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WhatIsNewinthe17thEdition? The17theditionincludesthefollowingchanges:
• AllnewBusinessCurrentsexamplesthatcalloutthepracticalapplications ofcostaccountingintherealworld.
• TheRecallandReviewexercisesarenowmatchedwithsimilarend-ofchapterexercises.
• Theadditionofcriticalthinkingcomponentstocertainend-of-chapter exercisesandproblems.
• Theuseoficonsnexttocertainexercisesandproblemsthatrelatebackto theappropriateRecallandReviewexercisesandSelf-Studyproblems.
• Theinclusionofanintegratedexampleofaskateboardmanufacturerthat continuesthroughoutthefirstthreejob-ordercostingchapters.
• Newcoverageonenterpriseresourceplanningsystemshasbeenadded.
• Increasedcoverageofactivity-basedcosting.
WhatAretheFeaturesofthe17thEdition? The17theditionincludesseveralfeaturesthatfacilitatethelearningprocess forthestudentandallowtheinstructortoteachwithease.
PracticalApplications ABusinessCurrentsfeaturecallsoutthepracticalapplicationsofcost accountingintherealworld.Thisfeatureillustrateshowcostaccounting conceptsfromthechapterarepracticedinbusinesstoday.
CengageNOW OnlinehomeworkisnowapossibilitywithCengageNOW.CengageNOWisa powerfulcoursemanagementandonlinehomeworktoolthatprovides robustinstructorcontrolandcustomizationtooptimizethestudent learningexperienceandmeetdesiredoutcomes.CengageNOWoffers auto-gradedhomeworkandtestbank,easy-to-useassignmentoptions, and “ SmartEntry ” toeliminatecommondataentryerrors.Additional algorithmicproblemshavebeenauthoredtogivemoreflexibilityin assigninghomework.
DirectedAssignments Atspecificpointswithineachchapter,studentsaredirectedtoappropriate end-of-chapterassignments.Thisallowsstudentstoworkpracticeitems withoutcompletingtheentirechapter.EachofthesepointsincludesaRecall andReviewExercisewithitssolutionattheendofthechapter.Theseexercisesarereferencedtosimilarend-of-chapterexercises.
Self-StudyProblems Twodemonstrationproblemsareincludedattheendofeachchapter,witha step-by-stepexplanationofhowtosolvethem.TheseSelf-StudyProblems areconstructedfromdifficultconceptsinthechapterandreinforcethetechniquesandproceduresdiscussedinthechapter.Anaddedfeatureisend-ofchapterproblemsthatreferencestudentsbacktoSelf-StudyProblemsthat aresimilarintopicanddifficulty.
End-of-ChapterMaterials Theend-of-chapterquestions,exercises,problems,andmini-caseshavebeen carefullywritten,revised,addedto,andverifiedtoreflectthecoverageasit appearsinthechapters.Therehasbeenaconcertedefforttoprovidethe instructorwithawidechoiceofsubjectmatter,degreeofdifficulty,andcriticalthinkingopportunitieswhenassigningend-of-chaptermaterials.Where appropriate,comprehensivereviewproblemshavebeenaddedthatcoverconceptsfrommorethanonechapter.Additionally,selectedproblemsmaybe solvedusingspreadsheetsoftware.
IntegratedLearningObjectives Learningobjectivesbegineachchapter.Eachlearningobjectiveisindicated inthetextwherefirstdiscussed.Allend-of-chapterexercises,problems,and mini-casesareidentifiedbylearningobjectives.
KeyTerms Keytermsarehighlightedastheyareintroduced.Theyarelisted,alongwith pagereferences,attheendofeachchapter.Acomprehensiveglossaryis includedattheendofthebookprovidingdefinitionsforallthekeyterms.
Appendices TheInstituteofManagementAccountants “StatementofEthicalProfessional Practice ” isincludedinanappendixattheendofChapter1.Anappendixat theendofChapter8illustratesthefour-varianceandthree-variancemethods ofanalyzingfactoryoverhead.
WhatSupplementaryMaterials AreAvailable? Acompletepackageofsupplementarymaterialsisavailablewiththe17thedition of PrinciplesofCostAccounting toassistbothinstructorsandstudents.Thepackage includesmaterialsthathavebeencarefullypreparedandreviewed.
AvailabletoInstructors
AllinstructorresourcesareavailableonlineontheInstructorCompanion Websiteathttp://login.cengage.com .
SolutionsManual. TheSolutionsManualcontainstheanswerstoallend-ofchapterquestions,exercises,problems,andmini-cases.Thesolutionsare author-writtenandhavebeenverifiedmultipletimesfornumericalaccuracy andconsistency.
TestBank. Thetestbankhelpsinstructorsefficientlyassesstheirstudents’ understandingwithproblemsandquestionsthatreflectthematerialpresented. TheTestBankoffersavarietyofquestiontypesandhasalsobeentaggedto distinguishdifficultylevel,learningobjective,andAACSBandIMAstandards. TestbankfilesinWordformat,alongwithversionstoimportintoyourLMS, areavailableontheInstructorCompanionWebsite.CogneroTestBanksare availableviaSingleSign-onaccountathttp://login.cengage.com.
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PowerPointPresentations. Eachpresentationenhanceslecturesandclarifies difficultconceptswithconciseslidesdesignedtocaptureandkeepyour students’ attention.Thesechapter-by-chapterslidesareidealasguidesfor studentnote-takingandstudy.
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InstructorCompanionWebsite. Accessyourneededsupplementsimmediatelywiththecompanionwebsite.Thistext-specificwebsiteorganizes resourcesbychapterandallinstructormaterialsarepasswordprotected. Accessthesitebygoingtohttp://login.cengage.comtocreateanaccountor sign-intoyourcurrentaccount.
AvailabletoStudents AllstudentresourcesareavailableonlineontheStudentCompanion Website.Toaccessthetextcompanionwebsite,simplygotowww.cengage brain.com,searchforthetextISBNorauthor’slastnameandclickonthe “AccessNow” iconunderStudyTools.Resourcesareorganizedatboththe chapterandbooklevel.
StudentSpreadsheetTemplates. Familiarizeyourselfwithcurrentspreadsheetsoftwarewhilecompletingyourhomeworkassignmentseasily withtheseStudentSpreadsheetTemplates.Thesetemplatesaccompany manyend-of-chapteritemstoassiststudentsincompletingtheproblem.
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ExperienceAccountingVideos. Highlightprogressivecompaniesandallow youtoeffectivelyvisualizecriticalchapterconcepts enhancingwhatyou learninclass!TheExperienceAccountingVideosareavailablewithinthe StudyToolsandPersonalizedStudyPlaninCengageNOW.Theycanalso bebundledat noadditionalcostwithnewcopiesofthetext orpurchasedseparately.Youcanaccessthevideosatwww.cengage.com/accounting/eav.
KeyTermTesting. Testyourknowledgeofthekeytermsthatareoutlinedin thetextthroughouronlineflashcardsandcrosswordpuzzles.
Acknowledgments Theauthorsandpublisherwouldliketothankthefollowingreviewparticipants whohelpedusthinkaboutthemanydimensionsofthisrevisionbyproviding constructivecommentsandsuggestions:
AngelaKirkendall
SouthPugetSoundCommunityCollege
CharlesKee
KingsboroughCommunityCollege
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HilbertCollege
DavidBland
CapeFearCommunityCollege
DavidForester
HaywoodCommunityCollege
FrancesFord
SpaldingUniversity
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GadsdenStateCommunityCollege
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NorthamptonCommunityCollege
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SurryCommunityCollege
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HoustonCommunityCollege
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Mt.HoodCommunityCollege
PaulKeller
SUNYCollegeatOldWestbury
ScottWallace
BlueMountainCommunityCollege
ShannonOgden
BlackRiverTechnicalCollege
SharonBurnett
WestTexasA&MUniversity
SpencerMiller
EasternIdahoTechnicalCollege
StaceyMirinaviciene
KeukaCollege
SueCastaldi
AlbertusMagnusCollege
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BlackhawkTechnicalCollege
TheresaMeza
JamesSpruntCommunityCollege
ABOUTTHEAUTHORS EDVANDERBECK wasaprofessorofaccountancyatXavierUniversityin Cincinnati,Ohiofor32yearsandchairoftheDepartmentofAccountancyfor 24ofthoseyears.ProfessorVanDerbeckspecializedinteachingcostaccounting toaccountingmajorsandmanagerialaccountingtoundergraduateandMBAstudents.Healsotaughtatthetwo-yearcollegelevelatSUNY–Delhi.Hehasa BAinAccountingfromBinghamtonUniversity(formerlySUNY–Binghamton) andanMSinBusinessAdministrationfromtheUniversityofAlbany(formerly SUNY–Albany).HeislicensedasaCPA(inactive)inthestateofOhio. ProfessorVanDerbeckhasworkedasaninternalrevenueagentandperformed afacultyinternshipatwhatwasformerlytheBigEightaccountingfirmof Touche-Ross.Hehasservedasadevelopmentaleditorandmarketingmanager foraccountingpublicationswithSouth-WesternCollegePublishing.Professor VanDerbeckresidesinSanDiego,California,andisakayaker,swimmer,tennis player,andstudentofcasinogamingstrategies.
MARIAR.MITCHELL isanassociateprofessorofaccountancyatThomas MoreCollegeinCrestviewHills,Kentucky.Sheteachescostandadvanced accountingcoursesforaccountingmajorsandintroductoryaccountingcourses fortraditionalstudentsandthoseinthecollege’sadultandprofessionalprogram.Priortostartingheracademiccareerfull-time,sheworkedontheaudit staffatKPMGandforaglobalindustrialproductscompanywhereshewas responsibleforfinancialreportingandassistedwithactivities-basedcosting implementationprojects.ShehasalsobeenanadjunctinstructoratXavier UniversityandCincinnatiStateTechnicalandCommunityCollege.
ProfessorMitchellisaCPAinthestateofOhio,hasanMBAfromXavier University,andaBSinAccountingfromNorthernKentuckyUniversity.Outside theclassroom,sheenjoyshiking,reading,gardening,cooking,andgenealogy.
Chapter1 IntroductiontoCostAccounting 1
Chapter2 AccountingforMaterials 67
Chapter3 AccountingforLabor 131
Chapter4 AccountingforFactoryOverhead 181
Chapter5 ProcessCostAccounting General Procedures 255
Chapter6 ProcessCostAccounting Additional Procedures;AccountingforJointProducts andBy-Products 311
Chapter7 TheMasterBudgetandFlexibleBudgeting 365
Chapter8 StandardCostAccounting Materials,Labor, andFactoryOverhead 413
Chapter9 CostAccountingforServiceBusinesses,the BalancedScorecard,andQualityCosts 485
Chapter10 CostAnalysisforManagementDecision Making 523
Glossary 575
Index 591
1 IntroductiontoCostAccounting1 1.1 UsesofCostAccountingInformation5
1.1a DeterminingProductCostsandPricing5 1.1b PlanningandControl6
1.2 ProfessionalEthics,CMACertification,andCorporate Governance10
1.3 RelationshipofCostAccountingtoFinancialandManagement Accounting11
1.3a CostsofGoodsSold13
1.3b Inventories14
1.4 ElementsofManufacturingCosts17
1.4a DirectMaterials17
1.4b DirectLabor17
1.4c FactoryOverhead18
1.4d SummaryofManufacturingCosts18
1.4e FlowofCosts19
1.5 IllustrationofAccountingforManufacturingCosts19
1.6 CostAccountingSystems29
1.6a SpecialOrder30
1.6b ContinuousorMassProduction30
1.6c CombinationofSystems32
1.6d StandardCosting32
1.7 IllustrationofaJobOrderCostSystem32
1.7a WorkinProcessintheManufacturingStatement36 Appendix:IMAStatementofEthicalProfessionalPractice38
2 AccountingforMaterials67 2.1 MaterialsControl68
2.1a PhysicalControlofMaterials68
2.1b ControllingtheInvestmentinMaterials71
2.2 MaterialsControlProcedures76
2.2a MaterialsControlPersonnel76
2.2b ControlduringProcurement77
2.2c ControlduringStorageandIssuance82
2.2d ComputerizedMaterialsControl84
2.3 AccountingforMaterials85
2.3a DeterminingtheCostofMaterialsIssued86
2.3b AccountingProcedures92
2.4 Just-in-TimeMaterialsControl98
2.4a JITandCostControl101
2.4b JITandCostFlows101
2.5 Scrap,SpoiledGoods,andDefectiveWork103
2.5a ScrapMaterials104
2.5b SpoiledandDefectiveWork105
3 AccountingforLabor131
3.1 WagePlans132
3.1a Hourly-RatePlan133
3.1b Piece-RatePlan133
3.1c ModifiedWagePlans134
3.2 ControllingLaborCost135
3.2a LaborTimeRecords135
3.2b PayrollFunction136
3.3 AccountingforLaborCostsandEmployers’ PayrollTaxes140
3.3a Employers’ PayrollTaxes143
3.3b IllustrationofAccountingforLaborCosts144
3.4 PayrollAccrual149
3.5 SpecialLaborCostProblems152
3.5a ShiftPremium153
3.5b EmployeePensionCosts153
3.5c Bonuses155
3.5d VacationandHolidayPay155
3.5e AccountingforBonuses,Vacations,andHolidayPay156
4 AccountingforFactoryOverhead181
4.1 IdentifyingCostBehaviorPatterns182
4.2 AnalyzingSemivariableFactoryOverheadCosts184
4.2a ObservationMethod185
4.2b High-LowMethod185
4.2c ScattergraphMethod187
4.2d LimitationsofHigh-LowandScattergraphMethods188
4.2e Least-SquaresRegressionMethod189
4.3 BudgetingFactoryOverheadCosts191
4.4 AccountingforActualFactoryOverhead192
4.4a FactoryOverheadAnalysisSpreadsheets194
4.4b ScheduleofFixedCosts195
4.4c GeneralFactoryOverheadExpenses197
4.4d SummaryofFactoryOverhead197
4.5 DistributingServiceDepartmentExpenses197
4.6 ApplyingFactoryOverheadtoProduction205
4.6a DirectLaborCostMethod208
4.6b DirectLaborHourMethod208
4.6c MachineHourMethod209
4.6d Activity-basedCostingMethod210
4.7 AccountingforActualandAppliedFactoryOverhead213
5 ProcessCostAccounting—General Procedures255
5.1 ComparisonofBasicCostSystems256
5.1a MaterialsandLaborCosts256
5.1b FactoryOverheadCosts258
5.2 ProductCostinaProcessCostSystem258
5.2a NondepartmentalizedFactory259
5.2b DepartmentalizedFactory259
5.3 WorkinProcessInventories259
5.4 CostofProductionSummary OneDepartment,NoBeginning Inventory263
5.5 CostofProductionSummary OneDepartmentBeginning Inventory266
5.6 CostofProductionSummary MultipleDepartments,No BeginningInventory269
5.7 CostofProductionSummary MultipleDepartments,Beginning Inventory279
5.8 ChangesinPriorDepartment’sUnitTransferCost286
6 ProcessCostAccounting—Additional Procedures;AccountingforJoint ProductsandBy-Products311
6.1 EquivalentProduction–MaterialsNotUniformlyApplied311
6.1a MaterialsAddedatBeginningofProcess312
6.1b MaterialsAddedatEndofProcess314
6.1c MaterialsAddedatDifferentStagesofProcess317
7 6.2 UnitsLostinProduction320
6.3 UnitsGainedinProduction323
6.4 EquivalentProduction:First-In,First-OutMethod325
6.4a FIFOversusWeightedAverage-MaterialsAddedat Beginning325
6.4b FIFOversusWeightedAverage-MaterialsAddedatEnd330
6.4c FIFOversusWeightedAverage-ProsandCons333
6.5 JointProductsandBy-Products334
6.5a AccountingforJointProducts335
6.5b AccountingforBy-Products338
TheMasterBudgetandFlexible Budgeting365 7.1 PrinciplesofBudgeting366
7.2 PreparingtheMasterBudget367
7.2a SalesBudget369
7.2b ProductionBudget370
7.2c DirectMaterialsBudget373
7.2d DirectLaborBudget374
7.2e FactoryOverheadBudget375
7.2f CostofGoodsSoldBudget376
7.2g SellingandAdministrativeExpensesBudget376
7.2h BudgetedIncomeStatement376
7.2i OtherBudgets378
7.2j EvaluatingBudgetPerformance378
7.3 FlexibleBudgeting379
7.3a PreparingtheFlexibleBudget381
7.3b PreparingaPerformanceReportBasedonFlexible Budgeting382
7.4 PreparingtheFlexibleBudgetforFactoryOverhead384
7.4a UsingtheFlexibleBudget386
7.4b SemivariableCosts388
7.4c ServiceDepartmentBudgetsandVariances388
7.4d SummaryoftheBudgetingProcess389
8 StandardCostAccounting—Materials, Labor,andFactoryOverhead413
8.1 TypesofStandards415
8.2 StandardCostProcedures416
8.2a DeterminationofStandardCostsforMaterialsandLabor416
8.2b RecordingStandardCostsforMaterialsandLabor417
8.3 DeterminationofVariances418
8.3a AlternativeMethodofRecordingMaterialsCost424
8.4 AccountingforVariances425
8.4a AlternativeMethodofRecordingMaterialsCost425
8.4b DispositionofStandardCostVariances426
8.5 InterpretingVariances429
8.6 FeaturesofaStandardCostAccountingSystem432
8.7 IllustrationofStandardCostinaDepartmentalizedFactoryUsing ProcessCosting433
8.8 AnalysisofFactoryOverheadStandardCostVariances440
8.9 Two-VarianceMethodofAnalysis441
Appendix:Four-VarianceandThree-VarianceMethodsofAnalysis447
Four-VarianceMethodofAnalysis447
Three-VarianceMethodofAnalysis449
9 CostAccountingforServiceBusinesses, theBalancedScorecard,andQuality Costs485
9.1 JobOrderCostingforServiceBusinesses486
9.1a JobCostSheetforaServiceBusiness487
9.1b ChoosingtheCostAllocationBase488
9.1c TracingDirectCoststotheJob488
9.1d CostPerformanceReport488
9.2 BudgetingforServiceBusinesses489
9.2a TheRevenueBudget490
9.2b TheLaborBudget490
9.2c TheOverheadBudget491
9.2d TheOtherDirectExpensesBudget492
9.2e TheBudgetedIncomeStatement492
9.3 Activity-BasedCostinginaServiceFirm493
9.3a ConvertingIndirectCoststoDirectCosts494
9.3b MultipleIndirectCostPools495
9.3c JobCostSheet Activity-BasedCosting496
9.4 AllocationsUsingSimplifiedCostingversusActivity-Based Costing497
9.5 TheBalancedScorecardandQualityCosts501
9.5a TheFourCategoriesofaBalancedScorecard501
9.5b GuidelinesforaGoodBalancedScorecard503
9.5c TheBalancedScorecardIllustrated504
9.6 MeaningoftheCostofQuality506
9.6a TheFourCategoriesofaCostofQualityReport506
9.6b PreventionCosts506
9.6c AppraisalCosts506
9.6d InternalFailureCosts507
9.6e ExternalFailureCosts508
10 CostAnalysisforManagementDecision Making523 10.1 VariableCostingandAbsorptionCosting524
10.1a ProductCostsversusPeriodCosts524
10.1b IllustrationofVariableandAbsorptionCosting Methods525
10.2 MeritsandLimitationsofVariableCosting530
10.3 SegmentReportingforProfitabilityAnalysis531
10.4 Cost-Volume-ProfitAnalysis534
10.4a Break-EvenAnalysis535 10.4b Break-EvenChart538
10.4c Break-EvenAnalysisforManagementDecisions539 10.4d EffectofSalesMixonBreak-EvenAnalysis541
10.5 ContributionMarginRatioandMarginofSafety543
10.6 EffectofIncomeTaxonBreak-EvenPoint545
10.7 DifferentialAnalysis546
10.7a AcceptorRejectaSpecialOrder547 10.7b MakeorBuy548
10.8 DistributionCosts549 Glossary575 Index591
INTRODUCTIONTOCOST ACCOUNTING CHAPTER 1 BUSINESSCURRENTS1.1 CostAccountinginHollywood
AsHollywoodfilmbudgetscontinuetogrow,anarticlein BloombergBusinessweek reportedthatUniversalStudio’s DespicableMe2 grossedmorethan$840millionglobally, butcostonly$76million,makingitoneofthemostprofitablemoviesinthestudio’shistory.Thefilm’sproducer, ChrisMeledandri,whoalsoproduced Dr.Seuss’ The Lorax,iscreditedwithsuccessfullymanagingthefilm’s budget.Meanwhile,JeffreyKatzenberg,CEOofDreamworksAnimationSKG,announcedplanstodecreasethe budgetsofthecompany’sanimatedfilmsby$30million each,toanaveragecostof$120million.
Thisarticleraisesseveralquestionsthatmaybe answeredusinginformationintroducedinthisbook:
• Whichcostaccountingsystemisbestsuitedfor accountingforthecostsofproducingafilm?
• Howdoesonedeterminewhichstudiocostsare includedinmakingamovie?
• Whatmeasuresmaybeundertakenbyotherstudiosto successfullyreducetheirbudgets?
Source:Palmeri,Christopher, “DespicablyProfitable,” Bloomberg Businessweek,September23,2013,Issue4347,p.21–22.
Learning OBJECTIVES Afterstudyingthischapter,you shouldbeableto:
LO1 Explaintheusesofcost accountinginformation.
LO2 Describetheethicalresponsibilitiesandcertification requirementsformanagementaccountants,aswellas corporategovernance.
LO3 Describetherelationshipof costaccountingtofinancial andmanagement accounting.
LO4 Identifythethreebasicelementsofmanufacturing costs.
LO5 Illustratebasiccost accountingprocedures.
LO6 Distinguishbetweenthetwo basictypesofcostaccountingsystems.
LO7 Illustrateajobordercost system.
Theimportanceofcostaccountinginformationtothesuccessfuloperationofa businesshaslongbeenrecognized.However,inthecurrentglobaleconomic environment,suchinformationismorecrucialthanever.AutomobilesfromSouth Korea,compactfluorescentlightbulbsfromChina,electronicequipmentfrom Japan,andaircraftfromEuropearejustafewexamplesofforeign-madeproducts thathaveprovidedstiffcompetitiontoU.S.manufacturersbothathomeand abroad.Asaresultofthesepressures,companiestodayareplacingmoreemphasis oncontrollingcostsinanattempttokeeptheirproductscompetitive.Forexample, U.S.companiesareoutsourcingproductionandserviceactivitiestoothercountries,suchasproductionoperationsinHondurasandVietnam,andtechnicalsupportcallcentersinthePhilippines.However,asBusinessCurrents1.2indicates, some “offshore” manufacturingisheadedbacktotheUnitedStates.
BUSINESSCURRENTS1.2 “
Reshoring” aContinuingTrend Recently,Wal-martannouncedplanstorelocate$50billionin manufacturingtotheUnitedStatesandGeneralElectrichasbegun manufacturinginLouisville,KentuckyahybridwaterheaterthatwaspreviouslyoutsourcedtoaChinesecompany.Thesearejustafewexamples ofthe “reshoring” or “onshoring” effortsundertakenbyanincreasing numberofAmericanbusinesses.Reasonscitedforthisshiftinclude:
• PayratesinChinahaveincreasedatleast15%annuallyforthepast fewyears.Inaddition,therehasbeenrecentlaborunrestinChina.
• Oilpriceshaveincreasedandbecomemoreuncertain,resultingin highershippingcostsandenergycostsinChina,butdomestic energypricesarerelativelylessexpensive;
• Companieswantmorecontrolorprotectionfortheirintellectual property;
• ProductivityhasincreasedintheUnitedStatesduetoautomation;
• BecausethecustomerbaseislocatedintheUnitedStates,thereisa desiretobeclosertothecustomer;
• Adecliningdollarresultsinlessadvantageousexchangeratesfor imports.
Sources:Kilzer,Lou, “TopU.S.ManufacturersReturningJobsBacktoStatesfrom China,” McClatchy-TribuneBusinessNews,publishedbyThePittsburghTribuneReview,January5,2014. Nash-Hoff,Michele, “HowSanDiegoReflectsNationalManufacturingTrends,” Industry Week,January24,2014. Northam,Jackie, “AsOverseasCostsRise,MoreU.S.CompaniesAre ‘Reshoring,’” www.npr.org,January22,2014.
Costaccountingprovidesthedetailedcostinformationthatmanagement needstocontrolcurrentoperationsandplanforthefuture.Figure1-1 illustratestheproductionprocessforgoodsandservicesforwhichcost
accountingprovidesinformation.Managementusesthisinformationtodecide howtoallocateresourcestothemostefficientandprofitableareasofthe business.
Alltypesofbusinessentities manufacturing,merchandising,andservice businesses requirecostaccountinginformationsystemstotracktheiractivities. Manufacturers convertpurchasedrawmaterialsintofinishedgoodsby usinglabor,technology,andfacilities. Merchandisers purchasefinished goodsforresale.Theymaybe retailers,whosellproductstoindividualsfor consumption,or wholesalers,whopurchasegoodsfrommanufacturersand selltoretailers. For-profitservicebusinesses,suchashealthclubs,accountingfirms,and NFL footballteams,sellservicesratherthanproducts. Notfor-profitserviceagencies,suchascharities,governmentalagencies,and somehealthcarefacilities,provideservicesatlittleornocosttotheuser.
Itisnecessaryforanyorganizationtohaveasetofproceduresinplaceto providethefinancialinformationneededbythatorganization.The accounting informationsystems ofmanufacturersmustbedesignedtoaccumulate detailedcostdatarelatingtotheproductionprocess. Costaccountingsystems areaccountinginformationsystemsusedbymanufacturerstotrackthecosts incurredtoproduceandselltheirdiverseproductlines.Whilethecostaccountingprinciplesandproceduresdiscussedinthetextmostlyemphasizemanufacturers,manyofthesameprinciplesapplytomerchandisingandservice businesses.Costaccountingisessentialtotheefficientoperationoffast-food restaurants,athleticteams,fineartsgroups,hospitals,colleges,socialwelfare agencies,andnumerousotherentities.Chapter9andothersectionsthroughout thetextillustratecostaccountingsystemsforservicebusinesses.
Inmanyways,theactivitiesofamanufactureraresimilartothoseofa merchandiser.Theypurchase,store,andsellgoods;bothmusthaveefficient managementandadequatesourcesofcapital;andtheymayemployhundreds orthousandsofworkers.Themanufacturingprocessitselfhighlightsthe
Figure1-1 ProductionProcessforGoodsandServices
differencesbetweenthetwo:merchandisers,suchas Target,buygoods inmarketableformtoreselltotheircustomers;manufacturers,suchas Kellogg’s,producethegoodsthattheysell.Onceamerchandiserhasacquired goods,itcanperformthemarketingfunction.Thepurchaseofrawmaterials byamanufacturer,however,isonlythebeginningofalongandsometimes complexchainofeventsthatresultsinafinishedproductforsale.
The manufacturingprocess requirestheconversionofrawmaterials intofinishedgoodsthroughtheuseoflaborandotherfactoryresources.A manufacturermustmakeamajorinvestmentinphysicalassets,suchasproperty,plant,andequipment.Toproducefinishedgoods,amanufacturermust purchaseappropriatequantitiesofrawmaterialsandsupplies,anddevelopa workforce.Inadditiontothecostofmaterialsandlabor,themanufacturer incursotherexpensesintheproductionprocess.Manyofthesecosts,such asdepreciation,taxes,insurance,andutilities,aresimilartothoseincurred byamerchandisingconcern.Costssuchasmachinemaintenanceandrepair, materialshandling,productionsetup,productionscheduling,andinspection areuniquetomanufacturers.Othercosts,suchassellingandadministrative expenses,aresimilartothoseincurredbymerchandisersandservicebusinesses.Themethodsofaccountingforsales,costofgoodssold,and sellingandadministrativeexpensesforamanufactureraresimilartothoseof merchandisers.Servicebusinesses,bycomparison,havenoinventories becausetheserviceisconsumedatthetimeitisprovided.Theopportunity tosellanemptyseatonaflight,forexample,islostoncetheflighttakes off.Servicebusinesseshaverevenueandoperatingexpenses,butnocostof goodssold.
Notethatproductqualityisasimportantacompetitiveweaponascost controlintheglobalarena.Originallyissuedforcompaniesmarketingproducts inEurope,butnowwidelyacceptedglobally,the ISO9000 familyofstandards forqualitymanagementwasdesignedbytheInternationalOrganizationfor Standardization,basedinSwitzerland.Thestandardsarebasedoneightquality managementprinciples,includingfocusoncustomerneeds,employeeinvolvementandsupplierrelationships,managementandintegrationofprocessesand continuousimprovement.1 MajorU.S.companiessuchas Boeing requiresupplierstohavesuchqualitymanagementsystemsinplace.2
The ISO14000 familyofstandardsaddressesvariousaspectsofenvironmentalmanagement.Thepremiseofthesestandardsisthatactivitiesthat benefittheenvironment,suchasbecomingmoreenergyefficientandconsumingfewerresources,andreducingwastethroughrecyclingandother initiatives,mayhavesubstantialeconomicbenefitsaswell.3 Itisbecoming commonforcompaniestoimplement sustainabilityprograms designedto
1InternationalOrganizationforStandardization, “QualityManagementPrinciples,” www.iso.org.
2Boeing, “DoingBusinesswithBoeingMc-DonnellDouglasAerospace&DefenseSystems TermsandConditionsGuide,” www.boeingsuppliers.com.
3InternationalOrganizationforStandardization, “EnvironmentalManagement.TheISO 14000FamilyofInternationalStandards,” www.iso.org.
reducetheimpactoftheiroperationsontheenvironmentandtoproduce reportsordevoteareasontheirwebsitestoreportontheirprogress.Asustainabilityreportmaycontaindetailsaboutthecompany’ssustainabilitygoals, howfarthecompanyhascomeinmeetingitsgoals,andthedollaramountof costsavingsresultingfromitssustainabilityprograms. Ford reportedina recentsustainabilityreportthatnotonlydoesitexpectitspreferredsuppliers’ facilitiestoattainISO14000certification,but100%havedoneso.4
Thecostofenvironmentaldamagecanbeveryhigh.IthasbeenestimatedthatthelosteconomicoutputresultingfromtheJanuary2014chemicalspillintheElkRiverinWestVirginiawas$61millionorabout24%of theeconomicactivityoftheaffectedregion.Thisdoesnotincludethecostof cleaningupthespillorfundsspentforemergencyservices.5 Inaddition,any partiesdeemedresponsibleforthespillwilllikelyfacefines,damages,and legalcosts.
1.1 UsesofCostAccountingInformation Principlesofcostaccountinghavebeendevelopedtoenablemanufacturersto processthemanydifferentcostsassociatedwithmanufacturingandtoprovide built-incontrolfeatures.Theinformationproducedbyacostaccountingsystemprovidesabasisfordeterminingproductcostsandsellingprices,andit helpsmanagementplanandcontroloperations.
1.1a DeterminingProductCostsandPricing
Costaccountingproceduresprovidethemeanstodetermineproductcosts thatenablethepreparationofmeaningfulfinancialstatementsandother reportsneededtomanageabusiness.Thecostaccountinginformationsystemmustbedesignedtopermitthedeterminationoftotalproductcostsand thecostsassociatedwithproducingoneunit,or unitcosts.Forexample,the factthatamanufacturerspent$100,000forlaborinacertainmonthisnot,in itself,meaningful;butifthislaborproduced5,000finishedunits,thefactthat thecostoflaborwas$20perunitissignificant.Thisfigurecanbecompared tothecompany’sunitlaborcostforpriorperiodsand,often,tothelaborcost ofmajorcompetitors.
Unitcostinformationisalsousefulinmakingimportantmarketingdecisionssuchas:
1. Determiningthesellingpriceofaproduct.Knowingthemanufacturingcost ofaproductaidsindeterminingthedesiredsellingprice.Itshouldbe highenoughtocoverthecostofproducingtheitemandthemarketing
LO1 Explainthe usesofcost accounting information.
4http://corporate.ford.com/microsites/sustainability-report-2012-13/supply-environmental -supplier
5 “ElkRiverSpillCostEconomy$19MillionPerBusinessDay,StudyFinds,” www.wowktv. com,February4,2014.
andadministrativeexpensesattributabletoit,aswellastoprovideasatisfactoryprofittotheowners.
2. Meetingcompetition.Ifaproductisbeingundersoldbyacompetitor, detailedinformationregardingunitcostscanbeusedtodeterminewhether theproblemcanberesolvedbyreducingthesellingprice,byreducing manufacturingandsellingexpensesattributabletotheproduct,orby somecombinationoftheabovethatwillstillresultinprofitablesales.
3. Biddingoncontracts.Manymanufacturersmustsubmitcompetitivebidsto beawardedcontracts.Knowledgeoftheunitcostsattributabletoaparticularproductisofgreatimportanceindeterminingthebidprice.
4. Analyzingprofitability.Unitcostinformationenablesmanagementto determinetheamountofprofitthateachproductearns,therebyallocatingthecompany’sscarceresourcestothosethataremostprofitable.Itis notuncommon,however,forsomecompaniestoretainacertainproduct line,knownasa lossleader,whichyieldsaverylowprofit,orevenaloss, tomaintaintheproductvarietythatwillattractthosecustomerswhoalso purchasethemoreprofitableitems.BusinessCurrents1.3discusseshow Amazonhasadoptedthisstrategy.
BUSINESSCURRENTS1.3 KindleProfitability IntheJanuary2012issueof PCMagazine,AngelaMoscaritoloreported inanarticletitled “KindleFireCouldBeMoreProfitablethanExpected” thatAmazonmakesuptheestimated$18itlosesoneachKindleitsells inlessthanfivemonths,primarilythroughsalesofeBooksandKindle apps.ItisalsoexpectedthatKindlesaleswouldresultinadditional revenuesfromthesaleofothergoodsandpreferredmembershipsthat allowfreeshipping.
1.1b PlanningandControl Oneofthemostimportantaspectsofcostaccountingisthepreparationof reportsthatmanagementcanusetoplanandcontroloperations. Planning istheprocessofestablishingobjectivesorgoalsforthefirm anddeterminingthemeansbywhichtheywillbemet.Effectiveplanningis facilitatedbythefollowing:
1.ClearlyDefinedObjectives. Theobjectivesofthemanufacturingoperation maybeexpressedintermsofthenumberofunitstobeproduced,thedesired quality,theestimatedunitcost,thedeliveryschedules,andthedesiredinventorylevels.
2.AProductionPlan. Thisshouldbeadetailedplandesignedtoguidethe companytoreachitsobjectivesthatincludesadescriptionofthe
manufacturingoperationstobeperformed,aprojectionofhumanresource needsfortheperiod,andthecoordinationofthetimelyacquisitionofmaterialsandfacilities.
Costaccountinginformationenhancestheplanningprocessbyproviding historicalcoststhatserveasabasisforfutureprojections.Managementcan analyzethedatatoestimatefuturecostsandoperatingresultsandtomake decisionsregardingtheacquisitionofadditionalfacilities,anychangesin marketingstrategies,andtheavailabilityofcapital.
Theword “control” isusedinmanyways,butfromtheviewpointofthe manufacturingconcern, control istheprocessofmonitoringthecompany’ s operationsanddeterminingwhethertheobjectivesidentifiedintheplanning processarebeingaccomplished.Effectivecontrolisachievedasfollows:
1.AssigningResponsibility. Responsibilityshouldbeassignedforeach detailoftheproductionplan.Allmanagersshouldknowpreciselywhattheir responsibilitiesareintermsofefficiency,operations,production,andcosts. Thekeytopropercontrolinvolvestheuseofresponsibilityaccountingand costcenters.
Theessenceof responsibilityaccounting istheassignmentofaccountabilityforcostsorproductionresultstothoseindividualswhohavethemost authoritytoinfluencethem.Itrequiresacostinformationsystemthattraces thedatatocostcentersandtheirmanagers.
A costcenter isaunitofactivitywithinthefactorytowhichcostsmay bepracticallyandequitablyassigned.Acostcentermaybeadepartmentora groupofworkers;itcouldrepresentonejob,oneprocess,oronemachine. Thecriteriaforacostcenterare(1)areasonablebasisonwhichmanufacturingcostscanbetracedorallocatedand(2)apersonwhohascontroloverand isaccountableformanyofthecostschargedtothatcenter.
Withresponsibilityaccounting,themanagerofacostcenterisaccountableonlyforthosecoststhatthemanagercontrols.Forexample,laborand materialcostswillbechargedtothecostcenter,butthemanagermaybe responsibleonlyforthequantityofmaterialsusedandthenumberoflabor hoursworked.Thismanagerwouldprobablynotbeaccountablefortheunit costofrawmaterialsorthehourlyratepaidtoemployees.Thesedecisions arenormallybeyondthemanager’scontrolandaretheresponsibilityofthe purchasingandhumanresourcedepartments,respectively.Themanagermay beresponsibleforthecostofmachinerymaintenanceandrepairduetomisuseinthecostcenter,butnotresponsibleforthecostsofdepreciation,taxes, andinsuranceonthemachineryifthedecisiontopurchasethemachinery wasmadeatahigherlevelintheorganization.Ifproductioninthecost centerforagivenperiodislowerthanplanned,thiscouldbeduetopoor supervisionofproductionworkers,whichisthemanager’sresponsibility.If thedecreaseinproductioniscausedbyless-skilledworkersbeinghiredby HumanResources,however,thatwouldbebeyondthemanager’scontrol.
Costofproductionsummaries foracostcenterreflectitscosts,in dollars,anditsproductionactivity,inunits.Inaresponsibilityaccounting
system,thespecificdataforwhichthemanagerisresponsiblewouldbe highlightedforthepurposeofperformanceevaluation.Quiteoften,botha costofproductionsummaryandaseparateperformancereportwillbepreparedforacostcenter.The performancereport willincludeonlythose costsandproductiondatathatthecenter’smanagercancontrol.AnillustrationofaperformancereportappearsinFigure1-2.Notethe “variancecolumns” thatappearintheillustration.A variance representstheamountby whichtheactualresultdiffersfromthebudgetedorplannedamount.Ifthe actualamountspentislessthantheamountbudgeted,thevarianceis favorable (F); ifmorethanbudgeted,itis unfavorable(U).Anin-depthdiscussionof budgetingandvarianceanalysisappearsinChapters7and8.
Thesereportsmustbefurnishedatregularintervals(monthly,weekly,or daily)onatimelybasis.Toprovidethemaximumbenefit,thereportsshould beavailableassoonaspossibleaftertheendoftheperiodbeingreported. Reportsnotproducedinatimelyfashionarenoteffectiveincontrolling futureoperations.
2.PeriodicallyMeasuringandComparingResults. Actualoperatingresults shouldbereviewedperiodicallyandcomparedtotheobjectivesestablishedin theplanningprocess.Thisanalysis,whichmaybemademonthly,weekly, daily,orevenhourlyinthecaseofproductionandscrapreports,isamajor partofcostcontrolbecauseitcomparescurrentperformancewiththeoverall plan.Theactualdollars,unitsproduced,hoursworked,ormaterialsusedare comparedwiththe budget,whichismanagement’soperatingplanexpressed inquantitativeterms(unitsanddollars).Thiscomparisonisaprimaryfeature ofcostanalysis.Thenumberofdollarsspentorthequantityofunitsproducedhaslittlesignificanceuntilcomparedwiththebudgetedamounts. Notethattheappropriatenessofthe$157,600actualyear-to-dateexpenditure for “Food” inFigure1-2canbeevaluatedonlywhencomparedtothebudgetedamountof$155,300.
3.TakingNecessaryCorrectiveAction. Theperformancereportsmayidentifyproblemareasanddeviationsfromthebusinessplan.Appropriatecorrective actionshouldbeimplementedwherenecessary.Asignificantvariancefromthe planisasignalforattention.Aninvestigationmayrevealaweaknesstobecorrectedorastrengthtobebetterutilized.Managementwantstoknownotonly theresultsofoperationsbutalsohowtheresults whetherfavorableorunfavorable comparewiththeplan,whythingshappened,andwhowasresponsible.Forexample,managementmaywanttodeterminethecausesofthe unfavorableyear-to-datevarianceof$2,300for “Food” inFigure1-2.Thevariancemaybeduetoanuncontrollableriseinfoodpricesortoacontrollable wasteoffoodattherestaurant,oracombinationofboth.Basedonthevariance analysis,managementmustbepreparedtoimproveexistingconditionsbysuch meansasimplementingmoreeconomicalpurchasingmethodsandstandardizingportionsizes.Otherwise,theperiodicmeasurementofactivityhaslittle value.TherelationshipofplanningandcontrolisillustratedinFigure1-3.
Figure1-2 PerformanceReport
Barbara's Bistro Performance ReportKitchen September 30, 2016
LO2 Describethe ethicalresponsibilitiesandcertification requirementsfor management accountants,aswell ascorporate governance.
Figure1-3 RelationshipofPlanningandControlforBarbara’sBistro PLANNING • CLEARLY DEFINED OBJECTIVE: INCREASE PROFIT BY 15%
• PLAN TO REACH THE OBJECTIVE: REDUCE FOOD COSTS BY 10%
BUILD CORRECTIVE ACTIONS INTO PLAN
CONTROL • MEASURE AND COMPARE RESULTS: COMPARE BUDGETED TO ACTUAL FOOD COSTS, MONTHLY.
• TAKE CORRECTIVE ACTION: IDENTIFY MORE ECONOMICAL SUPPLIERS AND CONTROL FOOD WASTE
1.2 ProfessionalEthics,CMACertification, andCorporateGovernance The InstituteofManagementAccountants(IMA) isthelargest organizationofaccountantsinindus tryintheworld.Comparabletothe CPAcertificationforpublicaccountants,the CertifiedManagement Accountant(CMA) certificate whichisawardedbytheIMAafterthe candidatecompletesafour-yeardegreefromanaccreditedcollegeoruniversity,twocontinuousyearsofrelevantprofessionalexperienceinmanagementaccountingorfinancialmanagement,andarigoroustwo-part examinationconsistingoffinancialplanning,performance,andcontrol andfinancialdecision-makingwithastrongemphasisonethics evidences ahighlevelofcompetencyinmanagementaccountingandfinancial management.
Inadditiontocompetency,theneedforethicalconductinmanagingcorporateaffairshasneverbeengreater.Individualemployees,investors,andthe economyasawholehavebeennegativelyimpactedbyrecentaccounting
