Cost Accounting

1 Cost Accounting Has Purpose 1-1 1.1 Companies Know Their Purpose: Do You Know Yours? 1-2 Purpose Is Meaningful 1-2 Company Strategy: Turning Purpose into Action 1-2 Your Own Strategy 1-4 Measures, Targets, and Results on the Balanced Scorecard 1-5 1.2 The Purpose of Cost Accounting 1-9 Data Analytics in Action: Data Analytics Isn’t New 1-9 Big Picture Thinking and Decision-Making 1-10 Using Data Analytics to Problem-Solve 1-14 Data Analytics in Action: Keeping Score 1-14 The Value Chain 1-15 1.3 What Guides Our Purpose? 1-17 The Importance of Ethics in Business 1-17 Governing Bodies Within Accounting 1-18 Appendix 1A: Why You Should Learn to Learn 1-23 Your Role as a Lifelong Learner 1-23 Fixed versus Growth Mindset 1-23 Purposeful Pedagogy 1-24 How This Text Can Help You Learn 1-25 Data Analytics Activities 1-35 2 Refresher on Cost Terms 2-1 2.1 Overview of Costs 2-2 Using Financial Statements to Interpret Revenues and Expenses 2-2 Costs versus Expenses: Let’s Get Specific 2-3 Opportunity Costs and Sunk Costs 2-4 2.2 Costs for Service Providers, Merchandisers, and Manufacturers 2-7 Service Providers 2-7 Data Analytics in Action: Cutting Corners 2-8 Merchandisers 2-8 Manufacturers 2-10 2.3 Defining and Assigning Costs 2-11 Product and Period Costs 2-12 Manufacturing and Nonmanufacturing Costs 2-12 The Cost Object, Direct Costs, and Indirect Costs 2-14 Prime Costs and Conversion Costs 2-15 2.4 Variable and Fixed Costs and the Relevant Range 2-16 Variable Costs 2-16 Managing Variable Costs 2-17 Data Analytics in Action: It’s a Snap! 2-17 Fixed Costs 2-17 Managing Fixed Costs 2-18 Relevant Range and Costs of Capacity 2-19 Fixed Costs on a Per-Unit Basis: Be Careful 2-20 2.5 Tracing Product Costs from the Balance Sheet to the Income Statement 2-21 Inventoriable Costs 2-22 Raw Materials Inventory on the Balance Sheet 2-22 Work-in-Process Inventory on the Balance Sheet 2-23 Finished Goods Inventory on the Balance Sheet 2-24 Cost of Goods Manufactured 2-25 Cost of Goods Sold 2-26 2.6 Comparing Gross Margin and Contribution Margin Income Statements 2-28 Gross Margin versus Contribution Margin 2-28 Full Costs 2-30 Data Analytics Activities 2-49 3 Cost Behavior and Cost Estimation 3-1 3.1 The Basics of Cost Behavior 3-2 Selecting Cost Drivers 3-2 Data Analytics in Action: Counting Cars 3-2 The Relevant Range, and Costs Within It 3-3 3.2 Estimating Costs Is Crucial: Here’s How 3-9 Account Analysis Method 3-9 High-Low Method 3-10 Data Analytics in Action: Scatter to Avoid Slacking? 3-12 Excel Tutorial: The Scatter Plot 3-12 3.3 Sophisticated Cost Estimation with Regression 3-15 Overview of the Regression Method 3-15 Excel Tutorial: Regression Analysis 3-17 Evaluating Regression Output 3-21 Assumptions of Regression 3-23 Multiple Regression 3-25 3.4 When Costs Are Nonlinear: The Learning Curve 3-29 Applying the Learning Curve 3-30 Learning Curve Impacts on Costs and Prices 3-31 Data Analytics Activities 3-54 4 Cost-Volume-Profit Analysis 4-1 4.1 Contribution Margin and the Break-Even Sales Point 4-2 Data Analytics in Action: Consuming Coffee and Trends 4-2 Contribution Margin 4-2 Numbers of Sales in Units to Break Even 4-4 Sales in Dollars to Break Even 4-5 What Happens After Break-Even Analysis? 4-6 4.2 Cost-Volume-Profit (CVP) Analysis 4-8 It’s Graphic: Understanding CVP Relationships 4-9 The Relevant Range: Quite Relevant 4-10 Margin of Safety 4-10 4.3 Break-Even with Target Profit and Taxes 4-12 Modifying the Break-Even to Include Target Profit 4-12 Modifying the Break-Even to Include Target Profit After[1]Tax 4-13 4.4 Break-Even with Multiple Products 4-14 Data Analytics in Action: Big Data for Bigger Sales 4-15 4.5 Operating Leverage and Sensitivity Analysis 4-17 Sensitivity Analysis Shows the Effects of Operating Leverage 4-17 Using the Degree of Operating Leverage Multiplier 4-18 4.6 CVP Analysis for Service and Nonprofit Organizations 4-21 Data Analytics in Action: More Service, Fewer Costs 4-21 Data Analytics Activities 4-35 5 Relevant Costs for the Decision[1]Maker 5-1 5.1 Decision-Making Made Easier 5-2 Data Analytics in Action: Don’t Succumb to Analysis Paralysis 5-2 5.2 What Are Relevant Costs and Relevant Information? 5-4 How Relevant Information Supports Decision-Making 5-4 Sunk Costs 5-5 The Total Cost Approach versus the Relevant Cost Approach 5-6 5.3 Management Decisions Requiring Use of Relevant Costs 5-7 Insource versus Outsource 5-7 Keep versus Drop 5-11 Excel Tutorial: Goal Seek 5-12 Product-Mix Decisions 5-14 Data Analytics in Action: Tasty, Fast, or Both? 5-15 Excel Tutorial: Solver 5-17 Special Orders 5-20 5.4 Decision-Making and Opportunity Costs 5-22 5.5 Fixed Costs and Decision-Making 5-25 Direct Fixed Costs 5-25 Common Fixed Costs 5-26 Allocated Fixed Costs 5-27 Data Analytics Activities 5-44 6 Mastering the Master Budget 6-1 6.1 Why Budget? 6-2 Budgeting and Behavior Modification 6-2 Data Analytics in Action: Budgeting Made Fun? 6-2 Types of Budgets 6-3 Budgeting and Ethical Considerations 6-5 6.2 The Master Budget 6-7 Revisiting the Strategic Planning Process 6-7 Organizational Structure and Responsibility Centers 6-8 The Master Budget Inputs and Outputs 6-10 Follow-Up and Feedback 6-11 6.3 The Operating Budget and the Budgeted Income Statement 6-12 Sales Forecast: It All Starts Here 6-13 Production Budget 6-14 Direct Materials Purchases Budget 6-16 Direct Labor Budget 6-17 Manufacturing Overhead Budget 6-18 Cost of Goods Sold and Cost of Goods Manufactured Budgets 6-20 Selling, General, and Administrative Expenses Budget 6-21 Non-Operating Expenses Budget 6-23 6.4 The Financial Budget and the Budgeted Balance Sheet 6-24 Budgeted Inventory Balance 6-25 Cash Receipts, Cash Collections, and the Budgeted Accounts Receivable Balance 6-26 Data Analytics in Action: Banks Expedite Loan Collections 6-27 Cash Disbursements and Budgeted Accounts Payable Balance 6-29 Budgeted Cash Balance 6-31 6.5 Budgeting in Retail and Service Organizations 6-35 Budgeting for Retailers 6-35 Budgeting for Service Providers and Nonprofit Organizations 6-36 Data Analytics Activities 6-57 7 Capital Budgeting Choices and Decisions 7-1 7.1 Capital Budgeting: The Point and the Context 7-2 Data Analytics in Action: Using Data to Scout a Location 7-2 The Circle of Life of Businesses 7-2 Return on Investment (ROI) 7-4 7.2 Elements of Capital Budgeting Decisions 7-6 Timeliness 7-6 Time Value of Money 7-7 Cash Flows: Lump Sums and Annuities 7-9 Discount Rate 7-13 Tax Rate 7-14 Depreciation Tax Shield: Yes You Can! 7-15 Data Analytics in Action: Data Informs Decision[1]Making 7-15 7.3 Tools to Evaluate Capital Budgeting Choices 7-17 Net Present Value (NPV): A Powerful Machine 7-17 Internal Rate of Return (IRR) 7-20 Payback Period 7-22 Accounting Rate of Return (ARR) 7-24 Profitability Index 7-25 7.4 Sensitivity Analysis 7-27 7.5 Making the Decision 7-29 7.6 The Follow-Up 7-33 Post-Investment Audit 7-33 Performance Evaluation 7-33 Data Analytics Activities 7-50 Time Value of Money Tables 7-52 8 Job Costing Visualized 8-1 8.1 Job Costing: An Overview 8-2 Defining Jobs and Job Costing 8-2 Revisiting Product Costs 8-2 Actual versus Normal Costing 8-4 Data Analytics in Action: Is It Hot in Here? 8-4 How Job Costing Is Organized 8-6 8.2 Actual and Applied Manufacturing Overhead 8-10 Accounting for Actual and Applied Manufacturing Overhead 8-10 Calculating Applied Manufacturing Overhead 8-12 Budgeting Manufacturing Overhead for a Specific Job 8-13 8.3 Putting It Together: Costing Jobs and Units 8-15 Cost Flows, Accounts, and Journal Entries 8-16 Year-End Adjustments 8-22 Income Statement Impacts of Job Costing 8-23 8.4 Job Costing and Decision-Making 8-26 Job Costing’s Impacts on Decision 8-26 Data Analytics in Action: Information or Invasion? 8-26 Ethical Considerations Related to Job Costing 8-27 8.5 Job Costing in Service Organizations 8-30 Data Analytics Activities 8-51 9 Activity-Based Costing 9-1 9.1 Traditional Job Costing and ABC Compared 9-1 Drawbacks of Traditional Costing 9-2 The Advantage of Activity-Based Costing 9-3 A Better Cost with Activity-Based Costing 9-4 Data Analytics in Action: A Sweet Outcome 9-5 9.2 The Cost Hierarchy, Activities, and Cost Drivers 9-7 Identifying Activities as Cost Pools 9-7 Cost Drivers 9-9 The Cost Hierarchy 9-10 9.3 Using Activity-Based Costing for Product Costing 9-13 Step 1: Identify Direct Costs 9-14 Step 2: Identify Activities and Cost Drivers 9-15 Step 3: Calculate Cost Driver Rates and Assign MOH 9-15 Step 4: Record MOH Costs 9-16 9.4 Decision-Making Outcomes, Including Time-Driven Activity-Based Costing (TDABC) 9-19 Impacts of Activity-Based Costing on Product and Service Costs 9-19 Who Should Use Activity-Based Costing? 9-19 Broader Outcomes of Using Activity-Based Costing 9-21 Time-Driven Activity-Based Costing: A Time-Saving Alternative 9-22 Data Analytics in Action: An Impressive By[1]Product 9-24 Data Analytics Activities 9-43 10 Variance Analysis and Standard Costing 10-1 10.1 A Variety of Purposes for Budgets and Variance Analysis 10-2 Motivate and Benchmark 10-2 Plan and Control 10-3 Evaluate Performance and Troubleshoot 10-4 Data Analytics in Action: Process Improvements at Nike 10-4 10.2 Master Budget and Flexible Budget Variances 10-6 Limitations of the Master Budget 10-6 The Flexible Budget 10-7 10.3 Standard Costing 10-11 The Purpose of Standard Costing 10-11 Setting and Updating Standards 10-13 Data Analytics in Action: A New Way of Checking Out the Competition 10-13 10.4 Direct Materials and Direct Labor Variances 10-15 Overview of Production Variances 10-16 Direct Materials Variances 10-17 Direct Labor Variances 10-22 10.5 Variable-MOH and Fixed-MOH with Journal Entries 10-24 Variable-MOH: Price and Efficiency Variances 10-24 Data Analytics in Action: Calculate All the Variances 10-24 Fixed-MOH: Price and Volume Variances 10-26 Journal Entries to Close Variances 10-28 10.6 Sales Variances 10-31 Master Budget Sales Variances: Sales Price Variance and Simplified Sales Activity Variance 10-31 Comprehensive Sales Activity Variance: Sales Mix Variance and Sales Quantity Variance 10-33 Sales Quantity Variance: Market Size Variance and Market Share 10-38 11 Process Costing 11-1 11.1 Process Costing: An Overview 11-2 Data Analytics in Action: Mining Data for Mining Real 11-3 Job Costing versus Process Costing 11-3 The Importance of Determining WIP Inventory Correctly 11-4 The Steps of Process Costing 11-5 11.2 Step 1: Verify Physical Units in the Period and Identify Degree of Completion 11-7 No Beginning or Ending WIP Inventory 11-7 With Only Ending WIP Inventory 11-8 With Beginning and Ending WIP Inventory 11-8 11.3 Step 2: Determine Status of Physical Units and Convert to Equivalent Units 11-13 Using the FIFO Method to Determine Status of Physical Units 11-14 Using the Weighted-Average Method to Determine Status of Physical Units 11-15 11.4 Steps 3 and 4: Account for Costs and Calculate Cost per Equivalent Unit 11-17 Using the FIFO Method to Calculate Cost per Equivalent Unit 11-18 Using the Weighted-Average Method to Calculate Cost per Equivalent Unit 11-18 11.5 Step 5: Assign Costs to WIP Inventory and FG Inventory with Journal Entries 11-21 Assigning Costs Using the FIFO Method with Corresponding Journal Entries 11-22 Assigning Costs Using the Weighted-Average Method with Corresponding Journal Entries 11-24 Applications of Determining Product Costs 11-25 11.6 Costs Transferred-In from Another Department 11-26 Transferred-In Costs Using the FIFO Method 11-26 Transferred-In Costs Using the Weighted-Average Method 11-29 11.7 Operation Costing 11-31 Data Analytics Activities 11-51 12 Absorption versus Variable Costing 12-1 12.1 Absorption Costing: An Overview 12-2 The Purpose of Absorption Costing and How It Works 12-3 Management Decision-Making and Absorption Costing 12-6 Data Analytics in Action: This Machine Is Learning! 12-7 Balance Sheet and Income Statement Impacts of Absorption Costing 12-8 12.2 Variable Costing: An Overview 12-10 The Purpose of Variable Costing and How It Works 12-10 Balance Sheet and Income Statement Impacts of Variable Costing 12-11 12.3 Side-by-Side: Comparing Absorption Costing and Variable Costing 12-13 The Two Methods Compared: Inventory Costs and Balance Sheet Impacts 12-13 The Two Methods Compared: COGS, Operating Income, and Income Statement Impacts 12-14 12.4 Determining Denominator Volumes for Fixed[1]MOH 12-17 Managing Capacity 12-18 Denominator Volume Choices 12-18 Further Outcomes of Denominator Decisions 12-20 13 Data Analytics 13-1 13.1 Big Data? Data Analytics? Challenges and Opportunities 13-2 Overview of Data 13-2 Big Data and Data Analytics in Cost Accounting 13-3 Challenges and Opportunities 13-3 Data Analytics in Action: Meeting the Challenges 13-4 13.2 Sourcing and Storing Data 13-6 The Role of Data Analytics in Decision-Making 13-6 Data Sources and Data Storage 13-7 The Cost of Data and Its Ethical Considerations 13-10 Data Analytics in Action: When Data Is Especially Costly 13-11 13.3 Categories of Data Analytics Techniques 13-13 Overview of Data Analytics Categories 13-14 Descriptive Analytics 13-15 Diagnostic Analytics 13-18 Predictive Analytics 13-19 Prescriptive Analytics 13-20 Data Analytics in Action: Price Check on Aisle 3 13-20 13.4 Your Role in Solving Business Problems with Data Analytics 13-23 Data Analytics Outcomes in Cost Accounting 13-23 Being Career-Ready 13-25 14 Support Department Costing 14-1 14.1 Support Department Costing: An Overview 14-1 Types of Support Departments and Their Costs 14-2 Allocating Support Department Costs 14-4 Data Analytics in Action: Keep or Drop? 14-5 Cost Allocation Bases for Support Departments 14-6 14.2 Methods of Allocating Support Department Costs 14-8 The Direct Method Illustrated 14-8 Step Method Illustrated 14-10 Reciprocal Method Illustrated 14-12 Excel Tutorial: The Reciprocal Method 14-13 Comparing the Three Methods 14-16 Data Analytics in Action: This Call May Be Analyzed 14-16 14.3 Allocating Common Costs and Bundled Revenues 14-20 Stand-Alone Cost Allocation Method 14-20 Incremental Cost Allocation Method 14-21 Allocating Revenue from Sales of Bundled Products/Services 14-22 15 Joint Costs and Decision[1]Making 15-1 15.1 Joint Costs: Description and Illustration 15-2 15.2 Methods of Allocating Joint Costs 15-4 Sales Value at Split-Off Method 15-4 Net Realizable Value (NRV) Method 15-5 Physical Quantities Method 15-6 Choosing an Allocation Method 15-8 15.3 Joint Costs and Decision-Making: Should We Sell or Process Further? 15-10 Relevance of Joint Costs to Sell-or-Process-Further Decisions 15-10 Sell-or-Process-Further Decision Factors 15-10 Data Analytics in Action: More Fresh Options 15-11 Decision-Making and Performance Evaluation 15-12 15.4 A Decision: How Should We Account for By-Product and Scrap? 15-13 By-Products Revisited 15-13 Data Analytics in Action: Analysis Reduces Waste 15-14 The Production Method 15-14 The Sales Method: By-Products and Scrap Recognized at Time of Sale 15-17 Production Method versus Sales Method 15-19 16 The Art and Science of Pricing to Optimize Revenue 16-1 16.1 Pricing: Art + Science + Psychology 16-2 Truths About Pricing 16-2 Consider the Context: Customers, Costs, and Competitors 16-3 16.2 Special-Order Pricing: Be Opportunistic 16-5 Lowest Acceptable Special-Order Price 16-6 Relationship to Relevant Costs for the Decision[1]Maker 16-7 16.3 Cost-Plus Pricing: If You Can Sell the Plus, Charge It 16-9 Overview of the Cost-Plus Method 16-10 The Calculation: A Starting Point 16-10 Data Analytics in Action: Using Data to Set Prices 16-10 Comparing Special-Order Pricing to Cost-Plus Pricing 16-13 16.4 Target Costing for Target Pricing—Backward but Brilliant 16-14 Steps to Implement Target Costing for Target Pricing 16-15 The Value in Value Engineering 16-16 Data Analytics in Action: Ensuring the Value of Business Activities 16-16 16.5 Consumers and Pricing Practices 16-17 Consumer Perceptions and Pricing 16-17 Other Pricing Practices: Fair or Illegal? 16-18 Data Analytics in Action: No Free Parking 16-19 Data Analytics Activities 16-33 17 Management Control Systems and Transfer Pricing 17-1 17.1 The Need for an Effective Management Control System 17-2 Centralized versus Decentralized Organizations 17-2 Goal Congruence 17-4 Components of a Management Control System 17-5 17.2 How Responsibility Centers Work 17-6 Characteristics of Responsibility Centers 17-6 Cost Centers 17-8 Revenue Centers 17-9 Profit Centers 17-10 Investment Centers 17-10 Data Analytics in Action: Major League Baseball Invests in Data 17-11 17.3 How to Measure Performance of Investment Centers 17-13 Return on Investment and Its Components 17-13 Residual Income (RI) 17-16 Economic Value Added (EVA®) 17-16 17.4 Transfer Pricing: An Overview 17-18 The Genesis of Transfer Pricing 17-19 Determining the Optimal Transfer Price Range 17-21 How Companies Set Transfer Prices 17-23 Management and Transfer Pricing 17-27 Transfer Pricing in Multinational Companies 17-28 18 Business Strategy, Performance Measurement, and the Balanced Scorecard 18-1 18.1 An Overview of Business Strategy 18-1 The Strategic Planning Process 18-2 A Closer Look at Business Strategy 18-3 18.2 Performance Measurement Guides Performance 18-8 Congruent Outcomes: Linking Business Strategy to Employees’ Objectives 18-8 The Performance Measurement Process 18-9 Traits of Financial Performance Measures 18-12 Traits of Nonfinancial Performance Measures 18-13 18.3 Using the Balanced Scorecard to Assess Company Performance 18-15 Balancing the Four Perspectives 18-16 Linking Business Strategy to the Balanced Scorecard 18-17 Data Analytics in Action: New Measures and Targets 18-18 Evaluating Success 18-20 Company Index I-1 Subject Index I-0 Key Formulas Review K-0