Table of Contents

Chapter 1 - Overview of Cost Accounting.............................................................................................................................................. 1

Financial Reporting................................................................................................................................................................................... 1

Management Reporting............................................................................................................................................................................. 1

Problem Resolution.................................................................................................................................................................................... 3

Price Setting................................................................................................................................................................................................ 3

Cost Investigation....................................................................................................................................................................................... 4

Budget Formulation................................................................................................................................................................................... 5

Constraint Analysis.................................................................................................................................................................................... 5

Cost Accumulation Systems...................................................................................................................................................................... 5

Chapter 2 - The Cost Accountant Job Description.............................................................................................................................. 8

To Whom Does the Cost Accountant Report?....................................................................................................................................... 8

What Are the Principal Accountabilities of the Cost Accountant?.................................................................................................... 8

What Are the Qualifications of a Cost Accountant?.......................................................................................................................... 10

Who Does the Cost Accountant Supervise?......................................................................................................................................... 10

Chapter 3 – Types of Costs....................................................................................................................................................................... 12

Actual Costs.............................................................................................................................................................................................. 12

Avoidable Costs........................................................................................................................................................................................ 12

Committed Costs...................................................................................................................................................................................... 12

Conversion Costs..................................................................................................................................................................................... 13

Deferred Costs.......................................................................................................................................................................................... 13

Differential Costs..................................................................................................................................................................................... 14

Direct Costs............................................................................................................................................................................................... 14

Discretionary Costs................................................................................................................................................................................. 15

Expired Costs............................................................................................................................................................................................ 15

Fixed Costs................................................................................................................................................................................................ 15

Historical Costs........................................................................................................................................................................................ 15

Indirect Costs............................................................................................................................................................................................ 16

Irrelevant Costs........................................................................................................................................................................................ 16

Marginal Costs......................................................................................................................................................................................... 16

Normal Costs............................................................................................................................................................................................ 17

Period Costs.............................................................................................................................................................................................. 17

Replacement Costs................................................................................................................................................................................... 17

Semi-Fixed Costs...................................................................................................................................................................................... 18

Step Costs.................................................................................................................................................................................................. 18

Sunk Costs................................................................................................................................................................................................. 18

Traceable Costs........................................................................................................................................................................................ 19

Variable Costs.......................................................................................................................................................................................... 19

Chapter 4 - Inventory Valuation............................................................................................................................................................ 21

Valuation Step 1: The Quantity of Inventory on Hand...................................................................................................................... 21

The Periodic Inventory System.............................................................................................................................................................. 21

The Perpetual Inventory System............................................................................................................................................................ 22

The Gross Profit Method........................................................................................................................................................................ 23

Valuation Step 2a: Inventory Costing.................................................................................................................................................. 24

The First In, First Out Method.............................................................................................................................................................. 25

The Last In, First Out Method............................................................................................................................................................... 26

The Dollar-Value LIFO Method............................................................................................................................................................ 27

The Link-Chain Method.......................................................................................................................................................................... 29

The Weighted Average Method.............................................................................................................................................................. 31

Standard Costing...................................................................................................................................................................................... 32

The Retail Inventory Method.................................................................................................................................................................. 33

Valuation Step 2b: Inventory Costing.................................................................................................................................................. 34

Job Costing................................................................................................................................................................................................ 34

Process Costing........................................................................................................................................................................................ 34

By-Product and Joint Product Costing................................................................................................................................................ 34

Valuation Step 3: Overhead Allocation................................................................................................................................................ 34

Valuation Step 4: Inventory Valuation................................................................................................................................................. 37

The Lower of Cost or Market Rule........................................................................................................................................................ 37

Obsolete Inventory Accounting.............................................................................................................................................................. 39

Chapter 5 - Job Costing............................................................................................................................................................................. 43

Overview of Job Costing......................................................................................................................................................................... 43

When Not to Use Job Costing................................................................................................................................................................ 44

Accounting for Direct Materials in Job Costing................................................................................................................................ 44

Accounting for Labor in Job Costing................................................................................................................................................... 46

Accounting for Actual Overhead Costs in Job Costing..................................................................................................................... 46

Accounting for Standard Overhead Costs in Job Costing................................................................................................................ 47

The Importance of Closing a Job.......................................................................................................................................................... 49

The Role of the Subsidiary Ledger in Job Costing............................................................................................................................. 49

Job Costing Controls............................................................................................................................................................................... 49

Chapter 6 - Process Costing..................................................................................................................................................................... 52

Overview of Process Costing................................................................................................................................................................. 52

The Weighted Average Method.............................................................................................................................................................. 52

The Standard Costing Method............................................................................................................................................................... 54

The First In, First Out Method.............................................................................................................................................................. 55

The Hybrid Accounting System.............................................................................................................................................................. 57

Process Costing Journal Entries........................................................................................................................................................... 58

Problems With Process Costing............................................................................................................................................................ 59

Chapter 7 - Standard Costing.................................................................................................................................................................. 62

Overview of Standard Costing............................................................................................................................................................... 62

Advantages of Standard Costing........................................................................................................................................................... 62

Disadvantages of Standard Costing...................................................................................................................................................... 63

How to Create a Standard Cost............................................................................................................................................................. 63

Historical, Attainable, and Theoretical Standards............................................................................................................................ 64

How to Account for Standard Costs...................................................................................................................................................... 65

Overview of Variances............................................................................................................................................................................ 65

The Purchase Price Variance................................................................................................................................................................ 66

Material Yield Variance.......................................................................................................................................................................... 67

Labor Rate Variance............................................................................................................................................................................... 68

Labor Efficiency Variance...................................................................................................................................................................... 68

Variable Overhead Spending Variance................................................................................................................................................ 69

Variable Overhead Efficiency Variance.............................................................................................................................................. 70

Fixed Overhead Spending Variance..................................................................................................................................................... 70

Selling Price Variance............................................................................................................................................................................ 71

Sales Volume Variance........................................................................................................................................................................... 72

Problems with Variance Analysis.......................................................................................................................................................... 72

The Controllable Variance..................................................................................................................................................................... 73

The Favorable or Unfavorable Variance............................................................................................................................................. 73

Where to Record a Variance.................................................................................................................................................................. 73

Which Variances to Report..................................................................................................................................................................... 74

How to Report Variances........................................................................................................................................................................ 75

Chapter 8 - Joint and By-Product Costing.......................................................................................................................................... 78

Split-Off Points and By-Products.......................................................................................................................................................... 78

Why We Allocate Joint Costs................................................................................................................................................................. 79

How to Allocate Joint Costs................................................................................................................................................................... 79

How to Determine Prices........................................................................................................................................................................ 80

Special Concerns With By-Product Costing........................................................................................................................................ 80

Chapter 9 - Waste Accounting................................................................................................................................................................ 83

Definition of Spoilage.............................................................................................................................................................................. 83

Accounting for Normal Spoilage........................................................................................................................................................... 83

Accounting for Abnormal Spoilage....................................................................................................................................................... 85

Accounting for the Sale of Spoilage...................................................................................................................................................... 85

Cost Allocation to Spoilage.................................................................................................................................................................... 86

Definition of Rework................................................................................................................................................................................ 86

Reporting Rework..................................................................................................................................................................................... 86

Accounting for Rework............................................................................................................................................................................ 87

Definition of Scrap................................................................................................................................................................................... 87

Accounting for Scrap............................................................................................................................................................................... 87

Impact of Waste on Manufacturing Systems....................................................................................................................................... 89

Chapter 10 - Product Pricing................................................................................................................................................................... 91

What Does This Cost?............................................................................................................................................................................. 91

The Issue of Pricing Duration................................................................................................................................................................ 91

The Issue of Overhead Costs.................................................................................................................................................................. 93

The Issue of Overhead Application....................................................................................................................................................... 94

Corporate Overhead Costs..................................................................................................................................................................... 96

What Does This Cost, Part Two............................................................................................................................................................ 97

The Issue of the Bottleneck..................................................................................................................................................................... 98

What Does This Cost, Part Three.......................................................................................................................................................... 98

Chapter 11 - Target Costing.................................................................................................................................................................. 101

The Basic Steps of Target Costing...................................................................................................................................................... 101

Value Engineering Considerations..................................................................................................................................................... 102

The Cost Reduction Program.............................................................................................................................................................. 103

The Milestone Review Process............................................................................................................................................................ 103

Problems with Target Costing............................................................................................................................................................. 104

The Members of a Design Team.......................................................................................................................................................... 105

The Role of the Cost Accountant in Target Costing........................................................................................................................ 105

Data Sources for Target Costing........................................................................................................................................................ 106

The Product Life Cycle and Target Costing...................................................................................................................................... 107

Chapter 12 - Transfer Pricing............................................................................................................................................................... 109

Overview of Transfer Pricing.............................................................................................................................................................. 109

Market Price Basis for Transfer Pricing........................................................................................................................................... 110

Adjusted Market Price Basis for Transfer Pricing.......................................................................................................................... 111

Negotiated Basis for Transfer Pricing............................................................................................................................................... 111

Contribution Margin Basis for Transfer Pricing............................................................................................................................. 112

Cost Plus Basis for Transfer Pricing.................................................................................................................................................. 112

Cost Anomalies in a Cost-Based Transfer Price.............................................................................................................................. 113

Pricing Problems Caused by Transfer Pricing................................................................................................................................ 113

The Tax Impact of Transfer Prices..................................................................................................................................................... 114

Chapter 13 - Direct Costing................................................................................................................................................................... 118

Overview of Direct Costing.................................................................................................................................................................. 118

Contribution Margin versus Gross Margin....................................................................................................................................... 119

Direct Costing as an Analysis Tool.................................................................................................................................................... 120

Direct Costing Pitfalls.......................................................................................................................................................................... 125

Chapter 14 - Activity-Based Costing................................................................................................................................................... 129

The Problem with Overhead Allocation............................................................................................................................................ 129

Overview of Activity-Based Costing................................................................................................................................................... 131

Activity-Based Management................................................................................................................................................................ 136

Advantages of Activity-Based Costing............................................................................................................................................... 137

Problems with Activity-Based Costing............................................................................................................................................... 139

The Incremental Cost Reduction Fallacy.......................................................................................................................................... 140

The Bill of Activities.............................................................................................................................................................................. 141

System Scope Issues............................................................................................................................................................................... 142

System Integration Issues..................................................................................................................................................................... 142

Chapter 15 - Constraint Analysis......................................................................................................................................................... 145

Constraint Analysis Operational Terminology................................................................................................................................. 145

Overview of Constraint Analysis......................................................................................................................................................... 145

The Cost of the Bottleneck.................................................................................................................................................................... 147

Local Optimization................................................................................................................................................................................ 148

Constraint Analysis Financial Terminology..................................................................................................................................... 149

Constraint Analysis from a Financial Perspective.......................................................................................................................... 149

The Constraint Analysis Model........................................................................................................................................................... 149

The Decision to Sell at a Lower Price................................................................................................................................................ 152

The Decision to Outsource Production.............................................................................................................................................. 153

The Capital Investment Decision........................................................................................................................................................ 154

The Decision to Cancel a Product...................................................................................................................................................... 156

Comparison of ABC to Constraint Analysis...................................................................................................................................... 157

Chapter 16 - Capital Budgeting Analysis........................................................................................................................................... 159

Overview of Capital Budgeting........................................................................................................................................................... 159

Bottleneck Analysis................................................................................................................................................................................ 160

Net Present Value Analysis.................................................................................................................................................................. 160

The Payback Method............................................................................................................................................................................. 162

Accounting Rate of Return................................................................................................................................................................... 163

Capital Budget Proposal Analysis...................................................................................................................................................... 164

The Outsourcing Decision.................................................................................................................................................................... 165

The Capital Budgeting Application Form......................................................................................................................................... 166

Capital Rationing................................................................................................................................................................................... 168

Capital Budgeting with Minimal Cash............................................................................................................................................... 169

The Post Installation Review............................................................................................................................................................... 170

The Lease versus Buy Decision........................................................................................................................................................... 170

Chapter 17 - Cost Collection Systems................................................................................................................................................. 174

Data Entry Accuracy............................................................................................................................................................................. 174

Data Entry with Bar Codes.................................................................................................................................................................. 174

Data Entry with Radio Frequency Identification (RFID)............................................................................................................... 176

Document Imaging................................................................................................................................................................................ 177

Special Considerations for Labor Tracking...................................................................................................................................... 178

The Duration of Cost Collection......................................................................................................................................................... 181

The Chart of Accounts........................................................................................................................................................................... 182

Backflushing........................................................................................................................................................................................... 185

Other Sources of Cost Information..................................................................................................................................................... 186

Chapter 18 - Cost Variability................................................................................................................................................................ 190

Mixed Costs............................................................................................................................................................................................. 190

Labor-Based Fixed Costs..................................................................................................................................................................... 191

Costs Based on Purchase Quantities.................................................................................................................................................. 192

Costs Based on Production Batch Sizing........................................................................................................................................... 193

Cost Based on Step Costs..................................................................................................................................................................... 194

Time-Based Costs.................................................................................................................................................................................. 194

Experience-Based Costs....................................................................................................................................................................... 195

Incorporating Cost Variability into Reports..................................................................................................................................... 196

Chapter 19 - Cost of Quality.................................................................................................................................................................. 200

Types of Quality..................................................................................................................................................................................... 200

Costs Impacted by Quality................................................................................................................................................................... 201

Reporting on the Cost of Quality........................................................................................................................................................ 202

Answers to Chapter Questions.............................................................................................................................................................. 206

Glossary....................................................................................................................................................................................................... 227

Index............................................................................................................................................................................................................. 231

 

Exam Score Sheet ………………………………………………………………………………………………………..…..234

 

CPE Exam …………………………………………………………………………………………………………………....235