Cost Accounting For Dummies E-Book

Kenneth W. Boyd

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2013

Seitenzahl: 592

Beschreibung

The easy way to get a grip on cost accounting Critical in supporting strategic business decisions and improving profitability, cost accounting is arguably one of the most important functions in the accounting field. For business students, cost accounting is a required course for those seeking an accounting degree and is a popular elective among other business majors. Cost Accounting For Dummies tracks to a typical cost accounting course and provides in-depth explanations and reviews of the essential concepts you'll encounter in your studies: how to define costs as direct materials, direct labor, fixed overhead, variable overhead, or period costs; how to use allocation methodology to assign costs to products and services; how to evaluate the need for capital expenditures; how to design a budget model that forecast changes in costs based on expected activity levels; and much more. * Tracks to a typical cost accounting course * Includes practical, real-world examples * Walks you though homework problems with detailed, easy-to-understand answers If you're currently enrolled in a cost accounting course, this hands-on, friendly guide gives you everything you need to master this critical aspect of accounting.

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Cost Accounting For Dummies®

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Library of Congress Control Number: 2012956409

ISBN 978-1-118-45380-3 (pbk); ISBN 978-1-118-45381-0 (ebk); ISBN 978-1-118-45382-7 (ebk); ISBN 978-1-118-45383-4 (ebk)

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About the Author

Ken Boyd, a former CPA, has over 28 years of experience in accounting, education, and financial services. Ken is the owner of St. Louis Test Preparation (www.stltest.net). He provides online tutoring in accounting and finance to both graduate and undergraduate students. His YouTube channel (kenboydstl) has hundreds of videos on accounting and finance.

In recent years, Ken has served as an adjunct professor of accounting at the Cook School of Business at St. Louis University (SLU). Ken also worked as an instructor for Dearborn Financial, a division of Kaplan, Inc. In that role, he taught test preparation courses for the National Association of Security Dealers (NASD) Series 7, 6, and 63 exams. Ken taught over 1,000 students for Dearborn.

Ken has written test questions for the Certified Public Accountant (CPA) Exam for ACT, Inc. Ken is married and lives in St. Louis, Missouri, with his wife Patty and his three children, Kaitlin, Connor, and Meaghan.

Dedication

I dedicate this book to my father, Bill Boyd, who is a hero to me. I would also like to dedicate this book to my wife and closest friend, Patty, and our children. Finally, this book is dedicated to the faculty and staff of three St. Louis schools: Chaminade College Preparatory School, St. Peter Catholic School in Kirkwood, and Visitation Academy. Thank you for your devotion and for educating our children.

Author’s Acknowledgments

I want to thank Erin Calligan Mooney, acquisitions editor, for the opportunity to write this book. Thanks also to Matt Wagner of Fresh Books Literary Agency, who presented me to Wiley. I owe a huge debt of thanks to Barry Schoenborn, who served as the technical writer for this book. His wit, wisdom, and work ethic helped me become a writer.

Many thanks to the Wiley team: Alissa Schwipps, senior project editor; Susan Hobbs, copy editor; and Anna K. Jensen and John T. Caldwell, the technical editors. They worked very hard to make this book more accurate and easier to read. Without them, there wouldn’t be a book.

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Cost Accounting For Dummies®

Visit www.dummies.com/cheatsheet/costaccounting to view this book's cheat sheet.

Table of Contents

Introduction

About This Book

Conventions Used in This Book

What You’re Not to Read

Foolish Assumptions

How This Book Is Organized

Part I: Understanding the Fundamentals of Costs

Part II: Planning and Control

Part III: Making Decisions

Part IV: Allocating Costs and Resources

Part V: Considering Quality Issues

Part VI: The Part of Tens

Icons Used in This Book

Where to Go from Here

Part I: Understanding the Fundamentals of Costs

Chapter 1: So You Want to Know about Cost Accounting

Comparing Accounting Methods

Using management accounting

Fitting in cost accounting

Using Cost Accounting to Your Advantage

Starting with cost-benefit analysis

Planning your work: Budgeting

Controlling your costs

Setting a price

Improving going forward

Chapter 2: Brushing Up on Cost Accounting Basics

Understanding the Big Four Terms

Comparing direct and indirect costs

Mulling over fixed and variable costs

Covering Costs in Different Industries

Reviewing manufacturing costs

Considering costs for retailers

Finding costs most companies incur

Why Are You Spending?: Cost Drivers

Pushing equipment too hard and relevant range

Previewing inventoriable costs

Following the Rules of the Cost Accounting Road

Deciding on accrual basis or cash basis

Finishing with conservatism

Chapter 3: Using Cost-Volume-Profit Analysis to Plan Your Business Results

Understanding How Cost-Volume-Profit Analysis Works

Calculating the breakeven point

Financial losses: The crash of your cash

Contribution margin: Covering fixed costs

Lowering the breakeven point to reach profitability sooner

Target net income: Setting the profit goal

Using operating leverage

Timing is everything when it comes to costs

Using Cost-Volume-Profit Analysis to Make Savvy Business Decisions

Pitching the product: Deciding to advertise

Pricing magic: Lowering your price without losing your profit

Sales mix: Combining the results of two products

The Tax Man Cometh, the Profits Goeth

Understanding pre-tax dollars

Adjusting target net income for income taxes

Chapter 4: Estimating Costs with Job Costing

Understanding How Job Costing Works

Cost objects: The sponges that absorb money

Charging customers for direct and indirect costs

Implementing job costing in manufacturing: An example

Taking a Closer Look at Indirect Costs using Normal Costing

Budgeting for indirect costs

Following a normal job costing system

Following the Flow of Costs through a Manufacturing System

Control starts with control accounts

Explaining the debit and credit process

Walking through a manufacturing cost example

Applying the methodology to other control accounts

Chapter 5: More Activity, More Cost: Activity-Based Costing

Avoiding the Slippery Peanut Butter Costing Slope

Recognizing a single indirect cost allocation

A fly in the peanut butter: Dealing with different levels of client activity

Missing the mark: Undercosting and overcosting

Designing an Activity-Based Costing System

Refining your approach

Grouping costs using a cost hierarchy

Testing your ABC design

Using Activity-Based Costing to Compute Total Cost, Profit, and Sale Price

Allocating indirect costs evenly by product

Analyzing and reallocating cost activities

Changing allocations to cost pools

Changing prices after ABC

Part II: Planning and Control

Chapter 6: What’s the Plan, Stan? Budgeting for a Better Bottom Line

Brushing Up on Budgeting Basics

Seeing the master budget and its component parts

Why budgeting is important

Planning strategically

Planning How to Plan: Factors That Impact Your Budgeting Process

Experience counts

Timing is everything

People get you headed in the right direction

Sales projections pay off

The Nuts and Bolts (and Washers) of Budgeting

Understanding the budgeting financials

Reviewing revenue and production budgets

Budgeting with Cash Accounting or Accrual Accounting

Cash basis accounting: Using your checkbook to budget

I accrue, you accrue, we all accrue with accrual accounting

Budgeting to Produce the Income Statement and Balance Sheet

The well-balanced balance sheet

The incredible income statement

Chapter 7: Constant Change: Variance Analysis

Variance Analysis and Budgeting

Using management by exception to recognize large variances

Seeing the problem in using a static budget

Opting for a flexible budget

Investigating budget variances

Analyzing in Material Price and Efficiency Variances

Applying price variances to direct materials

Applying efficiency variances to direct materials

Implementing price variances for direct labor

Sizing up efficiency variances for direct labor

Using Your Findings to Make Decisions

Following up on variances

Judging the effectiveness of your employees

Tying supply chain concepts to variance analysis

Attaching ABC costing concepts to variance analysis

Chapter 8: Focusing on Overhead Costs

Using Cost Allocation to Minimize Overhead

Paying for the Security Guard: Fixed Overhead Costs

Planning fixed overhead costs

Allocating fixed overhead costs

Assessing potential causes of fixed overhead variances

Those Vexing Variable Manufacturing Costs

Working with variable overhead costs

Implementing variance analysis

Finding the reasons for a variable overhead variance

Chapter 9: What’s on the Shelf?Inventory Costing

Working with Inventoriable Costs

Using the matching principle to calculate profit on sale

Erring on the conservative side

Costing Methods for Inventory

Using the first-in, first-out (FIFO) method

Accounting with the last-in, first-out (LIFO) method

Weighing the merits of weighted-average cost

Considering specific identification method

Analyzing profit using FIFO and LIFO

Using Variable and Absorption Costing to Allocate Fixed Manufacturing Costs

Defining period costs and product costs

Applying variable and absorption costing

Relating Capacity Issues to Inventory

Reviewing theoretical and practical capacity

Using normal and master-budget capacity

Choosing a capacity level

Part III: Making Decisions

Chapter 10: Cost Drivers and Cost Estimation Methods

Working with Cost Behavior

Understanding linear and nonlinear cost functions

Discovering how cost drivers determine total costs

Considering Cost Estimation Methods

Walking through the industrial engineering method

Agreeing on the conference method

Reviewing the account analysis method

Checking out the quantitative analysis method

Choosing a cost estimation method

Exploring Nonlinear Cost Functions

Changing cost functions and slope coefficients

Understanding the impact of quantity discounts

Assessing the Impact of Learning Curves

Chapter 11: Making Smart Business Decisions with Relevant Information

Navigating the Geography of Relevance

Introducing the decision model

Applying a model to an equipment decision

Considering relevant qualitative factors in decision-making

Special Orders Don’t Upset Us, Do They?

Deciding between Outsourcing and In-house Production

Weighing opportunity costs

Contemplating the carrying cost of inventory

Maximizing Profit When Capacity Is Limited

Managing capacity and product mix

Analyzing customer profit and capacity

Chapter 12: Making Smart Pricing Decisions: Figuring Total Costs

Understanding Influences on Prices

Customers

Competitors

Suppliers

Special orders

Pricing for Profits Down the Road

Reviewing market-based and cost-based pricing

Aiming at the target: Target costing

Arriving at a Reasonable Profit

Using cost-plus pricing

Using product life-cycle budgeting

Part IV: Allocating Costs and Resources

Chapter 13: Analysis Methods to Improve Profitability

Processing Cost Allocation

Why bother? Purposes of cost allocation

Justifying cost allocation decisions

Implementing Cost Allocation

Using cost hierarchy to allocate costs

Allocating tricky corporate costs

Keeping track of customer revenues and costs

Going Over Sales Mix and Sales Quantity Variances

Remembering variances and contribution margin

Getting the story about sales mix variance

Calculating sales quantity variance

Chapter 14: Behind the Scenes: Accounting for Support Costs and Common Costs

Not Everyone Generates Revenue: Support Costs

Introducing single rate cost allocation method

Checking out dual rate cost allocations

Using practical capacity to determine cost allocation rates

Going Over Variance Analysis and Department Costs

Choosing budgeted versus actual rate of usage

Implications for the rate of usage selected

Allocating to multiple departments

Focusing on Common Costs

Mulling over stand-alone cost allocation

Stepping up to incremental cost allocation

Making a Commitment: Contracts

Contracting with the government

Thinking about reasonable and fair costs

Chapter 15: Joint Costs, Separable Costs, and Using Up the Leftovers

Working with Joint Costs

Explaining joint cost terms

Appreciating the importance of allocating joint costs

Considering joint cost allocation methods

Continuing Production: Computing Separable Costs After Splitoff

Exploring the net realizable value method

Introducing the constant gross margin percentage NRV method

Choosing a Joint Cost Allocation Method

Making the case for sales value at splitoff

Falling back to other joint costing methods

Deciding to sell or process further

Holding a Garage Sale: Making the Most of Byproducts

Chapter 16: Tracing Similar Products with Process Costing

Process Costing: Presenting the Basic Approach

Leading off with direct material costs

Following up with conversion costs

Sitting on the Factory Floor: Dealing with Work in Process

Using Equivalent Units to Compare Apples to Apples

Counting the units for equivalent units

Hunting down the total costs of production

Putting units and costs together

Seeing different percentages of completion

Using the Weighted Average Method for Process Costing

Handling beginning work in process

Continuing with equivalent units

Introducing the First In, First Out Method of Process Costing

Comparing Processing Costing Methods

Mulling over weighted average and FIFO methods

Debating transferred-in costs

Part V: Considering Quality Issues

Chapter 17: What a Waste! Getting the Most from Spoilage, Scrap, and Reworked Products

Accounting for Waste

Determining the inspection point

Understanding spoilage and scrap

Spoilage and process costing

Reworking a product to recoup some profit

Applying Process Costing Methods to Spoilage

Weighing in on the weighted average costing method

Doing the FIFO Hokey Pokey: Put your first in first, take your first out first

Job Costing for Spoilage, Reworked Products, and Scrap

Making adjustments for normal and abnormal spoilage

Reworking and selling a product

Making allocation decisions about scrap

Chapter 18: Making Smart Ordering Decisions

Considering the Costs of Inventory

Going through the ordering sequence

Taking a closer look at stockout costs

Calculating Inventory Quantity with the Economic Order Quantity Formula

Figuring a Favorable Reorder Point

Introducing safety stock: Creating a cushion

Computing safety stock

Evaluating Prediction Error

Calculating relevant total costs

Acting on a prediction error

Buying more and ignoring EOQ

Practicing Just-In-Time Purchasing

Kicking around JIT benefits and risks

Putting in a JIT purchasing system

Adjusting total purchasing cost

SCM and Customer Demand Issues

Pulling apart the supply chain

Analyzing demand

Chapter 19: Quality: Building a Better Mousetrap

Considering Quality Benefits and Costs

Listing the benefits of quality

Listing the costs of quality

Taking steps to ensure quality

Compiling a Cost of Quality Report

Putting Quality Practices in Place

Quality in job costing

Taking a spin through inventory

Customer Satisfaction: Measuring and Improving It

Customer satisfaction’s non-financial measurements

Is measuring customer satisfaction worth the effort?

Doing More in Less Time

Analyzing performance related to time

Calculating average waiting time

Adding in manufacturing lead-time

Eliminating the Constraint of the Bottleneck

Fewer bottlenecks mean increased contribution margin

Clearing bottlenecks

Part VI: The Part of Tens

Chapter 20: Ten Common Costing Mistakes and How to Avoid Them

Pricing a Product Incorrectly

Listing Fixed Costs As Variable Costs

Labeling Period Costs As Product Costs

Misusing Target Net Income

Forgetting About Taxes

Assigning Costs to the Wrong Product

Not Reviewing Variances Correctly

Redlining: Pushing Production Activity Above Relevant Range

Ignoring the Timing of Costs

Not Implementing Activity-Based Costing

Chapter 21: Ten Ways to Increase Profits Using Costing

Selling More Of The Right Products

Implementing Sales Mix Analysis to Increase Total Profits

Building a Higher Margin of Safety

Deciding How Much You Need: Production and Scheduling Issues

Who Does What: Handling Costs and Employee Issues

Reducing and Managing Scrap

Moving It off the Shelf: Inventory Issues

Effectively Taking Special Orders

Making Accurate Cost Allocations

Addressing the Issue of Spoilage

Cheat Sheet

Introduction

The world needs accountants. People who know how to do accounting make the business world go round. Accountants analyze and report on every aspect of a business.

Cost accounting can be the most difficult accounting topic to grasp. This area has a unique language — a set of terms that differ quite a bit from other areas of accounting. Students and business owners may find cost accounting more challenging than other areas of accounting.

I wrote Cost Accounting For Dummies because your ability to understand this material has a huge payoff. Every business can be improved using cost accounting. The concepts help you to lower costs and increase profits. I’m passionate about helping you learn more about these critical topics.

About This Book

Some cost accounting books overwhelm you with dozens of complex topics. Not Cost Accounting For Dummies. Here, I focus on the really important topics that are used the most often. Accounting knowledge is meaningful when you can use it to solve a problem.

As a friend of mine once said, “It’s hard to drink out of a fire hose,” so I present the material in this book in an easy-to-read reference format. The book is logically divided into parts. Each part contains several chapters that are divided into readable “chunks” or sections. This system avoids blasting you with information. Instead, topics are introduced at a steady (but not overwhelming) rate, with concepts building on one another, making the reading (and understanding) easier.

The great thing about the book is that you decide where to start and what to read. It’s a reference book. You can locate a topic in the table of contents or the index, read about it, and move on. Accountants love organization (most accountants place their pencils in order from shortest to longest). This book is organized to be a quick reference.

Conventions Used in This Book

I use the following conventions throughout the text to make information consistent and easy to understand:

All web addresses appear in monofont.

New terms appear in italic type and are closely followed by an easy-to-understand definition.

Bold is used to highlight the action parts of numbered steps.

In accounting, sometimes two terms can mean the same thing. Here are some of those terms that you find in this book:

Cost of sales has the same meaning as cost of goods sold.

Sales and revenue mean the same.

Indirect costs has the same meaning as overhead costs.

Predetermined,budgeted, and planned all have the same meaning.

Net income is also profit, for the purposes of this book.

This book discusses three of the four basic financial statements. The fourth statement, statement of retained earnings, isn’t covered. Three components of the statement — retained earnings, dividends, and net income — are addressed using the other three financial statements. So the fourth statement wasn’t needed. I cover financial statements in Chapter 6.

When numbers appear, I use numerals, not words. This is common in accounting books.

Finally, keep in mind that companies sell both products and services. Some companies are manufacturers, and some are retailers. You see examples from both perspectives throughout the book.

What You’re Not to Read

I’ve written this book so that you can find information easily as well as effortlessly understand what you find. And though it’d be great if you read every word, I’ve set off some text from the main information, text you can live without if you’re just after the reference material.

The stuff set off from the main text is interesting. It’s meant to be funny and sometimes thought-provoking. But if you’re just after the nuts and bolts, you can come back to these items later:

Text in sidebars: Sidebars are shaded boxes that usually give detailed examples or flesh out historical perspectives on the topic at hand.

Anything with a Technical Stuff icon: This icon indicates information that’s interesting but that you can probably live without. Read these tidbits later if you’re pressed for time.

Foolish Assumptions

I had to make some assumptions about you, the reader. As I wrote the book, here’s what I assumed:

You’re someone who needs an easy-to-read overview of cost accounting. Also, you want to investigate the topics that are used the most often to solve problems. You may be reading this book while taking a cost accounting course, but a business owner who needs more cost accounting knowledge should also find value in reading it.

You’re able to follow basic arithmetic and algebra. Many of items you need to calculate appear in the form of equations. Accountants love to create an x or y variable and then solve for that variable, using an equation.

You have a beginner’s-level knowledge of how a business works. You understand that sales less expenses equals profit. You’re aware that a business needs to have capital (cash, equipment, and so forth) to operate.

You’re willing to read, pause, and assess what you’ve read. Learning cost accounting takes some effort. It’s not the sort of thing you can rush through. Whereas the text makes it easy to find information, it takes some effort to understand what you read. After you get it, you can use cost accounting to improve your business for years to come.

How This Book Is Organized

This book is divided into parts that focus on the thought process of cost accounting. When an accountant is considering an issue related to costs, the parts broadly represent the steps he or she uses to resolve the issue — to plan (budget), make decisions, allocate resources, and ensure that a quality product or service is created.

Part I: Understanding the Fundamentals of Costs

So what exactly is cost accounting — and why should you care? Chapter 1 explains how cost accounting relates to other areas of accounting, but you still need to know basic terms, which you find in Chapter 2. You also learn about the types of costs and which are costs are most important. Chapter 3 is all about cost-volume profit (CVP) analysis, the starting point for planning your costs. Hey, accountants love to plan. You then learn about job costing and process costing in the next chapter. And Part I wraps up with Chapter 5 and activity-based costing (ABC). ABC teaches you how to dig deeper into your costs to find cost savings.

Part II: Planning and Control

Part II starts with Chapter 6 and a stroll through the budgeting process. Budgets are great if they are realistic and something you take seriously. You analyze the differences between your budget and actual results using variances — that’s in Chapter 7. Moving on to Chapter 8, you get into overhead costs, which are often neglected in accounting, but these costs have a big impact on profit. If you’re not careful, increasing overhead costs can cut into your profit. You go over inventory costs in Chapter 9, because inventory is often the most expensive cost in a business.

Part III: Making Decisions

You planned your business in Part II; now Part III helps you make good decisions in running your business. Cost drivers connect your business activities (sales and production, for example) to the costs you incur. You’ll find cost drivers in Chapter 10. Chapter 11 explains how your business decisions need to be relevant. Relevant decisions are the important decisions — an area that you should focus on. And because you use costs to determine your product price, pricing decisions are discussed in Chapter 12.

Part IV: Allocating Costs and Resources

Ready, aim, fire. After you make decisions, you really should take action. Part IV covers allocating resources. Chapter 13 analyzes the profitability of your business. Most businesses have departments that share resources. The cost of using those resources is defined as a support cost — see Chapter 14 for more. Chapter 15 addresses joint costs. These costs occur when you use the same production to produce multiple products. Everyone in your organization needs to understand how costs are shared. That process can prevent employee complaints down the road. Process costing is presented in detail in Chapter 16.

Part V: Considering Quality Issues

Successful businesses must deliver a quality product. I don’t go back and buy from companies that don’t sell a quality product. Chapter 17 deals with spoilage and rework. Spoiled products are defective products and can’t be sold to a customer. Rework refers to fixing a defective product. When you order product, you should consider how to minimize your ordering costs, so Chapter 18 addresses that topic. Chapter 19 looks at quality issues related to production and product delivery, and also covers the critical issue of customer satisfaction. This section can make the difference between good companies and great ones.

Part VI: The Part of Tens

Every For Dummies book includes a Part of Tens. It’s a great tool to have when you start using cost accounting. Sometimes you win, sometimes you lose, and sometimes it rains. Chapter 20 lists ten costing mistakes. Mistakes always cause you to incur more costs — and possibly end up with a net loss for the year. Improvements are covered in Chapter 21. This chapter is the payoff for the effort you’ve made to read this book. The concepts in Chapter 21 help you reduce costs and improve profits. Keep these points in the back of your mind as you manage your business. If someone asks you what’s in this book, you might mention the Part of Tens.

Icons Used in This Book

To make this book easier to read and simpler to use, I include some icons that can help you find and fathom key ideas and information.

This icon appears whenever an idea or item can help reinforce your understanding of a concept. A tip might make it easier to remember a topic.

Any time you see this icon, you know the information that follows is so important that it’s worth reading more than once.

This icon flags information that’s a big concern. Warnings critical to your business are tagged with this type of icon.

This icon appears next to information that’s interesting but not essential. Don’t be afraid to skip these paragraphs. But come back at a later date and check them out. They’ll be waiting for you.

Where to Go from Here

This book is organized so that you can go wherever you want to find complete information. Want to know about product pricing, for example? Head to Chapter 12. If you’ve taken an accounting course or two, start at Chapter 3 with cost-volume-profit. You can use the table of contents to find broad categories of information or use the index to look up more specific topics.

If you’re not sure where you want to go, you may want to start with Part I. It gives you all the basic info you need to understand cost accounting and points to places where you can find more detailed information.

Part I

Understanding the Fundamentals of Costs

In this part . . .

So you’re ready to learn all there is to know about cost accounting. You’ve come to the right place! Part I introduces cost accounting terms as well as some basic methods of analysis. You compare cost accounting to other accounting methods and learn four important cost terms: direct costs, indirect costs, fixed costs, and variable costs. You also find out about product and period costs, cost-volume-profit (CVP) analysis, and job costing. Process costing and the flow of manufacturing is also looked at.

Chapter 1

So You Want to Know about Cost Accounting

In This Chapter

Understanding accounting methods

Comparing cost accounting systems

Controlling your costs

Applying a price to your product

Mulling over quality issues

In a nutshell, cost accounting is the process of analyzing and planning what it costs to produce or supply a product or service. The analysis helps reduce costs — and possibly eliminate them. Lower costs, of course, allow for increased profits.

Business folks use cost accounting to determine the profitability of a product. The rule is simple: The price should cover the product cost and generate a profit. Competition may dictate the price charged for a product. In other instances, a profit is added to a product cost to create a unique price.