Accounting 306: Cost Accounting

• Managerial Accounting


  The process of: Identifying, Measuring, Analyzing, Interpreting, Communicating information
• Organization


  • Organized set of activities
  • Planning
  • Directing
  • Decision Making
  • Controlling
• Resources an organization acquires


  • Funding
  • Patents
  • Buildings
• Objectives of Managerial Accounting Activity


  • Providing information for decision making and planning
  • Assisting managers in directing and controlling activities
  • Motivating managers and other employees towards organization's goals
  • Measuring performance of subunits, activities, managers, and other employees within the organization
  • Assessing the organization's competitive position and working with other managers to ensure the organization's long-run competitiveness in its industry
• Balanced Scorecard


  • Financial Perspective
  • Customer Perspective
  • Operations Perspective
  • Innovation Perspective
• Managerial Accounting


  Information for decision making, planning, and controlling an organization's operations
• Financial Accounting


  Published financial statements and other financial reports
• Users of Information


  • Internal
  • External
• Chief managerial and financial accountant (CFO or Controller)


  • Supervising accounting personnel
  • Preparation of information and managerial and financial reports
  • Analysis of accounting information
  • Planning and decision making
• Treasurer


  • Responsible for raising capital and safeguarding the organization's assets
  • Supervises relationships with financial institutions
  • Works with investors and potential investors
  • Manages investments
  • Establishes credit policies
  • Manages insurance coverage
• Internal Auditor


  • Responsible for reviewing accounting procedures, records, and reports in both the controller's and the treasurer's areas of responsibility
  • Expresses an opinion to top management regarding the effectiveness of the organization's accounting system and its system of internal controls
• Cost behavior


  The relationship between cost and activity
• Cost estimation


  Using knowledge of cost behavior to forecast a cost at a particular level of activity
• Cost estimation process


  1. Determining cost behavior

  2. Often focuses on historical data
• Cost terminology


  • Variable costs
  • Fixed costs
  • Mixed costs
• Variable costs


  Costs that change in total in relation to some chosen activity or output
• Fixed costs

  Costs that do not change in total in relation to some chosen activity or output
• Mixed costs


  Costs that have both fixed and variable components; also called semivariable costs
• Variable costs for different types of organizations


  • Merchandisers: Cost of goods sold
  • Manufacturers: Direct material, Direct labor, and variable manufacturing overhead
  • Merchandisers and Manufacturers: Sales commissions and shipping costs
  • Service Organizations: Supplies and travel
• Examples of fixed costs


  • Real estate taxes
  • Insurance
  • Sales salaries
  • Depreciation
• Total variable cost


  Cost that changes in total in relation to the chosen activity or output
• Variable cost per unit


  Cost that is constant per unit of the chosen activity or output
• Total fixed cost


  Cost that does not change in total in relation to the chosen activity or output
• Fixed cost per unit


  Cost per unit that decreases as more units of the chosen activity or output are consumed
• Semivariable cost


  A cost that has both fixed and variable components
• Semivariable cost slope


  The variable cost per unit of activity
• The determination of cost behavior is called cost behavior, not cost prediction
• Variable costs change in direct proportion to a change in the activity level
• Cost prediction


  A forecast of a cost at a particular level of activity
• Cost function


  A mathematical description of how a cost changes with changes in the level of an activity relating to that cost
• Assumptions in estimating cost functions


  • Variations in the level of a single activity (the cost driver) explain the variations in the related total costs
  • Cost behavior is approximated by a linear cost function within the relevant range
• Linear cost function


  y = a + bX, where y is the dependent variable (the cost being predicted), X is the independent variable (the cost driver), a is the intercept (fixed costs), and b is the slope (variable cost per unit)
• Cost estimation methods


  • Visual-Fit Method
  • High-Low Method
  • Least-Squares Regression Method
• Visual-Fit Method


  1. Plot the data points on a graph

  2. Draw a line through the plotted data points so that roughly equal numbers of points fall above and below the line
• Visual-Fit Method results

  • Estimated fixed cost = $10,000
  • Vertical distance is total cost, approximately $16,000
• Quantitative analysis


  • Uses a formal mathematical method to fit cost functions to past data observations
  • Advantage: results are objective
  • Advantage: most rigorous approach to estimate costs
  • Challenge: requires more detailed information about costs, cost drivers, and cost functions and is therefore more time-consuming
• High-Low Method


  1. Calculate the slope coefficient (variable cost per unit)

  2. Calculate the constant (fixed cost)

  3. Write a linear equation
• High-Low Method example


  • Owl Co recorded production activity & maintenance costs for two months
  • Compute: 1. The variable cost per unit, 2. The fixed cost, 3. The total cost for 10,000 units
• High-Low Method - Unit Variable Cost

  Unit variable cost = Change in Cost/Change in Units
• High-Low Method - Fixed Costs

  Fixed cost = Total cost - Total variable cost