COST ACCOUNTING AND REPORTING 1.
Manufacturers - convert purchased raw
materials into finished goods by using labor,
PRINCIPLES OF COST ACCOUNTING technology, and facilities
Chapter 1: Introduction to Cost Accounting 2. Merchandisers - purchase finished goods for
resale
Cost Accounting – provides the detailed cost
information that management needs to control 3. For-profit service businesses - such as health
current operations and plan for the future clubs, accounting firms, and NHL hockey teams,
- the process of accounting for cost from sell services rather than products
the point at which expenditure is
incurred or committed to establishment 4. Not-for-profit service agencies - such as
of its ultimate relationship with cost charities, governmental agencies, and some
centers and cost units (Chartered health care facilities, provide at little or no cost
Institute of Management Accountants the user
CIMA in England)
- form of managerial accounting that Comparing Merchandising and Manufacturing
aims to capture a company's total cost Companies
of production by assessing the variable
costs of each step of production as well
as fixed costs, such as a lease expense
- measures, analyzes and reports
financial and nonfinancial information
relating to the costs of acquiring or
using resources in an organization. It
provides information for both
management accounting and financial
accounting
- examines the cost structure of a
business. It does so by collecting Balance Sheet
information about the costs incurred by
a company's activities, assigning
selected costs to products and services
and other cost objects, and evaluating
the efficiency of cost usage
- is sometimes used in place of
management accounting. It includes
defining cost and valuating inventories
to help managers to run business
Production Process for Goods and Services income Statement
Basic Equation for Inventory Accounts
o Management uses this information to
decide how to allocate resources to the
most efficient and profitable areas of
the business
Service – Inventory
Types of Businesses that use Cost Accounting
o Service businesses by comparison, have
o All types of business entities
no inventories because the service is
(manufacturing, merchandising, and
consumed at the time it is provided
service) require cost accounting
information systems to track their
Hybrid businesses - companies that may be
activities
classified in more than one type of business. A
restaurant, for example, combines ingredients
in making a fine meal (manufacturing), sells a
cold bottle of wine (merchandising), and fills Effective planning is facilitated by the following:
customer orders (service) 1. Clearly defined objective
2. A production plan - detailed plan
The Nature of Manufacturing Process designed to guide the company to reach
o The nature of the manufacturing its objectives that includes a description
process requires that the accounting of the manufacturing operations to be
information systems of manufacturers performed, a projection of the human
be designed to accumulate detailed cost resource needs for the period and the
data relating to the production process. coordination of the timely acquisition of
o The manufacturing process requires the materials and facilities
conversion of raw materials into
finished goods through the use of labor Control: View (Manufacturing)
and other factory resources - Is the process of monitoring the
o Product quality is as important a company’s operations and determining
competitive weapon as control in the whether the objectives identified in the
global arena planning process are being
accomplished
ISO 9000 standards - requires that
manufacturers have a well-defined quality Effective control is achieved as follows:
control system, and that they consistently 1. Assigning responsibility
maintain a high level of product quality
o Standards are based on eight quality Responsibility Accounting - assignment of
management principles including focus accountability for costs or production results to
on customer needs, employee those individuals who have the most authority
involvement and supplier relationships, to influence them
management and integration of
processes and continuous improvement Cost Center - A unit of activity within the
factory to which costs may be practically and
ISO 14000 – environmental management equitably assigned
o Premise –activities that benefit the - may be a department or a group of
environment, such as becoming more workers, it could represent one job, one
energy efficient and consuming fewer process or one machine
resources, and reducing waste through
recycling and other initiatives, may have Criteria for a cost center
substantial economic benefits as well 1. a reasonable basis on which manufacturing
costs can be traced or allocated
Uses of Cost Accounting Information o A person who has control over and is
o Principles of cost accounting have been accountable for many of the costs
developed to enable manufacturers to charged to that center
process the many different costs
associated with manufacturing and to Note: With responsibility accounting, the
provide built-in control features manager of a cost center is accountable only for
o The information produced by a cost those costs that the manager controls
accounting system provides a basis for:
Prepared for a cost center
Determining Product Costs and Pricing o Cost of production summaries for a cost
o Cost information system must be center reflect its costs in amount, and
designed to permit the determination its production activity in units
of total product costs and the costs o Performance evaluation or performance
associated with producing one unit or report – includes only those costs and
unit costs production data that the center’s
Unit cost information is also useful in making manager can control
important marketing decisions such as:
1. Determining the selling price of a 2. Periodically measuring and comparing
product. results
2. Meeting competition 3. Taking necessary corrective action
3. Bidding on contract
4. Analyzing profitability
Planning and Control
Planning - the process of establishing objectives
or goals for the firm and determining the means
by which they will be met
Cost Accounting Information - enhances the planning, budgeting, business reporting,
planning process by providing historical costs decision analysis, and risk management
that serve as a basis for future projections
Support members' career development
through access to an active professional
community, continuing education,
valuable information, and resources
Support members and their
organizations in driving business
performance by promoting the highest
ethical standards for internal financial
management practices
Building successful careers and
organizations requires the ability to rise
above shifting business landscapes. At
IMA, we are pleased to support the
journey.
Mission
We do this by:
Offering our prestigious credential -the
CMA®-with a proven return on
investment
Building a professional network that
provides career resources and contacts
to last a lifetime
Creating CPE-eligible education programs
that improve industry knowledge and
Professional Ethics, CMA Certification, and leadership potential
Corporate Governance Giving voice to the profession with
IMA – Institute of Management Accountants - - insightful and timely journals and
largest organization of accountants in industry newsletters
in the world Serving as a thought leader in cutting-
edge research and industry best
practices
Advocating for the profession in a
challenging regulatory environment
Values
To carry out this mission, we align our
organization along with these five Global Core
Values:
• Respect for the Individual
• Passion for Serving Members
• Highest Standards of Integrity and Trust
Vision Mission
• Innovation and Continuous Improvement
-To be the leading -To provide a forum
• Teaming to Achieve
resource for for research, practice
development, development,
CMA – Certified Management Accountant
certifying, education,
certificate
connecting, and knowledge sharing,
supporting the and advocacy of the
world’s best highest ethical and
accountants and best practices in
financial management
professionals in accounting and
business finance
Vision
Provide best-in-class certification – the
CMA – for critical internal financial
management responsibilities, including
3. Abstain from engaging in or supporting any
activity that might discredit the profession.
4. Contribute to a positive ethical culture and
place integrity of the profession above
personal interests.
IV. CREDIBILITY
1. Communicate information fairly and
objectively.
2. Provide all relevant information that could
reasonably be expected to influence an
intended user's understanding of the reports,
analyses, or recommendations.
IMA Statement of Ethical Professional Practice 3. Report any delays or deficiencies in
Members of IMA shall behave ethically. A information; timeliness, processing, or internal
commitment to ethical professional practice controls in conformance with organization
includes overarching principles that express our policy and/or applicable law.
values and standards that guide member 4. Communicate professional limitations or
conduct. other constraints that would preclude
responsible judgment or successful
Principles performance of an activity.
IMs overarching ethical principles include:
Honesty, Fairness, Objectivity, and Sarbanes-Oxley Act of 2002 – written to protect
Responsibility. shareholders and stakeholders by improving
- Members shall act in accordance with corporate governance
these principles and shall encourage - Also known as the Public Company
others within their organizations to Accounting Reform and Investor,
adhere to them Protection Act of 2002
- Created by US Senator Paul Sarbanes
Standards (D-Maryland) and US Congressman
IMA members have a responsibility to comply Michael Oxley (R-Ohio)
with and uphold the standards of Competence, - Signed into law July 30, 2002
Confidentiality, Integrity, and Credibility. - Most dynamic securities legislation since
Failure to comply may result in disciplinary the Securities and Exchange Acts of
action. 1933 and 1934
I. COMPETENCE Corporate governance - the means by which a
1. Maintain an appropriate level of professional company is directed and controlled
leadership and expertise by enhancing
knowledge and skills. Key elements of Sarbanes-Oxley
2. Perform professional duties in accordance o CEO and CFO certification of financial
with relevant laws, regulations, and technical statements
standards. o Establishment of Public Company
3. Provide decision support information and o Requires that a company’s annual
recommendations that are accurate, clear, report contain an internal control
concise, and timely. Recognize and help manage report
risk. o Increased criminal penalties for
violations of securities law
II. CONFIDENTIALITY
1. Keep information confidential except when Professional Ethics, CMA Certification, and
disclosure is authorized or legally required. Corporate Governance
2. Inform all relevant parties regarding o Accounting Oversight Board (PCAOB –
appropriate use of confidential information. Public Company Accounting Oversight
Monitor to ensure compliance. Board) - nonprofit corporation established
3. Refrain from using confidential information by Congress to oversee the audits of public
for unethical or illegal advantage. companies in order to protect investors
and further the public interest in the
III. INTEGRITY preparation of informative, accurate, and
1. Mitigate actual conflicts of interest. Regularly independent audit reports
communicate with business associates to - oversees the audits of brokers and
avoid apparent conflicts of interest. Advise all dealers registered with the Securities
parties of any potential conflicts of interest. and Exchange Commission (SEC),
2. Refrain from engaging in any conduct that including compliance reports filed
would prejudice carrying out duties ethically. pursuant to federal securities laws
o Prohibits a public accounting firm from
providing non-auditing services to a
company it audits.
o Requires that a company’s annual report
contain an internal report
o Board of Directors’ responsible for hiring,
compensating, and terminating the audit
firm
o Severe criminal penalties for the
o The Securities and Exchange Commission
destruction or alternation of business
(“SEC”) issued Memorandum Circular
documents and retaliation against
(“MC”) No. 24, Series of 2019, advising
“whistleblowers”
the public of the adoption of the Code
of Corporate Governance for Public
Relationship of Cost Accounting to Financial
Companies and Registered Issuers (the
and Management Accounting
“CG Code”), which takes effect on 12
o Financial accounting meets the needs of
January 2020.
investors, creditors, and other external
users of financial information.
Management Accounting and Cost Accounting
o Management accounting focuses on
historical and estimated data that
management needs to conduct ongoing
operations and do long-range planning
o Cost accounting includes those parts of
financial and management accounting
that collect and analyze cost
information
Management Accounting - application of
professional knowledge and skill in the
preparation of accounting information in such a
way as to assist management in the formulation
of policies and in the planning and control of
the operation of the undertakings
- profession that involves partnering in
management decision making, devising
planning and performance
management systems and providing
expertise in financial reporting and
control to assist management in the
formulation and implementation of an
organizations strategy
Top 7 Trends in Management Accounting
1. Expansion from product to channel and
customer profitability analysis
2. Management accounting's expanding role
with enterprise price performance
management (EPM)
3. The shift to predictive accounting
4. Business analytics embedded in EPM
methods Comparison of Financial and Managerial
5. Coexisting and improved management Accounting
accounting methods
6. Managing information technology and
shared services as a business, and
7. The need for better skills and competency
with behavioral cost management.
Code of Corporate Governance
Relationship of Cost Accounting to Financial Manufacturing Overhead - Manufacturing costs
and Management Accounting that cannot be traced directly to specific units
produced
o Indirect materials – materials used to
support the production process
o Indirect labor – wages paid to
employees who are not directly
involved in production work
Nonmanufacturing Costs
Selling Costs – costs necessary to secure the
order and deliver the product
Administrative Costs – all executive,
organizational, and clerical costs
Product Costs vs Period Costs
Product costs – direct materials, direct labor,
and manufacturing overhead
Period costs – include all selling costs and
administrative costs
If your inventory balance at the beginning of the
month was $1,000, you bought $100 during the
month, and sold $300 during the month, what
would be the balance at the end of the month?
Inventory, beginning + Purchases – Sales =
Inventory, ending
1,000 + 100 – 300 = $800
Elements of Manufacturing Costs
- Manufacturing or production costs are
classified into three basic elements: (1)
direct materials, (2) direct labor, and
(3) factory overhead
Direct Materials - Raw materials that become
an integral part of the product and that can be
conveniently traced directly to it
Direct Labor - Those labor costs that can be
easily traced to individual units of product.
Factory Overhead - Manufacturing costs that
cannot be traced directly to specific units
produced (indirect materials and labor)
Journal Entries for Cost Accounting 8. Miscellaneous selling and administrative
expenses for telephone and fax, copying
1. Purchase of materials in cash and on account charges, office supplies, travel, and rental of
office furniture and equipment totaled $3,750
Materials xxx on account
Cash xxx
Selling and Administrative Expenses
Materials xxx Accounts Payable
Accounts Payable xxx
9. Transfer of Factory Overhead to Work in
2. Distribution of materials to direct materials Process
and indirect materials
Work in Process xxx
Work in Process (Direct Materials) xxx Factory Overhead xxx
Factory Overhead (Indirect Materials) xxx
Materials xxx 10. All goods in process have been finished by
the end of the month, record transfer of Work
3. Record the payroll and the payments to in Process to Finished Goods
employees (ignoring payroll deductions)
Finished Goods xxx
Payroll xxx Work in Process xxx
Wages Payable xxx
Wages Payable xxx 11. Invoices of $25,000 representing costs of
Cash xxx materials, utilities, and selling and
administrative expenses are paid
4. Distribution of payroll to appropriate
accounts would be as follows: Accounts Payable xxx
Cash xxx
Work in Process (Direct Labor) xxx
Factory Overhead (Indirect Labor) xxx 12. A total of 400 tables are sold to retailers at a
Selling and Admin Expenses xxx net price of $114.66 each
Payroll xxx
Accounts Receivable xxx
5. Depreciation expense of $250,000 building is Sales xxx
6% of the building cost per year. The sales and Cost of Goods Sold xxx
admin offices occupy one-tenth of the total Finished Goods xxx
building, and the factory operation is contained
in the order of nine-tenths. The expense for one 13. Cash totaling $33,000 is collected on
month is recorded as follows: accounts receivable
Factory Overhead Cash xxx
Selling & Administrative Expenses Accounts Receivable xxx
Accumulated Depreciation – Building
Product Cost Flows
(250,000 x 6% x 1/12) = 1,250
1/10 = S&A = 1,250 x 1/10 = $125
9/10 = FOH = 1,250 x 9/10 = $1,125
6. Depreciation expense for the $75,000 of
factory machine and equipment is 20% of
original cost per year
Factory Overhead
Accumulated Depreciation – M&E
Manufacturing Cost Flows
($75,000 x 20% x 1/12) = $1,250
7. The cost of heat, light, and power for the
month was $1,500
Factory Overhead
Selling and Administrative Expenses
Accounts Payable
Assigning Costs to Cost Objects
Process Cost System – accumulates costs for
each department or process in the factory
Summary of the Types of Cost Classifications
1. Financial Reporting
2. Predicting Cost Behavior
3. Assigning Costs to Cost Objects
4. Making Business Decisions
o Some companies use both a job order
and a process cost system.
o A standard cost system, which is not a
third system can be used with either a
job order of a process cost system, uses
predetermined standard costs to
furnish a measurement that helps
management make decisions regarding
efficiency of operations
Illustration of a Job Order Cost System
Cost Accounting Systems
- To provide management with data
needed for effective cost control, two
basic types of cost accounting systems
have been developed:
a. Process Cost System
b. Job order Cost System
- Both systems are used to gather cost
data and to allocate costs to goods
manufactured
Uses of Cost Systems
Job Order Cost System - the output consists of
special or custom-made products.
- the focus is on determining the cost of
the individual specific job
