Engineering Financial and Cost Analysis - Lecture - CostAccounting1, Lecture notes of Financial Management

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Engineering and Financial Cost Analysis

Introduction to Cost Accounting

Cost Accounting

Techniques that develop detailed information about the cost of products or services.

• (^) Internal (Managerial Accounting) for
  • (^) budgeting,
  • (^) variance analysis and making a
  • (^) variety of business decisions.
• (^) External (Financial Statements).
  • (^) Income Statement
    • (^) “Cost of Goods Sold” for Manufacturing operations
    • (^) “Purchases” for Merchandising and Service organizations
  • (^) Balance Sheet
    • (^) Inventory

A Historical Perspective (cont)

• (^) 19th Century Post-Industrial Revolution
  • (^) More capital investment and higher overhead, primarily in process industries;
  • (^) Throughout the 1800s there were no well-defined cost accounting systems.
  • (^) Development of absorption and variable accounting methods to allocate fixed costs.
  • (^) Alexander Hamilton Church developed the machine-hour method for allocating fixed costs (land, building, equipment).

An Historical Perspective (cont)

• (^) Early 20th Century
  • (^) Increased capital investment in assembly industries.
  • (^) Variable costing method grew in acceptance but was still less commonly used than the Absorption costing method.

How Are Costs Classified???

• (^) There are two methods used by the Cost

Accountant to apply costs consistently:

• (^) Manufacturing or Non-manufacturing Costs
  • (^) This distinction determines if costs are associated with product or services or with support functions.
• (^) Period or Product Costs
  • (^) This distinction used to determine when costs are expensed.

Manufacturing Costs

• (^) Manufacturing is the conversion of

materials into finished goods.

• (^) It requires:
  • (^) Direct Labor
  • (^) Direct Material
  • (^) Overhead

Direct Material

• (^) All raw materials added during the conversion process - (^) become an integral part of the finished goods.
• (^) Indirect Material
  • (^) difficult to determine the amount of some raw materials that are consumed during the conversion process for a specific product (included in Overhead)
• (^) Prime Costs = Direct Material + Direct Labor

Overhead

• (^) All other factory costs required for production but are not directly associated with each unit of production. - (^) Indirect Labor - (^) Indirect Material - (^) Overhead

Product and Period Costs

Emphasize the timing of expenses.

• (^) Product Costs
  • (^) Costs that can be directly “attached” with Product and will be expensed when the product is sold (not necessarily the period they were incurred).
• (^) Period Costs
  • (^) Costs not easily “attached” to product and will be expensed in the period in which they were incurred.

Collecting Costs

• (^) Job Order
  • (^) Production of individual or batches of many different types of products.
  • (^) Costs can be collected for independent orders.
• (^) Process
  • (^) Continuous processing of a single type of product for relatively long periods of time.
  • (^) Costs can not be cost-efficiently collected for independent orders.