Basics of Cost Accounting Flashcards
(14 cards)
Role of Cost Accounting
- Cost accounting supports the management of a company by providing information necessary for managing the entire company/individual departments
- Provides info for:
1) Planning (e.g.: future prices)
2) Documentation (e.g.: cost information)
3) Monitoring (e.g.: costs, to avoid loss)
4) Control (e.g.: employee behavior)
Cost Accounting vs Capital Budgeting
1) Cost Accounting : short term, up to one year for operational decisions -> time value of money is neglected
2) Capital Budgeting : long term decision making (new plant, entering new market) -> time value of money is important
Cost Terms
1) - Total : costs that relate to all goods produced within a given period
- Unit : cost of a single unit of a particular good
2) - Direct : costs that can be directly traced to a cost object
- Indirect : cannot be assigned directly (caused jointly by several cost objects, like a salary)
- Artificial indirect: could in principle be traced directly to a cost object, but the process would be too expensive
3) - Variable : cost that change when the production quantity changes
- Fixed : costs that remain constant when the quantity of the cost driver changes
Types of costs
- Inventoriable : costs assigned to a particular production unit
- Periodic : costs that cannot be capitalised (considered as assets on balance sheet)
- Opportunity : foregone contribution to a company’s profit by choosing a decision over another
- Sunk : costs caused in the past and can no longer be changed by current decisions
3 sub-systems of cost accounting
1) Cost-type accounting : which costs have been incurred ? -> distinguishes between cost types
2) Cost-center accounting : where have costs been incurred ? -> distinguishes between cost centers
3) Product and service costs : for which products have the costs been incurred ?
Classification of cost types
1) Nature of the input goods : material, labour, machine costs
2) Attributability of costs : direct/indirect
3) Dependence on output variation : fixed/variable costs
4) Position in value chain : R&D, procurement, selling and shipping, manufacturing costs
5) Origin of the input good : primary/secondary costs
Material consumption recording methods
1) Inventory : consumption = beginning inventory + acquisitions + ending inventory
2) Carrying-on : consumption = directly record consumption when occurs
3) Retroactive accounting method : consumption = calculated based on the bills of material for each product
Material consumption valuing methods
1) FIFO : assumes that material delivered first is consumed first
2) LIFO : assumes that material delivered last is consumed first
3) Ex-post average prices : uses average purchase price for all material at the end of the period
4) Moving average prices : uses average purchase price after each consumption based on total inventory at the time
Components of personnel costs
1) Salaries : payment employees get each month
2) Time wages : e.g.: hourly wage
3) Piece-rate wages : based on output
4) Premium wages : bonuses/rewards
5) Fringe benefits : e.g.: corporate car
Types of depreciaton
1) Straight-line : a = (purchase price I - residual value L)/useful life
2) Declining balance : depreciation amounts decrease at a certain rate
- p = 1 - ᵀ√(L /I) with T useful life
3) Arithmetic-degressive : depreciation amounts decrease each year by constant value
- d = 2(I - L)/ T(T + 1)
4) Units of production : depreciation amount per unit = (I - L)/ Total units of production
Interest Costs
- Interest costs = capital required for operations * interest rate
- Four steps to determine them :
1) Determine assets necessary for operations
2) Value the assets
3) Determine capital required for operations
4) Determine the interest rate - Weighted average cost of capital : WACC = (cost of equity * equity)/(equity + debt) + (cost of debtdebt)(1 - tax rate)/(equity + debt)
3 steps of cost center accounting
1) Primary cost allocation : assigning indirect costs to the cost centers where they were incurred
- If they can’t be directly traced : their allocation can be quantity or value based
2) Interdepartment cost allocation : allocate costs from indirect cost centers (energy, maintenance) to the direct cost centers
3) Allocation of overhead costs (OVCs): assigning them to the corresponding cost object
4) Direct costs can be directly traced to the individual cost objects
Methods for the allocation of service-department costs
1) Reciprocal method (equations): qⱼcⱼ = Cⱼ(primary costs of j) + (OVCs delivered from other indirect cost centers)cⱼ
2) Reciprocal method (iterations): repeated allocation of the costs for internal services in several steps
3) Method of credit/debit : assumption of predefined transfer prices for internal services (we then allocate OVCs based on predefined trends for prices)
4) Step-ladder method : consider services between indirect cost centers only in one direction
5) Direct method: doesn’t take exchanges between cost centers into consideration
Determining overhead rates for costing
- When ? After allocating OVCs from indirect to direct cost centers
- How ? Through an allocation base, e.g. the associated direct costs
- Why ? To calculate the product costs
- Formula (in %) : Total OVCs of a center / Allocation base costs
