Вы находитесь на странице: 1из 14

MODULE 2

Cost and Management Accounting Framework

Learning Objectives:

OVERVIEW: • Understand cost, cost object and cost driver


• Explain the cost classification
To properly account for costs, accountants • Understand and analyze the behavior of costs
must have an understanding on the different cost • Differentiate Cost Center and Profit Center
concepts and terminologies that are encountered in
• Understand the flow of costs, the journal entries
cost accounting.
and the preparation of cost statement
This module will provide you an understanding on
the cost framework—including its classifications and
behavior as well as an overview on cost flows and
cost statements.

2.1 Cost classifications, Concepts and Terminologies

As discussed in the previous module, cost is is a resource given up in exchange of goods and services. Cost is usually
measured in monetary amount equivalent to that of the resource. Cost object is anything for which a separate
measurement of cost is desired, it can be any product, machine, service or process for which cost information is
accumulated. Cost object’s cost resulted from an activity which generates cost, this is what we refer to as the cost driver.
Some examples of cost driver are machine-hours worked, kilometers driven, machine set-ups, and direct labor hours. Cost
accumulation is the collection of cost data in some organized way by means of an accounting system.

 ELEMENTS OF COST
The basic elements of cost include material, labor, and overhead costs. It can be illustrated as follows:
*source:https://www.tutorialspoint.com/accounting_basics

Jellyren Gutierrez, CPA


Instructor
 COST CLASSIFICATION CATEGORIES:
Cost in the accounting manner has different classifications depending on the needs of the management, and
accountants must know these types of cost and how to measure them.

Association with cost object:


DIRECT COSTS—are costs that can be easily and conveniently traced to a specified cost object. For example, a
furniture manufacturing’s cost of woods used will be a direct cost when assigning cost to the production. The term
cost tracing is used to describe the assignment of direct costs to a particular cost object.

INDIRECT COSTS—are costs that cannot be easily and conveniently traced to a specified cost object. For example,
the salary of production supervisor of a furniture manufacturing is indirect cost to the furniture because the salary
is not incurred to produce a specific furniture hence you cannot trace the cost easily. Cost allocation is used to
describe the assignment of indirect costs to a particular cost object

Classification of a cost as direct or indirect depends on the cost object specification. For example, the depreciation
of machinery is indirect cost if the cost object is a product, but if the cost object is the production department the
depreciation is a direct cost.

Cost Assignment to cost object

DIRECT
COST

COST
OBJECT
INDIRECT
COST

Reaction to changes in Activity:

As the activity level rises and falls, a particular cost may rise and fall as well—or it may remain constant.

FIXED COSTS—remains static or constant irrespective of changes in output or activity


VARIABLE COSTS—changes in direct proportion of change in volume of output or activity

Classification on the Financial Statements:

Costs are found in the financial statement. The balance sheet contains the unexpired costs (assets) while the
income statement contains the expired costs (expenses and losses).

PRODUCT COSTS—costs that are related to making or acquiring the products or providing the services that directly
generate the revenues of an entity. Product costs are also called inventoriable costs and include the cost of direct
material, direct labor, and overhead.

▪ Direct Material is any readily identifiable part of a product. Includes raw materials, purchased
components from contract manufacturers, and manufactured subassemblies.
▪ Direct labor refers to the time spent by individuals who work specifically on manufacturing a product
or performing a service.
▪ Overhead is any factory or production cost that is indirect to the product or service and, accordingly,
does not include direct material and direct labor.

PERIOD COSTS—are related to business functions other than production, such as selling and administration.
Period costs are generally more closely associated with a particular time period than with making or acquiring a
product or performing a service. One important type of period cost is distribution—any cost incurred to
warehouse, transport, or deliver a product or service. Although distribution costs are expensed as incurred,
managers should remember that these costs relate directly to products and services. It must be planned for in
relationship to product/service volume, and these costs must be controlled for profitability to result from sales.

2.2 Cost Behavior


Cost behavior refers to how a cost reacts to changes in the level of activity. It is important for management to understand
the behavior of costs, whether cost will change and by how much depending on the decision they are making.
Understanding the types of behavior exhibited by costs is necessary to make valid estimates of total costs at various
activity levels. Variable, fixed, and mixed costs are the typical types of cost behavior encountered in business

VARIABLE COSTS
Variable cost varies in direct proportion to changes in activity level. A cost to be variable must be variable with
respect to something or what we call an activity base—which is a measure of whatever causes the incurrence of
a variable cost. An activity base is sometimes referred to as a cost driver. Some of the most common activity bases
are direct labor-hours, machine-hours, units produced, and units sold.
For example, a small inn provides breakfast to its guests. The cost of one breakfast is P120. The behavior of the
cost is shown below:

Number of Guest Cost per breakfast Total cost of breakfast


7 120 840
10 120 1,200
13 120 1,560

As you can see the cost varies directly with the number of deliveries ON A TOTAL basis, it is to be noted that
variable cost remains constant on a PER UNIT basis.

FIXED COSTS

A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity. Unlike variable
costs, fixed costs are not affected by changes in activity. For example, assumes the inn rents its building. Monthly
rental is P10,000. Regardless of the number of deliveries, the monthly rent will still remain at P10,000 pesos. Take
note that fixed costs remain constant in total, but is indirectly proportional on a per unit basis.

Monthly Rental Number of Guest Rental per guest


10,000 7 1,428.57
10,000 10 1,000
10,000 13 769.23
Presenting fixed cost on a per unit basis is discouraged because its causes misunderstanding to users and readers
that it is like a variable cost and that its total cost will vary depending on the activity level.

Summary of Cost Behavior

Cost behavior within the relevant range


Cost Per Unit In total
Variable constant Varies directly
Fixed Varies indirectly Constant

Total Total
Cost Cost
Variable Cost

Fixed Cost

Activity level Activity level

Relevant Range
Management accountants ordinarily assume that costs are strictly linear; that is, the relation between cost on the
one hand and activity on the other can be represented by a straight line. Economists point out that many costs
are actually curvilinear; that is, the relation between cost and activity is a curve. Nevertheless, even if a cost is not
strictly linear, it can be approximated within a narrow band of activity known as the relevant range by a straight
line.
Relevant range is the range of activity within which the assumption that cost behavior is strictly linear is reasonably
valid. Outside of the relevant range, a fixed cost may no longer be strictly fixed or a variable cost may not be
strictly variable. It is important to remember that assumptions on cost behavior may be invalid outside the
relevant range.
Other costs exist that are not strictly variable or fixed. A mixed cost has both a variable and a fixed component.

MIXED COSTS
A mixed cost is a cost which contains both variable and fixed cost elements. Mixed costs are also known as
semivariable costs.

For example, a company incurs a mixed cost called fees paid to the state. It includes a license fee of $25,000 per
year plus $3 per rafting party paid to the state’s Department of Natural Resources. If the company runs 1,000
rafting parties this year, then the total fees paid to the state would be $28,000, made up of $25,000 in fixed cost
plus $3,000 in variable cost. Exhibit 2–5 depicts the behavior of this mixed cost. Even if Nooksack fails to attract
any customers, the company will still have to pay the license fee of $25,000. This is why the cost line in Exhibit 2–
5 intersects the vertical cost axis at the $25,000 point. For each rafting party the company organizes, the total cost
of the state fees will increase by $3. Therefore, the total cost line slopes upward as the variable cost of $3 per
party is added to the fixed cost of $25,000 per year. (Adapted Managerial Accounting Garrison, Noreen, Brewer)
The total cost hence can be expressed using the equation:
Y= a +bX
Y represents total cost
a represents total fixed cost
b represents variable cost per unit
X represent the level of activity

Applying the equation, supposed that the company organize 800 rafting parties, the total cost can be calculated
as:
Y= 25,000 + (3 x 800)
=27, 4000

➢ SEPARATING MIXED COSTS


It is important to separate mixed cost for proper analysis and decision-making. You can use variety of methods
to separate mixed cost including High-Low Method and Least-Squares Regression Method.

Illustration:
A company produces a product, the following costs were incurred during the first half of the year:
Units produced Total Cost
January 500 12,000
February 800 15,000
March 1000 19, 500
April 1250 23,000
May 900 18,000
June 600 13,500
Let us separate the mixed cost using:

HIGH-LOW method
The high-low method uses the highest and lowest activity levels and their related costs to estimate the variable
cost per unit and the fixed cost.

First Step: Identify the highest point of activity and lowest point activity.
Looking at the table, the highest activity level is 1,250 units and the lowest is 500 units
Second step: Calculate the variable cost. Variable cost will be calculated using the formula:
Cost at high activity level – cost at low activity level
Variable Cost= High activity level – Low activity level

P23,000 – P12,000 11,000


Variable Cost= =
1,250 units – 500 units 750

Variable Cost= 14. 67/unit

Third step: After calculating the variable cost, determine the fixed cost. This is done by taking the total cost at
either the high or the low activity level and deducting the variable cost element.

Let us take the high level total cost of 23, 000 at 1, 250 units.

Fixed cost = Total cost - Variable cost

Fixed cost = 23,000 - (14.67 * 1, 250 units)


Fixed cost= 23, 000 – 18, 337.5
Fixed cost= 4, 662. 5

Fourth step: Since the fixed and variable elements are now separated we can now formulate our cost formula
that can be used to calculate costs at different activity levels.
Total Cost= 4, 6662.5 + 14.67X

Least-Squares Regression Method

The least-squares regression method, unlike the high-low method, uses all of the data to separate a mixed cost
into its fixed and variable components. This is the edge of least-squares over high-low, since it uses all data it
provides a more accurate information. A regression line of the form Y= a + bX is fitted to the data, where a
represents the total fixed cost and b represents the variable cost per unit of activity.

First Step: Find the value of a and b. The formula to calculate the values is presented below.

Second Step: Calculate the figures needed for the formula. To do this, identification of variables should be made.

Using the illustration, the independent variable will be the number of units produced and dependent
variable is the total cost.

x y xy x2
January 500 12,000 6,000,000 250,000
February 800 15,000 12,000,000 640,000
March 1000 19, 500 19,500,000 1,000,000
April 1250 23,000 28,750,000 1,562,500
May 900 18,000 16,200,000 810,000
June 600 13,500 8,100,000 360,000
Total 5,050 101,000 90,550,000 4,622,500
Mean 841.67 16,833.33

Third step: Substitute the figures to the formula to find a and b. Thus,

90,550,000 – 6(841.67)( 16833.33) 5,541,346.83


b= = =14.89
4,622,500 – 6(841.67)( 841.67) 372, 049. 67

a= 16,833.33 – 14.89(841.67) = 4, 300. 86


Fourth Step: After determining the variable and fixed cost, we can now formulate our cost formula that can be
used to calculate costs at different activity levels.

Y= a +bX
Y= 4, 300. 86 + 14. 89X

2.3 Cost Center and Profit Center

All business has different departments or divisions, and each of these departments have their own function and
contribution to the business. Identification of departments is essential for multiple reasons including cost allocation and
budgeting, staff management, profitability and efficiency analysis etc.

Cost center is a unit of a business that is responsible for incurring of costs. A cost center is generally that part of a business
that does not directly generate revenue but supports the functioning of key revenue generating departments of a
business. It thus incurs costs during its operation. A cost center is termed as such as costs are incurred by it to keep it
running. Example of cost center includes administration department, accounts and finance departments and human
resources departments.

Profit center is a unit of a business that is responsible for generating revenue for the business. A profit center utilizes
business resources to generate revenue and thus has both identifiable revenues and identifiable costs. Profit centers
include different product lines in a manufacturing concern, different sales departments in a retail store, and IT hardware
sale and IT software services in an information technology company.

2.4 The Conversion Process


Most organizations convert or change inputs into outputs. Inputs typically consist of material, labor, and overhead. In
general, product costs are incurred in the production (or conversion) area and period costs are incurred in all
nonproduction (or non-conversion) area.

Retails versus Manufacturers/Service Companies

Retail companies purchase goods in finished or almost finished condition, which typically need little, if any,
conversion before being sold to customers. While manufacturing or service companies have activities that involves
conversion of inputs into finished goods or service. The materials or supplies and conversion costs of
manufacturers and service companies must be assigned to output to determine the cost of both inventory
produced and goods sold or services rendered.

The production or conversion process in manufacturers occurs in three stages:


1. work not started (raw material),
2. work started but not completed (work in process), and
3. work completed (finished goods)

Thus, manufacturers normally use three inventory accounts to accumulate costs as goods flow through the
manufacturing process:
▪ Raw Material Inventory,
▪ Work in Process Inventory (for partially converted goods), and
▪ Finished Goods Inventory.

As you can see in the illustration above, the main difference between retailer and manufacturing and service company is
the presence of the “production center”. This is the phase where inputs (materials, labor, overhead) are processed or
transformed into finished products. The finished products are then stored and transferred into finished goods inventory
account until it is sold. When a product is sold, its cost will flow from inventory to cost of goods sold that will be reflected
in the income statement.

2.5 The Cost Statement


A cost statement or cost sheet presents the breakdown of costs incurred in the production of goods. A typical example
of cost sheet is presented below.

COST SHEET
Raw Materials Inventory, beginning xxx
Add: Raw materials purchased xxx
Raw materials available for use xxx
Less: Raw Materials Inventory, ending (xxx)
Raw materials used xxx
Direct Labor xxx
Manufacturing Overhead xxx
Total Manufacturing Cost xxx
Add: Work-in process, beginning xxx
Cost of goods to be manufactured xxx
Less: Work in process, ending (xxx)
Cost of Goods Manufactured xxx
Add: Finished Goods inventory, beginning xxx
Goods available for sale xxx
Less: Finished Goods inventory, ending (xxx)
Cost of Goods Sold xxx

All data presented in the cost sheet is derived from the corresponding ledger accounts supported by source documents.

2.6 Cost Flow and Journal Entries

The illustration below gives you an overview on the flow of costs in manufacturing operations as well as its related
journal entries. These will be further discussed in the future modules or topics
Raw Materials Inventory
Cash/Accounts Payable
to record purchase of raw materials

Work In Process Inventory


Raw Materials Inventory
to record direct materials issued/used

Manufacturing Overhead
Raw materials inventory
to record indirect materials issued/used

Work in Process Inventory


Salaries and Wages Payable
to record direct labor

Manufacturing Overhead
Salaries and Wages Payable
to record indirect labor

Manufacturing Overhead
Various Accounts
to record other indirect expenses

Work In Process
Manufacturing Overhead
to record applied overhead

Finished Goods Inventory


Work in Process Inventory
to record finished goods

Cost of Goods Sold


Finished goods inventory
to record goods sold

 Demonstration Problem on Cost Flows, Jornal Entries, and Cost Statement (Adapted, Raiborn)

Latourneau Company had the following account balances as of August 1, 2010:


Raw Material (direct and indirect) Inventory $20,300
Work in Process Inventory 7,000
Finished Goods Inventory 18,000

During August, the company incurred the following factory costs:


a) Purchased $164,000 of raw material on account.
b) Issued $180,000 of raw material to production, of which $134,000 was for direct materials.
c) Accrued $88,000 in factory payroll costs; $62,000 was for direct labor and the rest was for supervisors’ salaries.
d) Accrued $7,000 of utility costs; of this amount, $1,600 was fixed;
e) Accrued $2,000 of property taxes on the factory;
f) Recorded $40,000 of straight-line depreciation on factory equipment.
g) Applied actual overhead to Work in Process Inventory.
h) Transferred goods costing $320,000 to Finished Goods Inventory.
i) Recorded total sales of $700,000; of these, $550,000 were on account.
j) Recorded cost of goods sold of $330,000.
k) Recorded selling and administrative costs of $280,000 (credit “Various accounts”).

▪ Journal Entries:

a.) Raw Materials Inventory 164,000


Accounts Payable 164,000
to record purchase of raw materials

b.) Work In Process Inventory 134,000


Raw Materials Inventory 134,000
to record direct materials issued/used

Variable Manufacturing Overhead 46,000


Raw materials inventory 46,000
to record indirect materials issued/used

c.) Work in Process Inventory 62,000


Salaries and Wages Payable 62,000
to record direct labor

Fixed Manufacturing Overhead 26, 000


Salaries and Wages Payable 26,000
to record indirect labor

d.) Fixed Manufacturing Overhead 1,600


Variable Manufacturing Overhead 5, 400
Utilities Payable 7,000
to accrue utilities

e.) Fixed Manufacturing Overhead 2,000


Property Taxes Payable 2,000
to accrue property taxes

f.) Fixed Manufacturing Overhead 40,000


Accumulated Depreciation 40,000
to record depreciation on factory equipment

g.) Work In Process Inventory 121, 000


Fixed Manufacturing Overhead 69, 600
Variable Manufacturing Overhead 51, 400
to record applied overhead

h.) Finished Goods Inventory 320,000


Work in Process Inventory 320,000
to record finished goods
i.) Cash 550,000
Accounts Receivable 150,000
Sales 700,000

j.) Cost of Goods Sold 330,000


Finished goods inventory 330,000
to record goods sold

k.) Selling and Administrative expenses 280,000


Various accounts 280,000
to record period costs

▪ Cost Statement

COST SHEET
Raw Materials Inventory, beginning 20,300
Add: Raw materials purchased 164,000
Raw materials available for use 184,300
Less: Raw Materials Inventory, ending (4,300)
Raw materials used 180,000
Less: Indirect materials (46,000)
Direct Materials 134,000
Direct Labor 62,000
Variable Manufacturing Overhead 51,400
Fixed Manufacturing Overhead 69, 600
Total Manufacturing Cost 317,000
Add: Work-in process, beginning 7,000
Cost of goods to be manufactured 324,000
Less: Work in process, ending (4,000)
Cost of Goods Manufactured 320,000
Add: Finished Goods inventory, beginning 18,000
Goods available for sale 338,000
Less: Finished Goods inventory, ending (8,000)
Cost of Goods Sold 330,000

References Used:

• Cost Accounting Eight Edition by Raiborn and Kinney


• Cost Accounting: A Managerial Emphasis 14th edition by Horngren, Datar, and Rajan
• Cost Accounting 2018 edition by Pedro Guerero
• https://www.accountingcoach.com/blog/difference-cost-center-profit-center
Learning Activities

Exercise 1: True/False

_____1. Rent on a factory building used in the production process would be classified as a period cost.
_____2. Period costs are found only in manufacturing companies, not in merchandising companies.
_____3. Costing and cost accounting are the same.
_____4. The cost of goods manufactured is calculated by adding the amount of work in process at the end of the
year to the cost of raw materials used, direct labor worked, and manufacturing overhead incurred for the year
and then subtracting work in process at the beginning of the year.
_____5. A publisher that sells its books through agents who are paid a constant percentage commission on each
book sold would classify the commissions as a fixed cost
_____6. Variable costs per unit are affected by changes in activity.
_____7. Profit centers do not have costs.
_____8. The assumption that cost is strictly linear is always valid.
_____9. Retails, merchandising and manufacturing business have the same conversion process,
_____10. Product costs are called inventoriable costs.

Exercise 2:
Determine the classification of the following costs. Indicate whether each of the following items is a variable (V), fixed
(F), or mixed (M) cost and whether it is a product/ service (PT) or period (PD) cost. If some items have alternative
answers, indicate the alternatives and the reasons for them.
________1. Wages of factory maintenance workers
________2. Insurance premiums paid on the headquarters of a manufacturing company
________3. Cost of labels attached to shirts made by a company
________4. Property taxes on a manufacturing plant
________5. Paper towels used in factory restrooms
________6. Salaries of offi ce assistants in a law fi rm
________7. Freight costs of acquiring raw material from suppliers
________8. Computer paper used in an accounting fi rm
________9. Cost of wax to make candles
________10. Freight-in on a truckload of furniture purchased for resale

Exercise 3:
O&W Metal Company makes designer emblems for luxury vehicles. Each emblem is handcrafted out of titanium to the
customer’s design specifications. O&W’s artisans are paid an hourly wage and work between 30 and 60 hours a week.
O&W uses the straight-line method of depreciation. To ensure that each emblem conforms to the customer’s
specifications, O&W has each emblem inspected by an independent company. The inspection company charges a set
price per month, plus an additional amount for each item inspected. After inspection, each emblem is shipped in a
crush-resistant shipping container.

a. Which of O&W’s costs (titanium, artisan wages, equipment depreciation, inspection, shipping containers) is a mixed
cost?
b. Data on total mixed costs and total production for O&W’s five months of operations are as follows:

Units Produced Total Cost


August 1,000 units 80,000
September 1,200 86,000
October 1,600 98,000
November 2,500 125,000
December 2,200 116,000
Using the high-low method and least-squares regression method, determine the (1) variable cost per unit and (2) total
fixed costs.

c. O&W estimates that it will produce 2,000 units during January. Using your answer to (b), estimate the (1) total
variable costs and (2) fixed cost per unit for January.

Exercise 4:

The following data (in thousands of dollars) have been taken from the accounting records of Karstone Corporation for
the just completed year.

Sales ......................................................................... $880


Raw materials inventory, beginning ........................ $20
Raw materials inventory, ending .............................. $30
Purchases of raw materials ....................................... $150
Direct labor ............................................................... $180
Manufacturing overhead .......................................... $230
Administrative expenses .......................................... $100
Selling expenses ....................................................... $130
Work in process inventory, beginning ..................... $80
Work in process inventory, ending .......................... $30
Finished goods inventory, beginning ....................... $120
Finished goods inventory, ending ............................ $100

Compute the:
1. The cost of the raw materials used in production during the year
2. The cost of goods manufactured
3. The cost of goods sold for the year

Evaluation

What am I learning from this


module?

What am I finding hard or


challenging about the topic?

What was the most important


thing I learned from this
module?

Вам также может понравиться