Cost Management and Costing Systems
Cost of Goods Manufactured
Beginning Materials Inventory
(+) Material Purchases
(-) Ending Materials Inventory
(=) Direct Materials Used
(+) Direct Labor
(+) Factory Overhead Applied
(=) Total Manufacturing Costs Incurred During Year
(+) Work in Process Inventory, Beginning
(=) Total Manufacturing Costs to Account For
(-) Work in Process Inventory, Ending
(=) Cost of Goods Manufactured
Cost Driver
Predetermined Factory OH Rate = Estimated Factory OH Amount for the Year / Estimated Level of Cost Driver for the Year
Budgeted Factory OH / Budgeted Direct Labor Dollars
(% changes to $, 100% = $1)
Applied OH
Labor * Predetermined Factory OH Rate
Chapter 1: Introduction to Cost Management
- Cost management is the development and use of cost management information by the management accountant.
- Cost management information is used in all four management functions and is important in pursuing a firm’s mission and goals.
- The contemporary business environment has increased competition, influencing the management accountant’s role.
- Several contemporary management techniques enable cost management to respond to the changing business environment.
- The two main competitive strategies are cost leadership and differentiation.
- There are five steps for strategic decision-making.
- Management accountants look to professional organizations for guidance, training, and support.
- Professional certifications, such as the Certified Management Accountant (CMA), can be obtained from various professional organizations, including the Institute of Management Accountants (IMA).
- Management accountants must maintain high ethical standards, including competence, confidentiality, integrity, and credibility.
Chapter 3: Cost Behavior and Cost Assignment
- Cost assignment: Tracing direct or allocating indirect costs to cost pools using cost drivers.
- Four types of cost behavior (and cost drivers):
- Volume-based: Fixed cost, Variable cost, Mixed cost, Step cost
- Activity-based
- Structural
- Executional
- Product and service costing focuses on differentiating product costs from period costs.
- Manufacturing and merchandising firms both have a Cost of Goods Sold amount.
- Costs flow through three inventory accounts in a manufacturing firm (raw materials, work-in-process, finished goods); merchandising firms have one (inventory held for sale).
Chapter 4: Job Costing
When developing a product costing system, three choices must be made:
- Cost accumulation method (job or process costing)
- Cost measurement method (actual, normal, or standard costs)
- Overhead assignment method (volume-based or activity-based)
- A firm’s competitive strategy should guide its choice of a cost system.
- Job costing accumulates costs and assigns them to specific jobs, customers, projects, or contracts.
Job costing uses several accounts to control product cost flows:
- Materials Inventory: Records direct material costs.
- Work-in-Process Inventory: Records direct labor, direct materials, and applied factory overhead.
- Factory Overhead: Tracks actual and applied overhead.
- Finished Goods Inventory: Tracks completed goods.
A predetermined factory overhead rate applies factory overhead to specific jobs (four steps):
- Estimating factory overhead costs
- Selecting a cost driver
- Estimating the quantity of the chosen cost driver
- Dividing the estimated cost by the estimated driver quantity
At the end of the period, the Factory Overhead account should be closed (over/under-applied overhead disposed of) using one of two methods:
- Close the over/under-applied overhead entirely to the Cost of Goods Sold (CGS) account.
- Prorate the over/under-applied overhead to the ending inventory and CGS accounts.
- Three potential overhead application errors: aggregation, specification, and measurement.
- Service industries use job costing, focusing on direct labor.
- Operation costing: A hybrid system using job costing for direct materials and a process/departmental approach for conversion costs (direct labor and factory overhead).