Cost Accounting For Dummies

Ken Boyd is Co-Founder of Accountinged.com and owns St. Louis Test Preparation. He tutors and coaches people on the principles of accounting and prepares them for challenging accounting licensing exams by making accounting interesting and fun.

• Introduction 1About This Book 1Foolish Assumptions 2Icons Used in This Book 2Beyond the Book 3Where to Go from Here 3Part 1: Understanding the Fundamentals of Costs 5Chapter 1: So You Want to Know about Cost Accounting 7Comparing Accounting Methods 8Considering your shareholders 8Mulling over creditors 9Addressing concerns of regulators 9Using management accounting 9Fitting in cost accounting 10Using Cost Accounting to Your Advantage 11Starting with cost-benefit analysis 11Planning your work: Budgeting 12Controlling your costs 12Setting a price 13Improving going forward 14Chapter 2: Brushing Up on Cost Accounting Basics 17Understanding the Big Four Terms 17Comparing direct and indirect costs 18Mulling over fixed and variable costs 20Fitting the costs together 21Covering Costs in Different Industries 22Reviewing manufacturing costs 22Considering costs for retailers 23Adding up costs for e-commerce firms 23Finding costs most companies incur 24Why Are You Spending? Cost Drivers 25Pushing equipment too hard and relevant range 25Previewing inventoriable costs 26Following the Rules of the Cost Accounting Road 27Understanding generally accepted accounting principles (GAAP) 27Deciding on accrual basis or cash basis 29Finishing with conservatism 30Chapter 3: Using Cost-Volume-Profit Analysis to Plan Your Business Results 31Understanding How Cost-Volume-Profit Analysis Works 32Calculating the breakeven point 32Financial losses: The crash of your cash 34Contribution margin: Covering fixed costs 35Lowering the breakeven point to reach profitability sooner 36Target net income: Setting the profit goal 37Using operating leverage 38Assessing e-commerce businesses 40Timing is everything when it comes to costs 41Using Cost-Volume-Profit Analysis to Make Savvy Business Decisions 42Deciding to advertise 43Lowering your price without losing your profit 44Combining the results of two products 45Costing and pricing a new product 48The Tax Man Cometh, the Profits Goeth 51Understanding pre-tax dollars 51Adjusting target net income for income taxes 52Chapter 4: Estimating Costs with Job Costing 53Understanding How Job Costing Works 54Cost objects: The sponges that absorb money 55Charging customers for direct and indirect costs 56Implementing job costing in manufacturing: An example 57Deciding on costing for IT consulting projects 61Taking a Closer Look at Indirect Costs using Normal Costing 64Budgeting for indirect costs 65Following a normal job costing system 66Following the Flow of Costs through a Manufacturing System 67Control starts with control accounts 67Explaining the debit and credit process 68Walking through a manufacturing cost example 70Applying the methodology to other control accounts 73Chapter 5: More Activity, More Cost: Activity-Based Costing 75Avoiding the Slippery Peanut Butter Costing Slope 76Recognizing a single indirect cost allocation 77A fly in the peanut butter: Dealing with different levels of client activity 77Missing the mark: Undercosting and overcosting 79Designing an Activity-Based Costing System 81Refining your approach 81Grouping costs using a cost hierarchy 82Testing your ABC design 83Using Activity-Based Costing to Compute Total Cost, Profit, and Sale Price 87Allocating indirect costs evenly by product 88Analyzing and reallocating cost activities 88Changing allocations to cost pools 89Changing prices after ABC 90Implementing ABC Costing for a Business Pivot 91Deciding whether to pivot 92Mulling over a pivot example 93Using ABC Costing for a New Business Model 94Considering sunk costs 94Reviewing food and labor costs 95Allocating new overhead costs 95Applying ABC costing to overhead costs 96Evaluating your results 98Part 2: Planning and Control 99Chapter 6: What’s the Plan, Stan? Budgeting for a Better Bottom Line 101Brushing Up on Budgeting Basics 102Seeing the master budget and its component parts 102Why budgeting is important 103Considering the costs and benefits of data collection 104Leveraging AI and data analytics for effective budgeting 106Planning strategically 107Planning How to Plan: Factors That Impact Your Budgeting Process 108Experience counts 109Timing is everything 109People get you headed in the right direction 110Sales projections pay off 111The Nuts and Bolts (and Washers) of Budgeting 112Understanding the budgeting financials 113Reviewing revenue and production budgets 116Budgeting with Cash Accounting or Accrual Accounting 119Cash basis accounting: Using your checkbook to budget 119I accrue, you accrue, we all accrue with accrual accounting 121Budgeting to Produce the Income Statement and Balance Sheet 122The well-balanced balance sheet 122The incredible income statement 123Chapter 7: Constant Change: Variance Analysis 125Variance Analysis and Budgeting 126Using management by exception to recognize large variances 126Seeing the problem in using a static budget 127Opting for a flexible budget 131Investigating budget variances 134Analyzing in Material Price and Efficiency Variances 135Applying price variances to direct materials 136Applying efficiency variances to direct materials 137Implementing price variances for direct labor 139Sizing up efficiency variances for direct labor 139Using Your Findings to Make Decisions 140Following up on variances 141Judging the effectiveness of your employees 143Tying supply chain concepts to variance analysis 145Attaching ABC costing concepts to variance analysis 145Chapter 8: Focusing on Overhead Costs 149Using Cost Allocation to Minimize Overhead 150Paying for the Security Guard: Fixed Overhead Costs 151Planning fixed overhead costs 151Allocating fixed overhead costs 152Assessing potential causes of fixed overhead variances 155Those Vexing Variable Manufacturing Costs 156Working with variable overhead costs 156Implementing variance analysis 159Finding the reasons for a variable overhead variance 161Chapter 9: What’s on the Shelf? Inventory Costing 163Working with Inventoriable Costs 164Using the matching principle to calculate profit on sale 164Erring on the conservative side 166Costing Methods for Inventory 166Using the first-in, first-out (FIFO) method 168Accounting with the last-in, first-out (LIFO) method 169Weighing the merits of weighted-average cost 170Considering specific identification method 171Analyzing profit using FIFO and LIFO 171Using Variable and Absorption Costing to Allocate Fixed Manufacturing Costs 173Defining period costs and product costs 174Applying variable and absorption costing 175Relating Capacity Issues to Inventory 177Reviewing theoretical and practical capacity 178Understanding capacity issues for e-commerce firms 179Using normal and master-budget capacity 181Choosing a capacity level 182Part 3: Making Decisions 185Chapter 10: Cost Drivers and Cost Estimation Methods 187Working with Cost Behavior 188Understanding linear and nonlinear cost functions 188Discovering how cost drivers determine total costs 189Considering Cost Estimation Methods 190Walking through the industrial engineering method 190Agreeing on the conference method 191Reviewing the account analysis method 191Checking out the quantitative analysis method 192Choosing a cost estimation method 196Exploring Nonlinear Cost Functions 197Changing cost functions and slope co-efficients 198Understanding the impact of quantity discounts 198Assessing the Impact of Learning Curves 198Considering how AI and Data Analytics Impact Learning Curves 200Reviewing AI and data analytics 200Throwing in the learning curve 200Simplifying a procedure 201Finding and using better data 201Chapter 11: Making Smart Business Decisions with Relevant Information 203Navigating the Geography of Relevance 204Introducing the decision model 205Applying a model to an equipment decision 206Understanding IT purchasing issues 208Considering relevant qualitative factors in decision-making 210Special Orders Don’t Upset Us, Do They? 211Deciding between Outsourcing and In-house Production 213Weighing opportunity costs 217Contemplating the carrying cost of inventory 218Maximizing Profit When Capacity Is Limited 220Managing capacity and product mix 220Analyzing customer profit and capacity 222Chapter 12: Making Smart Pricing Decisions: Figuring Total Costs 227Understanding Influences on Prices 228Customers 228Competitors 228Suppliers 229Special orders 229Pricing for Profits Down the Road 231Reviewing market-based and cost-based pricing 231Aiming at the target: Target costing 232Arriving at a Reasonable Profit 236Using cost-plus pricing 237Using product life-cycle budgeting 239Managing IT product costs and pricing 245Part 4: Allocating Costs and Resources 249Chapter 13: Analysis Methods to Improve Profitability 251Processing Cost Allocation 252Why bother? Purposes of cost allocation 252Justifying cost allocation decisions 253Implementing Cost Allocation 254Using cost hierarchy to allocate costs 254Allocating tricky corporate costs 256Keeping track of customer revenues and costs 260Going Over Sales Mix and Sales Quantity Variances 264Remembering variances and contribution margin 265Getting the story about sales mix variance 265Calculating sales quantity variance 269Chapter 14: Behind the Scenes: Accounting for Support Costs and Common Costs 271Not Everyone Generates Revenue: Support Costs 272Introducing single rate cost allocation method 272Checking out dual rate cost allocations 275Using practical capacity to determine cost allocation rates 277Going Over Variance Analysis and Department Costs 281Choosing budgeted versus actual rate of usage 281Implications for the rate of usage selected 284Allocating to multiple departments 285Focusing on Common Costs 290Mulling over stand-alone cost allocation 290Stepping up to incremental cost allocation 291Making a Commitment: Contracts 292Contracting with the government 292Thinking about reasonable and fair costs 293Chapter 15: Joint Costs, Separable Costs, and Using Up the Leftovers 295Working with Joint Costs 296Explaining joint cost terms 296Appreciating the importance of allocating joint costs 297Considering joint cost allocation methods 298Continuing Production: Computing Separable Costs After Splitoff 301Exploring the net realizable value method 301Introducing the constant gross margin percentage NRV method 303Choosing a Joint Cost Allocation Method 308Making the case for sales value at splitoff 308Falling back to other joint costing methods 308Deciding to sell or process further 309Holding a Garage Sale: Making the Most of Byproducts 310Chapter 16: Tracing Similar Products with Process Costing 313Process Costing: Presenting the Basic Approach 314Leading off with direct material costs 314Following up with conversion costs 315Sitting on the Factory Floor: Dealing with Work in Process 315Using Equivalent Units to Compare Apples to Apples 316Counting the units for equivalent units 317Hunting down the total costs of production 318Putting units and costs together 319Seeing different percentages of completion 321Using the Weighted Average Method for Process Costing 325Handling beginning work in process 325Continuing with equivalent units 326Introducing the First In, First Out Method of Process Costing 328Comparing Processing Costing Methods 331Mulling over weighted average and FIFO methods 331Debating transferred-in costs 333Part 5: Considering Quality Issues 335Chapter 17: What a Waste! Getting the Most from Spoilage, Scrap, and Reworked Products 337Accounting for Waste 338Determining the inspection point 338Understanding spoilage and scrap 338Spoilage and process costing 341Reworking a product to recoup some profit 346Applying Process Costing Methods to Spoilage 346Weighing in on the weighted average costing method 347Doing the FIFO Hokey Pokey: Put your first in first, take your first out first 349Job Costing for Spoilage, Reworked Products, and Scrap 352Making adjustments for normal and abnormal spoilage 352Reworking and selling a product 355Making allocation decisions about scrap 357Chapter 18: Making Smart Ordering Decisions 359Considering the Costs of Inventory 360Going through the ordering sequence 361Taking a closer look at stockout costs 362Calculating Inventory Quantity with the Economic Order Quantity Formula 363Figuring a Favorable Reorder Point 365Introducing safety stock: Creating a cushion 366Computing safety stock 366Evaluating Prediction Error 367Calculating relevant total costs 367Acting on a prediction error 369Buying more and ignoring EOQ 370Practicing Just-In-Time Purchasing 371Kicking around JIT benefits and risks 371Putting in a JIT purchasing system 373Adjusting total purchasing cost 376SCM and Customer Demand Issues 377Pulling apart the supply chain 378Analyzing demand 378Chapter 19: Quality: Building a Better Mousetrap 381Considering Quality Benefits and Costs 382Listing the benefits of quality 382Listing the costs of quality 383Taking steps to ensure quality 384Compiling a Cost of Quality Report 385Putting Quality Practices in Place 387Quality in job costing 387Taking a spin through inventory 388Customer Satisfaction: Measuring and Improving It 389Customer satisfaction’s non-financial measurements 389Is measuring customer satisfaction worth the effort? 391Doing More in Less Time 392Analyzing performance related to time 392Calculating average waiting time 394Adding in manufacturing lead-time 395Eliminating the Constraint of the Bottleneck 396Fewer bottlenecks mean increased contribution margin 396Clearing bottlenecks 397Part 6: The Part of Tens 401Chapter 20: Ten Common Costing Mistakes and How to Avoid Them 403Pricing a Product Incorrectly 403Listing Fixed Costs As Variable Costs 404Labeling Period Costs As Product Costs 404Misusing Target Net Income 404Forgetting About Taxes 405Assigning Costs to the Wrong Product 405Not Reviewing Variances Correctly 406Redlining: Pushing Production Activity Above Relevant Range 406Ignoring the Timing of Costs 407Not Implementing Activity-Based Costing 407Chapter 21: Ten Ways to Increase Profits Using Costing 409Selling More Of The Right Products 409Implementing Sales Mix Analysis to Increase Total Profits 410Building a Higher Margin of Safety 410Deciding How Much You Need: Production and Scheduling Issues 410Who Does What: Handling Costs and Employee Issues 411Reducing and Managing Scrap 411Moving It off the Shelf: Inventory Issues 411Effectively Taking Special Orders 412Making Accurate Cost Allocations 412Addressing the Issue of Spoilage 412Index 415