cost Management terms

8/12/2019 cost Management terms

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Cost Management Terms

Financial Accounting Cost Accounting Management Accounting

Reporting to External users Reporting to External /Internal

users

Reporting to Internal users

Prepare Financial statements

using GAAP Basis

Supports both FA and MA,

informs cost of resources

acquired n consumed during the

period.

To improve organizational

decision analysis and focus.

Has Historical focus. Both Future oriented

Sacrifice measured by price

paid to acquire the goods orservices. An generally cost word

is used which is an asset. When

benefit of acquisition expires

cost becomes an expense or

loss.

Cost Objectentity to which

cost is attached.Cost DriverBasis used to

assign the cost to cost object.(

Measure of an activity eg DL

Hrs/Machine Hrs etc i.e casual

factor in incurrence of cost to an

entity.. Key aspect is existence

of direct cause n effectrelationship. between Qty of

driver consumed n Total cost.

Measurement in monetary terms

of amount of resources used forsome other purpose. Its not

operational but it becomes when

used as incremental/differential

costs.


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Manufacturing Cost Non Manufacturing Cost

3 types : Direct Materials :Tangible input to

manuf process which can be traced to

product.

Not a manufacturing cost like :

Direct Labor : cost of human labor traced to

product.

Selling Costgetting the product from

factory to consumer.

Indirect Material :Tangible input which

cannot be traced to the product.

Indirect Labor : Tangible cost of human

labor which cannot be traced to product.

Factory operating cost or Indirect

overhead.

Admin ExpensesIndirect cost attached to

the manuf.

Group :

Prime costDM + DL

Conversion costDL + manuf O/h


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What to do with

certain costs whether

to expense or

capitalize.?

Product / Inventoriable Cost( Period costs

Capitalize as part of finished

goods inventory n become

component of cost of goods

sold.

Expensed as

incurred as they

are not

capitalized in

finshed goods

inventory n

excluded from

cost of goods

sold.

Under GAAP all manuf cost

are treated here. Hence

approach is full orabsorption costing. (

All seeing n

admin costs are

treated here.Hence approach

is full or

absorption

costing

For internal reporting is

often to capitalize only

variable manuf cost-variable costing

, here treat all the

other costs .


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Direct Indirect

Associated with particular cost object in

economically feasible way.

Cannot be associated with particular cost object

in economically feasible way n has to be allocated

on some basis..

They are collected in cost pool. Cost Pool is an

account into which variety of similar costs

elements with common cause are accumulated.

Common cost is shared by more then 2 elements.

They have to be allocated with systematic basis.


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Relevant Range : defines limits within which per unit variable costs remains constant

n fixed costs are not changeable in short run.

Mixed cost are estimated with following

Regression Method ( Scatter graph)complex n determines avg rate of variability of

mixed cost rather then high n low method as below.

HighLow methodless accurate but fast.-

Higher valueLower value

-----------------------------------------------------

Diff in 2 activities.

FCTCVC


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Linear Non Linear

All above costs are classified here as they

change at constant rate over short run.

FC per unit is classified here as it shows

asymptotic character as high degree of variability

over the range as whole.

Step cost functionsconstant over small range of

output but increases by steps as activity level

incrases.


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Cost of Goods sold :

Op stock + Purchasecl Stock

Cost of Goods manufactured :Op Wip +Total Manuf costsCl WIP.

.


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Controllable cost : under discretion of

manager

Non Controllable cost : committed by

another organization removing managers

discretion.

Avoidable cost : eliminated by performing

weel any activity.

Committed Costs : Holding an asset cost .

Incremental Differential

Engineered : direct quantifiable cause n

effect relationship between level of output nresources consumed.

Discretionary: tend to be subject of periodic

outlay decision.

Outlay cost : Explicit or out of pocket costs.

Opportunity costs : Implicit costs

Imputed costs are to be involved even no

transaction has occurred.

Economic cost : both explicit n implicit.


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Relevant costs

Sunk Costs

Historical cost.

Joint Cost

Separable costs.

By products.

Normal Spoilage Abnormal Spoilage.

Rework

Scrap

Waste.

Carrying Costs

Transferred in costs

Value adding costs

Normal capacityPractical capacity

Theoritical capacity ( ideal)


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Absorption costing / Fulltreats all manuf costs as

product costs

Requirement under GAAP

Gross MarginSales revenueabsorption cost of

goods sold.

Variable costing / directconsiders only variable

manuf costs to be product costs.

Not allowed per GAAP but useful for internal

decision making.

Basis Contribution Margin.

Actual Costingaccurate method for recognizing

costsAfter production ends costs are totaled n Indirect

are allocated.

Misleading

Normal costingcharges DM/DL actual basis n

applies O/h on budgeted rates. compensatesfluctuations in actual costs.

Extended normal costinguses normal rates

Job Order Costingused for producing products

having individual characteristics. Hence costs are

attached to specific jobs.

Process Costingsimilar products are produced

continuously and costs are attached for each

process hence its calculated avg price for the

product through FIFO and Weighted Avg.

For unfinished units have to be restated in

equivalent units of production.( EUP)


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Activity Based Costingattaching costs to

the activity rather physical goods.

Under volume based costing single pool

collects all indirect costs n allocate to

production.

Whereas ABC every activity bears on

production have own cost pool which are

assigned based on cost driver.

Its an distortions of product cost

information brought about by peanut butter

costing which inaccurately spreads the cost

to various products which use different

amount of resources.

Life cycle costingemphasizes need toprice products to cover all costs incurred

during lifespan of product not only cost of

production

.

Before Production cost are upstream costs

After Production costs are downstream

costs.


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Standard Costingsystem of information

for management where actual are different

from Target/Standards costs.

Such costs predetermined attainable unit

costs not just avg of past costs.

Used for job order n process costing.


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Flexible Budgetingcalculation of quantityn cost of input for various level ofproduction.

Supports static budget which presentsprojection achieved for future period.

Actual v/s standards ( static n flexible

budgets ) are compared to calculatevariances which enables Management byexception.


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Allocating Join costs :

Physical units methodallocated in some physical measure i.e. volume or

weight

Joint cost * units of each product /Total units.

Sales value at Split Off method : proportion of total sales value attributable to

period production costs Joint cost * Estimated SP at split off /Total SP at split off.

Estimated net realizable method : is variation of sales value method. All

separable costs are deducted to make product saleable before allocation.

(Estimated final price separable costs) /Total estimated final price.

Constant gross margin % NRV method : uses same gross margin % for all the

products. Step 1Determine gross margin %

Step 2Final Sales valuegross Margin = Total Cost

Step 3 Deduct separable cost = Joint cost.


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Allocating Service Dept costs :

o Direct Methodsimple, least accurate as costs

are allocated directly to production Dept. No

allocation for services rendered to other Dept.o Step Down Methodmore accurate , as service

dept are allocated in more order from one that

provides most service to other service dept that

the one which provides the least.

o Cost are allocated to both remaining service dept n

production dept.


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Reciprocal Methodcomplex but

accurate. Simultaneous equation method

is used to allocate the cost among service

n production Dept.

Target costing is method to calculate price

of product by adding desired unit profit

margin to total unit costs. Concept ofTarget pricing.


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Variance Analysis

Standard costs are budgeted unit costs established to motivate productivity n

efficency, to alert mgt for variances in comparison with actual v/s standards.

They are based on some basis not on historical base.

Uses both Job order n process costing for variances.

It is vital tool for performance monitoring system.

Ideal , theoretical or max Variance are set on basis of skilled employees. No chancefor below standards.

Practical variance is based on current attainable variances.

Management by exception.

Standard costs are used for DM/DL/DO.


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Variance Analysis

DM Variances :

Price Variance :

AQ* (SP-AP)

Where AQActual Quantity

SPStandard price

APActual Price.


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Variance Analysis

DM Quantity variance :

SP(SQ- AQ)

Total Material VarianceDM Price variance +

DM Quantity variance.


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Variance Analysis

Direct Labor variance :

DL Rate variance

AQ ( SP-AP)

DL Efficiency variance

SP( SQ-AQ)

Total Labor varianceDL Rate + DL Effeiciency

variance.


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Variance Analysis

Mix VarianceAQ * S%)SP

Yield variance( SQ * S%* SP)-

( AQ*A%*SP)


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Variance Analysis

DO Variance

Varia8ble

Spending variance (AQ *Std rate)-Actual V OH

Efficiency

(SQAQ)*SP


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Variance Analysis

DO Variance

Fixed

Spending variance Flexible/Static BudgetActual costs

Production Volume -

(Std hrs allowed for actual output* SR)-

Flexible/Static Budget


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Variance Analysis

Sales Variance

Total Contribution Margin variance

AQ(SP-AP)

Sales Volume variance

(AQ- SQ)BCM

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cost Management terms

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