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