actual
size and share of various markets is not always
available
These are considered Level 4 variances (a
decomposition of the Sales-Quantity variance
Sales Variances Summarized
CHAPTER 15
Allocation of
Support Department Costs,
Common Costs,
and Revenues
Allocating Costs of a Supporting

Department to Operating Departments
Supporting (Service) Department provides
the services that assist other internal
departments in the company
Operating (Production) Department directly
adds value to a product or service
Methods to Allocate
Support Department Costs
Single-rate method allocates costs in each
cost pool (service department) to cost objects
(production departments) using the same rate
per unit of a single allocation base
No distinction is made between fixed and variable
costs in this method
Methods to Allocate
Support Department Costs
Dual-Rate method segregates costs within
each cost pool into two segments: a variablecost pool and a fixed-cost pool.
Each pool uses a different cost-allocation base
Allocation Method Tradeoffs

Single-Rate method is simple to implement,
but treats fixed costs in a manner similar to
variable costs
Dual-Rate method treats fixed and variable
costs more realistically, but is more complex to
implement
Allocation Bases
Under either method, allocation of support costs can

be based on one of the three following scenarios:
1.
2.
3.
Budgeted overhead rate and budgeted hours

Budgeted overhead rate and actual hours
Actual overhead rate and actual hours
Choosing between actual and budgeted rates:

budgeted is known at the beginning of the period,
while actual will not be known with certainty until
the end of the period
Comparative Allocation Bases

Illustrated
Methods of Allocating Support Costs to

Production Departments
1. Direct
2. Step-Down
3. Reciprocal
Direct Method
Allocates support costs only to Operating
Departments
No Interaction between Support Departments
prior to allocation
Direct Method
Support Departments
Information Systems
Manufacturing
Packaging
Accounting
Data Used in Cost Allocation

Illustrations
Direct Allocation Method Illustrated
Direct Allocation Method Illustrated,

cont.
Step-Down Method
Allocates support costs to other support
departments and to operating departments
that partially recognizes the mutual services
provided among all support departments
One-Way Interaction between Support
Departments prior to allocation
Step-Down Method
Support Departments
Information Systems
Manufacturing
Packaging
Accounting
Step-Down Allocation Method

Illustrated
Step-Down Allocation Method

Illustrated, cont.
Reciprocal Method
Allocates support department costs to operating
departments by fully recognizing the mutual
services provided among all support departments
Full Two-Way Interaction between Support
Departments prior to allocation
Reciprocal Method
Support Departments
Information Systems
Manufacturing
Packaging
Accounting
Reciprocal Allocation Method (Repeated

Iterations) Illustrated
Reciprocal Allocation Method (Linear

Equations) Illustrated
Choosing Between Methods

Reciprocal is the most precise
Direct and Step-Down are simple to compute
and understand
Direct Method is widely used
Allocating Common Costs

Common Cost the cost of operating a facility,
activity, or like cost object that is shared by
two or more users at a lower cost than the
individual cost of the activity to each user
Methods of Allocating
Common Costs
Stand-Alone Cost-Allocation Method uses
information pertaining to each user of a cost
object as a separate entity to determine the costallocation weights
Individual costs are added together and
allocation percentages are calculated from the
whole, and applied to the common cost
Methods of Allocating
Common Costs
Incremental Cost-Allocation Method ranks the individual users of a
cost object in the order of users most responsible for a common
cost and then uses this ranking to allocate the cost among the users
The first ranked user is the Primary User and is allocated costs up the
cost as a stand-alone user (typically gets the highest allocation of the
common costs)
The second ranked user is the First Incremental User and is allocated
the additional cost that arises from two users rather than one
Subsequent users handled in the same manner as the second ranked
user
Cost Allocations and Contracting
The US government reimburses most

contractors in either of two main ways:
1. The contractor is paid a set price without
analysis of actual contract cost data.
2. The contractor is paid after an analysis of actual
contract cost data. In some cases, the contract
will state that the reimbursement amount is
based on actual allowable costs plus a fixed fee
(cost-plus contract)
Revenue Allocation and

Bundled Products
Revenue Allocation occurs when revenues are related
to a particular revenue object but cannot be traced to
it in an economically feasible manner
Revenue Object anything for which a separate
measurement of revenue is desired
Bundled Product a package of two or more products
or services that are sold for single price, but individual
components of the bundle also may be sold as
separate items at their own stand-alone prices
Methods to Allocate Revenue to Bundled

Products
Stand-Alone (separate) Revenue Allocation

Method uses product-specific information
on the products in the bundle as weights for
allocating the bundled revenues to the
individual products. Three types of weights
may be used:
1. Selling Prices
2. Unit Costs
3. Physical Units
Methods to Allocate Revenue to Bundled

Products
Incremental Revenue-Allocation Method ranks
individual products in a bundle according to criteria
determined by management and then uses this ranking
to allocate bundled revenues to individual products
(similar to earlier discussed Incremental CostAllocation Method)
The first-ranked product is the primary product
The second-ranked product is the first incremental product
The third-ranked product is the second incremental product, etc
CHAPTER 5
Activity-Based Costing
and
Activity-Based Management
Background
Recall that Factory Overhead is applied to production
in a rational systematic manner, using some type of
averaging. There are a variety of methods to
accomplish this goal.
These methods often involve tradeoffs between
simplicity and realism
Simple Methods
Unrealistic
Complex Methods
Realistic
Broad Averaging
Historically, firms produced a limited variety of
goods while their indirect costs were relatively
small.
Allocating overhead costs was simple: use
broad averages to allocate costs uniformly
regardless of how they are actually incurred
Peanut-butter Costing
The end-result: overcosting & undercosting
Over & Undercosting

Overcosting a product consumes a low level
of resources but is allocated high costs per
unit
Undercosting a product consumes a high
level of resources but is allocated low costs
per unit
Cross-subsidization
The results of overcosting one product and
undercosting another.
The overcosted product absorbs too much
cost, making it seem less profitable than it
really is
The undercosted product is left with too little
cost, making it seem more profitable than it
really is
An Example:
Plastim
Plastim & Simple Costing
Plastim and ABC Illustrated
Plastim and ABC Rate Calculation
Plastim and ABC Product Costs
Plastim: Simple & ABC Compared
Conclusions
Each method is mathematically correct
Each method is acceptable
Each method yields a different cost figure, which will lead to
different Gross Margin calculations
Only Overhead is involved. Total Costs for the entire firm
remain the same they are just allocated to different cost
objects within the firm
Selection of the appropriate method and drivers should be
based on experience, industry practices, as well as a costbenefit analysis of each option under consideration
A Cautionary Tale
A number of critical decisions can be made
using this information;
Should one product be pushed over another?
Should one product be dropped?
Accounting for overhead costs is an imprecise

science. Accordingly, best efforts should be
put forward to arrive at a cost that is fair and
reasonable.
Rationale for selecting a more refined

costing system
Increase in product diversity

Increase in Indirect Costs
Advances in information technology
Competition in foreign markets
Cost Hierarchies
ABC uses a four-level cost structure to
determine how far down the production cycle
costs should be pushed:
Unit-level (output-level)
Batch-level
Product-sustaining-level
Facility-sustaining-level
ABC vs. Simple Costing Schemes

ABC is generally perceived to produce superior
costing figures due to the use of multiple
drivers across multiple levels
ABC is only as good as the drivers selected,
and their actual relationship to costs. Poorly
chosen drivers will produce inaccurate costs,
even with ABC
Activity-Based Management
A method of management that used ABC as
an integral part in critical decision-making
situations, including:
Pricing & product-mix decisions
Cost reduction & process improvement decisions
Design decisions
Planning & managing activities
Signals that suggest that ABC

implementation could help a firm:
Significant overhead costs allocated using one or two
cost pools
Most or all overhead is considered unit-level
Products that consume different amounts of resources
Products that a firm should successfully make and sell
consistently show small profits
Operations staff disagreeing with accounting over
manufacturing and marketing costs
ABC and Service / Merchandising

Firms
ABC implementation is widespread in a variety
of applications outside manufacturing,
including:
Health Care
Banking
Telecommunications
Retailing
Transportation

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CHAPTER 1

The Accountants Role in the

2009 Pearson Prentice Hall. All rights reserved.

Accounting Discipline Overview

Major Differences Between

Do not have to follow GAAP;

Ultra current to very long

2009 Pearson Prentice Hall. All rights reserved.

Strategy & Management Accounting

Strategy & Management Accounting

Management Accounting and Value

2009 Pearson Prentice Hall. All rights reserved.

Management Accounting and Value

Research & Development

2009 Pearson Prentice Hall. All rights reserved.

The Value Chain Illustrated

2009 Pearson Prentice Hall. All rights reserved.

A Value Chain Implementation

2009 Pearson Prentice Hall. All rights reserved.

Key Success Factors

2009 Pearson Prentice Hall. All rights reserved.

Planning & Control Systems

Control takes actions that implement the

A Five-Step Decision Making Process in

Identify the problem and uncertainties

Management Accounting Guidelines

A Typical Organizational Structure and

2009 Pearson Prentice Hall. All rights reserved.

2009 Pearson Prentice Hall. All rights reserved.

2009 Pearson Prentice Hall. All rights reserved.

2009 Pearson Prentice Hall. All rights reserved.

Basic Cost Terminology

Cost Object Examples at BMW

BMW X 5 sports activity vehicle

Dealer-support telephone hotline

R&D project on DVD system enhancement

Herb Chambers Motors, a dealer that purchases

Setting up production machines

Environmental, Health & Safety

Basic Cost Terminology

Direct & Indirect Costs

BMW: Assigning Costs to a Cost

Factors Affecting Direct / Indirect

Cost Behavior, continued

Cost Behavior Summarized

Cost Behavior Visualized

Other Cost Concepts

Relevant Range Visualized

Multiple Classification of Costs

These multiple classifications give rise to

Multiple Classification of Costs,

Different Types of Firms

Types of Manufacturing Inventories

Types of Product Costs

Accounting Distinction Between

Cost Flows Visualized

Cost of Goods Manufactured

Multiple-Step Income Statement

Other Cost Considerations

Different Definitions of Costs

Different Definitions of Costs

Three Common Features of

Cost Function Assumptions