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Cost AccountingCost Accounting

Chat Session 1Chat Session 1



Chapter 1:Chapter 1:The Accountant¶s Role in theThe Accountant¶s Role in the

OrganizationOrganization

What is cost accounting?What is cost accounting?

Differences between managerialDifferences between managerialand financial accounting.and financial accounting.The value chain and the supplyThe value chain and the supply

chainchainGuidelines to provide valueGuidelines to provide value



The Business Function of theThe Business Function of theValue ChainValue Chain

Research and developmentResearch and developmentDesign of products, services, or Design of products, services, or

processesprocessesProductionProductionMarketingMarketing

DistributionDistributionCustomer serviceCustomer service



Chapter 2:Chapter 2: An Introduction to Cost Terms and An Introduction to Cost Terms and

PurposesPurposesWhat is a cost?What is a cost?What is a cost object?What is a cost object?

Direct and indirect costsDirect and indirect costsCost allocationCost allocationCost behaviorsCost behaviors

Variable costsVariable costsFixed costsFixed costsMixed costsMixed costs




PurposesPurposesRelevant rangeRelevant rangeCost driversCost drivers

Total cost and unit costsTotal cost and unit costsManufacturing companies,Manufacturing companies,merchandising companies, andmerchandising companies, and

service companiesservice companiesInventoriable and period costsInventoriable and period costs




PurposesPurposesVariable cost:Variable cost:

Changes inChanges in total total as volume changesas volume changesRemains constantRemains constant per uni t per uni t

Fixed cost:Fixed cost:Unchanged inUnchanged in total total as volume changesas volume changesDecreasesDecreases per uni t per uni t as productionas productionincreasesincreases




PurposesPurposesCost Example:Cost Example:

Leased Car Leased Car

Fixed: monthly lease payment of $500 per monthFixed: monthly lease payment of $500 per monthwhich includes 10,000 miles. There are nowhich includes 10,000 miles. There are noadditional charges as long as you stay within your additional charges as long as you stay within your milesmiles

Variable: a per mile charge of $.30 for every mile usedVariable: a per mile charge of $.30 for every mile usedabove the 10,000 milesabove the 10,000 miles




PurposesPurposesThree types of companies:Three types of companies:

Manufacturer Manufacturer Purchase material and convert toPurchase material and convert tofinished goodsfinished goods ± ± auto manufacturer auto manufacturer

Merchandiser Merchandiser Purchase finished goods and resellPurchase finished goods and resellthemthem ± ± retail storeretail store

ServiceServiceProvide service or intangible productsProvide service or intangible products - -lawyer lawyer




PurposesPurposesThree categories of inventory for aThree categories of inventory for amanufacturing companymanufacturing company

Rawmaterials

Work in process

Finishedgoods




PurposesPurposesThreeThreecategories of acategories of amanufacturingmanufacturingcompany costscompany costs

Direct materialDirect materialDirectDirectmanufacturingmanufacturinglabor labor IndirectIndirectmanufacturingmanufacturing

costscosts(manufacturing(manufacturingoverhead)overhead)




PurposesPurposesInventoriableInventoriablecost (productcost (productcosts)costs)

InventoryInventoryrecorded on therecorded on thebala nce shee t bala nce shee t

until solduntil sold ± ±eventuallyeventually

becomes costbecomes costof good sold onof good sold onthethe inc om einc om es tat e m en t s tat e m en t

Period costPeriod cost All costs other All costs other

than cost of than cost of goods soldgoods sold ± ±reported asreported asexpensesexpenses ononthethe inc om einc om es tat e m en t s tat e m en t in thein theperiod they areperiod they areincurredincurred




PurposesPurposesThree key features of cost accountingThree key features of cost accounting

and cost management:and cost management:1.1. Calculating the cost of products,Calculating the cost of products,

services, and other cost objectsservices, and other cost objects2.2. Obtaining information for planningObtaining information for planning

and control and performanceand control and performance

evaluationevaluation3.3. Analyzing the relevant information Analyzing the relevant informationfor decision makingfor decision making



Chapter 3Chapter 3CostCost--VolumeVolume--Profit (CVP)Profit (CVP)

Analysis AnalysisKey Assumptions:Key Assumptions:Changes in revenues and costs occur Changes in revenues and costs occur only because of changes in outputonly because of changes in outputTotal costs can be separated into fixedTotal costs can be separated into fixedand variable costsand variable costsRevenues and costs are linearly relatedRevenues and costs are linearly relatedto output within the relevant rangeto output within the relevant rangeUnit selling price, unit variable costs,Unit selling price, unit variable costs,and fixed costs are known and constantand fixed costs are known and constantThe analysis covers only a singleThe analysis covers only a singleproduct or product mixproduct or product mixThe analysis is not impacted by the timeThe analysis is not impacted by the timevalue of moneyvalue of money




Analysis Analysis Ba sic Inc om e S tat e m en t:Ba sic Inc om e S tat e m en t:

RevenuesRevenues(Expenses)(Expenses)

Operating IncomeOperating Income

Co n t ri bu t i o n M a rgin Inc om e S tat e m en t:Co n t ri bu t i o n M a rgin Inc om e S tat e m en t:

RevenuesRevenues(Variable Costs)(Variable Costs)

Contribution MarginContribution Margin(Fixed Costs)(Fixed Costs)

Operating IncomeOperating Income




Analysis AnalysisContribution Margin (CM) per unit:Contribution Margin (CM) per unit:Unit Selling PriceUnit Selling Price $10$10Unit Variable CostUnit Variable Cost (8)(8)CM per unitCM per unit $ 2$ 2

Contribution Margin % of Sales:Contribution Margin % of Sales:CM / Selling PriceCM / Selling Price $2 / $10 = 20%$2 / $10 = 20%

Contribution Margin total: (assume 100 units)Contribution Margin total: (assume 100 units)Sales RevenueSales Revenue $1,000$1,000

Variable CostsVariable Costs (800)(800)Total CMTotal CM $ 200$ 200




Analysis Analysis

Operating Income (OI) vs. Net Income (NI)Operating Income (OI) vs. Net Income (NI)OI +OI + NonoperatingNonoperating IncomeIncome ± ± NonoperatingNonoperatingExpensesExpenses ± ± Income Tax = NIIncome Tax = NI




Analysis AnalysisBreakeven Point =Breakeven Point =fixed costs / contribution marginfixed costs / contribution margin

If fixed costs are $400 / $2 = 200If fixed costs are $400 / $2 = 200 uni t suni t s would needwould needto be made to breakevento be made to breakeven

If fixed costs are $400 / 20% = $2000 inIf fixed costs are $400 / 20% = $2000 in s al ess al es

revenuerevenue would need to be earned to breakevenwould need to be earned to breakeven

PROOF:PROOF:$2000$2000 -- $1600 (VC) = 400 (CM)$1600 (VC) = 400 (CM) ± ± 400 (FC) = $0400 (FC) = $0




Analysis AnalysisTarget operating income (TOI) =Target operating income (TOI) =(fixed costs + TOI) / contribution(fixed costs + TOI) / contribution

marginmarginIf we want a target operating income of $600:If we want a target operating income of $600:($400 + 600) / 20% = $5000($400 + 600) / 20% = $5000 s al es d olla rss al es d olla rs must bemust beearned, or $5000 / $10 = 500earned, or $5000 / $10 = 500 uni t suni t s ..

PROOF:PROOF:$5000$5000 -- $4000 (VC) = 1000 (CM)$4000 (VC) = 1000 (CM) ± ± 400 (FC) = $600400 (FC) = $600




Analysis AnalysisIncome tax affectIncome tax affect

Target net income (TNI) =Target net income (TNI) =

target operating income (TOI) = target nettarget operating income (TOI) = target netincome / (1income / (1--tax rate)tax rate)

If a company earns $50,000 before taxes andIf a company earns $50,000 before taxes andthe tax rate is 40%:the tax rate is 40%:

Operating IncomeOperating Income $50,000$50,000Deduct taxes @ 40%Deduct taxes @ 40% 20,00020,000Net IncomeNet Income $30,000$30,000

$30,000 / (1$30,000 / (1--40%) = $50,000 40%) = $50,000




Analysis AnalysisCVP analysis is used for:CVP analysis is used for:

Strategic decisionsStrategic decisionsHow much to spend on advertisingHow much to spend on advertisingWhether to expand into new marketsWhether to expand into new markets

Add to existing product lines Add to existing product lines




Analysis AnalysisSensitivity Analysis (whatSensitivity Analysis (what- -if)if)Margin of Safety:Margin of Safety:Budgeted revenuesBudgeted revenues ± ± breakevenbreakevenrevenues = margin of safetyrevenues = margin of safety d olla rsd olla rs$5,000$5,000 -- $2,000 = $3,000 safety net$2,000 = $3,000 safety net

Margin of safety dollars / budgetedMargin of safety dollars / budgeted

revenues = margin of safetyrevenues = margin of safety percen ta ge percen ta ge$3,000 / $5,000 = 60% (or sales can$3,000 / $5,000 = 60% (or sales candrop 60% before it effects our bottomdrop 60% before it effects our bottomlineline

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