Cost Test 1

Value Chain(What is it)

Activities that convert raw materials and other resources into finished goods and services for use by consumer

Finished Goods

Materials + Labor + overhead

Value Added Activities

Activities customers are willing to pay for because customers believe the activities add value to the finished good or service

Value Chain Activities

Research and Development, Design, Purchasing, Production, Distribution, and Marketing, and Customer Service

Research and Development

Creation and Development of new ideas realted to products and services

Desgin

the detailed development of engineering of products and services

Purchasing

Acquisition of goods and services required for production

Production

the combination of DM+DL+FOH to produce the product

Marketing

Making the product known to customers

Distribution

The process of getting the product into the customers hands

Customer Service

taking care of the buyer after the sale

Accounting systems

Finanical accounting and cost accounting.

Financial Accounting

Preparing 4 statements in accrodance with GAAP. Focused on the past, external

Cost Accounting

Providing managers with timely and relevant infomration. Not Guided by GAAP

Decsions

Cost accountants do not make decisions, managers make the decisions

Key Players

CFO, Treasurer, the controller, the internal auditor, and cost accountant

Non-Value added activies

Activities not adding value to the product or service form the customers perspective (may actually be necessary to manufacture the product.

If the cost adds no value…

the cost should be eliminated

Cost Benefit Anaylsis

Cost compared to the benefit. Cost > benefit cut the cost

Cost

Cost Driver

Factor that causes a particular increase

Differential Costs

Costs that differ among alternatives. Cost A-Cost B= Differential Costs

Relvant costs=when there is a difference

Irrelevant Costs=when there is not a difference

Differential Revenue

Change in Revenue due to action.

Responsibility Center

Single manager has respondsibility for what does and doesn’t happen in the unit. Each has a budget

Cost Accounting: in Research and Development

lean manufacturing is all about the elimination of waste and continuous improvement. The focus is on production and partnering with suppliers to provide seamlesss production of product

Cost Accounting: in Design

More complex=greater cost, pairing manufacturing cost and the complexity in the design of the product

Activity Based Costing

Costing method tha first assigns costs to activities and then to the products based on the consumption of actives by the various products.

Cost Accounting: in purchasing

two items of trending in this area: Performance Measurement(minimizes unessceary transaction processes and indicates how well a particular process is working) this is the standard. Benchmarking(basis for comparison)

Cost Accounting: in Prodcution

the heart of the value chain. Two kinds JIT and Lean Manufacturing. JIT-just in time for use. Lean-free from anything that hinders cost

Cost Accounting: in Marketing

CRM: shows firms who to target by assessment of customer revenues and costs. Nothing happens till the sale takes place

Cost Accounting: in distribution

the finished product makes its way to the consumer. Outsourcing:having activity done by someone outside the firm

Cost Accounting: in Customer Service

Three trends in customer serivce

Total quality management

a method where the company seeks to excel in all dimensions and the customer defining quaility

cost of quality

a system to measure the cost of poor quaility : rework, returns and lost sales

enterprise resource planning

information technolgy linking various systems of a company to a single master information system

ethicical conduct for cost accountants

set forth by insitute of managment accountants

Ethical Standards

doing what is right, these standards are set very early in life, ethicical standards vary from person to person

IMA: Sarbanes Oxley

Competence, confidentiality, integrity, creditabilty

Competence

Having an appropriate level of knowledge and seeking to maintain and improve this knowledge. Follow all appropriate laws and regulations. Provide accurate, clear, concise, and timely information to managers.  Know your limitations.

Confidentiality

Keep all company information confidential unless disclosure is authorized.  Inform others of appropriate use of confidential information and supervise subordinates adequately.  Never use confidential information to gain an unfair advantage.

Integreity

Avoid all possible conflicts of interest.  Keep others advised of potential conflicts of interest. Don’t do anything that might prejudice your ability to do your job ethically. Don’t do anything to discredit the profession.

Credibility

Communicate everything fairly and objectively. Disclose all relevant information.  Disclose any potential deficiencies in your reporting.

Cost

This is what you give up to acquire goods and services.  Some call cost the sacrifice you make to get what you need.  In the case of a non-cash transaction, cost is the fair market value of what you give up or what you get whichever is more clearly determinable.   A cost goes on the books as an asset. Cost is the focus of cost accounting

Expense

An expense is an expired cost.  Expenses are recognized on the income statement.  Think of an expense as depreciation on a truck costing $55,000.  The $55,000 originally went on the books as an asset and over time is expensed thru depreciation

Outlay Costs

A past, present, or future cash outflow.  Also may be called out-of-pocket cost.  This is where you reach in your pocket and hand over the cash.   These costs are always recorded in the Accounting information system.

Opportunity Costs

This is what you sacrifice by selecting the best option available.  Some call it a foregone benefit. For example, if you have $1000 to invest and invest in all in the stock market, you sacrifice (give up) the opportunity to invest your monies elsewhere.  These costs are never recorded in the accounting records because they are not out of pocket costs.

Operating Profit

The excess of operating revenue over the operating costs.  This is different from net income because to calculate net income you must subtract from gross profit the interest, income taxes, extraordinary items, and perhaps other adjustments necessary to comply with GAAP.

Basic Formats for Cost Accounting

Revenue-Cost=Operating profit.  The focus for the cost accountant is on operating profit because net income calculated under GAAP includes items that are not part of the day to day activities of the cost accountant.  Operating profit focuses attention on what the cost accountant is most concerned about: Cost.

Products Costs

Direct materials, direct labor, and Manufacturing overhead.

Direct Materials

The cost of materials that are clearly and easily traceable to the finished product.  For example, in making an aluminum boat the aluminum is a direct material.

Direct Labor

The cost of labor that is clearly and easily traceable to the finished product.  For example, in making an aluminum boat, the welder is direct labor. Hands on the product.

Manufacturing Overhead

Any cost to make the product other than direct materials and direct labor.  Indirect materials and Indirect labor are two examples of manufacturing overhead.  In making an aluminum boat, welding rods would be indirect materials and factory supervision would be indirect labor.

Prime Cost

Direct materials + direct labor;

Conversion Cost

direct labor + manufacturing overhead

Period Costs

Non-manufacturing costs. These costs are expensed in the period incurred and never carried in any inventory account.(

Marketing costs:  the selling costs; advertising, sales commissions, sales offices

\
            Administrative costs:  Costs to manage the company and provide support to production.

Cost Allocation

The process of assigning cost to products, people, segments, etc.  For example, if you rent a house with three others and the rent is 2000 per month and you share expenses equally, each person would be allocated a $500 of the total cost.  Only INDIRECT costs are allocated.  INDIRECT costs are those costs that are cannot be directly related to a cost object. 

Cost Object

An end to which a cost is allocated.  Might be the product being manufactured, a department, or a customer.

Cost Pool

The collection of costs to be assigned

Cost Allocation Rule

This is the method used to allocate the cost.  The allocation method should be one that is fair and the resulting allocation of cost is representative of the amount of cost used by the cost object in day-to-day activities.

Cost Flow Diagram

A diagram or flowchart showing the cost allocation process. A diagram or flow chart will show how the system works. The system of cost allocation should: 1) identify the cost objects, 2) determine the cost pools, 3) Select an appropriate cost allocation rule, and 4) allocate the cost.

Direct Cost

A direct cost is a cost that never needs allocating.  The cost is incurred in such a way that allocation of the cost is unnecessary.  Direct materials and direct labor do not need allocation because the amount spent for direct materials and direct labor is clearly and easily traceable to the product. 

Cost Flows

Costs to manufacture a product have a starting point and end point.  The essence of the production process is to buy take delivery of the needed raw materials, hire the labor needed to manufacture the product, and rent a building and turn on the electricity.  Of course, there is much more, but this is the essence.

Direct Materials Inventory

This is the inventory of raw materials

Work in Process

This is the inventory of partially completed goods

Finshed Goods

These are the completed units ready for sale

Inventoriable Costs

Any cost added to one of the three inventory accounts.

Cost of Goods Manufactured

Direct materials used + Direct labor + Manufacturing overhead + beginning work in process – ending work in process.  Direct materials used = beginning direct materials plus net purchases – ending raw materials. Net Purchases = Purchases – purchases discounts – purchases returns and allowances.

Cost of Goods Sold

Beginning finished goods + Cost of goods Manufactured – ending finished goods. Once we know cost of goods sold we may subtract this from revenues to calculate operating profit.

Cost Behavior

This is how the cost changes if we make one more boat.  Some costs will increase in total and stay the same per unit and some costs will remain the same in total but change per unit. 

Cost Driver

This is the activity that drives the cost to change as production increases or decreases.

Fixed Cost

This is a cost which remains the same even when we produce one more boat.  Rent is a good example.  If rent is $5,000 per month and we make one more boat, our rent stays the same.  The fixed cost per unit is a totally useless, meaningless, irrelevant, and misleading number.  The fixed cost per unit declines every time we make one more boat, so in theory; if we make enough boats we could reduce the fixed cost per unit for rent to mathematically zero.  Fixed cost per unit is no good; fixed cost in total is very good.

Variable Cost

A cost that increases in total when we make one more boat.  However, the variable cost per unit will stay the same.  For example, if one boat costs $200 for aluminum, if we make one more boat, the total cost for aluminum goes up $200 but the per unit cost for aluminum for one boat will remain constant at $200

Relevant Range

 This is an extremely important concept with cost behavior.  This is the expected range of activity over which production is expected to occur. Let’s say our relevant range is 15,000 to 18,000 boats per month. This means the definitions of fixed cost and variable cost are only true within this range of 15-18.  If we want to get outside this range and produce 40,000 boats, we will need to rent more space and rent will increase in total.  However, this does not make rent a variable cost.  The total cost for rent increased only because we got outside the relevant range.

Semivariable Cost

Also called a MIXED COST, this is a cost having some fixed cost and some variable cost.  Think of your phone bill or electricity bill where you pay a base charge regardless of usage and then pay a charge for what is used.  The base charge is the fixed cost and the usage is the variable cost.

Step Cost

A cost which increases in increments; say every 1000 boats this cost will increase (as opposed to an increase in total when we make one more boat).  A good example is maintenance workers in our factory.  We may need one for each 10,000 boats manufactured. So from 0-10,000 we need one, but if we get past 10,000 we need another.  Step costs cannot be purchased fractionally.  For example, we assume we cannot purchase 1/4th of a maintenance worker

Costs Include

Direct materials, Direct labor, Variable manufacturing overhead, fixed manufacturing overhead, variable marketing and administrative costs, and fixed marketing and administrative costs.

Full Cost

Includes all costs.  All of them.  All product costs and all period costs.

Full Absorption Cost

 Includes only the cost to make the boat.  DM, DL, VMO, and FMO.  We do not need marketing and administrative costs to make our boat.  We do need those costs to stay in business but we do not need them to make our boats.  FULL ABSORPTION COST is the value we must use when following GAAP for inventory valuation purposes.

Variable Costs

\:  Includes DM, DL, Variable Manufacturing costs and Variable marketing costs.

Variable Cost per unit

Equals total variable cost divided by number of units.  Very important number.

Fixed Cost

Includes Fixed manufacturing overhead and fixed marketing and administrative.

Fixed Cost per Unit

total fixed costs divided by number of units.  A totally useless, meaningless, irrelevant and misleading number. 

Gross Margin

Revenue – Cost of goods sold.  GROSS MARGIN PER UNIT = Selling price per unit minus full absorption cost per unit.

Cost of Goods sold

Full absorption cost per unit times units sold.

Contribution Margin per unit

Sales price – Variable cost per unit.

FOR GAAP/FINANCIAL REPORTING (traditional)

SALES                                                                                                                                                     

\-cost of goods sold                                                                                                                           

=Gross Margin                                                                                                                                   

\-Marketing and Admin                                                                                                                    

= OPERATING PROFIT

FOR COST/INTERNAL REPORTING

                                                                                                           -VARIABLE COSTS

                                                                              =CONTRIBUTION MARGIN

                                                                                                            -FIXED COST

                      =OPERATING PROFIT

Financial Reporting (traditional)

The income statement format below is the format you studied in financial accounting.  This format must be followed to comply with GAAP.  However, for internal purposes, this format is lacking.

FOR COST/INTERNAL REPORTING (contribution)

The format below is the contribution format to the income statement.  Though it is unacceptable for GAAP it is quite useful in conveying information to managers for decision making purposes.  The primary advantage over the traditional income statement presented above is the contribution format to the income statement separates cost into cost behavior and allows managers to see which costs will increase in total if we make one more boat and which costs will remain the same if we make one more boat.

Period Cost

Cost that can more easily be attributed to time intervals.

Indirect Costs

Cost that cannot be directly related to a cost object.

Fixed Cost

Cost that does not vary with the volume of activity.

Opportunity Cost

Lost benefit from the best forgone alternative.

Outlay Cost

Past, present, or near-future cash flow.

Direct Cost

Cost that can be directly related to a cost object.

Expense

Cost charged against revenue in a particular accounting period.

Cost

Sacrifice of resources.

Variable Cost

Cost that varies with the volume of activity.

Full Absorption Cost

Cost used to compute inventory value according to GAAP.

Product Cost

Cost that is part of inventory.

COST-VOLUME-PROFIT ANALYSIS

is analysis of the interrelationships that exist among costs, volume, and profit for a company. In terms of COST we are considering fixed costs and variable costs. For purposes of CVP analysis we assume no mixed costs exist. In terms of VOLUME we are considering production of units. And in regard to PROFIT we are considering what happens to our profitability when we combine costs with volume. In essence, we want to know what happens to profit when we increase volume with associated costs.