CAPE Accounting: Unit 2

Avoidable/Relevant Costs have to categories:

1. Differential/ Incremental Costs: is the additional cost incurred for a given decision 2. Opportunity Cost: is the benefit lost from one item to obtain something else 'what you give up to achieve something else'.

Production Costs are split into 2 categories

1. Direct Costs 2. Indirect Costs

There are 3 inventory method:

1. First in First Out (FIFO) 2. Last in First Out (LIFO) 3. Weighted Average (AVCO)

Types of Cost Curves

1. Fixed Cost Curve 2. Variable Cost Curve 3. Mixed Cost Curve (Semi-Variable Cost Curve) 4. Total Cost Curve 5. Step Fixed Cost Curve 6. Step Variable Cost Curve

Decision Making

managers use costs to make day to day decisions concerning the organization. These costs can either be avoidable or unavoidable.

Shift Premium

the extra pay given to employees that is above normal pay received by factory workers due to a particular shift worked.

Planned and actual costs

- Planned Cost: is the approved estimate cost of work undertaken. -Actual Costs: is the specific cost incurred for the work carried out.

Controllable and Non-Controllable costs

- Controllable Costs:are items of expenditure that are directly influenced (by authority) within a period of time. These costs are critical in the decision-making process because they may changed by persons who are in direct control. example: controlling daily expenses,such as supplies,maintenance and overtime or large investment in land building and equipment - Non-controllable costs: are costs that cannot be changed or managed by management. Example include depreciation and wire off

Manufacturing and Non-Manufacturing

- Manufacturing Costs: also known as product costs is the cost incurred to produce a product. -Non-manufacturing costs: also known as period costs is the cost related to the non-factory aspects of the business.

Product Costs

- are costs related to producing and acquiring products that directly generate revenue for the firm. - any costs that would be found in your manufacturing account. - also called inventoriable costs

Fixed, Variable and mixed costs

-Fixed cost: are costs that remain constant no matter production (Examples of fixed costs include straight-line depreciation, insurance, property taxes, rent, supervisory salaries, administrative salaries, and advertising). Unlike variable costs, fixed costs are not affected by changes in activity - Variable cost: are costs that vary in total in relation to changes in activity (for example direct materials, include cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, packaging materials, electricity and water expenses) - this is a combination of fixed and variable cost examples are electricity and telephone bill, on a per unit basis fixed cost does not fluctuate with changes in activity nor does it remain constant with changes in activity.

Examples of period costs

-Selling and Administrative costs. These costs are reported on the income statement as they are incurred. Not part of manufacturing overhead, not related to making the product.-Examples: Anything at corporate headquaters, anything related to selling the product, shipping costs, administrative salaries, executive salaries, administrative office expenses, sales commissions, advertising, research and development, etc. -Warehouse costs and people who move inventory are period costs-Selling Costs - all cost associated with marketing the finished products and getting the product to the customer -Administrative Costs - costs incurred for the general administration of the organization

There are 3 types of cost classifications: (DIP)

1. Inventory Valuation 2. Decision Making 3. Planning and Control Costs

There are 3 costs associated with inventory:

1. Purchasing Cost 2. Ordering Cost 3. Carrying Cost

Role of cost and management accounting in manufacturing and service industry

1. They provide management with data on efficient use of company resources 2. Compute the cost of providing service

Disadvantages of Periodic Inventory System

1. can leads to delayed results 2. less control of inventory

Examples of product costs

1. direct materials 2. direct labour 3. factory overheads(If the cost has the word "factory", "plant", "manufacturing", as a descriptive word, the cost will be part of manufacturing overhead-Examples of manufacturing overhead costs are: - utilities at the plant such as electricity, water, phone. Support personnel at the plant such as an accountant, human resources or computer support. Training, maintenance and repairs, rent, insurance, taxes, etc. KEY - it has to happen at the manufacturing facility. Indirect labor and indirect material are part of manufacturing overhead.)

Disadvantages of the Perpetual System

1. expensive to implement 2. can be inaccurate at times

There are many types of remuneration:

1. hourly rate 2. commission 3. fixed salary 4. bonus 5. piece rate 6. shift premium 7. holiday pay 8. overtime

Advantages of Periodic Inventory System

1. inexpensive to set up 2. simple to use

The categories of decision making under relevant costs

1. make or buy 2. accept or reject 3. accept or reject special orders

There are 2 systems to do inventory valuation

1. perpetual inventory system (CSEC way) 2. periodic inventory system

Two cost that are used to value inventory

1. product costs (manufacturing costs) 2. period costs (non manufacturing costs)

Advantages of the Perpetual System

1. works in real time because its continuous 2. good inventory tracking so can easily pick up shortages

Similarities between financial accounting and management accounting

1.They both utilize the Accrual basis of accounting 2. They both highlight a business economic transaction 3.they both provide a performance evaluation of the business for decision making 4. They both share the common practice of reports in economic information and even report some of the same information

Assumptions that are made about the economic order quantity model

1.the demand rate is uniformed and known 2. The items do not vary with order size 3. All the orders are delivered at the same time 4.lead time is known in advance so that the order can be timed to arrive when inventory is exhausted 5. The cost to place and receive an order is the same regardless of the amounts ordered 6 the cost of holding inventory is a linear function of the number of items held

AVCO per unit

= total cost of goods in inventory/total units in inventory

Perpetual Inventory System (day to day/continuous)

A detailed inventory system in which a company maintains the cost of each inventory items and the records continuously show the inventory that should be on hand.

Periodic Inventory System (over a period)

An inventory system in which a company does not maintain detailed records of goods on hand (physical inventory count) throughout the period and determines the cost of goods sold only at the end of an accounting period.

Production Cost per unit calculation

Cost of goods manufactured(Production Cost)/number of units produced

Ordering Cost Formula

D/O * OC where D is demand per units, O is order size and OC is order cost

Structure of Schedule of Cost of Goods Manufactured

DIRECT RAW MATERIALS USED: Beginning Inventory Purchases Add: Carriage Inwards and Import Duties Less Return Outward (Purchases Returns) Net Purchases Cost of Materials Available for use Less ending inventory Cost of materials consumed/used DIRECT LABOUR: OTHER DIRECT EXPENSES: PRIME COST FACTORY OVERHEADS (list factory overheads) CURRENT MANUFACTURING COSTS Add: Opening WIP TOTAL MANUFACTURING COSTS Less: Closing WIP Production Cost/ Cost of goods manufactured

Calculation for overtime premium

Direct labour(regular rate * hours work) Manufacturing overhead(overtime premium: excess rate*extra hour) Total cost for the week

Comparison of financial and management in terms of users of accounting information

Management accounting has internal users such as managers at all levels and employees financial accounting has external users such as creditors investors government agencies

Comparison of financial and management in terms of freedom of choice with reference to accounting measures

Management accounting has no constraints information prepared contains both monetary and non-monetary transactions Financial accounting constrained by generally accepted accounting principles information prepared contains mostly monetary transaction public companies must be audited by an independent auditor

Comparison of financial and management in terms of accounting information

Management accounting helps managers to plan and controlled business operation financial accounting helps investors creditors and other make investments give credit and make other decisions

Comparison of financial and management in terms of timing focus for preparation of financial reports

Management accounting uses both historical and future information such as formal use of budgets as well as financial records in addition the information use must be relevant Financial accounting to use historical information only it' evaluates a firm early performance the information used in the preparation of the reports contains characteristics such as relevant and faithful representation and must be reliable and objective

Comparison of financial and management in terms of type of report

Management has detailed report and may include details about products departments or territories financial summarized reports on an entire business

Comparison of financial and management in terms of time span

Management report is flexible and vary daily, monthly and yearly financial report is less fixable it can be quarterly or yearly

Examples of non-manufacturing administration expenses

Managers salaries or supervisors, legal and accountancy charges, depreciation of office equipment, secretarial salaries, office stationary, salary of chief accountant, property taxes on office building

Impact of labor due to technological charges

Many manufacturing companies have more fixed cost and fewer variable costs including labor. This results in fewer Persons being employed and therefore a decrease in direct labor cost. Also because there are more fixed cost there is an increase in automation and as a result depreciation and lease charges increases

Reconciliation of net income

Net Income per Absorption Costing Add: Fixed Cost in Opening Stock (Diff) Less: Fixed Cost in Closing Stock (Diff) Net Income per Marginal Costing I/S

Carrying (Holding) Cost formula

O/2 * C - where O is order size and C is carrying cost per unit

Examples of non-manufacturing selling and distribution expenses

Rental of delivery van, sales staff salaries commission carriage outwards, depreciation of delivery vehicles, advertisement and display expenses

Direct expense

Royalty, license fees which have to be paid to others for the right to produce the product or to use their processes

Re-Order Point (Level)

The inventory level at which additional goods need to be ordered which is determined by 3 factors: 1. usage 2. lead time 3. safety stock

Factory profit

The percentage to be added to the cost of production as profit

Cost of production/Cost of goods manufacturing

The total cost of materials, labor, and other inputs required in the manufacturing of a product. = (prime costs+factory overheads+opening WIP)- closing WIP

Management Accounting

This focuses on accounting tools managers used to internally run a business these tools can help managers to control the day-to-day operation by comparing actual results with budgeted results

Financial Accounting

This forecast on preparing financial records and reports for the use of external users such as investors, shareholders, suppliers, banks, and government agencies

Purchasing Cost

cost of purchasing the actual inventory/materials. (Purchases-Discount Received+Carriage Costs)

Indirect wages

Wages of all factory workers who do not actually make the goods example managers,supervisors, stores staff and cleaners

The EOQ Graph

Y axis: Annual Cost X axis: Re Order Quantity

Inventory Valuation

allows a company to provide a monetary value for items in inventory.

Relevant Total Cost

also called total stock and administration cost. This is the total incremental and avoidable cost of the company implementing a business decision.

Carrying (Holding) Cost

also known as holding cost and this is the cost of holding an item in inventory, usually your stock brought down from the previous period. Examples Storage charges, stores- wages, equipment,maintenance etc Insurance and security

Period Costs (Fixed Costs)

are costs related to other business functions such as selling and administrative expenses, these costs are usually found in your income statement. These are also called fixed costs and are not directly related to production. They are cost matched against revenue on a time period basis They are related to time and not to activities and do not change to the level of output or activity

Unavoidable Costs (Irrelevant Costs)

are costs that have already been incurred (sunk/past costs) and the decision maker is no longer in control of these costs. Example rent

Cost Curves

are economic models and they are used to measure the cost against the output

Step-fixed Cost Curve

costs that remain fixed over a wide range of activity but jump to a different amount for activity levels outside that range

Direct Costs

includes direct materials, direct labour and direct expenses, which are traceable to the production process.

Mixed Cost Curve

is a curve that is made up of the fixed and variable cost curve.

Fixed Cost Curve (per unit)

is a downward sloping curve which shows that the more units you acquire the smaller (per unit cost) the portion of your fixed cost each would be incurring.

Fixed Cost Curve (total)

is a horizontal line because it never changes regardless of output. Examples of fixed costs include: rent,insurance.

Idle Time

is a period of inactivity on the part of factory workers due to machine breakdown, industrial actions etc. - Payment made for idle time should be treated as an indirect cost.

Manufacturing Account

is also known as a schedule of cost of goods manufactured, is an account that is used to determine the production cost for an accounting period

Fixed Salary

is an agreed amount that is paid monthly or weekly to an employee.

Commission

is an amount that is paid to an employee based on a percentage of the employee's sales undertaken. (Commission= %*Sales)

Bonus

is an incentive system that is given to workers when the perform a task in a shorter period or better than expected.

Conversion Cost

is cost on converting raw materials into finished goods. This is calculated as the sum of direct labour and factory overheads. (direct labour + factory overheads)

Remuneration

is money paid for labour.

Payroll Accounting

is the calculation of wages and salaries for employees.

Stock (Inventory) Valuation

is the cost that is associated with an organizations inventory at the end of a reporting period.

Cost

is the monetary measure of resources that is given up to attain a product or service.

Cost Classification

is the process of arranging cost items into groups based on their degree of similarity.

Prime Cost

is the sum of all your direct costs. = direct labour + direct expense + direct materials

Indirect Labour

is the work by factory employees that cannot be easily traced to production.

Direct Labour 2

is the work by factory employees, that can be easily traced to production or the conversion of raw materials to finished goods.

Relevant Total Cost formulae

ordering cost + carrying cost = (D/O *OC) + (O/2 *C)

Holiday Pay

refers to pay given to employees for working on public holidays.

Variable Cost Curve

resembles a 45 degree line, cost changes in proportion to output. Examples of variable costs include: commission, electricity payable at a fixed rate per kilowatt.

Economic Order Quantity formulae

square root of 2DO/C -where D is total demand in unit, O is ordering cost and C is carrying cost. (answer is in units)

At Economic Order Quantity

total ordering cost is equal to total carrying cost (OC=CC)

Usage

the amount of inventory used or sold daily.

Ordering Cost

the costs associated to facilitate the purchase of inventory, including the cost of data entry, transport costs and phone calls, administrative cost, communication cost, cost of ordering excess or too little inventory etc.

Cost behavior

the way in which a cost reacts to changes in the level of activity

Avoidable Costs (Relevant Costs)

these are costs that are not necessarily going to be incurred but its incurrence depends on the course of action chosen. Examples direct labour cost ( they are critical to a particular decision in choosing one alternative over another )

Step Variable Cost Curve

these are costs that change drastically due to a change in expenditure that which cannot be spread over an accounting period.

Indirect Costs (Factory Overheads)

these are indirect material,labour and expense costs which support production but are not traceable to the production of each unit. For example: rent of factory, indirect materials used,wages paid to factory managers.

Work in progress/process

these are referred to as goods that are still in the production process and have not yet been completed.

Direct Labour

these include costs associated directly to the actual production process. For example: direct wages,wages of machine operators and factory wages

Total Cost Curve

this curve starts where your fixed cost curve line begins. This cost is the sum of your fixed and variable costs. - TC=FC+VC

Overtime

this is the additional work that an employee will put in outside of the business times which is usually charged a time and a half (1.5) or double time (2). (basic rate* number of hours worked*overtime rate). Overtime is treated as indirect labour.

Economic Order Quantity (EOQ)

this is the quantity of inventory that should be ordered so as to minimize the cost of both ordering and holding inventories over a given period of time

Piece Rate

this is where an employee is paid based on the number of units they produce in any given period. (hourly rate* quantity of goods)

Hourly Rate

this is where employees are paid on a basic rate per hour for any work undertaken throughout the work week. (basic rate*number of hours per week)

First-in, first-out (FIFO) method

this method states that the first items to to enter inventory are the first ones to be sold.

Last-in, first-out (LIFO) method

this method states that the last items to enter inventory are the first ones to be sold.

Weighted Average (AVCO) method

this method states that with each receipt of goods the average costs in the inventory is recalculated and assumes that all costs are the same.

Planning and Control

this process requires cost accountants to predict costs then compare them to actual results.