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Lesson 2
By Shan Wikoon
Cost Accounting Systems
Knowing unit costs help
managers:
Compute cost of
goods sold for the
income statement
A cost accounting system (also called product costing system or costing system) is
a framework used by firms to estimate the cost of their products for profitability
analysis, inventory valuation and cost control.
Estimating the accurate cost of products is critical for profitable operations. A firm
must know which products are profitable and which ones are not, and this can be
ascertained only when it has estimated the correct cost of the product.
Further, a product costing system helps in estimating the closing value of materials
inventory, work-in-progress and finished goods inventory for the purpose of
financial statement preparation.
Cost Accounting Systems
Costs
accumulated
by job A job is the production of a
unique product or
specialized service. May be
https://www.youtube.com/watch?v=Uw_52M9GLbg one unit or a batch of units.
Steps in job-order costing process
In a job-order costing system, jobs are accounted for using the job-
order cost sheet. The process involves the following steps:
1. Identification of the job
2. Tracing direct costs to the job
3. Identifying the indirect costs i.e. manufacturing overheads and
finding the cost allocation base for each cost.
4. Applying the indirect costs to the job using the pre-determined
allocation rate.
5. Finding total cost by summing up all the cost components.
6. Closing the under/over-applied manufacturing overheads to
cost of goods sold/income statement.
7. Calculating revenue and profit.
1. Job order costing
How Do Materials and Labor Costs Flow Through the
Job Order Costing System?
17-12
How Do Service Companies Use a Job
Order Costing System?
Service companies do not have inventory or manufacturing
costs.
Trace direct labor to jobs.
Allocate overhead costs to jobs:
1. Compute the predetermined overhead allocation rate.
2. Allocate indirect costs to jobs, using the
predetermined overhead allocation rate.
Use the costing information to make pricing decisions.
Process Costing
Process costing
for normal cars
Inventory Management Accounting Systems
where :
S = Setup costs D = Demand rate P = Production cost I = Interest rate (considered an opportunity cost, so
the risk-free rate can be used)
http://www.investopedia.com/terms/e/economicorderquantity.asp
Economic order quantity model
How Do Just-In-Time Management
Systems Work?
A just-in-time management system
reduces inventory costs.
Raw materials and finished goods are
completed just in time for delivery to
customers.
The cost of buying, storing, and moving
inventory can be significant for companies.
How Do Just-In-
Time
Management
Systems Work?
19-24
Just-in-Time Costing
Just-in-time costing is a costing system
that simplifies accounting for companies.
Tracks costs after the units are completed
Combines Raw Materials Inventory and Work-
in-Process Inventory into Raw and In-Process
Inventory
The Conversion Costs account combines direct
labor and manufacturing overhead costs.
19-25
Just-in-Time Costing
19-26
Recording Transactions in JIT
Price Optimization systems
Price Optimization systems are mathematical programs that calculate how
demand varies at different price levels, then combine that data with information
on costs and inventory levels to recommend prices that will improve profits.
Price Optimization systems
Price Optimization systems can be used to
tailor pricing for customer segments by
simulating how targeted customers will
respond to price changes with data-driven
scenarios. Given the complexity of pricing
thousands of items in highly dynamic market
conditions, modeling results and insights
helps to forecast demand, develop pricing and
promotion strategies, control inventory levels
and improve customer satisfaction.
Companies use Price Optimization systems to:
Initial price optimization works well for companies with a stable base of
long life-cycle productsgrocery stores, drug chains, officesupply
stores and commodities manufacturers
Price Optimization systems should factor in three critical pricing elements: pricing strategy, the
value of the product to both buyer and seller, and tactics that manage all elements impacting
profitability. Practitioners should:
Select the preferred optimization model and determine desired outputs and required inputs
Collect historical data, including product volumes, the company's prices and promotions,
competitors' prices, economic conditions, product availability, seasonal conditions and
fixed and variable cost details
Clarify the business's value proposition and set strategic rules to guide the modeling
process
Shan is an experienced HND tutor and assessor who works in London, UK. He has a Degree of Master
of Laws in Law of International Trade - University of Wales, a Diploma in Business Administration, a
Degree of Bachelor of Law and a Diploma in Computing.
If your institution is in London and seeking reliable tutors, please contact Shan on
shanwikoon@gmail.com