COST ACCOUNTING

IE University
Professor IGNACIO ASIN LAPIQUE
E-Mail: iasinl@faculty.ie.edu

Topic 1: INTRODUCTION TO MANAGEMENT AND COST ACCOUNTING

Cost volume analysis: how profit will change as number of units sold or cost per unit change.

Cost accounting is a key tool for strategic decision making

Chapter 2:

Cost- a sacrificed resource to achieve a specific objective

Actual cost- accost that has occurred
Budget cost- a predicted cost
Cost object- anything for which a cost measurement is required

Cost accumulation – the collection of cost data in an organized way by means of an

accounting system

Cost assignment – a general term that encompasses the gathering of accumulated cost to a
cost object in two ways
-tracing: cost with a direct relationship to the cost object
-allocating= accumulated costs with an indirect relationship to a cost object

Prime costs: direct material + labor

Conversion costs: labor + overhead

Equation:
DM used + conversion costs = total manufacturing cost incurred in the year

The 3 types of manufacturing costs:

Material
overhead
labor
Chapter 9 review:
Absorption cost = fixed + variable (per unit)
PART 2: INVENTORY COSTING AND COST-VOLUME-PROFIT ANALYSIS

Revenues – all variable cost gives you the contribution margin

 Revenue (units sold (sales) * selling price per unit)

 Beginning inventory = ending inventory of last year
 Variable manufacturing cost ( variable manufacturing cost per unit produced *
number of units produced (production))
 Cost of goods available for sale (beginning inventory + variable cost)
 Ending inventory (negative) (ending inventory units * manufacturing cost per unit
produced)
 Variable cost of goods sold ( cost of goods available for sale – ending inventory-
 Variable operating costs (operating cost per unit * units sold (sales))
 Contribution margin ( Revenues – variable cost of goods sold – variable operating
cost)
 Fixed manufacturing cost is given
 Fixed operating cost is given
 Operating income (contribution margin – fixed manufacturing cost – fixed operating
cost )
 Beginning inventory (variable manufacturing cost per unit + fixed manufacturing cost
per unit * beinging inventory)
 Variable manufacturing cost ( variable manufacturing cost per unit produced *
number of units produced (production))
 Allocated fixed manufacturing cost ((fixed manufacturing cost / units)*production))
 Cost of goods available for sale (beginning inventory + variable cost + allocated fixd
manufacturing cost)
 Ending inventory (negative) (ending inventory units * (manufacturing cost per unit
produced + fixed manufacturing cost per unit)
 Cost of goods sold (cost of goof available for sale – ending inventory + production
volume variance)
 Gross margin (revenues – cost of goods sold)
 Variable operating cost (operating cost per unit * sales)
 Fixed operating cost
 Operating income (gross margin – (variable + fixed operating costs)
PART 3: PRICING & MEASURING RELEVANT COSTS AND REVENUES FOR DECISION-
MAKING

When comparing or analyzing the offer,

o Without the special offer is simply finding the operating income with the relevant
costs (no fixed (unless stated))
o With the special offer we include the additional gain from the offer + the previous no
special offer
o ------------------------------------------------------------------
o Thus, revenue is the special offer gain in revenue (4600*80) + the previous without
offer, (14000hrs -4600hrs) *115
o Landscape costs follows the same idea, 60*4600 + (14000-4600)*60
o ((Marketing costs are relevant costs because they depend on the revenue and thus
having revenue changing, marketing costs change as well and therefore have to be
included))
o In conclusion we compare the operating income from without the one time special
offer with the special offer and choose the option with the higher operating income.
When we need to evaluate with a change in operating income
(simply evaluate the addition gain of taking the offer)

o Find the gain in the additional offer

o Hence, looking at ‘requirement’, the additional revenue is 65*800
o We then need to choose which costs are relevant (no fixed (unless stated) and no
variable marketing (as stated)), 800*60 (we are not told what the new variable
landscape costs are hence we assume they are the same without the offer)
o These give us the additional increase in operating income of taking on the new offer.
PART 4: PRODUCT COSTING: ISSUES AND PROBLEMS

(a) Actual Costing:

Direct-costs = Actual direct-cost rate × Actual qty of direct-cost inputs
Indirect-costs = Actual indirect-cost rate × Actual qty of cost-allocation bases
Identify the formulas to calculate the direct and indirect-costs under normal costing.
(b) Normal Costing:
Direct-costs = Actual direct-cost rate × Actual qty of direct-cost inputs
Indirect-costs = Budgeted indirect-cost rate × Actual qty of cost-allocation bases
Identify the formulas to calculate the direct and indirect-costs under the variation of normal costing.
(c) Variation of Normal Costing:
Direct-costs = Budgeted direct-cost rate × Actual qty of direct-cost inputs
Indirect-costs = Budgeted indirect-cost rate × Actual qty of cost-allocation bases

budgeted manufactering budgeted labor budgeted indirect

overhead costs ÷ hours = cost rate
Budgeted compensation per ÷ Budgeted = budgeted direct
 direct labor-
hours per
professional professional cost rate per hour
Budgeted total
direct labor- budgeted indirect
Budgeted indirect-costs ÷ hours = cost rate per hour
Budgeted
billable hours
Budgeted compensation per per budgeted direct
professional ÷ professional = cost rate per hour
Budgeted
quantity of budgeted indirect
Budgeted indirect-costs ÷ allocation base = cost rate per hour

Actual Actual direct Actual indirect-

indirect-costs ÷ labor-hours = cost rate

Budgeted
Budgeted Budgeted direct indirect-cost
indirect-costs ÷ labor-hours = rate

Budgeted Budgeted direct Budgeted

direct-costs ÷ labor-hours = direct-cost rate